Market Correction

8 June 2009

Editor, Slate

Dear Editor:

Eliot Spitzer asserts that the U.S. economy is in a "transition away from actual goods production" ("Green Shoots, Red Ink, Black Hole," June 3) - part of a long-run pattern that Mr. Spitzer finds "terrifying."

While today's economy is in poor shape, and likely to be made worse by Uncle Sam's frenetic fiddling, the only thing terrifying about the data that Mr. Spitzer presents is Mr. Spitzer's shabby understanding of them.

For example, the evidence that he offers for America's alleged transition away from goods production is the decline in the number of manufacturing jobs. Yes; such jobs are disappearing. But the value of total U.S. manufacturing output is rising. In fact, in 2007 it was (as it has been for decades) the largest in the world, at an all-time high of $1.831 TRILLION - accounting for more than 20 percent of the entire world's manufacturing output. The country generating the second-largest flow of manufacturing output in 2007 was China, which produced output valued at $1.106 trillion – only 60 percent of the U.S. total.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

7 June 2009

Editor, The New York Times Book Review
620 Eighth Avenue
New York, NY 10018

To the Editor:

Reviewing Michael Crawford's "Shop Craft as Soul Craft" (June 7) Francis Fukuyama writes:

"Highly educated people with high-status jobs - investment bankers, professors, lawyers - often believe that they could do anything their less-educated brethren can, if only they put their minds to it, because cognitive ability is the only ability that counts. The truth is that some would not have the physical and cognitive ability to do skilled blue-collar work, and that others could do it only if they invested 20 years of their life in learning a trade. “Shop Class as Soulcraft” makes this quite vivid by explaining in detail what is actually involved in rebuilding a Volkswagen engine.... Small signs of galling and discoloration mean excessive heat buildup, caused by a previous owner’s failure to lubricate; the slight bulging of a valve stem points to a root cause of wear that a novice mechanic would completely fail to perceive."

Indeed. This insight that a successful economy must use knowledge that is dispersed, unimaginably detailed, and often unable to be articulated fueled F.A. Hayek's skepticism of government intervention. Here's Hayek:

"Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances."*

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

* F.A. Hayek, "The Use of Knowledge in Society," American Economic Review, Sept. 1945, Vol. 35, pp. 519-30. This quotation appears in paragraph 9:

http://www.econlib.org/library/Essays/hykKnw1.html

6 June 2009

Editor, Washington Times

Dear Editor:

Peter Leitner wants Uncle Sam to stop G.M. from selling its Hummer division to China-based Sichuan Tengzhong, LTD., in part because this sale allegedly would be a practice in "forever hijacking scores of U.S. jobs" ("Hummer sale to China," June 5). Mr. Leitner is blind to the full scope of the modern economy.

Most U.S. jobs today depend critically on economic openness of the sort that Mr. Leitner decries. Capital from abroad; inputs from abroad; customers abroad; and consumer goods from abroad (that lower prices in the U.S. and so raise Americans' real wages) - each of these consequences of economic openness plays a large role in creating countless jobs in the U.S. and, ironically, in imparting to all jobs in America much of the attractiveness that makes the prospect of losing these jobs so difficult.

Making America more closed to trade would indeed keep fewer U.S. jobs from 'moving abroad,' but it would also make these jobs less worth keeping.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

5 June 2009

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

Floyd Norris wisely warns against the unintended consequences of tax policy - in this case, a one-time tax break on overseas profits that backfired ("Tax Break for Profits Went Awry," June 5).

But the ill and unintended consequences of another piece of tax-policy social-engineering needs greater attention. I speak of Internal Revenue Code section 162(m), a 1993 brainchild of Bill Clinton. Aimed at reducing what Mr. Clinton divined was excessive executive salaries, 162(m) eliminated the tax-deductibility of executive pay in excess of $1 million UNLESS such pay was performance-based.

Alas, as found by economists James Wallace and Kenneth Ferris, "One unintended consequence of the legislation was that executives' total compensation actually increased in the post-1993 period."* The reason is that a greater portion of executive pay was shifted into performance-based stock-options - which are both less transparent to shareholders than are annual salaries, and which give executives greater incentives to rig short-term results in ways that raise executive pay even as this rigging increases market volatility and reduces dividend yields.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

* “IRC Section 162(m) and the Law of Unintended Consequences” (Nov. 2006):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=942667

4 June 2009

Editor, Washington Times

Dear Editor:

Cal Thomas is correct to note that government-produced automobiles are no models of performance, style, or safety ("Downfall of an icon," June 4). They truly are hunks of junk.

I recall being in Germany in September 1990, not long after the collapse of the Iron Curtain. A German friend told me of a then-recent incident that happened at night as he drove on the autobahn. He was cruising along at about 120 miles per hour in his Mercedes when he saw ahead two faint, flickering lights. "Good thing I slammed on my brakes," he said, "because the lights were candles in the rear window of a Trabant. They were being used as tail lights!"

The government-made Trabant, I gather, had a top speed of about 60 MPH - and, obviously, also a wholly unreliable electrical system.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

4 June 2009

Editor, Washington Post
1150 15th St., NW
Washington, DC 20071

Dear Editor:

Google CEO Eric Schmidt should not be surprised that Google's market success "has competitors sharpening their lobbying efforts" ("Tech Titans' Ties to Washington Grow Closer - and More Complicated," June 4).

Mr. Schmidt's father, the late Wilson Schmidt, was on the economics faculty at Virginia Tech many years ago when that university was home to the Center for Study of Public Choice - a group of scholars whose research shows that government serves well-funded and well-organized lobbies far more readily than it serves the public good. That the elder Mr. Schmidt was instrumental in furthering the research that reveals this reality is evidenced by the fact that the Center's library, now at George Mason University, proudly bears his name.

Sincerely,
Donald J. Boudreaux
Director, Center for Study of Public Choice
and
Chairman, Department of Economics
George Mason University