Why you don’t have to worry about the trade deficit

From the Marketplace website comes this audio in which Doug Irwin, Jeff Frankel and Margaret McMillan explain why you don't have worry about the trade deficit.

Just before the holidays, President-elect Donald Trump announced he would create something called the National Trade Council to promote U.S. manufacturing. Trump named Peter Navarro, an ardent China critic, to lead the office. Trump and Navarro also share another passion: an aversion to trade deficits. A trade deficit means that the U.S. imports more goods and services than it exports. We've run one every year since 1974. To most economists, that's not a big concern.

Nobel Prize-winning thoughts on incentives and the importance of contracts

On NPR's Morning Edition Steve Inskeep talked to Bengt Holmstrom of MIT, who was one of the winners of the 2016 Nobel Prize in economics.

Perhaps a fitting piece of research to end the year on

A new NBER working paper on Depression for Economists by Jonathan de Quidt and Johannes Haushofer, NBER Working Paper No. 22973, issued in December 2016.

No its not about depressed economists, although recent events are enough to make any economist - especially trade economists - depressed, but rather the economic causes and effects of depression.

Major depressive disorder (MDD) is one of the most prevalent mental illnesses worldwide. Existing evidence suggests that it has both economic causes and consequences, such as unemployment. However, depression has not received significant attention in the economics literature. In this paper, we present a simple model which predicts the core symptoms of depression from economic primitives, i.e. beliefs. Specifically, we show that when exogenous shocks cause an agent to have pessimistic beliefs about the returns to her effort, this agent will exhibit depressive symptoms such undereating or overeating, insomnia or hypersomnia, and a decrease in labor supply. When these effects are strong enough, they can generate a poverty trap. We present descriptive evidence that illustrates the predicted relationships.

But I can't help but think this is, to a degree at least, reinventing the wheel. I'll bet that psychologists have been looking at such things for years.

Why are there still so many jobs?

Here's a paradox you don't hear much about: despite a century of creating machines to do our work for us, the proportion of adults in the US with a job has consistently gone up for the past 125 years. Why hasn't human labor become redundant and our skills obsolete? In this talk about the future of work, economist David Autor addresses the question of why there are still so many jobs and comes up with a surprising, hopeful answer.

Thomas Sowell: so long, and thanks for all the fish

At age 86, Tom Sowell has decided he has better things to do with his time than write magazine columns and so he has retired as a regular columnist. His final column is here. Sowell writes,

Even the best things come to an end. After enjoying a quarter of a century of writing this column for Creators Syndicate, I have decided to stop. Age 86 is well past the usual retirement age, so the question is not why I am quitting, but why I kept at it so long.

It was very fulfilling to be able to share my thoughts on the events unfolding around us, and to receive feedback from readers across the country — even if it was impossible to answer them all.

Being old-fashioned, I liked to know what the facts were before writing. That required not only a lot of research, it also required keeping up with what was being said in the media.

During a stay in Yosemite National Park last May, taking photos with a couple of my buddies, there were four consecutive days without seeing a newspaper or a television news program — and it felt wonderful. With the political news being so awful this year, it felt especially wonderful.

Sowell notes the advances that have been made in terms of material welfare during his lifetime,

In material things, there has been almost unbelievable progress. Most Americans did not have refrigerators back in 1930, when I was born. Television was little more than an experiment, and such things as air-conditioning or air travel were only for the very rich.

My own family did not have electricity or hot running water, in my early childhood, which was not unusual for blacks in the South in those days.

It is hard to convey to today's generation the fear that the paralyzing disease of polio inspired, until vaccines put an abrupt end to its long reign of terror in the 1950s.

Most people living in officially defined poverty in the 21st century have things like cable television, microwave ovens and air-conditioning. Most Americans did not have such things, as late as the 1980s. People whom the intelligentsia continue to call the "have-nots" today have things that the "haves" did not have, just a generation ago.

The effects of economic growth can be dramatic and welcome, and those who are anti-growth, for whatever reason, should keep this in mind.

Realignment: The future of British politics

May be not just UK politics but New Zealand politics, at least to some degree, as well. The idea that in the future politics will not be divided by 'left vs right', but rather by 'nationalism vs liberalism' is one worth considering.

In this audio excerpt from a lunchtime lecture, Dr Steve Davies - Head of Education at the Institute of Economic Affairs - outlines his predictions for the realignment of the UK political parties over the next decade.

The lecture, which took place on September 27th 2016, foreshadowed the Conservative Prime Minister's party conference speech, which showed signs of Steve's prediction that the future of politics will not be divided by 'left vs right', but rather by 'nationalism vs liberalism'.

The fall and fall of Soviet agriculture or why small is sometimes beautiful

In chapter 4 of his recent book “Was Communism Doomed?: Human Nature, Psychology and the Communist Economy" psychologist Simon Kemp outlines the mostly sorry tale of Soviet agriculture. He sums the Soviet experience up by saying,

Overall, Soviet agriculture was not a great success story.

The question raised by this is, Why?

Kemp gives his answer is chapter 8 of his book on “Psychological Ownership”. Kemp notes that agriculture does not require a large organisation. Kemp writes,

Economies of scale are not always important in agriculture. When Stalin initiated the brutal collectivisation of Soviet agriculture, he appears to have done so with the genuine belief that in the long run the larger units would prove more productive. As we have seen, this increase in productivity did not happen [see chapter 4 of Kemp's book]. In part, this is because agriculture does not always benefit from concentrated large-scale production.

Owner-operator (family) farms are still in most countries, including New Zealand, the standard organisation for agricultural production. Why this is so is a question relevant for why collective farms failed. After all collective farms were designed more along large scale industry lines than small scale family lines.

The short economic answer to this question is, I would argue, given by Allen and Lueck (1998). They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. So larger more industrial looking farms may work.

But right now, small it seems really is beautiful.

Ref.:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.

The enviromental costs of Christmas trees: real vs. artificial

I'm guessing this is the big question in environmental economics. Timothy Taylor takes a look at the issue at his Conversable Economist blog. He writes,

One artificial tree used for one year has greater environmental impact than one natural tree. However, an artificial tree can also be re-used over a number of years. Thus, there is some crossover point, if the artificial tree is used for long enough, that its environmental effect is less than an annual series of trees. For example, the ellipsos study finds that an artificial tree would need to be used for 20 years before its greenhouse gas effects would be less than those of an annual series of natural trees. The PE Americas study offers a wide range of scenarios, and summarizes, but here is the situation "for the base case when individual car transport distance for tree purchase is 2.5 miles each way. Because the natural tree provides an environmental benefit in terms of Global Warming Potential when landfilled, and Eutrophication Potential when composted or incinerated, there is no number of years one can keep an artificial tree in order to match the natural tree impacts in these cases. ... For all other scenarios, the artificial tree has less impact provided it is kept and reused for a minimum between 2 and 9 years, depending upon the environmental indicator chosen."

But a full analysis of the issue needs to look at effects across all the full life-cycle of the tree, whether natural or artificial. And things get complicated right about here.

Under what conditions is the tree manufactured or cultivated, with what use of energy, fertilizer, and logging methods? By what combination of transportation mechanisms is the finished tree moved to the home? A substantial share of artificial trees are manufactured in China and then shipped to North America. What are the different issues in use of the tree, including use of water and emissions of fumes? What is the end-of-life for the tree? For example, the carbon in a natural tree will be stored for some decades if the tree goes into a landfill, but not if if is composted or incinerated.

In short, its difficult being green!

Trump’s trade adviser is a terrible filmmaker

Or so says Scott Meslow at the Politico Magazine. Yes Trump's head of the new White House National Trade Council Peter Navarro has made a film, called "Death by China" (what else?).

No I didn't know either.

The film is apparently based on Navarro's book also with the title "Death by China: Confronting the Dragon - A Global Call to Action".

Perhaps the takeaway from Meslow's review comes early in the article,

As a film critic, I found it an appalling cinematic experience. But it’s a brutally effective, if unsubtle, 79 minutes of propaganda -- which might explain why Trump liked it so much.

Meslow continues,

Within its first five minutes, Death By China lays out the stakes: 57,000 American factories closed, 25 million Americans can’t find "a decent job," and the United States owes $3 trillion to China. The roots of our alleged economic woes, Navarro argues, can be traced back to 2001, when the United States enthusiastically endorsed Beijing’s entry into the World Trade Organization.

Now I have no idea whether this is good film making or not but it sounds like crap economics. As any number of economists have pointed out American's economic woes are not due to trade they have more to do with things like changes in technology.

This bit is interesting,

Navarro attempts to prove this point with an array of cherry-picked talking heads, a series of unenlightening man-on-the-street interviews, and — most strikingly — some computer-animated sequences designed to dramatize Navarro’s argument. In one, a knife bearing the label "Made in China" is plunged into the center of the United States, covering the lower half of the country in a sea of blood. In another, missiles of "currency manipulation" and "illegal export subsidies" are fired from cannons and dropped from planes, leaving American cities in rubble. Navarro structures his film around China’s "Weapons of Job Destruction." Everything is cast in the violent, overheated rhetoric of a war with China — a war Navarro argues we’re losing.

These are all standard tactics in the agitprop documentary playbook: Present one side of a political argument with a dizzying array of semi-credentialed talking heads, leaving dissenting voices on the floor of the editing bay. When your logic is lacking, appeal to emotion instead, depicting derelict factories or unhappy-looking American workers. And, because audiences have been conditioned to expect political documentaries to entertain as well as inform, leaven all the messaging with simplistic cartoons, jaunty music and the occasional joke.

A little later Meslow writes,

Navarro himself appears only briefly, laying out what he views as a practical guide for what the average American can do to combat this threat. "Every time a consumer walks into a Walmart, the first thing they have to do is be aware enough to look for the label. Then, when they pick up that good and it says, 'Made in China,' I want them to think, 'Hmm. It might either break down, or it could kill me, number one. This thing, if I buy it, might cost me, or someone in my family or my friends, their job. Lastly, 'Hey — if I buy this, that money is gonna go over to help finance what is essentially one of the most rapid military build-ups of a totalitarian regime since… when? The '30s. I mean, make no mistake about that."

Again crap economics. So you have been warned. There is more in Meslow's review which you can read for yourself, if you really want to.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 57, Decmeber 2016) of the NZAE magazine Asymmetric Information.

A question to end the year with.

A question I have absolutely no idea of the answer to. This comes from Greg Mankiw's blog.

A professor emails me:

My students have the pleasure to use your economics textbook. I have one question: where the symbol "Y" for GDP comes from? All the others, we could detect, such as NX , NCO, etc. My students are curious, and I could not give them a good answer.

My unsatisfying response:

To be honest, I don't know. It is an old convention to use Y to denote real GDP, and I am just following that. But I don't know where or why the convention began.

So anyone who knows the answer let the rest of us in on the secret.

Is the concept of inequality the best way of thinking about our economic problems?

This question is asked by Tyler Cowen in a chapter in a new book The US Labor Market: Questions and Challenges for Public Policy, edited by Michael Strain, which is freely available online from the American Enterprise Institute. The issues raised in the book are relevant to more countries than just the US.

Cowen opens by making an interesting comparison,

I find it useful to compare the productivity slowdown and the increase in income inequality. It seems the productivity slowdown has been of much greater consequence for human welfare, including for lower-income groups. For instance, if American productivity growth had not slowed after 1973, today the median household would earn $30,000 more each year. Alternatively, if income inequality had not accelerated after 1973, today the median household would earn an extra $9,000 more. That is less than one-third of the loss from the productivity slowdown.

One question I would ask is why income inequality and not consumption inequality? Consumption seems more relevant to people's well being.

Cowen goes on to say,

I wish to suggest a simple hypothesis: income inequality (or for that matter wealth inequality) is not the real problem. Rather, the problem is that many Americans are not seeing their lives improve as much as we would like. This is a problem whether or not the top 1 percent is seeing big gains. The problem has to do with the low level of earnings or health or well-being or opportunity for some individuals, not the disparity per se. That is a simple point, but it is difficult to communicate in today’s discourse on these issues, and it turns out to have significant concrete implications for how we should seek remedies.

Later Cowen notes,

Practically speaking, that conceptual mistake misdirects the focus to making people or their outcomes more alike, rather than elevating opportunity for those at the bottom and also in the middle. In fact, opening up enterprise and opportunity for large numbers of people often increases measured income inequality, even when it makes life better for most people, including those at the bottom. Let’s say for instance that global markets were opened up to additional trade, or occupational licensure were relaxed and new commercial opportunities were created. Some people could use these new opportunities to earn much more than others, perhaps millions or even billions more. Probably most people would be better off, but since measured inequality might well rise, analysts who focus on inequality are likely to overlook or undervalue these potential remedies. Keep in mind that the larger a market economy, the larger a country, and the higher the level of aggregate wealth, the higher the level of inequality is likely to be for purely natural reasons; if everything and everyone is clustered at or near zero, inequality just can’t get very high.

Relevant to my question about consumption inequality Cowen points out that,

If we look at the inequality of consumption, rather than income, and count government benefits as a relevant part of income, it turns out actual inequality is considerably lower than many popular or even academic discussions might indicate.

If global inequality is part of the inequality we are worried about, then we should worry less.

Another striking and under-discussed feature of the inequality debates is that global income inequality has been going down for over 20 years. The very poorest people in the world are now much wealthier than before, and significant portions of China, India, Africa, and other developing parts of the world now belong to a growing global middle class. Several billion people have been lifted out of extreme poverty into better circumstances, and over time we can expect the emerging economies to grow at faster rates than the wealthy ones, which will limit inequality all the more. At the same time, scourges such as malaria, polio, and other diseases have for the most part lost ground, most of all in poorer countries. The last 20 to 30 years are probably the most egalitarian time, in terms of income, the world has ever seen. So to the extent income equality is important, we should be celebrating like never before. More specifically, every discussion of income inequality, if it is to be accurate and scientific, should open by framing its worries in the context of a time that has made unparalleled strides toward limiting income inequality overall. Of course for political reasons that is not a popular presentation, but it is an accurate one.

Cowen then looks at key drivers of the increase in inequality. He shows that it makes sense to disaggregate "the inequality problem," as a lot of it isn’t a problem at all, or again it is a problem of some kind other than an inequality problem.

Take as an example one issue you see much discussed which is skills-biased technical change. And there could be a problem here. It is bad that some individuals do not work well with information technology, which is becoming so much more important to most people's work, and this does harm their wages and future opportunities. But the problem part of that equation is not an inequality problem; it is an education problem and a retraining problem. Cowen also discusses issues to do with global markets and rent-seeking.

Cowen sums up this section by saying,

In sum, America [and likely New Zealand] has serious problems of inadequate education, lack of retraining, and some quite bad policies in particular areas. In most cases that disaggregation is a better way of understanding what is going on rather than emphasizing inequality at the macro-economic level. The gap between rich and poor is neither the major driver of the actual problems nor the most important symptom of the most significant problems. Lack of opportunity in absolute terms is the main symptomatic problem.

In the last section of his chapter Cowen looks at the question, How Should Policy Respond? He briefly discusses five areas, Health Care, Occupational Licensing, Education Cheaper Rent and Lower Home Prices, Discontinue or Ameliorate the War on Drugs and End Crony Capitalism.

With regard to house prices and rents, an issue New Zealanders can relate to, Cowen writes,

These days it is harder for Americans to migrate successfully to some of the most economically dynamic American cities, in large part because of high rents and restrictive building codes, stemming from the NIMBY mentality. For a low-skilled worker, the higher wages in New York or San Francisco do not always make up for the much higher rental costs. In the 1950s, a typical apartment in New York City rented for about $60 a month, or adjusting for inflation about $530 a month; today that is closer to the cost of a parking space in Manhattan. If it were cheaper to move into major American cities, more Americans would have an easier path toward a higher salary and a brighter future. Economists Chang-Tai Hsieh and Enrico Moretti have argued that the American economy could become much richer if more workers could move from the low-productivity cities to the high-productivity cities; that would increase income mobility, too. Hsieh and Moretti estimate that lower rents, through building deregulation, could increase American GDP by almost 10 percent. A lot of those gains would go to Americans who cannot currently afford to move to San Francisco and other high-productivity cities.

The size of the effect on GDP of having people move from low-productivity areas to high-productivity areas did come as a surprise to me.

Cowen ends by saying that the United States has some very real and obvious problems, many of which impact the low- and middle-income earners of America in particular, but the concept of inequality is not the best conceptual starting point for finding or evaluating potential solutions.

There are many other interesting points made in Cowen's chapter and it is well worth the read, no matter what your current view of inequality.

The book containing Cowen's chapter also has many other useful chapters on a variety of issues to do with labour markets. Anyone interested in such markets should give it a read.

Should we ban loss leaders?

Loss leaders are one of those retail marketing tricks that are often complained about, for many different reasons. For example, back in 2009 the NBR ran a story Lack of loss-leader sales good news for brand conscious wine industry. In 2011 the Otago Daily Times ran a story claiming,

Supermarkets were also driving binge-drinking by using alcohol as a "loss leader", sold below cost to attract shoppers.

Others see loss leaders as anti-competitive or predatory.

Big chains have the power to buy in bulk, reducing the individual price of products. They use tactics like ‘loss-leaders’ – purposely selling a product below cost to entice customers into their store to buy even more with their ‘savings’. The smaller retailers must match their prices, for fear of losing customers, which reduces their margins. When their rents rise markedly, they are increasingly being forced to move or close.

But are loss leaders really so bad? Are they are anti-competitive or predatory?

A forthcoming paper in the American Economic Review - Unplanned Purchases and Retail Competition by Justin P. Johnson - suggests that loss leaders are non-predatory and possibly even pro-competitive.

Abstract

I propose a framework in which asymmetric multi-product retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a non-predatory (and possibly pro-competitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.

So, sorry, but banning loss leaders may not be such a great idea.

Institute of Economic Affairs: 2016 - a year in review podcast

IEA staff join IEA News Editor Kate Andrews (chair) to discuss all of the surprises and upsets in 2016, what these revelations will mean for the new year.

First, we hear from IEA Director General Mark Littlewood and Digital Officer Madeline Grant join in to discuss the unforeseen triumph of the campaign to leave the European Union.

After that we hear from Communications Director Stephanie Lis and Head of Lifestyle Economics Christopher Snowdon on the aftermath of the Brexit vote, particularly concerning the new government that has risen up because of it.

And finally, Mark will be back to chat with Kate about how America ‘made politics interesting again.’

Also hear from Mark, Maddie, Stephanie and Christopher about their favorite moments, statistics, and 'Person of the Year' in 2016, as well as their best prediction for 2017.

Interesting blog bits

1. The IEA blog covers a new IEA publication on Balancing the economy: The hand of government or the invisible hand?
   

   Despite its considerable strengths, the UK economy is seen as having a number of problems, in particular productivity which lags behind some competitors, low levels of investment and persistent regional disparities. Following the referendum decision to leave the EU, there is wide interest in developing a new industrial strategy. The UK government's proposals are unlikely to help the situation.

2. Jenesa Jeram suggests This Christmas, reject sugar taxes and embrace the joy of food

   We don't need a sugar tax to protect us from Christmas excesses.

3. Andrew Bernard, J. Bradford Jensen, Stephen Redding, Peter Schott on Global firms: Insights for trade and trade policy
   

   Events of the last year have raised questions about the future growth of international trade. This column examines the role played by ‘global firms’ that both import and export, and are likely to be part of multinationals, in the international economy. In a world of interdependent firm decisions, small reductions in tariffs or trade costs can have magnified effects on trade flows, as they induce firms to serve more markets with more products at greater volumes, and also to source greater volumes of intermediate inputs from more countries. At the same time, policies to restrict imports can end up hurting producers for whom both importing and exporting are a central pillar of their overall business strategy.

4. Scott Sumner asks Did monetary offset cause the Great Recession?

   In the past, it has been argued by Summer that tight money caused the Great Recession. But what caused the tight money?

5. Ed Dolan asks What Is the Nairu and Why Does it Matter?

   What happens in terms of US monetary policy will depend, in large part, on what may be the wonkiest number in all of economics—the Nairu. Nairu stands for Non-Accelerating Inflation Rate of Unemployment—such a mouthful that no one ever says it out loud. The basic idea behind the Nairu is simple. It is widely accepted that as the economy moves through the business cycle from recession to expansion to boom, shortages develop in labor and product markets that put upward pressure on prices and wages. The Nairu is supposed to capture the sweet spot—the lowest level to which the unemployment rate can safely fall before inflation starts to accelerate.

6. Scott Burns on Cashing Out of Poverty

   Financial innovations like mobile money have gained fame for transforming commerce in the developing world. But they’re also helping the poor escape poverty.

7. Timothy Taylor offers An Appetizer Buffet of Economic Research Highlights

   The sort of readers who find Taylor's blog interesting might also want to check out the "Research Highlights" blog being run by Tim Hyde for the American Economic Association. Once or twice each week, the blog features a paper chosen from this set of seven journals and offers up a short, readable, nontechnical overview. Here are some examples from the last few weeks.

Import duties

The University of Chicago Booth School of Business Economic Experts Panel was asked the question,

Adding new or higher import duties on products such as air conditioners, cars, and cookies — to encourage producers to make them in the US — would be a good idea.

In response 93% of them "Disagreed" or "Strongly Disagreed". There were three "Did Not Answer" so of those who did answer 100% went with either "Disagreed" or "Strongly Disagreed".

In the comments on their vote Oliver Hart noted,

Duties lead to dead-weight losses and also retaliation.There can be losers from free trade but there are better ways to compensate them.

while Austan Goolsbee just said,

stupid

I guess none of these guys will be getting jobs in Trump's White House National Trade Council.

Fiat money vs. the gold standard

Scott Sumner and Larry White take on monetary policy in this Econ Duel.

Throughout the 19th century and up until the Great Depression, the gold standard was used in the United States. It was largely abandoned in the 20th century.

But what is the gold standard? It’s a system for defining the value of a currency in terms of gold. In other words, you could exchange your $20 paper bill for actual gold at one point in history.

Under a fiat money system, such as the one we have in the U.S. today, that $20 paper bill is inconvertible. You can’t exchange it for a backing store of value because there isn’t one.

In this Econ Duel, economists Scott Sumner and Larry White, who both focus on monetary theory and policy, debate the positives and drawbacks to the gold standard vs. fiat money, and the role of central banks.

On the side of the gold standard, White argues that, when properly implemented without a central bank intervening, it provides a more predictable price level and lower average inflation.

Sumner, taking up the banner for fiat money, argues that the gold standard is simply a rule that worked well in the 19th century and that a good fiat money system is, for this day and age, a better alternative.

What is holding firms back in developing countries?

Chris Woodruff, IGC research programme director, explains why improving management practices is critical for the development of the private sector in developing countries.

Why is rent do damn high?

Many of the arguments here apply to New Zealand.

You’ve no doubt heard it before: the rent is too damn high!

In major cities across the United States, rent prices have been skyrocketing for some time. As a percentage of median income, rent is much higher for those that choose city life over suburbia.

But why are rental prices in these cities so expensive, and what can we do about it?

It’s a classic case of supply and demand: lots of people want to move to big cities because of the opportunities they afford. Naturally, they demand housing. But the supply is often short due to many factors, from geography to regulations. What does economics tell us happens when there’s a lot of demand, but not so much supply? Prices rise. As a consequence, many people are priced out of pursuing the lucrative opportunities available in major cities.

Coastal cities, like San Francisco and New York, have obvious geographical restrictions on building “out.” One way to deal with this problem is to build upwards with more skyscraper housing. This often isn’t feasible due to regulations on building heights, density, parking requirements, etc. But these regulations could be lessened or removed, allowing big cities to become denser and lowering rent prices. Lifelong city-dweller Matt Yglesias discusses this approach in this Duel.

On the other side, Tyler Cowen, who has always lived in the suburbs, argues that allowing cities to become denser may only provide a short-term solution. As more people move in, the cities become more productive with higher incomes for their inhabitants. And the rents rise again.

What to say to those who lose their jobs because of imports

Here at the Cafe Hayek blog Don Boudreaux takes up one of the most difficult issues to do with advocating free trade, what does an advocate of free trade say to to those who lose jobs to imports?

Nothing that you say to someone who loses his or her job to changing market conditions is likely to satisfy that person. The personal almost always trumps the abstract. The seen hides the unseen. The proximate overwhelms the distant. The present is real while the future is still to be created. This reality, however, does not diminish the importance of defending free trade honestly, unconditionally, and without apology.

Such a defense begins with the insistence that jobs are not lost to imports or to foreigners; instead jobs are lost to fellow citizens – in two ways. First, it is the spending decisions of fellow citizens that determine when particular jobs are created and when they are destroyed. Second, the job lost by Smith is replaced with a new (and likely very different) job filled, if not by Smith, then by Smith’s fellow citizen Jones. So when someone complains about losing his or her job “to imports,” it is right to note that protecting that job necessarily requires that fellow citizens’ freedoms be curtailed and fellow citizens’ economic well-being be reduced. Protection necessarily shrinks the spending power of countless fellow citizens. Protectionism also destroys the actual jobs of many other fellow citizens (for example, jobs in domestic machine-tool factories that disappear because steel tariffs take a bite out of domestic machine-tool production) and destroys the job prospects of still other fellow citizens (for example, retail-store-management jobs that never materialize because tariffs on consumer goods reduce consumers’ demand for such goods).

Again, no such arguments will satisfy someone who believes that his job disappeared because of international trade. But that person’s refusal to accept that these arguments are part of a sound case for free trade does not, as emotionally understandable as this refusal is, render these arguments invalid. If we mute or trim our defense of free trade out of understandable sympathy with the unemployed worker who we see, we are complicit in supporting a system – protectionism – that not only destroys the jobs of workers who we don’t see (but who are, and whose sufferings are, every bit as real as the worker who we do see), but also will deny to our children and grandchildren a future that is as prosperous and as peaceful as possible.

It is necessary to keep in mind when defending free trade that it will destroy some jobs (a fact that is often clearly seen), and this has very real negative effects on people, but it is also necessary to realise that it will also create jobs (a fact that is often unseen) which has very real positive effects on other people. As Paul Krugman has written,

It should be possible to emphasize [...] that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

The trade economist Douglas Irwin has this to say on the matter of trade and jobs,

The claim that trade should be limited because imports destroy jobs has been around at least since the sixteenth century. And imports do indeed destroy jobs in certain industries: [...]

But just because imports destroy some jobs does not mean that trade reduces overall employment or harms the economy. [...]

So in terms of jobs the free trade/protection debate is about which jobs there are in an economy rather than the total number of jobs. Changes in trade policy moves jobs a round the economy, free trade moves jobs away from sectors of the economy that produce things we are (relatively) bad at doing towards things we are (relatively) good at doing. Each of free trade and protection will be good for some people and bad for others. Perhaps the real question is, how do we best help those who in the short-run are harmed by changes in trade policy?