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Last Build Date: Fri, 15 Dec 2017 10:27:49 -0500

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Free Trade Agreements v Unilateral Free Trade, by Contributing Guest

Fri, 15 Dec 2017 10:27:49 -0500

by Pierre Lemieux In order to be useful...a free trade agreement must further free trade more than it restricts it through international standards and regulatory harmonization. The current renegotiation of the North American Free Trade Agreement (NAFTA) raises two sorts of questions. First, is NAFTA a free trade agreement? Will it be a free trade agreement after it is renegotiated? Second, do we need free trade agreements to have free trade? (Addressing the second question may answer some of the reader comments on my recent post about comparative advantage.) I am using "free trade agreements" loosely to include all forms of reciprocity, that is, situations where one country opens its borders to another one only if the latter reciprocates. On the first set of questions, NAFTA has reduced barriers and increased trade among the three partner countries - the United States, Canada, and Mexico. US exports to NAFTA countries have increased from about 2% of GDP to more than 2.5%. In a regional or plurilateral trade agreement (as opposed to a world treaty like the ones administered by the World Trade Organization), a trade diversion effect (diverting trade from other countries) can reduce or eliminate the trade creation effect, but this is less likely in NAFTA's continental-wide trade. A revamped NAFTA may not deserve the label of free trade - for example, if its regulatory content is expanded through labor, environmental, gender, or other sorts of standards. The Canadian government is pushing in that direction, and the US government agrees at least for the labor and environmental standards. I'll come back to this issue later. The second line of question is, why pursue reciprocity when we can have unilateral free trade instead, that is, when any government can open its country to trade without waiting for others to reciprocate? This question is especially relevant in view of Douglas Irwin's new book (Clashing over Commerce: A History of Trade Policy), which suggests that for two centuries and a half, American trade policy has oscillated between protectionism and reciprocity, ignoring the option of unilateral free trade. Unilateral free trade provides a large part of the benefits of free trade, although we should note that the welfare economics of free trade is trickier than it looks at first sight. The only thing we can safely say is that, for any participating country, the monetary benefits of free trade are nearly always greater than its costs. We can translate this, a bit loosely, into the statement that most individuals benefit from free trade. If a foreign country is protectionist, the government of your own country only compounds your problems by adopting protectionism too. As economist Joan Robinson suggested in her Essays in the Theory of Employment (1947), protectionist retaliation looks like the decision "to dump rocks into our harbors because other nations have rocky coasts." One's own government's trade policy should not depend on the restrictions that foreign countries impose on their own citizens. It is always useful to remember that, from the viewpoint of a country (this collectivist way of speaking being just a shortcut), imports are the benefits, and exports are the cost, not the other way around. James Mill, the 19th-century economist who was also the father of John Stuart, correctly wrote in his Elements of Political Economy: The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given. When one country exchanges ... the whole of its advantage consists in the commodities imported. It benefits by importation, and by nothing else. ... That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commodities. They are benefited, therefore, not by what they give away; that it would be absurd to say; but by what they receive. For a country - that is, for most of[...]



Rogoff's Alternative to the Wall, by David Henderson

Thu, 14 Dec 2017 16:23:15 -0500

Cash also plays a role in the illegal immigration problem that bedevils countries like the United States. It is incredible that some politicians talk seriously about building huge border fences, yet no one seems to realize that a far more humane and effective approach would be to make it difficult for U.S. employers to use cash to pay ineligible workers off the books and often below the minimum wage. Jobs are the big magnet that drives the whole process. This is from the introduction to Kenneth S. Rogoff, The Curse of Cash. Rogoff is a prominent economics professor at Harvard University and former chief economist at the International Monetary Fund. At a recent Liberty Fund conference in San Antonio where I was the discussion leader, and where chapters from Rogoff constituted 30% to 40% of the readings, I highlighted Rogoff's thoughts on immigration. I had missed this passage above until my friend Jeff Hummel pointed it out. Here, though, are the parts I did highlight in the discussion questions I suggested. They cover the same territory: Whatever one's position on legal immigration, few would argue with the proposition that under normal circumstances, countries have a sovereign right to control their borders and to determine their immigration policy. The issue is becoming increasingly prominent across advanced economies. Some US politicians are proposing extreme measures, such as building a giant razor wire fence across the US-Mexican border, much as Hungary has done and other European countries are considering. Yet there seems to be precious little awareness of how much more difficult and risky it would be for employers to routinely hire illegal workers if they could not pay in cash, and how phasing out paper currency might prove a far more effective remedy than the alternatives being considered. To be clear, I strongly favor allowing increased legal migration into advanced economies. Any economist who takes income and wealth inequality seriously realizes that, despite the enormous progress of the past three decades, differences across countries simply swamp the within-country inequality that Thomas Piketty and others worry about. The 2015 Nobel Prize winner Angus Deaton, author of the 2013 book The Great Escape, has forcefully made this point. International migration from poor countries to advanced ones create massive welfare gains for the immigrants. The issue is likely to become an even more important humanitarian concern if, as likely seems the case, climate change makes some parts of the world that are now densely populated uninhabitable. One can hope that enabling countries to better control their borders might lead to a more rational debate on immigration policy, though I admit that might be optimistic. Rather than ask the question I asked the participants, I'll lay out the tension between these two passages. On the one hand, Rogoff favors the right of the U.S. government to decide who enters and who stays. On the other hand, he favors more legal immigration and makes the case for it beautifully and succinctly. But he wants to cut down on illegal immigration and sees the elimination of $100 and $50 (and possibly $20) bills as an effective way to do so. Here's the problem. If Rogoff is right that eliminating these high-denomination bills will substantially reduce illegal immigration, then his policy will also substantially reduce the "massive welfare gains for immigrants." The only situation under which the massive welfare gains would continue is if legal immigration increased a lot. He and I can both hope that we would have a more rational debate on immigration policy that would lead to, say, an additional one million or two million people a year allowed to immigrate to the United States. But Rogoff admits that that is optimistic. So, realistically, where are we? Either the U.S. government does not eliminate high-denomination bills and that facilitates illegal immigration along with the huge gains to immigrants from being able to work at higher-wage jobs or the U.S. government [...]



Doherty on libertarians and Bitcoin, by Alberto Mingardi

Thu, 14 Dec 2017 11:50:47 -0500

I think it was Baron Nathan Rothschild who used to answer the question "how did you get rich?" with "I always sell too soon". That may not apply to Bitcoin early adopters, who are the subject of a fascinating piece by Brian Doherty. Doherty has long been a most passionate and capable historian of the libertarian movement (read his Radicals for Capitalism) and here he is writing perhaps a new chapter.

(image) We will see with time how what has been hailed as Bitcoin's institutionalisation, the fact that now you can trade futures on Bitcoin, will impact the prize. So far, a Doherty writes, the impression is that "you will always regret using Bitcoin". The price has been and is quite volatile but you just have to think about this year's performance (basically, it grew twenty times) to understand the reasons for regret.

Will it go on? Is there a genuine demand for Bitcoin, as millennials--and, indeed, the rest of us--will grow more and more impatient with a financial system that seems difficult if not arcane compared with the heftiness of the Amazons and Ubers of this world? Or is it just a mania? Libertarians and nerds tend to go for the first, members of the financial establishment for the second. This is indeed one of those cases in which all actors seem to follow their script meticulously.

Doherty's piece has reminded me of Michael Lewis's The Big Short. Lewis wanted to tell the story of odd people who, being somehow outsiders to the financial system, understood the housing bubble ahead of anybody else (see Arnold Kling on the point). I think that this gets a bit lost in the movie adaptation, but it struck me when I read the book. "The Big Short" is a plea to diversity, diversity of backgrounds, of methods, of views, which is essential for the process of price discovery to happen. Cryptocurrencies were a product of this diversity, well before the financial sector awoke to them. They were conceived, and used, and promoted by outsiders who knew more math than economics and whose economics, when they had one, seemed to be of the Austrian blend.

In the last few months, I have asked myself a number of times why in the world I didn't buy Bitcoins when they were launched: I should have been enthusiastic about the idea, and I knew people who dealt in that trade. But I didn't. Doherty's piece healed my wounds by telling me I was hardly alone.

The article is instructive and well written. Read the whole thing.

(0 COMMENTS)



Tyler Cowen and the Four Blind Men, by Scott Sumner

Wed, 13 Dec 2017 16:24:22 -0500

Tyler Cowen has an excellent new video out that looks at four schools of thought in business cycle theory, with application to the Great Recession. I agree with most of the specifics in the video, but differ in how to interpret the bigger picture. I'll try to explain why. Tyler starts with the metaphor of 4 blind men trying to understand the nature of an elephant, each touching a different part of the beast. The implication is that each of these four perspectives offers something useful, and we should not confine our view to just one perspective. The wise man takes an eclectic view of things. I see the video as mixing up very different types of disagreement. Consider his description of the 4 views: 1. Keynesian: Focus on shortfall in aggregate demand, look at C+I+G factors. 2. Monetarist: Also look at AD, but see unstable monetary policy as the root cause. 3. Real Business Cycle: Slowing productivity growth before the 2008 recession helps explain the instability of AD. Taxes and subsidies slowed the recovery. 4. Austrian: Government programs encouraged home lending, led to malinvestment. Fed policy was too stimulative before the recession. To some extent, I agree with all four views. And yet I think monetarism is true and Keynesianism, RBC and Austrianism are false. So here's how I look at things: 1. One split is between nominal and real theories of the business cycle. I believe the AS/AD model is true. This model suggests that both nominal (AD) and real (AS) factors play a role in the cycle. I believe AD shocks are the biggest factor in the US, and AS shocks are the biggest factor in Venezuela. But each play a role in both countries. 2. What do RBC proponents believe? Some RBC models do incorporate sticky prices. But I recall Bennett McCallum arguing that if real business cycle theory was not a denial of the importance of nominal shocks, then it's hard to see how it's a distinctive theory at all. After all, even in textbook Keynesian AS/AD models you see AS shocks playing a role. Furthermore, prominent RBC theorists often tend to scoff at claims that high unemployment is caused by a lack of AD, and point to factors such as government programs and regulations that create a disincentive to work. Tyler suggests that slowing productivity growth in some way have contributed to a slowdown in AD during the Great Recession. I think that's true, although I see the mechanism in a way that may differ from his view. I believe slowing productivity growth lowered the equilibrium interest rate. The Fed tried to keep up by lowering actual rates, but did not do so rapidly enough, and money became tighter. So I don't see that as evidence in support of hard-core RBC theory, in which AD shocks are not very important because wages and prices are pretty flexible. Again, not all RBC proponents take that extreme view, but it's the only thing really distinctive about the theory. Otherwise it's two blind men both touching the trunk of the elephant, and assigning different names to the same appendage. So this is why I believe that while slowing productivity growth played a modest role in throwing monetary policy off course, and government programs like 99 week extended unemployment benefits slightly raised the natural rate of unemployment during the recovery, the RBC model is fundamentally wrong. It's simply not a useful model. It adds nothing useful to AS/AD analysis. We already knew that both real and nominal shocks matter---the RBC proponents differ in incorrectly exaggerating how much they matter. 3. Let's put aside the nominal/real argument, and think about different nominal theories. The Keynesians are right that a lack of AD led to the Great Recession. But that doesn't make the Keynesian theory true. The real question is: What caused AD to fall sharply. The Keynesian model suggests that the problem is the inherent instability of capitalism, especially the propensity to invest. That may be a useful theory[...]



The Truth Hurts: Public Choice and Liberty, by Bryan Caplan

Wed, 13 Dec 2017 15:11:52 -0500

Reagan was worried that Americans were losing their love of liberty.  Here's my depressing talk arguing that Americans love liberty as a vague platitude, but are deeply statist on almost all particulars.

I am only a messenger.

(11 COMMENTS)



Eugene Volokh on Everything, by David Henderson

Wed, 13 Dec 2017 14:10:53 -0500

Nick Gillespie has a good interview with Eugene Volokh of the famed law blog The Volokh Conspiracy.

Among the most interesting highlights are his discussion of the cake baker and anti-discrimination laws. Volokh makes the important distinction between whether a law is right by libertarian, that is, pro-freedom, standards and whether a law is constitutional. He points out that the constitutional screen for laws has wider holes in it that the libertarian screen. (These are my words for his thoughts.) I need to keep reminding myself that. Of course, as a legal scholar who teaches, I assume, constitutional law, his instinct is always to go to whether the law is constitutional, not whether the law is right.

I wish Nick Gillespie or whoever wrote up the brief intro had kept that in mind. The writeup says:

In a wide-ranging interview about The Volokh Conspiracy, Volokh discussed the site's aims, why he thinks the government is sometimes right to force business owners to serve customers they don't like

But Volokh didn't even address the issue of whether it's right. His argument was solely about whether the constitution allows such laws, not about whether the government is right in having such laws.

The other most interesting parts, near the end, are on what he sees as Trump's largely first-rate picks for federal judges and his point that the Supreme Court does not have as much effect on policy as many people think.

(9 COMMENTS)



Is Hiring Jews Evidence of anti-Semitism?, by David Henderson

Tue, 12 Dec 2017 17:24:38 -0500

At first glance, the title of this post seems strange. How could hiring Jews be evidence of anti-Semitism? And yet that is where we are. I got a late start this morning and made the mistake, while on my exercise bike, of turning on Megyn Kelly's new show on NBC. Apparently, Alabama Republican candidate for U.S. Senate Roy Moore had been accused of anti-Semitism. Kelly showed a clip of his wife defending him in which she pointed out that they had hired a Jewish lawyer. Kelly then asked a Roy Moore supporter, with a somber tone, whether he could understand how that statement by Moore's wife could upset some people; presumably she had Jews in mind. I thought the Roy Moore supporter deflected the issue nicely by pointing out that some people will get offended by anything.

But I would have preferred a more direct response. It would have gone something like this:

No, I don't see why it would upset people. What evidence would we look for it we were trying to figure out whether someone was anti-Semitic? One major piece of evidence would be whether they associate with Jews. Assuming Roy Moore's wife told the truth, the evidence here is that he does associate with at least one Jew. That may not be enough evidence to persuade people who think he's anti-Semitic. But it's some evidence and it goes in the right direction.

In a broader sense, think about one reason people care so much about whether others are anti-Semitic, anti-black, or anti-gay. If you look at the discussion when I talk about freedom of association, you can't help but conclude that one major reason is their fear, possibly justified, that those who are anti-Semitic, anti-black, or anti-gay will refuse to hire or do business with, Jews, black people, or gays, respectively.

(44 COMMENTS)



The Will of the People Meets the Man in the Moon, by Contributing Guest

Tue, 12 Dec 2017 10:43:49 -0500

by Pierre Lemieux The basic reason why there is no such thing as "the will of the people" is that there is no people to have a will. I don't know enough about the Middle East and foreign policy to take a position on the propriety of moving the United States embassy to Jerusalem. I now admit that, contrary to what I once thought, foreign policy - relations with foreign Leviathans - is a distinct and justifiable field of analysis and government action. I am still seduced by Lysander Spooner's stirring words on this general topic, but I don't think they are the final word. Yet, if the Supreme Court, in District of Columbia v. Heller, could cite Spooner on slavery and the right to keep and bear arms, I must be allowed to quote him on foreign affairs: On general principles of law and reason, the treaties, so called, which purport to be entered into with other nations, by certain persons calling themselves ambassadors, secretaries, presidents, and senators of the United States, in the name, and on behalf, of "the people of the United States," are of no validity. These so-called ambassadors, secretaries, presidents, and senators, who claim to be the agents of "the people of the United States," for making these treaties, can show no open, written, or other authentic evidence that either the whole "people of the United States," or any other open, avowed, responsible body of men, calling themselves by that name, ever authorized these pretended ambassadors and others to make treaties in the name of, or binding upon anyone of, "the people of the United States." Neither can they show any open, written, or other authentic evidence that either the whole "people of the United States," or any other open, avowed, responsible body of men, calling themselves by that name, ever authorized these pretended ambassadors, secretaries, and others, in their name and behalf, to recognize certain other persons, calling themselves emperors, kings, queens, and the like, as the rightful rulers, sovereigns, masters, or representatives of the different peoples whom they assume to govern, to represent, and to bind. The "nations," as they are called, with whom our pretended ambassadors, secretaries, presidents and senators profess to make treaties, are as much myths as our own. ... Our pretended treaties, then, being made with no legitimate or bona fide nations, or representatives of nations, and being made, on our part, by persons who have no legitimate authority to act for us, have intrinsically no more validity than a pretended treaty made by the Man in the Moon with the king of the Pleiades. As an economist and a student of politics, however, I can say something about the "will of the people" that Ambassador Nikki Haley invoked in her United Nations speech on the embassy decision. She said: President Trump finally made the decision to no longer deny the will of the American people. She made other statements conveying the idea that "the people" has an easily ascertainable meaning: The Jewish people are a patient people. The American people are less patient. The American people have overwhelmingly supported that position... This last statement and the plural verb in all three suggest that "the people" may perhaps be conceived in an individualist, as opposed to collectivist, way; I know Americans who are patient, others who are not. But "the will of the people," an expression that has proved a convenient excuse for despotic revolutionaries, is pushing the envelope too far. Even Jean-Jacques Rousseau used "the general will" (la volonté générale) more often than "the will of the people." The basic reason why there is no such thing as "the will of the people" is that there is no people to have a will. The people is made of separate individuals who each has his own individual will. Indeed, Americans are divided on Middle East policy. And there is no w[...]



The sad paradox of free markets, by Alberto Mingardi

Mon, 11 Dec 2017 15:47:34 -0500

In a really interesting post on on zoning and congestion pricing, John Cochrane nails it:

The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.
(image)
Most people indeed are very shrewd consumers and hefty producers, but they seldom derive, from their own ability as market actors, any general idea about the relationship between government and the private sector. More often than not people would advocate strong regulations to "protect" customers, even though they themselves feel they would not quite need any similar rule and act responsibly besides. We are as good at "using" the market as we are naturals at calling to patronise our fellow men and women. At some point, this latter feature of human nature shall jeopardise the first. Cochrane put it elegantly and succinctly. A sentence to ponder.

(1 COMMENTS)



Is Support for Freedom of Association Fanatical?, by David Henderson

Mon, 11 Dec 2017 15:36:12 -0500

In an article in which he makes a number of good points, on net defending a baker's decision not to bake a cake for a celebration that the baker objects to on religious grounds, Andrew Sullivan writes:

And it is a hard case constitutionally. It pits religious and artistic freedom against civil equality and nondiscrimination. Anyone on either side who claims this is an easy call are [sic] fanatics of one kind or other.

I think laws against discrimination are wrong, based on my belief in freedom of association. I've written about that many times on EconLog and so I won't repeat the arguments here. I'll simply cite a post in which I took on Michael Munger's opposition to freedom of association.

So Sullivan would call me a fanatic. Oh, well.

(24 COMMENTS)