Wednesday, October 2, 2013

George Will's thoughts on markets

Washington Post journalist Dr. George Will is world renown for his analysis of US politics, economics, and economic history.  He has examined, reported, and essayed on policy decisions in DC for decades. Here are Dr. Will's thoughts on a host of economic topics - ranging from tax policy to medicare to the role of government - from a recent, hour long interview by Reason.

Tuesday, June 18, 2013

Be Skeptical of People Selling Hammers Made of Glass

Suppose I offered to sell you a computer software package--maybe some office software--and said "It works great, but if any developer anywhere publishes some of the code then the product might stop working and other bad stuff might happen." You would be wise to reconsider using this software, and you would be skeptical of anyone who told you how wonderful it was.

Now suppose that a powerful apparatus for collecting intelligence on terrorist activity is revealed, and its advocates say that as a result this apparatus is now much less effective, and we are less safe. Whether or not this is true, shouldn't one come away thinking that this system has a serious flaw? That is, it relies on a large number of people to be completely quiet about the things they are doing (some of which might be morally or legally questionable to them and others). This is not a robust system. Its failure was inevitable.

This might suggest that a future replacement system should be less dependent on human secrecy, with fewer people involved and more automation. It ought to collect data in such away that revealing its existence does not weaken its effectiveness. On the other hand, maybe that's a terrible idea.

Wednesday, June 12, 2013

Thomas Sowell Demolishes a Bad Argument for Immigration, and I Am Not Impressed

Thomas Sowell had an Op-Ed that made the rounds yesterday. In it he takes on the common and mistaken argument that immigrants do jobs that Americans will not do--that is, that the U.S. has a shortage of labor. He's talking about immigrant farm workers, but the same argument has been made in regards to high-skill tech workers.

It looks like the argument for a shortage of high-skill tech workers (often called STEM, or Science, Technology, Engineering, and Mathematics) is wrong. The data backs up what basic theory would suggest: If there is a shortage of labor, wages rise, bringing quantity demanded into equilibrium with quantity supplied. That is, if there's a shortage of labor, we should see rapidly rising wages. In fact, STEM wages are flat. The same is probably true for low-skill workers, like immigrant farm workers.

So this argument for increased immigration is wrong. We don't need increased immigration to get labor markets into equilibrium; wages do that for us. But this is not an argument against increased immigration, even though Sowell seems to think it is. Why?

Let's stop thinking about labor for a moment and think about some other resource--let's say, aluminum. Suppose that we had very little aluminum. We would only be able to use it in a few, particularly valuable things. Lots of great stuff that we could do with aluminum would not get done. Would there be a shortage of aluminum? No, because markets would adjust and the price of aluminum would be high.

Now suppose that there is a lot of aluminum in the rest of the world, which we could bring here and use very effectively to build cool stuff. What would Thomas Sowell think of this? If he were consistent, he would have to say something like "we don't 'need' the additional aluminum; we have been doing fine with American aluminum for years, and the market simply adjusts by pushing the price higher. There is no shortage." But this would completely miss the point.

The great thing about having more aluminum is that it allows us to make more cool stuff with aluminum. We could allow people in other countries to make things with aluminum for us, but we have physical and human capital here which would allow us, in some cases, to make better use of aluminum than foreigners can. Therefore it makes sense to allow Americans to use as much aluminum as they want, from wherever they want.

Similarly, the great thing about having more workers--whether from within the U.S. or outside of the U.S.--is that they allow us to make more cool stuff. Immigrants come from other countries to work here for higher wages. Why are they able to earn higher wages here? Is it because American employers are nicer or more generous? No, it's because we have more physical  capital (tools, equipment, machinery, buildings, computers, etc.) and more human capital (skills, knowledge, training, etc.) for them to work with, so that they produce more stuff of greater value here in the U.S. That is, workers earn more here because they produce more value when they work here. We should want them to come here and make more stuff, just like we should want to have as much aluminum (or oil or bananas or whatever) as people are willing to pay for to get things done.

There are some side issues with immigration that make it more complicated. Illegal immigrants may impose fiscal burdens on Americans by consuming public services. On they other hand, they also pay a lot of taxes from which they will not benefit (payroll taxes, for example). They may vote in ways that undermine the economic system or good policy, although I think the evidence there is spectacularly weak. In both cases there are simpler, more elegant solutions than "keep out the foreigners".

In any case, these are the sorts of issues on which discussion of increased immigration should focus. The default view of economists is "immigration to the U.S. is efficient, just as immigration from Alabama to Tennessee is efficient, because it increases output". The debate should focus less on whether immigration in general is good for us--it is--and more on how to deal with the few ways that it might have negative effects.

Here's Bryan Caplan speaking at MTSU in 2011 on why we should allow a lot more people to immigrate to the U.S., and why common objections are wrong.

Tuesday, May 21, 2013

Your Views on Gun Control Will Probably Be Irrelevant in 15 Years

At an Economics Club meeting near the end of the semester we discussed things the club can do in the future, ate pizza, and discussed the economics of gun control.

There is an extensive literature in economics on the effects of various gun control regulations and violent crime. Economists have looked at variations in international laws, and variation in state laws within the U.S. They've looked at ownership rates and concealed carry laws. There are some economists, such as John Lott, who are convinced that greater access to legal use of guns reduces crime. Others have found that, at least in some cases, like concealed carry laws, this is not true (Ayres and Donohue). There are also reasons to be suspicious of the quality of data. Police departments have incentives to make crime rates appear to go down, and improvements in medical technology cause some shootings to be classified as attempted homicides, rather than the actual homicides they would have been twenty years ago.

I'm going to discuss this literature very briefly, and then explain why this literature--indeed, all arguments about gun control--probably won't matter in a few years. (After the jump.)

Wednesday, May 15, 2013

North Carolina: The Make-Work State

In October I discussed the economic sophistry behind car dealerships trying to stop Tesla Motors from selling its cars directly to consumers, instead of through independent dealerships. It looks like North Carolina has been captured by the dealership special interest group. There is no gentle way to put it: This is, economically speaking, stupid. There is no more reason to prohibit sales of cars online or direct from the manufacturer than there is to prohibit direct sales of, say, computers, or fruits and vegetables. Somehow, I don't think North Carolina will prohibit residents from buying directly from Dell's website or their local farmer at the farmer's market.

North Carolina's consumers will be poorer as a result of this policy than they would otherwise be.

Thursday, May 9, 2013

James Buchanan's Legacy at MTSU

MTSU held an event today celebrating the life of James M. Buchanan, an MTSU alumnus and Nobel Prize-winning economist. Several important announcements were made by MTSU president Sidney McPhee, Dean John Vile of the MTSU Honors College, and James Buchanan's nephew Jeff Whorley.

James Buchanan's Nobel medallion has been perpetually loaned to the university by Jeff Whorley. Mr. Whorley also announced that James Buchanan left a $2.5 million bequest to MTSU. President McPhee explained that the money would be used for several purposes:
  • Buchanan scholars will receive a bronze medallion depicting James Buchanan upon graduation. These students are the most academically gifted at MTSU, and receive a full academic scholarships. Having taught them myself, I can attest that they're excellent students, and can stand with the best I've taught at other schools. 
  • George Mason University (where James Buchanan worked from 1983 until his death) and MTSU will be cooperating on The Buchanan Papers Project, an effort to collect, organize, display, and make available James Buchanan's work. I'm guessing that will mean some kind of digital format, but this wasn't clear.
  • Most excitingly for me (and hopefully other economists at MTSU), there will be a new James M. Buchanan Lecture Series. Economists, political scientists, policy makers, and others will talk about the relevance and application of James Buchanan's ideas.  The Department of Economics and Finance has had its own speaker series for a while now; this semester we had Dennis Coates, Matthew Yglesias, and Don Boudreaux (the latter of whom discussed James Buchanan and Public Choice). I look forward to having even more economics to consume!
  • Most of the funds will be used to support the Buchanan Scholarship program. It was suggested that this might mean giving out more scholarships, although no details were given.
You can expect that James Buchanan's work will continue to live on at MTSU in a variety of forms. 

Don Boudreaux at MTSU on the Life and Contributions of James Buchanan: "Politics Without Romance"

Donald Boudreaux of George Mason University spoke at MTSU on April 22nd, 2013. The title of the talk was "Public Choice: Politics Without Romance". The talk was also in memory of MTSU alumnus and Nobel Prize recipient James M. Buchanan, who passed away in January of 2013. Special thanks to the MTSU Honors College for helping to organize the event.

Matthew Yglesias at MTSU on Why "The Rent is Too Damn High"

Matthew Yglesias of Slate spoke at MTSU on March 20, 2012. The lecture was based on his book "The Rent is Too Damn High. Thanks to the Distinguished Lecture Fund, the MTSU School of Journalism, and the Economics Club for funding and for helping with organizing the talk.

Dennis Coates on Public Funding for Sports Stadiums at MTSU

Dennis Coates of the University of Maryland, Baltimore County spoke at MTSU on March 5, 2012. The title of the talk was "Do Taxpayers Benefit from Subsidies for Sports Facilities and Events?". The short answer is "No".

Monday, April 29, 2013

The Economics of Twinkies

It is generally unpopular to say that bankruptcy is a "good" thing - the conventional wisdom, it seems, is to bail firms out, particularly those that are large employers (c.f., GM) or who might be strongly interdependent with other firms (c.f., investment banks). After all, won't widespread bankruptcy lead to a massive recession?

This seems like the wrong question to ask. From a market perspective, allowing firms to go bankrupt is a crucial element to well functioning economy - it is the process where unprofitable firms gain legal protection over their insolvency - essentially putting businesses that can't make goods that people want in a cost-effective manner "out of business." What happens next? Bankruptcy allows the assets of unprofitable firms to be bought up by entrepreneurs (perhaps prior competitors) at low prices, free of the restrictions of expensive labor contracts, debt obligations, and other encumbrances. Through this process, entrepreneurs can reorganize production - i.e., reallocate land, labor and capital - in a way so that the firm can be profitable. This can be a painful process - indeed, recessions are bound to happen. But this is good for the economy. It is only through this process will the economy become more efficient, producing goods that people want at lower prices, increasing employment and generating profits.

Consider the recent struggles of Hostess Brands Inc., makers of Twinkies, Ho Ho's, Sno Balls and Ding Dongs. Hostess was forced to file for bankruptcy in the fall of 2012 after their labor union - the Bakery, Confectionery, Tobacco Workers and Grain Millers' International Union - rejected a new labor contract that entailed an eight percent reduction in wages, among other significant cuts. After bankruptcy proceedings were concluded, Apollo Global Management LLC and Metropoulos & Co. agreed to buy up the Hostess brand. This past week Hostess has re-emerged under the banner Hostess Brands LLC and in the coming months are expected to reintroduce their menu of sugary treats to the marketplace. The current business plan is to hire 1,500 new workers. None of these will be unionized.

Is this a good thing? Yes. While it is true that Hostess workers will earn less money than they did before, at least Twinkies can now be made profitably. And in the long run there will likely be even more people employed in Hostess food production than there was under union rule. A market driven by profits will direct the allocation of resources far more efficiently - i.e., greater social wealth and employment - than by politicians seeking votes.