Here’s a letter that I sent to the Wall Street Journal:

Peter Navarro asserts that “China mops up vast sums of export dollars through sterilization efforts that are tantamount to forced saving.  In the process, Chinese consumers lose significant purchasing power because of the undervalued yuan – and Americans lose millions of jobs” (Letters, Nov. 21).

Ignore the question of whether or not Beijing’s commitment to peg the yuan to the dollar really is currency manipulation.  Instead, suppose the Chinese people truly did – voluntarily – have a very high savings rate.  Would Prof. Navarro argue that trade with the Chinese under those circumstances would cause Americans to “lose millions of jobs”?

If not, why does Prof. Navarro believe that “forced saving” by the Chinese depresses American employment?  From Americans’ perspective, the particular reasons why the Chinese people save as much as they do are economically irrelevant.

But if Prof. Navarro does believe that even voluntarily high savings by the Chinese makes U.S. trade with that country a source of higher unemployment in America, then Prof. Navarro must believe that America’s best trading partners are those foreigners who are most profligate – in which case Prof. Navarro should also believe that he is better off trading with individuals who are profligate than with individuals who save and accumulate capital.  I wonder if Prof. Navarro trades only with mall-rat teenagers and other irresponsible spendthrifts.  Given his economic ideas, he should seriously consider this course of action.

Sincerely,
Donald J. Boudreaux

Here.

The narrative is more important than the facts. People like the narrative because it pleases them. Not because it’s true. Truth is elusive.

But evidence and facts do matter.

So when someone says the TARP was central to preventing disaster, don’t disagree. Don’t talk about how evil and anti-democratic it was to give the Secretary of the Treasury a $700 billion blank check with no accountability, a check he said he needed desperately and urgently because he needed to do x and then a week or so later, he did y. No, bring that up later. Instead, say the simple most important four words in the language of debate.

How do you know?

Simple. How do you know? What evidence do have for the claim? Always a good question.

I know. This (HT: Drudge) is how “the system” works. I’m supposed to understand it. But I don’t. It’s a lousy system.

On page 432 of the Reid bill, there is a section increasing federal Medicaid subsidies for “certain states recovering from a major disaster.”

The section spends two pages defining which “states” would qualify, saying, among other things, that it would be states that “during the preceding 7 fiscal years” have been declared a “major disaster area.”

I am told the section applies to exactly one state:  Louisiana, the home of moderate Democrat Mary Landrieu, who has been playing hard to get on the health care bill.

In other words, the bill spends two pages describing would could be written with a single world:  Louisiana.  (This may also help explain why the bill is long.)

Senator Harry Reid, who drafted the bill, cannot pass it without the support of Louisiana’s Mary Landrieu.

How much does it cost?  According to the Congressional Budget Office: $100 million.

It takes about 200 years to get to a world where this is considered smart rather than shameful. I still call it shameful.

In the current New Yorker, James Surowiecki is properly critical of the economic distortions introduced by taxing debt-financed income much more lightly than taxing equity-financed income.

But his policy conclusion is a non sequitur:

Given the weak state of the economy and of housing prices, a wholesale rewriting of the tax code may be a bridge too far right now, but there are plenty of reforms—capping deductions, phasing them out over time, restricting their use by heavily leveraged companies—that would move in the right direction.

The clearest hurdle to these changes may be political, but the bigger hurdle is, in a way, psychological: because tax breaks on debt have been around so long, we can hardly imagine what it would be like if we changed them, and we tend to underestimate their influence in shaping our behavior. Subsidizing debt seems harmless simply because we’ve always done it. But the fact that you’ve had a bad habit for a long time doesn’t make it less dangerous.

It simply doesn’t follow – as a matter of logic, ethics, or economics – that, because debt-financed financial gains are taxed less heavily than are equity-financed financial gains, debt-financed gains are subsidized (as opposed to equity-financed gains bearing an undue tax burden).  Nor does it follow that taxes on debt-financed gains ought to be raised.  Eliminating these distortions can also be done by reducing taxes on equity-financed gains.

I wonder if Surowiecki believes that low-income Americans are being distortingly subsidized by high-income Americans.  After all, if failure to tax a financial gain as heavily as that gain might be taxed means that the untaxed portion of that gain is a subsidy, then it appears as if the current ‘progressive’ rates of income taxation in the U.S., in and of themselves, transfer subsidies from higher-income Americans to lower-income Americans.

If confronted with evidence of economic distortions created by ‘progressive’ income-tax rates, would Surowiecki advocate raising taxes on low-income workers as the only means of eliminting such distortions?

Here’s a letter that I sent this morning to the Washington Post:

Harold Meyerson is confused about U.S. trade with China (”A marriage made in China,” Nov. 18).

As incontrovertible evidence that American exporters and producers are harmed by U.S.-China trade, he points to the fact that, since the 1998 agreement that normalized trade between the two countries, America’s trade deficit with China has grown.  Indeed it has grown, in absolute terms.

But U.S. imports from China as a proportion of U.S. exports to that country have fallen during this time – from 6.24 in 1999 to 4.72 in 2008.  Put differently, the real value of America’s exports to China has grown by more (323 percent) than has the real value of America’s imports from that country (220 percent).*

Sincerely,
Donald J. Boudreaux

I’m attending now the 27th annual Cato Institute Monetary Conference.

Just before the conference kicked off this morning at 9am (EST), The Economist’s Zanny Minton Beddoes suggested that I do some live blogging while here.  I hadn’t thought to do that.  (I’m here to moderate one of the afternoon panels.)

But, what the heck, here’s at least one post coming live at you from the conference……

….

Following an outstanding opening address by Allan Meltzer, the first panel featured Zanny Minton Beddoes, George Melloan, Benn Steil, and Peter Wallison.  Fine presentations all.

In his remarks, Benn Steil mentioned a fact that I was (to my chagrin) unaware of, but it strikes me – as it strikes Steil – as being one important reason for excessive build-up of debt in America.  According to page 8 of this 2005 CBO study,

The resulting [tax] rate on equity-financed corporate capital income is 36.1 percent and that on debt-financed corporate capital income is -6.4 percent, a difference of 42.5 percentage points. The rate on equity-financed corporate capital income is higher than the statutory corporate tax rate because of the extra tax imposed on dividends and capital gains at the individual level.

Such a huge deviation from neutrality in taxing equity-financed corporate income and in taxing debt-financed corporate income cannot help but to distort financing decisions toward debt – perhaps dangerously so.

Here’s a letter that I sent yesterday to the Washington Post:

Harold Meyerson’s discussion of U.S. trade with China is a buffet of errors (”A marriage made in China,” Nov. 18).

For example, portraying trade with China as gutting both America’s export potential and America’s manufacturing base, Meyerson fails to mention two crucial facts: First, the inflation-adjusted value of U.S. exports to China in 2008 were more than 300 percent greater than they were in 1998, the year the U.S. normalized trade with China.*

Second, the real value of U.S. manufacturing output continues to rise.  By the end of 2008 – despite the economic downturn – manufacturing output in the U.S. was 13 percent higher than it was in 1998.**

Another error is Mr. Meyerson’s assertion that “By artificially depressing its currency and making its exports cheaper, China is compelling other nations to erect trade barriers.”  Put aside the question of whether or not China truly is “artificially depressing its currency.”  Other nations are no more “compelled” to erect trade barriers in response to Beijing’s cheap-yuan policy than these other nations would be “compelled” to torpedo their own merchant-marine ships in response to Beijing torpedoing Chinese merchant vessels.

Sincerely,
Donald J. Boudreaux

* I adjusted these current-dollar trade figures for inflation by using the Minneapolis Fed’s calculator.

** See table B-51 here.

Here’s a letter that I sent yesterday to the Wall Street Journal:

John Micetich argues that “if we add up the bailouts to all financial firms, we’re well over $1 trillion, at least 10 times more than the Fred/Fan bailout. Therefore, let’s put most of the blame where it belongs: Wall Street investment houses and commercial banks voluntarily taking inordinate risk with shareholder money” (Letters, Nov. 17).

Let’s say that your brother Bob is pastor of a church.  You – a successful gangster – make it known to Bob that you stand ready to repay any of the church’s debts if ever Bob finds the church’s cash flow to be inadequate.

Whom would Mr. Micetich blame if Bob then launches ambitious construction projects to expand the size of the church, only later to find that his parishoners’ contributions are too small to allow payment of the church’s debts?  Surely he won’t blame brother Bob, for Bob quite rationally relied upon your promise to backstop these debts.

The blame clearly is yours, which would be forgivable if your generosity were made manifest with money you earned honestly.  But because you forcibly confiscate money from others, the ultimate losers in this little tragedy are the persons whose wealth you seize – the persons whose seized wealth supports your gaudy lifestyle and your faux-generous promises to brother Bob.

Sincerely,
Donald J. Boudreaux

There are advantage to universal standards. The most important is economies of scale–once you learn the standard, it applies everywhere. But the disadvantages are subtle and usually much greater than the advantages.

I don’t want a single standard of health care, one standard of what’s “best.” Everyone is different and what is best for me may not be best for you. More importantly, what is best is unknowable to a committee of experts. Not hard to know. Not difficult to discover. Unknowable. What age should a women have a mammogram is not a question that has an answer. There are many answers. One reason is that women are different. A more important reason is that our knowledge evolves. What is thought to be “best” (wait until 40) may turn out to be different (wait till 50). But even more importantly, when power is centralized, the very idea of “best” no longer applies. The incentives aren’t there. When there is one standard set by the political process, the experts’ incentives on whatever committee determines the universal standard are inevitably going to be politicized. So give me “inefficient” competition among standards. Let different standards vie for attention.

I was thinking about these issues this afternoon when I spoke at a convention of international accountants. The topic was the crisis but there was a side issue of what they called “convergence,” the idea of a single international accounting standard. As one speaker put it, an investor examining a company in Beijing or Barcelona or Boston should be reading the same information that has been generated by the same standards.

It’s a nice idea. And convergence sounds good, doesn’t it? But I couldn’t help thinking about Basel II. Those were international standards and yes, it was good that they were the same everywhere. But they might not have been the right standard. Yousee, when you have only one standard, it really has to be very, very good or it’s really a disaster. And what is the incentive to come up with the “best” standard? When a standard has a monopoly, the incentive to manipulate it to make sure it complies with your desires is very strong. So rent-seeking is inevitable.

Rather than have a set of experts come up with the best standard, I would prefer competition among standards. Let investor dollars determine which are the best standards. Maybe tehre would be convergence, maybe not. And when there are lots of standards, you can get improvement as people learn over time. But those universal standards struggle to improve. The people who design them have a tendency to defend them even when they’re flawed.

At the end of the discussion, a committee was mentioned, I think it was part of the UN, that was looking at some accounting issue. It was mentioned that the committee represented the different regions of the world. There was a representative from Africa, South America, Asia, North America, and Latin America. Because every part of the world had a representative, it was assumed in the conversation that everyone’s interests would be heard.

The word “representative” is usually used that way, but it really has no meaning. The African “representative” on the commitee is not representing Africa in any meaningful way. There is no African “interest” or meaningful sense of the phrase “what is best for Africa.” Africa is a diverse place. Some rules or standards might benefit rich countries or small countries or multinational corporations or leaders or the people. To say that someone represents Africa is a meaningless phrase. But of course it’s worse than that. The person who is called the African representative has no real incentive to represent Africa or the people of Africa. That person is likely to respond to his or her political patrons. So the whole thing is a romantic illusion.

Give me more competition and less universality.

John Stossel understands economics.

Canadian Rondi Adamson offers her sober thoughts, in this short essay, on Canada’s health-care system.  (HT Gerry Nicholls)  Here’s a short snippet:

We [Canadians] would do well to not preach, in spite of Barack Obama’s assertion — during his appearance a few weeks ago on the Late Show with David Letterman — that Canadians “are perfectly happy with their system.”

Are we? A one-time, extensive US-Canada sponsored study, done in 2004, showed that Canadians and uninsured Americans had similar levels of satisfaction when it came to healthcare. In fact, more Americans (53 percent) than Canadians (44 percent) were said to be “very satisfied” with the state of their healthcare.

My preference would be for Canada to adopt a multi-tiered approach to healthcare, in which the private and public intermingle. For those concerned this would be “unfair,“ they are fooling themselves if they think there aren’t Canadians who, through personal and professional connections, bump queues and otherwise receive favourable treatment.

In this article, I celebrate — on the occasion of his 90th birthday — the central lessons taught by Jim Buchanan (who, I have just learned, will again teach a seminar at GMU this coming Spring semester!).

A key ‘graf from my article:

Buchanan insists that we should always look upon “politics without romance,” that we ought never to forget that all the fine campaign phrases and soaring promises issued by politicians too often disguise the selfish, sometimes sleazy, reality of political activity.

Here’s a letter that I sent yesterday to the Florida Times-Union / Jacksonville.com:

The only thing worse than the satire in Joseph Steinman’s criticism of capitalism is Mr. Steinman’s command of the facts (”Private enterprise: Far from a perfect system,” Nov. 16).

For example, it’s untrue that health-care in the U.S. is supplied by “a mostly unencumbered private sector.”  Medicare, now with an annual budget of $523.6 billion, accounts for nearly one in every four dollars spent on health-care in America.  Other interventions include regulations that restrict consumers’ ability to shop for health-care insurance across state lines; legislatively imposed requirements specifying which conditions insurers must cover; licensing requirements for physicians, dentists, and nurses – requirements that artificially reduce the supply of these health-care providers; and the necessity of securing F.D.A. approval for all new drugs and medical devices.

Whether or not one approves of these interventions, it’s impossible to legitimately deny that they exist, that they significantly affect Americans’ access to health-care, and that they render America’s health-care market far from “unencumbered.”

Sincerely,
Donald J. Boudreaux

Go here and vote if it moves you. The category is Best Education podcast. You can vote once a day for the next two weeks.

Here’s a letter that I sent yesterday to the New York Times:

Columnist Paul Krugman writes that policies to promote “job sharing” are “worthy of consideration” (”Free to Lose,” Nov. 13).

Let’s start at the New York Times.  I know several economists currently without jobs (and certainly without regular newspaper columns).  I propose that Times Co. chairman Arthur Sulzberger reduce Mr. Krugman’s presence on the editorial page to, say, one column per year.  The remaining hundred or so columns that Mr. Krugman would otherwise have written for the NYT can be written by unemployed economists.

I’ll be very happy to supply Mr. Sulzberger with names of economists who need the work.

Sincerely,
Donald J. Boudreaux

This is the opening of my essay that I blogged on last week, “How Little We Know,” on the hopes for financial reform:

When an airplane crashes, expert investigators probe the cause of the crash. Their analysis can lead to changes in aircraft design, flight procedures, and regulations in hopes of reducing the likelihood of a crash in the future. The growth of knowledge in the airline industry has been extremely productive. Between 1989 and 2008, there was a seven-fold reduction in the probability of a fatal crash.

There is a natural tendency for economists (and even for normal people) to presume that similar analytical techniques can be applied to financial crashes. After all, economists presumably know more than we did in the past. We have ever more data and ever more sophisticated techniques for analyzing the data. Yet there is no evidence to suggest that financial market regulation is more effective than in the past. If anything, the opposite appears to be the case.

You can download it here at The Economists’ Voice. I think it requires an institutional subscription, but evidently astute readers have found ways to get it.

“Saves lives, saves souls” — as wonderfully described by reader Charlie Quidnunc, who deserves a hat tip for drawing my and Russ’s attention to this further addition to the Prosperity Pool.

Here’s a letter that I sent yesterday to the New York Times Book Review:

Paul Barrett’s review of two books on today’s financial crisis is a verbal bubble inflated by its author’s irrational exuberance for naïve conventional wisdom and his greedy reliance upon morality-play explanations (”Rational Irrationality,” Nov. 15).

The review never mentions any of the many decidedly anti-laissez-faire interventions leading up to the crisis, such as Uncle Sam’s creation and backing of Fannie and Freddie; or politicians pressuring lenders to make mortgages “more affordable”; or the Fed’s 1998 intervention to save Long Term Capital Management (and the dangerous signal that this intervention sent to Wall Street); or the Fed’s loose monetary policies leading up to the crash.

This latter omission is especially egregious given Mr. Barrett’s favorable reference to John Cassidy’s claim that Adam Smith himself allegedly supported heavy regulation of financial markets.  The quotation from the Wealth of Nations that convinces Mr. Cassidy and Mr. Barrett that Adam Smith was a proto-Barney Frank on matters of financial regulation appears in Smith’s discussion of paper money.  In this quotation Smith endorses restrictions on banks’ issuance of paper money to the general public.  Paper money, Smith believed, is appropriate only for “dealers.”  Regardless of the merit of Smith’s argument here, it is clearly not an endorsement by Smith of widespread regulation of financial markets.

Sincerely,

Donald J. Boudreaux

And my colleague Larry White points out this other passage from Smith, also from Book II, Chapter II of Wealth of Nations:

If bankers are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum; and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the publick, be rendered in all other respects perfectly free. The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the publick. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs, which the rivalship of so many competitors is always ready to bring upon them.

Here’s a letter that I sent yesterday to the New York Times:

Paul Krugman is impressed that in Germany “unemployment is only slightly higher than it was before the crisis” (”Free to Lose,” Nov. 13).  Indeed, Krugman is so bedazzled by the results of Germany’s extensive labor-market interventions that he writes that America “might have something to learn” from “Germany’s jobs miracle.”

Let’s explore this “miracle” with facts.  OECD data reveal that annual unemployment rates in Germany during the ten-year period from 1998 through 2007 (the latest year for which consistent data are available) never fell below 7.5 percent and soared as high as 10.6 percent (in 2005).  Over these ten years, Germany’s unemployment rate averaged 8.9 percent.*

During the same period, America’s annual unemployment rate never rose above 6 percent (which it reached in 2003), and was as low as 4.0 percent (in 2000).  It averaged over these ten years 4.9 percent – fully four percentage points lower than the corresponding figure for “miraculous” Germany.  This fact means that if America during these years had had the same unemployment rate as Germany, roughly 5.5 million more Americans would have been unemployed.

Even if Germany’s restrictive labor policies are the reason that that country’s unemployment rate is today lower than is the current rate in the U.S., a longer-run perspective suggests that America has far less to learn from Germany than Germany has to learn from America.

Sincerely,
Donald J. Boudreaux

Also, as my colleague Tom Hazlett points out (in private correspondence) — and others point out, too — Germany engaged in nothing like the “stimulus” spending that Uncle Sam irresponsibly orgied on during the past couple of years.  Perhaps the fiscally more prudent Germany — the Germany that resisted U.S. calls for obnoxious “stimulus” spending — does have a thing or two to teach America about fiscal policy if not about labor-market policies.

Commenting on this post, Daniel Kuehn suggests that when Paul Krugman advocates European-style labor-market restrictions and subsidies, he (Krugman) does so not as a means of increasing employment today – in the midst of a recession – but, rather, as a means of keeping employment from falling as dramatically from its boom-time highs.  As Daniel puts it, “Krugman was clearly advocating an unemployment-smoothing strategy across the business cycle, which would increase unemployment in boom times but reduce it in busts.”

Having re-read Krugman’s column several times, I disagree with Daniel regarding Krugman’s intent.  Krugman might well believe that such labor-market policies are desirable in part because they are “unemployment-smoothing.”  But in his column he talks about what can and ought to be done now to reduce America’s current double-digit unemployment rate.

But for the sake of argument let me grant, during the remainder of this post, that Daniel’s interpretation of Krugman is correct.  Alas, such a generous reading of the Princeton professor does little to save him from being justly accused of having infused the column in question with questionable economics.

Below, as reported by the OECD, are annual unemployment rates for Germany and the U.S. for the ten-year periord 1998 through 2007.  (I chose this period because I want reliable comparable data for both countries — so I use the OECD’s reported data for both countries, and 2007 is the most-recent year for which the OECD provides annual unemployment rates for each of these countries.)

Year        Germany               U.S.

1998        9.0%                    4.5%

1999        8.3%                    4.2%

2000       7.5%                    4.0%

2001        7.6%                    4.7%

2002       8.4%                    5.8%

2003       9.3%                    6.0%

2004       9.8%                    5.5%

2005      10.6%                   5.1%

2006       9.8%                   4.6%

2007       8.4%                   4.6%

While it’s true that Germany’s unemployment rate today of 7.7% is lower than America’s current rate of 10.2%, it’s very difficult to look at the above numbers on unemployment rates over recent years and conclude that European-style labor-market restrictions are good policies for people seeking gainful employment.  The average rate of unemployment for Germany over the 1998-2007 period was 8.9% while that for the U.S. was 4.9%.

So if these restrictions “smooth” unemployment, they seem to do so by keeping unemployment perpetually high.

(BTW, I italicize “if” because, at least during the downturn at the beginning of 2000s, it’s not at all clear that changes in Germany’s unemployment rates were significantly smoother than were those in the U.S. — but perhaps such “smoothing” is meant to kick in only for really big downturns, such as the one that began in late 2007, in which case there is added force to what I’ll say now as I return to the main line of my argument.)

If high rates of unemployment are undesirable (and they certainly are), what’s the advantage to having “smoother” unemployment over time if that “smoother” unemployment is at levels chronically higher than would exist in the absence of the policies aimed at “smoothing” unemployment?

If a quack physician continually injects substances into your body that keep you feeling ill, year in year out, you’ll not be much comforted knowing that the change in the way you feel when you really get sick is less than is the change in the way that people not subject to the quack physician feel when those people really get sick.  Induced long-term illness is no cure for illness; nor is it a method of making the patient healthy over the long-run.