Tuesday, November 29, 2005

How to out-Krugman Krugman

Josh Hendrickson (whose blog Dobbs Report you should be reading if you're not already) alerted me over the weekend to this New York Times article by Robert H. Frank, categorized as "Economic Scene" in the Business section. We're talking about the Times, of course, so we can't expect them to be "fair." Being "fair" would have required putting Frank's piece in the op-ed section.

I was a little busy with shopping and errands and never did get around to blogging about Frank. Meanwhile, Don Luskin today seized on Frank's socialist theme, and he exposed him for being yet another Krugman-esque hack who masquerades under the guise of actual economics. Luskin's takedown of Frank is one of those things you simply have to read for yourself.

While I'm nowhere near as familiar with Frank, his agenda is quite evident. What I find curious is that he actually goes beyond Krugman's typical socialist schtick. Krugman supports a heavily progressive tax structure (the second plank of the Communist Manifesto) that facilitates "the rich" supporting everyone else via big government social programs. It naturally fails to account for incentive, for how long will "the rich" continue to support the rest of society? Nonetheless, only this last March, based on his Keynesian pseudo-economics and revisionist history, Krugman justified higher taxes because, though it's not true, "President Clinton's 1993 tax increase ushered in an economic boom." But Frank justifies heavy taxes on "the rich" because, he all but directly says, it's for their own protection.

Higher taxes on "the rich" are for their own good? If you believe Frank, if "the rich" pay lower taxes, they risk a higher chance of dying from bacteria in undercooked beef, of having their expensive cars damaged by potholes, and of having our national security compromised by stolen nuclear stockpiles in Russia. The first is supposedly because there's less federal money to inspect meat, which doesn't preclude someone from cooking beef thoroughly. The second is supposedly because there's supposedly less money for road repair, but a "rich" person can more easily afford a new tire and alloy mag for a Porsche than a poor person can afford a tire and steel rim for an Escort. The third is supposedly because we've cut back on funding to secure Russian nuclear stockpiles. It's a real stretch, as if the other two weren't, and not just because a liberal is suddenly worried about U.S. national security. You could spend every penny of U.S. GDP and still not completely secure Russia's nuclear stockpile. Perfect safety does not exist, so it's perfectly sensible to cut back on spending when you gain nothing from it. I would have thought that Frank, who is touted as an economist, would understand trade-offs between spending and benefits, particularly at the margin. Maybe that's why he teaches only introductory economics.

And Frank ignores a basic fact: deficits are borrowed money, allowing a government to spend beyond tax revenues collected. What he's saying would be true if the federal and state governments stayed on budget, which they hardly ever do. Take my home state of New York as an example. The majority of state voters approved a $2.9 billion bond proposal for a great many transporation expansions and repairs. I opposed it vehemently, but its passage proves that even New York can still borrow money, if it offers enough interest.

Since I'm touching on government deficits and bonds, let's revisit something that as Steve Conover explained last January. It is perfectly possible to neutralize your portion of the interest payments on the national debt. The more U.S. Treasury bonds you own, the more interest you receive that was partially coming from your taxes, and at a certain point you'll receive as much in interest as the portion of your taxes that pay the interest on the national debt. Then consider that it's overwhelmingly "the rich" who buy U.S. Treasury bonds, courtesy of their greater incomes. So Frank's assertion that the national debt falls more heavily on "the rich" is not necessarily true.

I have a keen interest in international trade, so one thing Frank wrote really got my attention. He claimed that "the United States' share of global patents granted continues to decline. Such cuts threaten the very basis of our long-term economic prosperity." Without having statistics in front of me, I'll just say right now that this also is not necessarily true. Beware of this time-honored way of skewing statistics. If I receive 100 patents in one year and 105 the next year, and everyone else receives 50 and then 55 patents, then my share has gone down as a percentage, but in absolute numbers I haven't lost ground.

And Frank had the foolishness to cite a Republican senator who is fearful and ignorant of international trade. Free trade brings prosperity, and even freer trade like NAFTA and CAFTA are a step in the right direction. When Domenici claims that "We're now on track to a second-rate economy and a second-rate country," is he speaking of the United States? Because if he's that clueless about the strength and resilience of the American economy, that alone is reason to get him out of Congress. Dr. Jagdish N. Bhagwati had two excellent pieces that explain why Americans have no one but themselves to fear: "Why Your Job Isn't Moving to Bangalore" and "Americans Manage to Convince Themselves They Are Underdogs."

Perhaps we should just take Domenici's prescription and impoverish ourselves. Protectionist economics may keep domestic wages high, but fewer people at home will be able to afford goods and services like before. About the worst thing politicians can do for the economy is enact protectionist policies during economic downturns: in addition to FDR's misplaced faith in government spending as a substitute for private consumption, the Hawley-Smoot Tariff was a major factor in exacerbating the Great Depression.

Now, focusing on Frank's overtly socialist agenda, no doubt he believes it's morally wrong that any single individual is able to consume more than anyone else, but the real immorality is when people consume more than others because the former have used the power of government to take (better termed "coerce" or "steal") wealth from the latter. This is the very "redistribution of wealth" that Krugman openly advocates, and for which Frank uses the euphemism "public investment." But as Jon Henke of QandO so well put it, "we don't have inequality in income—we have inequality in output. Some of us haven't been producing our share."

In Frank's world, how terrible a situation for anyone who has more wealth! Yet the reality is that greater wealth is as terrible as Brer Rabbit being thrown into the briar patch -- with the bonus that Brer Rabbit hired someone to throw him in. Look beyond the mere fact that someone bought more things of greater value: it necessarily means the supplier has earned more income, and the economy is greater than had the buyer only enough money for one rose, a cheaper car, etc. What is so wrong about people having the freedom, and thus the motivation, to produce more, earn more, and spend or save more? That is what Frank really thinks is terrible: the freedom to choose to earn, and the freedom to choose how to dispose of one's wealth. I was about to qualify "wealth" with "legitimate," meaning gained without the use of coercion and/or fraud, but socialists have completely distorted "legitimate" as they have many other words.

And most importantly, where does all the money go that "the rich" spend and save? To everybody else. "Trickle-down" does exist, folks, as I explained back in my second-ever blog entry. "The rich" do not sit on piles of money, or stick it where only other "rich" can touch it. Nor does it just "trickle down" to everyone else, because to everyone else is the only place it can go.

But, socialists claim, government spending is the same as private consumption, so there is no economic loss. First, they ignore the very real disincentive effect of higher taxes. Bruce Bartlett uses a conservative estimate of 20 cents lost for every $1 collected in taxes. As I've pointed out, that in fact is low compared to other estimates. Second, socialists (who these days hide behind the moniker "progressive") ignore the gross inefficiency of government spending. It's worth quoting Milton Friedman again: "...if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get."

It is the natural tendency of government to waste taxpayers' money. I'll say as I have before, that the problem isn't the lobbyists, but that governments exceed their Constitutional authority and thus generate special interest groups. We shouldn't be surprised that every $1 increase in Medicaid spending in the early 1990s meant the private sector could reduce its own spending by only 50 to 75 cents. We shouldn't be surprised that our public infrastructure costs so much to build to get so little, especially "expansions" the public wouldn't otherwise pay for. We shouldn't be surprised that Donald Trump fixed Central Park's Wollman rink at a fraction of what the city had wasted on nothing. And we shouldn't be surprised that we can't get rid of bad politicians, because we deserve such a fate for continually re-electing them.

One can only wonder what kind of world Frank thinks ours is, when he criticizes rich people thusly: "Wealthy families have further insulated themselves by living in gated communities and sending their children to private schools." Since when is it wrong to use your wealth to protect yourself and your family from the criminals with whom liberal politicians and liberal judges play catch-and-release? Since when is it wrong to want your children to receive a good education, at a safe school without bullies, troublemaking students that prevent others from learning, and bad teachers who get tenure because their unions lobbied city hall?

There's an old poem by Edwin Arlington Robinson, which my father taught me when I was little:
Richard Cory

Whenever Richard Cory went down town,
We people on the pavement looked at him:
He was a gentleman from sole to crown,
Clean favored, and imperially slim.

And he was always quietly arrayed,
And he was always human when he talked;
But sill he fluttered pulses when he said,
"Good-morning," and he glittered when he walked.

And he was rich--yes, richer than a king--
And he was admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.

So on we worked, and waited for the light,
And without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head
Something makes me suspect that this is one of Frank's favorites, since he believes people must be protected from having greater wealth. Yet not all rich people kill themselves, and above all, Richard Cory still had the freedom to dispose of his own life (literally) as he saw fit, apparently without harming others.

Perhaps a little from Jefferson is in order?
The care of every man's soul belongs to himself. But what if he neglect the care of it? Well what if he neglect the care of his health or his estate, which would more nearly relate to the state. Will the magistrate make a law that he not be poor or sick? Laws provide against injury from others; but not from ourselves. God himself will not save men against their wills.
Nor will God save men from their wealth, however they use it. They must choose, and remember, it's the love of money that is the root of all evil, not money itself.

Well, after this review of Frank's bad economics, it's no wonder he lamented in the Times that "most students seem to emerge from introductory economics courses without having learned even the most important basic principles." If he teaches introductory economics with such convoluted logic as he displays in his writings, I can see how he'd get such an impression from his own students, and it wouldn't be their fault.


Anonymous Anonymous said...

I'm not sure why I'm bothering, as I doubt any of this will register, but what the heck...

"which doesn't preclude someone from cooking beef thoroughly" - yeah, but what if the restaurant *you* happen to pick undercooks the beef ... sayonara!

"but a "rich" person can more easily afford a new tire and alloy mag for a Porsche" - Have a nice time changing tires on your Porsche every day.

"but its passage proves that even New York can still borrow money, if it offers enough interest." - You look too young to have been around during NYC's 'meltdown' in the 70's, but it wasn't pretty. And ask Argentina about government's ability to go into debt indefinitely.

"It is perfectly possible to neutralize your portion of the interest payments on the national debt." Tell that to people who held Argentinian government bonds. Okay, the US government isn't likely to forfeit, but how brilliant will you feel about holding 4% US bonds if inflation goes up to 8%. And especially, how will the Chinese feel about holding 4% US bonds if the dollar drops by a third!

Yes, government taxation is redistributing wealth (though I'd suggest that these days it's more the middle class paying the rich and the poor), but is this necessarily a bad thing for anyone? As Henry Ford found out, if you pay your workers enough to buy Fords, you sell more, and make more money yourself.

Oh, and "ignore the gross inefficiency of government spending" - in many cases this is true, but consider health care, where we as Americans pay much more collectively than say Canada or England, and guess what, don't live as long.

I haven't read Frank's article, but I'd say rather than ridiculing him about teaching into Econ, you might try *taking* intro Econ.

Tuesday, November 29, 2005 6:22:00 PM  
Blogger Perry Eidelbus said...

Sorry, anonymous, but you need to take an introductory economics course as well as Frank. Perhaps if he had good economics professors like I did, he wouldn't tout his socialist bunk.

If a restaurant undercooks its beef, then you have the right to sue. You can also avoid it in the first place by going only to a reputable establishment. For example, Ruth's Chris Steakhouse sears its meat at 1800 degrees Fahrenheit. You can trust that their cooking process will kill just about any harmful organism known to man.

You did me a favor by pointing out the labor costs of changing tires and mags. A "rich" person who can afford a Porsche can still afford that more easily than someone of a low income whose Escort just got a bent rim. So Frank's logic is still, well, wrong.

Since you want to bring up the irrelevant topic of age: you did not give yours, but I suspect you were not yet alive in the 1770s. Yet that does not preclude discussing the American Revolution or any other past history, so long as one has the actual facts. That being said: if you take a look around my blog, you'll find that since I work in the city, I have a keen interest in its politics and economics. That includes its fiscal history. New York City survived its woes, and where is it today? In a couple of years, it will be back to borrowing money. Unlike Argentina, it has never needed to borrow money so it could meet service payments on other debts, so your comparison is more than a stretch.

Your hype about inflation is just that, hype. Eight percent isn't going to happen, especially with Bernanke coming to the helm, so you can stop your worrying. Do you recall that he supports target-based inflation? And I say this as one who takes a pretty Austrian view of inflation and central banking.

The dollar dropping by a third? Hardly. Do you honestly think that China, Japan, South Korea and other holders of U.S. debt will allow their assets to depreciate? No, and that's why the Bank of Japan constantly intervenes when the yen gets too strong. China is a little more complex, because their alleged "manipulation" is to prevent a yuan collapse and resultant capital flight. They also buy so many U.S. Treasury bonds to prop up their insolvent banking system.

For further reading: Why China won't let the dollar slide too far and the previous So you wanna revalue the yuan?

What Henry Ford actually did was pay higher wages to attract better workers. Absenteeism and turnover all but disappeared, because the workers didn't want to lose what were now good jobs. Ford suddenly had all the good workers he wanted, which was more efficient than hiring bad workers at lower wages. That's the real reason they were called "efficiency wages," not because they promoted workers buying their own product.

How do you not see that with products that have high labor costs, simply increasing workers' wages does nothing? Increased labor costs are inevitably passed on to the consumer, including the workers who made the cars in the first place. And when a $600 automobile becomes an $800 one, that reduces sales among non-autoworkers. That offsets any gain, if there were any, from workers buying more cars.

Simplifying health care to two-variable regression is not a topic worthy of serious discussion. It's overly simplistic to say "We do this but this happens" when there are many other factors of greater significance. And even in your simplification, you're looking at the wrong variables. Americans spend a lot of money and generally live shorter lives, but we eat fattier foods (which lead to heart disease and various forms of cancer) and have more stress. Why shouldn't we enjoy our lives by eating the foods we want? After all, we're a twentieth of the world's population yet produce about 30% of the world's economic output. We're too busy working while, for example, most of the French wonder where they'll take their next vacation and how to effectively get others to pay for it.

You are one who extols the virtues of big government, yet there are almost always market solutions that cost far less and are far more efficient.

If you would like me to explain to you some introductory concepts in economics, drop me a line. You wouldn't happen to be Krugman or Frank...are you?

Tuesday, November 29, 2005 8:26:00 PM  
Anonymous Colin said...

Too right. I slammed Frank myself a few days ago over here:


Wednesday, November 30, 2005 11:48:00 AM  
Blogger Perry Eidelbus said...

Health care is certainly a desirable thing, but the question still remains: at what cost?

Friday, December 02, 2005 1:27:00 PM  
Anonymous Michael Bishop said...

It is sad that you are unwilling to seriously engage Robert Frank's ideas. One can be conservative and still be serious and open-minded but your comparative advantage is entertaining idealogues with insults. The serious reader should at least read one of Frank's longer articles on the topic before making up their mind.

Friday, December 02, 2005 7:09:00 PM  
Blogger Perry Eidelbus said...

No, what's actually sad is how Frank is just another socialist hack at the Times.

I engaged his ideas with every bit of serious thought they deserve, and they fall short in the realm of real economics. In real economics, human incentive matters. We've had over 150 years since Bastiat's death to learn to consider more than just the seen.

Most importantly, I work hard and honestly for my income. I coerce no one; I injure no one. So I will sooner be damned, in the perfectly literal sense, before I willingly let someone in another ivory tower of academia tell me I should be taxed more, all because he thinks I should be prevented from overconsuming.

Friday, December 02, 2005 8:28:00 PM  
Blogger Fred Mullner said...

Perry--This is the first time I've read your blog, and I can't believe what I've been missing. Great stuff. I'll be back!

Saturday, December 03, 2005 11:33:00 PM  

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