Costs and Benefits are Culturally Dependent

futurama culture

The above screenshot is taken from Futurama.  Lrrr and his wife, Ndnd, rulers of the planet Omicron Persei 8, are aliens from a warlike race.  Violence permeates their culture.  While Lrrr himself is not particularly warlike (he half-heartedly invades Earth in one episode just to stop his wife from nagging him), the culture still is ingrained in him and much of his confusion regarding Earth is why it is not more warlike (another quote I could have chosen is when he is watching an episode of the in-show spoof of Ally McBeal called Jenny McNeil, he asks “if McNeil wants to be taken seriously, why does she not simply tear the judge’s head off?”).

Lrrr’s confusion stems from the two different cultures of Earth and Omicron Persei 8.  What is “foolish” behavior for him is normal behavior for the people of “ancient” Earth (Futurama takes place in the opening decades of the 3,000’s, so “ancient Earth” to him is the 90’s and 2000’s for us).  For Lrrr, there is a benefit to demonstrating strength before (or to) friends.  For the people of Earth, it is a cost.

This simple fact makes the job of the economist difficult when it comes to regulation.  The typical Econ 101 story for regulation is to do a cost-benefit analysis and, if the costs are less than the benefits, then regulation may be justified.  But this seemingly straightforward process is, as we can see above, actually quite complex.  What counts as a cost and benefit, as well as the relative values of those costs and benefits, are subjective.  It depends on the person observing the situation.  For us, Ross’ behavior is normal and praiseworthy.  For Lrrr, the exact same behavior is confusing and foolish.  And Earth observer might propose a regulation that rewards people who act like Ross.  And Omicron Persei 8 observer might propose legislation that punishes people who act like Ross.

Ultimately, the determination of regulatory behavior comes down to the subjectivity of the observer.  What this means is “optimal” regulation (such as a tariff, tax, wage, etc), while possible in theory, is practically impossible.  What may be an optimal tax for one observer may be too high/low for another and may be a subsidy for a third.

This subjectivity is why I adhere to a status quo bias and a presumption of liberty.  Legislative and legal changes should not be done casually, and even with great thought and analysis, should be undertaken only very carefully.

Are US Property Rights Contributing to the Trade Deficit?

The United States has relatively strong property rights protections compared to other nations.  According to the Economic Freedom of the World Index, the US remains in the top quartile when it comes to property rights protection (although the absolute score has fallen in recent years).  Could this ranking be contributing to the US’ global trade deficit, and especially that with China?

When looking at international trade accounts, what is typically reported on is the trade balance or current account.  This is, generally, the amount of goods/services imported and exported between two countries.*  However, there is an opposite side to the coin here that is less discussed: the capital account or the importation/exportation of asset ownership between countries.  Asset ownership includes things like real estate, ownership of firms, etc.  By definition, the current account and the capital account must sum to zero.  In other words, foreigners sell to us in order to buy either US made goods/services or US assets.  If the US has a trade deficit (more imports being sold to US buyers coming in then exports being sold to foreign buyers going out), then the US must necessarily have a capital account surplus (more assets being bought in the US by foreigners then US citizens buying foreign assets).

So, where do property rights play in?  Property has long been a good vehicle for saving as it literally provides shelter and typically has some value.  As with any nation that gets wealthier, the wealthy people in China are looking for safe yet productive ways to invest and save.  Property does not play that role in China.  Much of Chinese property is, at best, leased from the government; it cannot be outright owned.  What can be owned, however, is always at risk from nationalization or appropriation from the Chinese government, especially if one becomes a political target.

In the US, property rights are much more secure.  Except under few conditions, and with compensation, the US government cannot just appropriate property to itself.  Property is easily transferable, either by sale or by inheritance or gift, in the US.  The US has a strong rental market, meaning they can earn rents, and the police generally enforce property rights from burglary and fraud.  In short, property is generally safe in the US.**

If a Chinese person wanted to put money in property as a means of saving, putting money in his own country would not necessarily make sense given their instability when it comes to property rights.  S/he may be more interested in investing in the US.  In order to do this, however, they would need US dollars.  US dollars are acquired by selling goods in the US.  The Chinese person then, instead of using those dollars to buy American-made goods/services, invest in the American economy by buying real estate and turning them into investment properties, an option not easily available to them in China.

Trade deficits are not, prima facie, a reason for worry.  they do not mean that the economy is weak or weakening.  Indeed, just the opposite: in the above discussion, the trade deficits exist precisely because the US economy is strong!

*It’s slightly more complicated than this, but for our purposes here that does not matter.

**Of course, a glaring exception to this is the abomination known as civil asset forfeiture, but even that is restricted in the US and, God willing, on its way out

Today’s Quote of the Day…

…comes from page 236 of Bruno Leoni’s 1961 work Freedom and the Law (3rd Edition, emphasis original):

If we consider it well, there is nothing “rational” in voting that can be compared with rationality in the market.  Of course, voting may be preceeded by argument and bargaining, which may be rational in the same sense as any operation on the market.  But whenever you finally come to vote, you don’t argue or bargain any longer.  You are on another plane.  You accumulate ballots as you would accumulate stones or shells – the implication being that you do not win because you have more reasons than others, but merely because you have more ballots to pile up.  In this operation you have neither partners nor interlocutors but only allies and enemies…The political language reflects quite naturally this aspect of voting: Politicans speak willingly of campaigns to be started, of battles to be won, of enemies to be fought, and so on.  This language does not usually occur in the market.  There is an obvious reason for that While in the market supply and demand are not only compatible but also complementary, in the political field, in which legislation belongs, the choice of winners on the one hand and losers on the other are neither complementary nor even compatible.

JMM: This difference between the market and the political realm is utterly lost on those who advocate for government directing of the market: those who argue for “trade wars” or “minimum wage” or any other government interventions.  Markets are about cooperation, not violence.  When China sells goods to the US, it is not a battle, China is not the enemy.  When Wal-Mart hires workers at a given wage, it is not Wal-Mart exploiting workers or some great battle between labor and management, but rather cooperation between the two.

Political language easily lends itself to conflict and violence.  But to use that same language in the market is to fundamentally misunderstand what the market is.

Where’s Mine?

In my Econ 385 class on Tuesday (International Economic Policy), an excellent discussion on student loan debt came up.  One of my students asked the probing question: “Student debt is approaching $1.8 trillion.  Everyone seems to recognize this is a bubble.  Why is there so much resistance to student debt forgiveness?” 

I opened the discussion up to the class.  Lots of excellent, well-reasoned opinions were expressed.  Some argued that the schools have no incentives to keep their expenditures in check since the government is subsidizing the loans.  Some argued that the politicians do not bear the full costs of these loans, nor a default, so they have little incentive to address the issue.  Others noted that the banks would keep giving loans so long as they are backed by the government.  All of these are excellent points, which I’ll not rehash here (I wish I could take credit for teaching these students, but they were already smart before they came to my class).  

There is a larger issue I wanted to discuss, one which was not discussed in class (we were acting under the assumption, for the sake of the discussion, that forgiveness was the best option).  This issue is: who gets forgiven?

What is it about student loan debt that makes it worthy of being forgiven, but other forms of debt are not?  There’s credit card debt, housing debt, business debt, auto debt, etc.  All this debt can have the same effect as student loan debt.  True, student loan debt is larger than these other sources, but if that’s the case, that’s just an argument either for partial forgiveness, or for people to mount up other forms of debt.

If student loan debt is forgiven, the holders of the other forms of debt will wonder “why not me?  Where is mine?”  Indeed, recently a friend used exactly this line of reasoning when justifying tariffs for his own industry: “My competitors and suppliers get protection.  Why not me?”

This is the problem with most government handout programs.  Those that are designed to help a certain and arbitrary group can compel members of the out-group to seek their own rents.  If student loan debt is forgiven, business owners might lobby to have their debt forgiven (“I’m creating jobs!  if my debt is forgiven, then I can create more jobs!”).  Or automobile owners (“My car lets me get to my job!”).  Anyone could come up with various excuses.  

This rent seeking, of course, then results in wasted resources.  Resources that could have gone to productive uses are now trying to capture rents.  And there are other issues as well that I’ll not touch on here: the sanctity of contracts (will it become harder for people to get loans since the value of a loan contract will be reduced?), moral hazard problems (will former debtors seek even more debt since their previous amount was forgiven?).  These are all important issues to consider.

Division of Labor Allows High-Productivity People to be Highly Productive

Commenting on this post at Cafe Hayek, Marisol Regalado Aguilar writes:

I’ve never understood why some many pundits think the government should admit only high-skilled immigrants. We need fruit pickers and floor cleaners, too.

Marisol makes an important point.  There are always jobs that need to be done.  By dividing labor, it allows people to specialize in what they are comparatively best at.  For every janitor or fruit picker imported (that is, low-skilled immigration), it allows doctors and factory workers to focus on their jobs.  In other words, highly productive people are only highly productive because low productivity people do low productivity jobs.

Despite the fears, the division of labor does not reduce wages but rather increase them.  It allows people to focus, become more productive, and thus increase their marginal output and increase their wages.  Low skilled immigration serves precisely this function.

Consider the following: a doctor’s office has basic janitorial needs: trash emptied, rooms sanitized, basic upkeep, etc.  If the doctor cannot hire someone to do that, either because they are not available or he’d have to pay higher wages to lure them away from other jobs and he cannot afford to do so, then he’d have to do the work himself.  That’d necessarily mean he has less time to see patients, do research, or whatever he does to be highly productive.  The doctor would have to become lowly productive.

Restricting immigration to just high skilled workers will not result in increased productivity in the nation.  If anything, it’ll result in lower productivity, and thus lower wages.

Obsolescence: Economic and Technical

The language of economists is often fraught with confusion for a simple reason: we use common words and use them in a precise manner that is different from what many people think.  We inherited a language and our words don’t quite fit into others mouths easily.

One such word is “obsolescence.”  People tend to think of “obsolescence” in a technical sense, that is as something that is old and thus no longer needed.  The horse and buggy was made obsolete by the automobile.

Economists think of the term in a different manner, that is to describe a method of acting that is no longer economically practical given the change in costs/benefits.  This may include adopting a new technology, but it may not.  By way of example, consider the following: why do some people still take the train when we can fly everywhere?  In a technical sense, the airplane has made the passenger train obsolete.  But people still ride the train because the costs of riding are lower than the benefits of riding versus the same calculus of flying.  For some people, the act of flying is obsolete.

Ian Fletcher makes this very mistake in responding to Pierre Lemieux’s new monograph What’s Wrong with Protectionism?  Fletcher writes:

You [Lemieux] attack a protectionist straw man. For example, contrary to what you [Lemieux] say on page 48, reasonable opponents of unilateral free trade do not advocate protecting “obsolete manufacturing.”

Fletcher is confusing technical and economic obsolescence.  Protectionists do indeed advocate protecting obsolete manufacturing; they are obsolete in that they are no longer serving people’s needs since people are now choosing imported products.  If this were not the case, then protectionism would not be needed.  These firms might be at the top of the tech world, but that does not mean they are successfully serving a need.  To protect them is indeed to protect an obsolete industry.

Imperfect Competition: Liquor Edition

Over the weekend, I had the great opportunity to meet a local distiller, Alex Laufer of One Eight Distilling, a company in Washington DC.  Alex’s operation was fascinating to learn about from the perspective of an economist.  He also provided some excellent insight into the nature of competition.

Being a distilling company that makes gin, bourbon, rye, and vodka, One Eight is competing against big companies like Jim Beam, Jack Daniels, Stolichnaya, Beefeaters, and the like.  His prices, like other craft distillers, tend to be higher than these big brands.  Alex knows he cannot compete solely on price; his scale and operation do not allow for that.  Instead, he competes on uniqueness and quality.  His gin uses more peppery ingredients than the competition.  His bourbon and rye are similarly peppery.  He produces a unique product.  One Eight is able to (ably) carve out a niche in the liquor market and successfully compete against the Big Boys.

What’s interesting is, from a purely theoretical perspective, One Eight’s behavior is not, strictly speaking, competitive.  In a “perfectly competitive” market, all firms compete on price and price alone.  Only by lowering marginal cost can they compete.  In a sense, the theory of perfect competition is not one of competition at all.

One Eight’s form of competitive behavior, that of product differentiation, is deemed “imperfect competition.”  It’s considered “monopolistically competitive” and, in straight theory, may be frowned upon as being economically inefficient compared to the perfectly competitive model.  But, in a “perfectly competitive” world, One Eight would not exist.  It would not be able to price low enough.  We, as consumers, would be denied uniquely flavored gin, bourbon, rye, and vodka.  In short, there’d be less diversity in the market, leading to fewer people being able to satisfy their preferences.  I like Jim Beam, but I like One Eight even better.  In a perfectly competitive world, I’d still be better off consuming Jim Beam than nothing, but I’d not be as well-off as I am in the “imperfectly competitive” world of One Eight.

The perfectly competitive market is often touted as some golden standard of competition; regulation is used to try to move the market to this idea (eg, antitrust regulation).  But, ironically, such regulation tends to reduce real competition.