Even Under Mercantilist Theory, Trump is Wrong

Donald Trump is, to put it nicely, a fact-challenged person.  Makes sense; populists typically are (for example, see my many many posts on Bernie Sanders).  One of his arguments for his tariff schemes is that the US is “losing” at trade.  That argument is based off of a long-since-discredited economic theory known as Mercantilism, where the wealth of a nation is created by exports (Mercantilism was first challenged by Adam Smith in 1776, and later empirically discredited by David Ricardo in the 1800’s and subsequent waves of economists in the 1900’s and 2000’s).

But, even if we assume Trump is right about exports, he is still wrong on the facts.  The United States is, according to the World Factbook, the world’s largest exporter (excluding the EU).  The US exports $2.14 trillion of goods and services each year.  The closest competitor is China, who exports $1.51 trillion goods/services.  US exports are 41.7% higher than our closest competitor.  The US’ export market is the 8th largest economy in the world.  We export more than 196 countries produce.

Even under Mercantilist misunderstandings, the US still stands tall.

Is There A Thing As Too Much Safety?

No one wants to be killed via a bad drug, right?  Safety is important!  But is there such a thing as too much safety?  Perhaps there is.  Let’s examine this question though the lens of economics: though a cost-benefit analysis.  But, let’s look at this in terms, not of money, but in lives.

Let’s say, hypothetically, that it takes the FDA 10 years to approve a drug for sale in the US market.  Those 10 years come with a cost in life: people who, if taking the drug, would survive but die instead.*  Let’s say that number is 100 lives (10 per year).  The benefit comes from those who, once the drug is approved, survive given a certain success rate.  Let’s say that number is 5/yr.  It would take 20 years for the drug on the market for it to “break even” in terms of lives saved vs lives lost during testing.  That’s a long time (a generation).  However, if the testing period were shortened , say to 5 years, it would take only a decade to “break even.”  The cost, in terms of lives lost, would be lower.  There is a benefit, in this example, to reducing the FDA’s regulatory ability.

“Well, that’s all well and good,” you might say, “but this is a hypothetical example.  In the real world, we don’t know what the outcome of drug trials may be!”  This is quite true: the FDA could rush through an approval that turns out to be unwarranted and costs more lives.  However, this is only tangential to my point, which is the cost-benefit analysis economists do can provide some insight into the “right” regulatory process: if the process is too long and doesn’t provide any additional benefits but incurs further costs, we may wish to reduce the regulatory burden.**

Cost-benefit analysis (which, as we have seen, needn’t be limited to just monetary costs/benefits) is a useful tool for assessing claims by those who lament deregulation and/or call for more regulation.  It could be such regulation would cause more harm than good!  (Likewise the opposite is also true: it could be the deregulation causes more harm than good)

*This is an extreme example.  We could easily have said “people who suffer instead” and the point would remain the same.  But allow me some dramatic flair.

**There is some evidence to this position, but I will refrain from making a judgement call at this time, sticking to the hypothetical.

Today’s Quote of the Day…

…is from Page 10 of GMU economist Alex Tabarrok and Claremont McKenna College economist Eric Helland’s 2006 book Judge and Jury: American Tort Law on Trial:

The [American] tort system has grown significantly in size and cost over the past decades.  But we should not assume that the expansion is necessarily to be decried.  We also spend more on health care and more on video games than we did in past years, but neither development is a problem if we receive value for the money.  Similarly, if the civil justice system works well, then the greater use of the system may be a net benefit.

This is an important point in discussions that is often lost: it’s both costs and benefits that matter.  Without looking at both it makes statements like “we have too much tort” or “we don’t manufacture enough” or even so much as “there is too much pollution.”  Without this (or some other form of quantification), statements like the above are meaningless and empty.

As an aside, I find the fastest way to see how much one has thought on a topic is to ask them “by what criteria do you use to judge this?”  If someone has spent time thinking about the issue, they’ll have some form of a response (“we have too little manufacturing.  If there were more, there’d be less unemployment and reduce unemployment costs,” for example).  From there, a greater conversation can occur.  If they don’t have an answer, hopefully the question will prompt them to consider the issue in more depth (alternatively, if they refuse to answer, then one can readily dismiss it as nothing more than incoherent ramblings).  I hasten to add that the response one gives to the question need not be correct, but rather the fact it exists on some theoretical or empirical grounds are what matters; from that point, the conversation begins.  This question is a screening tactic, not a fact-finding tactic (though it does lead to one).

 

Some More Thoughts On Immigration

Many people will complain that, so long as the institution of welfare and voting exist in this nation, we cannot have open borders in regard to immigrants.  They claim the immigrants will just come here and become welfare queens and vote away our democratic institutions for their socialist ones.  Ignoring the factual issues with these complaints (Immigrants use welfare at lower rates than domestic citizens and naturalized-immigrant voting patterns and policy views don’t differ much from Americans), there are larger issues at play here.

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An Economist’s Dream

It’s not often one gets so many economic fallacies contained in one area, but this article in Bloomberg is one of those rare instances where we do.  Rather than quote relevant areas, I’ll just let you read through it; it’s short but contains many mistakes.

There are several econ 101 problems the author makes this article:

1) the first two charts are meaningless. Looking at total unemployment and total wages and not minimum wage unemployment and wages, obscures the truth. For example, if a minimum wage worker was laid off but two new CEOs were hired, then the unemployment rate would fall and real wages would rise. The cost of the minimum wage would be hidden by the hiring of the CEOs.

2) The final graph is the clincher: the minimum wage, at $11 is well below what the workers were already making! According to the graph, they’ve earned well above that for at least a decade! Since the minimum wage was set below the market rate, then it wasn’t “binding”, which means it wouldn’t have had an effect because workers were already earning more!

3) Assuming away my first two points, there is still nothing conclusive. Laying workers off is just one of the margins employers can adjust to a minimum wage hike, and it’s one done more in the long term than the short term (see work by David Neumark). In the short run, which this change represents, employers are more likely to adjust by cutting hours, benefits, or supplementing with capital equipment (to the extent they can). There are many margins they can adjust along. To look only at unemployment (and especially so in such a flawed manner such as this) is mistaken.

4) My final point is one must remember to look for the “unseen” job losses. These are hard to measure but still very real. Let’s say, for example, a business owner was going to expand her store, and to do so needed 4 extra workers. The hike goes into effect. It is now cheaper for her to hire 3 workers and have one machine to augment them (prior to the hike, the relative cost of the machine was too high). The official employment statistics would count this as 3 jobs added, but not count the one job lost. That job was very real, but now it’s gone.