Category: Economics

The continent of Africa has so much space that you could fit most of the United States, China, India, and a lot of Europe onto it. But if you compare Africa to Europe, Europe has two to three times the length of coastline that Africa has.

Why does that matter? Because, as this fascinating video by Marginal Revolution University explains, coasts mean access to water which makes trade easier and increases economic growth.

As the video explains, economic growth is not only affected by a country’s rules and institutions, but by a country’s natural blessings and natural hindrances.

The headline at CNN was surprising: “Under Sanders, income and jobs would soar, economist says”; the opening paragraph of their article even more so:

Median income would soar by more than $22,000. Nearly 26 million jobs would be created. The unemployment rate would fall to 3.8%.

Those are just a few of the things that would happen if Bernie Sanders became president and his ambitious economic program were put into effect, according to an analysis given exclusively to CNNMoney. The first comprehensive look at the impact of all of Sanders’ spending and tax proposals on the economy was done by Gerald Friedman, a University of Massachusetts Amherst economics professor.

Like Sanders, Friedman believes in democratic socialism. He also believes an unlikely series of events could happen: Sanders becomes president (very unlikely), President Sanders is able to push his plan through a GOP-controlled Congress (politically impossible), and then median household income magically rises to $82,200 by 2026 (the current projection by the Congressional Budget Office is that it’ll be around $59,300).

You would expect Republicans and conservatives to mock this type of wishful thinking. But some of the strongest criticism has come from a seemingly unlikely source: liberal economists who once chaired the President’s Council of Economic Advisers.

Alan Krueger of Princeton University, Austan Goolsbee of the University of Chicago Booth School, and Christina Romer of the University of California at Berkeley all chaired President Obama’s Council of Economic Advisers at different times during his administration, while Laura D’Andrea Tyson of the University of California’s Haas School of Business was the chair under President Clinton. The four published a rather scathing open letter to both Sanders and Friedman. Here is the full text of the letter:
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“The twin tracks of work and wage do not meet, and cannot be scientifically related. They are bridged by morality, not by mathematics.” -Lester DeKoster

executiveLow-wage workers continue to picket and protest around the country, demanding an increased minimum wage, improved access to benefits, and better working conditions. The political rhetoric has followed accordingly, with Bernie Sanders calling for an increase in the minimum wage to $15 per hour, and Hillary Clinton arguing for $12 (due to differing magic potions, no doubt). Simultaneously, widespread angst over “excessive” executive compensation continues to fester.

But alas, prices are not play things, and we do society no favors by trying to distort market signals according to our own arbitrary whims (whether $12, $15, $100, or otherwise). Given the history and trajectory of the American economy, we ought not be stuck in the mire of such minimum-mindedness, seeking to control and micro-manage our way to peace and prosperity through top-down mechanistic means. The path to prosperity is one of creation and contribution, planted with seeds of service and opportunity, where new wealth is a natural byproduct of access to the pond.

Yet throughout all this, “market signals” are simply signals, the discernment of which requires human conscience before and after and throughout. When we think about the intersection of work and wages, “listening to the market” is not where it stops, as critics of the free market wrongly assume. The baseline of actual prices in a complex economy is where things begin, and the Christian wage-setter must be careful and attentive to how things ought to proceed.

In Work: The Meaning of Your Life, Lester DeKoster explores these “twin tracks” of work and wage, noting that the proper bridge will not be built by arbitrary government edict, but by the art of “executive stewardship,” driven by God-given responsibility and God-directed conscience. “Work and wage draw together at the point where conscience functions,” he writes, “that is to say, work and wage tracks coalesce in persons making executive decisions.” When we inhibit the freedom of the human conscience, an inhibition of the economic order is sure to follow.

DeKoster devotes an entire chapter to this topic, an excerpt of which is available at the Oikonomia blog. Those who set wages have an “awesome obligation,” DeKoster writes, and their conscience must balance a host of factors, all pushing toward a variety of goals, including (1) the best product, (2) the best working conditions, (3) the best wage for everyone involved, and (4) “reflecting the best efforts at every job, to be sold at the lowest price compatible with the requirements.” In balancing all of this, the executive also heeds transcendent signals, whether through ethics or spiritual discernment. (more…)

Rich-Businessman-Lighting-Cigar-With-100-Dollar-Bill-ShutterstockMichael Bloomberg and Donald Trump are both businessmen, both are politicians, and both are billionaires. Obviously, then, they must know a lot about economics, right?

Not necessarily. As Don Boudreaux — a man who does know a lot about economics — correctly points out, success at business does not imply knowledge of economics:

Knowing how to run a business is not the same thing as knowing economics.  To assume that the two domains of knowledge and expertise are the same is an error equivalent to assuming that a successful NASCAR driver is thereby an expert automotive engineer.  Of course, it’s possible for a successful NASCAR driver to know something about automotive engineering, just as it’s possible for a successful business person to know something about economics.  But success at each of the former tasks (driving a race car and managing a business) is not the same thing as, and requires very little familiarity with, the latter domains of knowledge (automotive engineering and economics).

Strong evidence – indeed, virtual proof – that knowing how to run a business successfully does not imply knowledge of economics is supplied by the great economics-policy differences that separate successful business people.  Charles Koch, for example, is a far more successful business person than is Donald Trump, yet Mr. Koch’s understanding of economics differs markedly from Mr. Trump’s.  If success at business were a sufficient indicator of deep and expert knowledge of economics, it would be nearly impossible to explain the deep differences that separate Mr. Koch’s professed understanding of economics from Mr. Trump’s professed understanding of economics.

I would go even further than Boudreaux and say that being a successful businessperson doesn’t even mean that a person knows much about business. Of course there are some business people who, if they had to start over from scratch, could become successful again. But many more — perhaps even the majority — achieved their status because they relied on variables, ranging from ideal market conditions to just plain dumb luck, that cannot be replicated.

This is also why businesspeople rarely make effective politicians: they tend to overestimate their knowledge of macroeconomics and end up falling for dumb economic policies (e.g., trade protectionism).
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drug-pricesIf you suffer from acid reflux, your doctor may prescribe Nexium. But at $9 a pill, the price is enough to give you a worse case of heartburn.

That’s the price in the U.S. If you live in Canada, though, you can get the drug for less than a $1 a pill.

This price disparity leads many politicians to think the solution is obvious: Americans should just buy drugs from Canada or other countries where they are cheaper.

Amy Klobuchar (D-Minn.) and John McCain (R-Az.) have twice introduced legislation to allow Americans to order up to a 90-day supply of medicines from a licensed Canadian pharmacy. And Hillary Clinton and Bernie Sanders have made importing drugs from Canada part of their platform for reducing the cost of healthcare.

If this seems too easy, it’s because it’s an economically ignorant idea. Writing in the Harvard Business Review, Rafi Mohammed explains why this strategy won’t work:
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In Leonard Reed’s famous essay, “I, Pencil,” he marvels over the cooperation and collaboration involved in the assembly of a simple pencil — a complex coordination that is quite miraculously uncoordinated. 

In a short video from economist Alex Tabarrok, the same lesson is applied to Valentine’s Day roses:

“Behind every Valentine’s Day rose, there’s an extensive network of people from all over the world,” says Tabarrok, “from the farmer to the shipper to the auctioneer to the retailer—all cooperating to produce and transport roses from field to hand in a matter of days.”

But though these countless creative partners are surely acting out of some degree of self-interest, and though (in this case) they are working to enable and empower what we presume to be “loving” exchanges, there is something deeper going on throughout the activity. (more…)

Conservatives are known for arguing about the ill effects of over-regulation, reminding us how it stifles innovation, cramps entrepreneurship, and harms small businesses. Where we’re less effective is connecting this reality to the more fundamental abuses it wields on human dignity in general and the poor and vulnerable in particular.

In a 45-minute talk given at Heritage Action, Senator Ben Sasse of Nebraska offers a detailed critique of over-regulation in America.

Pointing first to the proper scope of regulatory policies, Sasse proceeds to note the increasing overreach of the federal government and the range of reasons to oppose it. Watch an excerpt here:

Although arguments about over-regulation and taxation are bound to involve in depth discussions about numbers and econometrics, Sasse reminds us that our focus must remain on the preservation of freedom and human dignity. (more…)