Earlier this month in Bali, WTO ministers reached agreement on a set of negotiating issues known as “trade facilitation,” which deal mostly with customs reform and related measures to reduce the time and cost of transporting goods and services across borders. If removing tariffs is akin to turning on a water spigot full blast, trade facilitation is the act of untangling and straightening out the attached hose. A kinked hose impedes the flow as an administratively “thick” border impedes trade.
This paper, which I wrote a few years ago, describes the importance of trade facilitation reforms to economic growth, and explains why subjecting such self‐help reforms to negotiation – instead of just undertaking them as a matter of surviving in a competitive global economy – would only delay the process of removing inefficiencies. Five years after the paper was written and 12 years after multilateral negotiations were launched in Doha, a deal was reached obligating governments to reform and streamline their customs procedures, with technical and financial assistance provided by the wealthy to the developing countries. As I wrote yesterday, this is small relative to the overall Doha Round agenda and relative to what might have been accomplished over these past 12 years in the absence of Doha (i.e., without adhering to the pretensions that our own domestic barriers to foreign commerce are assets to be dispensed with only if foreigners dispense of theirs). But perhaps nobody has been more gifted at exposing the absurdity of administrative trade barriers with pithy wit and grace than the 19th century French classical liberal business and economics writer Frederic Bastiat. Around 1850, Bastiat made a case for trade facilitation that can scarcely be improved:
Between Paris and Brussels obstacles of many kinds exist. First of all, there is distance, which entails loss of time, and we must either submit to this ourselves, or pay another to submit to it. Then come rivers, marshes, accidents, bad roads, which are so many difficulties to be surmounted. We succeed in building bridges, in forming roads, and making them smoother by pavements, iron rails, etc. But all this is costly, and the commodity must be made to bear the cost. Then there are robbers who infest the roads, and a body of police must be kept up, etc. Now, among these obstacles there is one which we have ourselves set up, and at no little cost, too, between Brussels and Paris. There are men who lie in ambuscade along the frontier, armed to the teeth, and whose business it is to throw difficulties in the way of transporting merchandise from the one country to the other. They are called Customhouse officers, and they act in precisely the same way as ruts and bad roads.
Congratulations, negotiators, for agreeing to remove the kinks from your hoses.
Donald Berwick may have mastered the science of health care management and delivery. (I for one would jump at the chance to enroll my family in the Berwick Health Plan.) But his recent oped in the Washington Post shows he has yet to absorb the lessons that economics teaches about government planning of the economy, such as through ObamaCare.
Berwick, whom President Obama recess‐appointed to be administrator of the Centers for Medicare & Medicaid Services (CMS), sets out to defend ObamaCare from a fairly devastating critique by Robert Samuelson a few days earlier. Berwick responds, in essence, nuh‐uh:
I saw how this law is helping tens of millions of families and is finally putting our health‐care system on the right track…I have seen how improving care can reduce costs dramatically.
Berwick fails to see the world of difference between those two statements. Yes, in his private‐sector work, Berwick has helped hospitals save more lives, kill fewer people, and save money in the process. I’m pretty sure he has saved more lives than I ever will.
But all he saw from his perch at Medicare’s helm was people happy to receive checks from the government, and a bunch of well‐meaning bureaucrats setting goals. He did not see the costs imposed by those subsidies. As for goal‐setting, this one sentence captures it all:
The CMS, for example, has set ambitious goals to reduce complications that, if met, would save 60,000 lives and $35 billion in just three years.
If. Met. A recent Congressional Budget Office review of Medicare pilot programs showed that Medicare bureaucrats set goals all the time. They never achieve them.
Berwick’s claim that ObamaCare “cracks down hard on waste and fraud” because “Last year the government recaptured a record $4 billion” is even more ridiculous. The official (read: low‐ball) estimates are that CMS loses $70 billion per year to fraud and improper payments. The best evidence suggests that wasteful spending approaches $200 billion per year in Medicare alone. All that money that comes from you, John Q. Taxpayer. Berwick knows all these things. Yet he thinks you should be impressed that recovering a measly $4 billion is the best the government has ever done.
Berwick would never tolerate such willful blindness, shoddy reasoning, and (surprise!) poor results if it were his own money on the line. Which is exactly the point. In a free market, people spend their own money. At Medicare, Berwick spent, and ObamaCare continues to spend, other people’s money.
That is the main reason why markets are smart and government is stupid. And why otherwise smart people like Berwick can afford to keep their eyes shut.
At the Britannica Blog today I note President Obama’s concern over ATMs, Hillary Clinton’s support for the candlemakers’ petition, John Maynard Keynes’s simple solution to the problem of unemployment—and how Bastiat refuted all their arguments more than 150 years ago:
And there’s your question for President Obama: Do you really think the United States would be better off if we didn’t have ATMs and check‐in kiosks? … And do you think we’d be better off if we mandated that all these “shovel‐ready projects” be performed with spoons?
In his 1988 book The American Job Machine, the economist Richard B. McKenzie pointed out an easy way to create 60 million jobs: “Outlaw farm machinery.” The goal of economic policy should not be job creation per se; it should be a growing economy that continually satisfies more consumer demand. And such an economy will be marked by creative destruction. Some businesses will be created, others will fail. Some jobs will no longer be needed, but in a growing economy more will be created.…
Finding new and more efficient ways to deliver goods and services to consumers is called economic progress. We should not seek to impede that process, whether through protectionism, breaking windows, throwing towels on the floor, or fretting about automation.
It reminds us of the need to repeat, and repeat, and repeat the same messages. Tornadoes, diseases, and wars are not good for “the economy.” They may be good for hardware stores, doctors, and military contractors, but not for the rest of us. Still, the New York Times couldn’t help but tell us on the front page that “Reconstruction Lifts Economy After Disasters.”
Frederic Bastiat exploded the fallacy long ago. Here’s a modern (and shorter) retelling:
GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves.
I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.
But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:
[T]his exposure is in the single-digit billion range, and arguably potentially better.
I won’t argue with Rattner’s numbers. After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.” My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.
Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen. Rattner touts what is seen, namely that GM and Chrysler still exist. And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished. (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring. But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).
Tom Palmer of the Atlas Network has a very concise — yet quite devastating — video exposing the Keynesian fallacy that the destruction of wealth by calamities such as earthquakes or terrorism is good for economic growth. Tom cites the work of Bastiat, who sagely observed that, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” As you can see from the video, many who pontificate about economic matters today miss this essential insight.
I can’t resist the opportunity to also plug a couple of my own videos that touch on the same issues. Here’s one on Keynesian economics, one on the failure of Obama’s faux stimulus, and another on the policies that actually promote prosperity.
Two items in Tuesday’s newspapers remind us of the often unseen costs of regulation and also of the often unseen benefits of market processes. In the Wall Street Journal, Prof. Todd Zywicki examines the likely consequences of a law to limit credit card interest rates and the fees they charge to merchants:
Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity‐theft protection, was stalled. Card issuers also increased their efforts to attract higher‐risk customers who generate interest and penalty fees to offset lower interchange revenues from lower‐risk transactional users.
Those are the kinds of unseen costs that most of us wouldn’t anticipate (that’s why economists talk about “unanticipated [or unintended] consequences” of action). Only after the fact were economists able to identify the specific costs of the regulation. It seemed like a good idea — limit the cost of something that consumers (voters) want. Did anyone predict the consequences? People probably predicted that annual fees would rise to compensate for the lost revenue from interchange fees. But did they anticipate a slowdown in innovation in security and identity‐theft protection? Did they anticipate that card issuers would work harder to get higher‐risk customers? Such regulation always impedes the optimal working of market processes, and thus inevitably delivers sub‐optimal results.
Meanwhile, we often observe conditions in the marketplace that don’t seem to make sense to us. So we assume something is wrong, maybe even corrupt. An article in the Washington Post written in a sober yet hysterical style raised the problem of “medical salesmen in the operating room.” Then, in a letter to the Post, Dr. Mark Domanski explains why it makes sense to have medical salesmen in the operating room. A Post article on the topic had been full of anecdotes about a salesman who “began his career selling hot dogs” hanging out in operating rooms and doctors who expressed outrage. If only they had thought to ask a surgeon in distant Arlington, Virginia:
I found David S. Hilzenrath’s Dec. 27 Business article, “The salesman in the operating room,” to be one‐sided.
Of course, medical sales representatives work along doctors in operating rooms. As a surgeon, I always want a company rep in the operating room.
So, if you were having surgery that involved a complicated piece of equipment, wouldn’t you like somebody from the manufacturer to be there? I know I would.
Remember when you tried to assemble that desk you bought from a furniture store? We all know how to use a screwdriver, but when something is off, it’s nice to know there is a number to call. What if you needed to put that desk together quickly because you needed it for something important? It would be nice if the company sent someone to make sure all the parts were there and in good order. That’s what a good rep does.
As the surgeon, I make the diagnosis and decide the treatment. No company representative tells me how to use a knife. But many products in the operating room are complex and change almost every year; they are getting better that fast.
When I am using a complex product, such as a plating system for fixing a jaw fracture, having the rep in the room ensures that the system is functional. I know all the parts will be there. I know that the right screw and plate will be handed to me at the right time.
Sometimes we call in the rep for an operation, and it turns out that the fracture does not need to be plated. No rep has ever suggested that I plate a fracture that didn’t need to be plated.
Members of Congress and activists are constantly reading articles about apparent problems and rushing off to propose legislation. These examples and countless more should remind us to think carefully before we coercively interfere in the decisions that millions, billions, of people make every day.