Category Archives: Economic Fallacies

In Defense of the Gouger

There was a recent disruption in the supply of gasoline to Georgia due to a ruptured pipeline. The resulting shortage was the predictable result not of the constrained supply but rather busybody price controls imposed by the Governor. The universal support by the public for the Governor’s actions betrays a breathtaking ignorance of basic economics. The law of supply and demand cares not one whit for your desire to maintain a constant supply of a good while forcing its price down.

Not only should “gouging” be “legal,” but in fact welcomed. Gouging ensures a supply of a good even when supplies are constrained. For example, gouging of event tickets ensures that you can get a ticket at a moment’s notice. Although the price is high would you prefer high price and ticket vs. no ticket? Rising prices due to increased demand is the market-natural rationing system. If prices stay low, then no one cuts back and the good is quickly consumed. High prices incentivize conservation so a given supply last longer and is available to those that desperately have a need of it. Hypocritically the state blocks private business from such practice but happily engages in it on a regular basis in the PeachPass toll lanes of I-85. I have personally seen prices go from 7¢ to over $11 for the same stretch. Of course this is a good thing, and the state knows it, so it is rather disingenuous for them to block it in other arenas.

The most common objection is what of the station that raises their prices during the day on the mere rumor of a disruption? They’ve already paid for the gas in the tanks in the ground – how can they possibly justify reaping these windfall gains? Easy. The higher price (and profit) ensures the station itself can buy more from their supplier at the soon to be higher prices. If the gas in the ground cost 25 and is sold for 30, then the station takes from those sales 25 and buys the same amount again. But if they are not allowed to raise prices and it soon will cost 100 to refill the station’s tanks, then they can only buy 1/3 of what is needed and so will run out that much faster each time. If they can charge 120, they can take 100 and fully replenish the tanks ensuring a steady supply.

A tertiary benefit of high prices is as economic alarm. It signals too society that resources are more urgently needed where prices are high. People then swoop in to access that higher profit potential and so the supply immediately begins to swell and prices fall. So even when such “gouging” occurs it will not last long as the market corrects itself naturally. No need for men with guns running around threatening people.

The usual objection here is that people can’t afford the higher prices. Please. No one is going to be filing bankruptcy because they spent extra on gas for a week or so. The above average amounts are no more than typical monthly discretionary spending (movies, eating out, etc.) The prospect of possibly foregoing a few luxuries doesn’t seem like the sort of essential human right that rises to a compelling state interest. Indeed, state intervention only makes matters worse – when it comes to economics, there’s no free lunch.

Stepping Up to the Plate?

Slow internet. No words invoke greater apoplexy in modern man than these. Oconee County, being largely rural, has suffered through its share of less than ideal Internet connectivity over the last decade. So it is little wonder that county officials recently engaged representatives of Corning Optical Communications to discuss the possibility of wiring the entire county for fiber optic Internet access. As a resident myself, nothing would please me more. However, as an ethically consistent human being, I cannot opt to ignore a little thing like theft even when that theft might benefit me personally.

Inroads to high speed Internet have been slow not because of capriciousness but rather due to simple economics. Investments are made only if the prospect of a meaningful return is sufficient to compensate for the risk involved. What would you say if someone asked you to invest your retirement savings into a project that might yield a payback of less than 1% after 75 years? If you’re unwilling to make such a poor investment, then who can blame the telecoms for reaching the same conclusion. Capital intensive projects like running underground cables for miles and miles only to serve a handful of customers just don’t make economic sense unless those customers are willing to pay hundreds of dollars a month. And since nobody is willing to pay that, it doesn’t happen. Local governments don’t help either as various right-of-way statutes heap unnecessary costs on the process (see OCGA §46-5-1(a) and 48-5-423).

In the meeting, according to the Oconee Enterprise, Administrative Officer Jeff Benko observed that, “…in areas where the private sector has not stepped up to the plate, there’s an opportunity for the government to intervene.” In other words, where my parents have not stepped up to the plate by buying me a Ferrari, there’s an opportunity for my bank-robbing uncle to buy one on my behalf. “Stepping up to the plate” is the economic equivalent of providing something at a false cost because no one is wiling to pay its true cost.

This project was estimated to run about $1400/home served. If everyone voluntarily wrote a $1400 check that would be grand. It would be true democracy, marketplace democracy, in action. Consumers vote their preference every time they open their wallet. But we live with a political democracy as well, so as long as 51 out of 100 people want something, then it’s perfectly acceptable to reach into their neighbor’s wallet and take what is needed. Some might suggest paying for it with bonds is ethically sound as someone is voluntarily lending money to the county. But that logic is specious insofar as the bond must eventually be repaid and the only way to do so is with taxes and as we all know, taxes are theft. Indeed bonds are even more cowardly as they shift the repayment burden onto future taxpayers who have no voice in what is decided today.

Repeat after me: just because it is something I want, that does not make it is ok to use political means to force others to provide it for me.

Dear Mr. President

The White House recently posted an “Email from President Obama: An Update on Overtime” on the whitehouse.gov website. For some reason I was not on the distribution list for that e-mail. Had I been, here’s what I would have said:

“I wanted you to be the first to know about some important news on an issue I know you care deeply about: making sure you’re paid fairly.”

By “make sure” do you mean men with guns will insert themselves into the employer-employee relationship and substitute your notion of “fairness” for ours?

“Tomorrow, we’re strengthening our overtime pay rules to make sure millions of Americans’ hard work is rewarded. If you work more than 40 hours a week, you should get paid for it”

So people that are paid a salary aren’t paid for their work? That’s news to me. Last time I checked a salary covers ALL hours worked in a week, whether that is 25, 35, 40 or 60.

You do realize that there are two sides to this equation – sometimes a salaried worker may work 50 hours in a week and sometimes they may work 30. Regardless, they are paid the same amount each week. Oddly all the focus has been on the hours above forty worked but not on those that have the flexibility to work fewer hours when needed. Over time these fluctuations averages out to a level that satisfies both the employer and employee. There are benefits to both parties to being salaried. Salaried employees have an incentive to work as efficiently and productively as possible. If productivity exceeds both parties’ initial expectations, that can then become the basis to negotiate a raise. But, if one is not allowed to work more than 40 hours in a week (something many employers will now do to mitigate the cost increases) it becomes that much more difficult to justify a higher wage.

People who earn a salary take some measure of pride in that fact; punching a clock is seen as something teenagers do, not professional adults. Earning a salary means your employer is putting their trust in your ability to accomplish the necessary tasks without constant micromanaging. But overtime laws gag the employer and make it illegal for them to treat some employees as adults – they have no choice but to infantilize them with a “non-exempt” (hourly) classification. We (Seachem) have employees that are presently salaried but who stand to lose that status with this coming change. They view it as a demotion. I hope that they, and millions like them, do understand that it is you (and your progressive ilk) that is doing the demoting, come Election Day.

It is peculiar that some businesses can legally sell their wares at a flat rate (cell phone service, gym memberships, satellite TV, all you can eat buffets, etc.) but those who sell their labor are not afforded that same measure of autonomy. It’s almost like the government thinks individuals don’t have the capacity to make the “right” choice and so require a paternalistic helping hand.

“or get extra time off to spend with your family and loved ones.”

No, no you can’t. Read your own statutes Mr. President. What you just described is called “comp time” and that is illegal under the FLSA. At least for private employers and their non-exempt employees it is. “Public” employers are free to engage in this practice. I guess private employers are not as enlightened as their public brethren and so can’t be trusted to fairly give time off in lieu of extra hours worked even if that is what the employee wants.

“It’s one of most important steps we’re taking to help grow middle-class wages and put $12 billion more dollars in the pockets of hardworking Americans over the next 10 years.”

Right, instead of raising taxes on the employer directly, we’ll just raise them indirectly by finding another way to compel businesses to redistribute even more of their profits (wages are on average four-times the size of net profit) to those that bore no risk in earning them. Remember; when a business loses money employees still get paid. But when a business makes money employees expect even more money. Heads I win, tails you lose.

But that $12 billion figure is a pipe dream. These overtime rules changes will not raise worker income anywhere near to what you believe. To the extent it does raise it for some, it will be at the expense of others that are either laid off or that can’t be hired because too much of payroll is going toward paying excessive overtime. What this rule change will do, however, is ensure that America becomes less and less productive as businesses opt to send employees home at 40 hours. Payrolls will remain the same but output will decline. Although this is effectively a raise (the same money for less work) it actually harms both parties. The employee, being constrained to only 40 hours, is now in a weaker position to demonstrate their value. Likewise the employer realizes less output for the same amount of money. On net for the country less work will be done, growth will slow down and we’ll all wonder why the private sector appears to operate more and more like the Post Office or DMV.

Capital investments, which propel improvements to productivity, are the natural method to improve workers’ standard of living. Productivity gains translate into more goods for the same amount of work and income. Effectively everything becomes cheaper and thus more affordable. But these gains have all but been eroded by 40+ years of inflation wrought by the duopolic partnership of the Federal Reserve and Federal Government.

“But after years of inflation and lobbyists’ efforts to weaken overtime protections, that security has eroded for too many families”

Inflation is a 100% government phenomenon. The US Treasury issues bonds to prop up annual budget deficits. The Federal Reserve buys those bonds (directly or indirectly through open market operations) by using money literally created from nothing. More dollars equals more inflation, and the cycle continues year after year. If the government is serious about ending wage and benefit erosion it has the power to end it by ceasing all inflationary policies. It really is that simple.

“One of the many Americans who has been working hard but struggling to keep up is a single mom from Tucson, Arizona, Elizabeth Paredes. As an assistant manager at a sandwich shop, Elizabeth sometimes worked as many as 70 hours a week, without a dime of overtime pay.”

Seen benefit, unseen harm. You really should read more Bastiat. For every worker that benefits thousands more will be harmed by lost jobs, fewer hours, or simply not being hired in the first place. Forcing her employer to pay her more makes about as much sense as raising the minimum wage to $50/hour because you found a single mother with ten children who can’t get by working for $8/hour.

If someone wants to earn more money, then they should enhance their skills and find a new job. Dissatisfaction with low-skill wages is like buying a home by the airport and then being upset about the noise. Demanding changes to overtime or minimum wage laws would then be like adding new noise regulations that would make air travel cost more for everyone; concentrated benefits for some, increased costs for everyone else. Don’t ask others to pay the penalty for your choices.

“When workers have more income, they spend it – often at businesses in their local community – and that helps grow the economy for everyone.”

It is unclear why the economy would grow more if an employee spends money vs. the employer. Is the purchase of one set of goods “better” for the economy than another? I presume this line of reasoning comes from the flawed Keynesian notion that it is consumer spending that drives the economy. This viewpoint of course ignores the fact that consumers can’t buy anything until businesses/employers have first spent money on hiring employees, building plants, opening stores and so on. Consumer spending rests on the bedrock of business spending which itself lays on the firm foundation of savings. The lower the profit, the slower the savings, and thus everything else built upon it. Consumption does not grow an economy. Only savings and investment into capital goods will do that by making it easier to produce more goods with less effort. That is what improves the standard of living for everyone.

“Americans have spent too long working long hours and getting less in return. So wherever and whenever I can make sure that our economy rewards hard work and responsibility, that’s what I’m going to do.”

The fact that a thief can improve his standing at the expense of his victim(s) does not justify thievery as a legitimate means to improve one’s condition. Employers and employees have come to mutually beneficial arrangements that both parties agreed to. The employer is free to fire the employee and the employee is free to quit. No one is forcing these arrangements. There is no rational basis to suggest a disinterested third party has the right to interject themselves in these negotiations and supplant their judgment for the judgment of both parties.

When you remove choice from either party you rob them of their agency to live as independent, free individuals. In short, you turn them into de facto children. We are not children Mr. Obama. We are free men and women. Let us live our lives as we see fit, not as you do.

The Rise or Fall of Socialism

Is socialism on the rise (Bernie Sanders)? Or is it on the decline (Venezuela’s economic implosion, Brazil’s impeachment of their socialist President, Cuba and North Korea’s decades of abject poverty)? To be fair, one could likewise cite the relative success of China, Denmark, Norway, or Canada as proof of socialism’s success. Why the difference? Why are some putatively socialist countries not total economic basket cases whereas others clearly are? To uncover the answer we must understand why some groups of people come together and achieve their goals while others fail. In any endeavor there is a group of individuals who have tight control over the means of goal achievement. This allows them to direct those means so as to ensure an efficient operation that will achieve the desired ends. Does that not remind you of something else? Like say a business perhaps? The reality is that the modern nation-state is simply a really big company, with shareholders (citizens), a board of directors (congress/parliaments) and a president running the show. Unfortunately this is one corporate stock you can’t sell if you disagree with how the company is being run.

So if states are structured as a business, why do some fail and some thrive? For the same reasons any business might fail or thrive. Success entails the optimization of three factors: consent, control, and resources. All factors play a role, however any one of them can overwhelm the others. This is the reason we see very different outcomes in a variety of nominally socialist countries, e.g. Venezuela vs. Denmark. It is not enough to cite Cuba (excessive level of state control) as a failure and therefore close the case on socialism. Were that the case then one would be susceptible to charges that capitalism can’t “work” because sometimes a business goes bankrupt. However it is just as disingenuous for those on the left to cite oil-rich Norway (abundant resources) as proof of socialism’s success. If Cuba had Norway’s oil resources it would be faring far better. Or maybe not, as in the case of oil rich Venezuela which too suffers from excessive state control of the economy and is presently circling the drain.

Countries that exert a high degree of control (totalitarian) over their citizens will always experience less “success” than those that exert little control. Less control means greater freedom to innovate and solve problems from the bottom up rather than the top down. Formerly socialist/communist countries (China, Vietnam) that have embraced the benefits of freedom (that is, free vs. state managed markets) within their borders have seen improved standards of living relative to those that have not (Cuba, North Korea, Venezuela). As a country or business grows in size, efficient control becomes exponentially more difficult. This is due to the Hayekian knowledge problem. Stated simply it is the reason that a family farm runs smoothly but a state run collective not so much. Unfortunately, those in charge don’t realize they lack the appropriate knowledge and thus make sledgehammer style choices that only serves to undermine the endeavor. The solution to the size-control problem is to move toward less control and smaller size through decentralization. Large businesses with autonomous subsidiaries have mastered this problem well.

A critical and often overlooked factor in the success of a state is consent. Without consent the process will be crippled if participants undermine or refuse it. This is a key difference between business endeavors and state endeavors; states always compel those who do not consent to participate. Businesses cannot force people to work for them or for customers to buy their products. Apathy was not an option when it came to the rise of 20th century socialism. The motto of Russia, China, Vietnam, and Cambodia: join us or die. Democracies maintain an illusion of consent that mollifies a credulous citizenry into the quiet acceptance of being ruled. They are better than dictatorships, but not by much, and fall far short of the benefits one would see with true pluralism.

To make America great again we must recognize that while our resources are substantial our size puts us at a disadvantage. The only way to overcome that disadvantage is to loosen, not tighten, the reigns of economic control and to foster true consensual pluralism by permitting those who wish to not participate in the dominant system to work toward building alternatives that will expand, not constrain, choice.

False Equality

This year the so-called “Equal Pay Day” was April 12th. It’s “celebration” is a weak attempt at capitalizing on the notoriety of the entirely valid “Tax Freedom Day” (i.e. the day after which a country’s citizens get to keep all their income if they were theoretically taxed at 100% until their tax burden was satisfied). In 1900 in the United States Tax Freedom Day was January 22. Today it is April 24. We have lost a lot of freedom in the interim. Many real injuries to women’s right have been reversed in that same interim; however pay inequality has always been a phantom menace. Equal Pay Day is but a disingenuous mischaracterization of a statistical truth as proof of willful malfeasance.

Yes, if you lump all female workers together and all male workers together the females earn about 79% of what the men earn. But through willful blindness of the trees (different jobs) in observation of only the forest (aggregate salaries) this statistic fails to make the case that it is employer discrimination that robs women of their rightful earnings. To highlight this failing consider another similar statistics. Comparing workers below age 45 against those over age 45 we find a similar gap. Those 45 and under earn about 80% of those 45 and over.  Clearly there must be a bias toward paying older works more. Or consider not pay but rather work place fatalities. On average, for every female workplace fatality there are twelve men who perish.  Again, clearly this must be a sign of a negligent disregard for the safety of men in the workplace relative to women. Oh, what’s that you say? There are obvious reasons why an older worker would earn, on average, more than a younger worker? There are obvious reasons why more men would die in the workplace than women? True (to both), yet somehow the “obvious” reasons that would also contribute to a difference in aggregate pay between men and women are dismissed out of hand whenever issues of gender pay disparity are discussed. Why is that?

If one were to look at wages at a hypothetical hospital where all the men were doctors and all the women were nurses would it not be surprising that the women made less than the men in aggregate? In reality, when numbers are adjusted for age and education, women (pre-child birth) earn just as much if not more than men in several fields. The shift occurs as couples start to have children and women take on the traditional role of staying at home and raising children.  This means they leave the workforce (reducing earnings based experience) or take on lower paying, more time-flexible positions.

Now the strident feminists among us might actually agree and say it is this cultural “patriarchy” that must be changed – by force. I’m not sure what they would have us do though – have the government decide which parent must raise the children in order to keep the distribution of male/female stay-at-homers equal across society? Even though feminists may privately admit that culture is the real reason for this wage “gap”, publicly they persist in casting employers as the scapegoat. This stance though demonstrates a profound lack of understanding of basic economics. Unsurprisingly, the type of person who will loudly clamor for more government intervention in the workplace to ensure “fair” pay for women will also decry the “greed” of the employer in paying them less. The irony of that position is that if the wage gap were employer driven, their supposed vice (greed) would quickly neutralize it. A properly “greedy” employer would seek out every women they can find in order to achieve a 20% discount on their payroll. In turn the unemployment rate for women would be 0%. But of course it is not. This lack of 0% female (or any supposedly discriminated group for that matter) unemployment should put to rest the notion that discrimination is the proximate cause for such pseudo-pay disparities.

Honey I Shrunk the Seat!

Senator Chuck Schumer (D-NY) recently introduced an amendment to an FAA reauthorization bill that would have required the FAA to set minimum values for how narrow and close commercial airline seats may be. Fortunately, this amendment was rejected last week.  While those of us who have flown in recent years (and experienced firsthand the “Honey I Shrunk the Airplane Seat” phenomena) can all certainly sympathize with the goals of such legislation, it would nevertheless be a gross violation of the rights of the airlines to dictate how they may or may not utilize equipment THAT THEY OWN. Of course there already exists an ever-expanding regulatory framework that strangles other businesses similarly. So how is this any different? It’s not. And that’s what is so scary – it was rejected not on principal but rather because it was visible. Visible government intrusions send the wrong vibe to a supposedly freedom loving populace. But invisible intrusions go on every day and are of course perfectly fine. If the death penalty were required to take place in public it would be ended immediately; but when done behind closed doors the public in general couldn’t care less.

Such reflexive urges to regulate by those “in charge” of our lives are a predictable outcome of their glaring ignorance of basic economics. It is the usual story: government engages in Practice A which stealthily causes Harm B and so our great benefactors must now step in to save us from the very harm they caused in the first place. For example, the federal government, through its puppet the Federal Reserve, is constantly inflating the US dollar. This steadily erodes the value of said dollar until after many years the drips of annual inflation have carved a canyon of lost value. There are two ways to respond to this declining value: raise prices, or, maintain prices while reducing quantity/quality. For example, boxes of cereal now contain 15% less than they did only a few years ago but are marketed at the same price point. It is a surreptitious form of inflation that consumers don’t immediately recognize but is just as injurious to their buying power as is rising prices.

Competition has become so fierce that a game of chicken has ensued where no one wants to be the first to raise nominal prices. This has occurred with airlines as well. Although ticket prices may have risen or fluctuated with fuel prices, such prices are, all things equal, less than they otherwise would have been had seat sizes not shrunk. Getting 10-15% more seats on a plane means lower average cost for each flyer. It is simply a natural response to the incentives created by government interference in the economy (Fed money printing). Eventually seat sizes will decline to a level where ridership will drop off. At that point the industry will know they can go no lower. But that is how the market works; the feedback of profit and loss tells businesses if they are doing good or doing poorly. Top down regulations subvert that process and prevent the voice of the consumer from being heard.

Actually, progressives like Schumer should appreciate the spectrum of market prices engendered by this seating freedom. It incentivizes those who value comfort over money to pay ever-increasing prices for the larger seats. These higher prices can be used to subsidize other ticket classes thereby expanding fare access through lower prices or halting the size decline. By allowing consumers to vote with their dollars the market delivers what consumers, in aggregate, are willing to accept. While any single consumer may disagree with where that point is, it should no more be the right of a minority of consumers to dictate to all what they should be able to buy any more than a minority of busybody senators should be able to dictate to a nation how they may live their lives.

Muh’ Science!

Even among those that profess a belief in limited government there is an ready willingness to join hands with the big-government progressives on the subject of science funding. I mean, any fool can see we need government to fund science – no profit-oriented business would fund basic science research if the probability of a marketable product resulting were unknown. A recent article in Scientific American (Feb 2016, pg 11)  editorializes on this very viewpoint – that “without government resources, basic science will grind to a halt.” The irony within the article is that the author doesn’t realize the evidence he cites to advance his position in fact undermines, rather than bolsters, his argument. He claims private profit seeking businesses would never have an incentive to pursue such research… right after citing how such businesses used to do exactly that (AT&T Bell Labs and Xerox PARC). Gee, I wonder why they stopped? You don’t suppose it had anything to do with the ever expanding growth of government funding of basic science research? Indeed, why would any company make investments into basic science research if some other large entity (the government) is going to do it for them by publicly funding the research and freely publishing the results? The author then doubles down on the cognitive dissonance by calling those who believe that profit-driven companies will altruistically pay for basic science naïve. So people are naïve to believe that something that the author just cited as a past occurrence (privately backed basic science research) could occur in the future? Indeed, although it did snow last winter, now that it is summer I think it is naïve to believe it could ever snow again.

Truly there is no clearer case of the cart pushing the horse. The increase in public funding of basic science research was not a response to declining private funding; rather, it caused that very decline by providing an incentive for private industry to shift the risk burden onto the public.

If one is still unable to imagine a world without socialized science funding, then let’s examine history to see what the future might bring. Not only did we have the private labs of AT&T Bell Labs as well as Xerox PARC as free market models, we also had non-profit philanthropic foundations, such as the now over one-hundred year old Research Corporation for Science Advancement. Research Corporation, while philanthropic, follows a sound business model. They invest in basic scientific research at universities and when that research yields results that can be commercialized they package the technology and transfer the patents and use the profits to support future research grants.

Imagine that, a free market approach to funding basic science research that is both sustainable (success breeds more success) and does not require theft (taxation) in order to fund it. These are but a few examples of how the free market did, and can once again, provide support for basic science research and puts the lie to the assertion of the state-worshipers that such things are impossible without government support.

Trade Balance

Last week’s article touched on seen benefits and unseen harms wrought by political intervention into people’s lives. This week we pivot to a somewhat new corollary of that principle, that of imagined harm. This is harm that can’t exist but because of a fundamental ignorance one has an expectation that it will occur. Ignorance of economics leads to a broad range of bad predictions and decisions and even businessmen (e.g. Donald Trump, Warren Buffet, etc) are not immune to such ignorance. Despite Trump’s repeated protestations that “we” (America) are “losing” because of the presence of trade deficits with some countries (notably Mexico and China) there is simply no cause for concern. The current trade deficit between the US and Mexico is $58 billion. That means that Americans purchased $294 billion in goods from Mexico but Mexicans purchased “only” 236 billion in US goods.  In Trump’s mind (and many others) this constitutes a loss. Well if that is so I guess I had better stop buying my groceries from Publix – my family’s trade deficit with Publix is thousands of dollars every year! Yes, I would be much better off if I grew all my own food, than my trade deficit with Publix would be zero. Do you see how ridiculous this sounds now? So to solve a trade deficit Americans should pay even more for the goods they want? This is supposed to somehow compel the Mexican government to coerce its citizens into buying more US goods? How can any government make its people buy more from a particular country? Countries are not monolithic entities; they are composed of individuals.

Trade is not a zero sum game where one side “wins” and the other side “loses”. Both sides gain or profit from any trade in the sense that if either party did not value the thing they got more than the thing they gave up they would not have engaged in the trade. Trump and his ilk view trade like a game of Monopoly because they fall for the fallacy of anthropomorphizing countries into single actors and then distill all trade down to a single good: money. So in his mind the US gave Mexico $294 and Mexico gave the US $236 – as though they were just swapping currency and nothing else. Yes, that would be a loss, but that is not at all what is going on. It is an absurd distillation of the transactions of millions of individual actors into a meaningless aggregate. To get a clearer picture of what is going we need to disaggregate these numbers. Let’s imagine that Joseph buys $10 worth of goods from José. Joseph now has a $10 item and José has a $10 bill. Who lost here? No one. Trump would view this as a $10 trade deficit. But a deficit implies some sort of debt obligation, that something is owed, but nothing is owed, both sides swapped value for value. Now imagine that José buys $7 worth of goods from Joseph. Joseph now has $3 in goods and $7 cash, or $10 of value. José now has $3 in cash and $7 in goods, again, $10 in value.

Indeed all trade follows the rules of double entry accounting. Mexico’s cash account goes up while their goods account goes down: in balance. The US’s goods account goes up while their cash account goes down: in balance. Claiming a trade deficit exists is the equivalent of looking at only one side of a standard accounting balance sheet and claiming it is not balanced because one refuses to look at the other side of the sheet.

To the extent that jobs and industry are moving out of the US and that this harms in the short term those that lose their jobs perhaps it would be more appropriate to not lay blame at the feet of those business moving away but rather ask the origin of the incentives they are responding to (regulations, unionization, taxes anyone?)

Trading Places

A basic economic principle is the necessity of accounting for both the seen and the unseen (first elucidated by the great French economist Frédéric Bastiat). It provides a basis for understanding how politicians perennially cast themselves in the role of Santa Claus whilst picking our pockets. We are a willing audience to the magician who dazzles us with (for example) public works project (the seen benefit) while remaining unaware of the unseen harms unfolding (those things not done, created, or attempted due to diversion of resources into the political projects). The principal works for any intervention into people’s lives. For example, sanctions or trade embargos are often put in place in order to influence the actions of the leaders of another country. Although there is not a single historical precedent for this ever working, it remains the most popular passive-aggressive tool in the arsenal of the state. The language used to speak of such embargos employs the ruse of anthropomorphization (“America” cuts off trade to “Iran”) in order to hide the underlying reality that rather than the target country being harmed it is the individuals that constitute that country that are harmed. See, it’s not millions of people being made to suffer; it’s just a nebulous non-human “country”. Those who engage in these practices of course understand the reality of weighing human suffering and misery against the greater good of their desired ends. Indeed it was Madeline Albright’s admission that the deaths of approximately half a million Iraqi children during the 1990s sanctions against Iraq were “worth it” in order to achieve their goals (this remark was specifically cited by Osama Bin Laden as one of the many reasons behind the 9/11 attacks).

But that is just the seen harm. There is also an unseen harm levied against US citizens and businesses who are barred from trading with the country embargoed (for example, Iran). Iranians want to buy US made goods. US businesses want to sell those goods. We have a willing buyer and a willing seller being prevented from engaging in trade because of a belligerent busy-body-bully in the middle. Those lost sales for US businesses will not be made up somewhere else – they are simply gone. These missed opportunities lead to more unseen harms – lost jobs, or rather jobs that would have been created but never were.

To the extent US businesses have foreign competitors in countries lacking an embargo against Iran then it is our own government that is pushing sales into the arms of their competitors. Brilliant. Some might say that this loss in sales to US companies is “worth it”, that it is their patriotic duty to suffer through such lost sales in order to help our country battle the existential threat we face from a country… that has never threatened us nor attacked any other country in over two-hundred years. Well that is certainly easy to say when you’re not the one cruising past potential income you are barred from touching. Ask yourself, would you willingly skip annual bonuses if your government told you it would help influence Iran? Yeah, I didn’t think so. And apparently Boeing doesn’t think so either   – this politically well-connected company managed to get itself on a short list of companies exempt from the current trade embargo with Iran. How convenient. Apparently the expediency of pleasing big donors trumps the so-called “national interest” that applies to everyone else. Justice for all indeed.

Market Failure: Revenge of the Commons?

If you missed last week’s article be sure to read it here, however, a synopsis of the article’s thesis is that “market failure” is impossible. Markets are closed systems and as such anything internal to the system affects the entire system. A market can no more “fail” than a pot of water exposed to a flame will fail to boil. Apropos the pot of water example: if a pot of water does not boil after 5-seconds of exposure to a lighter we do not say “ah-ha, physics has failed, here is proof that flames cannot boil water!” No, we realize that if sufficient heat is applied, it will boil (thermodynamics) but that the process takes time (kinetics). Failure of something to occur instantly or even within our own lifetime does not equate to “failure”. Markets regulate themselves; perhaps not as fast as some would like, but it occurs nevertheless. As the saying goes: you can have it fast, cheap, or good: pick any two. With state regulation of the market you only get one: fast, at the expense of it being both expensive (inefficient) and poor (ineffective). Natural market regulation is both good (effective) and cheap (efficient), but tends to be slow, which many find frustrating. This gradual process thus provides a framework of excuses for state intervention to speed things up. These people fail to see the thermodynamic forest for the kinetically slow-growing trees.

At first glance it might appear the pot example is not illustrative of a closed market system. The pot is exposed to the surrounding air, which can transfer the heat away. So we must clearly demarcate the borders of the system under discussion; let us say the pot and flame are in an insulated box. Everything outside is irrelevant to what occurs in the box.

So, we define the market as that system containing everything that is (apparently) part of the market. However, the counterargument here would be that things outside of the market system, unlike the pot and flame, do effect what is in the system. That is, the “commons” outside of the market (into which things may be dumped or extracted) apparently play a role. To the extent such commons are artificial in nature (“public” spaces) and thus through state coercion the market’s efforts to allocate and economize those resources via private property are frustrated, we cannot say then that any abuse of such spaces is a market failure. The state itself is setting up the very situation that opens them up to abuse. The state is not part of the market. The market is peaceful voluntary trade where both parties “win”; the state is violent involuntary trade where one side wins and one side loses.

However, there are natural common areas (the oceans and the sky) that are not amenable to conventional private property demarcations (e.g. fences) – although technology is slowly changing that reality. These would appear to be areas outside of the closed market (private) systems and thus immune to feedback from the market even though the market may benefit from them. For markets separated by a commons but connected through other means, the feedback occurs at the border with the commons and this information is transmitted via the other connection just as though they directly bordered each other.

But, let us consider the more difficult example of two isolated markets, not in communication, separated by a commons. We will consider the ocean (although the sky works equally well). Imagine that you live on the coast and fish for a living. Far across the ocean another settlement pollutes the water. Eventually that pollution reaches your shore and affects your fishing productivity. You have no idea where it is coming from (non-point source pollution), all you know is that it is a new cost you did not have before. Since you do not know the source you only have once choice: to clean up/remove the pollution at the bordering point to where you customarily fish.

Is the fact that you have to devote resources to cleaning this up a market failure? No. Why not? Well imagine that if instead of it being some far away people polluting the water it was some natural event (volcano, mudslide, etc.). Your actions would be no different (cleaning the water) yet you would not say the market has failed just because Nature foisted additional hurdles at you. If the effect is the same, the cause is irrelevant if you have no way of knowing or influencing the cause.

Now lets say you do find out who is polluting and ask them to stop but they refuse. You do not trade with them so feedback cannot occur that way. You now have two choices that prompt me to pose this question: Is it morally justified to attack and kill them until they submit to your will if continuing to remove the pollution yourself may also solve the problem? One option involves the ending of human life; the other option is a mere inconvenience. Which would you choose? If you answer yes to the former then I suggest you reflect on how the state has warped your sense of reality such that it is considered morally acceptable to initiate violent actions against others in order to resolve non-violent conflict. Now consider that all state actions rest on a bedrock of threatening violence against those that will not bend to its will, no matter how trivial the concern. History does not judge kindly those who initiate aggression to force others to do their bidding