Wondering about immigrants, illegal immigrants, outsourcing, exports and imports

Many US citizens have unfounded economic concerns because the media, politicians, and powerful special interests (e.g., unions) inundate them with misinformation and bad economics.  If you hear too many people saying the same wrong things, you are likely to believe them – unless you are educated enough to understand why they are wrong.  People used to think that the world was flat.  That changed only when they became educated.  When it comes to economics, Flat Earthers are alive and well – and are in the majority.

Here are some things for the Flat Earthers to consider.

If more illegal Mexicans working in the US implies less work for US citizens, doesn’t a US birth rate that exceeds the death rate also mean less work for US citizens as children grow up?

Illegal Mexican workers can be eliminated by providing them with work permits.

If Mexican working in the US eliminate US jobs, how about annexing Mexico as a 51^st State?

If Mexicans working in the US is bad, does that mean that Mexicans working in Mexico is good?  If so, isn’t it good when US firms outsource to or build plants in Mexico?

If US exports are good, aren’t US imports good, too?  Where would foreigners get dollars to pay for US exports if there were no US imports?

If it were possible, wouldn’t US imports without US exports be preferable to US exports without US imports?  Wouldn’t you rather receive Japanese cars free than give American cars to the Japanese free?

Do you think that a new car factory that produces cars at less cost is desirable?  Imagine a car factory in San Francisco where you put corn in and get cars out cheaper than making the same cars in Detroit.  Is this good or bad?  If you choose bad, please call me.  I have things to sell at exorbitant mark ups.  If you choose good, do you care how the corn is converted into cars?  If not, what if the factory in San Francisco is a pier where corn is shipped to Japan and cars are received from Japan?

Don Boudreaux and Deirdre McCloskey: Minimum wage laws and jobs

Here is a link to a insightful comment by Don Boudreaux, citing Diedre McCloskey, about minimum wage laws and jobs.

DB is on target - data analysis is important, but not the whole story. If the data analysis is inconsistent with good theory, question the data analysis.

Steve Landsburg on Cardinal Timothy Dolan

Steve Landsburg shows how little Cardinal Timothy Dolan knows about economics.  Here is Steve's comment.

Pope Francis is coming to New York, and Cardinal Timothy Dolan is disturbed about ticket-scalping:

“Tickets for events with Pope Francis are distributed free [via lottery] for a reason — to enable as many New Yorkers as possible, including those of modest means, to be able to participate in the Holy Father’s visit to New York,” Cardinal Dolan, the archbishop of New York, said in a statement. “To attempt to resell the tickets and profit from his time in New York goes against everything Pope Francis stands for.”

So according to Cardinal Dolan, “everything Pope Francis stands for” consists of the proposition that for New Yorkers of modest means, nothing should take precedence over turning out to see Pope Francis — not groceries, not medicine, not car repairs, not any of the other things that people can buy with the proceeds from selling their tickets.

I doubt that Pope Francis is quite as egomaniacal as the Cardinal paints him. But apparently the Cardinal himself would rather see poor people cheering for the Pope than improving their lives.

Richard Epstein: The Economic Fantasies Of Robert Reich

Here is Richard Epstein's article about Robert Reich's economic savvy.

The United States has seen better days. The political and economic fabric of the country is unraveling, yet there is little agreement about how best to move the country forward. My own position has long been that the culprits of slow growth and social discontent are the increased levels of taxation and regulation that suck the productive lifeblood out of society. That position today is in the minority. A vocal group of progressive thinkers are plumping for the opposite course—and prominent among them is Robert Reich, former Secretary of Labor for Bill Clinton. In his new book “Saving Capitalism: For the Many, Not the Few”, he argues for a set of policies that would cripple the American economy. A better title for his book would be”Dooming Capitalism, For Everybody”.

George Will: Impeach the IRS Director

Here is a link to a good article by George Will.

A snippet:

“Look,”wrote Lois Lerner, echoing Horace Greeley, “my view is that Lincoln was our worst president not our best. He should [have] let the [S]outh go. We really do seem to have 2 totally different mindsets.” Greeley, editor of the New York Tribune, was referring to Southern secessionist states when he urged President-elect Lincoln to “let the erring sisters go in peace.”

Greeley favored separating the nation from certain mind-sets; Lerner favors suppressing certain mind-sets. At the Internal Revenue Service, she participated in delaying for up to five years — effectively denying — tax-exempt status for, and hence restricting political activity by, groups with conservative mind-sets. She retired after refusing to testify to congressional committees, invoking Fifth Amendment protection against self-incrimination.

Government's "solutions" can make things worse

An article by Allan H. Meltzer illustrates how well the Government's "solutions" can miss the point and either not help or make things worse.

The large market declines and increased volatility of the past few months have prompted concerns that we may be headed toward financial chaos again. The 2010 Dodd-Frank law was the supposed solution to prevent that from happening, but as Milton Friedmancautioned, “the government solution to a problem is usually as bad as the problem and very often makes the problem worse.”

Case in point: Dodd-Frank’s Financial Stability Oversight Council has subjected several U.S. banks and nonbank financial institutions to special regulatory scrutiny based on the idea that their failure could lead to another crisis. But the theory behind so-called systemically important financial institutions, or SIFIs, is fundamentally flawed. Financial crises are pathologies of an entire system, not of a few key firms. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.

The risks to a system are most pronounced when financial institutions borrow heavily to finance investments. If the value of the assets falls or becomes highly uncertain, creditors—who include depositors—will rush to pull out their money. The institution fails when it is unable to find a new source of funds to meet these obligations.

The collapse of Bear Stearns and the Lehman Brothers bankruptcy are prime examples. Before the 2008 crisis, some firms had leverage ratios of 25:1 or higher, meaning that for every $26 of investment, the firm needed to borrow $25. This required banks to obtain large amounts daily to pay off previous creditors. But when the value of their investments fell—which in the last crisis included a large share of mortgage and other asset-backed securities—the banks could not borrow and had to raise money quickly by selling their assets, sometimes at fire-sale prices. This turned seemingly solvent firms into insolvent ones.

A bank’s inability to pay off its creditors can be transmitted to others. The mechanism can be direct: The debtor bank defaults, and its creditors cannot repay their creditors, etc. But the mechanism can be indirect. The suspicion that similar assets held by other institutions are subject to the same downward pressure can start a run at even an unrelated financial institution.

However, this domino effect has less to do with the so-called interconnectedness of the financial institutions than with weaknesses in the system itself. To understand why, consider the contrast between the 2008 financial crisis and the dot-com crash in the late 1990s and early 2000s.

The bursting of the dot-com bubble and subsequent failure of many Internet-based companies had serious repercussions for investors, but not for the financial sector. That’s because the failed firms were financed primarily through equity, not borrowed money. Investors took big losses when the value of tech companies fell precipitously. But there were no runs.

Mutual funds are similar. Many are large and hold assets that may be risky, but they don’t fail when the value of their assets falls. The liabilities move one-for-one with the value of the assets because the fund does not promise to pay off any fixed amount to its investors. There is no reason for a run: Getting money out first serves no purpose to investors nor does withdrawal of funds cause significant distress. The fund simply sells the assets at the market price and returns that amount to investors.

These factors suggest that instead of trying to divine which firms are systemically important, banks should be required to get a larger share of the funds they invest by selling stock. Bank investment funded by equity avoids the danger of a run: If the value of a bank’s assets falls, so too does the value of its liabilities. There is no advantage in getting to the bank before others do.

Using higher equity requirements to reduce systemic risk has been suggested on these pages by Allan Meltzer, and in “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It,” a recent book by Anat Admati and Martin Hellwig that has received much attention.

This reasoning also implies that deposits—the checking and saving accounts that are bank liabilities—should be invested only in short-maturity secure assets, like Treasury bills. A bank’s long-term investments, in mortgages or stocks, can then experience big losses or even fail. Bad for the bank and its investors, but not for the financial system or for depositors, whose deposits are backed by virtually risk-free assets.

The Federal Reserve seems to be wising up, and may require higher equity capital for the SIFIs and place less emphasis on regulation. Fed Chair Janet Yellen told the Senate Banking Committee on July 16 that she is open to raising the threshold on the asset level warranting SIFI status and scrutiny. Additionally, the international Financial Stability Board announced on July 31 that it would set aside work on designating funds or asset managers as systemically important to focus instead on whether their activities or products were systemically important.

Dodd-Frank’s method of protecting the financial system is based on a misdiagnosis of what led to the 2008 financial crisis. A more rules-based approach that focuses primarily on equity and leverage would provide better certainty and a higher cost-benefit ratio than designating firms as SIFIs.

From Bloomberg: Clinton's Plan to Mess Up Prescription Economics

From Bloomberg, by Megan McArdie.

Hillary Clinton thinks drug development should be riskier, and less profitable. Also, your health insurance premiums should be higher. And there should be fewer drugs available.

This is not, of course, how the Clinton campaign would put it. The official line is that Americans are just paying too darn much for drugs, and she has a plan to stop that:

A gun accessible to children can save lives

Here is a link to a column by John Lott.

John is on target.

Why would anyone buy recycled paper?

Thanks to John Lott for the picture and idea.

Here is a picture that Nikki Goeser took earlier today from a Staples store in the Nashville area.

There is a huge difference in price, so why would anyone want to buy recycled copy paper?  One answer you may hear is that it saves trees.  However, that is doubtful.  Furthermore, there are other adverse effects that those who want to save trees may not like.  Consider the following, for example.

• If people use enough paper products from trees, the only way to get enough trees is to raise trees.  The result will be more trees than there would be if people did not use paper products or used recycled paper products.

Why do you think there are so many chickens, so much corn, for example?

• Recycling paper adds pollution and increases global warming.  Raising trees decreases pollution and decreases global warming.

Raising trees uses mostly clean energy, e.g., sunlight through photosynthesis that decreases pollution and decreases global warming (photosynthesis removes carbon dioxide from and adds oxygen to the atmosphere).  Recycling paper uses mostly “dirty” fuels that add substances to the atmosphere, e.g., carbon dioxide, that increase pollution and increase global warming.

• Recycling requires additional “dirty” energy to segregate and gather the used paper, including the use of petroleum based fuels, and additional methane produced by humans due to the energy they use to perform various recycling tasks.

Don Boudreaux illustrates how wrong a Professor of Philosophy can be on Economics

The moral of Don's comment, below, illustrates that people with advanced degrees and high academic status can miss the point just as effectively as someone who never went to college.  I conjecture that the difference between the two is that the latter may be more likely to appreciate that he may be wrong than the former.



 Princeton University Press generously sent to me a copy of Princeton University philosopher Harry Frankfurt’s hot-off-the-press book, On Inequality.  This book is very short and so, although I’m an exceptionally slow reader, I’ve already read about half of it.

Depending upon my time and inclination, I might or might not in the near future blog more on this book.  But I here wish to quote a passage in it that occurs very early on (on page 4):

"In extracting from the economic wealth of the nation much more than they require in order to live well, those who are excessively affluent are guilty of a kind of economic gluttony."

While I agree with what I (so far) detect to be a principal theme of Frankfurt’s book – namely, that income inequality itself is morally unobjectionable – this quoted statement conveys in about as short a compass as I’ve ever encountered the deep misunderstanding of the economy that is shared by far too many people.  What follows is only a partial review of the errors that infect the above quotation:

(1) Wealth in a market economy is not ‘extracted.’  Instead, wealth is created and produced.

(2) Therefore, there is no “economic wealth of the nation” that exists independently of the efforts of entrepreneurs, innovators, and producers to create such wealth.  Such wealth, once created, can be stolen from its creators and producers.  But it is a fundamental conceptual error to suppose that there is some national wealth that exists in natura, independently of human innovative and productive efforts.

(3)  The nation in such a discussion is of no relevance.  Even if (contrary to fact) wealth is created by nature and is simply ‘extracted’ from the earth by humans, why focus on the nation rather than on the globe?  Surely nature cares not a whit for the arbitrary political boundaries that her human spawn draw (and alter over time).  Surely nature regards an epsilon increase or decrease in the well-being of an individual who resides in nation X with no more or less interest than she regards an epsilon increase or decrease in the well-being of an individual who resides in nation Y or in nation Z.

(4) There is no objective meaning to the phrase “require in order to live well.”  “Require” could – indeed, strictly does – mean only “enough to subsist.”  As such, therefore, no one requires aspirin.  No one requires hard (as opposed to thatched) roofs.  No one requires more than one change of clothing.  No one requires literacy, or numeracy beyond a grasp of basic arithmetic.  No one requires running water or flush toilets or telephony or access to electrical power or artificial lighting or inexpensive birth-control methods or that the “digital divide” be bridged.  (Indeed, the vast majority of human beings throughout history have never experienced such luxuries.)

(5) So to accuse someone of being “excessively affluent” inevitably is to make what amounts only to a value judgment rather than to refer to some colorably objective criterion.

(6) The “economic gluttony” ending of the above quotation reveals that its author has, if not strictly a fixed-in-size-pie view of wealth, a view in which wealth is seen to be largely independent of human creativity, effort, risk-taking, gumption, and choice.  Someone who becomes very rich is, in this view, someone who gluttonously grabbed more from the common store than is his or her due.

In short, the conception of human prosperity conveyed by the above-quoted statement is horribly, totally, and calamitously mistaken.  Yet it is a conception held by, I’m sure, at least 80 percent of the world’s population.  Sad.  And scary