Archives: 08/2010

The Laffer Curve Strikes Again

In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower – Serbia, Macedonia, Moldova and Ukraine – have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers – units of British American Tobacco, Japan Tobacco International and Philip Morris – contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

  • If federal policymakers won’t reverse course on high-speed rail, let’s hope state policymakers step up to squelch this budding boondoggle before it’s too late.
  • Joe Biden demonstrates the arrogance of the political class, which at its core believes that free individuals are incapable of making the “right” decision without the guiding hand of the state.
  • Short-term measures implemented by policymakers to “fix” the economy have also introduced unwelcome economic distortions.
  • The Interior Department’s Minerals Management Service was “captured” by the industry it regulated. Not the first example of regulatory capture; won’t be the last.
  • Alaska’s Manufacturing Extension Partnership shows that economic development agencies are better at “press release economics” than promoting policies that will result in real economic growth.

Media Feeds America’s Skepticism about Trade

As usual, Dan Griswold does an excellent job today correcting fallacies about trade and the trade deficit that continue to be perpetuated in the mainstream media (particularly at the Washington Post).  

I just want to add my two cents without belaboring any of Dan’s succinctly-made points.  (Besides, I’ve harped on and on and on and on and on about the problem of trade reporting this year.) It’s a shame that so much time and energy has to be diverted to cleaning up messes left by reporters and editors, who should know better by now.

The bottom line is that neither imports nor trade deficits cause U.S. job loss or slower economic growth.  If anything, the charts below (all compiled from BEA and BLS data) support the conclusion that imports and the trade deficit rise when the economy is growing and creating jobs, and they both fall when the economy is contracting and shedding jobs. 

Parents, Mark Your Calendars: September 14th Is Obama Day At School!

Yesterday, White House sources confirmed that President Obama will deliver another back-to-school address aimed at all of the nation’s children. That’s right, the president will make September 14 the second-annual Obama Day at your local school!

You might recall last year’s Obama Day, for which the U.S. Department of Education put out teaching guides that gave parents across the country reasonable cause to fear a day of liberal politics and celebrating President Obama. You might also remember the divisive national uproar that precipitated, which ultimately culminated in a relatively staid — but nonetheless campaign-esque — speech, not to mention a fair amount of after-the-fact sneering at people who either didn’t want public-school kids exposed to left-wing politicking or just wanted their kids, you know, left alone by the president. Finally, you might recall the May Parade magazine graduation “address” the president wrote that offered just the kind of profit-denigrating, “service” extolling rhetoric that people feared eight months earlier:

Of course, each of you has the right to take your diploma and seek the quickest path to the biggest paycheck or the highest title possible. But remember: You can choose to broaden your concerns to include your fellow citizens and country instead. By tying your ambitions to America’s, you’ll hitch your wagon to a cause larger than yourself. You can choose a career in public service or the nonprofit sector, or teach in an underserved school. If you have medical training, you can work in an understaffed clinic. Love science? You can discover new sources of clean energy or launch a business that makes the most efficient and affordable solar panels or wind turbines.

So will this year’s Obama Day be as controversial as the last installment? Probably not.

For one thing, unless the White House is not just wearing blinders, but living in a full-on isolation tank, it won’t authorize the release of any lesson plans to go with the talk. And if it does, it will scrutinize them, put them before focus groups, and torture them until they give up any and all material that could be even minutely controversial.

Second, while there is plenty of anger to go around right now, there’s been no burning summer of discontent like last year’s spree of town-hall conflagrations. It seems the growing ranks of fuming Americans are now more focused on ballot boxes than soap boxes.

Finally, last year there was a sense that President Obama — who’d led the “stimulus” charge, driven the takeover of GM and Chrysler, was championing huge and incomprehensible health-care legislation, and had repeatedly been in Americans’ faces — was simply too much in our lives. Directing his near-ubiquity toward  peoples’ kids only made matters worse. Oh, and some of the rather off-putting stuff from the “Cult of Obama,” as Gene Healy dubbed it, probably didn’t help.

This year, while certainly still a presence, it seems the president has made himself more scarce.

So the coming address is not likely to launch nearly the same seismic outrage as last year’s. But there’s still good reason to object to it.

No doubt the speech will feature prominent backdrop propaganda, sweeping views of packed-in, star-struck students, and camera angles designed to make the president appear just a bit larger than life. You know — standard campaign stuff many people don’t want in their schools. The speech will also almost certainly tout “major achievements” in education by the administration, especially the mega-overrated Race to the Top. So it will be politically self-serving — though masked by the plausible explanation that it’s just about “the children” — and yet another reminder why the Constitution gives the federal government no authority to interfere in education.

But there is one other, more mundane argument against this speech, and it is being made — as it was in 2009 — by the Washington Post’s Jay Matthews: the president will once again be eating up student learning time. As U.S. Secretary of Education Arne Duncan has often opined, American students probably need to spend significantly more time learning, not less. Yet his boss has apparently decided that every year he is going to take a little of that precious time and say “this is mine — look at me!”  

And so we have to ask ourselves: Are the benefits of students being told to work hard and stay in school really worth the myriad problems that go with a controversial, inevitably politicized, time-grabbing, national presidential address? The answer can only be a resounding “no.”

Is the Trade Gap to Blame for Slowing GDP Growth?

What had been a recurring story line buried in the business pages has now burst onto the front page: “Economic growth slowed by trade gap,” the Washington Post reports this morning in an above-the-fold headline.

The lead sets the stage for a story long on generalizations: “A widening U.S. trade deficit has become a substantial drag on economic growth as the country’s exports struggle to keep pace with the swelling sums that Americans are again spending on imported goods.”

The half truth in the story line is that exports fell by $2 billion in June compared to the month before, and that this has a negative effect on overall GDP growth. In our more globalized world, the rising wealth of our trading partners translates into more production in our own economy, and vice versa.

The fatal flaw of the story line (as I tackled recently here and at greater length here) is that it assumes that rising imports slow economic growth. That assumption, in turn, rests on a simplistic Keynesian view that if a portion of domestic demand is satisfied by spending on imports, that means less demand for domestically produced goods, thus less output and lower employment.

That view neglects the supply-side role of imports. More than half of what we import consists of goods consumed by producers—capital machinery, raw materials, parts and other intermediate inputs. Those imports help us produce more, not less. The Keynesian view also confuses cause and effect: Imports usually grow in response to RISING domestic demand. Consumers more eager to spend “swelling sums” on imports typically buy more domestically produced goods as well.

The bean counters at the Commerce Department “subtract” imports from GDP, not because those imports are a drag on growth, but to avoid double counting. If we want to count the number of widgets and other goods added to the economy in a quarter, we would obviously not count those that have been imported. But this does not mean the economy would have been that much larger if the widgets had not been imported.

The Post story adds to the misunderstanding by claiming: “At a basic level, trade deficits represent a loss of wealth for a country—money flowing abroad for goods and services produced elsewhere, supporting businesses and workers in other countries.”

This betrays a basic misunderstanding of wealth that Adam Smith exposed two centuries ago in The Wealth of Nations. Does wealth consist of money—pieces of green paper or blips on a computer or, in Smith’s day, bars of gold—or does it consist of the actual stuff that people produce to make their lives better, all those goods and services that we consume each year? Smith argued it was the latter. And in that case, a trade deficit at a basic level represents an inflow of wealth from the rest of the world—a cornucopia of cool stuff arriving everyday at our ports and stocking the shelves of our stores.

Of course, even if you think that dollars are the ultimate measure of wealth, obsession with the trade deficit ignores the fact that those dollars spent on imports quickly return to the United States. If they are not used to buy our goods and services, they are buying our assets—real estate, stocks, Treasury bonds, and so on. The “loss of wealth” supposedly represented by the trade deficit is almost exactly offset every year by a “gain of wealth” represented by the net inflow of dollars in the form of capital investment from the rest of the world.

Besides being wrong in its basic economics, making the trade deficit the scapegoat for slow growth poses a double danger for economic policy:

Danger no. 1 is that it tempts politicians to reach for the snake oil of protectionism to create jobs. If only we could stop the flood of imported goods, Americans would make more of those same goods themselves, creating millions of jobs. In reality, higher trade barriers impose a host of offsetting costs on the economy, resulting in lower output.

Danger no. 2 of blaming the trade deficit is that it diverts attention from policies that are far more plausible culprits in dampening growth. Politicians find it much easier to blame imported consumer goods from China for slower GDP growth than huge looming tax increases, expensive new health care mandates, a depressed housing sector, and a generally anti-business climate in Washington.

The trade gap should be the least of our worries.

What Everyone Missed in the Revised GDP Data

Quoting from the revised GDP report:  “Real gross domestic purchases – purchases by U.S. residents of goods and services wherever produced – increased 4.9 percent in the second quarter, compared with an increase of 3.9 percent in the first.”

Although 4.9 percent is clearly faster than 3.9 percent, every leading newspaper will surely report that the GDP report proves the economy is “losing momentum,” and (absurdly) that slower GDP growth in one quarter is evidence of a double-dip recession.

After accounting for slower growth of inventories, “final sales to domestic purchasers” increased 4.4 percent in the second quarter, compared with 1.3 percent in the first quarter.  Losing momentum? 

Real disposable personal income also increased 4.4 percent, compared with 1.7 percent in the first quarter. Losing momentum?

Business fixed investment increased 17.6 percent, compared with 7.8% in the first quarter.  Losing momentum?

Fiscal or (more likely) monetary “stimulus” only claims to speed up “domestic demand” (spending).  It turns out that much of that spending went to imports in the second quarter.  But that certainly does not mean, as the demand-side fetishists would have you believe, that households and firms were not spending.