Tag Archives: Economics

Economics Doesn’t Have to Be Boring

Economics is a genuinely exciting subject to study. But introductory economics classes are genuinely boring.

Maybe they’re designed that way to weed out the weak. But that means fewer people are learning the economic way of thinking. This is a mistake. Everyone should know at least the basics.

I’m not talking comparative statics or Edgeworth boxes, or any of that nonsense that scares off lay people. Leave that to the academics. I’m talking fundamentals. The stuff that everyday people can understand and use. Such as the fact that people respond to incentives, and by being aware of that, you can read a lot into why people behave the way they do.

Or the role that the price system plays in conveying information and affecting behavior. Or the fact that millions of Parisians and New Yorkers are fed each and every day, even though nobody is coordinating the process. Which really is a miracle if you think about it.

That’s why Bill Easterly is one of my favorite economists. Tasked with teaching Econ 1 this semester, he’s decided not to follow the usual (boring) pedagogy:

Sorry, I’m not all that concerned with “how individuals, blah, blah, optimal choices, blah, blah, scarcity, blah, blah…” I’m concerned why some people are so rich and other people are so poor. I want to understand why some economies work and others don’t, and why even the ones that work still don’t work for everyone. I want to understand how other Americans and I got 64 times richer than our ancestors.

I want to know why Robert Iger, the CEO of Disney, makes $140,000 a day, and why some rock-breakers I met in Ghana make $1 a day. I think a differential of 140,000 times is pretty important to understand…

Economics principles are a set of tools that have evolved to transcend scarcity into abundance. When students use these principles to solve problems in an Econ class, they are recreating the process of historical problem solving in which poor people discovered the principles to become rich people.

If there were more professors like Easterly, maybe economics would have a livelier reputation, not to mention more students. The subject matter is the very stuff of life. But the average lecturer’s performance is the very stuff of death. Or at least of sleep.

Economists vs. Economics

Are economists ruining economics? Over at the American Spectator, I say why that may well be be the case. Key points:

-Economists can’t even predict whether the stock market will go up or down tomorrow. Yet many economists tell everyone who will listen that they know how to solve the financial crisis and dig out of a near-global recession. No wonder people aren’t taking them as seriously as they used to.

-Economics isn’t the problem. The economic way of thinking is as powerful a tool as any for understanding the world around us. But it has its limits. Too many economists have pretended those limits away out hubris, or for political reasons.

-Any economist saying he understands global business cycles when he can’t even understand the pencil poking out of his breast pocket is a charlatan. But the discipline he dishonors is as beautiful as poetry. Interested readers should take a look at Leonard Read’s classic short essay, “I, Pencil,” as a case in point.

The Rahn Curve

A little government can do a lot of good. A lot of government can do little good.

Rules protecting life, liberty, and property can create the stable conditions that entrepreneurs need to flourish. It works best when these rules are simple, clear, and few. But problems emerge when government takes on other missions.

Rules that are complicated, opaque, and numerous create instability. Entrepreneurs are less likely to invest or innovate if they fear the rules of the game might change tomorrow on a whim. Complying with regulations takes up time and effort that could be spent creating wealth. When governments get involved in business, businesses will involve themselves with government. This is an invitation to corruption, rent-seeking, and regulatory capture. Many backs get scratched, but economic growth suffers.

Dan Mitchell‘s latest video introduces the Rahn Curve, named after top-notch economist Richard Rahn, to illustrate that concept visually. Most academic studies on the subject estimate that governments that take up 15 to 25 percent of GDP is about the right size. The U.S. government consumes roughly 40 percent of GDP. That wide range is because different government policies have different effects, and because the complexity of even the smallest economies makes any macro-level study uncertain.

The academics might be guessing too high, though. Historical data from the 19th century show that the best-performing economies had governments around 10 percent of GDP. That includes the U.S. and most of Europe.

Returning to that size government wouldn’t even be particularly austere. the U.S. government would have a $1.4 trillion budget. Roughly what we had during the Clinton years.

I hope you’ll take a few minutes to watch. The Rahn curve contains valuable insights.

Explaining Free Trade in Under Three Minutes

Sometimes, the fastest, most effective way to explain economics is to tell a story. One of the best-done examples is in Steven Landsburg’s book The Armchair Economist, where he tells David Friedman’s “Iowa Car Crop” story to get readers to think about trade (see pp. 197-99).

[T]here are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa.

Okay… how does that work?

First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

Sounds almost magical. But it happens millions of times every day. The lesson is that trade is about specialization. A farmer doesn’t know how to build a car. But he can still have one by sticking to his specialty – growing wheat. He can trade his surplus to other people who do nothing but specialize in building cars.

This cuts both ways. Most factory workers don’t know a thing about farming. But by concentrating on building cars, they eat far better than if they grew their own wheat. The nature of trade is that everyone wins when they specialize. The only limit on specialization is the size of the market.

Restrictions on trade – tariffs, quotas, antidumping duties — shrink that market. And by shrinking the market, they limit specialization, which is the source of all prosperity. It’s good to grow cars in Iowa.

The lesson doesn’t apply to just wheat and cars. It applies to everything. Tom Palmer from the Atlas Economic Research Foundation makes that clear as day in this excellent video. If you want to learn the meaning of free trade in under three minutes, this is as good as it gets.

The Correct Capital Gains Tax Rate Is Zero

Cato’s Dan Mitchell gives a quick primer on the capital gains tax in the latest short video from the Center for Freedom and Prosperity.

President Obama wants to raise the rate from 15 percent to 20 percent. Dan gives six reasons why he should lower it to zero:

-Taxing saving and investment more means there will be less of it.

-Entrepreneurs will take fewer risks since higher capital gains taxes lower their return on investment. Why bother to innovate?

-America’s high capital gains tax rate makes us less competitive than other countries that have a lower tax rate – or no tax at all.

-IRS busybodies nosing around in our investment portfolios is hardly conducive to protecting privacy.

-Investment creates jobs. The capital gains tax lowers investment, and therefore job creation.

-A capital gains tax is inherently unfair. Tax laws should not penalize people based on how they earn, spend, or save their income. Taxes should be as neutral as possible.

Fixing America’s Immigration Black Market

One of the problems with current immigration laws is that they raise the price of immigrating legally. Basic economics tells us that when something costs more, people consume less of it.

That’s why so many of America’s immigrants are turning to dangerous but cheap immigration black markets to enter the country. This is a problem with an obvious solution. In today’s American Spectator, Alex Nowrasteh and I make the case that lowering the cost of legal immigration through liberalization will reduce the amount of illegal immigration, and shrink cruel black markets.

Basic economics wins again.

How Wisely Is Stimulus Money Being Spent?

Not at all, to be honest. For starters, the very notion of stimulus violates basic economics. Taking money out of the economy and then putting it back in has no net effect. But it gets worse. Much worse.

When that money is put back into the economy, it goes to the weirdest places — $3.4 million is going to Florida to build a tunnel under U.S. Highway 27, so turtles can cross safely. A fish hatchery in South Dakota is getting $20,000 for new light fixtures. $50,000 is being spent to resurface a tennis court in Bozeman, Montana.

And so on.

These boondoggles aren’t getting nearly enough press. To help fill the vacuum, the good folks at Citizens Against Government Waste have put up a new website, MyWastedTaxDollars.org. Click on over and check it out. The best feature is an interactive map that shows just how unwisely stimulus funds are being spent all over the country.

Stimulus is worse than a zero-sum game. It is actively harmful. It is government saying that it knows how to spend your money better than you do; stimulus is the ultimate act of hubris. Kudos to CAGW and MyWastedTaxDollars.org for providing hundreds of examples of why government hubris should be replaced with government humility.

Broken Windows, 9/11, and World War II

Ever hear the old canard that war is good for the economy? Or that natural disasters create jobs? Those arguments illustrate one of the oldest fallacies in economics: Bastiat’s broken window fallacy. The video below, by Tom Palmer and his colleagues at the Atlas Economic Research Foundation, explains why in two minutes and change. Worth watching.

Four Ways to Spend Money on Health Care

As the House gets ready to pass the health care bill today, I’m reminded of one of the first lessons in economics I ever learned. Milton Friedman put it best:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And 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. And that’s government. And that’s close to 40% of our national income.

The biggest problem with health care today is that patients only pay 12 percent of costs out of pocket.  As far as each individual is concerned, it’s basically on sale for 88 percent off! No wonder we spend so much on health care.

Today’s bill consists almost entirely of spending other peoples’ money on other people. If it becomes law, that 12 percent figure will fall even further. This is no way to keep costs under control. However noble Congress’ intentions may be, its bill will not work as advertised. Human nature won’t allow it.

Influential Books

Over at EconLog, George Mason economics professor Bryan Caplan lists the 15 books that have been his biggest intellectual influences. It’s worth a look. For you libertarian ideologues out there, pay attention to what he says about Rothbard and Mises. I love them both, and clearly so does Caplan; he assigned a fair amount of Rothbard when I took his graduate public finance class. But they’re not without their faults.

My own list would look pretty different. But I have to say, it would share a lot of common themes.