What do citizens really want?

Robert Reich obviously doesn’t understand how and why products come to market (We Need Public Directors on TARP Bank Boards, April 25). In reference to the decision between fuel-efficient cars and less fuel-efficient trucks and SUVs he says: “GM executives would have a perfect right, if not a duty, to disregard what we as citizens tell them to do in favor of what shareholders want them to do.” How does Mr. Reich think we “tell” car companies what we want? He seems to believe it’s through the political process. Not quite. We tell companies what kinds of cars we want to buy the same way we tell companies what kinds of cereal, neckties, and books we want to buy — we buy them. Basic microeconomics teaches that the more people want to buy a certain product (i.e. higher demand), the higher the price of that product. This goes a long way to explain why, as Mr. Reich reminds us, the trucks and SUVs are profitable and, consequently, what GM executives want to produce: they are what “we as citizens” really want.

Matt Hutchison
Chicago, IL

Washington hubris

Senator Dick Durbin, in his recent letter (Letters, April 22), concludes his justification of mortgage cramdowns with the following: "But doing nothing as foreclosures continue to increase will not end this recession." He seems to be saying that doing this particular something -- namely allowing "bankruptcy judges to modify the terms of mortgages which would otherwise fail" -- would somehow stop the economy's slide. It's amazing that the senator believes that flipping that one little switch will do so much to put hundreds of thousands of people back to work.

Economists can't settle on three things that caused the crisis, so the implication that Senator Durbin, after a long career in law and politics, knows the one thing that can fix it is incredible on its face. As hard as it is to predict the short- and long-term implications of cramdowns on mortgages themselves, something by definition less complicated than the broader United States economy, I find it hard to believe he can predict the ability of that one rule change to end the recession. On second thought, considering the typical Washington hubris, maybe Senator Durbin's confidence isn't that amazing after all.

Matt Hutchison
Chicago

College athletes and the NCAA

I submitted the following letter to the WSJ:

I concur with Richard Vedder and Matthew Denhart regarding the exploitation of college athletes. After reading The Blind Side by Michael Lewis about football player Michael Oher and the grief the Touhy family received from the NCAA for taking him off the streets and providing him with the structure he needed to become a star left tackle, I’ve become extremely suspicious of the NCAA’s rules. These rules are sold as being in the best interest of the athletes, though many times they are far from it. To add to the list of pay limits and transfer restrictions given by Messrs Vedder and Denhart, allow me to add what I consider to be just as egregious: rules that not only effectively force athletes to conscribe to the NCAA’s game but also heavily penalizes them if decide to leave early.

The NCAA, for all intents and purposes, is a monopsony, or, one buyer with many sellers. It has achieved this by convincing the NFL and NBA to prevent high school athletes from skipping college by making them ineligible for the professional ranks until they are a year or two removed from high school. In addition to that, the NCAA also discourages players from turning pro early by preventing them from returning to school under many circumstances, such as in the frequent event of an unsuccessful draft night. If they were really looking out for the best interests of the players, the NCAA would not disallow those athletes from returning to college over a youthful mistake, permanently cutting many off from what is likely their only opportunity to obtain a university diploma. Instead, these players would be permitted to come back to school, so they can better prepare themselves for the next level, whether it is professional sports or some other career. I wish it were so that the NCAA was looking out for the athletes, but in many instances it appears that it’s simply looking out for the business of college sports.

Matt Hutchison

The article to which I was responding is here. These are the important paragraphs:

Take Kevin Durant, for instance. After a stunning freshman season with the Texas Longhorns in 2008, Mr. Durant elected to forgo his final three years of college and entered the NBA draft. Selected by the Seattle Supersonics (now the Oklahoma City Thunder), he agreed to a contract paying $3.5 million in the first year. By contrast, his yearly compensation (in the form of room, board, books and tuition fees at Texas) amounted to about $33,120, less than 1% of what was offered by the Supersonics.

...

In a competitive market, companies cannot exploit workers in this way for long, as rival firms will hire them away at higher salaries. In basketball, however, the NCAA cartel prevents that, dictating limits on pay (essentially college costs) and even penalizing transfers to other schools. Strict rules also prevent college athletes from signing lucrative endorsement deals or accepting gifts beyond a certain amount. Soon after entering the NBA, Mr. Durant further augmented his earnings by signing a $72 million deal with Nike; he inked other endorsement contracts with Gatorade, EA Sports and Upper Deck.

AIG and their bonuses

From David Boaz at Cato:

Ex post facto legislation isn’t just bad because it’s unconstitutional. It’s unconstitutional because it’s bad.

The whole is here. And it's excellent.

Who supports free trade?

I submitted the following letter to the NYT in response to this letter from Senator Sherrod Brown:

Senator Sherrod Brown doesn’t quite understand the motivations of businesses that support free trade. Is it to earn some excess profits as they “[move] manufacturing jobs to China because of low wages”? Only partially, because as soon as they do, those profits are eliminated as their competitors do the same; their only “benefit from the status quo trade policy” is that they live to operate another day. In truth, most business owners who support or object to free trade only do so as a matter of survival. Either you’re trying to stay alive by lowering your costs via foreign trade or you’re trying to stay alive by keeping your competitors from lowing their costs via foreign trade because for whatever reason you cannot. So who, then, are the ultimate benefactors of free trade? It’s you, me, Senator Brown, and anyone else who lives on a budget.

Matt Hutchison

Religious Liberty

After today's lesson in EQ, I thought I'd add a few external thoughts.

First, from Joseph Smith:

“The Saints can testify whether I am willing to lay down my life for my brethren. If it has been demonstrated that I have been willing to die for a ‘Mormon,’ I am bold to declare before Heaven that I am just as ready to die in defending the rights of a Presbyterian, a Baptist, or a good man of any other denomination; for the same principle which would trample upon the rights of the Latter-day Saints would trample upon the rights of the Roman Catholics, or of any other denomination who may be unpopular and too weak to defend themselves.

“It is a love of liberty which inspires my soul—civil and religious liberty to the whole of the human race. Love of liberty was diffused into my soul by my grandfathers while they dandled me on their knees. …

“If I esteem mankind to be in error, shall I bear them down? No. I will lift them up, and in their own way too, if I cannot persuade them my way is better; and I will not seek to compel any man to believe as I do, only by the force of reasoning, for truth will cut its own way.”

Then I saw a very cool article in the Wall Street Journal:

"[Madison] believed that the main reason to have separation of church and state was to help religion. He came to this view in part because of an unusual but crucial alliance he built with evangelical Christians of his day... They believed that not only was government repression bad but so was government help. Madison agreed and worked hand in hand with the evangelicals to press this point. In a crucial document called the Memorial and Remonstrance, Madison integrated the arguments of the Enlightenment intellectuals with the arguments of the evangelicals to create something much greater. Separating church and state would be better for both state and church.

This may be a concept that's a bit jarring to modern culture warriors. We've come to think that if you're pro religion you must surely want government to play a greater role in promoting religion. And if you're in favor of separation of church and state that you must want to reduce religion's role.

Madison and his evangelical allies had a completely different concept. They wanted to promote religion. They just believed that the best way to promote religion was for government to leave it alone.

This basic approach has made America one of the most religiously free and religiously vibrant nations in the world.

That last sentence reminds me of a podcast on Econtalk with Larry Iannoccone I heard awhile back. He talked about how in the US we have somewhat of an entrepreneurial approach to religion, and that accounts for a lot of why we have so much more church attendance than other countries. If you have a state-sponsored church, the effect will be a limited number of other churches from which people can choose. The fewer choices, the more likely a given choice won't be what you want. Obviously, the less satisfied you are with the religious service, the less likely you are to attend or participate. On the other hand, if you "let a thousand flowers bloom", there is a better chance that someone will come up with a religious experience that suits you, increasing the likelihood of your involvement.

The freedom to worship as we please really has made us quite a "religiously vibrant" nation. And for that I'm grateful.

Less Blood and Gore

They (David Blood and Al Gore) wrote this editorial in the WSJ and I sent these two letters in response:

Al Gore and David Blood don’t seem to understand tradeoffs (“We Need Sustainable Capitalism”, Nov 5). They are correct in recognizing that social bads like extreme poverty and disease deserve our attention, but they fail to see how their proposals to stop the “climate crisis”, by placing a price on carbon, stand in the way. With carbon-based energy such a significant portion of the budget, the only way much of the world’s poor — and I’m talking about more than just the American poor; they are rich by global standards — will make ends meet in an environment of taxed carbon is to either go without or be subsidized by the wealthy. Going without will ensure they stay in poverty; subsidization through the tax system leaves less money in the hands of entrepreneurs to help develop and distribute the medicines that will cure diseases. It will simply lead to more of the redistribution supported by the just-elected Obama administration.

We’ve heard their prognostications in other venues about the worst case-scenarios of doing nothing about the climate. It’s time we also had a discussion of the worst-case scenarios of taking action. If we do hold such a discussion, I’m sure a severe worsening of many of the ills Mssrs Gore and Blood hope to cure will be among them.

Matt Hutchison
Chicago

Al Gore and David Blood talk about their “new philosophy of investment management and business” (“We Need Sustainable Capitalism”, Nov 5), but I’m sad to tell them what their doing isn’t all that new or original. People have been trying to make a buck by manipulating the political system in their favor for some time now. While I’m all for their efforts to raise private money for renewable energy, clean technology, etc, these investments won’t be profitable for some time without governmental subsidies or usage mandates. The only way they can expect to generate returns for their investors is to pressure (or persuade) their friends in Washington to help them out. And judging by the rhetoric of newly-elected Barack Obama, who by his own account started slowing the rise of the oceans simply by being nominated for the presidency, Mssrs Gore and Blood will get plenty of help. New philosophy indeed.

Matt Hutchison
Chicago

I'm back, baby!

At least temporarily. I submitted the following letter in response to this editorial in the WSJ:

I understand the desire to pass the free trade agreement with Colombia, but to argue that one country (Colombia) “deserves...trade preferences” while others (its Andean neighbors) do not (Pelosi’s Trade Priorities, Oct 1) is the wrong way to go about it. Using trade as a political tool to influence foreign nations has only modest (if that) impact. Nations such as Cuba have lived without access to U.S. markets for 50 years. Who has paid the bulk of the price for that policy? Cuban citizens. Because they have been cut of from the gains from trading with the U.S., they have also been cut off from a higher standard of living. The people of Andean nations do not “deserve” a less harsh treatment simply because of the actions of their political leaders. The ability to freely trade with Americans is not something we should be bestowing upon those nations we feel deserve it. It is something we should allow unmolested not only because it is in the economic interests of the citizens of the U.S. and whoever their trading partners might be but also because it shows that we respect the “unalienable” right of liberty even when the leaders of those foreign nations do not.

Matt Hutchison
Chicago

Why is saying "I don't know" a bad thing?

From Jerry Taylor at Cato:

Tomorrow’s debate will likely produce few sparks. I’m against nuclear energy subsidies and don’t think the industry would survive without them. Thursday and Friday, however, will be more interesting. I don’t have the faintest idea what sort of personal automobiles will be on the market in, say, 2030, and even less idea what the energy economy of the next generation will look like. I suspect, however, that John thinks it’s all rather obvious where energy markets and technologies are heading and that he has the perfect master plan to most efficiently accelerate all the big-time changes that history has in store for us.

Saying “I don’t know” to questions like these is never that good of an idea if you want to dazzle people with your wisdom and insight. On the other hand, it’s hard to marshall the argument that “the oil age is over and the age of genetically modified gerbils on treadmills is coming” (or whatever) and then say that the government needs to do something to get us there. Well, if its so inevitable, then why must
government act at all? We’ll find out if John can manage to resolve that tension in what will likely be his argument.

He's referring to V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies and a debate they're having at the LA Times about the future of energy use and generation. I guess it's hard to be considered an expert when you don't know what's going to happen. Unfortunately, no one knows what's going to happen (although some might guess correctly on occasion), but admitting that doesn't put food on the table.

Gains from trade

I saw this by Pete Hoekstra and John Shadegg in the Washington Times quoted on Free Exchange:

Every month the United States runs a trade deficit of $60 billion, most of which is related to energy. Imagine the impact on the U.S. economy if we invested that money in the exploration and production of American energy. It would lead to job creation, it would ripple through the economy, the dollar would strengthen and we would finally see some stability in energy prices.

It followed this by the author of the Free Exchange post:

A bad reason for new drilling is that it will reduce our dependence on foreign oil. That's a bad reason because it won't, and it's a bad reason because "reduce dependence on foreign oil" is kind of a silly idea.

I agree. The idea of energy independence is pretty silly. First of all, it will never happen, no matter how much we (the government) "invest" in renewable energy. Second, the more resources we forcibly devote to energy, the fewer of those resources we devote to other, more productive endevours. But what got me interested in the Hoekstra/Shadegg quote was the idea that somehow our trade deficit can be otherwise "invested". I don't even know what that means. On this podcast with Don Boudreaux, he gives the example of buying a $2k laptop from Sony. It's a private transaction that doesn't incur debt (necessarily, though it could, but that's a different issue). If he instead bought the laptop (or oil) from a domestic producer, it doesn't mean "we" now have that money to spend or invest. In the end, you gave a producer American money for a good. That producer then must use that American money in places that accept American money (usually that means assets or good denominated in American money) or they can exchange it with someone into their home currency. That money will either be spent on American goods or invested in American assets.

Tyler Cowen sums up well my thoughts on the misguided idea of money leaving the country in a post about sovereign wealth funds:

If capital has "left" the U.S., it's because there was some gain from that transaction, such as when we buy oil. There's then a subsequent gain if those revenue are invested wisely in the United States. It's not just a wash through "recycling." If you spend some money in stores, and then some people then invest in our company, that's not a wash either.

A help for the housing market

Alan Greenspan:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

From Greg Mankiw.

I thought a similar thing a few months ago. Well, not the same thing because I was thinking about "illegal" immigrants as well, but that isn't as politically palatable as just focusing on skilled immigrants. It was in relation to a blog post on the AJC about how many homes are vacant because unskilled immigrants are returning home (or simply moving on) due to the lack of jobs/enforcement. The result is that the values of those homes still occupied are falling. The question was raised of whether someone would rather have their homes lose value or have illegal neighbors. The overwhelming response in the comments was that people would rather have their homes lose value. I was kind of shocked, but kind of not.

In the end, instead of trying to artificially boost demand, Congress should simply reduce (heck, remove) the artificial constraints on demand.

Don Boudreaux on lobbyists

From my inbox:

17 August 2008

Editor, The New York Times Book Review
229 West 43rd St.
New York, NY 10036

To the Editor:

Thomas Frank is confused. First he argues, in 2004, that capitalist materialism has been unleashed on this great land by, of all things, Americans' failure to be sufficiently materialistic. Now he asserts that the gigantic and powerful lobbying industry currently astride Washington is the child of the same free-market ideology that has allegedly succeeded in inflicting laissez faire on Americans ("What's the Matter With Washington?" August 17).

I waited in vain for reviewer Michael Lind to point out the obvious fact that, if the market really has become so dominant as Mr. Frank famously asserts, the government would have fewer, not more, favors to sell. Lobbying would be a dying industry.

Alas, the continued, kudzu-like growth of lobbying firms in Washington is powerful evidence against Mr. Frank's incessantly repeated insistence that free-market "idolaters" have shifted all power from government to markets.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
Enterprise Hall
George Mason University
Fairfax, VA 22030
703-993-1130 (office)