Internet Commentator

The decline in manufacturing is a good thing

I posted last year about the widespread cargo cult which elevates manufacturing jobs above all. Don Boudreaux has a great post over at Café Hayek on this very topic and I think this particular quote really nails it:

Service-sector jobs are the most desirable. Until his retirement, my dad had a manufacturing job: he worked as a welder in a shipyard. Like most parents, his dream was for his children to become doctors or lawyers and the like. Ever hear a parent say “I want my boy to grow up to be a pipe-fitter!” or “My dream is for little Suzy one day to operate her very own sewing machine in a clothing factory!”

The cargo cult

It is often the case that someone who finds reality incongenial to his political outlook will identify phantom complaints to bolster his contention that things really are worse than they appear to be. Ireland's relatively liberal economy must be hell for assorted dirigistes, collectivists and protectionists. Damn it if it doesn't seem to demonstrate that free trade and lower taxes are strongly correlated with prosperity. But hark, on the horizon lurks the spectre of a decline in manufacturing coming to rescue the forlorn protectionists from the embrace of crazy bug eyed neo-liberalism. Could it be - be still my dirigiste heart - that disaster looms after all? Such immiseration would be a small price indeed for the contentment that comes with knowing one was right after all.

But, sadly for protectionists, gladly for the rest of us, this is a phantom complaint, a chimera, albeit one with a strong intuitive appeal. After all, how are we supposed to make money if we don't make things to sell, dammit?

Now, I agree with The Economist that a decline in manufacturing is a good thing:

Yet there is a residual belief that making things you can drop on your toe is superior to working in accounting or hairdressing. Manufacturing jobs, it is often said, are better than the Mcjobs typical in the service sector. Yet working conditions in services are often pleasanter and safer than on an assembly line, and average wages in the fastest-growing sectors, such as finance, professional and business services, education and health, are higher than in manufacturing.

A second worry is that services are harder to export, so if developed economies make fewer goods, how will they pay for imports? But rich countries already increasingly pay their way in the world by exporting services. America has a huge trade deficit not because it is not exporting enough, but because American consumers are spending too much.

I suggest that this intuitive belief that it is better to be "making things you can drop on your toe" is nothing but a cargo cult which attaches some sort of mystical intrinsic value to objects. An object you can drop on your toe is only worth what someone else is willing to pay for it. There's no point in making it if it turns out that nobody wants it at the price for which you can afford to sell it, or even worse, for free.

My old Apple Mac LC 4/40 computer was worth quite a few quid when I bought it back in 1994. You could do plenty of toe-damage by dropping it. But it's now worth approximately zero (perhaps given the cost of disposal, a bit less than zero). I could "boost manufacturing" by setting up a factory to make 1994-era Apple Macs but I would lose my shirt. Nobody wants to buy these objects from Ireland or anywhere else. But there's plenty of stuff people still want to buy from Ireland - holidays, services, film-locations, software - even if less of it these days troubles your toes.

Homo Economicus versus Homo status-us

Great article from Arnold Kling on motivations. Noting that while economic motivation is often frowned upon, status-seeking is more prevalent and more harmful:

The drive for economic gain helps the individual, and, as Adam Smith famously showed, helps others. Trade and economic growth are positive-sum games, in which there can be winners without losers. Moreover, when people seek economic gains, this is usually transparent. You usually understand when you and others you transact with are trying to improve your economic well-being. Status, on the other hand, is typically a zero-sum game, in which one person's gain comes at the expense of others. Adding to the evils of status-seeking is that people often deceive themselves and others into believing that they are doing something for a higher motive when in fact they are seeking status.

[...]

Most importantly, I believe that we often are mistaken in attributing our own motives. In particular, I believe that the status-seeking motive is more powerful than we recognize. Actions that we claim are undertaken for economic or higher-calling reasons may in fact be motivated by status-seeking.

[...]

There are people who genuinely help the poor and others in need. However, I think there are many more people who seek the status of being perceived as championing the poor. Such status-seekers may attain their goal without doing much good. In fact, even if they harm their supposed beneficiaries, they may nonetheless achieve higher status. The so-called "relief effort" following Hurricane Katrina, appears to be following a typical pattern, in which very little of the funding is likely to reach those in need.

Even more on the flat tax

Michael Larkin at Disillusioned Lefty chips in on the flat tax debate following an article by Johann Hari:

With respect to Hari, his contribution to the debate on a flat tax, while certainly more important than mine, is hardly that significant. My problem with the article is the manner in which he refers to his political opponents, saying, for example, that the salesmen of the flat tax are just "flogging a huge bonus for the rich". Yes, he's entitled to say whatever he wants and all that jazz, but I would hope that one day we could get past this misrepresentation of people who simply disagree with you. Hari is right in saying that the flat tax, by definition, is going to reduce the tax burden on the rich; there need be no debate about that. And if a government was to introduce a flat tax, it wouldn't be beyond the realms of reality to argue that they were simply peddling to their super-rich financiers for entirely self-motivated reasons. Equally, it is not beyond the realms of reality that the likes of Steve Forbes might be arguing for a flat tax for entirely self-motivated reasons. Of course, it may not be true, but the question is worthy of debate. But what isn't worthy of debate is everyone who supports a flat tax is doing so for self-motivated reasons.

Here's Michael's earlier post on the flat tax.

More on the flat tax

One of the things which bugs me about the whole flat tax discussion is the attempt by (generally) left wing opponents to restyle it as a principled, deontological argument of left versus right, redistributionism versus laissez faire. But, this really is a consequentialist question - would such a tax be more efficient? - and if it is possible to settle this question, there's no reason why such a tax couldn't be adopted by the redistributionist left. In fact there are many opponents of flat taxes on the "right" because it is much easier to raise a flat tax than a progressive tax - the boiled frog syndrome - and flat taxes per se don't do anything to scale back the size of the government. What depresses me reading left wing critiques of the flat tax such as Hutton's or that of his colleague Victor Keegan, the week prior, is that they offer the flimsiest palimpsest of a consequentialist argument, reserving their passion for normative statements such as "There is something about flat rate taxes and social justice that just do not mix." This type of conservative* social democracy is doomed, wedded as it is to means, however outdated (or even tried-tested-and-failed), of nationalisation, punitive taxation instead of aims of freedom and fairness .

* in the literal meaning - the opposite of radical.

Not what I'd call a demolition

I promised in the post below that I'd have a closer look at Will Hutton's argument against the flat tax from last Sunday's Observer. Hutton begins predictably:

Even its most enthusiastic champions recognise that for the first few years the income tax take will fall, but only as the price of transition.

Er, no actually. Its champions, enthusiastic and lukewarm alike tend to argue that the tax take would go up. It is one of the cornerstones of the flat tax argument. Hutton is erecting a strawman and stuffing words into his mouth.

There would be such a tidal wave of business start-ups and a burst of creativity unleashed by the new incentive that increased growth would soon restore overall revenues to where they used to be. An economic nirvana would dawn.

The strawman speaks! It is true that flat tax proponents think such a system would tend to generate significant benefits for the economy, but that is not the same thing as saying that you can bank on this to cover the alleged shortfall between the current complicated system and a simplified system. The argument is that there are huge deadweight costs associated with a complex tax regime and that high marginal tax rates and tax breaks encourage non-compliance or market-distorting avoidance measures (for example, Ireland's section 23 properties) and that a simplified system makes declaring or collecting taxes easier and more transparent. This ought to be a benefit right from the off even if the mini-boom doesn't take off. No "period of transition" applies.

As for the poor, if the flat rate was too onerous, then one sole new allowance might be permitted: an exemption for, say, the first £10,000 or £12,000 of income. Millions would be taken out of the tax system altogether. And the millions more who earn just a few thousand above the threshold would be better off, too; they would just pay the flat rate on the balance of their income over the allowance - a trivial amount.

This threshold is not some provisional post-hoc option but is built into pretty much all flat tax proposals. Otherwise, it's not clear what precisely is Hutton's objection.

This is an economic idea that has gone from the batty fringe to centre stage faster than any other I can remember. No matter that it is virtually impossible to construct a flat-rate tax without massively squeezing the post-tax incomes of middle-income earners while giving the rich a gratuitously large kickback because the rate has to be set above today's basic rate of tax but below the top rate. No matter that the only way round this problem is to slash public spending, allowing the flat rate to be pitched below today's basic rate while finding resources to at least double the current threshold for paying tax.

Nonsense again. Not only is it not "virtually impossible" but it's eminently do-able. Try as Hutton might, this is not a batty idea and has been studied by plenty of experts of evidently greater imagination than he. And not only the Adam Smith Institute. Indeed, a recent UK treasury report which was presented as endorsing the type of arguments Hutton makes was since revealed, thanks to the Freedom of Information act and the Daily Telegraph, as supporting the notion that tax rates would reduce under a flat tax as a result of greater compliance and foreign investment.

Or that the collection problems it might have helped solve in eastern Europe and Russia do not exist in law-abiding Britain.

[laugh]

[wipes tear from eye]

Poor old Will must lead a really sheltered life if he believes this.

No matter that some allowances put forward for the axe, like those to encourage pensions, exist for very good reasons, or that the only way to capture even the first disputable benefits is to apply the flat rate across the entire tax system because income tax generates a mere quarter or so of all tax receipts.

This is why I seldom read Hutton. His obtuseness. I don't know whether to laugh or tear what's left of my hair out. This weird "disputable benefit" argument is nonsensical. Either the flat tax doesn't have a benefit (a point he has been vainly trying to establish) or it does. If it doesn't, it makes no sense to maintain that to "capture" this benefit, the flat tax would be expanded into other areas. This is possibly a revealing slip. One might be tempted to conclude that Hutton fears that the flat tax would be successful after all and the consequent implication for his corporatist social-democrat world-view and soak-the-rich politics in general.

In fact, Hutton's supposed "demolition" merely rehashes most of the common misconceptions about such a tax. The Adam Smith Institute's Madsen Pirie does a pretty good job of dealing with these and more in this Think Piece.

I'm smoking the truth, man

I started a comment over at neither indifferent nor sceptical enquiring of Ciarán what he was smoking, but as the comment lengthened I felt my thoughts warranted a blog post. Ciarán mentioned, approvingly, a bizarre piece in today's Guardian by Phillip Pullman suggesting a few "conservative" policies the Tory party might like to consider.

Here's Ciarán:

It's not precisely cogent argumentation, but Pullman is raising an important issue that has been around for a while. That is, that much of contemporary British conservatism is, well, not very conservative.

And my thoughts...

Ciaran, what are you smoking? I read Pullman's piece earlier and was trying to figure out if he was serious (in his satirical intent). There might not be much that's conservative about contemporary "conservatism", but there's absolutely nothing conservative in Pullman's grab bag of 1970s Labour policies. Since when are nationalised healthcare and education and punitive taxation* "conservative"?

An attachment to market, without much in the way of regard for the suitability of markets for certain activities or the effects of market forces on the less well off (who happen, for the most part, to be the children of the less well off too) involves a degree of disengagement that genuine conservatives could not have condoned.

Funny that, I could have sworn I noticed that countries with freer economies tend to have less poverty and greater employment. Am I disengaged from reality or are those on the left who are so wedded to the notion that free markets create unfair outcomes disengaged from the inconveniently obverse reality?

And as for the idea of a flat-tax: it may get Schroeder re-elected in Germany. Besides that, I can't believe any sane politician could flirt with it as a viable electoral winner. By which I mean, too many people will either see public services or their wages fall as a result of its introduction whilst simultaneously knowing that they're paying the same tax rate as the Queen...

I know it's sacrilege to even consider a flat tax but has it occurred to you that you might simply be wrong? For starters, there's really no reason why people ought to see their wages fall - most flat tax proposals envisage that the tax wouldn't kick in until a certain threshold. The big change people could see is not that their overall tax take would go up but that their marginal tax rate would go down - no more penalising overtime and encouraging people to opt for cash in hand or nixers instead. Secondly, one argument for flat taxes is that they could increase the overall tax take. Now this is not some nonsense argument about this tax spurring growth, but rather that a simplified tax rate would a) encourage greater compliance and make it easier to detect non-compliance, and b) remove all the various tax shelters, breaks and incentives which apart from the distortions they cause, typically mean that the super-rich pay much less tax than they would under a simple nonavoidable flat tax.

..See Will Hutton's demolition of it in last Sunday's Observer.

"Demolition" is rather flattering. Will Hutton's piece is nonsense (I expect no less - he's been wrong about almost everything else hitherto) and ripe for a bit of critical analysis which I promise to get right to...

* Pullman's exact words were: A genuinely conservative idea would be to restore the principle that the wealthiest people should bear more financial responsibility than they've been required to do under the filthy-rich system: so income tax for the rich should go up.

Look on the bright side...

Like Dick O'Brien, I'm often late to peruse my copy of the Economist, so it wasn't until this morning that I got round to reading last week's issue. It wasn't exactly a choking-on-muesli moment, but I did find myself startled to read this passage from the leader on Katrina:

History suggests that the hurricane will have little effect on the national economy. Despite all the pictures of sinking hotels and flooded convention centres, the overall impact of natural disasters is often close to neutral: lost output (which will be large) is then compensated for by a surge in reconstruction and public spending (also large). That may be scant comfort to individual hoteliers, residents and insurers, but on a national level the economic damage will be real but limited.

[emphasis added]

Somebody at The Economist needs to be familiarised with the work of a certain French gentleman. Now, I'm no economist, but I can see that any money devoted to this "surge in reconstruction and public spending", just like the money James Goodfellow has to spend repairing his window, is merely diverted from constructive use in other parts of the economy, not conjured up from thin air. Perhaps a better way of phrasing this might have been to say that the American economy is large and flexible enough to withstand the undoubted shock represented by Katrina's devastation. You expect to see broken-window thinking in the aftermath of such a disaster - there was certainly plenty of it after the tsunami - but not in a publication calling itself The Economist.

French productivity

I admit that I am somewhat of a closet Francophile but there are quite a few things about France I most certainly do not "phile", not the least of which is that country's illiberal labour regulation. One of the little nuggets regularly profferred by Franco-boosters - most recently by Paul Krugman - is the notion that, despite its job-destroying economic policies, France enjoys higher productivity levels than its more liberal and prosperous peers. Division of Labour tackles this resilient, er, canard:

Consider a thought experiment: Suppose countries A and B each have 10 people employed and that output per worker in the two countries is equal. Workers within each country are not equally productive but the distribution of productivity is the same in both countries. (If it is easier to grasp--assume 10 sets of identical twins have been separated at birth with one child from each set of twins going to each country.)

Now suppose that country B decides to enact some sort of tax or labor market regulation. As a result of this policy the least productive worker in country B is no longer employed. (For concreteness, the policy might be a minimum wage law that makes it unprofitable for a firm to hire the worker at the minimum wage.)

What effect does this policy have on the productivity of workers in the two countries? Country B's productivity now appears to be higher than country A's because the least productive worker in country B is no longer employed and no longer counts in the productivity calculations. (This is akin to having one's course average increase when the lowest grade is dropped.)

[via Cafe Hayek]

This time it's different!

There are a number of blogging tics that irritate me (and if I've ever been guilty of these I hang my head in shame!), use of terms like "MSM", or "The Blogosphere". One of the most annoyingly persistent memes (sorry, I know this word is another blogging cliché) is to establish a "watch" blog solely devoted to picking apart the blog posts of your particular bete noire:" Warbloggerwatch, warbloggerwatchwatch, sullywatch, yada yada yada. These blogs resemble nothing so much as a pantomime audience, the "counterpoint" consisting of an abrupt "Oh, no it isn't" more often than any detailed counterargument.

However, this one is rather good. Radley Balko of The Agitator was so incensed by Morgan Spurlock's tendentious, error-strewn output - including Super Size Me, Don't Eat This Book and 30 days - his contempt for capitalism and his popularity among the less reflective youth that the one op-ed piece he intended to write about "Don't Eat.." developed into a fully fledged blog. Lot's of good stuff there and a pretty thorough rebuttal of plenty of Spurlock's disingenuous or erroneous claims.