Category — Economics & Finance

I need to vent a little bit about the way the discussions under Jason’s post on markets and E.D.’s response have tended to move into debates about the merits of communism and capitalism, as if the question is whether markets can solve either all problems or none. I doubt that speaking about markets at this level of abstraction is very useful, but since we’re already doing it, I’ll toss in my opinion.

The reason that basically all large and lasting human cultures have made some space for markets (and formed black markets in the event that someone powerful tries to outlaw legal markets) is that when people trade with each other, the distribution of goods necessarily moves toward matching the map of preferences. This happens for a simple reason. If a proposed trade doesn’t alter the distribution of goods in a way that the parties to the trade prefer, then they won’t trade. In just the way that Jason described, market spaces take distributed information into account, and they’re extremely powerful and rather amazing.

So if markets work so well, why don’t we use them for everything?
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In my ‘wealth and moral character’ post, the discussion quickly turned to the Walmart debate, and whether Walmart was bad or good for local economies, communities, etc.  Let me first say that I understand the impulse to blame Walmart for many perceived ills in local communities.  Walmart is not an attractive place.  I am instinctively turned off by the aesthetic of the big box store.  Nevertheless, I am aware also that my aesthetic concerns can cloud my judgment, and that perhaps we should think more in terms of basic human welfare rather than purely aesthetic (big box vs. small mom and pop).  A few of the critiques of Walmart include:

• Walmart puts small businesses out of business.
• Walmart depresses wages.  Walmart employees are treated badly and paid badly.
• Walmart and other big box stores have an averse impact on communities both aesthetically and because they are big corporations.
• Walmart receives unfair advantages from government in zoning and tax treatment.

Let’s address each. 

#1)– there is an assumption that because a large, cheap retailer moves into a community it will drive all its small competitors out of business.  First of all – this is quite possibly very true.  That is why whenever one big-box retailer moves into an area, we should hope its followed by one or two more.  These competitors will keep the costs of goods at the other big box retailers low.  The reason that the mom and pop retailers are driven out of business by Walmart in the first place is that they can’t compete with both the lower cost of goods, but also the much wider availability of goods that Walmart (or Target, etc.) can provide.  Typically these mom and pop retailers were local monopolies in the first place, and had poor selections and high prices.  Walmart, Target, and other big businesses come in with a much better selection of goods and so consumers freely choose to shop there instead.

And voila!  Consumers now have more money in their pockets.  Poorer or working class people suddenly have cheaper clothing, furniture, medicine, and even groceries.  This means they have more money left over at the end of the day to spend on other goods.  Clever local business people can capitalize on this by starting up businesses that are not in direct competition with Walmart – like restaurants, bars, or novelty stores.  Indeed, the leftover money from cheaper goods can quickly translate into a more robust local business climate than ever before.  It results in a changed local economy, not in the death of a local economy altogether.  The cheaper retail goods (and books, if you want to include Amazon in this critique) and so forth lead to new services being available to consumers because these consumers have more money to spend on leisure, on massages or movie tickets, or nights out on the town.  In other words, this idea that Walmart destroys local business is simply not true.  It changes local business, but it certainly doesn’t destroy it.  Indeed, restaurant owners may find that they can purchase some of the food-goods cheaper from Walmart (or Sam’s Club, or Cosco) cheaper than ever before….

(As an example: Let’s say I have $50 to spend.  I need to buy some things for the house.  At the local retailer these items will cost me $35 leaving me with $15 to save or spend.  At Walmart they will cost $20 leaving me with $30 to save or spend.  If I buy the goods at Walmart I can then go spend $30 on other goods or services around town.  I can spend twice as much on going out to eat.  Hell I might even be able to do dinner and a movie.  If I’d bought the goods at the local retailer, I would certainly have been limited to dinner or a movie.)

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Jonah Goldberg makes some very good points about human welfare and markets:

I’m no unmitigated fan of Wal-Mart, but it can’t be denied that Wal-Mart—and stores like it—have improved the lives of a lot of low-income families by making life’s necessities, and even its luxuries, affordable. Lightbulbs put a lot of candle makers out of business[*], but lightbulbs also made indoor lighting cheaper, safer, and more widespread. That’s a good trade.

Indeed, the market is the only thing that transforms luxuries into affordable indulgences. A low-end car today has features that the best Mercedes didn’t have a generation ago. Teenagers have phones that are more powerful than the computers that NASA used to put men on the moon. Indeed, even leisure has become democratized.

[…]

One last point. I love the Templeton Foundation and I think they do fantastic work. But questions like “Does the Free Market Erode Moral Character?” bother me a great deal. As opposed to what? Socialism? Socialism certainly erodes moral character. Some of the most alienated, selfish, deracinated people I’ve ever met were people who grew up under the yoke of Communism. Arthur Brooks’s work has definitively shown that large welfare states siphon off philanthropy and erode altruism.

Adam Smith’s case for the free market rested on the fact that it encouraged good character (as Yuval Levinrecently detailed), and I think Smith won that argument a long time ago. A more fruitful question, with deep religious and philosophical implications and precedents, would be “Does wealth erode moral character?” Debating that would still allow for some healthy attacks on the free market, because without free markets, wealth really isn’t something to worry about.

First of all, I know citing Goldberg round these parts will earn me a whole host of angry comments.  How dare I quote the man who wrote Liberal Fascism!?  He’s a fascist!  He’s not very nice!  He strawmans liberals!

I admit, I have a fondness for Goldberg which allows me to ignore our many points of disagreement long enough to point out the many smart, sensible things he does write.  And this is one of them.

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I’m glad E. D. Kain’s post about markets has been recovered. It’s easier (and fairer) to critique something that actually exists. He writes:

Choice and economic liberty are only useful instruments within society because they avoid many of the traps that come along with big government picking winners, rewarding rent seekers, and so forth.

I can’t say I agree.

Let’s start with economic liberty. Although it’s true that a well-run market will avoid the traps that come with state action, markets are also good in another way. I’m sure he knows this, but it bears repeating.

Markets discover distributed and inarticulate knowledge about preference and utility. Markets are useful not only because they avoid the government picking winners, but also because outside of the market virtually no one, government or otherwise, can tell who the “winners” are at all, at least not if they act alone. The government may be bad at picking winners, but so is everyone else.

We need markets because we need to them to solve a very difficult problem, the problem of gathering up widely distributed, paper-thin, ever-changing knowledge about what people want and need. As Friedrich Hayek put it,

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Do markets do this perfectly? Certainly not. Markets can fail due to outside interference (see: government). They can also fail because defining property rights, reducing transaction costs, and accounting for externalities can be very hard. These difficulties must often be solved by resorting to politics, and thus incurring the problems of politics anyway.

But the real question is not whether markets work perfectly. It’s whether any of the alternatives can do the job as well or better. When we consider that the real work of markets is to gather up distributed knowledge and render it publicly legible, it seems clear to me that few other social institutions are even seriously trying. Many of the worst of them, government programs above all included, act as if this work has already been done — as if Hayek’s dispersed knowledge had already been aggregated once and for all, and as if the action at hand weren’t going to upset it all in the process.

To be perfectly clear, markets aren’t the be-all and end-all of public policy for me. They are, however, the option we ought to try first, because properly designed, they tend to tell us what’s going on. This is tremendously important, and it’s very difficult to admit that we don’t know it.

We should also resort to markets, possibly with creative modification, when the other avenues have failed. Not everyone will agree with me here, but I’d argue that “the” market seldom fails, as if “the” market were always and everywhere the same thing. It’s much more often the case that free choice constrained by the given ruleset has failed, so we need to rework the rules to better reflect market principles. Perhaps we’ll succeed, and perhaps we won’t. Politics may intervene, as it so often does.

And briefly, as to “choice.” I can’t believe that “choice” merely serves to avoid the pitfalls of government, and that it has no other function. (Does anyone?) The exercise of individual choice is aesthetically beautiful. It sharpens our powers of judgment and reasoning. It grants dignity and moral responsibility to all of us, and these should not be lightly surrendered.

Some hail the 1950s as America’s golden decade.  It was boom time in America, and like the Big Automakers, Big Government continued what was begun during the Great Depression, adding notches to the belt of the New Deal through expansions of Social Security and other entitlement programs, culminating the next decade with the passage of Medicare.  Times were good for American manufacturing during the post-war years as well, and America looked to be on its way toward perpetual prosperity.

However, the intervening years have been more of a mixed bag for Americans.  Free trade and globalization as well as the constant advancement in technology have led to an entirely different workforce than the one we had six decades ago.  Similarly, immigration, the civil rights movement, and the society-wide integration of women into the labor force have changed the face of American jobs entirely.  Many people look at all these changes and point only to free trade or globalization as the culprits in trying to understand why the world has changed so drastically, but this misses all these other changes which have occurred since the days when American made vehicles were really the only ones to choose from, and the concept of a two-income household was as strange as the idea of rearing children out of wedlock.

So what would have changed if the American people had decided to enact protectionist policies instead of free trade agreements?  And to what extent would we have needed to go to maintain the sort of civil society we had in 1950 or 1960?  Could we have, through protectionist and greater redistributive policies, created a society wherein the same level of economic prosperity and indeed preeminence could have continued to present day while at the same time bringing minorities and women into the work-force?  Would this be possible (is it possible even now?) to sustain without also maintaining a large, even global standing army?

Furthermore, to what degree is the perceived prosperity of the 50’s and 60’s in fact merely an illusion of the ‘good ol’ days’?  There is a widespread belief that this was an era of prosperity, and that in recent times people have become worse off, poorer, less able to achieve the American dream.  A college degree is the new high school degree.  There are not as many good blue collar jobs, etc.  But could we have enacted policies to counter this?  Could we have kept the lumber jobs, the fishing jobs, the manufacturing jobs?  What policies would this have demanded?  Less strict environmental regulations, to begin with. Some cap on innovation of new technology.  Much higher taxes, and very strict protectionist policies.  The protection, even, of very big corporations against competition – especially automakers, but other industries as well, such as telecommunications.  Then the question becomes, what would have been the side-effect of these policies?

These are the questions we need to ask when we begin to question free trade.  It is only one component in the change the world has undergone in recent decades.  Many of the changes are far more egalitarian in nature.  How much has the two-income family had an effect on home prices – effectively pricing out single-income families from the housing market?  How much has federal tuition assistance led to much higher college tuition?  The dead lumber towns are the result of legislation aimed to save forests.  And on and on.

So went the agrarian society.  So goes manufacturing.  Why staff a mail room full of mail runners and sorters when machines can do it better?  Why hire elevator operators when elevators are pretty easy to operate on our own?  Why charge more for a product, when you can undercut your competitor by making large capital investments in computers and machinery which save on costs in the long run?  In the end all these changes lead to a new sort of economy, and they can be a painful process, but there is really no stemming the tide.

Certainly the cost of stemming the tide would be much greater than merely enacting some stricter tariffs.  I don’t think economic populists have a clear vision of the America they imagine could be preserved through protectionism, or a good handle on the lengths such protectionism would truly need to go to do the trick.

P.S. – all this being said, I think that Randian advocacy of markets with no regulation, etc. is at least as Utopian.  Few people actually believe that no regulation would be the best policy, only that regulation should be efficient and limited because it is subject to capture and manipulation.  Also, this is not really an argument against taxes or anything of that nature.  Countries like the Netherlands or Denmark have very free trade and very high taxes, managing to keep government out of the economy while still providing strong safety nets (indeed, perhaps too strong!)  The trick, I think, is figuring out how to maintain as much economic liberty as possible while still providing effective state services and safety nets.  This is impossible when both parties spend all their time talking past one another or come up with healthcare plans that are “bipartisan” only inasmuch as they are good ideas stripped down to rather watery ones, diluted to the point of being almost entirely worthless.

Dani Rodrik on the Chinese trade imbalance vice grip:

So we are left, it seems, with two equally unappetizing options. China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere. Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.

There is, of course, a third path, but it would require re-writing the WTO’s rules. If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers.

It is not a pretty solution, but it is the only one. The great advantage of industrial policies is that they enable growth-promoting structural change without generating trade surpluses. They are the only way to reconcile China’s continued need for industrialization with the world economy’s requirement of lower current-account imbalances.

Rodrik is one of the few sane voices left on globalization.  His interest is (rightly) in the area of development: human, social, economic, and political.  Markets are a means to that end and not an end in themselves, something that’s described brilliantly in his book, One Economics, Many Recipes (highly recommended).

What he points to here with respect to the WTO and here criticizing the IMF for opposing a sane policy of (tempered) capital controls on “hot money” flows  (A policy I’ve long supported) is that countries along a developmental path have different needs which are best served by different policies.  Trans-national governing entities from fully modernized countries intent on replicating the rules and practices of those countries do not help emerging economies.  Instead, they’ve created the current damned if you do, damned if you don’t conundrum Rodrik brilliantly summarizes.

Lest I immediately hear howls about capital controls, it’s worth keeping in mind that in the wake of the financial crisis, we now have a system of capital bailouts.  The capital “control” lies with the banking and financial sectors and with the governments subservient to them.  See, for example, the positive response from the stock market after news surfaced of an impending bailout in Greece.

Absent capital controls, we have what Thomas Friedman called the electronic herd, which is by the way a perfect metaphor.  It’s just that Friedman saw no way to slow down or even impede/corral the herd and therefore argued we should just submit to its whims and welcome our new financial overlords (complete with breathless utopian talk of flattening worlds and all the rest).

Now that herd runs rampant through the field, eats all the local grass, leaves the land stripped, confident in the knowledge that it will get “bailed out” (whatever that means at this point).  In other words, the electronic herd has become a non-ecological herd, without a niche and competing/countervailing forces to keep it in check.  Those checks are what need to be restored.

Ted Nordhaus and Michael Shellenberger, writing in Foreign Policy:

In this, Obama was following two decades of magical thinking among both greens and liberal Democrats about energy technology. In this view, energy efficiency pays for itself, solar and wind power are already nearly cost competitive with fossil fuels, and both can quickly and cheaply reduce emissions. This Pollyanna view of fossil fuel alternatives and efficiency, which makes going green seem cheap and easy — little more than the cost of “a postage stamp a day” — has provided the justification for green-policy advocacy that has overwhelmingly focused on pollution regulations and carbon pricing while ignoring serious investment in energy research and development…

The real technological obstacles to decarbonizing the global economy today represent an insurmountable obstacle to political efforts to limit carbon emissions. Until policymakers get serious about addressing the central technological challenge, all efforts to control carbon emissions are doomed.

The entire article is worth a read.

I think their criticisms of this policy–seen in the Waxman-Markey House Energy Bill–are solid.  They correctly point out that the bill includes substantial giveaways to energy industries, much like insurance industry concessions in the health care bill.

But in what world is legislation going to get through the US Congress that isn’t rife with all kinds of industry goodies?

If we want to fund (as Nordhaus and Shellenberger prefer, and I’m with them on this one) R&D, how is that not going to create government-industry alliances?  They might benefit different industries than in the Waxman-Markey bill, but this sounds to me like the same basic program, just with different recipients on the other end.

Particularly when Nordhaus and Shellenberger call for this:

However, the technologies we need will not materialize in response to carbon prices or emissions caps. Nor will they arrive, as many conservatives would have it, by getting the government out of the way and simply allowing a new generation of Steve Jobs and Bill Gates to tinker away in their garages.

Rather, we need to create a new clean energy economy in the same way we created our information economy: by identifying a set of well-defined technical problems and mobilizing the human resources of our technologically advanced civilization — our scientists, laboratories, universities, and engineers — to solve them.

If the money is going to spent anyway (which I assume it will be), I generally think the Nordhaus-Shellenberger proposal would be a much better allocation of federal resources than a cap and trade bill laden with buy-offs for the energy industry.  But we shouldn’t act as if it would be anything other than a different form of government-industry collaboration.

That said, I’m pretty skeptical of this idea: [Read more →]

Br. Erik writes an interesting riposte to Br. Poulos re: The Tea Partiers.

Erik’s post is here, James’ here.

Given that James is writing about the Tea Partiers, I think it’s fair to now officially start calling him (lovingly) The Mad Hatter.  I don’t know if that makes Erik The March Hare  (and me Alice?), but here we go.

First Poulos (quoted by Erik):

Moreover, liberals of any party seeking primarily to foster or facilitate cultural change typically have little desire to focus their attention, much less their careers, on preventing the government from aggrandizing itself. A government that routinely manages economic behavior through its economic policy is well able to routinely manage social and personal behavior that way. In theory, there’s no reason why lots of Republicans can’t be ‘socially liberal but fiscally conservative.’ In practice, social liberals, of any party, have a vested interest in a government that rules not only by law but by economics.

Erik:

This is a preposterous thing to say.  Perhaps I’m biased since I’m “socially liberal but fiscally conservative” myself (I know, the first step toward RINOism!) but I think that statements such as this only function if politics is truly a linear field, if “socially liberal” or “socially conservative” can only be defined in the narrowest of terms.

Both Erik and Freddie (The Cheshire Cat?)  rightly point out in the comments to James’ post the slight oddity (madness?) of bandying about the “Ts” of tyranny and taxation given the (comparatively) low rates of taxation in the United States.

Nevertheless, I think The March Hare has missed The Hatter’s point here. [Read more →]

Indulge me, if you will, in a little self-reflection.

I would probably describe myself as a libertarian conservative. I’m pretty sympathetic to the ideas of limited, decentralized government, free markets, and a decent respect for history and the culture. One thing I can’t muster, however, is the righteous certitude that seems to characterize so many critics of this Administration. Take, for example, this editorial on the stimulus from The Washington Examiner:

Today nearly a year later, unemployment stands at 10 percent. The actual total is closer to 17 percent when you include people who gave up after months of fruitlessly searching for work. The Obama stimulus program has become the butt of jokes on late-night talk shows, thanks to revelations by this newspaper and others of the phantom nature of more than 100,000 of the 640,000 positions claimed by Obama to have been created or saved, as well as revelations about jobs saved or created in congressional districts and ZIP odes that don’t exist.

Now along comes the Associated Press with a detailed study of whether the Obama stimulus program had any measurable effect on the construction industry. The AP study was reviewed by economists at five universities. Here’s what AP found: “Ten months into President Barack Obama’s first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry,”

–

Despite the evidence that federal stimulus spending does not do what its advocates promise, Obama and his Democratic allies who control Congress are determined to take another whack at the taxpayers by passing a second stimulus program, the $75 billion Jobs for Main Street Act that will spend most of its funds on — what else? — construction projects. The House approved the proposal in December on a narrow 217-212 vote, and the Senate is expected to take it up later this month. The basic reason government stimulus spending doesn’t work is this: For the government to spend $75 billion in one part of the economy, it must first take $75 billion out of the economy somewhere else. There is another name for this process — robbing Peter to pay Paul.

You’ll excuse me if I don’t find the folk economics of The Examiner’s editorial staff – “robbing Peter to pay Paul” and all the rest – terribly persuasive.

For starters, their agenda is transparently obvious: Make things seem really bad by citing a few out-of-context numbers and then suggest the stimulus – rather than, say, a terrible economic climate – is to blame. Never mind the fact that the 17 percent unemployment rate they point to is taken out of context and wildly-inflated. Never mind the fact that botched local jobs or faulty record-keeping are indictments of individual projects, not the economic logic of counter-cyclical government spending.

The rest of the editorial is hardly better. The widely-cited AP study on construction stimulus funds is, of course, a lot more complicated than The Examiner’s editorial excitedly makes it out to be. The construction industry – the actual source of the study’s data – called the AP’s conclusions “fundamentally flawed.” As for The Examiner’s contention that “federal stimulus spending does not do what its advocates promise,” the notoriously-liberal American Enterprise Institute seems to think the bill worked pretty well: “. . . substantial support from fiscal stimulus, coupled with inventory rebuilding, boosted real GDP growth in the second half of the year to an estimated 3 percent annual rate. Without fiscal stimulus and inventory building, however, growth would have remained negative–an ominous fact because the fiscal stimulus will fade rapidly by mid-2010.”

None of which is to say that the stimulus was an unqualified success. None of which is to say that liberals aren’t guilty of similar bouts of self-righteous back-slapping.  But as someone who tends toward conservative outlets, I’m shocked by frequency of similar proclamations, which seem more akin to religious mantra than anything approaching sober analysis (Shelby Steele’s latest op-ed immediately comes to mind: “But where is the economic logic behind a stimulus package that doesn’t fully click in for a number of years?” I don’t know about the logic of the stimulus package, Shelby, but I sure as hell wouldn’t turn to someone who “specializes in the study of race relations, multiculturalism, and affirmative action” for macroeconomic analysis).

In the wake of an incredibly disorienting collapse that defies just about every facile ideological diagnosis, I don’t find absolute certainty all that attractive anymore. Call me a squish or a bad team player or someone who’s unwilling to take sides when the chips are down, but the Great Recession of ‘09 has shaken my faith in dogmatic economic analysis of just about any stripe.

Cry me a river. Furthermore, do Wall Street firms complaining that compensation ratios are at historically low levels not realize that the problem is with bankers receiving bonus compensation in the first place?

I do not expect Chicago School economists to favorably review the Obama Administration’s economic policy, but to suggest that those economic policies, not only those which have been passed (The American Recovery and Reinvestment Act) but those which have yet to pass or are simply on its wish list are hindering an economic recovery – a claim made by Gary Becker, Steven J. Davis and Kevin Murphy in this WSJ Op-Ed piece – without providing any real evidence to support your claim is weak.  Call it a serious case of putting the cart before the horse manure.  Here’s an excerpt from their op-ed:

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases…

Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.

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Rortybomb expands on his Evil Rorty scenario with a solution: [Read more →]