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27 июня, 02:44

Bret Stephens's Attack on Ron Paul, by David Henderson

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As I noted last week, I was at an event at the Commonwealth Club of San Francisco to discuss a forthcoming documentary called "Is America in Retreat?" (The video should be available in a few weeks.) The inspiration for documentary is a book with the same title written by Bret Stephens, currently a New York Times columnist and before that a foreign policy columnist with the Wall Street Journal and, before that, the editor in chief at the Jerusalem Post. The organizers told me to focus on the documentary in preparing my comments, and so that's what I did. Since then, though, I've paged through Stephens's book. He has one mention of Ron Paul. It is this: [Rand] Paul's foreign policy is often viewed as an effort to water down and make palatable the moonshine that is the worldview of his father, former Texas congressman Ron Paul, the libertarian who thinks America had it coming on 9/11 because we were "occupying" Muslim territories. Perhaps. Had it coming? To say that someone "had it coming" means that the person or country deserved it. I'm sure Bret Stephens understands that. I've followed Ron Paul's foreign policy statements closely over the years and I can't find him ever saying that. I can find him often saying that the 9/11 attack occurred as a response to U.S. foreign policy. But that doesn't mean that we "had it coming." Does Stephens do a similarly bad job in characterizing the views of others who disagree with him? I hope not, but I'll see. (0 COMMENTS)

27 июня, 00:51

How should we measure productivity?, by Scott Sumner

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The Financial Times has an article claiming that Japanese construction workers are far more productive than American workers. But the data they provide seems to suggest the exact opposite: Reality is the other way around. Despite radically different demographics and essentially no immigration, Japan has consistently employed a much larger share of its workers in the construction industry than the US, although the share has dropped over time. Even at the peak of America's housing bubble, only about 5.5 per cent of workers were employed in construction. In Japan last year, more than 7 per cent of employees worked in construction So how can they claim that Japanese workers are more productive than American workers? The article points out that Japan builds far more houses per capita than the US, indeed almost as many houses in total, despite a population only 40% of the US. But why is that? Given that Japan's population is falling, one might expect exactly the opposite. The article attributes the difference to cultural preferences: My colleague Robin Harding has elegantly explained that much of the robust demand for new housing can be attributed to the Japanese preference for tearing down and replacing old homes, with the expectation those too will be replaced in short order. Why are these old homes replaced so often? I live in a home built in 1930, which certainly does not need to be torn down and replaced, indeed any replacement would likely be of lower quality. Here's another way of thinking about the productivity question. In both countries, the vast majority of people have homes to live in---somewhere around 99%. So then the question becomes: In which country does it require more labor to provide a flow of housing services, which keeps a roof over the head of 99% of the population? And the answer is clear---it takes much more labor (per capita) to house the Japanese population than the American population. That suggests that Japanese labor productivity is lower. Of course we also need to consider quality. American housing is provided with far fewer workers, but perhaps Japan's housing is of far higher quality. So maybe the quality adjusted housing productivity is higher in Japan. One important component of quality is size. Are Japanese houses far bigger than American houses? Maybe, but given that America has a reputation for enormous houses, and given that even Europeans consider Japanese houses to be tiny, I'm not willing to accept that claim without firm data. Maybe Japanese houses are much smaller than American houses, but they are built with such jewel-like precision that the quality is higher despite being smaller. But in that case why are Japanese houses torn down just a few decades after they are built? The FT article doesn't even come close to justifying the claim that Japanese construction workers are more productive than American construction workers. There are some problems with American housing quality, particularly for homes built during the 40 years after WWII. But more recently built homes seem to be of pretty good quality, with lots of amenities such as multiple bathrooms and granite countertops. We are a long way from the Levittown ranch houses of the late 1940s. Last year I went to an open house for a 3500 sq. feet Toll Brothers house, which would probably be regarded a mansion in Japan. It counts as "one house" in the US data. Rather than better construction productivity, the real story may be that Japan has better (more flexible) zoning rules, which makes it easier to build new homes. It's not our construction workers that have low productivity, it's our government. BTW, A recent WSJ article reminded me of the debate over manufacturing---is the job loss trade or automation? Here's just one more piece of evidence that it's mostly automation: Later this year, a new Chevron Phillips facility capable of producing 1.5 million metric tons of ethylene a year is coming online in Baytown, Texas. It covers a plot the size of 44 football fields and is made up of 350 miles of pipe, 40,000 tons of steel and 140,000 tons of concrete. It has taken four years to finish. During the height of its construction, more than 4,500 construction workers and engineers were on site. Once operational, it will only take around 200 employees to run. American manufacturing has a very bright future--just don't expect any more jobs. The same article suggests that this plant is not a fluke: In April, Exxon said it selected a site near Corpus Christi, Texas, for a $9.3 billion petrochemical complex it is building jointly with Saudi Basic Industries Corp. The proposed facility, the largest of its kind in the world, is expected to be done by 2021 and produce 1.8 million metric tons a year of ethylene, the main component of plastic. "We don't see this as a bet," said Neil Chapman, president of the chemicals unit at Exxon, which is investing a total of $20 billion in such projects along the Gulf of Mexico. "You've got to pinch yourself sometimes and say 'this is the envy of the world.' " Dow's plant in Freeport, Texas, when fully operational by the end of the year, will produce 1.5 million metric tons of ethylene annually. The company plans to export at least 20% of the plastic it makes in the U.S. and is particularly eyeing Latin America as a ripe market. So maybe 600 jobs. Which is basically nothing. (2 COMMENTS)

26 июня, 21:05

Boudreaux on the Progressive Mentality, by Bryan Caplan

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My dear colleague Don Boudreaux comments on my recent questions about the absence of libertarian/progressive cooperation:As he so frequently does, Bryan here hits on its head an important nail solidly, cleanly, and with impressive force. I suspect that the single biggest factor that distinguishes "Progressives" from libertarians and free-market conservatives is the simple fact that "Progressives" do not begin to grasp the reality of spontaneous order.  "Progressives" seem unable to appreciate the reality that productive and complex economic and social orders not only can, but do, emerge unplanned from the countless local decisions of individuals each pursuing his or her own individual plans.  Therefore, "Progressives" naturally adopt a creationist view of society and of the economy: without a conscious and visible (and well-intentioned) guiding hand, society and the economy cannot possibly work very well.  Indeed, it seems that for many (most?) "Progressives," the idea that a spontaneously ordered economy can work better than one directed consciously from above - or, indeed, that a spontaneously ordered economy can work at all - is so absurd that when "Progressives" encounter people who oppose "Progressive" schemes for regulating the economy, "Progressives" instantly and with great confidence conclude that their opponents are either stupid or, more often, evil cronies for the rich and the powerful.Don tells an interesting story, and he's probably true in some cases.  But ultimately, I think resentment of markets has little to do with incomprehension of "spontaneous order."  Key point: As Hayek emphasizes, markets are only one form of spontaneous order.  Others include language, science, fashion, manners, and even informal hiking paths.  In each case, individuals pursue their own plans with no central direction, yet a tolerably well-functioning social order emerges.  And leftists rarely express resentment - or even worries - about the social value of any of these.  So how can spontaneous order be the crux of the issue?My preferred story is much simpler: Leftists look at the world of business and see greedy people leading and prospering.  This upsets people of almost every ideology if they dwell on it.  On an emotional level, human beings want people with noble intentions in charge.  Who then are leftists?  They're the sub-set of humans who feel these emotions with exceptional intensity and durability - and accept a group identity that reinforces such emotions.  Why is a power-hungry politician who bullies strangers with big plans and pompous speeches more "nobly intentioned" than a greedy businessman who woos strangers with fine wares and low prices?  I don't know, but clearly I'm in the minority here.Well, at least I'm in good company.P.S. I've also previously rejected the view that people dislike markets because their benefits are "unseen" rather than "seen."  Quick version: To sell war, you've got to convince people that its non-obvious, distant consequences are positively fantastic.  Contra Bastiat, though, it's ridiculously easy to convince them of this.  If you tell people that the skies will fall if their country doesn't fight, they believe it - even though the worst case scenario is usually the loss of some territory most people can't even find on a map.My best explanation is that Bastiat's seen/unseen fallacy is not a general psychological tendency.  Instead, it's an expression of anti-market bias: Since people dislike markets, they're quick to dismiss claims about their hidden benefits.  When people are favorably predisposed to an institution, however, they're quite open to the possibility that it's better than it looks to the naked eye.  Government's a good example, but so are religion, medicine, and education.  (8 COMMENTS)

25 июня, 19:55

Are the Savings from Cutting Medicaid Illusory?, by David Henderson

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Answer: It depends. Chicago Tribune columnist Steve Chapman, and also my long-time friend, reminds us of one of the most important principles in economics: There's no such thing as a free lunch. Indeed, this principle is so important that I've made it Numero Uno in my Ten Pillars of Economic Wisdom. Steve makes his point in "The Illusory Savings from Cutting Medicaid," June 25, 2017. Steve thinks that if we apply that principle to the Senate Republicans' plans for cutting the federal government's subsidies to Medicaid, we must conclude that others will pay more. His key bottom line: Cutting back Medicaid coverage would save taxpayers some cash, but only by taking it from others. The reduction would raise costs for low-income people and most likely degrade their health. He's almost certainly right that it would mean taking more cash from taxpayers at the state level, since the Senate Republican plan would change the current federal subsidy to state Medicaid plans to a block grant to states. But would it save taxpayers cash only by taking it from others? That depends. One argument for turning over Medicaid to state governments and letting them set the terms is that state governments can try different methods. Some will work better, some worse, and then state governments that want to can imitate the ones that work better. Is there a way to have Medicaid work better? There certainly is. It is to have small co-payments for medical services: say $5 for a doctor visit and $50 for a day in the hospital. The purpose of such copayments is not to, green eyeshade style, extract small amounts of money from poor and near-poor people. The purpose is to have them put "skin in the game" so that their use of health care costs them something and they don't treat an incredibly expensive resource as a free resource. With a smaller federal role in setting the rules for Medicaid, surely some states would experiment with small co-payments. This could save substantial money without increasing taxes. Another way state governments could save money without making health care worse is to let the Walmarts of the world deliver low-cost but high quality care using people who are health care professionals but not high-cost doctors. Some state governments allow this; others don't. But if state governments had to bear more of the cost of Medicaid, some of them would likely respond to this incentive by allowing more such innovation. And that might also mean that poor people's health would not be degraded. We already know from the Oregon Medicaid study that Amy Finkelstein et al have written about that Oregon's Medicaid doesn't seem to have done much for the physical health of Medicaid beneficiaries there. (See Megan McArdle's article for a very nice treatment of the issues.) And even if the effects are positive but too small to detect, the odds are good that those positive effects would still occur if poor people, responding to co-pays, dropped the marginal uses and kept the important ones. The above paragraph is an application of two other important pillars of economic wisdom: Pillar #2--incentives matter--and Pillar #3--economic thinking is thinking on the margin. Steve also writes: Some recipients would get cut off under the GOP plans, and some would get less coverage. That--surprise!--would leave them worse off, because comprehensive health insurance is a good thing to have. He and I probably think of health insurance the same way: it's really good to have. But another important Pillar of Economic Wisdom is Pillar #7: The value of a good or service is subjective. I might think you should have health insurance but you might think you should not. If you lose health insurance solely because of a reduction in subsidy, then Steve is right: by your own standards, you are worse off. But the Congressional Budget Office, whom Steve quotes about the number of people who will lose health insurance due to Republicans' proposed plans, found in its study of the House Republicans' bill that a substantial number will lose Medicaid not because they will lose eligibility for Medicaid--many won't lose eligibility--but because they will no longer be forced by law--the individual mandate--to sign up for it. The same is likely to be true of the Senate Republicans' plan. So, whatever Steve or you or I think of the wisdom of their decision, by their standards, losing Medicaid means they are better off: they choose to lose it. Steve Chapman is right: there is no such thing as a free lunch. But sometimes there are more efficient ways of delivering subsidized lunches. (14 COMMENTS)

24 июня, 19:09

James Buchanan's Work, by David Henderson

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There's a lot of buzz on the Internet lately (see here for my recent commentary on Sam Tanenhaus's review) about the recent book by Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America. MacLean sees economist James M. Buchanan as the key figure in the rise of the "radical right." One of the things that those of us who know Buchanan's work well have been saying, on Facebook and elsewhere, is that Ms. MacLean doesn't seem to know his work well. Which is a pity because she presumably spent at least months and probably years researching his work. If only there were a way for people to read some of Jim's many books without having to spend a small fortune. Fortunately, there is. Liberty Fund has made many of his books available electronically for free. See here, browse through, and enjoy reading the works of this remarkable man. HT2 Art Carden. P.S. For a quick look at who James Buchanan was, see my brief bio of him in The Concise Encyclopedia of Economics. (2 COMMENTS)

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23 июня, 23:04

Both Sides Gain from Exchange, by David Henderson

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My friend and blogging competitor Don Boudreaux writes: You say that China's agreement to buy more beef from America is "a big win for us." Well, these beef exports from the U.S. are mostly a win for the Chinese people. From the perspective of us Americans, the beef that we export is a cost. That beef is part of what we give up in exchange for whatever it is we'll import with the earnings that we receive on the beef sales. Our true benefit from this trade deal is chiefly in the additional Chinese chickens that we'll now be allowed to import. Yet that's a benefit that we could have - and should have - enjoyed even without Beijing's agreement to let the Chinese people enjoy greater access to American beef. It's true that the beef exports are a win for the Chinese people. But I don't think we have fine enough tools to know whether most of the benefits are to Chinese people or most are to U.S. beef producers. Imagine that the Chinese have very close substitutes for our beef at comparable prices. Then their being allowed to buy U.S. beef benefits them but not by a lot. Their gain is called consumer surplus. Imagine (probably contrary to fact) that U.S. beef producers have few options for selling their beef to people other than the Chinese. Then the U.S. beef producers' gain, called producer surplus, is quite large. I have no prior view on which is larger. I do know, though, that both sides gain from exchange and so when they're allowed to exchange more due to a reduction in the Chinese government's barrier to exchange, that's a win for both sides. So it's not out of line for the person he's responding to to celebrate the win for the U.S. producers.. (5 COMMENTS)

23 июня, 15:14

Nominal exchange rates, real exchange rates and protectionism, by Scott Sumner

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The three concepts mentioned in the title of the post are completely unrelated to each other. So unrelated that the subjects ought not even be taught in the same course. The nominal exchange rate is a monetary concept. Real exchange rates belong in course on the real side of macro, perhaps including public finance. And protectionism belongs in a (micro) trade course. The nominal exchange rate is the relative price of two monies. It's determined by the monetary policies of the two countries in question. It plays no role in trade. Protectionism is a set of policies (such as tariffs and quotas) that drives a wedge between domestic and foreign prices. Protectionist policies reduce both imports and exports. They might also slightly affect the current account balance, but that's a second order effect. Real exchange rates influence the trade balance. When there is a change in either domestic saving or domestic investment, the real exchange rate must adjust to produce an equivalent change in the current account balance. A policy aimed at a bigger current account surplus is not "protectionist", as it does not generally reduce imports and exports, nor does it drive a wedge between domestic and foreign prices. It affects the gap between imports and exports. Here are some policies that can lead to a lower real exchange rate and a bigger current account surplus: 1. The central bank can accumulate lots of foreign assets, increasing national saving. 2. The government can run a budget surplus. 3. The government can create a sovereign wealth fund. 4. The government can encourage private savings, via a pay as you go retirement system. [Update: I meant fully funded pension system, not pay as you go.] 5. The government can switch from an income tax to a consumption tax. None of these are protectionist. A low real exchange rate is sometimes called a "competitive advantage", although the concept has absolutely nothing to do with either competition or advantages. It's simply a reflection of an imbalance between domestic saving and domestic investment. These imbalances also occur within countries, and no one ever worries about regional "deficits". But for some odd reason at the national level they become a cause for concern. Some of this is based on the mercantilist fallacy that exports are good and imports are bad. Here's David Glasner: Currency manipulation has become a favorite bugbear of critics of both monetary policy and trade policy. Some claim that countries depress their exchange rates to give their exporters an unfair advantage in foreign markets and to insulate their domestic producers from foreign competition. Others claim that using monetary policy as a way to stimulate aggregate demand is necessarily a form of currency manipulation, because monetary expansion causes the currency whose supply is being expanded to depreciate against other currencies, making monetary expansion, ipso facto, a form of currency manipulation. As I have already explained in a number of posts (e.g., here, here, and here) a theoretically respectable case can be made for the possibility that currency manipulation can be used as a form of covert protectionism without imposing either tariffs, quotas or obviously protectionist measures to favor the producers of one country against their foreign competitors. I disagree with this. There is no theoretically respectable case for the argument that currency manipulation can be used as protectionism. But I would go much further; there is no intellectually respectable definition of currency manipulation. And the most egregious recent example of currency manipulation was undertaken by the Chinese central bank when it effectively pegged the yuan to the dollar at a fixed rate. Keeping its exchange rate fixed against the dollar was precisely the offense that the currency-manipulation police accused the Chinese of committing. Because currency manipulation does not exist as a coherent concept, I don't see any evidence that the Chinese did it. But if I am wrong and it does exist, then it surely refers to the real exchange rate, not the nominal rate. Thus the fact that the nominal value of the Chinese yuan was pegged for a period of time has no relevance to whether the currency was being "manipulated". The real value of the yuan was appreciating. The dollar was pegged to gold from 1879 to 1933, and yet I don't think the US government was "manipulating" the exchange rate. And if it was, it was not by fixing the gold price peg, it would have been by depreciating the real value of the dollar via policies that increased national saving, or reduced national investment, in order to run a current account surplus. In my view it is misleading to call policies that promote national saving "currency manipulation", and even more so to put that label on just a subset of pro-saving policies. If economists want to use the term 'currency manipulation', then they first need to define the term. I have not seen any definitions that make any sense. Here's China's real exchange rate, which has been appreciating over time. (11 COMMENTS)

22 июня, 22:31

Is America in Retreat?, by David Henderson

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This evening Johan Norberg, who, with Free to Choose Media, put together a one-hour video on foreign policy, will be presenting a segment of the video at the Commonwealth Club. There will be a panel discussion after. I will be one of the panelists. The gist of the video is that the U.S. government is in retreat from commitments around the world and shouldn't be. Here are the details: Location: 555 Post St., San Francisco Time: 5:45 p.m. check-in, 6:30-8:15 p.m. film screening and discussion This link gives the fees for non-members. (6 COMMENTS)

22 июня, 20:54

Progressive/Libertarian: The Alliance That Isn't, by Bryan Caplan

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My one big disagreement with Ed Glaeser's great piece on housing deregulation is when he says:Reforming local land use controls is one of those rare areas in which the libertarian and the progressive agree. The current system restricts the freedom of the property owner, and also makes life harder for poorer Americans. The politics of zoning reform may be hard, but our land use regulations are badly in need of rethinking.Actually, there are four other big areas where the two ideologies converge.  1. Immigration.  Immigration restrictions deprive billions of basic liberties, impoverish the world, and do so on the backs of the global poor, most of whom are non-white.2. Occupational licensing.  Licensing laws bar tens of millions of people from switching to more lucrative and socially valuable occupations, all to benefit richer insiders at the expense of poorer outsiders.3. War, especially the War on Terror.  Since 2002, the U.S. has literally spent trillions fighting the quantitatively tiny problem of terrorism by waging non-stop wars in the Middle East.  We don't know what the Middle East would have looked like if the U.S. had stayed out, but it's hard to believe it would be worse.  And there's no end in sight.4. The criminal justice system, especially the War on Drugs.  Hundreds of thousands of non-violent people, disproportionately poor and non-white, are in prison.  Why?  To stop willing consumers from doing what they want with their own bodies.These four issues are so massive, you'd expect a staunch progressive/libertarian alliance would have been forged long ago.  But of course it hasn't.  Why not?  Some progressives flatly disagree with one or more of these policies; see Bernie contra open borders.  But the bigger stumbling block is that progressives place far lower priority on these issues than libertarians.  That includes war, unless the Republicans hold the White House.  Why not?  I regretfully invoke my Simplistic Theory of Left and Right.  The heart of the left isn't helping the poor, or reducing inequality, or even minority rights.  The heart of the left is being anti-market.  With some honorable exceptions, very few leftists are capable of being excited about deregulation of any kind.  And even the leftists who do get excited about well-targeted deregulation get far more excited about stamping out the hydra-headed evils of market.Can we make parallel accusations against libertarians?  Sure.  The second half of my Simplistic Theory says: The heart of the right is being anti-left.  Since most libertarians loosely identify with the right, stubbornly focusing on housing, immigration, licensing, peace, and criminal justice is dry.  Though these five areas are plausibly the biggest and most harmful abridgements of human freedom on Earth, it's more exciting for libertarians to dwell on symbolic issues that drive the left to apoplexy.Prove me wrong, kids.  Prove me wrong. (33 COMMENTS)

21 июня, 23:50

Tanenhaus on James Buchanan, by David Henderson

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I have just read the first serious book review I've seen of historian Nancy MacLean's hatchet job book on James Buchanan, Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America. It's by Sam Tanenhaus. He is, by and large, sympathetic with MacLean's strong claims about the role of James Buchanan in the rise of the radical right. Those of us who knew him well are more skeptical, partly because he was so bookish, so into thinking about fundamental ideas about governments and societies, and not really up to date on this or that political skirmish or current politician. In any case, parts of the Sam Tanenhaus piece read as if Tanenhuas is writing for an audience that knows little economics and little U.S. history and is, therefore, credulous. Or it's possible it's Tanenhaus himself who's ignorant and credulous. I don't know. Three passages stand out. Buchanan played a part, MacLean writes, by teaming up with another new University of Virginia hire, G. Warren Nutter (who was later a close adviser to Barry Goldwater), on an influential paper. In it they argued that the crux of the desegregation problem was that "state run" schools had become a "monopoly," which could be broken by privatization. If authorities sold off school buildings and equipment, and limited their own involvement in education to setting minimum standards, then all different kinds of schools might blossom. Each parent "would cast his vote in the marketplace and have it count." The argument impressed Friedman, who a few years earlier had published his own critique of "government schools," saying that "the denationalization of education would widen the range of choice available to parents." Far-fetched though these schemes were, they gave ammunition to southern policy makers looking to mount the nonracial case for maintaining Jim Crow in a new form. Friedman himself left race completely out of it. Buchanan did too at first, telling skeptical colleagues in the North that the "transcendent issue" had nothing to do with race; it came down to the question of "whether the federal government shall dictate the solutions." But in their paper (initially a document submitted to a Virginia education commission and soon published in a Richmond newspaper), Buchanan and Nutter were more direct, stating their belief that "every individual should be free to associate with persons of his own choosing"--the sanitized phrasing of segregationists. See what Tanenhaus does here? He starts out by laying out Buchanan's pretty good argument against government monopoly. But then he says that southern politicians could use this argument to mount the nonracial case for maintaining Jim Crow. I'm not sure how. If people could choose their own schools, then Jim Crow would crumble. The essence of Jim Crow was lack of choice. See Loving v. Virginia. Tanenhaus continues. Buchanan left out race too "at first." So then a reader would think that Buchanan later introduced race, right? Let's see. Buchanan and Nutter stated their belief that "every individual should be free to associate with persons of his own choosing." Tanenhaus says that this was the sanitized phrasing of segregationists. Possibly. I don't know. But it's also the phrasing of people who opposed Jim Crow laws, which forbade certain forms of freedom of association. One would think that if Tanenhuas wants to make his case that Buchanan favored segregation, he would come up with direct quotes to make it. It appears that he can't. So he uses a quote making the case against segregation and claims that it's really a disguised case for desegregation. For Buchanan, the trouble now went beyond the government. The enemy was the public itself, expressed through the tyranny of majority rule: The have-nots preyed on the rich, egged on by the new elite--labor bosses, benevolent corporations, and pandering politicians--who fell over themselves promising more and more. This is a roughly accurate view of Buchanan's thoughts on democracy, although I don't recall Buchanan talking about benevolent corporations--maybe he did. But there's one jarring line that shows Tanenhaus's ignorance of Buchanan's views. It's this one: "The have-nots preyed on the rich." Any guesses as to who advocated that the government "prey on the rich" by imposing a 100% marginal tax rate on the value of all estates over $500,000 in 1975 dollars (or one million--I've forgotten which)? Hint: his initials are JMB. That's right: James M. Buchanan. He advocated that at a Liberty Fund conference I attended with him in June 1975 in Athens, Ohio. His view of Social Security--a "Ponzi scheme"--is shared by privatizers like Paul Ryan. True, but Tanenhaus might be surprised by someone else who explicitly labeled Social Security a "Ponzi game" and celebrated it for that reason: Paul A. Samuelson. Tanenhaus, to his credit, is pretty much on target with his description of public choice. This was not a new argument, but Buchanan gave it fresh rigor in his theory of "public choice," set forth in his pioneering book, The Calculus of Consent (1962), written with Gordon Tullock. Governments, they argued, were being assessed in the wrong way. The error was a legacy of New Deal thinking, which glorified elected officials and career bureaucrats as disinterested servants of the public good, despite the obvious coercive effects of the programs they put into place. Why not instead see politicians and government administrators as self-interested players in the marketplace, trying to "maximize their utility"--that is, win the next election or enlarge their department's budget? This idea turned the whole notion of a beneficent government, and of programs and policies designed more or less selflessly, into a kind of fairy tale expertly woven by politicians and their flacks. Not that politicians were evil. They were looking out for themselves, as most of us do. The difference was in the damage they did. After all, the high-priced programs they devised were paid for by taxes wrested from defenseless citizens, who were given little or no effective choice in the matter. It was licensed theft, reinforced by the steep gradations in income-tax rates. Actually, this is a pretty decent, if simplified, view of public choice. The one part that is off is the implication that the idea that government is beneficent began with New Deal thinking. It's much older than that. Has Tanenhaus read James Madison? Or Adam Smith? And he does well at saying that the damage when government looks out for itself is way greater than when private individuals do it. Look at the well over one-million people killed in Vietnam war and millions displaced due in part to LBJ's narrow motives. (21 COMMENTS)

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21 июня, 21:41

Build, Baby, Build, by Bryan Caplan

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Ed Glaeser makes the case for housing deregulation for Brookings:Housing advocates often discuss affordability, which is defined by linking the cost of living to incomes. But the regulatory approach on housing should compare housing prices to the Minimum Profitable Construction Cost, or MPPC. An unfettered construction market won't magically reduce the price of purchasing lumber or plumbing. The best price outcome possible, without subsidies, is that prices hew more closely to the physical cost of building.In a recent paper with Joseph Gyourko, we characterize the distribution of  prices relative to Minimum Profitable Construction Costs across the U.S... We base our estimates on an "economy" quality home, and assume that builders in an unregulated market should expect to earn 17 percent over this purely physical cost of construction, which would have to cover other soft costs of construction including land assembly. We then compare these construction costs with the distribution of self-assessed housing values in the American Housing Survey. The distribution of price to MPPC ratios shows a nation of extremes.  Fully, 40 percent of the American Housing Survey homes are valued at 75 percent or less of their Minimum Profitable Production Cost... Another 33 percent of homes are valued at between 75 percent and 125 percent of construction costs.[...] But most productive parts of America are unaffordable. The National Association of Realtors data shows median sales prices over $1,000,000 in the San Jose metropolitan area and over $500,000 in Los Angeles. One tenth of American homes in 2013 were valued at more than double Minimum Profitable Production Costs, and assuredly the share is much higher today. In 2005, at the height of the boom, almost 30 percent of American homes were valued at more than twice production costs.  We should blame the government, especially local government:How do we know that high housing costs have anything to do with artificial restrictions on supply? Perhaps the most compelling argument uses the tools of Economics 101. If demand alone drove prices, then we should expect to see places that have high costs also have high levels of construction. The reverse is true.  Places that are expensive don't build a lot and places that build a lot aren't expensive. San Francisco and urban Honolulu have the highest ratios of prices to construction costs in our data, and these areas permitted little housing between 2000 and 2013. In our sample, Las Vegas was the biggest builder and it emerged from the crisis with home values far below construction costs.The top alternate theory is wrong:The primary alternative to the view that regulation is responsible for limiting supply and boosting prices is that some areas have a natural shortage of land. Albert Saiz's (2011) work on geography and housing supply shows that where geography, like water and hills, constrains building, prices are higher.   He also finds that measures of housing regulation predict less building and higher prices. But lack of land can't be the whole story. Many expensive parts of America, like Middlesex County Massachusetts, have modest density levels and low levels of construction. Other areas, like Harris County, Texas, have higher density levels, higher construction rates and lower prices...If land scarcity was the whole story, then we should expect houses on large lots to be extremely expensive in America's high priced metropolitan areas. Yet typically, the willingness to pay for an extra acre of land is low, even in high cost areas. We should also expect apartments to cost roughly the cost of adding an extra story to a high-rise building, since growing up doesn't require more land. Typically, Manhattan apartments are sold for far more than the engineering cost of growing up, which implies the power of regulatory constraints (Glaeser, Gyourko and Saks, 2005).Which regulations are doing the damage?  It's complicated: Naturally, there are also a host of papers, including Glaeser and Ward (2009), showing the correlation between different types of rules and either reductions in new construction or increases in prices or both. The problem with empirical work any particular land use control is that there are so many ways to say no to new construction. Since the rules usually go together, it is almost impossible to identify the impact of any particular land use control. Moreover, eliminating one rule is unlikely to make much difference, since anti-growth communities would easily find ways to block construction in other ways.Functionalists are wrong, as usual:Empirically, there is also little evidence that these land use controls correct for real externalities. For example, if people really value the lower density levels that land use controls create, then we should expect to see much higher prices in communities with lower density levels, holding distance to the city center fixed. We do not (Glaeser and War, 2010). Our attempt to assess the total externalities generated by building in Manhattan found that they were tiny relative to the implicit tax on building created by land use controls (Glaeser, Gyourko and Saks, 2005).What's to be done?  State governments are our least-desperate hope:The right strategy is to start in the middle. States do have the ability to rewrite local land use powers, and state leaders are more likely to perceive the downsides of over regulating new construction. Some state policies, like Masschusetts Chapter 40B, 40R and 40S, explicitly attempt to check local land use controls. In New Jersey, the state Supreme Court fought against restrictive local zoning rules in the Mount Laurel decision.  If states do want to reform local land use controls, they might start with a serious cost benefit analysis and then require localities to refrain from any new regulations without first performing cost-benefit analyses of their own. It will be a great day when constructing new housing regulations is as big a bureaucratic nightmare as constructing new housing is now! (4 COMMENTS)

21 июня, 17:37

What's causing the low inflation?, by Scott Sumner

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This article caught my eye: When online retail giant Amazon.com Inc. announced last Friday that it would purchase Whole Foods Market Inc., a plunge in retail and grocery stocks reinforced the disinflationary tone set by three straight months of disappointing data on consumer prices. It's an example of the technological forces that are increasing competition and further limiting companies' ability to pass on higher wage costs to customers. "That normally indicates that somebody thinks that they are not going to be earning as much as they were," Federal Reserve Bank of Chicago President Charles Evans said of the market reaction to the deal while speaking with reporters Monday evening after a speech in New York. "For me, it just seems like technology keeps moving, it's disruptive, and it's showing up in places where -- probably nobody thought too much three years ago about Amazon merging with Whole Foods," he said. Evans, a voter on the Federal Open Market Committee this year who supported its decision to raise interest rates last week, says he is less confident than most of his colleagues that inflation will soon rise to their 2 percent target. A big reason for his ambivalence: Deflationary competitive pressures could have become more important for the overall trend in prices than the so-called Phillips Curve relationship, which links inflation to the state of the labor market. That model, coined almost 60 years ago, is the basis for the Fed's outlook for continued gradual rate increases. I'm a bit confused by this. I certainly agree that there are good reasons to question the Phillips Curve model, for standard "never reason from a price change" reasons. The Phillips Curve only works if changes in inflation are driven by AD shocks, not aggregate supply shocks. In that sense I agree with Evans. But what is the nature of these mysterious AS shocks? Evans points to technology and competition, but these are forces that would cause the long run AS curve to shift to the right more rapidly. In other words, these are factors that would lead to a higher trend rate of growth in real GDP. The most noteworthy aspect of our modern economy, however, is slowing trend RGDP growth. Instead, it seems that wage moderation has shifted the SRAS curve to the right, producing a steady decline in the unemployment rate. The economy is not growing very fast at all, and what growth is occurring (roughly 2%) appears to be well above the long run trend rate, as the unemployment rate can't keep falling forever. I'm not saying that he is wrong about Amazon, or even retailing as a whole. But when you look at the data it's clear that technology is not having much impact on overall real GDP growth. And even if you argue that we aren't measuring growth properly, and the actual RGDP is higher because we miss all the goodies provided for free on the internet, it still doesn't solve the puzzle. The puzzle is the low rate of reported inflation. If real growth is higher than the official figures suggest, then inflation is even lower. And this leads us to the point where macroeconomic discussions ought to start---with NGDP growth. The real issue for monetary policymakers is not inflation and/or RGDP growth, it's NGDP growth. The only way to have low inflation despite low RGDP growth is if the Fed has such a tight monetary policy that NGDP growth remains slow. And that's exactly what they've done since 2009. If you produce 4% NGDP growth year after year after year, then why be surprised that inflation remains low? Why look for explanations having to do with "technology" or "competition" if the answer is right there in front of your eyes---NGDP. If the Fed starts delivering 11% NGDP growth, as in the 1970s, and we still have sub-2% inflation, then we can start worrying that technology is holding down inflation. But in that case we'd have no reason to worry about the low inflation "problem", as RGDP growth would be 9%. Which is just another stating a point I repeatedly emphasize; inflation doesn't matter, it's NGDP growth that matters. HT: John Hall (14 COMMENTS)