Bogus trade arguments are often made in America

Once again I am compelled to remind people that good graphics and snazzy background music are no substitute for proper academic research.

Someone sent Mike Munger a video entitle "Million American Jobs Project" that rehashes the old protectionist get-rich scheme of diverting consumer spending to domestic products while ignoring higher costs and the wealth destruction that follows.



The entire thing appears to be a rip off of ABC's Made in America political campaign from a few years ago, right down to the bogus claim that unnamed economists back up what they're saying.

If each of us spends just 5 percent more on things made in America, economists say we will create a minimum of a million new jobs for Americans.

That's a lie. You're a liar, Mr. nice sweater with rolled-up sleeves to express you devotion to hard work. Your "research" was also a complete farce, as American manufacturing jobs didn't leave so much as get replaced by labor-saving technologies. That's why production levels rose as employment levels fell.
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Has Peter Morici ever been told?

Once again Peter Morici, who is commonly introduced as an economist because he teaches some economics classes at the University of Maryland, has written a bogus opinion piece claiming that a disaster is good for the economy. That is, the unwanted destruction of valuable resources leads to a greater number of resources in the same area.

Morici has been penning articles like this for a long time, and he's immediately smacked down by people like Don Boudreaux and Mike Munger. What's different this time I noticed is that the commenters to the original article tore it apart right away.

Boudreaux has called Morici out on these claims before. Henry Hazlitt even wrote a book about why Morici is wrong in 1946. They are far from alone in their criticism.

What I don't understand is why Morici keeps on trucking like nothing is up. Does he know that he's a court jester? Has no one told him the gaping flaws in his arguments so he can respond to pick up the remains scraps of his dignity?
I don't advocate violence or criminal activity, but since Morici is claiming it's in everyones interest to destroy, why hasn't he asked anyone to burn down his house?
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Bootleggers abandon Baptists

I've seen some pretty bad examples of jobs created for the sake of jobs, but this issue in North Carolina takes the cake. Politicians blocked a bill that would end inspections of new cars.

Usually the supporters mask their position with claims that creating these artificial jobs will benefit the larger society. They're not even trying here.

Sen. Jerry W. Tillman, a Randolph County Republican, protested that the measure would hurt garages, tire dealers and inspection stations – whose trade associations had lobbyists in attendance at the crowded meeting room.
 “I know a lot of people who do this, and they sell some gas on the side, but most of their profit comes from these inspections,” Tillman said. “We have 7,500 small businesses that do these inspections.”
Car owners statewide pay $13.60 for the annual safety inspection. The emissions inspection, required in 48 mostly urban counties, costs an additional $16.40. Studies have shown newer cars have fewer safety or emissions problems. State motor vehicle and air quality agencies have supported the proposal to end inspections for cars from the three most recent model years.

Mike Munger has some choice words.

So, the original bill would have saved taxpayers $30 million. Our legislature has decided that $20 million of that should be set aside as a subsidy to people who provide pointless inspections, apparently at an enormous profit. But we could eliminate the charade of the inspection, and just force car owners to fork over the cash directly, and save those car owners more than $10 million.  

Why don't we do this? Everyone is better off. Station owners get their cash, the mercantilist legislature can hoard their "jobs," and car owners save a lot of valuable time.  

 The answer is that the charade is the point. It's important. If we admit that most government "services" are actually just the new mercantilism of protecting zero-productivity jobs, then we would have to think about getting rid of the jobs. And then where would legislators get their campaign money? They'd have to talk to actual voters, instead of lobbyists. Ick. 

"Ick" is right. In July 2010 I wrote:

As I've said before, destroying jobs is progress. Imagine if instead of making legislation easier to read, we decided to make it harder, and Latin replaced English as the language of American law. Now all laws are written entirely in Latin. Law firms would be forced to hire Latin scholars to translate for the legal team. There would be some law and Latin experts, but you would expect a lot of two-man teams to do the job of one paralegal. This sounds really nice to window breakers, but the rest of us can see the price of legal services would jump and society would be made worse off.

How is making needless inspections anyone better off? The supporters don't even pretend it benefits anyone except the inspectors. It's a bad sign when the bootleggers can run free instead of hiding behind the Baptists.
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Taxes are progressive enough

There is a lie being repeated that America has a regressive tax system, that the rich pay a lower percentage of their wealth than the middle class. Instead, we have a progressive tax system that has done a great job of keeping inequality in check.

As I've said before, there's nothing wrong with inequality. What we should focus on is the well-being of the poor, and the poor in America enjoy a high standard of living.

The recent Bruce Meyer episode of Econtalk made a compelling point that inequality is much lower than the pundits claim because they are merely looking at pre-tax income. Once you factor in taxes, consumer spending and government assistance programs like the earned income tax credit you see a much different picture observe.

Both the left and the right make the mistake of focusing on the top tax bracket in the past, which was higher than it is today, but affected few people. A much larger percentage of our federal taxes paid by the wealthy, and it's not just because they have more of the wealth. We are seeing lower taxes for the poor and middle class.

Enter Warren Buffet and the claim that he pays a lower tax rate than his secretary, whose income was never identified. He claimed he paid 17.4 percent while everyone else in his office pays 31 to 44 percent. Greg Mankiw said that isn't even true, but let's play along and say it is.

Is it fair for members of the left to use him as an example to "prove" that the rich pay a lower tax rate, like "Bob" did in an exchange we had in a comment section at For The Sake of Science last month? People rightly claim that taxpayers are able to use loopholes and write-offs to reduce their tax bill, and the rich have access to smart accountants who can exploit them, so could this stymie the progressiveness of the official tax rates?

The good news is that the hard data says otherwise. Using Warren Buffett as an anecdotal example is misleading, as we can see by looking at the effective federal tax rate that compares what people actually pay in taxes to their incomes. Here's what the Congressional Budget Office projected for this year:



It's plain to see that in reality, the five different quintiles fall neatly in line, with the top 1 percent that gets so much focus today paying the highest at 33.8 percent. It is a lie to say the rich pay less of a percentage of taxes than anyone else.

All is not lost for the left. They could simply abandon this bogus claim of a regressive tax system and instead focus on the gains that have come through lowering taxes for the poor and middle class and various "redistribution" programs like the earned income tax credit. That would allow them to sleep better at night instead of, in the words of Michael Munger, elevating the sin of envy to a virtue.
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Pretty pretend guns are not a right

Lately my fellow bloggers have been writing about the importance of rights, like the right to a trial in relation to the safety of the public over at Congress Shall Make No Law, and fictional rights that fools cherish, such as the right not to be offended as Popehat and For The Sake of Science both did a great job of hammering out.

So with that in mind, I'm going to tackle the issue that really matters to me - the false claim that Gears of War 3 players have a natural right to pretty guns.

Gears of War 3 is an Xbox game that retails for $60. In some online multiplayer modes, there are some purely aesthetic customizations one can make to their character, the relevant one here being "weapon skins," where the guns players uses can have different paint jobs or animated graphics to make their pretend guns dazzle. Some of these weapon skins are unlocked by completing specific tasks in the game, but a set of 22 was made that players have to pay real money to use.

For $3, you can unlock a static paint scheme like tiger stripes or a flower pattern for all five starting weapons. For $4, you get an animated graphic, like an ocean ripple, for all five. For $15, you can unlock all 22 skins for one of the five weapons, and for a poorly-spent $45 you can unlock each and every one of them.

Predictably, there has been a lot of complaints on the Internet, most of it whiny. The best articulated criticism I have seen is from a level-headed competitive player named K.L. who made a very reasonable video saying this isn't the end of the world, but he doesn't like the policy of incorporating money-making tactics normally reserved for freemium games into a retail game. He hit all the normal points, such as making people pay to use content on the disc, something I don't have a problem with.

Let me start by saying K.L., or "arCtyC" as he likes to be called, has hit upon a gut feeling I share. There is something disappointing about having to pay to use these fun weapon skins. He also does a good job of stressing that this is an entirely voluntary transaction.

Paying to make your pretend guns prettier goes beyond voluntary and satisfies all of the criteria of Michael Munger's "euvoluntary" or "truly voluntary" criteria. Epic Games created the skins, has the legal right to sell them and customers know what they're getting. The weapons skins have no impact on weapon performance, and there are still zero-dollar unlockable weapon skins, so players are not punished for failing to buy them. There is no coercion vaguely associated with this transaction.

So that leaves one criteria to be considered euvolunary. How terrible is the Best Alternative To A Negotiated Agreement, or BATNA? If not buying a product will result in the death of a consumer, the BATNA differential is said to be very large.

I have trouble imaging a smaller BATNA than not being able to use a pretty pretend gun without paying $3. Sure, it's foolish for most people to pay $45, and I imagine most people chose not to, but a lot of people paid an extra $90 to have their copy of the game bundled with a cheap desk statue, a few trinkets, fake documents and a few different weapon skins and aesthetic downloads. For some reason, offering special editions of games and movies to consumers doesn't draw the same complaints, but the same elements are all there.

I gave it some thought and paid $3 to have the pretty flower imagine at the start of this post put on some of my pretend guns. This small price acts as a barrier, preventing every other player from having an obnoxious arsenal, and as a result I haven't run into anyone else with the same pretty guns.

There is no way to know if Epic Games planned to include the weapon skins, and later decided to charge for them, or were simply looking for another source of revenue and put a little bit of work into creating these for-pay paint jobs. The intent is irrelevant. The weapon skins are a fun addition to the game that I was happy to pay a small amount of money for, and in result, I received exactly what I wanted.
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Who protects consumers from big businesses?

In response to yesterday's post, Jeremy writes:

"How do you respond to the leftist argument that free-markets enable undesirable behavior by industries such as "predatory lending" or the neglect of ecological disasters such as the Union Carbide leak in Bhopal.

"The behavior I'm particularly interested in hearing your response to is manufactured demand. Most economic models act under the assumption that the consumer is logical - but I think you are aware of just how illogical consumers can be...

Sales of bottled water didn't skyrocket until massive marketing campaigns (propaganda?) convinced people that bottled water was a good idea - despite being wasteful and relatively quite expensive.

"Credit cards are another example. I would argue credit cards are a significantly better idea than bottled water - and certainly have their uses. But obviously, some people just shouldn't have them. Credit card debt can be devastating. If they were logical and well informed, I assume they wouldn't demand the service - or maybe demand less, but there are obviously instances of people borrowing more than they can handle.

"People who fail to pay their bill on time and suffer late fees are profitable. In a free-market, what's to stop a credit card company from spending millions on targeting their marketing towards profitable consumers in the absence of education (generally public) or consumer protection mechanisms?

"Individualism and self-reliance (qualities highly valued by the right) are great, but what's an individual to do when millions (billions?) of dollars are spent to convince them to act a certain way that benefits industry but, arguable, is destructive to them. (Think: consuming expensive bottled water, eating fast food and accumulating excessive debt.)"

In answer to your first question, I believe competition in the free market protects most consumers from bad products. The Internet has been a great tool for assembling consumer reviews, including repeating horror stories of bad companies.

Milton Friedman did a PBS special in his 1980 Free to Choose series entitled "Who Protects the Consumer?" that goes deeper into how the free market encourages good products and services, and how government intervention stifles these things and creates monopolies. You can see it here.

It's important to remember that even though there are flaws in the marketplace, the treatment from government intervention has a lot more potential to do harm.

Bruce Yandle came up with a theory called "Bootleggers and Baptists" that any piece of legislation will have two types of supporters: Those who support it on moral grounds (The Baptists) and those who support it because they will benefit from it (The Bootleggers). He explains how the Clean Air Act was worsened by coal lobbyists. The legislation forced companies to buy an air-cleaning product that made it cheaper to buy the most toxic coal around, and it lead to more pollution.

In addition, Yandle identifies the tobacco settlement in the 1990s as a scheme to make it more expensive to sell tobacco; protecting big tobacco from smaller competitors.

If you take one thing away from this response, let it be this: Corporation do not want a free market. Big companies would much rather have the government protect them from competition. They are willing to lobby or make outrageous claims in support of regulations, tariffs, subsidies and bailouts for protection.

Advertising as propaganda

As for advertising influencing people to buy things they don't need, I point you to skeptical marketer Steve Cuno's article on that very subject here, and his response to angry critics here. I am unaware of his politics, or if he envisions any legal restrictions on advertising, but his commitment to science is clear. A telling paragraph from his first essay:

"No matter how well crafted advertising may be, the inescapable fact is that the market always has a choice. The most skillful advertiser cannot foist a product on a public that doesn’t want it. There’s a reason for the failure of products like Bic disposable underwear, Cosmopolitan (magazine) yogurt, Colgate kitchen entrees, Ben-Gay aspirin, Smith & Wesson mountain bikes, and McDonald’s clothing. Though respected, experienced advertising agencies threw their best at these products, the market voted NO with its collective checkbook, leaving ad agencies powerless to do anything about it.

"But markets can and often do wield the checkbook irrationally. When that happens, advertising makes a handy scapegoat. Advertising couldn’t make us buy Coors bottled water or Harley-Davidson perfume, but people still prefer to believe it makes us reach for Apple Jacks instead of apples."

So while I agree that buying bottled water is foolish, I don't know what impact advertising had on it's success. As Cuno writes, it's a logical fallacy to assume that because sales increased after an advertisement, that the advertisement caused the sale. Specifically, that fallacy is called "Post hoc ergo propter hoc."

As for predatory lending - I really don't know much about this subject. It's possible that companies try to give people credit so they can be trapped in debt, but that just sounds like a campfire story about dark masters.

What I do know a little about is the allegations of predatory lending and the recession. We blame companies for giving houses to people who can't afford them. However, that doesn't mean it was the free market at fault. We had a big push to help people get houses, and we had a string of lawsuits against financial institutions that didn't lend to the poor.

What are banks supposed to do? We said its wrong when they only lend to the rich, but then when they lend to poor people and those loans default, we say they were acting irresponsibly.

Mike Munger of Duke University said regulations set the banks up for the fall. There's still plenty of blame to go around to the banks, but it wasn't simply a lack of regulation that caused the terrible problems.

What are the limits?

The free market, however, does not guarantee environmental protection. That's why I support pollution taxes. It's very easy for a company to tolerate pollution "externalities" and a tax on pollution makes companies absorb those costs.

In addition, I also believe the government has a role in punishing companies that commit fraud. They aren't doing a good job of it with pseudomedicine, as the FDA allows companies to sell placebo products if they just put a little message on it that says it hasn't been tested.

In both of these cases, someone could make an argument that the free market will solve them. Fraudulent businesses will get bad publicity and people will avoid them, and there's a big push for environmentally-friendly companies. Consumers can encourage a company to be more Earth-friendly by boycotting reckless ones.

However, I don't believe these forces are enough. Fraud is a very purposeful act and deserves legal punishment, and people don't shop around enough for things like utility companies - which can lead to a lot of avoidable pollution.
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