22 ноября, 17:48

International Adoption: The Personal Side, by Bryan Caplan

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Arthur Brooks' personal experience with international adoption beautifully complements the science:When the moment of truth came, my name was called, I entered the room, and a Chinese official plopped a baby into my arms. I braced myself, and -- nothing happened. She didn't cry. She didn't scream. She just held onto my shirt with her tiny fists and stared up at my face. To me it was as if we had been together since the moment of her birth.[...]Today, my daughter is a freshman in high school. She spends too much time on Instagram but is killing it in her classes. And what about our giving experiment? In truth, I don't know or care what my daughter has done for my income or health. But my happiness? It spikes every time she looks at me and I remember the magic day we met.Despite this, international adoption has become less common.  And governments around the world are to blame:Back in the United States with our new daughter, Ester and I felt we were part of a foreign adoption movement. We were sure that enlightened public policy would continue to loosen regulations, which would make for more and more miracles like ours. Blended international families of choice were the wave of the future, we thought, and a reflection of an increasingly shared belief in a radical solidarity that transcended borders and biology. We were wrong. The year we adopted turned out to be the high-water mark in foreign adoptions and the number has dropped ever since. By 2016 it had fallen 77 percent from its peak, to 5,372. This is the lowest total in three and half decades. What happened? The answer is not a lack of need. Indeed, according to the Christian Alliance for Orphans, there are more than 15 million children around the world who have lost both of their parents. Part of the reason is the policies of foreign governments, which have made foreign adoption harder, for both nationalistic reasons and because of worries about corruption and human trafficking. Our own government has contributed as well: Foreign adoption plunged all through the Obama administration as the State Department imposed new hurdles in the name of curbing abuses, which are a significant worry for parents adopting from some countries (although not China, where virtually all the children, like my daughter, were abandoned at birth). Motivated by good intentions or not, these changes have left thousands of orphans unadopted. This is too high a price to pay for bureaucratic screw-tightening. In my family, we have a catchphrase: "I don't think about what could go wrong.  I think about what could go right!"  It's poetry, of course; I'm full of precaution.  But I stand by the spirit of our poem.  To take the case of international adoption: We're paranoid about the microscopic risk of accidentally snatching a poor family's wanted baby - and barely cognizant of the fantastic opportunity regulation snatches from the hands of orphans around the world.  Social Desirability Bias - and the demagoguery it fosters - is not only mindless, but heartless.P.S. Happy Thanksgiving to the Brooks family and to all of you! (0 COMMENTS)

22 ноября, 04:49

Summers on Growth, Trade, Immigration, Marshall Plan, and Tax Cartels, by David Henderson

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Larry Summers recently gave a speech at an event hosted by the Center for Global Development. It's quite good. His understanding of the big picture on economic growth is very impressive, as is his numeracy. What's a little surprising is his admission about some pretty awful bureaucratic incentives (although I'm glad he admitted it). And he gets the Marshall Plan wrong. First, the great news on standards of living in the world: Fifty percent is the growth that has been achieved in a variety of six-year periods in China over the last generation and in many other countries, as well. And so if you look at material standards of living, we have seen more progress for more people and more catching up than ever before. That is not simply about things that are material and things that are reflected in GDP. The primary message of the Global Health 2035 Report that I coauthored several years ago and that Amanda Glassman and others from CGD were involved in was that if current trends continue, with significant effort from the global community, it is reasonable to hope that in 2035 the global child mortality rate will be lower than the US child mortality rate was when my children were born in 1990. That is a staggering human achievement. It is already the case that in large parts of China, life expectancy is greater than it is in large parts of the United States. One can tell a similar story in terms of literacy and probably an even stronger story of the rights of women. Extreme poverty is now a phenomenon not of countries that just happen to be poor. It is a phenomenon that reflects pockets of poverty in countries that overall have reasonable incomes, like India or China, and it is a phenomenon of fragile and dysfunctional states that do not have effective governments. It is not a phenomenon of generalized poverty of countries that do not lack resources. Larry's perspective on trade: The reality is that the American market has been almost completely open for 40 years. And what has happened is that the developing countries have become much more productive and much more efficient and it has become much more possible to move goods at low cost and to export efficient production technologies to developing countries, and that would have happened with or without trade agreements, and the trade agreements have been good deals because they have opened the other countries' markets much more than they have opened ours, mostly because ours was already open. The huge increase in the Indian government's liquid wealth: In 1991, when I was new to all of this, I was working as the chief economist of the World Bank, and the first really important situation in which I had any visibility at all was the Indian financial crisis that took place in the summer of 1991. And at that point, India was near the brink. It was so near the brink that, at least as I recall the story, $1 billion of gold was with great secrecy put on a ship by the Indians to be transported to London, where it could be collateral for an emergency loan that would permit the Indian government to meet its payroll at the end of the month. And at that moment, the World Bank was in a position over the next year to lend India $3 billion in conjunction with its economic reform program. And the United States had an important role in shaping the World Bank's strategy. Well, that $3 billion was hugely important to the destiny of a sixth of humanity. Today, the World Bank would have the capacity to lend India in a year $6 billion or $7 billion. But India has $380 billion--$380 billion--in reserves dominantly invested in Treasury bills earning 1 percent. And India itself has a foreign aid budget of $5 billion or $6 billion. And so the relevance of the kind of flows that we are in a position to provide officially to major countries is simply not what it once was. Spending Other People's Money: Nothing to see here, folks; just move along: I remember as a young economist who was going to be the chief economist of the World Bank sitting and talking with Stan Fischer, who was my predecessor as the chief economist of the World Bank. And we were talking, and I was new to all this. I had never done anything in the official sector. And I said, "Stan, I don't get it. If a country has five infrastructure projects and the World Bank can fund two of them, and the World Bank is going to cost- benefit analyze and the World Bank is going to do all its stuff, I would assume what the country does is show the World Bank its two best infrastructure projects, because that will be easiest, and if it gets money from the World Bank, then it does one more project, but what the World Bank is actually buying is not the project it is being shown, it is the marginal product that it is enabling. And so why do we make such a fuss of evaluating the particular quality of our projects?" And Stan listened to me. And he looked at me. He's a very wise man. And he said, "Larry, you know, it is really interesting. When I first got to the bank, I always asked questions like that." "But now I've been here for two years, and I don't ask questions like that. I just kind of think about the projects, because it is kind of too hard and too painful to ask questions like that." The Marshall Plan: I gave a lecture on the Marshall Plan--the great historical success of foreign aid. Really? One of Larry's best students, Tyler Cowen, would take issue with that. After laying out the problem of global public goods, such as being ready to deal with a pandemic, Larry says: How we are going to mobilize support around global public goods, where the resources are going to be adequate around global public goods, I would suggest, is the second very large priority for the years ahead. That will be hard, especially when the people such as Larry who make the case have demonstrated and admitted that they earlier threw taxpayers' money around. See his admission above. His insight that most of the free trade agreements being talked about today are not really that much about freer trade: Most of those tariffs in today's world have gone away. And most of the content of what we now call free trade agreements beyond where we are now is not about the removal of those kinds of barriers. It is about, for example, securing intellectual property protection for global companies in a wider range of countries. Or it is about achieving access for service companies to a wider range of countries. Or it is about harmonizing rules in areas like safety standards or financial reporting standards. His desire to form a global tax cartel, something I wrote about some years ago and something Larry has wanted for a long time: There is no reason why preventing a race to the bottom in the taxation of mobile capital should not be an equally important priority for those concerned with international integration as the dissemination of intellectual property protection or the protection of investors' rights or the establishment of the right to branch. And that is an issue that-- because revenues not obtained in one place have to be obtained in another place--speaks very directly to the economic interests of broad publics everywhere. His point that the gains from freer immigration swamp the gains from freer trade: The fourth issue that I would highlight--and I can highlight its importance more credibly than I can speak intelligently about it--is addressing the set of issues having to do with the movement of peoples. It is on the one hand the case--and it is the point that economists emphasize--that if you think about the size of the barrier represented by the difference between the price of a car here and the price of a car there, or the price of a shirt here and the price of a shirt there, and you look at that barrier as a percentage, or you look at the cost of money here and the cost of money there, you look at that as a percentage or you measure the barrier, and then you look at the wage rate for an equivalent worker in one place and in another place, the barrier, the imperfection relative to full mobility and full openness is an order of magnitude greater with respect to the movement of people than it is with respect to the movement of capital or the movement of goods. And that is the globalist pure economic case for much freer movement of people than we have today. At the same time, there is the tension represented by the fact that while it might be difficult for moral philosophers to fully justify and understand, most of us care more about our children than our nephews, and most of us care more about our nephews than we care about our friends' children, and most of us care more about our friends' children than we care about strangers' children, and most of us care more about other American children than we care about children in other countries. And so an agenda of collective globalization is an agenda that is intentioned with bringing out the most generous impulses within us. And how we manage that tension is, I think, central going forward. I would like to see a world in which there is more movement of peoples, a world in which there are more opportunities for us to prosper and for developing countries to prosper, through more mobility, temporary or permanent, of peoples. I find the CGD work pointing up the magnitude of those barriers to be highly persuasive. Good on ya, Larry. His bottom line about migration: But I do not think there is a more important development issue than getting questions of migration right HT2 Timothy Taylor, aka The Conversable Economist. (2 COMMENTS)

22 ноября, 02:31

Ryan Murphy on government effectiveness and growth, by Scott Sumner

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A decade ago I wrote a paper that looked at several definitions of neoliberalism, and found that what I called "egalitarian neoliberalism" was especially closely correlated with civic virtue. This model was based on the various indices of economic freedom, with the sign on size of government inverted (so that bigger government was a plus, not a minus as in the typical economic freedom indices). For example, the (high trust) Nordic countries gravitate toward models that combine free markets and large government. Ryan Murphy has a very interesting new paper that explores these ideas in much more depth. He constructs an index of "State Economic Modernity" (SEM) by subtracting size of government in the Fraser Index of Economic Freedom of the World (EFW) from the component that measures rule of law and property rights. Again, the highest values of this SEM index tend to occur in the Nordic countries. He rightly points out that this measure makes more sense than "state capacity", which doesn't tell us what governments are actually doing: This paper constructs a measure, the SEM index, which can be thought of as a measure of state building or state economic power, and is related to the concept known as state capacity. In contrast to state capacity, rather than asking the hypothetical question of what is in a government's capacity to do, it measures the extent to which a government exerts itself within an economy, and how well it provides the most basic public goods. Murphy also points out that economic freedom may be easier to obtain that SEM: The countries of Georgia and Libya occupy approximately the same level of SEM, but they have very different levels of economic freedom. With political will, Georgia was essentially able to pull itself up from the current spot Libya finds itself in economic freedom to the very high level it is today (see Burakova and Lawson 2014). Compare this to countries with the same level of economic freedom, but very different scores in SEM. Guatemala has about the same level of economic freedom as the Nordic countries, but the opposite score in SEM. The idea that public officials could push Guatemala rightwards on the graph to meet the European social democracies in their degree of state building and state capacity is almost unimaginable. It would require high degrees of political will, skill, and luck for a matter of decades in investing in the country's social capital and human capital, if it is possible at all. In this sense, the SEM index may be more "deeply" institutional than measures of economic freedom, which may relate more to "policy." Murphy found that while economic freedom is correlated with growth, SEM is not: Table 12 provides regression results for economic growth. For these regressions, initial level of economic output is included as a control variable. All independent variables correspond to year t, while the independent variable corresponds to growth from year t to t+10. The most recent data points correspond to growth occurring from 2000 to 2010. A similar pattern to Table 11 emerges. The SEM index is significant in regressions that do not include country fixed effects, but loses significance when they are included. In fact, when they are included, its point estimate is negative. In the final specification, Regression (36), economic freedom retains statistical and economic significance; the coefficient actually implies that a one standard deviation increase in economic freedom corresponds to a 0.246 standard deviation increase in growth rate. Considering economists' collective inability to predict future growth rates very effectively, as noted by Easterly (2013: 215-238), the magnitude of the effect of economic freedom is quite large, while nothing is found for the SEM index. For anyone interested in comparative economic systems, I strongly recommend you take a look at Murphy's paper. Here's how I think about the growth findings. Both Sweden and Switzerland are essentially utilitarian economic models. But the Swedes assume that big government best promotes utilitarian goals while the Swiss assume that a smaller government is better able to achieve those goals. Because government of Switzerland is smaller, per capita income is higher. On the other hand, many poor countries have even smaller government. Their poverty reflects a lack of SEM; the benefit of small government is offset by a lack of good governance in other areas such as property rights and rule of law. Note that cultural differences affect GDP in two ways, by impacting governance and also by impacting the productivity of individual citizens. But culture is not the entire story, as the two Koreas demonstrate. Poor countries should first focus on getting richer, which means more economic freedom. In the long run, that freedom and prosperity will lead to better culture, which will allow them to choose between the Swiss and the Swedish models. But right now they don't have that choice because (as Murphy points out) they lack the cultural prerequisites needed for the Swedish model. Even greater economic freedom is not easy to achieve, but it's not as difficult as state economic modernity. When you are incompetent, it's easier to do nothing than to do something. Here is the correlation that Ryan found between SEM and EFW: (3 COMMENTS)

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21 ноября, 22:37

Answer These Questions About the Reformation, by Bryan Caplan

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This semester, my homeschoolers are unofficially taking a GMU class on Religions of the West.  Here's a list of questions about the Protestant Reformation (and a few other topics) they composed to discuss with their professor during office hours.  Paternal bias aside, I say these are fine issues to ponder.If you've got your own answers to some or all of the questions, please share in the comments.The Protestant Reformation1. Why did the Protestant Reformation happen? Standard story or more to it?2. Largest positive effects of the Reformation?3. Largest negative effects of the Reformation?4. Does the corruption of the Catholic church justify the actions of Protestant militants?5. Calvin (double predestination) vs Luther (single predestination), which has the superior interpretation of the Augustinian tradition? Is either right according to the Bible?6. Although Martin Luther was early on against violence towards Catholics, he later reversed his position. Why?7. Does the brutality of John Calvin's theocratic regime in Geneva render his teachings immoral? To what extent can the murders committed by the founder of a religion and his early followers be used to discredit the idea that said religion is one of peace?8. Of the wars caused by the Protestant Reformation, to what extent can they be blamed on political motivations rather than religious ones?9. When John Knox wrote his The First Blast of the Trumpet Against the Monstrous Regiment of Women, did he essentially argue that no form of government ruled by a woman is legitimate?Other1. How powerful is hindsight bias (the tendency to believe that certain events which happened were inevitable) among historians? Should people stay away from calling historical events inevitable?2. "Historical relativism." Do you agree with it?3. Baron d'Holbach wrote: "All religions are ancient monuments to superstition, ignorance, and ferocity; and modern religions are only ancient follies rejuvenated." To what extent was he right?4. On the (earthly) net, would it have been better (measured by the quality/quantity of human lives) if no organized religion had ever existed? (10 COMMENTS)

21 ноября, 18:11

Himmelfarb on why intellectuals hate capitalism, by Alberto Mingardi

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It is not the fault of capitalism that the common man does not appreciate uncommon books. ~Ludwig von Mises There are many gems in Gertrude Himmelfarb's Past and Present. The Challenges of Modernity, from the Pre-Victorians to the Postmodernists. One is a 1952 essay on "American Democracy and Its European Critics". In that essay, in comparing Tocqueville's reading of America with Harold Laski's (in The American Democracy), Himmelfarb notes perceptively that critics of American culture tend to see that "the incubus of Big Business lies heavily upon the whole country, stifling individual expression and corrupting individual tastes". But we know well that successful enterprises, cultural enterprises included, basically provide people with something that they want. Himmelfarb knows this, too. When Coca-Cola, comic books, and Raymond Chandler murder mysteries invaded Europe, penetrating even into the British stronghold, radicals set up a great cry against American capitalism. What they chose not to see is that the real offender is not capitalism so much as the European masses, who have given an enthusiastic reception to these supposedly degenerate products of American capitalism. Europe's real complaint against America is not that America is exporting capitalist culture, but that it is exporting popular culture. In 1956, reflecting on the intellectuals' dislike of capitalism, Ludwig von Mises commented: Many critics take pleasure in blaming capitalism for what they call the decay of literature ... Capitalism could render the masses so prosperous that they buy books and magazines. But it could not imbue them with the discernment of Maecenas or Can Grande della Scala. It is not the fault of capitalism that the common man does not appreciate uncommon books. I think there is a point in all this. Intellectuals have uncommon tastes and with them comes an inclination to put down the ordinary person, who has ordinary tastes. But instead of feeling happy at being different, intellectuals feel unduly isolated, neglected, and unrecognised in their endeavours and their passions. They thus equate a better society with a society in which common people are somehow forced to acquire such "superior" tastes, too. But such a society is difficult to build, if decision making is not centralised. A decentralised system--in which consumers decide what books and movies they want to consume, and producers decide what books and movies they want to publish and broadcast--may allow small niches for the intellectuals' superior tastes, but would tend to spend many resources to give people action movies and comic books. So, it becomes almost inevitable to blame the system--which is more comforting than blaming the people. Simplistic as an explanation of why capitalism is so unpopular among intellectuals? Perhaps. But I feel there's more than a grain of truth. (3 COMMENTS)

20 ноября, 22:05

How Corporate Income Taxation is Misunderstood, by Contributing Guest

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by Richard McKenzie "Don't tax me, don't tax thee, tax the man behind the tree!" ~ The late U.S. Senator Russell Long (D-LA) Republicans are being excoriated by pundits, journalists and Democrats for proposing to lower the corporate income tax rate from 35 percent to 20 percent. The critics claim the reduction is an unjust and extravagant tax break for President Donald Trump and his rich business compatriots. The reduction will transfer the country's tax burden onto the backs of the middle-class and lower-income groups, or so we are told. The critics, however, don't appreciate two major problems with corporate taxes: First, the critics fail to grasp the wisdom in a widely repeated tenet of public finance economics: Corporations don't pay taxes, people do. This is to say that while corporate taxes are directly drawn from corporate profits, those taxes must ultimately come out of the pockets of real people - and the real people affected are not just stockholders whose dividends are undercut by the tax. These taxes also come partially out of the hides of consumers as corporate managers seek to offset any reduction in after-tax profits (and dividends and share prices) by charging higher prices. More generally, to the extent that corporate taxes reduce companies' after-tax rates of return, investments in their production facilities will be impaired, curbing the supplies of products and further raising market prices. Hence, high corporate taxes can impair American firms' ability to sell abroad and to fend off foreign competition in their domestic markets. Workers do not get off scot free, either. With curbs in corporate production attributable to the corporate tax, the demand for labor can be tempered, undercutting worker wages and fringe benefits. How much are the stakeholders - investors, workers, and consumers - affected by corporate income taxation? It's hard to say, because the so-called "incidence" of the corporate tax depends on a multitude of factors, not the least of which are the elasticity (or responsiveness) of supply and demand in capital, labor, and product markets. The incidence of corporate taxation necessarily varies from market to market and even firm to firm. The corporate tax is, effectively, a means of taxing people hidden "behind trees," which is one of its chief attractions to politicians interested in garnering additional tax revenues for the government. They don't have to admit that the corporate tax is a disguised tax hit on median and low-wage workers and low-income consumers and not on just the rich Trumps, Bill Gates, and Warren Buffets of the world. The exact size of the various hits felt by all income classes are literally unknown and unknowable (although many econometricians feign that their statistical equations reveal truth). This means that the proposed corporate-tax-rate reduction will likely pad the pockets of the rich by some undiscernible amount, but it will also increase the disposable income of people all the way down at the bottom of the income ladder. Second, capital - financial and real - and goods and services are now more mobile across national boundaries than ever before. This is because many highly valued modern products - such as the iPhone - are relatively lightweight and can be shipped economically (and in volume and rapidly) by air. Other valuable modern products weigh nothing. Consider the digital nature and economic value of operating systems and the multitude of apps for smartphones and the growing value of "big data." Financial capital and services are also weightless. These products can be shipped globally with a few strokes on a computer and at the cost of a few electrons. A major and unheralded problem for modern governments is that they are landlocked, while firms and their plants and equipment and job bases can move with growing ease among countries at decreasing cost. The growing mobility of production has, of course, forced companies to compete by finding the most cost and tax-effective venues in the world. Their corporate prosperity, if not survival, depends on their doing so. Of course, the growth in the mobility of firms, and the greater demands they face to be cost competitive, mean that governments have necessarily been forced to consider in the development of their tax policies the tax rates charged by other countries. Indeed, the most important, powerful, and least touted argument in favor of the Republicans' corporate-tax-rate reduction is that the United States has the highest tax rate in the industrial world, which puts the country and its firms at a distinct competitive disadvantage, domestically and globally. For example, Ireland has a corporate tax rate of just 20 percent, but which is a third higher than Canada's, at 15 percent. Austria, Demark, and Finland have corporate tax rates of, respectively, 15, 22, and 20 percent. Socialist France has a corporate tax rate just under the United States', at 34.43 percent, but the French government is now proposing to lower the rate to 28 percent. The reason given? Its rate is noncompetitive. No wonder American firms now have a tax-induced bias toward producing and selling their products abroad, and then holding their profits there as well. Just as firms must keep their prices competitive with rivals, so do governments have to keep their tax rates competitive vis a vis other governments, now more than ever. It's the nature of the global economy. The reality of the fluidity of capital and goods in the global economy can be, and will be, a hard taskmaster. Richard McKenzie is the Walter B. Gerken Professor of Enterprise and Society (emeritus) in the Merage School of Business at the University of California, Irvine. He is also co-author, with Dwight Lee, of Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World. (13 COMMENTS)

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20 ноября, 18:25

The Ideological Turing Test in 3 Minutes, by Bryan Caplan

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Learn Liberty has just released a slick new video on my Ideological Turing Test.  Enjoy, share, and repent!  (6 COMMENTS)

20 ноября, 07:48

Coulter on Immigration, by David Henderson

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UPDATE BELOW Last week Ann Coulter wrote a piece on how immigrants to the United States helped Democratic candidates win in Virginia. She made a somewhat compelling case. It is this kind of concern that has made me more nervous than co-blogger Bryan Caplan or Cato Institute's Alex Nowrasteh about allowing more immigrants in. It's not that I want immigrants to vote for Republicans. It's that I don't want them to vote for bigger government. Of course, Republicans and Democrats tend to favor bigger government. So the Democratic vote per se is not necessarily a good indicator. Coulter pointed not only to foreign-born's proclivity to vote Democrat but also to their favoring bigger government. It's this latter than concerns me. She wrote: The foreign-born vote overwhelmingly, by about 80 percent, for Democrats. They always have and they always will -- especially now that our immigration policies aggressively discriminate in favor of the poorest, least-educated, most unskilled people on Earth. They arrive in need of a LOT of government services. According to the Pew Research Center, 75 percent of Hispanic immigrants and 55 percent of Asian immigrants support bigger government, compared to just over 40 percent of the general public. Even third-generation Hispanics support bigger government by 58 percent. I asked my friend Alex Nowrasteh of the Cato Institute for his quick thoughts on Coulter's article and he pointed out some strong evidence in the other direction. Alex wrote: I don't have the empirical evidence on Virginia to show it for the 2017 election, but redder states like Texas have about double the immigrant population. I assume that he was referring to the immigrant population as a percent of the total population in the state. Alex also pointed out the following: The difference [between Virginia and Texas] is how state-level GOPs treat immigrants. Gillespie's ads and arguments here were pretty insulting. Coulter also wrote that the idea that Republican support of Proposition 187 in California in 1994 helped turn California more left is a "fairy tale." Alex says that it did push California more left, referring me to this study. His data are striking. See especially his Figures 3 and 4. What if I weren't convinced by Alex's evidence? It wouldn't cause me to be against immigration. There are such huge gains from trade between immigrants and us that we shouldn't cut ourselves or them off from those gains. The solution is not to restrict immigration but to focus on the problem at hand. If you worry that immigrants will vote for bigger government, then address that problem, not immigration per se. My solution, to the extent this is a problem, is to have a longer residency requirement before one can become a citizen. Let people have a better understanding of the system before they vote. I got my green card in 1977 and didn't become a citizen until 1986. That was 9 years without voting, and it wasn't a big deal. What about making it 20 years? Or how about insisting that immigrants pay at least $100,000 in taxes cumulatively before they can vote? (I think Bryan Caplan suggested this but I can't find the reference.) There's a basic principle in economics, and, indeed, in life, that the best way to deal with a problem is to address the problem. The problem, if there is one, isn't immigration. It's voting. So address that. UPDATE: Daniel Bier recommends this article by Alex Nowrasteh. It handles some of the empirical issues about the effects of immigrants on economic freedom. Bottom line: they don't decrease it. (61 COMMENTS)

19 ноября, 20:12

How much do government workers cost?, by Scott Sumner

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Tyler Cowen directed me to an interesting question raised in his comment section (by "BC"): Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn't that mean that, while their actual salary may be lower than their official nominal salary, they actually don't pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.) For example, suppose a private firm and the federal government both value a worker's output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees! Doesn't this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive -- the usual cited distortion -- they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers. This is one of those cases where things look very different if you recall the macroeconomic linkages. Let's start by assuming that the government hires the worker away from a comparable private sector job. In that case, the tax paid by the newly hired government worker would be offset by the tax no longer paid on the job he left in the private sector. To make things simple, assume a flat rate tax system. Then total tax revenue is the tax rate times national income. Thus in order for the act of hiring a government worker to result in more total tax revenue, the act of hiring the worker would have to boost national income. Now we can see that the actual question being asked here is whether or not the act of hiring a government worker causes national income to be higher. Here are some models where that is generally not the case: 1. Monetarism 2. Austrianism 3. Real business cycle theory 4. New Keynesian models with a natural rate of output And here's one model where it may be the case: 5. Primitive Keynesian models of the sort that were discredited during the 1970s The wrong way to think about these sorts of issues is to look at accounting relationships at the individual level. "Follow the money". The correct way to approach the problem is to think in terms of aggregates such as "national income". Does government hiring cause national income to rise? If so, then you get more revenue. PS. In some New Keynesian (and RBC?) models you might get a rise in measured national income, as the government worker would make the country poorer, causing labor supply to increase as a way of preventing an excessively sharp fall in consumption. I'm abstracting from that (second order) issue, which gets into questions about the proper way to measure GDP. (10 COMMENTS)

19 ноября, 04:46

The third option, by Scott Sumner

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Last week I attended the Cato Monetary conference in Washington. Jim Dorn always does a good job of finding interesting speakers. I couldn't help contrasting the event with the Peterson Institute conference that I attended last month. At the Peterson Institute, most speakers correctly noted that insufficient AD was a key problem over the past decade, but also argued (wrongly, in my view) that monetary stimulus was relatively ineffective at the zero bound. At Cato it was almost the exact opposite. I don't recall anyone doubting the effectiveness of monetary policy (I attended 3 of the 4 panels), but there was almost no concern about insufficient nominal spending. Indeed a number of speakers seemed worried that policy was too expansionary. This makes me feel really good about the prospects for market monetarism. Both logic and facts are overwhelming on our side. It seems absurd to claim a fiat money central bank could not debase its currency. Are the Zimbabweans really that much more talented than we are? And when countries like Japan have changed policy the yen has fallen sharply, even at the zero bound. That doesn't happen in the Keynesian model. As for the level of AD, during most of the past decade both inflation and employment have been well below the Fed's targets. It's the (conservative) opponents of monetary stimulus who have a difficult argument to make, not us. This recent article gives a good sense of the weakness of the arguments of our opponents: TOKYO (Reuters) - Premier Shinzo Abe's victory in last month's election may make it difficult for the Bank of Japan to dial back its radical stimulus next year despite the rising cost of prolonged monetary easing, former BOJ board member Sayuri Shirai said on Friday. . . . Shirai said the BOJ should start withdrawing stimulus by hiking its yield target and slowing asset purchases next year, given the rising cost and diminishing returns of its policy. "When the economy is in good shape like now, the BOJ needs to normalise monetary policy so it has the tools available to fight the next recession," Shirai told Reuters. "But the election result has made that difficult," she said. Raising the BOJ's 10-year government bond yield target could trigger an unwelcome yen rise by narrowing the interest rate differentials between Japan and the United States, Shirai said. This quote exhibits a basic lack of understanding of monetary economics. The speaker implies that tightening monetary policy gives the BOJ more "tools" to fight the next recession, whereas the exact opposite is true. When the BOJ tightens monetary policy the natural rate of interest falls. The speaker presumably believes that what matters is the gap between the actual rate of interest and zero, whereas what really matters is the gap between the natural rate of interest and zero. When the BOJ raises the actual interest rate with a tight money policy, the natural interest rate falls. If Shirai were correct, then the Fed could have raised interest rates to 20% in 2008, giving them lots of "tools" to later cut rates and spur the economy when the recession got severe. But that's about as effective as trying to pick yourself up by your bootstraps. This is why I insist that people appointed to the Fed should be experts on monetary economics. I don't care about credential---it makes no difference if they have a PhD---but they need to understand the basic principles of monetary economics. Does Japan need higher interest rates to pop asset prices bubbles? Consider the Japanese stock market, which is about 40% below the peak value in 1991, while the US market has risen almost 10-fold. Or take housing, where prices in Japan are down about 40% since 1990 (lavender line), while they have risen 140% in the US (blue) and 360% in Australia (light blue). Australia's had the highest interest rates over that period (among developed countries), and Japan has had the lowest. So no, rapid asset price increases are not caused by low interest rates, indeed asset prices tend to rise more rapidly in countries with very high nominal interest rates. Japan doesn't have to worry about asset price bubbles. Japan would benefit from higher nominal interest rates, but only if brought about by a more expansionary monetary policy. PS. I should emphasize that there was plenty that I agreed with at the Cato conference. A number of speakers were critical of the war on cash (as am I), and Charles Calomiris was skeptical of the view that China was a currency manipulator. PPS. David Beckworth presented me with a coffee mug. Market monetarism is right on target to becoming the dominant view in macroeconomics; just give us another 10 or 20 years. (10 COMMENTS)

18 ноября, 17:52

Allan Meltzer, libertarian institutionalist, by Alberto Mingardi

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Chris De Muth has written a wonderful tribute to Allan Meltzer. It is a piece that accounts for a strong bond of personal friendship that goes beyond intellectual esteem. DeMuth brought Meltzer to the American Enterprise Institute as a Visiting Scholar when the latter left President Reagan's Council of Economic Advisors: "It took us perhaps four minutes to settle on business arrangements, sealed with a handshake and never any sort of written contract". Well, those were the days - and those were the gentlemen who could be happy with such trustworthy informality! DeMuth defines Meltzer as "that rare and wonderful intellectual avis, the libertarian institutionalist". The word "institutionalist" here is happily ambiguous. On the one hand, DeMuth remarks, Meltzer understood that "liberty is an artifact of human institutions, from banks to nations to the rule of law". That is not particularly rare, among libertarians. What is rarer is that from the understanding that "our institutions may rise and fall through evolutionary trial and error, but they are also subject to human reason, criticism, and purposive reform" Meltzer derived a passion for directly engaging in this very activity of criticism and purposive reform. Meltzer joined committees, advised politicians and institutions, all of this while writing his masterful History of the Federal Reserve. DeMuth alludes to the fact that this willingness to engage with reality did show a profound optimism but not an eagerness to settle on intellectual compromises. (Political compromises are a different matter). So concludes his tribute to Meltzer: Allan Meltzer led a life of complete integrity. He devoted himself to the most difficult and consequential of policy conundrums; subjected them to the highest levels of intellectual scrutiny over sustained periods of time; solved more than a few of them; promoted his solutions with indefatigable zest; and selflessly encouraged the like efforts of many others. It is only fitting that he left us with a few unsolved conundrums to wrestle on our own--along with a shining example of how to go about it. (0 COMMENTS)

17 ноября, 21:37

Taking Comparative Advantage Seriously, by Contributing Guest

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by Pierre Lemieux Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don't they now represent a comparative advantage? A recent Wall Street Journal story reports that the longer growing season of Mexican farmers is seen as a cause of dumping and that a renegotiated North American Free Trade Agreement may have to compensate for this comparative advantage of Mexico: American farmers, however, complain that their Mexican rivals enjoy unfair advantages, including low-cost farm labor, state subsidies and a year-round growing season that lets them dump cheap berries on the U.S. market when the two countries' growing seasons overlap in the late spring. Perhaps the reporter's or editor's interpretation was a bit loose (the reporter did not respond to my inquiry regarding whom exactly he was citing). But note how, in a similar way, French farmers complain against the unfair weather advantage of their Spanish competitors: French farmers and winegrowers dumped some two tons of peaches and nectarines in front of the Spanish consulate ... in order to denounce Spanish competition, deemed "unfair." ... For [a fruit growers' spokesman], "a European solution is needed." It is difficult to believe if you haven't seen it with your own eyes, but economic savvy is even less common in France than in America. This is a bit distressing nearly two centuries after French economist Frédéric Bastiat wrote his petition of candle makers disadvantaged by the competition of the sun. "If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun," Bastiat noted. In The Wealth of Nations, Adam Smith defended the importation of wine even if "[b]y means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them." As he explained, domestic production would cost "about thirty times the expence for which at least equally good can be brought from foreign countries." Or, to borrow an example from William Taussig, very good pineapples could be grown in Maine with similar means. Geography, weather, and other natural conditions create justifiable comparative advantage in trade. Except if one is an ascetic, it is not rational to produce by oneself what somebody else can produce more cheaply in another climate. However - and here is a little challenge - the distinction between "natural" and "artificial" conditions is not as neat as one might think. Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don't they now represent a comparative advantage? Ski resorts can be built and artificial snow made, possibly with government subsidies. Ignorant people can be instructed, even in government schools. Moreover, some phenomena straddle the distinction between the natural and the artificial, that is, phenomena like language, culture, and morals (see chapter 1 of Friedrich Hayek's vol. 1 of Law, Legislation and Liberty). The question is which features of the world count in comparative advantage? Swiss producers' strong work ethic and Canadians' use of English help determine their comparative advantage. Economies of scale benefit producers who have come to serve a larger market. Market institutions and a political system favorable to enterprise also help determine comparative advantage. But don't the Chinese government's subsidies and other assistance to Chinese businesses also help determine the latter's comparative advantage? Similarly, aren't the subsidies that aircraft maker Bombardier got from the Canadian and Québec governments now part of the company's comparative advantage? Such interrogations are related to an important argument made by Paul Krugman in an article later published in the Journal of Economic Literature ("What Should Trade Negotiators Negotiate About?" 35-3: 113-120). Krugman argued that government regulations and taxes are part of the comparative advantage landscape; they do change relative prices, but trade proceeds - and should be left to proceed - from that point on. This comprehensive concept of comparative advantage does not invalidate arguments against inefficient or immoral regulations, taxes, or subsidies. We may wish (often contra Krugman) that these measures do not exist in our own country, and try to persuade foreigners that they should not be subjected to them either. But they do not extinguish comparative advantage and negate all benefits from trade. Except perhaps in extreme cases (for example, trading in stolen goods, such as goods made with slave labor), foreign governments' interventions do not justify another government prohibiting its own residents from trading with the regulated or subsidized foreigners. One can wish that one's trading partners were freer and thus more productive and wealthy, but it remains beneficial to trade with them, even if not as much as it would be in an ideal world where everybody were perfectly free. As Krugman suggests, this wide view of comparative advantage reconciles free trade and political decentralization at the world level. It is beneficial and possible to have both. On the one hand, political decentralization is necessary to preserve liberty and experimentation, as opposed to a world government. Different peoples can have different sets of regulations, including less regulation. There is no need to impose standards or regulatory harmonization in "free trade" agreements. On the other hand, the benefits of free trade are preserved because comparative advantage continues to exist under intervention, although with some distortions. The distortions introduced by a world government monopoly would certainly be worse. This line of argument supports the idea that unilateral free trade is beneficial: it is in the interest of (most of) a country's residents to be free to import at will whatever obstacles other national governments impose on their own citizens or subjects. Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email: [email protected] (13 COMMENTS)