Economic Insight

We don’t know Kevin Williamson’s full resume but he often refers to his English major math.  Yet he has an impressive ability to express economic concepts clearly.  Recently, Kevin was at his best on NRO (and, of course, you should read it all):

A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why “trade deficit” is not a very useful term. A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger [that is a retailer in case you are not in the 34 states they operate in].

To be clear, you are not harmed because you can get better or cheaper stuff from Kroger (and Wal-Mart, Amazon, etc) than you can produce yourself.  Kevin gives great details about actual tariffs and goes on to identify the real problems that are produced in a trade war:

[The Donald] now proposes to spend $12 billion to bail out U.S. farmers hurt by his batty trade war. That figure will grow if the trade war continues.

The Donald is way wrong in his trade war because it harms everyone.  Elsewhere he has done much to improve economic freedom but he is absolutely wrong here.

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Markets Work; Alternatives Don’t

When we allow markets to work we get the Great Enrichment or as Jonah Goldberg calls it, The Miracle.  When we don’t we get the Soviet Union, Zimbabwe, and Venezuela.  The problem is that when we interfere with markets we screw things up and then we need to interfere again and then things get even worse.

We hate to accuse The Donald of having principles but, generally, it has been close to a principle of his to move in the direction of capitalism, for example, Donaldcare and tax reform.  Unfortunately, he has a tariff blind spot that led to this as discussed by Jack Crowe at NRO:

Under the plan, which could be announced as soon as Tuesday, farmers whose livelihoods have been harmed by the retaliatory tariffs resulting from President Trump’s trade war with China, NAFTA and the E.U. will be provided access to three distinct forms of aid: direct assistance, a food-purchase program and a trade-promotion program.

It is the nature screwing up by intervening in the market that one screw up leads to another.  Humans, experts or not, are not an effective replacement for the market. Tho Bishop at the Mises Institute puts it perfectly:

After all, Trump’s tariffs are not only a new tax for Americans, but a policy of directly picking winners and losers in the economy. The interests of steel workers, for example, are being placed above the interest of consumers and farmers. This leads to the government using tax dollars to prop up farmers. Of course this spending means that tax-paying consumers are hit yet again, with their tax dollars being used for this new welfare program.

You should real all of Tho’s article to remind yourself of the joys of capitalism.  If that is not enough to convince you then you need to read Jonah’s appendix in Suicide Of The West.  Capitalism works and alternatives fail.

Suicide Of The West

Jonah Goldberg’s Suicide Of The West is a book everybody should read.  It is not a great book but it has parts that are absolutely awesome and is full of thought provoking moments.

The best part is the discussion of what Jonah calls The Miracle and Deirdre McCloskey calls the Great Enrichment.  On titles, we’re with Deirdre but we will use Jonah’s here.  Jonah does a great job of explaining the extent of The Miracle.  We love his “most important “hockey stick” chart in all of human history” on page eight.  It shows actual global GDP over the last two thousand years and we get a hockey stick.  He doesn’t limit himself to one method of teaching so everyone should get it.

Sidebar: We thought of saying that everyone should be required to read Jonah’s introduction and appendix but we can’t count on everyone’s sense of humor.  Everyone should read it but we are not into coercion.  End Sidebar

Jonah’s book’s appendix has a nice summary of his four core arguments which we have abridged even more here:

The Miracle has caused us to be unnaturally prosperous
We stumbled into The Miracle and we can stumble out
Human nature is fundamentally unchanging
Human nature can overpower the institutions that make prosperity possible

We agree.  We are fans of the growth fairy so we would add (and think that Jonah agrees based on the last argument) that we now have the knowledge to make prosperity more likely.  We think that Jonah would say that our romantic side, the feelings of human nature, cause the conflict that might end prosperity.

Part of his stumble out argument is that we got The Miracle by argument and rhetoric and we can lose it the same way.  Here Jonah cites Deirdre’s article above.  We love both of them and especially Deirdre’s Rhetoric of Economics.  It was a light from above in our understanding the intellectual differences between economics and accounting.  When Deirdre finds rhetoric for the second time it is less convincing to us.

The conflict of the book is the the rationality of the discussion of economics and human nature and Jonah’s feelings towards The Donald.  Jonah despises The Donald because he has brought tribalism to the right.  With an already tribal left then there is little to do but despair for The Miracle because corruption will set in and capitalism will become ineffective.

In summary, we were beyond delighted that somebody made such a beautiful and sincere argument for capitalism.  Jonah hasn’t convinced us to share his pessimism but we are concerned.  It is an important book that you should read but it is not a great book.

 

Tough Choices

The WSJ Editors are taking Rick Perry and The Donald to task for proposing grid operators to buy coal and nuclear power.  Their recommendation is:

A better way to make coal and nuclear more competitive is to keep chipping away at renewable subsidies and cutting regulation.

We are in 100% agreement that we should reduce or eliminate renewable subsidies and cut regulation.  The Donald, Rick, and the rest of the administration are making admirable progress on the latter but the former need legislation and the probability of that seems extraordinarily remote.

We are not entirely convinced that the regulators cited by the WSJ are unbiased and having relatives in New England we are sure that the gas pipeline will face tough sledding even though there has been a positive court decision.  Heaven help them if they try to go through our aunt’s back yard as one proposal has it.  At best, the gas pipeline will be a long time coming.  We are unconvinced that the market will solve the problem shortly because folks are choking the market with both hands.

The first best solution is not available.  We are willing to support a short-term solution that is not market based because of existing subsidies.  We are not excited about it but it might be the best option.  The problem with being in charge is that you must make tough calls like this one.

 

 

Common Sense Is Not Common

We came across a six-week old opinion piece from Rhea Suh in Detroit Free Press.  Here is how she starts out:

We all want to buy less gasoline for our daily commute, grocery run or trip to the beach. We want to promote innovation, create jobs and leave our children a livable world.

Well, let’s start with the first sentence.  We suppose theoretically it might be true.  We would like to buy less gas.  Even more, we would like to pay less for gas.  But our actions are exactly the opposite.  MPG goes down as MPG go above 50:

While each vehicle reaches its optimal fuel economy at a different speed (or range of speeds), gas mileage usually decreases rapidly at speeds above 50 mph.

You can assume that each 5 mph you drive over 50 mph is like paying an additional $0.20 per gallon for gas.

We tried an experiment this weekend.  On a trip with 220 miles of highway driving we set the cruise control at the speed limit, 70 MPH.  Excluding commercial vehicles, RV, and folks towing stuff (not many of any of those) we passed seven vehicles.  We couldn’t count all the cars that passed us but it was several hundred.  We got the nice improvement on MPG that each one of those vehicles passed up.

Then there are the vehicles that we are driving.  It is obvious on the highway that there are lots of big ones.  This list for 2016 shows the top three sellers as pick-up trucks.  So folks are driving big vehicles fast.  Their actions show that they don’t care much about the amount of gas they use.

Then there is the second sentence about promoting innovation, jobs, and a livable world.  That doesn’t seem universal given the actions of the previous administration but Rhea puts it as a difference of opinion when she reports:

On Tuesday, Pruitt announced plans to weaken the successful clean car and fuel economy standards the U.S. Environmental Protection Agency and the U.S. Transportation Department put in place in 2012.  [Emphasis added]

We have no doubt that Pruit’s actions will promote innovation, jobs, and a livable planet but Rhea thinks we can regulate the economy to success.  Here is a fun irony from her:

And, building on the success of its all-electric Chevy Bolt, General Motors is planning to add 20 new electric models by 2023.

Sidebar: We got confused between a Volt and a Bolt.  We actually saw one of the former on our trip.  We are yet to make the acquaintance of the latter.  End Sidebar.

Success? Well we can’t find Bolt sales but HybridCars tells us

The first-generation extended-range electric Volt was launched late 2010 for model year 2011 and sold just 7,671 units during a protracted rollout. Its peak sales in 2012 amounted to 23,461 units. In 2013, sales were flat with 23,094 units; in 2014 they dropped to 18,805 units, and in 2015 as word of the pending second-generation Volt spread, sales were just 15,393.

The only success of the Volt is in garnering subsidies.  This estimate of over $250,000 per car might be high but electric vehicles are highly subsidized.  We are delighted that the current administration has cut back on the foolish regulations of the previous administration that would reduce innovation, jobs, and safety.  We often disagree with The Donald but here he is on the correct side and perhaps too reticent.  A more interesting question is: why does the federal government have any interest in the average MPG of any auto maker?  Let’s go the common sense route and continue to reduce regulations.

Great Terminology

The great terminology is not Intellectual Dark Web even though it is a useful term.  It comes from Holman W. Jenkins, jr. at WSJ.  He says:

Careers like Mr. Cuomo’s are built on running down what might be called “good policy” political capital. Mr. Cuomo is using up the state’s margin of energy survival to burnish his green potentials. He is sacrificing upstate’s economy to burnish his green credentials.

We agree.  Later Holman says:

This is the good-policy capital buffer at work. Mr. Cuomo is doing statewide what Mayor David Dinkins did for New York City in the early 1990s, using up the buffer. [Emphasis added]

Well said.  We think the term we have bolded, good-policy capital buffer, is great.  It fits with our conception of the growth fairy.  When you engage in good policy you feed the growth fairy and when you engage in bad policy you starve the growth fairy.  A great example of bad policy was the Obama requirement to raise MPG standards (CAFE) to 54.5.  Interestingly, the Washington Post called it uncontroversial.  Foolish would have been kind.  Fortunately, The Donald and friends have been undoing Obama’s handiwork.  The linked author is not happy but you should be.  The connection is not always instantaneous but it gives a buffer to all the anti-growth things that governments do.  Let’s call it the good-policy capital buffer in the future.

 

Too Kind

David R. Henderson is exactly right in his title but way too kind in his WSJ Op-Ed entitled A War On The Rich Won’t Help The Poor that analyzes the Oxfam report Reward Work Not Wealth.  David starts out with a dichotomy that he shows a counter example of later:

There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude.

The problem is that he has accepted the Oxfam starting point that inequality is the problem.  Inequality is not the problem and Oxfam is (or perhaps no longer is) an antipoverty organization as David describes it.  The Oxfam report uses the catch phrase, “Even It Up.”  The first might not close the gap as David demonstrates:

Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family.

The second way has no assurance that it will close the gap either.  Eating the rich, or some variant of it, will likely have a negative impact on the poor.  Will the gap, however measured, be reduced or increased?  It should not matter because making the poor worse off is a bad idea.  Go check out Venezuela.  We are sure there are studies of various plans to punish the rich but we doubt they are definitive.  The solution is to work on poverty by encouraging markets, rule of law, free trade, allowing GMOs, and so on.  Income inequality is uninteresting and unimportant.  Don’t get sucked into it.