Markets and Mobility

25 Thursday May 2017

Tags

Arnold Kling, Benefit Mandates, Collective Mind, Consumer Consensus, Don Boudreaux, Drug Laws, Foreign Aid, Jeffrey Tucker, Ludwig von Mises, Market Interactions, Minimum Wage, Occupational Licensing, Price Controls, Private Property, Public Aid, regulation, Wage controls, War on Poverty

Government aid programs tend to perform poorly, especially in developmental terms. In the U.S., anti-poverty programs keep the poor running in place, at best. Yes, they provide minimal income, but they seldom offer a way out and usually discourage it. Moreover, the administration of such programs diverts a significant share of funds to well-heeled civil servants and away from the intended recipients. Foreign aid programs are probably even worse, functioning as catch basins for funding corrupt officials. Progressives, in particular, persist in taking the paternalistic view that we must rely on government action to “care for” and “protect” the poor, able or not. Markets, on the other hand, are held to offer no promise in fighting poverty. In fact, the general assumption made by the progressive left is that markets exploit them.

The truth is that markets offer great promise for encouraging economic mobility. Arnold Kling offers a good conceptual construct in a recent post: while humans are often subject to irrational tendencies in their assessment of choices, their interactions in markets offer a way of smoothing irregularities and disparate bits of information, providing useful signals about the availability of resources and demands for their use. The result is a flow of information that best signals opportunity. Kling calls the process of market interactions the “collective mind”. Rather than encouraging individuals to fully participate in effective markets, free of intervention, we instead deny them the best opportunities for gain. The notion that the poor must be “protected” from markets is embedded in policies like wage and price controls, benefit mandates, overtime rules, drug laws, occupational licensing, and innumerable other harmful regulations. The poor should have the unfettered ability to avail themselves of the social efficiencies of Kling’s collective mind.

Last Thursday, Don Beaudroux’s “Quotation of the Day” was taken from an essay by Ludwig von Mises in which he characterized private property in a market economy as “property by consumer consensus”. In other words, consumers reward sellers who create value, and those rewards accumulate in the form of private property. Likewise, consumers punish poor performance, which has a cumulative negative impact on one’s ability to accumulate or hold onto private property. The benefits conferred by consumer preference do not stop with the owners of the firm. Others productively affiliated with the firm also reap gains in rewards, allowing them to accumulate private property. And of course, consumers are the beneficiaries in the first place: in their judgement the firm delivers value in excess of price. The key here is that free market rewards and penalties are deserved and based on productivity in meeting desires, and only the market can distribute property so efficiently. The able poor can certainly add value and thereby accumulate property, if only given the opportunity.

Jeffrey Tucker has stated that “Only Markets Can Win the War on Poverty” (ellipses are my edits):

“The default state of the world is grueling poverty, universal insecurity, and short lives. When governments do come along, they nearly always serve themselves first. … Capitalism made huge progress toward the conquest of poverty. For the first time in history, the productive resources of society turned from serving mainly the elites toward serving the common person. This change alone began to flip the power narrative of social evolution.

And this revolution continued for ~~two~~ some two-hundred years, during which time the average life span expanded dramatically, infant mortality collapsed, incomes rose, and the great project of universal ennoblement achieved an unprecedented boost. And this trend continues today wherever markets are given freedom to function, property rights are secure, and people can associate and trade without molestation by the elites. … In short, capitalism made huge progress toward the conquest of poverty.“

Markets are not harmful to the poor. To the contrary, as Tucker says, they have helped lift billions out of poverty around the globe. But government increasingly plays the role of big provider and arbiter of what can and can’t be traded, by whom, and at what price. The suspension of the market mechanism by this process denies the poor the opportunities made possible via participation in free markets, whereby Kling’s “collective mind” processes massive quantities of information and acts upon it spontaneously. But the “collective mind” concept, as a description of market interactions, is too simple: we know that individuals act on the signals provided by the market and are rewarded based on how effectively they do so. There is no doubt that the poor can do that too. It’s time to cast aside the paternalistic and destructive notion that the able poor must be insulated from markets.

A Trump Tax Reform Tally

03 Wednesday May 2017

Posted by pnuetz in Big Government, Taxes, Trump Administration

≈ 1 Comment

Tags

Alternative Minimum Tax, Border Adjustment Tax, C-Corporation, Capex Expensing, Capital Tax, Carry Forward Rules, Child Care Tax Credit, Don Boudreaux, Double Taxation, Goldman Sachs, Immigration, Interest Deductibility, Kevin D. Williamson, Mortgage Interest Deduction, Pass-Through Income, Protectionism, Qualified Dividends, Revenue Neutrality, S-Corporation, Shikha Dalmia, Standard Deduction, Tax Burden, Tax Incentives, tax inversion, Tax Reform, Tax Subsidies, Territorial Taxes, Thomas Sowell, Trump Tax Plan

The Trump tax plan has some very good elements and several that I dislike strongly. For reference, this link includes the contents of an “interpretation” of the proposal from Goldman Sachs, based on the one-page summary presented by the Administration last week as well as insights that the investment bank might have gleaned from its connections within the administration. At the link, click on the chart for an excellent summary of the plan relative to current law and other proposals.

At the outset, I should state that most members of the media do not understand economics, tax burdens, or the dynamic effects of taxes on economic activity. First, they seem to forget that in the first instance, taxpayers do not serve at the pleasure of the government. It is their money! Second, Don Boudreaux’s recent note on the media’s “taxing” ignorance is instructive:

“In recent days I have … heard and read several media reports on Trump’s tax plan…. Nearly all of these reports are juvenile: changes in tax rates are evaluated by the media according to changes in the legal tax liabilities of various groups of people. For example, Trump’s proposal to cut the top federal personal income-tax rate from 39.6% to 35% is assessed only by its effect on high-income earners. Specifically, of course, it’s portrayed as a ‘gift’ to high-income earners.

… taxation is not simply a slicing up of an economic pie the size of which is independent of the details of the system of taxation. The core economic case for tax cuts is that they reduce the obstacles to creative and productive activities.“

Boudreaux ridicules those who reject this “supply-side” rationale, despite its fundamental and well-established nature. Thomas Sowell makes the distinction between tax rates and tax revenues, and provides some history on tax rate reductions and particularly “tax cuts for the rich“:

“… higher-income taxpayers paid more — repeat, MORE tax revenues into the federal treasury under the lower tax rates than they had under the previous higher tax rates. … That happened not only during the Reagan administration, but also during the Coolidge administration and the Kennedy administration before Reagan, and under the G.W. Bush administration after Reagan. All these administrations cut tax rates and received higher tax revenues than before.

More than that, ‘the rich’ not only paid higher total tax revenues after the so-called ‘tax cuts for the rich,’ they also paid a higher percentage of all tax revenues afterwards. Data on this can be found in a number of places …“

In some cases, a proportion of the increased revenue may have been due to short-term incentives for asset sales in the wake of tax rate reductions. In general, however, Sowell’s point stands.

Kevin Williamson offers thoughts that could be construed as exactly the sort of thing about which Boudreaux is critical:

“It is nearly impossible to cut federal income taxes in a way that primarily benefits low-income Americans, because high-income Americans pay most of the federal income taxes. … The 2.4 percent of households with incomes in excess of $250,000 a year pay about half of all federal income taxes; the bottom half pays about 3 percent.”

The first sentence of that quote highlights the obvious storyline pounced upon by simple-minded journalists, and it also emphasizes the failing political appeal of tax cuts when a decreasing share of the population actually pays taxes. After all, there is some participatory value in spreading the tax burden in a democracy. I believe Williamson is well aware of the second-order, dynamic consequences of tax cuts that spread benefits more broadly, but he is also troubled by the fact that significant spending cuts are not on the immediate agenda: the real resource cost of government will continue unabated. We cannot count on that from Trump, and that should not be a big surprise. Greater accumulation of debt is a certainty without meaningful future reductions in the growth rate of spending.

Here are my thoughts on the specific elements contained in the proposal, as non-specific as they might be:

What I like about the proposal:

Lower tax rate on corporate income (less double-taxation): The U.S. has the highest corporate tax rates in the developed world, and the corporate income tax represents double-taxation of income: it is taxed at the corporate level and again at the individual level, perhaps not all at once, but when it is actually received by owners.
Adoption of a territorial tax system on corporate income: The U.S. has a punishing system of taxing corporate income wherever it is earned, unlike most of our trading parters. It’s high time we shifted to taxing only the corporate income that is earned in the U.S., which should discourage the practice of tax inversion, whereby firms transfer their legal domicile overseas.
No Border Adjustment Tax (BAT): What a relief! This was essentially the application of taxes on imports but tax-free exports. Whatever populist/nationalist appeal this might have had would have quickly evaporated with higher import prices and the crushing blow to import-dependent businesses. Let’s hope it doesn’t come back in congressional negotiations.
Lower individual tax rates: I like it.
Fewer tax brackets: Simplification, and somewhat lower compliance costs.
Fewer deductions from personal income, a broader tax base, and lower compliance costs. Scrapping deductions for state and local taxes in exchange for lower rates will end federal tax subsidies from low-tax to high-tax states.
Elimination of the Alternative Minimum Tax: This tax can be rather punitive and it is a nasty compliance cost-causer.

What I dislike about the proposal:

The corporate tax rate should be zero (with no double taxation).
Taxation of cash held abroad, an effort to encourage repatriation of the cash for reinvestment in the U.S. Taxes on capital of any kind are an act of repeated taxation, as the income used to accumulate capital is taxed to begin with. And such taxes are destructive of capital, which represents a fundamental engine for productivity and economic growth.
Retains the mortgage interest and charitable deductions: Both are based on special interest politics. The former leads to an overallocation of resources to owner-occupied housing. Certainly the latter has redeeming virtues, but it subsidizes activities conferring unique benefits to large donors.
Increase in the standard deduction: This means fewer “interested” taxpayers. See the discussion of the Kevin Williamson article above.
We should have just one personal income tax bracket, not three: A flat tax would be simpler and would reduce distortions to productive incentives.
Tax relief for child-care costs: More special interest politics. Subsidizing market income relative to home activity, hired child care relative to parental care, and fertility is not an appropriate role for government. To the extent that public aid payments are made, they should not be contingent on how the money is spent.
Many details are missing: Almost anything could happen with this tax “plan” when the real negotiations begin, but that’s politics, I suppose.

Mixed Feelings:

Descriptions of the changes to treatment of pass-through” income seem confused. There is only one kind of tax applied to the income of pass-through entities like S-corporations, and it is the owner’s individual tax rate. Income from C-corporations, on the other hand, is taxed twice: once at a 15% corporate tax rate under the Trump plan, and a second time when it is paid to investors at an individual tax rate, which now range from 15% to almost 24% for “qualified dividends” (most dividend payments), but are likely to range up to 35% for “ordinary” dividends under the plan. So effectively, double-taxed C-corporate income would be taxed at total rates ranging from 30% to 50% after tallying both the C-corp tax and the individual tax. (This is a simplification: C-corp income paid as dividends would be taxed to the corporation and then immediately to the shareholder at their individual rate, while retained corporate income would be taxed later).

Presumably, the Trump tax plan is to reduce the rate on “pass-through” income to just 15% at the individual level, regardless of other income. (It is not clear how that would effect brackets or the rate of taxation on other components of individual income.) Is that good? Yes, to the extent that lower tax rates allow individuals to keep more of their hard-earned income, and to the extent that such a change would help small businesses. S-corps have always had an advantage in avoiding double taxation, however, and this would not end the differential taxation of S and C income, which is distortionary. It might incent business owners to shift income away from salary payments to profit, however, which would increase the negative impact on tax revenue.

Interest deductibility and expensing of capital expenditures are in question. Interest deductibility puts debt funding on an equal footing with equity funding only if the double tax on C-corp income is fully repealed. Immediate expensing of “capex” would certainly provide an investment incentive (as long as “excess” expenses can be carried forward), and for C-corporations, it would certainly bring us closer to elimination of the double-tax on income (the accounting matching principle be damned!).
There is no commitment to shrink government, but that’s partly (only partly) a function of having abandoned revenue neutrality. It’s also something that has been promised for the next budget year.
The tax reform proposal represents a departure from insistence on revenue neutrality: On the whole, I find this appealing, not because I like deficits better than taxes, but because there may be margins along which tax policy can be improved if unconstrained by neutrality, assuming that the incremental deficits are less damaging to the economy than the gains. The political landscape may dictate that desirable changes in tax policy can be made more easily in this way.

Shikha Dalmia wonders whether a real antidote for “Trumpism” might be embedded within the tax reform proposal. If the reforms are successful in stimulating non-inflationary economic growth, a “big if” on the first count, the popular preoccupations inspired by Trump with immigration policy, the “wall” and protectionism might just fade away. But don’t count on it. On the whole, I think the tax reform proposal has promise, though some of the good parts could vanish before a bill hits Trump’s desk, and some of the bad parts could get worse!

Embracing the Robots

03 Friday Mar 2017

Posted by pnuetz in Automation, Labor Markets, Technology

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3-D Printing, Artificial Intelligence, Automation, David Henderson, Don Boudreaux, Great Stagnation, Herbert Simon, Human Augmentation, Industrial Revolution, Marginal Revolution, Mass Unemployment, Matt Ridley, Russ Roberts, Scarcity, Skills Gap, Transition Costs, Tyler Cowan, Wireless Internet

Machines have always been regarded with suspicion as a potential threat to the livelihood of workers. That is still the case, despite the demonstrated power of machines make life easier and goods cheaper. Today, the automation of jobs in manufacturing and even service jobs has raised new alarm about the future of human labor, and the prospect of a broad deployment of artificial intelligence (AI) has made the situation seem much scarier. Even the technologists of Silicon Valley have taken a keen interest in promoting policies like the Universal Basic Income (UBI) to cushion the loss of jobs they expect their inventions to precipitate. The UBI is an idea discussed in last Sunday’s post on Sacred Cow Chips. In addition to the reasons for rejecting that policy cited in that post, however, we should question the premise that automation and AI are unambiguously job killing.

The same stories of future joblessness have been told for over two centuries, and they have been wrong every time. The vulnerability in our popular psyche with respect to automation is four-fold: 1) the belief that we compete with machines, rather than collaborate with them; 2) our perpetual inability to anticipate the new and unforeseeable opportunities that arise as technology is deployed; 3) our tendency to undervalue new technologies for the freedoms they create for higher-order pursuits; and 4) the heavy discount we apply to the ability of workers and markets to anticipate and adjust to changes in market conditions.

Despite the technological upheavals of the past, employment has not only risen over time, but real wages have as well. Matt Ridley writes of just how wrong the dire predictions of machine-for-human substitution have been. He also disputes the notion that “this time it’s different”:

“The argument that artificial intelligence will cause mass unemployment is as unpersuasive as the argument that threshing machines, machine tools, dishwashers or computers would cause mass unemployment. These technologies simply free people to do other things and fulfill other needs. And they make people more productive, which increases their ability to buy other forms of labour. ‘The bogeyman of automation consumes worrying capacity that should be saved for real problems,’ scoffed the economist Herbert Simon in the 1960s.“

As Ridley notes, the process of substituting capital for labor has been more or less continuous over the past 250 years, and there are now more jobs, and at far higher wages, than ever. Automation has generally involved replacement of strictly manual labor, but it has always required collaboration with human labor to one degree or another.

The tools and machines we use in performing all kinds of manual tasks become ever-more sophisticated, and while they change the human role in performing those tasks, the tasks themselves largely remain or are replaced by new, higher-order tasks. Will the combination of automation and AI change that? Will it make human labor obsolete? Call me an AI skeptic, but I do not believe it will have broad enough applicability to obviate a human role in the production of goods and services. We will perform tasks much better and faster, and AI will create new and more rewarding forms of human-machine collaboration.

Tyler Cowen believes that AI and automation will bring powerful benefits in the long run, but he raises the specter of a transition to widespread automation involving a lengthy period of high unemployment and depressed wages. Cowen points to a 70-year period for England, beginning in 1760, covering the start of the industrial revolution. He reports one estimate that real wages rose just 22% during this transition, and that gains in real wages were not sustained until the 1830s. Evidently, Cowen views more recent automation of factories as another stage of the “great stagnation” phenomenon he has emphasized. Some commenters on Cowen’s blog, Marginal Revolution, insist that estimates of real wages from the early stages of the industrial revolution are basically junk. Others note that the population of England doubled during that period, which likely depressed wages.

David Henderson does not buy into Cowans’ pessimism about transition costs. For one thing, a longer perspective on the industrial revolution would undoubtedly show that average growth in the income of workers was dismal or nonexistent prior to 1760. Henderson also notes that Cowen hedges his description of the evidence of wage stagnation during that era. It should also be mentioned the share of the U.S. work force engaged in agricultural production was 40% in 1900, but is only 2% today, and the rapid transition away from farm jobs in the first half of the 20th century did not itself lead to mass unemployment nor declining wages (HT: Russ Roberts). Cowen cites more recent data on stagnant median income, but Henderson warns that even recent inflation adjustments are fraught with difficulties, that average household size has changed, and that immigration, by adding households and bringing labor market competition, has had at least some depressing effect on the U.S. median wage.

Even positive long-run effects and a smooth transition in the aggregate won’t matter much to any individual whose job is easily automated. There is no doubt that some individuals will fall on hard times, and finding new work might require a lengthy search, accepting lower pay, or retraining. Can something be done to ease the transition? This point is addressed by Don Boudreaux in another context in “Transition Problems and Costs“. Specifically, Boudreaux’s post is about transitions made necessary by changing patterns of international trade, but his points are relevant to this discussion. Most fundamentally, we should not assume that the state must have a role in easing those transitions. We don’t reflexively call for aid when workers of a particular firm lose their jobs because a competitor captures a greater share of the market, nor when consumers decide they don’t like their product. In the end, these are private problems that can and should be solved privately. However, the state certainly should take a role in improving the function of markets such that unemployed resources are absorbed more readily:

“Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.“

Boudreaux also notes that workers should never be treated as passive victims. They are quite capable of acting on their own behalf. They often act out of risk avoidance to save their funds against the advent of a job loss, invest in retraining, and seek out new opportunities. There is no question, however, that many workers will need new skills in an economy shaped by increasing automation and AI. This article discusses some private initiatives that can help close the so-called “skills gap”.

Crucially, government should not accelerate the process of automation beyond its natural pace. That means markets and prices must be allowed to play their natural role in directing resources to their highest-valued uses. Unfortunately, government often interferes with that process by imposing employment regulations and wage controls — i.e., the minimum wage. Increasingly, we are seeing that many jobs performed by low-skilled workers can be automated, and the expense of automation becomes more worthwhile as the cost of labor is inflated to artificial levels by government mandate. That point was emphasized in a 2015 post on Sacred Cow Chips entitled “Automate No Job Before Its Time“.

Another past post on Sacred Cow Chips called “Robots and Tradeoffs” covered several ways in which we will adjust to a more automated economy, none of which will require the intrusive hand of government. One certainty is that humans will always value human service, even when a robot is more efficient, so there will be always be opportunities for work. There will also be ways in which humans can compete with machines (or collaborate more effectively) via human augmentation. Moreover, we should not discount the potential for the ownership of machines to become more widely dispersed over time, mitigating the feared impact of automation on the distribution of income. The diffusion of specific technologies become more widespread as their costs decline. That phenomenon has unfolded rapidly with wireless technology, particularly the hardware and software necessary to make productive use of the wireless internet. The same is likely to occur with 3-D printing and other advances. For example, robots are increasingly entering consumer markets, and there is no reason to believe that the same downward cost pressures won’t allow them to be used in home production or small-scale business applications. The ability to leverage technology will require learning, but web-enabled instruction is becoming increasingly accessible as well.

Can the ownership of productive technologies become sufficiently widespread to assure a broad distribution of rewards? It’s possible that cost reductions will allow that to happen, but broadening the ownership of capital might require new saving constructs as well. That might involve cooperative ownership of capital by associations of private parties engaged in diverse lines of business. Stable family structures can also play a role in promoting saving.

It is often said that automation and AI will mean an end to scarcity. If that were the case, the implications for labor would be beside the point. Why would anyone care about jobs in a world without want? Of course, work might be done purely for pleasure, but that would make “labor” economically indistinguishable from leisure. Reaching that point would mean a prolonged process of falling prices, lifting real wages on a pace matching increases in productivity. But in a world without scarcity, prices must be zero, and that will never happen. Human wants are unlimited and resources are finite. We’ll use resources more productively, but we will always find new wants. And if prices are positive, including the cost of capital, it is certain that demands for labor will remain.

The Insidious Guaranteed Income

26 Sunday Feb 2017

Posted by pnuetz in Welfare State

≈ 3 Comments

Tags

Artificial Intelligence, Automation, Bryan Caplan, Cash vs. In-Kind Aid, Don Boudreaux, Earned Income Tax Credit, Forced Charity, Guaranteed Income, Incentive Effects, Mises Wire, Nathan Keeble, Permanent Income Hypothesis, Subsidies, Tax Cliff, UBI, Universal Basic Income

Praise for the concept of a “universal basic income” (UBI) is increasingly common among people who should know better. The UBI’s appeal is based on: 1) improvement in work incentives for those currently on public aid; 2) the permanent and universal cushion it promises against loss of livelihood; 3) the presumed benefits to those whose work requires a lengthy period of development to attain economic viability; and 4) the fact that everyone gets a prize, so it is “fair”. There are advocates who believe #2 is the primary reason a UBI is needed because they fear a mass loss of employment in the age of artificial intelligence and automation. I’ll offer some skepticism regarding that prospect in a forthcoming post.

And what are the drawbacks of a UBI? As an economic matter, it is outrageously expensive in both budgetary terms and, more subtly but no less importantly, in terms of its perverse effects on the allocation of resources. However, there are more fundamental reasons to oppose the UBI on libertarian grounds.

Advocates of a UBI often use $10,000 per adult per year as a working baseline. That yields a cost of a guaranteed income for every adult in the U.S. on the order of $2.1 trillion. We now spend about $0.7 trillion a year on public aid programs, excluding administrative costs (the cost is $1.1 trillion all-in). The incremental cost of a UBI as a wholesale replacement for all other aid programs would therefore be about $1.4 trillion. That’s roughly a 40% increase in federal outlays…. Good luck funding that! And there’s a strong chance that some of the existing aid programs would be retained. The impact could be blunted by excluding individuals above certain income thresholds, or via taxes applied to the UBI in higher tax brackets. However, a significant dent in the cost would require denying the full benefit to a large segment of the middle class, making the program into something other than a UBI.

Nathan Keeble at Mises Wire discusses some of the implications of a UBI for incentives and resource allocation. A traditional criticism of means-tested welfare programs is that benefits decline as market income increases, so market income is effectively taxed at a high marginal rate. (This is not a feature of the Earned Income Tax Credit (EITC).) Thus, low-income individuals face negative incentives to earn market income. This is the so-called “welfare cliff”. A UBI doesn’t have this shortcoming, but it would create serious incentive problems in other ways. A $1.4 trillion hit on taxpayers will distort work, saving and investment incentives in ways that would make the welfare cliff look minor by comparison. The incidence of these taxes would fall heavily on the most productive segments of society. It would also have very negative implications for the employment prospects of individuals in the lowest economic strata.

Keeble describes another way in which a UBI is destructive. It is a subsidy granted irrespective of the value created by work effort. Should an individual have a strong preference for leisure as opposed to work, a UBI subsidy exerts a strong income effect in accommodating that choice. Or, should an individual have a strong preference for performing varieties of work for which they are not well-suited, and despite having a relatively low market value for them, the income effect of a UBI subsidy will tend to accommodate that choice as well. In other words, a UBI will subsidize non-economic activity:

“The struggling entrepreneurs and artists mentioned earlier are struggling for a reason. For whatever reason, the market has deemed the goods they are providing to be insufficiently valuable. Their work simply isn’t productive according to those who would potentially consume the goods or services in question. In a functioning marketplace, producers of goods the consumers don’t want would quickly have to abandon such endeavors and focus their efforts into productive areas of the economy. The universal basic income, however, allows them to continue their less-valued endeavors with the money of those who have actually produced value, which gets to the ultimate problem of all government welfare programs.“

I concede, however, that unconditional cash transfers can be beneficial as a way of delivering aid to impoverished communities. This application, however, involves a subsidy that is less than universal, as it targets cash at the poor, or poor segments of society. The UBI experiments described in this article involve private charity in delivering aid to poor communities in underdeveloped countries, not government sponsored foreign aid or redistribution. Yes, cash is more effective than in-kind aid such as food or subsidized housing, a proposition that economists have always tended to support as a rule. The cash certainly provides relief, and it may well be used as seed money for productive enterprises, especially if the aid is viewed as temporary rather than permanent. But that is not in the spirit of a true UBI.

More fundamentally, a UBI is objectionable from a libertarian perspective because it involves a confiscation of resources. In “Why Libertarians Should Oppose the Universal Basic Income“, Bryan Caplan makes the point succinctly:

“Forced charity is unjust. Individuals have a moral right to decide if and when they want to help others….

Forcing people to help others who can’t help themselves… is at least defensible. Forcing people to help everyone is not. And for all its faults, at least the status quo makes some effort to target people who can’t help themselves. The whole idea of the Universal Basic Income, in contrast, is to give money to everyone whether they need it or not.”

Later, Caplan says:

…libertarianism isn’t about the freedom to be coercively supported by strangers. It’s about the freedom to be left alone by strangers.“

Both Keeble and Caplan would argue that the status quo, with its hodge-podge of welfare programs offering tempting but rotten incentives to recipients, is preferable to the massive distortions that would be created by a UBI. The mechanics of such an intrusion are costly enough, but as Don Boudreaux has warned, the UBI would put government in a fairly dominant position as a provider:

“… such an income-guarantee by government will further fuel the argument that government is a uniquely important and foundational source of our rights and our prosperity – and, therefore, government is uniquely entitled to regulate our behavior.“

Busting the K-12 Monopoly

12 Monday Dec 2016

Posted by pnuetz in Education, School Choice

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Betsy DeVos, Cafe Hayek, Don Boudreaux, Donald Trump, Education Funding, GI Bill, Opportunity cost, Public School Monopoly, Racial Segregation, School Choice, School Vouchers, Teachers Unions

Public school teachers are highly sensitive to any suggestion that their schools should “compete” for students, but it’s difficult to rationalize restrictions on competition faced by any institution that trades with consumers. Education is certainly not a natural monopoly. But in the U.S., K-12 public schools are granted an effective service monopoly over large segments of their local markets. Their monopoly status is a legacy and usually taken for granted, but that does not make the arrangement a natural state of affairs, or a healthy one.

The idea that education is a “public good”, or nonexclusive in the benefits it confers, is true only in a weak sense. Yes, there are external benefits from the education of children, but those are secondary to the personal benefits reaped by the children themselves as they go through life. And even strong public spillover benefits do not imply that government should provision the education itself, free of competition. Economic theory justifying intervention in markets implies only that the public sector should attempt to augment supply; direct production by the public sector is unnecessary and often unwise. Competition among schools will bring forth more of the private and public benefits than a monopoly.

But the public schools are free, and that doesn’t sound like a monopoly, right? Well, no, they aren’t free! Not to taxpayers, of course, but also, not to families with children who are denied the right to fully internalize the true opportunity cost of the resources claimed by public schools. The option to move to a school district with better academic performance is unavailable to many families. What would those families decide given a greater degree of empowerment to consider alternatives?

About 18 months ago, the topic of the K-12 monopoly was the subject of a favorite post on Sacred Cow Chips called: “Public Monopolists Say “Don’t Be Choosy“. It called attention to a thought exercise featured by economist Don Boudreaux on Cafe Hayek. Consumers are very choosy about their food, and they should be. Why shouldn’t they be just as choosy about another essential: the school for their children? Because the government won’t let them! Boudreaux lists factors that would make consumer grocery distribution just like the structure of K-12 education. That includes property taxes to pay for “public” grocery stores and the allotments of food they distribute, assignment of each family to a single public grocery store, but freedom to shop at “private” grocery stores at additional expense. He then asks how the food distribution system would perform. Here’s Boudreaux:

“Being largely protected from consumer choice, almost all public supermarkets would be worse than private ones. In poor counties the quality of public supermarkets would be downright abysmal. ….

Responding to these failures, thoughtful souls would call for ‘supermarket choice’ fueled by vouchers or tax credits. Those calls would be vigorously opposed by public-supermarket administrators and workers.

Opponents of supermarket choice would accuse its proponents of demonizing supermarket workers (who, after all, have no control over their customers’ poor eating habits at home). Advocates of choice would also be accused of trying to deny ordinary families the food needed for survival. Such choice, it would be alleged, would drain precious resources from public supermarkets whose poor performance testifies to their overwhelming need for more public funds.

As for the handful of radicals who call for total separation of supermarket and state—well, they would be criticized by almost everyone as antisocial devils indifferent to the starvation that would haunt the land if the provision of groceries were governed exclusively by private market forces.

In the face of calls for supermarket choice, supermarket-workers unions would use their significant resources for lobbying—in favor of public-supermarkets’ monopoly power and against any suggestion that market forces are appropriate for delivering something as essential as groceries.“

That’s exactly the behavior we see from the teacher’s unions, from which sanctimony flows liberally as to “public service”. Remember that the classic monopolist actively engages in denying choice and restraining trade through private actions, public relations and various other political means. But why would any sane observer have concluded that these “protected markets” would lead to successful outcomes?

It’s no secret that public schools in the U.S. face severe challenges. They are highly uneven in their results. A recent report in U.S. News said the following:

“Since World War II, inflation-adjusted spending per student in American public schools has increased by 663 percent. Where did all of that money go? One place it went was to hire more personnel. Between 1950 and 2009, American public schools experienced a 96 percent increase in student population. During that time, public schools increased their staff by 386 percent – four times the increase in students. The number of teachers increased by 252 percent, over 2.5 times the increase in students. The number of administrators and other staff increased by over seven times the increase in students.“

Federal efforts to improve K-12 education have been remarkably fruitless. Despite the massive increases in staffing over the past 50 years at all levels, graduation rates are still miserable in minority districts; schools are more segregated today than 50 years ago; huge gaps exist between the achievement of students in high and low-income districts; and math scores on standardized tests rank near the bottom of OECD countries, (science and reading scores are closer to the average).

The usual rejoinder from the public school establishment is that still greater funding is needed. Always more…. But families are exercising their right to opt-out. The number of home-schooled children is likely to exceed two million by 2020. There are now programs in 32 states facilitating choice through vouchers, tax credits, tax deductions, and education savings accounts. The body of research surrounding the effects of school choice is overwhelmingly positive: choice has improved academic outcomes in both private schools and the public schools that are forced to compete, it has a positive fiscal impact, and it reduces racial segregation. The constant drumbeat of additional funding requests looks unnecessary and wasteful in view of the options.

As for federal dollars, one suggestion is to pare back sharply the number of bureaucrats at the education department, putting the savings toward a program that would emulate the hugely successful GI Bill, under which beneficiaries chose how to spend the money.

Donald Trump’s nominee for education secretary is school choice advocate Betsy DeVos. Obviously, the new administration will not view the public school monopoly as untouchable. But let’s get one thing straight: no one is trying to “ruin” public schools. The objective is to fix something that’s been broken for a long time and, in so doing, to improve educational outcomes across all segments of society. The medicine delivered thus far, including top-down planning and profligate spending, has been expensive and ineffective, and even counterproductive in some respects. A few bad schools will fail under a competitive regime, but they already do. Bad schools have no sacred right to survive. Most struggling schools will improve, leveraging innovative techniques as well as their natural advantages, which often include proximity to a base of prospective students. It’s time to tackle the education problem by vesting consumers with sovereignty in the choice of schools.

Robots and Tradeoffs

31 Wednesday Aug 2016

Posted by pnuetz in Living Wage, Markets, Technology

≈ 1 Comment

Tags

AI, Artificial Intelligence, Biohacking, Capital Intensity, Collaborative Automation, Cyborgization, David Autor, Don Boudreaux, Exoskeletons, Factor Substitution, Farmbots, George Selgin, gier.org, Hal Varian, Human Augmentation, Labor Productivity, Minimum Wage, Owning Machines, Pew Research Center, Resource Allocation, Robert Samuelson, Robotics, Scarcity, Singularity Hub, Superabundance, Work-Leisure Tradeoff

The other day, a few colleagues were lamenting the incipient robot domination of the workplace. It is true that advances in automation and robotics are likely to displace workers in a variety of fields over the next few decades. However, the substitution of capital for labor is not a new phenomenon. It’s been happening since the start of the industrial age. At the same time, capital has been augmenting labor, making it more productive and freeing it up for higher-valued uses, many of which were previously unimagined. The large-scale addition of capital to the production process has succeeded in raising labor productivity dramatically, and labor income has soared as a consequence. That is likely to continue as increasingly sophisticated robots assume certain tasks entirely and collaborate with workers on others, even in the service sector.

Advanced forms of automation are another step in the progression of technology. The process itself, however, and the adoption of robotics, might well be hastened by public policy that pushes labor costs to levels not commensurate with productivity. I wrote about this process in “Automate No Job Before Its Time” on Sacred Cow Chips late last year. The point of that essay was that government-imposed wage floors create an incentive for automation. Because a wage floor has its impact at the bottom of the wage scale, at which workers are the least-skilled, this form of government intervention creates a regrettable and unnatural acceleration in the automation process. Other mandated benefits and workplace regulations can have similar effects.

Robert Samuelson makes the same points in “Our Robot Panic Is Overblown“. He notes the effectiveness of the U.S. economy in creating jobs over time in the presence of increasing capital-intensity. But he also warns of potential missteps, including the dangers of government activism:

“There are two dangers for the future. One is that the new jobs created by new technologies will require knowledge and skills that are in short supply, leaving unskilled workers without income and the economy with skill scarcities. … The second danger is that government will damage or destroy the job creation process. We live in a profit-making economic system. Government’s main role is to maintain the conditions that make hiring profitable. … If we make it too costly for private firms to hire (through high minimum wages, mandated costs and expensive regulations) — or too difficult to fire — guess what? They won’t hire. That’s what ought to worry us, not the specter of more robots.“

Historically, automation has actually created more jobs than it has destroyed. In general, however, the new jobs have required higher levels of skills than the jobs lost. In “Why Are There Still So Many Jobs? The History and Future of Workplace Automation“, David Autor of MIT says it this way:

“Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that lead to higher demand for labor, and interacts with adjustments in labor supply. … journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor.“

As with almost all automation, robots will replace workers in the most routine tasks. Tasks involving less routine will not be as readily assumed by robots. To a large degree, people misunderstand the nature of automation in the workplace. The introduction of robots often requires collaboration with humans, but again, these humans must have more highly-developed skills than a typical line worker.

Hal Varian, who is the chief economist at Google, describes the positive implications of the ongoing trend to automate (see the link in the last paragraph of this post), namely, less drudgery and more leisure:

“If ‘displace more jobs’ means ‘eliminate dull, repetitive, and unpleasant work,’ the answer would be yes. How unhappy are you that your dishwasher has replaced washing dishes by hand, or your vacuum cleaner has replaced hand cleaning? My guess is this ‘job displacement’ has been very welcome, as will the ‘job displacement’ that will occur over the next 10 years. The work week has fallen from 70 hours a week to about 37 hours now, and I expect that it will continue to fall. This is a good thing. Everyone wants more jobs and less work. Robots of various forms will result in less work, but the conventional work week will decrease, so there will be the same number of jobs (adjusted for demographics, of course).“

An extreme version of the “robot domination” narrative is that one day in the not-too-distant future, human labor will be obsolete. Automation is not limited to repetitive or menial tasks by any means. A wide variety of jobs requiring advanced skills have the potential to be automated. Already, robots are performing certain tasks formerly done only by the likes of attorneys, surgeons, and computer programmers. Robots have the potential to repair each other, to self-replicate, to solve high-order analytical problems and to engage in self-improvement. With advances in artificial intelligence (AI), might humans one day become wholly obsolete for productive tasks? What does that portend for the future of so many human beings and their dependents who, heretofore, have relied only on their labor to earn a living?

There are any number of paths along which the evolution of technology, and its relationship to workers and consumers, might play out. The following paragraphs examine some of the details:

The Human Touch: There will probably always be consumers who prefer to transact with humans, as opposed machines. This might be limited to a subsegment of the population, and it might be limited to the manufacture of certain artisan goods, such as hand-rolled cigars, or certain services. Some of these services might require qualities that are more uniquely human, such as empathy, and the knowledge that one is dealing with a human would be paramount. This niche market might be willing to pay premium prices, much as consumers of organic foods are willing to pay an extra margin. However, it will be necessary to retain the perceived quality of the human touch and to remain reasonably competitive with automated alternatives on price.

Human Augmentation: Another path for the development of technology is the cyborgization of labor. This might seem rather distasteful to current sensibilities, but it’s a change that is probably inevitable. At least some will choose it. Here is an interesting definition offered by geir.org:

“Cyborgization is the enhancement of a biological being with mechanical or non-genetically delivered biological devices or capabilities. It includes organ or limb replacements, internal electronics, advanced nanomachines, and enhanced or additional capabilities, limbs, or senses.“

These types of modifications can make “enhanced” humans competitive with machines in all kinds of tasks. The development of these kinds of technologies is taking place within the context of rehabilitative medical care and even military technology, such as powerful exoskeletons, but the advances will make their way into normal civilian life. There is also development activity taking place among extreme hobbyists underground, such as “biohackers” who perform self-experimentation, embedding magnets or electronic chips in their bodies in attempts to develop a “sixth sense” or enhanced physical abilities. Even these informal efforts, while potentially risky to the biohackers themselves, might lead to changes that will benefit mankind, much like the many great garage tinkerers who have been important to innovation in the past.

Owning Machines: Ownership of capital will take on a greater role in providing for lifetime earnings. Can the distribution of capital ever be broadened to the extent needed to replace lost labor income? There are ways in which this can occur. The first thing to note is that the transition to a labor-free economy, were that to transpire, would play out over many years. Second, we have witnessed an impressive diffusion of advanced technologies in recent decades. Today, consumers across the income spectrum hold computers in their pockets that are more than the equivalent of the supercomputers that existed 50 years ago. Today’s little computers are far more useful in many ways, given wireless internet connectivity. There are many individuals for whom these devices are integral to earning an income. Thus, the rate of return on these machines can be quite impressive. The same is true of computers, software (sometimes viewed as capital) and printers, not to mention other “modern” contrivances with income-earning potential such as cars, trucks and a vast array of other tools and hardware. Machines with productive potential will continue to make their way into our lives, both as consumers and as individual producers. This also will include value-added production of goods at home, even for use or consumption within the household (think 3D printers, or backyard “farmbots”).

Saving Constructs: Most of the examples above involve machines that require some degree of human collaboration. Of course, even the act of consuming involves labor: I must lift the fork to my mouth for every bite! But in terms of earning income from machines, are there other ways in which ownership of capital can be broadened? The first answer is an old one: saving! But there is no way most individuals at the start of their “careers” can garner a significant share of income from capital. Other social arrangements are probably necessary. One of great importance is the family and family continuity. Many who have contemplated a zero-labor future imagine a world in which there are only two kinds of actors: individuals and the state. Stable families, however, hold the potential for accumulating capital over time to provide a flow of income for their members. Other forms of social organization can fill this role, but they must be able to accumulate capital endowments across generations. Of course, in an imagined world with minimal opportunities for labor, some have concluded that society must collectively provide a guaranteed income. To indulge that view for just a moment, a world of complete automation would almost certainly be a world of superabundance, so goods would be extremely cheap. That means a safety net could be provided at a very low cost. Nonetheless, it would be far preferable to do so by distributing a minimal number of shares of ownership in machines. These shares would have some value, and to improve resource allocation, it should be the individual’s responsibility to manage those shares.

Economic Transition: The dynamics of the transition to robot-dominated production raise some interesting economic questions. Should the advancement of robotics and artificial intelligence create a massive substitution away from labor, it will be spurred by 1) massive upward shifts in the productivity of capital relative to its cost; and 2) real wages that exceed labor’s marginal productivity. There will be stages of surging demand for the kinds of advanced labor skills that are complementary to robots. The demand for less advanced labor services does not have to fall to zero, however. There will be new opportunities that cannot be predicted today. Bidding for scarce capital resources and the flow of available saving will drive up capital costs, slowing the transition. And as long as materials, energy and replacement parts have a cost, and as long as savers demand a positive real return, there will be a margin along which it will be profitable to employ various forms of labor. But downward adjustment of real wages will be required. Government wage-floor policies must be abandoned. That will not be as difficult as it might sound: the kind of automation envisioned here would have profound effects on overall costs and the supply of goods, leading to deflation in the prices of consumables. As long as real factor prices can adjust, there will almost certainly remain a balance between the amounts of capital and labor employed.

In “Robots Are Nothing New“, Don Boudreaux passes along this comment from George Selgin:

“I’ve always been aghast at finding many otherwise intelligent economists arguing as if technology had a mind of its own, developing willy-nilly, or even perversely, in relation to the relative scarcity of available factors, including labor. Only thus can it happen that labor-saving technology develops to a point where labor, instead of being relatively scarce, becomes superabundant!

The fundamental problem, I believe, is confusion of the role of technological change with that of government interference with the pricing of labor services that is among the things to which technology in turn responds. Labor-saving technology becomes associated with unemployment, not because the last is a consequence of the former, but because both are contemporaneous consequences of a common cause, to wit: minimum wage laws and other such interference that sets wage rates above their market-clearing levels.“

There is much disagreement on the implications of automation. This excellent survey of experts by the Pew Research Center contains a number of insights. Also, visit Singularity Hub for a number of great articles on automation and AI, some of which are surprising. I believe that these technologies hold a great deal of promise for humanity. The process will not take place as suddenly as some fear, but ill-conceived policies such as a mandated “living wage” would put us on an unnaturally speedy trajectory. Opportunities for the least-skilled workers will be foreclosed too soon, before those individuals can develop skills and improve their odds of establishing a life free of dependency. Too rapid an adoption of advanced automation and AI would increase the likelihood of choosing suboptimal production methods that might be difficult to change later, and it would leave little time for education and training for workers who might otherwise leverage new technologies. The benefits of automation and their diffusion can be maximized by allowing advances to take a natural course, guided by market forces, with as little interference from government as possible.

Suspending the Economic Problem With Free Stuff

27 Saturday Aug 2016

Posted by pnuetz in Central Planning, Socialism, Subsidies

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Bernie Sanders, central planning, Confiscation, Contrived Scarcity, Don Boudreaux, Free Stuff, Hillary Clinton, incentives, Jeffrey Tucker, Nonprice Rationing, Overuse of Resources, Property Rights, Redistribution, Scarcity Deniers, Socialism

When things are scarce, they can’t be free. That’s an iron law of economics. It’s true of everything we ever wish for and almost everything we take for granted. Things are naturally scarce, but when we are told that things can be free, it always comes from likes of whom Jeffrey Tucker calls “scarcity deniers”. Bernie Sanders and Hillary Clinton have told America that a college education should be free, and a large number of people take that seriously. They are scarcity deniers. On one level, the Sanders/Clinton claim is like any other promise that simply cannot be met at the stated cost — a rather garden-variety phenomenon among politicians. These promises are not harmless, as such initiatives usually involve budget overruns, compromised markets, underproduction and wasted resources.

The Sanders/Clinton claim, however, is a form of scarcity-denial that comes almost exclusively from the political left. That is really the point of Tucker’s article:

“This claim seems to confirm everything I’ve ever suspected about socialism. It’s rooted in a very simple error, one so fundamental that it denies a fundamental feature of the world. It denies the existence and the persistence of scarcity itself. That is to say, it denies that producing and allocating is even a problem. If you deny that, it’s hardly surprising that you have no regard for economics as a discipline of the social sciences.“

Our socialist friends (who otherwise claim to be defenders of science) contend that free things can be offered to a broad swath of the population with little consequence. The least cynical among them (perhaps including Sanders) believe that the costs can be shouldered by the wealthy and/or big corporations and banks. Others (including Clinton) know that the cost of “free things” must be met by higher taxes on a broader share of the population. Doesn’t that mean they recognize scarcity? Only superficially, because they fail to grasp the dynamics of resource allocation, the subtle forms in which costs are imposed, and the true magnitude of those costs.

If a thing is scarce, available supplies must be balanced against demand. The reward to suppliers at the margin must match the willingness of buyers to pay. That means there is no surplus and waste, nor any loss attendant to shortage and non-price rationing. The price creates an incentive for consumers to conserve and an incentive for producers to bring additional supplies to market when they are demanded.

A crucial prerequisite for this to work is the establishment of secure property rights. Then, absent coercion, one can’t overuse what isn’t theirs. One can’t simply take a thing from those who create it without a mutually agreeable payment. Creators cannot be forced to respond on demand without compensation. No one can be required to husband resources for others to simply take. No one can be asked to pay for a thing that will be commandeered by others. The establishment of property rights serves these purposes. Incentives become meaningful because they can be internalized by all actors — those consuming and those producing. And the incentives solve the problem of scarcity by balancing the availability of things with needs and desires, and balance them against all other competing uses of resources. Then, the market-clearing price of a thing reflects its degree of scarcity relative to other goods.

The socialist bluster holds that all this is nonsense. Would-be central planners propose that more of a thing be produced because they deem it to be of high value. Furthermore, it must be made available to buyers at a price the planners deem acceptable, or quite possibly for free to their intended constituency! Property rights are violated here in several ways: first, the owner/producer’s authority over their own resources is declared void; second, the owner has no incentive to care for their resources in a responsible and sustainable way; third, a confiscation of resources from others is required to pay at least some of the costs; fourth, the beneficiaries overuse and degrade the resource.

We know a scarce thing cannot be provided for free. Here are some consequences of trying:

Overuse of resources. When the buffet is free, the food disappears.
The “free thing” will be over-allocated to those who benefit and value it the least. (Example: the education of students for whom there are better alternatives.)
Supplies will evaporate unless producers are fully compensated. Otherwise, quality and quantity will deteriorate. This is a form of “contrived scarcity” (HT: Don Boudreaux).
If supplies dwindle, new forms of rationing will be necessary. This might involve time-consuming queues, arbitrary allocations, bribes, side payments and favoritism.
If suppliers are compensated, someone must pay. That means taxes, public borrowing or money printing.
Taxes weaken productive incentives and chase resources away. The consequent deterioration in productive capacity undermines the original goal of providing something “for free” and inflicts costs on the outcomes of all other markets. This creates more contrived scarcity.
So-called progressive taxes tend to hit the most productive classes with the greatest negative force.
Government borrowing to fund “free stuff” today inflicts costs on future taxpayers. More fundamentally, it misallocates resources toward the present and away from the future.
Printing money to pay for a “free thing” might well cause a general rise in prices. This is a classic, hidden inflation tax, and it may involve the distortion of interest rates, leading to an inter-temporal misallocation of resources.

Scarcity denial is a carrot, but it inevitably becomes a stick. To voters, and to naive shoppers in the marketplace of ideas, the indignant assertion that things can and should be free is powerful rhetoric. Producers, too, might happily accept “free-stuff” policies if they expect to be fully compensated by the government, and they might be pleased to have the opportunity to serve more customers if they think they can do so profitably. However, serving all takers of “free stuff” will escalate costs and is likely to compromise quality. It is also likely to create unpleasant circumstances for customers, such as long waiting times and unfulfilled orders. The stick, on the other hand, will be brandished by the state, blaming and penalizing suppliers for their failure to meet expectations that were unrealistic from the start. The fault for contrived conditions of scarcity lies with the policy itself, not with producers, except to the extent that they allowed themselves to be duped by scarcity deniers. Tucker notes the following:

“Things can be allocated by arbitrary decision backed by force, or they can be allocated through agreement, trading, and gifting. The forceful way is what socialism has always become.“

Politicians and would-be planners with the arrogance to claim that naturally scarce things should be free are dangerous to your welfare. These scarcity deniers cannot provide for human needs more effectively than the free market, and ultimately their efforts will make you subservient and poor.

Trade Enragement Syndrome

31 Sunday Jul 2016

Posted by pnuetz in Free Trade, Protectionism

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Bernie Sanders, Capital Account Surplus, Don Boudreaux, Donald Trump, Free trade, Geocentrism, Heliocentrism, Import Competition, monopoly power, NAFTA, Protectionism, Trade Deficit, Trans-Pacific Partnership

Trade makes us richer, not poorer. The anti-trade rhetoric spouted by neo-mercantilists like Donald Trump and Bernie Sanders is about as sensible as a boycott on goods produced in the next town, or for that matter, on anyone with whom one might otherwise choose to trade. Don Boudreaux perfectly captures my feelings about the rising trend of protectionist sentiment by comparing it to geocentrism:

“Lately I feel as I imagine an astronomer would today feel if, centuries after Copernicus and Galileo proved beyond a shadow of a doubt that the earth isn’t the center of the solar system, large numbers of people – including popular media pundits and politicians – began to insist that the sun and the planets and the stars do indeed all revolve around a stationary earth that is situated in the center of the universe.“

The very motivation for trade is to obtain something of value that one did not produce, to acquire that which one cannot easily acquire without trade, or to acquire it on more favorable terms than otherwise. It recognizes the reality that one’s productive efforts should be focused in an area that best suits their skills or natural talents. That’s better for the individual and better for society! Countries should produce what they are best at producing, which gives them a cost advantage in their areas of specialization. Trade allows individuals and nations to specialize in production but diversify in consumption, allowing them to enjoy access to the broadest possible range of goods and services produced worldwide.

The consummation of any trade heralds the attainment of mutual benefits to the parties: one produces and employs at a profit; the other consumes a thing of greater value than the price paid. The payments for foreign goods must come from either domestically-produced goods or from foreign investment in domestic real estate, buildings, factories or other real and financial assets. That is, if we purchase more goods from abroad than we export, then foreigners must either hold the dollars they receive or invest them in other ways. The latter represent trades in assets, and those trades, too, are mutually beneficial. The result is that U.S. investors gain and/or the economy benefits from new, productivity-enhancing plant and equipment, not terrible outcomes. Trade deficits are balanced by capital surpluses, and trade surpluses are balanced by capital deficits. Taken together, trade in goods and capital (assets) always balance and are mutually beneficial in every case, whether we run a trade deficit or a surplus.

That said, it’s worth emphasizing that so-called free trade agreements are something of a sham. Countries don’t trade. People do. Unfortunately, I have indulged the notion of national trade negotiation in the past, if only implicitly, by vouching for trade agreements like NAFTA and TPP as sort of second-best solutions to the horrid reality of trade restrictions promulgated by protectionist politicians. I reasoned that dismantling those barriers, one-country (or region) at-a-time was preferable to doing nothing. However, negotiations like these become mired in extraneous issues such as environmental policies, labor laws, immigration rules and other commercial policies. Nor do those negotiations always inhibit domestic subsidies to politically-favored activities. Indeed, they might actually encourage subsidies for value-eroding projects. Again, the entire process of trade negotiations is extraneous to the extent that trade takes place between individuals. Unfettered gains from trade require the absence of trade barriers. Dropping them unilaterally would benefit consumers, encourage efficiency by domestic producers, and provide a great example for other nations.

Opponents of trade, like Messrs. Trump and Sanders, lack a basic understanding of the reasons why individuals engage in cooperative exchange. Or at least they fail to acknowledge, for political reasons or sheer density, that what improves well-being at home is freedom to transact, across our borders as well as within our borders. To prevent this activity is to forcibly deny individual freedom. Boudreaux makes this point be asking trade opponents a series of questions, the first few of which are listed below:

“– Are you made richer if the supermarket … at which you once shopped hires armed goons to force you to start shopping there again?

– Do you believe that the owners and the employees of [that store] are so ethically entitled to your continuing patronage as a consumer that they are justified in employing armed goons to prevent you from shopping elsewhere?

– Do you believe that, now that [the store] has successfully forced you not to shop at competing supermarkets, that the owners and employees … will work as diligently and as creatively as possible to keep the prices they charge low and the quality of their service high?

– Do you believe that the higher profits and higher wages reaped by [the store’s] owners and workers as a result of their holding you hostage as a customer make you more prosperous?

– Do you believe that the higher profits and higher wages reaped by [the store’s] owners and workers as a result of their holding you hostage as a customer make your community more prosperous, even though [the store’s] higher profits and higher wages are necessarily funded by money that you and other … ‘customers’ are forced not to spend on other goods, services, or investment options?

– If you believe that [the store] has a right to force you not to shop for food at other supermarkets, do you believe also that [the store] has a right to force you not to grow more of your own food, or not to eat out more often at restaurants, or not to go on a diet?“

It is difficult to believe that educated people believe restrictions on the freedom of individuals to cooperate with others will improve their well being. Of course, those educated people are often politicians who stand to benefit from frightening voters, and who have no interest in reminding them that a flow of foreign goods broadens choices, reduces prices, and provides valuable discipline to domestic businesses. Without competitive discipline, we forgo important benefits and instead allow quality and price to come under the arrogant power of monopolists. There are, of course, many producers who are willing to provide meaningful support to politicians who will protect them from foreign competition. That’s not capitalism. Its cronyism!

Mobility, Safety Nets & Sticky Webs

23 Thursday Jun 2016

Posted by pnuetz in Big Government, Welfare State

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Affordable Care Act, Andrei Schleifer, Basic Income Guarantee, Christopher Jencks, Curley Effect, David Henderson, Dependent Class, Don Boudreaux, Earned Income Tax Credit, Edward Glaeser, Employment Incentives, Extreme Poverty, Henry Hazlitt, Kathryn Edin, Labor Force Participation, Luke Shaefer, Marginal Revolution, Medicaid expansion, Michael Tanner, Milton Friedman, Mises Wire, Obamacare, Social Safety Net, Tyler Cowan, Universal Basic Income, Veronique de Rugy, War on Poverty, Welfare State, work incentives

We’re unlikely to reduce the share of the U.S. population living in economic dependency under the current policy regime. So many aspects of tax law, regulation and aid programs are designed as if to perpetuate or perhaps even worsen the situation. I’ve discussed this topic before on Sacred Cow Chips in “Degrees of Poverty and the Social Safety Trap“, and “Minority Politics and the Redistributionist Honey Trap“.

Many supporters of aggressive anti-poverty efforts take umbrage at any suggestion that government aid might discourage the poor from engaging in productive activities. They imagine an implication that the poor are “lazy”, perfidious or otherwise undeserving of assistance. Whether that is a misunderstanding or merely rhetorical bite-back, the fact is that it is rational to respond to incentives and there is no shame in doing so. Unfortunately, many assistance programs contain incentive traps or income “cliffs” that discourage work effort. This applies to food stamps, rent subsidies, Obamacare subsidies, and many more of the 120+ federal aid programs and other state and local programs.

Here’s a new example from a research abstract posted at Marginal Revolution: The Medicaid expansion had very negative effects on labor force participation. The funding for Medicaid expansion at the state level was authorized by the Affordable Care Act (ACA) — aka Obamacare, but only about half the states went along with it. From the abstract:

“I find a significant negative relationship between Medicaid expansion and labor force participation, in which expanding Medicaid is associated with 1.5 to 3 percentage point drop in labor force participation.“

The direction of impact is hardly unique, and as Tyler Cowen notes at the link:

“Work is good for most people, and it is even better for their future selves, and their future children too.“

The negative impact of Obamacare is more massive than the estimate above might suggest. Veronique de Rugy at Reason.com discusses how “Federal Programs Keep People Poor“. While most of her article is about the negative impact of high marginal tax rates on the employment prospects of the poor, she also recalls an ugly CBO estimate of the ACA’s impact:

“In 2014, the Congressional Budget Office—Congress’ official fiscal scorekeeper—revised its original estimate to report that because of the law, by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work will have exited the labor force.“

There are several different channels through which the negative effects of the ACA operate: Small employers are incented to limit their hiring and the hours of employees, and federal subsidies (and sometimes state benefits) are available to individuals only so long as they remain below certain income thresholds. Again, this is typical of many government aid programs (the Earned Income Tax Credit (EITC) being an exception). More from de Rugy:

“When the government takes away a person’s benefits as his income goes up, it has the same effect as a direct tax. And remember, when you tax something, you usually get less of it. That means these programs can actually hinder income mobility: In order to continue receiving their government cash, individuals are forced to limit the amount they earn. Thus, they have an incentive not to try to climb the income ladder by putting in extra hours or signing up for job training and educational programs.“

Mises Wire recently carried a reprint of an essay by the great Henry Hazlitt, “How To Cure Poverty“. The gist of Hazlitt’s argument is that government largess simply cannot create wealth for society, but only diminish it. The mere process of redistributing the current “pie” consumes resources, but that is minor compared to the future reduction in the size of the pie brought on by the terrible incentives inherent in income taxation and many government benefit programs:

“The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success. … The way to cure poverty is … through … the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.“

Harvard professors Edward Glaeser and Andrei Schleifer have written about “The Curley Effect: The Economics of Shaping the Electorate“, which posits that redistributive policies that are harmful to constituents can be rewarding to politicians. The paper deals with policies that encourage emigration of affluent voters away from cities, but which nevertheless reward politicians by increasing the proportion of their political base in the remaining constituency. It seems to apply very well to many major cities in the U.S. However, it certainly applies more broadly, across states and nations, when affluent people and their capital are mobile while the less affluent are not, especially when benefits are at stake. It’s no secret that promises of benefits are often attractive to voters in the short run, even if they are harmful and unsustainable in the long run.

The welfare state appears to have helped to sustain many of the poor at an improved standard of living after accounting for benefits, or it has prevented them from falling into “deep poverty”. However, it hasn’t succeeded in lifting the poor out of dependency on the state. Pre-benefit poverty rates are about the same as they were the late 1960s. In addition, Christopher Jencks observes that the “Very Poor” have in fact become poorer. That’s discussed in his review of “$2.00 a Day: Living on Almost Nothing in America” by Kathryn Edin and Luke Shaefer. Jencks presents statistics showing that those in the lowest two percentiles of the income distribution have suffered a fairly sharp decline in income since 1999. Many of these extremely poor individuals do not avail themselves of benefits for which they could qualify. In addition, the EITC requires earned income. A job loss is a wage loss and, if it goes on, a loss of EITC benefits. Unfortunately, work requirements are more difficult to meet in the presence of wage floors and other distortions imposed by heavy-handed regulation.

A guaranteed national income has become a hot topic recently. Michael Tanner weighs in on “The Pros and Cons…” of such a program. There are many things to like about the idea inasmuch as it could sweep away many of the wasteful programs piled upon each other over the years. It is possible to construct a sliding-scale guarantee that would retain positive incentives for all, as Milton Friedman demonstrated years ago with his negative income tax concept. However, as Tanner points out, there are many details to work out, and the benefits of the switch would depend upon the incentive structure built into the guarantee. As a political plaything, it could still be dangerous to the health of the economy and an impediment to income mobility. Don Boudreaux has registered objections to a guaranteed income, one of which is based on strengthening the wrongheaded argument that we derive all rights from government. Even more interesting is David Henderson’s take on a basic income guarantee. He finds that the budgetary impact of a $10,000 guarantee would equate to a 30% increase in government spending, and that assumes that it replaces all other assistance programs! Henderson also discusses the public choice aspects of income guarantees, as well as moral objections, and he concludes that there are strong reasons to reject the idea on libertarian grounds.

The economy is riddled with too many subsidies, penalties and bad incentives that distort the behavior of various groups. The well-to-do often benefit from subsidies that are every bit as distortionary as those inherent in many public assistance programs. They should all be swept away to restore a dynamic economy with the potential to lift even more out of poverty. There could be a role for a guaranteed income on the grounds that it is better than what we’ve got. But we should recall the words of Hazlitt, who reminded us that we’ve come so far on the strength of property rights, private initiative, and free trade. Left unfettered, those things can take us much farther than the ugly pairing of beneficence and coercion of the government behemoth.

Good Leaders Aren’t Trade Warriors

30 Wednesday Mar 2016

Posted by pnuetz in Free Trade, Protectionism

≈ 1 Comment

Tags

Bernie Sanders, CATO Institute, Currency Manipulation, Daniel J. Ikenson, Direct Foreign Investment, Don Boudreaux, Donald Trump, Dumping, Federal Reserve, Free trade, Hillary Clinton, NAFTA, Open Trade, Paul Krugman, People's Bank of China, Predatory Pricing, Protectionism, Reserve Currency, Ted Cruz, TPP, Trade Deficit, Trade War, Unfair Competition

Protectionism

The protectionist foreign trade rhetoric issued by the major-party presidential candidates is intended to appeal to ignorant economic instincts. Donald Trump and Bernie Sanders come to mind most readily, but Ted Cruz and Hillary Clinton are jumping in with similar campaign positioning. The thrust of these populist, anti-trade appeals is that America is losing jobs to “unfair” foreign competition, an argument that distorts the very objective of trade: consumers take part in exchange in order to consume; they capture value from high quality, unique merchandise and competitive terms. Ultimately, producers engage in trade to gain the wherewithal to consume. Consumption is the real end-game.

It can be misleading to talk about “nations” engaging in trade with each other, despite the emphasis placed on trade agreements like NAFTA and TPP. In the first place, it is better to stress consumers and producers, rather than “nations”, because most foreign trade is private, cooperative activity, not national decision-making. But the candidates persist in characterizing trade as a “contest”. That misleading notion is what prompts governments to muck up the trade environment by imposing restrictions on the free flow of goods and services. Trade agreements have been heralded as great achievements, but they never approximate a regime of truly liberalized trade because the latter requires no formal agreement whatsoever, merely a hands-off approach by government. And trade agreements tend to entangle trade issues with other policy objectives, holding consumers hostage in the process.

We hear from opportunistic candidates that jobs are lost to trade with foreigners. But again, consumption, not “jobs” per se, is the real objective of economic activity. If domestic jobs are lost, it is generally because consumers judge the value produced inferior to what’s offered from abroad. American consumers should not be obliged to support inferior value, domestic market power unchecked by competition, monopoly prices and limited choices. Patriotic jingoism attempts to blind us from these economic imperatives.

The standard protectionist narrative is that foreign “nations” cheat on trade with the U.S. via currency manipulation, predatory pricing or “dumping”, “unfair” wages or other unfair labor practices. Do any of these objections to free trade hold water?

The “fairness” of foreign wages and labor practices is a matter of perspective. Wages cannot be considered unfair merely because they are low relative to U.S. wages. Wages paid to workers by foreign exporters tend to be consistent with the standard of living in those societies, and they are often some of the best income opportunities available there. This is economic dynamism that lifts masses from the grips of poverty. It’s absurd to caste it as “exploitation”.

Is it “unfair” to competitors in the U.S.? Not if they know how to compete and are allowed to do so. Unfortunately, government regulatory policies in the U.S. often present obstacles to the competitiveness of domestic producers. This is well-illustrated by Daniel J. Ikenson of The CATO Institute in “Crucifying Trade For The Sins Of Domestic Policy“. He emphasizes that trade promotes economic growth, but when it causes job losses for some workers, U.S. economic policies make it difficult for those workers to find new jobs.

“Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices.“

So-called “dumping” by foreign producers, or selling below cost, is an unsustainable practice, by definition. Pricing below cost is difficult to prove, especially if local wages are low and raw inputs are plentiful. If dumping can be proven, retaliation might feel good but would punish American consumers. A foreign producer might be subsidized by its government as a matter of industrial policy and economic planning, an unhealthy policy to begin with, and possibly to facilitate a long-run market advantage in foreign trade. The U.S. itself is thick with subsidized industry, however, so arguing for retaliation on those grounds is more than a little hypocritical.

I rarely quote Paul Krugman, but when I do, it’s from work he’s done as an actual economist, not as an agenda-driven pundit. So we have the following Krugman quote courtesy of Don Boudreaux:

“I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion. That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.“

David Harsanyi asks how American consumers will like more restrictive trade policy when forced to pay more for smart phones, laptops, HDTVs, cars, food, and any number of other goods. The usual anti-trade narrative is that foreign producers have harmed the manufacturing sector disproportionately, but in another article, Ikenson lays bare the fallacy that U.S. manufacturing has been victimized by trade.

The consequences of trade restrictions are higher prices, reduced production and reduced consumption, an undesirable combination of outcomes. This means higher prices of imported goods as well as domestic goods, whose producers will face less competition by virtue of the trade barriers. With reduced availability of imported goods, economic theory predicts that domestic producers will not fully meet the frustrated demands. This is a classic response of producers with monopoly power: restraint of trade. The negative consequences are compounded when foreign governments impose retaliatory measures against the U.S., harming American exporters.

A further misgiving expressed by politicians regarding free trade is that America’s trade deficit implies greater indebtedness to the rest of the world. This argument has been made by a few leftist economists who misunderstand the nature of direct investment, and who tend to think erroneously of economic outcomes as zero-sum. It’s true that foreign producers who receive dollars in exchange for goods often invest those proceeds in U.S. assets. A fairly small share of that investment is in debt issued by U.S. governments and private companies. But a much larger share is invested in U.S. equities and real assets, which are not U.S. debts. As Don Boudreaux points out, the domestic sellers of those assets generally reinvest in other U.S. assets, so private U.S. ownership of global capital is not diminished by increased foreign investment in the U.S.

An interesting aspect of the trade debate is that the dollar’s role as a global reserve currency implies that the U.S. must run a chronic trade deficit. The rest of the world uses dollars to trade goods and assets, but to acquire dollars, foreigners must sell things to holders of dollars in the U.S. This keeps the foreign exchange value of the dollar elevated, which makes imports cheaper to Americans and U.S. exports more costly to foreigners. Those dollars are a form of U.S. debt, but it is debt for which we should feel flattered, as long as confidence in the dollar remains. A diminished role for the dollar in world trade would lead to a surplus of dollars, undermining its value and promoting inflation in the U.S. Let’s hope for a gradual transition to that world.

Finally, the presidential candidates allege that foreign currency manipulation is another reason for American job losses. One prominent example occurred last year when China allowed the renminbi to decline to more realistic levels on foreign exchange markets. Donald Trump called this an unfair trade tactic, but apparently the People’s Bank felt that it couldn’t support the renminbi without undermining economic growth. The earlier dollar peg also helped to keep Chinese inflation in check. Contrary to Trump’s assertions, if China stopped manipulating its currency altogether, the renminbi would go even lower!

Beyond the opportunistic political arguments, the point is that central banks (including the U.S. Federal Reserve) manage their currencies to achieve a variety of objectives, not merely to promote exports. That is not an endorsement of such policies. It is an objective fact. Anyone can argue that a foreign currency is “too low” if their objective is to demonize a country and it’s exports to the U.S., but the assertion may not be grounded in facts as markets assess them.

The arguments against open trade policies are generally specious, hypocritical or grounded in a mentality of victimhood. Vibrant producers who are free of government restrictions should welcome the expanded markets available to them abroad and should not seek redress against competition via government protection. Liberalized trade has engendered tremendous economic benefits over the years, while protectionist policies have only brought severe contractions. Let’s be free and trade freely!