Remember Thy Broken Windows

Taking credit for about 1,000 jobs “staying” in Indiana from a Carrier plant’s decision not to move to Mexico, President-elect Trump proclaimed “Companies are not going to leave the US anymore without consequences.  Leaving the country is going to be very very difficult.”  This statement should strike fear into the hearts of liberty-loving, crony-capitalist hating people everywhere. Unfortunately, many of praised it as a step in the right direction, that the $7m in tax breaks is a “good deal.”  However, this is anything but a good deal.  It sets dangerous expectations that will cost Americans jobs, investments, and wealth.

Let’s start with the explicit threat in Trump’s words.  Firms, that operate or expand into the US, will lose their freedom to make business-effective moves.  This will increase the relative cost of doing business in the US (since the cost of relocation outside the country is now higher), making operating outside the country, not expanding operations at all, or automating, more attractive options. Firms will be far more cautious about their operations, thus reducing the total number of potential jobs and investment in the US.  This is the “unseen” effects of Trump’s threats.  The 1,000 jobs “saved” could come at the cost of many more unseen jobs “lost.”

Another side effect (which flies in the face of one of Trump’s campaign promises to “drain the swamp”) is this move will increase lobbying.  As Justin Wolfers tweeted: “Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay. Great economic policy.”  There is now an increased incentive for firms to lobby government for funds should they want to leave or relocate.  Given lobbying is certainly an arms race, firms will pour more money into lobbying and less into R&D or their employees.  To be sure, this is already a norm in the US, but Trump is merely perpetuating and expanding it, as opposed to ending it.

So, we have reduced investment into the US and increased interest in lobbying, both of which are economically inefficient activities.  Seems like quite a steep price to pay to give a temporary stay of execution for 1,000 jobs.

The Trouble With Statistics

In the comments section of this EconLog post, one commentator, pasjer, attempts to defend Castro’s legacy in particular and communism in general.  He (she?) writes:

I like Castro’s egalitarian planned economy; good health and education systems, existential safety, increased equality. Reasonably good GDP growth last 25 years. That economy, like in USSR and China saved lives. (Don’t rush to argue without checking life expectancy and child mortality data before.)

Life expectancy in China (1978), Soviet Union (1989) and Cuba (these days) was/is 3-8 years longer than world average; child mortality in these countries was/is 2-10 times lower than world average; all three countries, particularly China, started with planned economy poorer than world average.

That those three countries were barely above the World Average (and even then, they beat out mainly war-torn or plagued countries and lagged well behind their developed-world counterparts), is a poor argument for communism.  But it is also a mistake to focus just on life expectancy without looking at the quality of that life.

A simple historical example:

According to the book Time on the Cross, the life expectancy of a US slave in 1850 was about 36 years, slightly lower than the US average (40 years), but higher than many European countries (Italy – 35, Austria – 31) and about the same as others (Holland – 36, France – 36).  And while no estimates exist from the African continent at the time, it is possible these lifespans were even longer than in Africa.  Could one claim, then, that slavery was good for the black man?  Many often did, for this and similar reasons.  These statistics were how slavery was justified on moral (and Christian!) grounds.  But the life and care of the slave was not out of good will or in any genuine attempt to improve his life.  The care was done for the same reason a craftsman takes care of his tools: they serve a purpose and are expensive to replace.  But they have no freedom, no care beyond what is necessary to achieve goals.  They are not living for themselves, but for others.  It’s a very poor quality of life.

When we look at statistics, we must be careful.  Statistics can mislead just as easily as they can enlighten.  Given the extreme lengths Soviet, Cuban, Chinese, etc citizens went to escape their countries with “good health and education systems, existential safety, increased equality…,”I have to conclude the quality of life, of health care and education and equality, left much to be desired. Just like the slave trying to escape his master despite the master providing him with housing, clothing, food, and care.

What Economics Teaches Us About Humanity

F.A. Hayek once said:

Nobody can be a great economist who is only an economist – and I am even temped to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.

I argue this is very true (personally, I like the interaction between law and economics), but the opposite is true as well: economics can teach a lot of other disciplines, too.  The economic way of thinking, properly understood and applied, can provide many great insights.  Further, I am not talking about applying some of our more extreme assumptions and models, but rather just one particular assumption: people are, generally speaking, rational (that is: they move toward a specific goal).

The assumption of rationality can lead to some very interesting (and sometimes uncomfortable) questions.  For example, we often see people taking extreme risks to leave socialist/communist countries: crossing shark-invested oceans, climbing barbed-wire walls, risking execution or torture, cramming themselves into hot shipping crates or under bushes of hay, etc.  If we assume rationality, it leads us to the question: “What are conditions like in those countries where these risks are acceptable?”

The assumption of rationality also helps us reject some of the more silly arguments that can lead to bad policy.  For example, a common argument from the Right is that immigration must be restricted because immigrants vote Democrat and therefore they want to recreate the socialist Hellholes from whence they came.  The assumption of rationality leads us to question that claim: if they wanted to recreate socialism, why did they leave their socialist world to begin with?  It’d be irrational.  Could not a better explanation of immigrant voting patterns be simply the Democrats don’t treat them with outright hostility (but rather mask their hostility behind pleasant-sounding schemes like minimum wage)?

My professor Walter Williams likes to say never to assume someone is an idiot unless they prove themselves so.  The assumption of rationality helps prevent us from making this mistake.

It Matters Where Goods Go, Not Money

Commenting on this piece by Steve Horwitz (reblogged at Cafe Hayek), a commentator writes:

In actuality, the money isn’t really being kept local [by big businesses compared to local businesses].

To the extent this is true, by question is “so what?”  Money is not what matters.  What matters is goods and services that can be exchanged for money.  If a store sells the necessary food I need, what’s it matter if the money stays in Fairfax or goes to France?  If a store sells me clothing, what’s it matter if the money stays in Virginia or goes to Vanuatu?  What matters is my wealth has been increased.

If more goods and services are flowing into a community, even if dollars are flowing “out,” that is a good thing.

Further Thoughts on Predatory Pricing and International Trade

The other day, I wrote on predatory pricing (“dumping”) in the international trade market.  At Cafe Hayek, Don Boudreaux has additional comments.  Don writes:

There are many reasons to ignore allegations that private firms use so-called “predatory pricing” today as a means of monopolizing markets tomorrow – not the least of which is that there is no credible historical evidence of any such scheme ever actually being used to achieve genuine monopoly power for an alleged practitioner.  (By “genuine monopoly power” I mean the power of a firm to make consumers worse off than consumers were before the alleged predatory-pricing scheme resulted in the alleged monopoly power.)

Why is it genuine monopoly power is so unobtainable by a predatory pricer (for the sake of discussion, I am going to use the term “predatory pricing” both for domestic would-be monopolists and international “dumpers”)?  Here we must turn to our economic theory of monopolists.  A monopolist is a single seller who enjoys market power due to barriers of entry preventing other entrants into the market.  These barriers may be technological, geographical, or legal.  Since there are already participants the market (otherwise, the predatory pricer wouldn’t need to cut prices), we can determine the current barriers to entry are not so substantial as to prevent entry into the market.  This indicates that, even if the predatory pricer were to successfully drive out all current competition, future competition could come into the market as soon as prices rise to their monopoly level (this is especially true at the international level.  The world is a huge marketplace).

Another thing to consider is what happens to the competing firms.  These firms face two options when dealing with a predatory pricer: 1) compete on price or 2) shut down.  If they opt for #2 and shut down, their resources do not disappear.  They can either be sold to other competitors, new entrants into the market, or simply mothballed until the predatory pricer raises prices again and the firm can enter back into the market.

The above discussion should give us pause whenever we see some politician or special interest group complaining about “unfair price competition.”  It may very well be that the price is an accurate reflection of the firm’s costs and not a signal of some sinister pricing plot.