The Liberal Order

John Tamny on the Trade Deficit

An argument that is frustrating for economists to continue making, but John Tamny does a good job of explaining why a trade deficit is meaningless.

I run a variety of trade deficits, including a large one with a Safeway supermarket located in the Glover Park section of Washington, D.C. Unfortunately, as many customers of this Safeway are presently aware, it’s going through a partial re-model. As a result, many of the goods I would normally buy are not available thanks to the store’s reduced level of inventory.

If I were a country, economists and journalists would rejoice. Either because I can’t find much of what I used to buy, or because it’s not in stock due to the re-model, my trade deficit with Safeway has plummeted of late.

Am I better off? If we factor in that the goods I buy at Safeway tend to be healthier than my alternative choices, probably not. Economists would point to my falling Safeway deficit and say that I’m at least economically better off, but then my reduced trade deficit with Safeway has occurred alongside rising deficits with both Popeye’s Chicken and Domino’s Pizza. Whatever one thinks of my non-Safeway alternatives, I’m certainly worse off because at least at present, I can’t consume my surplus in the most optimal way.

In short, when we reduce trade to individual exchange, we see there can’t be deficits. We can only engage in deficit trading to the extent that we have a trade surplus elsewhere; usually with our employers, but sometimes with lenders and investors willing to curtail immediate consumption in order to capture a portion of the economic upside we offer.

HT to Management R & D.

"Penny Foolish" - Yes!

Let's say that two Mexicans live in the same town.  One chooses to cross the border into the United States to work picking tomatoes while the other decides that the low wages earned by tomato pickers is not enough for him to leave his friends and family and work. In other words, the expected wage was in the U.S. was less than his opportunity cost. If the wage increased by, say, $1 per hour more, he too would cross the border to work in the U.S.

An ordinance is then passed in the U.S. - call it the Assist the Mexican Immigrant ordinance, or AMI - mandating that tomato consumers must pay a penny more per pound for their tomatoes - an insignificant sum for sure - and the proceeds given to the tomato pickers . Are the existing tomato pickers made better off by this ordinance? No.

At this new wage the tomato pickers are earning economic rents (a wage in excess of their opportunity cost), which induces more people to move from Mexico to become tomato pickers. This influx of supply depresses the base pay earned by the tomato pickers to the point that they are no better off than before. In fact, it may induce more skilled Mexicans to cross the border - those with higher opportunity costs of their time - thus driving the less skilled out of their jobs. This competition makes the current tomato pickers worse off, not better.

Here's the aptly named story.

In 2005, Florida tomato pickers gained their first significant pay raise since the late 1970s when Taco Bell ended a consumer boycott by agreeing to pay an extra penny per pound for its tomatoes, with the extra cent going directly to the farm workers. Last April, McDonald’s agreed to a similar arrangement, increasing the wages of its tomato pickers to about 77 cents per bucket. But Burger King, whose headquarters are in Florida, has adamantly refused to pay the extra penny — and its refusal has encouraged tomato growers to cancel the deals already struck with Taco Bell and McDonald’s.

All the more reason to eat at Burger King.

Jobs Lost Due to Free Trade

Greg Mankiw points to this story about the decline of the U.S. sock industry due to increased globalization. Of particular note is the ending.

Jimmy Durham, the [Dekalb] county [Alabama] economic development officer, shows just how grim things have been for the sock business here.

On street after street, he points to buildings that used to house sock mills, most of which are now gone. With all these businesses shuttered, you might think Durham is in despair about the future of Fort Payne. He isn't.

Those closed sock factories are reopening as new businesses.

He points to Steadfast, which makes bridges; Ferguson, a major plumbing supply company; a distribution center for Children's Place; two new metal tube manufacturers; a high-tech label maker. For a town of only 13,000 people, this is a lot of new, good-paying employment. These jobs pay more than sock-making jobs.

In fact, most of 4,000 recently laid-off sock workers quickly found new jobs. It's an irony that reversing this tariff — fought for so hard by some in Fort Payne — will likely have its biggest impact thousands of miles away in Honduras.

It's difficult to convince trade skeptics of the transitioning of jobs when factories move offshore. And yet, despite a near doubling of imports into this country over the past ten years, employment has increased more than ten percent.

Of further note is this realization:

Wills never finished high school. Why bother? It was easier to just go get a job in a sock mill, just like his mom and dad and most of his uncles did. Wills is 60 now and had a good career.

Like many in Fort Payne, Ala., Wills was able to acquire more and more sock-making skills. Eventually, he opened his own business, as a sock machine specialist. He'd come into a mill and fix broken knitting machines. He specialized in K-Ends and Crawfords, an older kind of machine that didn't have computer-based controls. By 2003, most of the mills that used those old machines had closed or invested in newer models.

Wills suddenly found that there was no demand for his specialized services. He got a full-time job at Durham Hosiery, one of the last mills that still used K-Ends. But even Durham was investing more and more on newer equipment with computers. And Wills didn't know how to operate those.

"With computer machines," he says, "it's more important to have an education."

Again, to alleviate poverty you have to understand what causes it. It's not the schooling per se that improves one's productive output - there's probably more dumbing down going on in government schools than actual learning - but high school dropouts signal their inability/unwillingness to follow through and complete simple tasks.

Poverty and the Liberal-Statist Ethos

I remember watching Ruth Conniff interviewed a few years back and the interviewer asked her to explain what causes poverty. She replied, "A lack of money." Wow! That's like responding to the question of what causes obesity with "Being overweight." She defined poverty, but she certainly never answered what caused poverty.

Mark Winne concludes his op-ed in today's Washington Post with this:

We know hunger's cause -- poverty. We know its solution -- end poverty. Let this Thanksgiving remind us of that task.

Until you adequately explain what causes poverty you can never end it. Despite spending $10 to $12 trillion over the span of more than forty years fighting "the war on poverty" (under the leadership of eight Republican and Democratic presidents), poverty is actually worse. Or so we're led to believe, depending on how you define poverty.

Poverty is not caused by a lack of money; plenty of that has been thrown at it. Poverty is caused by one's inability to produce value to others. For whatever reason - those who live isolated from larger populations (hillbillies in the hollows of Kentucky and West Virginia, as well as isolationists the likes of Ted Kasczynski); those with mental and/or physical impairments; and those simply refusing to work - if you don't produce value to others you will have little income. And yes, there are coordination problems (there are too few jobs in a specific geographic area), but these should normally be temporary (entrepreneurs find it advantageous to open a business where the existing labor supply is plentiful and expected to be productive, or residents move to find jobs in areas where their skills are more in demand).

Liberals want to argue that poverty is largely a problem of mental illness (only about 20-25% of just the homeless population) or a coordination problems (markets do a lousy job of creating opportunities for the poor). Never is poverty viewed as self-imposed, and worse still, exacerbated by programs ostensibly seeking to eradicate it. (What incentive does the welfare bureaucracy have to eliminate their jobs?)

Watching The Boys of Baraaka was infuriating for just this reason. These kids have very little chance of leading productive lives, the efforts of the Baraka School notwithstanding. These kids still have to go back to their welfare-dependent dysfunctional families.

As Daniel Patrick Moynihan aptly noted,

"There is one unmistakable lesson in American history: A community that allows a large number of young men to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future — that community asks for and gets chaos... And it is richly deserved." — "Family and Nation", 1965

More Rent Seeking in the Music Industry

Back in the 80s and 90s unions embarked on a "Buy American" campaign, distributing bumper sticker s that implored Americans to "Buy American, the next job lost may be yours." It's a blatant display of union workers' rent seeking nature.

ASCAP, the American Society of Composes, Authors and Publishers, embarks on an even more egregious (or at least ridiculous) display of rent seeking behavior in the form of "Donny Downloader." You've got to see it to appreciate the idiocy.

HT: Reason Hit and Run

Gender Typing Women in the Workplace

It's difficult to convince some people that markets tend to weed out discrimination, or at least penalize those who discriminate. For example, let's say that Ty and Amy, a male and female carpenter, respectively, can both produce four shelving units in a week. If Ty is the favored party and earns, say, $1,000 per week, while Amy, the disfavored party, earns only $800 per week, then why aren't more Amy's hired and fewer Ty's? The marginal cost for Amy to produce a bookshelf unit is $200, while for Ty it's $250, and if profit maximizing firms in a competitive market don't act on this cost differential, they're not likely to remain in business for long. Or at least they'll pay in the form or reduced profits.

But many people see discrimination in various forms in the workplace and chalk it up to problems with markets, which require workplace regulation to advance the interests of those discriminated against. The problem, however, is that when you impose such regulations firms work around them, much to the detriment of those such regulations profess to help. If someone can sue for discrimination, you can bet that fewer firms will be willing to hire them, thus driving down their wages. And mandating quotas simply alters whom I hire. Since lesser skilled people tend to not advance much in the workplace, and are consequently more likely to sue their employer for discrimination, firms respond by hiring fewer workers with standing to sue who also have lower skills.

The problem of workplace discrimination comes about for other reasons, one that I refer to as the Happy Meal effect. A year or so ago my kids got McDonald's Happy Meals. The meals came in boxes that had on two sides a game for boys and on the other two sides a game for girls. The boy's side contained such directives as (and I'm paraphrasing), "You found the secret hiding spot, move ahead two spaces." or "You discovered your opponents secret, move ahead one space." The girl's game had such gems as "OMG, you and another girl wore the same dress to a party, go back one space." and "Curling Iron burnout, go back two spaces."

Boys are problem solvers - they should be creative, adventurous, and inquisitive, all traits respected in a business setting. Girls on the other hand, are baubels - they should just sit on the side and look pretty, traits that are not necessarily respected in a business setting, at least not in positions of authority.

Consider the reaction most people have when a male superior berates an employee for making a mistake or  acting in some unacceptable manner. Traditionally, the superior is feared and respected. But if it's a female superior acting the same way, the reaction is often to refer to her as "a bitch."

Some good studies are exploring this problem, including this study.

Victoria Brescoll, a researcher at Yale, made headlines this August with her findings that while men gain stature and clout by expressing anger, women who express it are seen as being out of control, and lose stature. Study participants were shown videos of a job interview, after which they were asked to rate the applicant and choose their salary. The videos were identical but for two variables — in some the applicants were male and others female, and the applicant expressed either anger or sadness about having lost an account after a colleague arrived late to an important meeting.

The participants were most impressed with the angry man, followed by the sad woman, then the sad man, and finally, at the bottom of the list, the angry woman. The average salary assigned to the angry man was nearly $38,000 while the angry woman received an average of only $23,000.

When the scenario was tweaked and the applicant went on to expand upon his or her anger — explaining that the co-worker had lied and said he had directions to the meeting — participants were somewhat forgiving, giving women who explained their anger more money than those who had no excuse (but still less money than comparative men).

So the cause behind discrimination is not necessarily a market problem as much as it is a cultural problem. If women are perceived as lacking competitiveness (or actually do lack competitiveness due, in part, to having it instilled in their heads since childhood that to problem solve is for boys and girls should simply look pretty and not act aggressively) or the ability to effectively manage people, then they'll be overlooked for management positions. Regulating the labor market ain't gonna work. Changing the culture and people's perceptions of women will, but changing culture doesn't happen overnight.

Thanks to my beautiful and lovely wife for the story link.

Are price ceilings counterproductive, even if implemented voluntarily?

Price ceilings lead to shortages, whether the price control is mandated by government or voluntarily implemented. In San Diego, many hotels reduced rates, rather than increase them, in light of the hordes of evacuees seeking shelter. A compassionate gesture? Maybe, but have they created adverse consequences?

Kirk Shaw, office manager at the city's Days Inn Harbor View said the facility has been flooded with evacuees, many of them coming from ravaged Ramona "saying that their houses were actually on fire."

The hotel has turned away dozens of guests in the past three days, Shaw said, during a time when business is traditionally slow. "People come in -- three four cars at a time -- saying they'd been driving around for like three hours and they needed a couple of rooms for their entire families, I didn't even have one for them, so I had to turn away entire families at a time."

Shelters are obviously an inferior good. There is no privacy; if you have small children it's difficult to keep tabs on them; the food is less than satisfactory; there is no television, at least private; sleeping is more difficult; etc. But there are available substitutes for one family staying in a local hotel, including staying with family, staying with friends, staying at a hotel farther away, staying with family farther away, staying in a camper,  sharing a hotel room with another family, etc.

At the margin, people are indifferent between two or more choices. If my reservation price for staying in a hotel is $200, then at any price above $200 I'll stay with 'Ol Crazy Aunt Millie rather than rent a hotel room. But if the hotel charges only $160, I'm staying at the hotel.

Keep in mind that there are others who don't have alternatives - or at least have less desirable alternatives than staying with their 'Ol CrazyAunt Millie - and might be willing to pay up to, say, $300 per night for a room for their family. But now that the hotel rooms are full they are unable to find a room.

My guess is that there are some families using two or more hotel rooms who would have doubled up or found alternative arrangements had the price of their rooms increased to, say, $400. There are also probably retired people staying in these hotels at the reduced rate who would have otherwise left town and stayed at a hotel in Vegas, Phoenix, or with relatives or friends in other cities. And there are probably families with small children, people whose jobs require them to remain nearby, people without family nearby, people who have loved ones in San Diego hospitals or hospice care, and so on who value a hotel room at more than $400 and yet are now unable to find a room.

It was a nice gesture on the part of the hotels, but I'd rather see compassion administered through the invisible hand of market prices.

Addendum: Edited for clarity.

Arnold Kling on George Mason University Economics

Well worth reading.

Here's my similar take on this analysis.

Here's an excellent quote:

Back in the 1980's, I recall that Microsoft had a very low profile in Washington. Technology leaders, including Bill Gates, seemed to feel this way: those who can, compete; those who can't, lobby. In this view, a technology firm that has a big lobbying focus is indicating that it has lost its way. If the Gates Foundation cannot come up with a better way to spend its money than to plead with politicians, then I would suggest that it has lost its way.

The Tyranny of the Market

Joel Waldfogel argues that markets, too, lead to a tyranny of the minority, much like libertarians and other small government types accuse democracy of producing. But Waldfogel premises his argument on bad economics. This is not to say that Waldfogel is a bad economist - to the contrary, he's an exceptional economist using bad  standard economic analysis of market comptition.

Waldfogel uses Nike shoes and the American Indians to prove his point. American Indians, who tend to have wider feet, until recently were unable to buy shoes specifically to fit their niche demands. Why did it take Nike so long to fulfill this niche market? Had markets effectively worked, this niche market would have been satisfied long ago. But instead, Nike produced shoes only for the majority player(s) in the market - people with small width feet.

The important question, however, is why Indian entrepreneurs didn't capitalize on this niche market long ago. Unlike Nike, it was the Indians who obviously had the localized knowledge of the problem and that their wants were underserved. So why didn't tribal entrepreneurs exploit this profit opportunity and produce a wider shoe? I wonder if the lack of markets and market culture in the Indian community had anything to do with their own neglect. In the end, it was only through fortuitous discovery (Kirznerian entrepreneurship) that Nike stumbled upon this unexploited profit opportunity?

Would we argue that markets fail if an American company failed to capitalize on an unmet demand of some Amazonian Indian tribe?

Where I have observed Waldfogel's argument come alive is in the market for textbooks. Principles textbooks are homogeneous. At dinner recently with the author of a new and heavily marketed textbook and the local rep from the publisher, I inquired about the homogeneity in this market and why it is that every book begins from the position of equilibrium and then proceeds to define market competition as firms that produce the same homogeneous good and enter and exit that specific market, seeking to compete away any economic profits. In other words, life begins miraculously at equilibrium and the role of market competition is simply maintaining stasis by producing more of the same bags of flour that every other firm is producing. Any deviation from this market equilibrium is defined as a failure of the market ala Akerlof, Stiglitz, etc.

I further asked, why there isn't a textbook for a standard principles class that begins with life in chaos and disorder. We then proceed to learn how market competition overcomes much of the information problems and other frictions inherent in social organization to bring about social cooperation through the spontaneous coordination of individual behavior. We then learn how market competition brings about the allocation of scarce resources, moving towards an ever-elusive and never attainable market equilibrium. The result is that markets produce vast amounts of wealth, not just for the wealthy, but for the common person as well. Market competition is thus defined as a dynamic process of disrupting equilibrium through entrepreneurial action, constantly seeking to better the human condition, either by discovery of new goods and services (pharmaceuticals, energy efficient cars and homes, etc.), further product differentiation (i.e., the iPod, large screen televisions, CDs and DVDs, computers, etc.) or by discovering new means of minimizing - yet never negating - transaction costs (ala Wal-Mart, Netflix, etc).  I  was told by both the author and the rep what I already knew:  the  majority of the profession doesn't  teach it, hence it's not a profitable venture for the textbook company. The result is the homogeneous principles text we see today. (This goes for other texts as well.)

The problem is, the buying and selling of textbooks is not undertaken within conventional market structures. Professors choose the text from which they wish to teach and students are then required to purchase that book. If given the choice, my guess is that the vast majority of students would choose a less formalistic text that deals more with economic concepts and less with methodology because it's more relevant to their lives and because in my experience that's the approach most students prefer their principles courses be taught. Paul Heyne put out such a book long ago (now authored by Pete Boettke and Dave Prychitko), but its use is limited. It's my experience that students prefer to learn more Coase and Alchian and less Samuelson.

In competitive markets there will always be entrepreneurs seeking to fill niche demands as long as doing so is can be done efficiently and thus profitably. And if not, there will be plenty of people seeing to make it so. Where we find Waldfogel's complaint valid we're bound to find either a lack of markets or government intervention used to deter entrepreneurial discovery. (And here.)

Greenspan On Economic Policy Under Republican Leadership

"The Republicans in Congress lost their way," Greenspan wrote. "They swapped principle for power. They ended up with neither. They deserved to lose."

Story here. Can't wait to read the book.