What everyone should know about social credit

Of the ideas that economists have to deal with every so often, one of the stranger ones is that of Social Credit monetary theory. Here in New Zealand Social Credit was once a third party with a reasonable following by voters. Back in 1955 it was such a force that an economist at the University of Canterbury, Alan Danks (later Professor and Sir) wrote a short pamphlet explaining what was wrong with the Social Credit approach to economics. The pamphlet is What Everyone Should Know about Social Credit by A.J. Danks, Christchurch: The Caxton Press, 1955.

What Everyone Should Know about Social Credit by Alan Danks on Scribd

Bernie Sanders and the disastrous rent control plan

Rent controls really are a bad idea.

There isn’t much disagreement among economists about what a national rent control policy would do to harm renters, housing prices, housing stock, and the incentive to build new housing. Nonetheless, Bernie Sanders persists. Ryan Bourne comments.

Making Sense of the minimum wage

Recently the Cato Institute put out a new Policy Analysis (No. 867) on Making Sense of the Minimum Wage: A Roadmap for Navigating Recent Research by Jeffrey Clemens. Clemens is an associate professor of economics at the University of California, San Diego.

Executive Summary:

The new conventional wisdom holds that a large increase in the minimum wage would be desirable policy. Advocates for this policy dismiss the traditional concern that such an increase would lower employment for many of the low-skilled workers that the increase is intended to help. Recent economic research, they claim, demonstrates that the disemployment effects of increasing minimum wages are small or nonexistent, while there are large social benefits to raising the wage floor.

This policy analysis discusses four ways in which the case for large minimum wage increases is either mistaken or overstated.

First, the new conventional wisdom misreads the totality of recent evidence for the negative effects of minimum wages. Several strands of research arrive regularly at the conclusion that high minimum wages reduce opportunities for disadvantaged individuals.

Second, the theoretical basis for minimum wage advocates’ claims is far more limited than they seem to realize. Advocates offer rationales for why current wage rates might be suppressed relative to their competitive market values. These arguments are reasonable to a point, but they are a weak basis for making claims about the effects of large minimum wage increases.

Third, economists’ empirical methods have blind spots. Notably, firms’ responses to minimum wage changes can occur in nuanced ways. I discuss why economists’ methods will predictably fail to capture firms’ responses in their totality.

Finally, the details of employees’ schedules, perks, fringe benefits, and the organization of the workplace are central to firms’ management of both their costs and productivity. Yet data on many aspects of workers’ relationships with their employers are incomplete, if not entirely lacking. Consequently, empirical evidence will tend to understate the minimum wage’s negative effects and overstate its benefits.

Pierre Lemieux on Peter Navarro's conversion

In the latest issue of Regulation, Pierre Lemieux writes on Peter Navarro's Conversion.

Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economists

Rare is something of an understatement!

Lemieux writes that

Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:

• The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
• The fairness argument: “Unfair” trade is not free trade and is destroying the American economy.
• The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
• The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
• The national security argument: Protectionism is required for reasons of national security.

Lemieux then examines each of these arguments and show what is wrong with them.

Lemieux concludes by saying,

Writing for Foreign Policy in March 2017, journalist Melissa Chan depicts Navarro as motivated by his love of media attention and his longing for political fame. He ran for public office several times, always unsuccessfully, and “morphed from registered Republican, to Independent, to Democrat, and back to Republican.” According to Chan, he is derided by well-regarded China analysts. Disregarding psychological and political speculations, one thing is sure: his arguments are not based on economic analysis.

To summarize my arguments, economics strongly suggests that the best trade policy is not to have one, to leave citizens alone to import or export as they wish. That’s true whether the country’s trading partners are free-traders or dirigistes like China. Free enterprise and economic freedom are not only efficient, they are what fairness is or should be about. There is no reason to be concerned with the trade deficit, except to the extent that it is caused by federal profligacy, in which case the solution is to solve the root cause of the problem. Retaliation only compounds other countries’ protectionism. National security is an easy protectionist excuse. Building a war economy in peace time is not acceptable in a free society.

The maintenance of economic freedom at home—which includes the freedom to import what one wants if one finds the terms agreeable—is the only individualist, coherent, and realistic policy. The young Peter Navarro seemed to understand that. Sadly, today’s Navarro does not.

Trump's trade policies have done the almost impossible, they have united economists across the entire political spectrum Unfortunately for Trump, they are united against him and the policies that Navarro has been advocating.

Problems with the "Living Standards Framework"

In the latest issue of Insights from the New Zealand Initiative Matt Burgess writes on the problems he's been having with the "new Living Standards Framework upgrade for Siri, based on work by the experts in the New Zealand Treasury". He writes,

In fact, the new Siri was quite limited. Throughout its years of development, managers had asked that the geniuses writing the code include some way to understand trade-offs between the five living standards objectives. In the end it was decided that “opportunity cost” was simply an intellectual concept, had no practical use, and attempting to include it could break the whole application.

And anyway, hardly anybody in the building had even heard of opportunity cost – how important could it be? – and so the application shipped without it.

This gets at one of the two basic questions about Treasury's "Living Standards Framework" I've had for some time now. Just how do they plan to trade-off one dimension in the framework against another? The second question is, Given that all the dimensions seem positively correlated with economic growth, what the point? Why not just concentrate on economic growth?

Maybe future upgrades to Siri will come with answers to these questions. We can hope.

The world really has gone mad!!

Where is Richard Dawkins when you need him?!!

"Darwin's Plagiarisms: The Greatest Fraud in History: Introduction to the Inheritance Model of Creation and the New Evolution Theory"

DEIRDRE ROSE, The Ministry of Second Timothy, Inc.

This is a comparative study which evaluates two theories: The theory of evolution and the theory of creation. The purpose of the study is to facilitate the development of a new branch of science. The status of these two theories are as such: evolution is treated as fact, and creation is not considered science. This paper turns everything on its head. Evolution and creation are handled in a completely new and different way. The human life cycle is redefined, and the order of life processes rearranged. Evolution is now defined as the end of the biological process, not the beginning; and there is a place for creation in this new model using a conceptual metaphor taken from a software engineering paradigm known as object-oriented design. In the process of comparing these two theories, the author unveils the greatest fraud in history -- great because it has gone undetected for two centuries and is still being perpetuated today.

I wonder what biology journal will publish this?

Intellectual property rights: yay or nay?

From the IEA comes this podcast in which Kate Andrews and Steve Davies talk about the good and bad aspects of intellectual property rights.

The Institute of Economic Affairs's Dr Steve Davies joins Kate Andrews to discuss the arguments for and against intellectual property rights - a topic that which particularly divides the libertarian movement.

In the podcast, Steve explains the philosophical arguments both for and against, ultimately arguing that copyright law forms illogical conclusions when taken to the extreme.

However, Steve thinks certain forms of intellectual property are justifiable and helpful, like trademarks, often because they spring up organically, and recognised by courts rather than determined by state policy.

He also points out, that as it becomes increasingly more difficult to monitor copyright infringement, changes to law may be needed for the 21st century.

The Latest bad idea in town: economic nationalism

From the IEA comes this podcast in which Kate Andrews and Steve Davies talk about the rise of economic nationalism.

From the left-ward shift of the Conservative Party in Britain, to the rise of Donald Trump in America, there seems to be a growing appetite for protectionism and central planning in contemporary politics. Steve and Kate examine some of the reasons behind this trend - and whether advocates of free trade are losing the "Battle of Ideas" in the 21st century.

They also look at what protectionist governments hope to achieve from adopting these policies - and how likely they will be to succeed in "bringing back jobs" for declining domestic industries.

The populist parallels of Sanders and Trump

From the Cato Institute comes this Cato Daily Podcast in which Caleb O. Brown talks to John Samples about the parallels between Sanders and Trump.

President Donald Trump and Senator Bernie Sanders have some strong parallels in their populism.

Trump and trade: threatening Toyota via twitter

More on the wacky world that is Donald Trump and trade. From the Cato Institute comes this Cato Daily Podcast in which Caleb O. Brown talks to Simon Lester about Trump threatening companies.

Can the specter of a President-elect threatening companies with punitive taxes really make the U.S. a better place to invest?

Now this is just wacky

In the UK the Labour Party Leader Jeremy Corbyn has suggested setting a maximum earning limit or, effectively, a marginal tax rate of 100%. Here is a two minute video in which Institute of Economic Affairs Director General Mark Littlewood explains why such a 'maximum wage policy' is economically and socially a terrible idea - and why such a policy would even stand to hurt Corbyn's own agenda.

The most obvious point is that high income earners, who are very mobile, just get up and leave the UK or cut back on the work they do. Littlewood makes this point with the example of footballers in the UK. This would reduce the amount of tax that the government gets from high income earners, not increase it. You must also wonder what effect it would have in the long-run on innovation and growth.

Trump and trade: the protectionist triumvirate

From the Cato Institute comes this Cato Daily Podcast in which Caleb O. Brown talks to Daniel J. Ikenson and Daniel J. Mitchell about Trump and trade:

With Wilbur Ross at Commerce, Peter Navarro at the new National Trade Council, and Robert Lighthizer as U.S. Trade Representative, Donald Trump has assembled a team aimed at protecting U.S. industry from competition.

Professor Benjamin Powell on sweatshops

This video was recorded at the Mises Institute in Auburn, Alabama, on 26 July 2016.

Paul Krugman should know better (updated)

At the Cafe Hayek blog Don Boudreaux writes,

During the course of the discussion one of my superb students, Chris Kuiper, mentioned in passing that Paul Krugman, in a recent New York Times column, mistakenly described safe drinking water as a public good. Here’s that column. Mr. Krugman emphasizes that safe drinking water is a public good according to “Econ 101.”

I don't think so. At least not back when I did Econ 101.

A public good is a good which has two properties, 1) non-excludable, which basically means if one person gets it then everybody get it and 2) non-rivalrous in consumption which amounts to saying the amount I consume don't affect the amount you can consume.

Now I don't think it will take to long for you to convince yourself that safe drinking water does not have these two properties. To take point 1), If water pipes go to my place but not to yours then I get water and you don't. Or if we pay for water and I pay the bill and you don't your water can be cut off. As to point 2) if water was non-rivalrous why are so many people worried about the amount of water used on farms, for example. If farmers could take all they wanted without reducing the water table their would be no problem. But we know they can't.

Safe water does, of course, have positive externalities that come with it, but this doesn't make it a public good. I'm guessing that what Krugman may be getting at is that safe water is a "merit good". The somewhat odd concept of a merit good was introduced by Richard Musgrave (1957, 1959). A merit good is a good or service which is judged that an individual or society should have on the basis of a norm other than respecting consumer preferences, ie the government forces you to have it. Or sometimes a merit good is thought of as a good which would be under-consumed (and under-produced) in the free market economy. There are, it is claimed, two major reasons for this: (1) When consumed, a merit good creates positive externalities. This means that the public benefit is greater than the private benefit but as consumers only take into account private benefits they will under-consume the good or service (and so it is under-produced). (2) Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they, again, under-consume the good.

It could be argued that there are positive externalities in the form public health benefits from safe water and thus it is a merit good. But this doesn't make it a public good.

Krugman also claims education is a public good.

There should, however, be much less debate about spending on what Econ 101 calls public goods—things that benefit everyone and can’t be provided by the private sector. Yes, we can differ over exactly how big a military we need or how dense and well-maintained the road network should be, but you wouldn’t expect controversy about spending enough to provide key public goods like basic education or safe drinking water. (Emphasis added)

And again no. To take just condition 1) from above, you can clearly exclude people from education. But again there are positive externalities to education, so a merit good.

Krugman, who is after all the co-author of an Econ 101 text, should know all of this. He is getting very sloppy when discussing basic economic ideas.

Refs.:

• Richard A. Musgrave (1957). "A Multiple Theory of Budget Determination," FinanzArchiv, New Series 25(1), pp. 33-43.
• Richard A. Musgrave (1959). The Theory of Public Finance, pp. 13-15.

Update: Tim Worstall also makes this point.

Blaug on the Cambridge controversy

I have just discovered that there are economists out there who are still going on about the Cambridge controversy, an old and largely forgotten battle between the two Cambridges - UK and Massachusetts - on (non)questions like what are the problems encountered with the concept of an aggregate production function; what to make of the so-called "Sraffa Revolution" - more accurately described by the historian of economic thought Mark Blaug as "the Rip-van-Winkle phenomenon": that is, the solution with linear programming techniques of a question ("the invariable measure of value") that may have made some empirical sense in Ricardo's corn-economy world but whose solution in a modern industrial input-output economy makes no empirical sense at all (as Harry Johnson once put it) and, of course, double switching.

Mark Blaug concludes his book "The Cambridge Revolution: Success or Failure?", London: Institute of Economic Affairs, 1974, by saying

The Cambridge UK theories are certainly logically consistent, even if they do not always hang together in a logically consistent total framework of theories. They are possibily more realistic in some of their basic assumptions, although that statement is itself highly ambiguous. But they are not simpler, they are not more elegant, they are totally incapable of producing testable predictions. Whatever is wrong with neoclassical economics (and who can doubt that there is much to complain of?), it wins hands down on all possible criteria.

But there are those, it would seem, on the UK (losing?) side that will not let the debate die.