Tuesday, October 25, 2016

In One Chart, Everything You Need to Know about Big Government, the Welfare State, and Sweden’s Economy

By Daniel J. Mitchell of Cato.
"Sweden punches way above its weight in debates about economic policy. Leftists all over the world (most recently, Bernie Sanders) say the Nordic nation is an example that proves a big welfare state can exist in a rich nation. And since various data sources (such as the IMF’s huge database) show that Sweden is relatively prosperous and also that there’s an onerous fiscal burden of government, this argument is somewhat plausible.

A few folks on the left sometimes even imply that Sweden is a relatively prosperous nation because it has a large public sector. Though the people who make this assertion never bother to provide any data or evidence.

I have five responses when confronted with the why-can’t-we-be-more-like-Sweden argument.
  1. Sweden became rich when government was small. Indeed, until about 1960, the burden of the public sector in Sweden was smaller than it was in the United States. And as late as 1970, Sweden still had less redistribution spending that America had in 1980.
  2. Sweden compensates for bad fiscal policy by having a very pro-market approach to other areas, such as trade policy, regulatory policy, monetary policy, and rule of law and property rights. Indeed, it has more economic freedom than the United States when looking an non-fiscal policies. The same is true for Denmark.
  3. Sweden has suffered from slower growth ever since the welfare state led to large increases in the burden of government spending. This has resulted in Sweden losing ground relative to other nations and dropping in the rankings of per-capita GDP.
  4. Sweden is trying to undo the damage of big government with pro-market reforms. Starting in the 1990s, there have been tax-rate reductions, periods of spending restraint, adoption of personal retirement accounts, and implementation of nationwide school choice.
  5. Sweden doesn’t look quite so good when you learn that Americans of Swedish descent produce 39 percent more economic output, on a per-capita basis, than the Swedes that stayed in Sweden. There’s even a lower poverty rate for Americans of Swedish ancestry compared to the rate for native Swedes.
I think the above information is very powerful. But I’ll also admit that these five points sometimes aren’t very effective in changing minds and educating people because there’s simply too much information to digest.

As such, I’ve always thought it would be helpful to have one compelling visual that clearly shows why Sweden’s experience is actually an argument against big government.

And, thanks to the Professor Deepak Lal of UCLA, who wrote a chapter for a superb book on fiscal policy published by a British think tank, my wish may have been granted. In his chapter, he noted that Sweden’s economic performance stuttered once big government was imposed on the economy.
Though the Swedish model is offered to prove that high levels of social security can be paid for from the cradle to the grave without damaging economic performance, the claim is false (see Figure 1). The Swedish economy, between 1870 and 1950, grew faster on average than any other industrialised economy, and the country became technologically one of the most advanced and richest in the world. From the 1950s Swedish economic growth slowed relative to other industrialised countries. This was due to the expansion of the welfare state and the growth of public – at the expense of private – employment.57 After the Second World War the working population increased by about 1 million: public employment accounted for c. 770,000, private accounted for only 155,000. The crowding out by an inefficient public sector of the efficient private sector has characterised Sweden for nearly half a century.58 From being the fourth richest county in the OECD in 1970 it has fallen to 14th place. Only in France and New Zealand has there been a larger fall in relative wealth.
And here is Figure 1, which should make clear that what’s good in Sweden (rising relative prosperity) was made possible by the era of free markets and small government, and that what’s bad in Sweden (falling relative prosperity) is associated with the adoption and expansion of the welfare state.
But just to make things obvious for any government officials who may be reading this column, I augment the graph by pointing out (in red) the “free-market era” and the “welfare-state era.”

As you can see, credit for the chart actually belongs to Professor Olle Krantz. The version I found in Professor Lal’s chapter is a reproduction, so unfortunately the two axes are not very clear. But all you need to know is that Sweden’s relative economic position fell significantly between the time the welfare state was adopted and the mid 1990s (which presumably reflects the comparative cross-country data that was available when Krantz did his calculations).

You can also see, for what it’s worth, that Sweden’s economy spiked during World War II. There’s no policy lesson in this observation, other than to perhaps note that it’s never a good idea to have your factories bombed.

But the main lesson, which hopefully is abundantly clear, is that big government is a recipe for comparative decline.

Which perhaps explains why Swedish policymakers have spent the past 25 years or so trying to undo some of those mistakes."

Monday, October 24, 2016

My response to the San Antonio Express-News on gender pay equity

Click here to see the original article.

There is more to gender pay issues than was mentioned in "Women's pay parity is goal of local panel" (by Josh Baugh, Oct. 23).
The story mentioned “Women make less money than their male counterparts for doing the same work, studies continue to show” while later saying “In the U.S., women make 79 percent of what men earn.”
One might conclude that women are only getting 79 percent of what men earn for the same work. This is not the case.
Many factors influence how much a worker is paid, including level of education, college major, years of experience and hours worked. Those might not be the same, in the aggregate, for men and women.
Looking at college majors, economist Mark Perry found that for eight of the top ten paying majors (like computer science and electrical engineering), at least 80% of the students are men. The only major in the top ten that was majority female was nursing.
Overall, 72% of the college degrees in the top ten majors combined go to men. In the next ten that percentage falls to 65.8%.
For each succeeding group of ten majors, the percentage of degrees going to men falls. The 49th highest (social work) is about 84% female and the 50th (biology) is about 58% female.
Colleges should encourage more women to major in the higher paying professions (or at least not actively discourage them). This could mean a little more mentorship from professors, including the male ones.
But the pattern is clear. Men dominate the highest paying majors, which explain some of the pay gap.
Turning to hours worked, a study by the Bureau of Labor Statistics showed that 25.5% of men working full-time worked 41 or more hours per week in 2013. That was true for only 14.3% of women. In general, men work about 15% more hours per week.
Based on this study, Mark Perry concluded that “for those workers with a 40-hour workweek, women earned 89.6% of median male earnings.”  Once hours worked are controlled for, “almost half of the raw 17.5% pay gap reported by the BLS disappears.”
June O’Neill, former Director of the Congressional Budget Office, concluded that: “Comparing the wage gap between women and men ages 35-43 who have never married and never had a child, we find a small observed gap in favor of women, which becomes insignificant after accounting for differences in skills and job and workplace characteristics.”
Another factor is what economists call a “compensating wage differential.” This is when you get paid more for doing dangerous or unpleasant work, like working on arctic oil rig.
How does this relate to the gender pay gap? It appears that men tend to work more dangerous jobs because about 93% of work place deaths each year are men.
To show how hard it is to achieve pay parity, there is a pay gap among White House staff workers, even with a liberal Democrat as president. The female staffers make about 9% less than the male staffers.
Lesley Clark of McClatchy news quoted a White House spokesman complaining about this study saying it only “looked at the aggregate of everyone on staff, and that includes from the most junior levels to the most senior.”
But the same is true for the statement that women earn 79 percent of what men earn for the same work. It is an aggregate that does not take into account key differences.
If we want to educate women about the disparity and give them tools to reduce it, we need to first acknowledge the underlying market realities.

Sunday, October 23, 2016

$15 minimum wage won’t hurt workers? Don’t take it seriously

From Mark Perry.
"Editor’s Note: Mark Perry, an economist at University of Michigan’s Flint campus and scholar at the American Enterprise Institute, responds to billionaire and $15 minimum wage advocate Nick Hanauer’s argument that “The claim that if wages go up, jobs will go down is not a theory — it’s a scam.” Perry argues that the minimum wage hurts the low-wage workers it’s supposed to help, as business will try to adjust to an increase in costs by reducing hours, reducing the number of employees or reducing benefits.
— Kristen Doerer, Making Sen$e Editor

Nick Hanauer, “America’s worst minimum wage pundit” according to Forbes columnist Adam Ozimek, was featured recently on Making Sen$e for his 4,400-word essay, “The claim that if wages go up, jobs will go down is not a theory — it’s a scam.” Much of Hanauer’s essay displays a fundamental misunderstanding of what economic theory — developed over hundreds of years in a discipline that is honored annually with a “Nobel Prize in economic sciences” — can tell us about the predictable effects of a $15 an hour minimum wage.
Despite Hanauer’s attempt to claim the moral high ground, many of us in the economics profession, including dozens of Nobel laureates, recognize that the minimum wage is a terrible and cruel public policy, one that reduces employment opportunities for the most vulnerable Americans.

Much of Hanauer’s argument in support of raising the minimum wage to $15 an hour is based on some questionable empirical evidence from a “first-of-its-kind” minimum wage “study” by the National Employment Law Project that was released earlier this year. Let’s be very clear, this “study” has not been taken seriously by the economics profession and in fact has been dismissed by those with even a passing knowledge of economics.

For example, Jim Tankersley of The Washington Post wrote about the study in an article with a title that sums up why it isn’t being taken seriously — “Here’s a really, really, ridiculously simple way of looking at minimum wage hikes.” Tankersley aptly described the NELP study as “possibly the most un-nuanced analysis of the effects of minimum wage hikes that you’ll ever see.” Specifically, here’s how he summarized the report (emphasis mine):
Paul Sonn and Yannet Lathrop, looked at each of the 22 instances since 1938 when the United States raised its federal minimum wage. They looked at what followed with employment overall, and what happened in the leisure/hospitality and retail sectors, where minimum-wage jobs are often concentrated.
They did not look at rates of change. They simply asked one question: One year after the wage went up, were there more jobs or fewer?
Tankersley points out that the NELP study might be a “useful talking point for raise-the-wage supporters,” but is “less useful as an economic study.” And finally, he concludes that:
There are plenty of reasons total employment could keep rising even if minimum-wage hikes were holding down job growth, the simplest being, the economy was growing at a strong enough clip to offset any damage from the hike. This is why economists prefer work that attempts to isolate the effects of a minimum-wage increase, through more sophisticated means such as regressions.
Thus, the unsophisticated “study” that Hanauer gushes over to support his advocacy of more than doubling the minimum wage to $15 an hour is really not a study so much as a talking point and provides no sound, credible basis for an increase in the minimum wage to $15 an hour. Since the NELP study forms the basis for much of Hanauer’s support of the minimum wage in his Making Sen$e column, let’s continue analyzing NELP’s lack of nuance and sophistication.

The main deficiency of the NELP study is that it doesn’t capture many of the possible negative employment effects that economists predict from government price controls. To start, Tankersley correctly points out the main flaw of the NELP study: It didn’t look at the changes in the rate of employment or at the changes in the growth rate of employment. The study simply reported whether the number of jobs increased or decreased following a minimum wage hike.

But employment in the U.S. always goes up over time, from population growth and immigration, by about 2 percent per year on average since 1938. So to report that the employment level increased after many minimum wage hikes is meaningless, because it doesn’t answer this important question: How much more might it have gone up without the artificial increase in labor costs for unskilled workers?
NELP’s ignorance of the “growth rate of employment” or the “rate of change in employment level” masks some potentially serious consequences. For example, suppose that the number of employed restaurant workers actually increased slightly following a new higher minimum wage of $15 an hour, suggesting that there are no negative employment effects of a minimum wage hike. The relevant question to serious economists and researchers is this: How does that increase in low-skill restaurant jobs at $15 an hour compare to what would have happened to the number of restaurant jobs without the minimum wage increase?

Suppose, for example, that restaurant jobs in a city had been increasing at an annual rate of 4 percent and by 5,000 workers per year due to normal economic growth and increases in that area’s population. Following a minimum wage increase to $15 an hour that imposes significantly higher labor costs on employers, suppose that the growth in the city’s restaurant jobs is cut in half to only a 2 percent growth rate, that is, from 5,000 to 2,500 workers per year. Research following NELP’s unsophisticated approach would show that the number of restaurant jobs increased; but it would now be a much lower rate of job creation because of the higher minimum wage. The increase of 2,500 jobs in the year following the minimum wage hike makes it appear that there is a positive employment effect, even though there is actually a net loss of 2,500 food jobs.

Further, serious economists wouldn’t bother looking at employment levels in the aggregate like NELP did for the entire labor market, but would look at the labor markets where we could expect to find negative employment effects of minimum wage hikes, such as the labor market for unskilled or limited-experience employees. As an example, if NELP were to find a 1 percent raw increase in total U.S. payroll employment following a minimum wage hike, that overall increase could have masked a decline in employment for teenage workers, those who would be most affected by the minimum wage.
A complete and fully nuanced, serious economic analysis of the minimum wage would also consider all of the possible negative effects on low-skilled workers following minimum wage hikes. Finding that employment levels have increased following minimum wage hikes doesn’t necessarily mean that low-skilled workers haven’t experienced other negative employment effects that would include: a) reductions in work hours and b) reductions in non-wage benefits and job attributes that make low-skilled workers worse off.

From a practical business standpoint and from economic theory, we would expect to find a stronger negative correlation between minimum wage increases and work hours than employment levels. When businesses budget their labor costs and schedule staffing levels to manage those costs, employers are more concerned about the number of hours their employees are scheduled to work during a given period than the number of workers employed at that business.

And when firms are forced to respond to an increase in the minimum wage, those businesses would likely first consider adjusting (reducing) the number of work hours scheduled to contain costs before they would adjust (reduce) the number of workers. The negative employment effects of an increase in the minimum wage would tend to show up more as a reduction in the number of hours of low-skill labor demanded by employers rather than a reduction in the number of low-skilled workers employed.
Further, businesses focused on the bottom line are more concerned about total worker compensation than just the monetary component of that compensation. If the monetary component of unskilled employee compensation increases, as it does following increases in the minimum wage, a nuanced economic analysis would correctly predict that adjustments would be made to the non-wage fringe benefits provided by employers. To the extent that increases in the monetary minimum wage are offset by employers reducing the non-wage fringe benefits, even low-skilled workers who remain employed will not necessarily be better off from a minimum wage hike. Those workers’ total compensation could stay the same or maybe even be reduced if the reductions in non-wage fringe benefits more than offset the artificial increase in monetary wages.
Again these are nuances — reductions in work hours and reductions in non-wage fringe benefits — that economists consider when trying to asses all of the negative effects of higher mandated wages and are nuances not considered by NELP or Hanauer.

To summarize, America’s “worst minimum wage pundit” uses the most un-nuanced analysis of the effects of minimum wage hikes to produce what might be the most un-nuanced column on the minimum wage you’ll ever see. Hanauer’s blanket condemnation of economists who are correctly skeptical about the government’s ability to improve economic conditions with price controls is unwarranted.

The history of government price controls has a very poor track record with thousands of examples of economic distortions and suffering following government-imposed price ceilings and price floors. One only need look south to Venezuela to see an economy today in total collapse, in large part because of government price controls on food and other consumer staples that are not unlike a $15 an hour minimum wage.

Even minimum wage activists like Hanauer would have to agree that what we want is for as many Americans as possible to have good jobs, jobs that pay well and allow workers to live a good life. Minimum wage advocates must surely also recognize that before any American worker can get a really good job, he or she needs an important first job. And those first jobs are almost always entry-level jobs that will start to disappear if the federal minimum wage is increased by 107 percent to $15 an hour by government fiat.

Remember that the real minimum wage is always zero, because that’s the wage that hundreds of thousands, possibly millions of workers will receive following an increase in the minimum wage to $15 an hour, because they will either lose their jobs or fail to find jobs when they enter the labor force. (See Congressional Budget Office report for data.) That’s a very cruel public policy, and I and many economists reject that form of cruelty as a progressive “scam” — and it’s a “scam” that would inflict the most harm on the most vulnerable among us.

The most disadvantaged Americans don’t need the alleged compassion of minimum wage advocates as much as they need entry-level jobs. And to maximize entry-level jobs, economic science tells us that we should allow market forces, not government bureaucrats and politicians, to determine wages in the labor market."

Saturday, October 22, 2016

Surge in Emergency Department Use Persists in New Oregon Medicaid Study

By Charles Hughes of Cato.

"One of the main arguments proponents of Medicaid expansion make, at least on the fiscal side, is that it would save money as people gaining Medicaid coverage would reduce their use of expensive visits to the Emergency Department (ED). An earlier study from the Oregon Health Insurance Experiment threw some cold water on that theory, as it found that getting Medicaid actually increased the number of ED visits by 40 percent. Some analysts postulated that this increase was only temporary because it was due to either pent-up demand for health care services, or because new enrollees did not have established relationships with doctors. The thinking was that after enrollees became familiar with their coverage or addressed long-gestating health problems, the reductions in ED use and the associated cost savings would materialize.

A new report analyzing a longer time horizon finds that this is not the case, and there is “no evidence that the increase in ED use due to Medicaid coverage is driven by pent-up demand that dissipates over time; the effect on ED use appears to persist over the first two years.” This is another blow to the oft-repeated claim that Medicaid expansion will lead to significant savings from reduced Emergency Department utilization, and the effect actually seems to work in the other direction.

The Oregon case is important because it is one of the few instances of random assignment in health insurance, as the state wanted to expand Medicaid but had funding constraints, so it employed a lottery to determine who would get coverage.

In this new update, the researchers see if there are any time patterns or signs of dissipation when it comes to the impact of Medicaid percent of the population with an ED visit or the number of ED visits per person. They expand upon the earlier utilization study to analyze the two years following the 2008 lottery and break up into six-month segments to see if there are any signs of the effects dissipating.

As they explain, “there is no statistical or substantive evidence of any time pattern in the effect on ED use on either variable.” In the first six-month tranche Medicaid coverage increased the number of ED visits per person by about 65 percent relative to the control group, and the estimates for the following three periods were similar and mostly statistically indistinguishable from each other. They also find that Medicaid increases the probability of an ED visit in the first period by nine percent, and the impact in the subsequent periods does not differ significantly.

Estimated Effect of Medicaid Coverage on Emergency Department Use over Time

Source: Finkelstein et al., New England Journal of Medicine (2016).

A similar analysis for hospital admissions comes to the same result: “no evidence statistically or substantively of a time trend in the impact of Medicaid on having a hospital admission or on the number of days in the hospital.”

They also fail to find evidence that Medicaid coverage makes doctor’s visits and ED use more substitutable, and again, if anything the effect works in the other direction. The authors suggest that this could be due to differences in how people respond to gaining access to Medicaid, or it could be that Medicaid increases the complementarity of these different dimensions of health care.

Whatever the underlying mechanism, there is no evidence here that Medicaid coverage leads to reductions in utilization in other dimensions. In fact, Medicaid coverage makes people more likely to visit the Emergency Department, and increases their number of visits relative to their baseline. This new study confirms that these effects were not temporary and do not dissipate, at least over the two year period they were able to analyze. Expanding Medicaid coverage will not lead to reductions in inefficient, inexpensive Emergency Department visits, and there will be no associated cost savings, undermining one of the common fiscal arguments for expansion."

Harvard Professor Greg Mankiw Paid $2,500 For A Ticket To See "Hamilton" And That Is Good

See I Paid $2,500 for a ‘Hamilton’ Ticket. I’m Happy About It.  Excerpt:
"It was only because the price was so high that I was able to buy tickets at all on such short notice. If legal restrictions or moral sanctions had forced prices to remain close to face value, it is likely that no tickets would have been available by the time my family got around to planning its trip to the city.
High prices are a natural reflection of great demand and scant supply. In a free market, in which private individuals can engage in mutually advantageous gains from trade, they are inevitable until demand subsides or supply expands.

The comedian Jay Leno learned this lesson some years ago. In 2009, while the economy was suffering through the Great Recession, Mr. Leno, a car enthusiast, generously performed two free “Comedy Stimulus” shows for unemployed workers near Detroit.

Yet zero is not, as economists put it, the equilibrium price to see a live performance by Jay Leno. Some of the unemployed who received free tickets tried to turn around and sell them on eBay for about $800. When Mr. Leno learned about this, he objected, and eBay agreed to take down offers to resell the tickets.

But why should Mr. Leno have objected? Some unemployed workers, presumably short on cash, thought that the $800 in their pockets was more valuable than an evening of laughs. Similarly, the ticket buyers would voluntarily give up their $800 for a seat. The transaction makes both buyer and seller better off. That is how free markets are supposed to work.

The only person made worse off by the sale is, perhaps, Mr. Leno himself. He wanted to be seen performing before an audience of the unemployed. Doing a show for higher-income residents of Michigan might not be viewed as altruistic, even if it left the unemployed better off. In other words, Mr. Leno’s objection to the eBay resale was arguably a rationally self-interested act in that the resale impeded his ability to appear selfless to others and, even, to himself.

Although I don’t object to ticket resales above face value, and I think it is pernicious when others do, I was saddened by my “Hamilton” transaction in one important way. About 80 percent of what I paid went to the ticket reseller, rather than to Mr. Miranda and his investors.

In the past, Mr. Miranda has objected to the automated software that quickly buys as many tickets as it can, so they can be resold at a profit. But there is an easy way to put these resellers out of business: The theater can charge higher prices to begin with.

Such a move would surely increase the show’s profitability. From my standpoint as a theater consumer, that’s a good thing. Future talents like Mr. Miranda would find it easier to fund their innovative theater projects. And with more projects funded, those consumers who don’t buy “Hamilton” tickets — perhaps deterred by its uniquely high prices — would find a greater variety of other shows from which to choose.

Those who run Broadway theaters clearly feel some unease about charging so much. That is one reason they often hold a few tickets back and offer them cheaply in lotteries the day of the show.
Yet Mr. Miranda and his investors could find better ways to give back to the community than vastly underpricing most “Hamilton” tickets and enriching ticket resellers. Maybe fund scholarships for theater students. Or maybe fill more seats with high school students (which is already happening to some degree, thanks to a grant from the Rockefeller Foundation)."

Friday, October 21, 2016

Highest-paying college majors, gender composition of students earning degrees in those fields and the gender pay gap

From Mark Perry.


"The table above was inspired by the recent Washington Post article “Want college to pay off? These are the 50 majors with the highest earnings,” which was based on a report released by Glassdoor on Monday titled “50 Highest Paying College Majors.” Glassdoor, an online employment website, analyzed nearly 500,000 resumes and corresponding salary reports to determine which college majors pay the highest median base salaries during the first five years following graduation. Most of those 50 college majors are displayed in the first two columns of the table above with their corresponding salaries.

After seeing the Glassdoor report, I thought it would be interesting to analyze the gender composition of students earning bachelor’s degrees in those top 50 highest-paying college majors. Using the most recent data from the Department of Education for “Bachelor’s degrees conferred by postsecondary institutions to males and females by field of study” for the 2013-2014 academic year, I attempted to match the college majors provided by Glassdoor as closely as possible to the 34 academic “fields of study” provided by the Department of Education. The fields of study reported by the government are much broader fields than the college majors reported by Glassdoor, so I did my best to match the two datasets. For example, the Department of Education only reports the number of bachelor’s degrees by gender for the broad academic field of “engineering,” without any details on engineering degrees in the six sub-fields of engineering reported by Glassdoor (electrical, mechanical, chemical, etc.). Likewise, all of the business-related degrees in finance, accounting, marketing, human resources, advertising, etc. are only reported as bachelor’s degrees in “business” by the government. Economics degrees are included in the category Social Sciences, along with degrees in fields like sociology, anthropology, political science, etc. For some Glassdoor college majors like Fashion Design, Biotechnology, Graphic Design, Film Studies, Sports Management, it wasn’t clear what bachelor’s degrees reported by the Department of Education matched those majors, so I omitted 10 of the 50 college majors, leaving 40 majors in the table above.

Here are some observations about the data in the table above:

1. For the Class of 2014, women earned more than 57% of all bachelor’s degrees, and by numbers were awarded 1,068,122 degrees compared to only 801,692 for men. Men received 42.9% of bachelor’s degrees in 2014, and that figure is shown at the bottom of the table above. In contrast to being significantly underrepresented for bachelor’s degrees overall, men were significantly over-represented for the highest-paying college majors as the data in the table show.

2. For example, in 8 out of the 10 highest-paying college majors — various Engineering fields, Computer Science and MIS — men represented more than 80% of the college graduates in those fields. The only college major of the top ten where women are over-represented is Nursing, a field where 84.4% of the bachelor’s degrees in 2014 were awarded to women.

3. For the top ten highest-paying college majors as a group, men earn an average of 72% of the bachelor’s degrees in those fields. For the top 20 college majors, men earn an average of nearly two-thirds of those degrees; for the top 30, the male average is 60.5% and for the top 50 (actually only 40 majors are considered), the average for men is 53.7% of degrees.

Bottom Line: What can we learn from these data on college majors, salaries, and gender? As my AEI colleague Christina Sommers has pointed out, if today’s young women want a quick fix to close the gender wage gap, they don’t need more government regulation of the labor market or corrective legislative action like the stalled Paycheck Fairness Act. Rather, you women should simply change their college majors from low-paying ones like feminist dance therapy to high-paying ones like many of those listed above. The raw gender wage gap doesn’t exist because employers discriminate against women in the labor market as much as it reflects voluntary and personal choices of both men and women in terms of college majors, careers, the number of hours worked, and family roles and responsibilities. As Christina Sommers explained, “Most economists will tell you that employers cannot be blamed for much or any of the gender wage gap. It is women’s choices that are the problem — beginning with their college majors.”

Solution: Change college majors, close the gender wage gap."

The Elemental Case for Free Trade

By Donald J. Boudreaux.

The positive economic case for free trade is straightforward. Here I distill it into ten – well, as you’ll see, really eleven – elemental points.

First, nothing about political borders justifies treating trades that cross those borders differently than trades that don’t. Whatever benefits result from you trading with someone in Kentucky are no less available when you trade with someone in Korea. Whatever economic problems – real or imaginary – are caused by you trading with someone in Korea are no less likely when you trade with someone in Kentucky.
Second, all economic activity is ultimately justified by how much it enables us to expand our consumption, not by how much it enables us to expand our production. Consumption is the end; production is the means. Of course, production is an essential means; we cannot expand consumption without expanding production. But production is not the ultimate purpose of economic activity. If you disbelieve me, ask yourself how much you’d pay for a sawdust-nail-‘n’-cardboard pie that took its well-meaning baker several days to produce. If you answer “nothing,” then you get this point.

Third, specialization expands output. And the greater the amount of specialization, the greater the output. A medical profession made up only of family-practice physicians will save fewer lives and reduce less pain than a medical profession made up of specialists such as neurosurgeons, podiatrists, cardiologists, ophthalmologists, and – my favorite (because many years ago one of these specialists saved my young son’s life) – pediatric gastroenterologists.

Fourth, specialization requires trade. A pediatric gastroenterologist based in New York City today enjoys a high standard of living, but only because many people willingly pay him to specialize in that highly specialized line of work and willingly accept his money in exchange for what they produce. This physician is rich only because he trades with others. If farmers, carpenters, tailors, airline pilots, and economics professors were unwilling to trade with him, he’d have no time to practice pediatric gastroenterology. He’d instead have to grow his own food, build his own home, and make his own clothing. He, and the rest of us, would be much poorer.

Fifth, specialization increases with the size of the market. The greater the number of consumers and producers, the larger is the scope for each producer to focus on a narrow specialization. This fact is why large cities have niche restaurants, such as vegan Lebanese, and highly specialized physicians, such as pediatric gastroenterologists, while small towns don’t feature restaurants and trades so highly specialized.

Points four and five working together spark self-reinforcing improvement: more trade promotes more specialization which, in turn, promotes more trade. Economies grow and standards of living improve.
Sixth, an important consequence of expanding the area of trade – of increasing the size of the market – is what economists call “increasing returns.” Doubling the number of people who trade freely with Americans causes the GDP of this larger economy to more than double. Per-capita GDP rises for all of these people who trade freely with each other. Compare medical care in an economy that features among its health-care professionals only 100 family-practice physicians to medical care in an economy with, say, 20 family-practice physicians and 180 specialists, such as pediatric gastroenterologists.

Seventh, there’s no limit to the degree to which labor can specialize and to which, as a result, total output can expand and expand at an increasing rate – that is, exhibit increasing returns. Put differently, the degree to which labor can specialize and cause total output to expand isn’t limited to, or defined by, the size of any particular country. Nor does the size of any particular country define a point beyond which the growth of specialization and output slows or becomes less reliable.
That is, even in a country as geographically large and as heavily populated as the United States, nothing in economic theory or history suggests that expanding the boundaries of our trading patterns externally – that is, beyond our borders – results in less expansion of our consumption and production than when we expand the boundaries of our trading patterns internally. We in Georgia or Virginia stand to gain just as much by expanding our trade with Mexicans as we stand to gain by expanding our trade with New Mexicans. There’s no reason not to have a global economy without economic boundaries.

Eighth, economic competition is good and it works just as effectively across political boundaries as it does within political boundaries. Competition disciplines firms, it spurs entrepreneurial creativity, and it discovers and encourages – much like a process of natural selection – what works best economically. Importantly, the competition that comes from free trade directs workers and other resources into those lines of productive activities at which each is most efficient. There’s simply no reason to neuter with trade restrictions the competition that comes from abroad simply because that competition isn’t home-grown.

Ninth, as Julian Simon taught, human beings in market economies are the ultimate resource. The ultimate resource isn’t land or petroleum or deposits of iron ore or of gold; it’s not factories or software or tractors; it’s not inventories of wheat or of rolled steel or of cash on hand. It’s human creativity and ingenuity. Indeed, it’s only because human creativity made them so that petroleum and iron ore and wheat and you-name-it are resources. Without human creativity these things would be mere raw materials, mere globs of molecules, that are no more valuable or useful to human beings than they are now to antelopes and hamsters.

And yet human creativity is one of the few resources that has consistently gotten more scarce over the course of the past 250 years.

We know that human creativity has gotten more scarce because its market price has risen enormously over the past few centuries in the market-oriented world. For example, the real hourly pay of the average American worker is today, conservatively estimated, about 60 times higher than it was in 1790.[1] This rise in the price of labor signals that it is has become more scarce relative to the demand for human labor.

In contrast, most other resources and productive inputs – including energy, metals, and transportation services – have become, and are still becoming, less scarce, if we judge them (as we should) by the trends in their real prices. They’re becoming less scarce precisely because we have more creative human beings contributing to the market economy.

Free trade maximizes the ability of the people of a country both to contribute their own creativity and effort to the global economy and to tap into the creativity and effort of the billions of other ultimate resources that reside in other countries. We tap into that creativity directly when we offshore productive tasks to foreign workers. We tap into it indirectly when we buy goods produced by foreign workers and entrepreneurs. Why would we wish to artificially reduce our and our fellow citizens’ access to supplies of the ultimate resource?

Tenth, restrictions on trade inevitably are driven by special-interest-group politics. Even if a sound theoretical case can be made for trade restrictions, it’s simply unrealistic to expect the state to be guided by that case. Instead, politicians and bureaucrats will only use that case as cover to create monopoly privileges for politically influential producer groups.

I here, at the last minute, add an eleventh point to the elemental case for free trade. I was reminded of this point just this morning by an e-mail from my great colleague Walter Williams. Walter asked me to remind you that countries don’t trade with each other; people trade with each other. China doesn’t trade with America. Individuals who reside on that part of the earth that we today call “China” choose to trade with other individuals who reside on that part of the earth that we today call “America” and who choose to trade with people in China.

That’s it. That’s the elemental economic case for free trade.

But there’s a second part to the case for free trade. It’s the part that’s been constructed in response to the multitude of misunderstandings that have arisen over the centuries with regard to trade.
This second part to the case for free trade is the longer part. The reason is that the capacity for misunderstanding and mischaracterizing trade is enormous. Many falsehoods require many corrections.
Here I’ve time only to mention a few pieces of this second part of the case for free trade.

First, over the long-run free trade causes no net loss of jobs. Put differently – and harkening back to a point made above – any change in consumer spending causes some workers to lose jobs while creating jobs for other workers. International trade isn’t unique on this front. The jobs lost today to imports are replaced tomorrow by other jobs.

And these other jobs are, overall, better than the lost jobs because they are the ones at which the workers in the country have a comparative advantage. The jobs lost are ones at which the workers have a comparative disadvantage.

If you worry that the loss of particular jobs today cannot be made up for by the creation of new jobs, consider that in 1950 the U.S. workforce contained roughly 60 million people, with roughly 57 million jobs. The unemployment rate in 1950 was 5.3 percent. Today, the size of the U.S. workforce is about 160 million, with about 152,000 jobs. In 66 years, the number of workers and the number of jobs in America have each increased by a bit more than 150 percent. The rate of unemployment today is a not-too-shabby five percent.

Over the long run, the number of jobs is determined not by the freedom of trade but by the size of the labor force, by the flexibility of labor markets, and by workers’ willingness and abilities to remain unemployed as they search for better job offers. What free trade does is to replace worse jobs with better jobs; protectionism protects worse jobs by preventing the creation of better ones.

Another objection to free trade is that it is undesirable if it creates trade deficits. This is an egregious fallacy, because another name for trade deficits is “capital surpluses.” Every cent of a U.S. trade deficit is a cent invested by foreigners in America or in dollar-denominated assets. These investments not only return the dollars to the U.S., they also signal that the U.S. is a relatively attractive place to invest. Further, by enlarging our capital stock, they enrich us.

If commenters started referring not to “our trade deficit” but to “our capital surplus” – an exactly equivalent term – there’d be much less misunderstanding and mischief caused by this accounting artifact.

Finally here, it’s a myth that high-wage Americans can’t compete against low-wage foreigners.
Specialization arises according to comparative advantage, which doesn’t stop operating as the wages of workers in a nation rise relative to wages elsewhere. But this point is esoteric. Another point is that low wages reflect low productivity. Americans’ wages are higher than Chinese wages because American workers on average are more productive than Chinese workers. So next time someone says “We can’t compete against low-wage foreigners,” translate that claim into its equivalent: “We can’t compete against low-productivity foreigners.” The latter claim sounds as silly as it really is.

I close not with economics but with ethics. After all is said and done my support for free trade is grounded in ethics, regardless of the economics. I believe deeply that if you work and earn income honestly, that income is yours to use as you choose. You may use it to buy tomatoes from your neighbor or to buy tomatoes from a farmer in Mexico. It’s your money. It belongs neither to the state nor to any domestic producer.

Yet protectionist arguments rest on the premise that your tomato-growing neighbor has some positive claim on your income. If you are prohibited from buying tomatoes from Mexico, or – more commonly today – penalized with a tariff for doing so, the state is insisting that domestic tomato growers have an ethical claim on part of your income. If you do not spend your income as the state, or as domestic tomato growers, deem best, you will be penalized. Tomato-growers’ economic well-being is elevated above yours. I find this presumption, which undergirds nearly all protectionist policies, to be reprehensible and ethically indefensible.

Thank you.

[1] Calculated from data found at: https://www.measuringworth.com/datasets/uswage/result.php
and adjusted for inflation using:http://data.bls.gov/cgi-bin/cpicalc.pl"