The growing sense the Rule of Law is weakening in America

“I firmly believe that what is driving the emotion at the town hall meetings is the feeling by the average American that the rule of law no longer prevails in our country. In other words, average Americans believe that in this age of corporate and individual greed and bail-out, those who don’t need a bail-out because they have lived virtuously and frugally are now paying the bills for the profligate.

The rule of law is at the core of a just and honorable society. The rule of law requires equal treatment of all. A President committing perjury, for instance, must be treated as all others committing perjury. Bondholders and creditors of a failing automobile company, for example, must not be denied money to which they are entitled under bankruptcy law because a union is favored by those in power. No class is favored over another, no exemption is granted, and the persons making the laws must conform to them as everyone else.

The rule of law presumes good order and transparent laws that are clearly worded and understandable by citizens. Few things bring more discredit to our system of government than Congressmen voting on a bill that has not been fully written, circulated, and debated. When the chair of a powerful congressional committee implies that he does not read certain congressional bills because they are too long and too complex, the legislative system is dysfunctional. When laws are so complex and pervasive that ordinary citizens are unsuspectingly violating these laws and are subject to prosecutorial whims, the system is evil. Few laws and restrictions, combined with clearly understood penalties, reduce the power of government and therefore increase individual freedom.

Finally, the rule of law works only if judges apply the law equally to all. A judge selected because of his/her empathy with a particular racial or ethnic group will, of course, favor that particular group. Such favoritism is directly contrary to the rule of law.

Without the rule of law, the cruelty of social Darwinism (survival of the fittest) is manifest. Political victory then becomes an opportunity to use the wealth of the nation to favor groups who supplied money and manpower for the victory. Such a spoils system is contemptible to average virtuous citizens who live the Golden Rule and pay their taxes while tax cheats are given positions of great influence. Average citizens are justifiably angry and frustrated if they view a powerful system as unfair and contemptible.”

James A. Davids, “Undermining the Rule of Law”, (31 August 2009; forthcoming on the RSG Op Ed page).


James A. Davids is Assistant Dean in the Robertson School of Government at Regent University where he teaches Government and Law.

Economic thought has been dominated from the beginning with an interest in the question of how authority is exercised, particularly as it related to the use of personal power (the Rule of Man) as contrasted to the application of impersonal power (the Rule of Law). It has always been understood that prosperity depends on good institutions in the broadest sense of the term, such as a government of limited purposes and power, respect for private property, and an independent and reliable legal system to enforce contracts and ensure fair competition in the marketplace. Key to this are a body of ex ante laws know to all and justified to all by their equal enforcement over the population without regard to circumstance or person, that is, the key is the Rule of Law. It has also been understood that a government too small to establish the rule of law and protect people and their property from both foreign and domestic enemies is as dangerous as a government so large and intrusive as to take away our liberties through the arbitrary use of power by individuals acting with partiality against our interests.

For the Rule of Law to prevail and contribute to our peace and prosperity each and every one of us has to have some degree of liberty from the arbitrary will of others that only the state can provide. In carrying out this fundamental responsibility no one and no group can have a privileged relationship to the state and its actions and decisions cannot be seen as favoring anyone, especially those charged with enforcement of the law. If the perception of favoritism gains currency, it weakens the political bonds among groups in society as they compete to protect themselves from what they regard as the predations of other groups that unfairly use the power of the state to advance their interests. In the case of the town hall meetings it is clear that many feel that the Rule of Law is being compromised and it is their interests and views that are being discriminated against by a government that is assuming unprecedented power to act in unprecedented ways.

In the area of economics, the Rule of Law is thought to bring a secure and predictable environment to economic activity and commercial decision-making, one which not only provides shelter from thieves and murderers but limits the predatory actions of unbounded political leaders. The mutual gains from market exchanges disappear without private property and freedom of private contract enforced by the state. Without those gains there is neither the efficiency that comes from competitive interactions in markets nor the economic growth that drives our level of living higher and higher. It is in this sense that the Rule of Law can be said to be the foundation on which our prosperity is build.

However, the Rule of Law is more fragile than commonly recognized. It breaks down when laws are passed without the consent of those who will be negatively affected by them, when citizens do not feel that the law has been just to them, when regulations become so numerous and so vague that it is impossible not to break them, when the state proves itself unwilling to protect its borders, when it provides greater protection to the criminal than the law-abiding citizen, when it become increasingly arbitrary and senseless, favoring the politically connected and discriminating against those without a voice, and most of all, when it is divorced from the lives lived by honest and hard-working people.

In other words, the Rule of Law breaks down when it no longer conforms to the needs, desires and aspirations of common and ordinary people.

One cannot help but feel that is it is this sense of alienation that fuels the unease reflected in the town hall meetings.

Adam Smith on politicians and the economy

“But though the profusion of government must, undoubtedly, have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is, undoubtedly, much greater at present than it was either at the Restoration or at the Revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater.

In the midst of all the exactions of government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants.

It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without exception, the greatest spendthrifts in the society. Let them look well after their own expense and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.(I, 328)”

Adam Smith, An inquiry into the Nature and Causes of the Wealth of Nations (1776), Book II, Chapter 3. (Paragraphed)

The Great Adam Smith (1723 – 1790), one of the key figures of the Scottish Enlightenment, was a moral philosopher and a pioneer of political economy. Smith is widely cited as the father of modern economics.

In terms of prevailing economic thought toward policy there are many resemblances between the time of Adam Smith and the times in which we live today. Mercantilism was the dominant theory and practice when Smith wrote The Wealth of Nations in 1776, and its promotion and support of an enormous array of interferences in the economy for the benefit of the then-prevailing business and political interests was the main target of his wrath. Smith was no apologist for merchants and manufacturers and he had no regard for, as he put it, “that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs”. He put his confidence in free markets and common people, not government controls and political elites, and slowly but steadily his vision of a fair and competitive society, while never fully achieved, replaced beliefs and values of Mercantilist doctrine.

It would appear we have come full circle in economic affairs. In many areas of our life and economy Mercantilism has returned. Wherever we turn, the government mandates and controls as never before. Congress is discussing expensive mandates in the area of health care, the President has just announced tariffs on imports of Chinese tires, the auto industry operates under government supervision, the financial sector is under the close supervision and regulation of the Treasury and the Federal Reserve, pay scales of the highly paid and the least paid are becoming under the eye of czars, the collapsed housing sector benefits from government largess. One might well ask, how are these programs different in any significant way from those of the Mercantilists Thomas Mun and James Steuart that Adam Smith criticized so harshly?

And are today’s political leaders any less careless of the public’s long-term interests or any less extravagant when spending the tax dollar or any less willing to promote the interests of the rich and the powerful over that of the poor and the powerless than those of Smith’s day?

In his time, Adam Smith was a radical and revolutionary preaching the gospel of the market and the benefits of liberty. In our time, we need be no less radical and revolutionary as we rededicate ourselves to his ideals and principles to ensure the continuation of our freedom and prosperity to the next generation.

The politicization of the economy

“For years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.

Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.
…
President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.

One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics.

If these initial deals are falling apart, it is only because reform met with unexpected resistance. …

In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.”

Tyler Cowen, “Where Politics Don’t Belong”, The New York Times (13 September 2009).

http://www.nytimes.com/2009/09/13/business/economy/13econ.html?_r=1&ref=business


Tyler Cowen is a professor of economics at George Mason University. He blogs at Marginal Revolution, one of the more popular web sites devoted to economic subjects.

As Tacitus said, “The more corrupt the state, the more it legislates.” One might add, “The more it legislates, the more it politicizes the life of every citizen, and the more it politicizes the life of every citizen, the more it destroys the freedom and prosperity of each one of us.”

Obama on financing the "public insurance option"

“Despite all this, the insurance companies and their allies don't like this idea. They argue that these private companies can't fairly compete with the government. And they'd be right if taxpayers were subsidizing this public insurance option. But they won't be. I have insisted that like any private insurance company, the public insurance option would have to be self-sufficient and rely on the premiums it collects. But by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers. It would also keep pressure on private insurers to keep their policies affordable and treat their customers better, the same way public colleges and universities provide additional choice and competition to students without in any way inhibiting a vibrant system of private colleges and universities.
…
Finally, let me discuss an issue that is a great concern to me, to members of this chamber, and to the public - and that is how we pay for this plan.”

From the prepared text of President Obama’s speech to Congress on the need to overhaul health care in the United States, as released by the White House and published by the New York Times (9 September 2009).

http://www.nytimes.com/2009/09/10/us/politics/10obama.text.html?pagewanted=all.


Now let me see if I understand these two parts of the President’s speech, delivered tonight.

In the first paragraph the President argues that the “public insurance option” would be self-sufficient on the premiums it collects. He asserts that it will be efficient because, supposedly, it will avoid overhead such as profits and (presumably excessive) executive salaries. I don’t believe this, but let me not quibble.

He then asserts that the public option would keep pressure on private insurers on pricing and customer service the same way public colleges and universities provide additional choice and competition to students without harming private colleges and universities. But the reason why public colleges and universities are able to compete with private colleges and universities is BECAUSE they are subsidized by the public sector. Without that subsidy, PUBLIC COLLEGES WOULD NOT EXIST TO PROVIDE COMPETITION TO THE PRIVATE COLLEGES AND THEREFORE ARE BY DEFINITION LESS EFFICIENT AND CANNOT BE USED AS A EXAMPLE OF COMPETITIVE PRESSURE. They are simply an artificial entity surviving on the generosity of the state and have no standing as efficient entities.

In the second paragraph, the President asks how are we going to pay for this. But if the public option really was self-sufficient and could be self-financing by relying on the premiums it collected, as he said it would be, WE WOULD NOT NEED TO DISCUSS HOW WE PAY FOR THE PUBLIC OPTION.

Me thinks this plan still needs more thought.

Thanks to David Henderson of Econlog for the pointer.

Praise for the division of labor from the Babylonian Talmud

“Our Rabbis taught: If one sees a crowd of Israelites, he says, Blessed is He who discerneth secrets, for the mind of each is different from that of the other, just as the face of each is different from that of the other.

Ben Zoma [a Talmudic sage] once saw a crowd on one of the steps of the Temple Mount. He said, Blessed is He that discerneth secrets, and blessed is He who has created all these to serve me. [For] he used to say: What labours Adam had to carry out before he obtained bread to eat! He ploughed, he sowed, he reaped, he bound [the sheaves], he threshed and winnowed and selected the ears, he ground [them], and sifted [the flour], he kneaded and baked, and then at last he ate; whereas I get up, and find all these things done for me.

And how many labours Adam had to carry out before he obtained a garment to wear! He had to shear, wash [the wool], comb it, spin it and weave it, and then at last he obtained a garment to wear; whereas I get up and find all these things done for me. All kinds of craftsmen come early to the door of my house, and I rise in the morning and find all these before me.”

Folio 58 of Maurice Simon, “Berakoth Translated into English”, Under the editorship of Rabbi Dr. I. Epstein, B.A., Ph.D., D. Lit.

http://www.come-and-hear.com/berakoth/index.html.


The words from the Talmud and the Bible convey an appreciation of the God-given spontaneous order of freedom and prosperity that emerges as a result of human action taken without regard to human design. Before us each day are the blessings of prosperity that we take for granted precisely because it is before us without the intentional design of any man.

This prosperity arises in large part out of the division of labor. The specialization of tasks and roles that comes out of cooperative labor in a market was celebrated in the past, as the Talmud attests, but the power of the division of labor to raise output and levels of living was not widely understood until Adam Smith wrote The Wealth of Nations. Smith explained to us how an increasingly complex division of labor was closely associated with economic growth, and that it required freedom of internal commerce and open and unrestrained trade among countries to impart its full benefit.

As Smith put it,

“Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (Adam Smith, The Wealth of Nations, Book IV Chapter II.)

That is, left to themselves and with their own interests in mind, the world is so designed -- Smith would say by the "Great Architect of the Universe” -- that people are “led by an invisible hand” to cooperate in a way that automatically brings about productivity gains and a wider basket of consumption to the larger society.

It is the price system of the market that is the secret the Babylonian rabbis sought to learn and it is Adam Smith who tells us how price signals arising spontaneously in a market communicate the dispersed knowledge of one person to another to yield high and rising incomes in an environment of political liberty.

A tip of the hat to Professor Don Boudreaux of Café Hayek for the pointer.

Robert Fogel on the rise in health care costs

“Why is it that although the average age of onset of disabilities has been delayed by ten years [by health care advances in the U.S.], and that these disabilities have become milder than they used to be, the share of GDP spent on health is rising? One factor is the increase in the proportion of the population that is elderly. However, such changes in age structure account for a minor part of rising expenditures, on the order of 10 percent.

The main factor is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend. Between 1875 and 1995, the share of family income spent on food, clothing, and shelter declined from 87 percent to just 30 percent, despite the fact that we eat more food, own more clothes, and have better and larger homes today than we had in 1875. All of this has been made possible by the growth in the productivity of traditional commodities. In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.”

Robert Fogel, “Forecasting the Cost of U.S. Healthcare”, The American: The Journal of the American Enterprise Institute (3 September 2009).

http://american.com/archive/2009/september/forecasting-the-cost-of-u-s-healthcare


Robert Fogel is the Charles R. Walgreen Distinguished Service Professor of American Institutions at the University of Chicago Booth School of Business. He won the Nobel Prize in Economics in 1993.

Essentially, Professor Fogel is saying that rising health care expenditures are a reflection of rising wealth and not a cause for worry. The complaints about costs and efforts to restrain them come from employers and governments that pay the bill. Rather than limiting access and otherwise rationing health care, it would be better to shift costs away from businesses and governments toward households and consumers, especially through added charges for such things as private hospital rooms, quicker attention by physicians, and not medically necessary procedures such as elective surgery.

I would add that if the “problem” of the health care in America is simply that people want to spend their growing income on more health care it would counterproductive to try and limit the expansion of health care sector, such as the present bills in Congress seek to do. More facilities and personnel are needed, not less.

Seven Tenets of economics

1. Production takes place for consumption (derived from the Scot Adam Smith), not the other way round.

2. Value is measured not as an average but at the margin (the Englishman W. S. Jevons, the Frenchman Leon Walras, and the Austrian Carl Menger).

3. The cost of producing a commodity or service is not the labour required (the German Karl Marx) but the commodity or service thereby lost (the Austrian Friedrich von Wieser).

4. The instinct of man is to “truck and barter” in markets (Adam Smith).

5. He will find ways round, under, over or through restrictions created by government (the Austrian Eugen von Böhm-Bawerk).

6. There is no such thing as absolute demand (for education, medicine or anything else) or supply (of labour or anything else) because both vary with price (the Englishmen Alfred Marshall, Lionel Robbins and many before and since).

7. Not least, without the signalling device of price, man cannot spontaneously and voluntarily co-operate for prosperous co-existence (the Austrian Ludwig von Mises and the Austrian-born but voluntarily-British Friedrich Hayek).

Arthur Seldon, “The IEA, the LSE, and the Influence of Ideas”, Volume 7 of The Collected Works of Arthur Seldon, Edited by Colin Robinson. The tenets have been reformatted into a numbered list here.

Arthur Seldon CBE (1916 –2005) was joint founder president, with Ralph Harris, of the Institute of Economic Affairs, where he directed academic affairs for 30 years. He studied at the London School of Economics where Arnold Plant and Lionel Robbins deepened his interest in classical liberalism and Friedrich Hayek introduced him to Austrian Economics.

These tenets for the most part are standard principles of economics and correspond more or less to the 10 Principles discussed by Greg Mankiw in Chapter 1 of the Principles text used in Regent classes. Once one understands that modern economics is centered on markets and the incentives that surround market-based activity, one has grasped the essentials of economics. The rest of economics is the application of these tenets (or “principles” as Mankiw calls them) to particular questions of analysis and policy.

One can also see from the names and countries associated with these different ideas that the development of economics is mainly a European effort that goes back more than 200 hundred years. It reflects steady intellectual progress from the publication of Smith’s Wealth of Nations in 1776 to what are called The Years of High Theory in the 1920s and 1930s. Since that time there have been refinements in theory and thinking but the foundations of the discipline had been laid and subsequent advances pale in comparison with the insights gained before the nuclear age.

Theory and intellectual advance prosper in those fields where the challenges are great and the needs pressing. In economics there have been three: In the mid-Eighteenth Century when Cantillon, Adam Smith, and the Physiocrats challenged the Mercantilists and the notion that the state should control the economy and the few should dominate the many; In the last third of the Nineteenth Century when the intellectual confusions of the Classical economists (including Marx) were finally overcome by Jevons, Walras, and the others mentioned above, and the question of a theory of value and the existence of economic equilibrium was settled through the application of mathematics; and In the 1920s and 1930s when a worldwide, sustained and deep depression led Robinson, Chamberlin, Myrdal, Hayek and Keynes, among others, to develop new tools to understand the implications of imperfect competition on prices and equilibrium and why an economy could sink and flounder for a decade or more. Demanding times demanded clear answers to great questions, and grand responses were forthcoming that set off what can be best be called a wave of intellectual advances and inventions in many areas of economics.

We are now mired in another difficult time when the economy is in disarray and our theories have been found wanting. One wonders, however, whether there will be a re-awakening of the spirit of intellectual innovation that has characterized our past periods of economic setback and turmoil. Perhaps this period of difficulty will be too transitory to set into motion the deep thinking required for really original and ground-breaking ideas to emerge. Unfortunately, really new thinking requires that problems fester for some time. Or perhaps the (to my mind over-) emphasis today on mathematical rigor will preclude absorbing the insights that history, practical experience and sheer “learnedness” bring to the task of constructing theories that are really relevant to actual economic problems.

We need new tenets in economics. Only time will tell if our problems are bad enough to generate them and whether we have the intellectual capacity to formulate them.

Thanks to Marginal Revolution for the pointer.

Potatoes and population growth

“The traditional explanation for the [dramatic] rise in population [in the 18th and 19th centuries] is that medical advances, such as the understanding of the germ theory or the innovation of vaccinations, and improvements in public sanitation greatly decreased infant and child mortality , which in turn led to an increase in population. However, in recent years, scholars such as Thomas McKeown and Robert Fogel have argued that the increase in population was mostly due to an improvement in nutrition rather than the advances in medicine or sanitation. McKeown argued that the decline in mortality began to occur well before the most important innovations such as antibiotics or vaccinations, which did not become prevalent until the 20th century, and therefore, there is scope for other factors to contribute to the rise in population. Fogel argued that since height is positively correlated with nutritional investment during childhood as well as lower mortality rates, then the observation that heights in America and the UK were increasing is evidence that nutrition was improving during this period. ....

[W]e argue that [a] ... main contributor [to nutrition] was ... the potato. Potatoes are extremely nutritious and a very "cheap" source of calories. They produced much higher yields per acre relative to pre-existing Old World staple crops. Historical survey data from England show that if a family of four were to subsist on only one crop, it would require 66% less land if it were to plant potatoes rather than staples such as barley, wheat, or oats. Potatoes are also easy to store and were popular as fodder for livestock through the winter. Therefore, cultivating potatoes also indirectly improved protein intake. ....

Our results suggest that the availability of this high-yielding crop dramatically increased population and urbanisation. The introduction of potatoes can explain 22% of the rise in population and 47% of the rise in urbanisation during the 18th and 19th centuries.”

Nathan Nunn and Nancy Qian, "Potatoes, the fruit of the earth", Vox EU, 5 August 2009.

www.voxeu.org/index.php?q=node/3845

Economists Nathan Nunn and Nancy Qian teach at the University of British Columbia and Brown University, respectively.

Larry Willmore notes:

Adam Smith, a Scot, in 1776 judged potato-eaters from Ireland to be "the strongest men and the most beautiful women perhaps in the British dominions" whereas the Scots, "who are fed with oatmeal, are in general neither so strong nor so handsome". The English, "who are fed with wheaten bread", rank between these two groups.

Thanks to Larry for the Tdj.

Paper recycling, cows, and saving the planet

“The standard reflex on the left when confronted with an economic question is to change the topic. Consider, for example, the economic argument against paper recycling. People say that recycling is a way of "saving trees," yet, in practice, it has exactly the opposite effect. Why are there so many cows in the world? Because people eat cows. Not only that, but the number of cows in the world is a precise function of the number that are eaten. If people decided to eat less beef, there would be fewer cows.

Yet the same is true of trees. "Old growth" timber is not used for pulp and paper—the trees that go into making our paper are a cash crop, just like wheat and corn. So one way to increase the number of trees being planted is for us to consume more paper. Furthermore, if we dumped used paper down an old mineshaft, rather than recycling it, we would in effect be engaged in carbon sequestration: taking carbon out of the atmosphere and burying it in the ground. This is exactly what we need to be doing in order to combat global warming. So recycling paper would appear to be bad for the planet, on numerous levels. Aluminum recycling makes sense (as suggested by the fact that it is profitable). But why paper recycling?

It's possible that there is a coherent response to this argument, but I've never seen one. Most environmentalists focus on how recycling reduces deforestation in the short term but ignore the long-term consequences of diminishing the incentive to reforest. More often people just change the topic, decrying how tree farming promotes monoculture, criticizing logging practices, or complaining about the wastefulness of consumer society. What is conspicuously lacking is a simple, cogent line of reasoning that defends the practice against the "economic" objection. Again, this isn't to say there is no argument, just that I've never heard it.

What I have heard is a whole host of increasingly ingenious ways of changing the subject.”

Joseph Heath, Filthy Lucre: Economics for People Who Hate Capitalism (HarperCollins, Toronto, 2009), p. 6.

http://www.harpercollins.ca/books/9781554683956/Filthy_Lucre/index.aspx

Comment by Larry Willmore:

Philosopher Joseph Heath (1967-) is an Associate Professor at the University of Toronto. He freely admits "I'm not an economist", having "essentially no formal training in the subject. I did take the usual Economics 101 course as an undergraduate, but I only went to class a couple of times. The professor got on my nerves. …. Since then, I've just been reading on my own. I also have no mathematics beyond high school. I did learn calculus, but I can't remember how to do it. I mention this not to undermine anyone's confidence in the arguments that follow, but merely to show that the barriers to economic literacy re not as great as they sometimes made out to be."

I don't know whether it is because—or in spite of—Heath's lack of formal training, but this is one of the best economics books I have read in years. I recommend it to everyone, but especially to those the left who might benefit from learning more about the capitalist system they profess to despise. Heath's book is a joy to read and covers many topics. I have quibbles with parts of the text, but these are minor compared to those I have with the average economics book written by an untrained journalist. Heath has clearly made an effort to understand what economists are trying to say. I especially liked his devastating criticism of libertarian ideology, on pages 24-43. [DOW: As one sympathetic to libertarianism, but not a libertarian, I shall have to check this out. I doubt it will change my appreciation of this important school of thought.]

Thanks to Larry for the Tdj.

Will the world regain its past growth path or remain below it?

“In normal recessions, however disruptive they are to businesses and jobs, things turn around predictably. The current global recession is far from normal.

Usually, to fight a recession, the central bank lowers interest rates, which results in increased demand and output. People resume buying durable goods such as appliances and cars. Firms start delayed investment projects. Often, an exchange rate depreciation gives a boost to exports by making them cheaper. The lower-than-normal growth during the recession gives way to higher-than-normal growth for some time, until the economy has returned to its normal growth path.

But the world is not in a run-of-the mill recession. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.

Some parts of the economic system have broken. Some firms went bankrupt that would not have in a normal recession. In advanced countries, the financial systems are partly dysfunctional, and will take a long time to find their new shape. Meanwhile, financial intermediation—and, by implication, the process of reallocation of resources that is central to growth—will be impaired. In emerging market countries, capital inflows, which decreased dramatically during the crisis, may not fully come back in the next few years. Changes in the composition of world demand, as consumption shifts from advanced to emerging economies, may require changes in the structure of production. In nearly all countries, the costs of the crisis have added to the fiscal burden, and higher taxation is inevitable.

All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis.

How much has potential output decreased? It is very hard to tell: we do not see potential output, only actual output. The historical evidence is worrisome, however. The IMF’s forthcoming World Economic Outlook presents evidence from 88 banking crises over the past four decades in a wide range of countries. While there is large variation across countries, the conclusion is that, on average, output does not go back to its old trend path, but remains permanently below it.”

Olivier Blanchard, “Sustaining a Global Recovery”, Finance & Development (September 2009).

http://www.imf.org/external/pubs/ft/fandd/2009/09/blanchardindex.htm


Olivier Blanchard is Economic Counsellor and Director of the Research Department of the International Monetary Fund. He is on leave from the Massachusetts Institute of Technology, where he serves as Class of 1941 Professor of Economics.

Potential output refers to the highest level of production that can be sustained over the longer-term, and assumes that all available human, capital and natural resources are being employed to the best effect within the limits of technology and managerial skills. In technical terms, it means that a country is producing on its production possibilities frontier, rather than inside it, indicating that it can produce more of one item only if less of some other item is produced. Clearly, with over 9 per cent unemployment, the United States is not operating on its production possibilities frontier and is not operating at its potential.

In this article, Professor Blanchard says that the recovery will not be robust and that if history is any guide economic growth will be slower than it has been in the past. He is also of the view that the any immediate recovery will weak and for that reason will not reduce unemployment for some time and the normal factors supporting a longer-term recovery, government fiscal policy and inventory rebuilding, will soon begin to play out.

What, he asks, will sustain the recovery and provide an impetus for longer-term world growth?

He points to two needed adjustments: A rebalancing of public and private spending, where higher private demand replaces unsustainable public spending through limiting the future growth of entitlements, and A rebalancing of demand across countries, where the huge external deficits of the United States were matched by huge external surpluses of China and other countries. The adjustments required to rebalance the world economy, he also points out, will not be easy.

Professor Mankiw went sailing and learned about pier fees

“Yesterday, I chartered a sailboat so my family and I could spend a couple of hours out on the waters off Nantucket. The captain of the boat met us at the town pier, loaded us onto a small skiff, and then took us to a mooring out in the harbor, where the boat was waiting.

He explained to us that he would prefer to keep his sailboat at the pier, which would make loading and unloading passengers much easier, but he could not get a space there. Every year, he told us, the town has a lottery to allocate the right to rent one of the scare docking slots. For quite a few years, the captain has been putting his name into the lottery, but he has never won. "There are just not enough spaces," he said.

Ever the economist, I replied, "It seems to me that the price isn't high enough."

"Well, actually," the captain said, "if you want to pay more, you can go down there." He pointed to the next dock over.

Apparently, next to the town pier is another pier that is privately owned and operated. The price for a docking space there is about five times as high as it is at the town pier. But there is never any significant shortage. Anyone can sign up for a slot, as long as you are willing and able to pay.

What a wonderful illustration of basic economic principles! In one way or another, scarce resources need to be allocated among competing uses. Free markets typically use the price system. Governments, often in the name of "fairness," seem to prefer other mechanisms, which don't always direct resources to their highest value use.

The sailboat ride was a bit of a bust, by the way. The day was warm and sunny, and the captain was a delightful storyteller, but the wind was not nearly sufficient for a good sail. Sadly, there are some shortages even the price system is not able to correct.”

N. Gregory Mankiw, “The Town Pier”, Greg Mankiw’s Blog (15 August 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course set to begin next week. He is also a Republican policy advisor.

Questions for students in Regent’s Principles course to think about:

1. If the town raised the rental price of a docking slot at the town pier, what would happen to the price at the private pier?

2. What would be the likely impact on the degree of boat utilization at the town pier? At the private pier?

3. After adjustments to the changes in prices at both piers, would society as a whole be better or worse off? Why?

4. Of the ten “Principles of Economics” discussed in Chapter 1 of Mankiw’s text, which principles are illustrated by this example of a possible adjustment to a new set of prices?