Wednesday, October 24, 2012

What is up with the China bashing?

In last nights presidential debate, both Obama and Romney gave China a tongue lashing reminiscent of the Michael Fay ordeal. Why? Because China sells goods to us too cheaply. Yes, you read that right. Both Romney and Obama want China to jack up their prices. Walt-Mart, you're next.

In the candidates defense, there are some reasons why we may not want China to do this, though I do not find any of them particularly convincing.

1. Trade deficits are bad in the long run. - China is not using the dollars we send them to buy American goods (at least directly). Instead they are buying American Treasury bonds, which is a form of direct investment. America needs to pay the interest and principle on these bonds and China can use their ownership of this debt as leverage when it comes to bargaining with the U.S. over various things. At least that is what people tell me. I am not that convinced. Besides, if we used the direct investment provided by China to invest in things like infrastructure and research that will (hopefully) increase output/economic growth in the future, we should have no problem paying back our debts to China. This is especially true when you remember that the interest rate on T bills is very low compared to other forms of investment due to them being "risk-less" assets. Unfortunately the government is using most of this direct investment to fund current consumption in the form of medicare, social security, medicaid and who knows what else.

2. The dollar might lose its place as the reserve currency. - Currently the dollar is the reserve currency for most if not all of the world. This means that the U.S. can borrow at a lower rate since there are always countries ready and willing to lend to America. It also means that most of the internationally traded commodities like oil and gold are valued in dollars, which gives Americans a slight advantage when purchasing these commodities since we do not incur the transaction costs that are a part of exchanging one currency for another. It is believed that the relative stability of the U.S. dollar, the size of our economy, and the fact that the U.S. pays its debts is largely responsible for the dollars elevated status. But just like a person who borrows too much, as the U.S. deficit rises countries may start to question our ability to pay our lenders and thus may demand higher interest rates or perhaps stop lending to us altogether. That would be very bad, at least in the short term.

I believe that this criticism does have some validity. However, I do not think that our trade deficit with China is that much of a contributing factor. The U.S. certainly has a spending problem, but the deficit with China is a small part of that problem and in my opinion a straw man for the larger issue.

3. It causes job loss in the U.S. - Quick answer: that is not at all obvious. Last night Obama talked about how his tariff on tires from China saved jobs. And while they may have directly saved the jobs of some tire factory workers, it is far from clear that they saved jobs overall. That is because when the price of tires goes up, which was the point of the tariffs, people buy less tires. This means less work for tire salesmen at Sears, Tire Discounters, etc., less work for truck drives who move tires from the ports inland, and less work for the crane operators who remove the shipping containers from the ships to land. I doubt that the Obama administration went around and counted all of the people in those occupations who lost their jobs because of the tariffs, but I am sure the number was far from 0.

So why might the tariff be bad for America? Increasing the price of tires is certainly bad for consumers. There are over 200 million licensed drivers in the U.S. All of them need to buy tires at some point. When you multiply the number of tires bought by 200 million people by even pennies, you are talking about a huge increase in the dollars spent on tires, which means that those dollars cannot be spent on other goods.

Are the jobs of tire factory workers worth the jobs of the tire support workers and this huge loss in the consumer surplus of tire purchasers? In my opinion they are not. But even if you think that they are, it is important to remember that tariffs do not come without costs. Like any other decision, there are trade offs.

The bottom line: Free trade is good. If anyone tells you otherwise the burden of proof is on them. And if it is me I need it to be beyond a reasonable doubt, and then a little bit more.

Friday, October 19, 2012

Minnesota bans learning

In another example of unintended consequences and government stupidity, the Minnesota government has banned free online learning websites from offering classes to the citizens of Minnesota. Yes, that is right. Banned. Why? Because of a state law meant to "protect" people.

"The law's intent is to protect Minnesota students from wasting their money on degrees from substandard institutions."

But as the article points out, no money is being spent and no degrees are being awarded. The classes are free and only individual classes are offered. There are no degree programs.

Here is a quote from George Roedler, manager of institutional registration and licensing at the Minnesota office of Higher Education.

"It's not like we're sending the police out if somebody signs up online," Roedler adds. "It's just that the school is operating contrary to state law."

Well I guess it is reassuring to know that if I did live in Minnesota and signed up for a free education class the police wouldn't kick my door in. Thanks George.

So what is Minnesota's solution to this obvious mix up? They want the institutions affiliated with Coursera to pay a registration fee! Wow. Luckily George thinks this wouldn't be too hard for the schools associated with Coursera. You hear that Stanford and Michigan? You're A OK for the citizens of Minnesota, but they are going to need some money first.

"George says he had hoped to work with Coursera to achieve that, and was surprised when they responded with the terms-of-service change notifying Minnesota residents of the law."

Really George? Surprised? You think Coursera has the manpower to go around to every state and meet some ridiculous licensing guidelines? And even if they did, is that how we want them using their resources? To placate rent seeking politicians?

So here you have a group of people and universities providing a great service at no cost to the consumer and Minnesota wants to jack up their costs of doing business in order to meet some state law that doesn't even really apply in this case. Forehead, meet desk.

The truth about the "wage gap"

In the most recent Presidential debate between Obama and Romney the equal pay issue was brought up again. As most of you probably know, there are people who believe that there is a systemic bias against women when it comes to wages. Not only does this not make much theoretical sense (why would companies hire men when they could get the same amount of work for 75% of the price?) but the data does not back it up either.

If you want to know the truth about the "wage gap" watch this excellent video by Steven Horwitz and

Wednesday, October 3, 2012

Should we prop up dairy farmers?

 Apparently California dairies are going broke.

People who have been dairy farmers there whole life, like 82 year old Mary Cameron, are losing money. In fact, Cameron is losing 40K/month! From the article:

Today, Cameron owes $7.5 million to her banks and creditors, and has run out of cash for feed. To make ends meet, she has sold cows for beef and fed her herd less grain — but that means milk production is down and so is revenue.

Cameron recently saw a bankruptcy lawyer and may have to sell her entire herd and dairy.

"It just makes me sad," Cameron said. "This is a world I love, this is my life."

How did this happen? Whose fault is it? Too much competition? Poor management? People drinking less milk? Mary Cameron thinks she knows:

For her woes, Cameron blames state officials' decision to keep milk prices lower than those in other states.

Wait. What? The problem according to Cameron is that the California government didn't keep the price high enough? So according to Cameron, the government is responsible for keeping the price of milk high enough for her to make money. And if they don't well that is just not fair.

But what about consumers? Why should everyone pay a higher price for milk so that Cameron can keep her farm? As the article states:

CDFA spokesman Steve Lyle said the reason for lower prices is that milk supply exceeds demand in California.

What Steve Lyle meant to say is that the quantity supplied exceeds the quantity demanded, but that aside, no one wants to buy the milk that Cameron is producing for the price that she wants to sell it at. Yet she, and other farmers, think that us consumers should be forced by the government to pay a price that suits them. It never ceases to amaze me that articles about agricultural price floors never mention the effect of high prices on the consumer. 

Not only are price floors bad for consumers in that they artificially reduce consumer surplus, but they also create a deadweight loss, which is bad for some producers and consumers.

California needs some dairy farmers to go out of business and the state government needs to quit fixing prices so that a market equilibrium can be reached in which the quantity demanded equals the quantity supplied. If not, consumers will bear the burden of keeping inefficient farmers like Mary Cameron in business.

"That's where I belong," she said, "...that's where I've been all my life."

No Ms. Cameron, the market says that is not where you belong. And it is not the responsibility of milk consumers to artificially support your lifestyle.