The US 'Rustbelt' explained

"[M]any people reflexively blame trade for the decline of [what's become knows as the American] 'Rustbelt.' ...
    "But ... [d]oes trade explain the decline of steel employment from roughly 190,000 to 84,000?

If trade [alone] explained the loss of employment in steel mills, then you would expect to have seen a precipitous decline in domestic steel production. In fact, there’s been very little change in steel output during a period where employment has plunged sharply:

"[I]mports have had some impact on employment in manufacturing. But the primary cause of job loss has been automation [exacerbated by] unionisation forcing jobs to other parts of the country, rather than trade."

~ composite quote by Scott Sumner and Jon Murphy from Scott's post 'Trade as a scapegoat'

You would think that when serious problems exist in the world, the world would be desperate to understand the causes. Yet causality, as a field of inquiry, is in decline. The great tragedy, as Finn Andreen explains in this guest post, is that discovering the real and underlying causes for social and economic problems is too often deemed unnecessary (and far too often wilfully ignored), and the public’s support instead is too often for easy, simple, and wrong-headed statist solutions ...

Libertarianism and the Importance of Understanding Causality

by Finn Andreen

Even though support for the free market has become stronger in the last decades, and a self-proclaimed libertarian just elected to President in Argentina, libertarianism itself can still only be considered a fringe movement. Most people still believe that many social problems are due to “market failure” and therefore require state intervention to be “solved.” Despite the obvious flaws of modern socialism—with its unlikely combination of a redistributive welfare state and globalist crony capitalism—and despite libertarianism’s robust philosophical and empirical foundations, the liberalism of Ludwig von Mises is still far from enjoying the majority support that it so amply deserves.

There are many reasons for this. Of course, media bias and public education prevent the dissemination of the ideas of freedom in society and limit the understanding of the free market. However, an often overlooked, yet equally important, reason is a general disregard for causality. When the real and underlying causes for social and economic problems are unknown or misunderstood, the public’s support for wrong-headed statist solutions to these problems is not surprising.

The Importance of Causes

The importance of causes to human inquiry has been grasped since early antiquity, crystalising with Aristotle and his still seminal theory of causality. Following in this tradition, Herbert Spencer considered the discovery of causal laws the essence of science; those who disregard the importance of the identification of causes, he argued -- whatever the subject matter -- are liable to draw erroneous conclusions.

In the Twilight of the Idols, Friedrich Nietzsche chastised modern society for still making errors of causality, namely, “the error of false causality,” “the error of imaginary causes,” and “the error of the confusion of cause and effect.” Unfortunately, these errors are made all too frequently in economic and political life.

In the realm of international relations, for instance, a disregard for contemporary history has led to an ignorance of the real causes of serious political events. Today’s conflicts could arguably have been avoided if their many and deep causes had been soberly and objectively considered by decision-makers. When George Santayana said that “those who cannot remember the past are condemned to repeat it” and when George Orwell wrote in his masterpiece 1984 that mastering the past is the key to mastering the present, both had in mind the crucial importance of knowing the actual causes of political events.

Nietzsche considered the error of the confusion of cause and effect to be the most dangerous one; he called it the “intrinsic perversion of reason.” This was not an exaggeration, considering the impact of this all-too-common reversal of causality. For example, this error happens when the state is absolved of the nefarious consequences of its previous actions, thereby empowering the state to legitimise policies that “solve” problems for which the state was itself originally responsible.

Examples: Recessions, Inflation, and Unemployment

As an example, it is possible to mention the boom-and-bust cycles of the typical state capitalist economy. The original cause for this cycle is the state, through its monopolistic monetary policy. As Murray Rothbard wrote, “The business cycle is generated by government: specifically, by bank credit expansion promoted and fueled by governmental expansion of bank reserves.”

Yet, during hard times—because this original cause of recessions is not generally recognised—the state itself is looked to by society to “save” the economy through measures such as bailouts or interest rate reductions (which mostly benefit big banks and strategic industries). This in turn sets the stage for the next artificial boom, and the cycle continues.

The problem of high inflation and high unemployment may be seen in the same way. Price inflation is caused by the state when its central bank increases the money supply to pay for its chronic budget deficits, with the added benefit of reducing the relative size of its enormous debt. Yet, when prices increase in the economy because of such actions, then the central bank itself is expected to come to the rescue—for instance, by artificially imposing price controls or hiking interest rates, thus slowing economic activity—to the further detriment of society.

High unemployment is also a phenomenon caused by the state, of course, when it imposes rigid labour laws and high taxation on companies, while redistributing “generous” unemployment benefits. Yet, when unemployment becomes “too” high because of these actions, then the state itself is expected to solve the problem—for instance, by providing tax incentives to companies for hiring low-skilled workers or by hiring more civil servants.

The Fallacy of “Market Failure”

It seems counterintuitive to believe that an agent responsible for social problems should also be the one to solve those problems. The only reason this flawed logic continues to be accepted is because of errors of causality. The real causes for economic problems are not well understood by the general public and are often confused with its consequences. In economics, this disregard for causal connections has probably wrecked as much damage upon societies as the international conflicts mentioned earlier by giving free rein to those who see few limits to the state’s regulation of economic and social life.

The same reasoning is applicable to an aspect that is usually blamed on the free market: so-called “externalities,” or the “external” costs that third parties sometimes bear. The extreme case of this is the concept of the “tragedy of the commons,” which is often used to justify the many globalist “green” initiatives to “fight” climate change. Quite apart from whether there are apocalyptic grounds to support such extreme social top-down policies, the libertarian view is that the real cause of many “externalities” is generally that private property rights have not been adequately defined.

Since causality is disregarded, social and economic problems such as those mentioned earlier are generally attributed to so-called “market failure,” thereby reducing the credibility of libertarianism among the general public. Indeed, libertarianism is usually rejected by the majority as a political and economic system because social problems are attributed erroneously to an incapability of the free market to provide solutions. There is rarely any perception that the real causes of these problems are statist interventions in the free market in the first place.

Libertarians have always recognized the importance of causality, as per the title of Mises’s magnum opus Human Action. Carl Menger, the founder of the Austrian School of Economics, explicitly mentioned that, as an important means of gaining insight into economic processes, he had “devoted special attention to the investigation of the causal connections.” Importantly, this was not only the position of the Austrian School at the time: “the search for these causal laws of reality was very much an international enterprise among economists in the last quarter of the nineteenth century and up to World War I.” However, for several sad and tragic reasons, this focus on causal connections in economic research was then lost.

As this article has tried to show, it is essential for causality in both economics and politics to be better understood -- by politicians, economists, and the general public. 

This is key to rein in the authoritarian inroads from governments that are taking place in all areas of life. 

And by demonstrating that the market only fails when it is constantly disrupted by state intervention, a better understanding of causal connections would also lead to an increase in the appreciation and popularity of libertarianism.

In fact, it would improve the standard of thinking all round.

* * * * * 

"Forget the cost-of-living-crisis. That's not something experienced in Wellington by public sector executives."

 

No wonder they're smiling: These ten people you see above above are given $5.2 million between them every year. Isn't that nice. Averaged out, that's a pretty tidy sum. What do they do for that money? They're on the Executive Leadership Team at NZ's Reserve Bank, aka Te Putea Matua (which my dictionary translates as "important basket.") Which doesn't really answer the question. (But might describe some of these people.)

The Reserve Bank, as I'm sure you know, has a coercive monopoly on the central price in the economic system. Only two of the Reserve Bank's "leadership team" however (Orr and Hawkesby) have any training in economics at all beyond high school. If that. "So," says economics professor Robert MacCulloch, "so I'm not clear what it is they do that's associated with NZ having better economic (monetary & banking) policies." 

They're posssibly not too clear about that themselves either -- although one does admit that "Sustainability has been a key focus," and another is a "recognised thought leader on digital and data innovation." Which clearly doesn't come cheap.

Overseeing this "team" is the Reserve Bank's Board of Directors (below)-- about whom, observes McCulloch, "it's even less clear what they do - again most have little to no expertise in central banking. [Quigley at least is an exception.] Nevertheless that 7 member Board took $662,000 for what-ever-it-is-they-do."

As McCulloch wryly notes, "Forget the cost-of-living-crisis. That's not something experienced in Wellington by public sector executives." No. But it should be.

"Why do you care about recessions?"

"Why do we care about recessions? ...
    "I think I know why we care about recessions. Recession are generally associated with lousy labor markets. The high unemployment of the 1930s was such a severe social problem that it put macroeconomics on the map as an important field of inquiry...

    "[But] I’ll tell you who cares about recessions—dumb people who believe that words have magical powers. 'If only I could convince you that this is a recession!' Yawn.
    "It’s not that I think you are wrong; it’s that I don’t care. Japan had a bunch of recessions in the 2010s. Do I care? No, none of them showed up in the labour market....
    "It’s incredibly uninteresting to see a slow growth economy alternate between slightly positive quarters and slightly negative quarters.
    "The entire world is now becoming more like Japan, with ever slower trend GDP growth rates. In the future, there’ll be lots more of these 'recessions' with booming labour markets.
    "This is why the 'Will there be a recession?' debate is so dumb. I don’t care whether the [country] experiences a recession; I’m simply not interested. The interesting question is whether the [country] will experience the sort of recession that we experienced in the past, where the unemployment rate always rose by at least 2 percentage points.
    "Now that’s an interesting question. [And equally interesting to me is the question: why is all the world now full of slow-growth economies?]"

~ Scott Sumner, from his post 'Why Do You Care About Recessions?'

"The right response to jobs 'lost' due to AI is the same as to the much larger number of jobs lost because of all the previous job-destroying technologies"

"I'd say that the right response to jobs 'lost' due to AI is the same as to the much larger number of jobs lost because of all the previous job-destroying technologies, to wit: shock and wonder that there should still, somehow, be some jobs left for new tech to do away with."

~ George Selgin

 

"While unemployment fluctuates, the underlying core of a quarter-of-a-million sick people or sole parents is entrenched"

From the Welfare Working Group's 2010 report: Long-Term Welfare Dependency: The Issues

 

"Most working-age welfare benefits were introduced in the late 1930s, and for the next thirty years recipients comprised just 2 percent of the population and were overwhelmingly widows and invalids. The explosion in welfare began from the mid-seventies.
    "Getting to my point, while unemployment fluctuates the underlying core of [a quarter-of-a-million] sick people or sole parents is entrenched. The economy has to carry this population whether times are good or bad, whether there are jobs or not.
    "WHY this situation has developed - or been allowed to develop - could fill a thesis. But many of you will have lived through the entire period and can probably share some valuable observations. Feel free."

~ Lindsay Mitchell, from her post 'The disconnection between unemployment and welfare dependency'

"'We broke the welfare culture forever. If the Tahltan can do it, any Indigenous Nation can do it!’"

"In 1983 and 1984, 80% of the Tahltan Nation [of northern British Columbia] were on welfare, and unemployment stood at 98%, following the dispossession of property and other human rights across spanning generations. Severe alcohol and drug problems characterised social life, along with high suicide rates and very low levels of educational attainment.
    "By 2013, it had all changed: 100% employment, zero suicides and an above-the-national-average graduation rate, from universities to trade schools.
    "[The tribe's] Chief Asp was clear that wealth was always to be created and could never be taken. Federal funding was firmly declined and returned to the government, along with all conditions it required.... Today funds are independently generated in the marketplace....
    "Equity rights and land titles were key components of wealth creation, including the tradability of those equity rights within the framework established by the Tahltan Central Government– undertaken to protect ‘the Tahltan inherent aboriginal rights and title’ and ‘the eco-systems and natural resources of Tahltan traditional territory.'
    "Traded rights have not only been an economic tool, but generated resources for improved environmental outcomes ...
    "From 98% unemployment to zero, Chief Asp concludes ... : 'We broke the welfare culture of the Tahltan Nation forever.’ A single message reverberates not only across North America, but globally: 'If the Tahltan can do it, any Indigenous Nation can do it!’"

~ Garreth Bloor, from his post 'Economic Freedom: Breaking the Culture of Welfare Dependency'

The real minimum-wage is zero

“When you are unemployed, your wages are zero, regardless of what the minimum-wage law specifies.”

~ Thomas Sowell, Fact-Free Liberals: Part II

 

"The Phillips Curve model is wrong because Keynesians get causality reversed."

"In fact, the Keynesian Phillips curve model is simply wrong. It’s not wrong because there is no relationship between inflation and unemployment. A sharp fall in both wage and price inflation tends to be associated with a temporary rise in unemployment. Rather the Phillips Curve model is wrong because Keynesians get causality reversed. They assume that causation goes from economic overheating to wage and price inflation, whereas the opposite is more nearly true. To be precise, it is unexpected increases in nominal growth in spending that cause both rising inflation and falling unemployment."

~ Scott Sumner, from his post 'Fortunately, this isn't the Volcker disinflation'

"Inclusion?"

"How many are the people who earnestly call for modern society to encourage greater 'inclusion,' yet who also support minimum-wage legislation? I suspect that the number of such people is large.
    "These people obviously miss what should be, but apparently isn’t, obvious – namely, by criminalising the ability of low-skilled workers to compete for employment by offering to work at wages below the legislated minimum, minimum-wage legislation is the opposite of 'inclusive.' Such legislation excludes from the above-ground job market workers with the lowest skills."
          ~ Don Boudreaux, from his post 'Inclusion?'

They think labour is homogeneous

"The so-called 'Fair-Pay'Act took effect yesterday and hospitality workers are expected to be the first to seek a so-called 'Fair-Pay' Agreement:

"How on earth can it be 'fair' to impose pay and conditions of thousands of different workplaces in different places with different staffing requirements ?
"How can it be 'fair' to treat staff in fine dining restaurants the same as those serving fast-food takeaways?
"How can it be 'fair' to treat businesses in big cities or tourists hotspots, where costs including land and buildings are higher, the same as businesses in small towns where costs are lower?"

          ~ Ele Ludemann, from her post 'How is this fair?' 

 

"Wage raises as such are not inflationary"

"There is a lot of nonsense said about these things. Some people assert that wage raises are 'inflationary.' But they are not in themselves inflationary. Nothing is inflationary except inflation, i.e., an increase in the quantity of money [and credit] in circulation... And under present conditions nobody but the government [and its agencies] can bring an inflation into being. What the unions can generate by forcing the employers to accept wage rates higher than the potential market rates is not inflation and not higher commodity prices, but unemployment of a part of the people anxious to get a job. Inflation is a policy to which the government resorts in order to prevent the large scale unemployment the unions' wage raising would otherwise bring about."

~ Ludwig Von Mises, from his 1958 article 'Wages, Unemployment & Inflation,' collected in Planning for Freedom

How to lie with unemployment stats

Various media and half the House's politicians have been celebrating the unprecedentedly low unemployment figure of 3.4%.

Some have been questioning how on earth we could have a figure so low when business is so, well, locked up.

Chart from Sense Partners, via New Zealand Herald 

[Hat tip Lindsay Mitchell[

Lindsay Mitchell has some of the answer, unearthing some "important numbers to remember whenever you hear Grant Robertson, the Finance Minister, waxing lyrical about the wonderfully low unemployment rate":

To be officially unemployed a person needs to be available for and seeking work. Just over 30,000 Maori in the North Island [for example] are officially unemployed. But over 70,000 are on a Jobseeker benefit.

And since you can be on the Jobseeker benefit with no immediate work obligation, you are not officially unemployed.

[And] in Northland, a region with a high Maori population the unemployment rate is 3.9% yet the Jobseeker rate is 10.5 percent.

In the general population the figures are:

Unemployment rate 3.4%

Jobseeker rate 6.1%

All benefit-dependent rate 11.3%

So what's the real unemployment rate? Whatever it actually is, there's no point asking Grant Robertson for the answer. 

"Permanent mass unemployment destroys the moral foundations of the social order. The young people who, having finished their training for work, are forced to remain idle, are the ferment out of which the most radical political movements are formed. In their ranks the soldiers of the coming revolutions are recruited."

"Permanent mass unemployment destroys the moral foundations of the social order. The young people who, having finished their training for work, are forced to remain idle, are the ferment out of which the most radical political movements are formed. In their ranks the soldiers of the coming revolutions are recruited."

~ Ludwig von Mises, from his 1922 book Socialism: An Economic and Sociological Analysis, p. 486.

[Hat tip Thorstein Polleit, Julian D.] 

Quote of the Day: On wages and the irrelevance of worker need and employer greed

 

“An important truth is that employers compete against other employers, and employees against other employees-not employees against employers, as folklore says. It is the availability of higher-valued alternatives, not the ability to bargain collectively, that increases bargaining power.”
~ Armen Alchian and William Allen,  from their classic textbook University Economics

RELATED READING:

• Wages and the Irrelevance of Worker Need and Employer Greed – GEORGE REISMAN’S BLOG

[Hat tip Jim Rose]

.

Labour dreams Little & make-work

 

Given that modern Labour seems resolved to fix every social and economic problem they see with a new tax, I was astonished to hear that news from their weekend conference that the Labour leadership are proposing a policy to remove a tax – or at least a tax burden.

No joke this: leader Andrew Little has recognised that many NZers work several jobs to either make ends meet, or make life liveable, and he says Labour policy will be to remove the iniquitous secondary tax that penalises these hard workers. These are my words, not his.

Business NZ agrees with him. And so do I.

Unfortunately the sensible comes packaged with the nonsensical in the form of a make-work scheme and at least one more new tax (see, they really are true to form).  Called a “levy” that will apply “to companies in sectors with skills shortages which were therefore reliant on migrant labour,” it is in effect a tax on businesses who struggle to find skilled labour. Bizarre, but true. Instead of

This new tax – a favourite of Little’s runtish deputy Grant Robertson, is already being called the Robertson Tax. It should never fly.

It does however at least seek to solve a real problem: that we live in a small country in which youth unemployment is much higher than it should be, while the number of skilled employees who want to work is much lower. There is an obvious gap there which makes one wonder if the two problems shouldn’t be fixing each othet.

Instead of the obvious approach of seeking answers in the minimum-wage laws that both Red and Blue parties uphold (which all around the world leads to higher levels of youth unemployment) and the frequent and misguided changes by both parties in how apprentices are trained that have decimated the number of skilled workers, these Labour Party rocket surgeons instead propose to pay these young folk who are being priced out of the market by minimum wage laws to be welfare serfs in somebody else’s charity army.

The jobs policy would be for those on the Jobseeker benefit for more than six months, and would not be compulsory. “We will give these young Kiwis the kick-start they need to get back on the right track,” said leader Andrew Little. “This job experience will help them develop strong work ethics and make them more attractive to employers. We will get them ready for work.

So just to be clear: this make-work scheme will “get these young Kiwis back on track” by teaching them that the state will always be there to hold their hand once it has priced them out of the market  And it “will not be compulsory” but “there will be an expectation they take part – and possible sanctions if they don’t.”  Which if it isn’t exactly compulsion just yet then it is surely ust one arse-kicking away from it.

Which is at least a few dozen short of what these dickheads deserve for dreaming this shit up.

.

Too few unemployed

 

Controversy in the Parliament this week as politicians accuse each other of lying.

It would be a rarer thing if they weren’t.

Labour’s Grant Robertson accused National of manipulating unemployment figures to make them look better.

In a media release Robertson, Labour’s finance spokesman, said National was “actively massaging official unemployment statistics” by changing the measure for joblessness to exclude those using websites, such as Seek or TradeMe.

There was manipulation going on, but not any that Robertson was headline-hunting about.

Statistics New Zealand had certainly changed the way it measures unemployment to diminish the number actively seeking work. This, of course, makes the figure look better for any government, but there is every reason to believe they were simply bringing the measure into line internationally as they say they were, and zero evidence the Government encouraged it– and zero adduced by Robertson, who has now climbed down.

In short, he was lying.

But so too were National ministers in crowing that unemployment is down. There are still 131,000 unemployed, 26,000 more than when National took office, which an astute opposition politician would have poiunted out, and and honest govt politician would have acknowledged. Instead, knowing the figure had been adjusted downwards, these toerags instead claimed credit for a drop attributable only to a statistical change.

So they lied too.

How do you know when a politician is lying? Their lips are moving.

Why do you keep taking these entities seriously? Dunno. You tell me.

There should be more of them unemployed.

.

Little thought given to Labour’s buy-local lunacy

“In this lies almost the whole difference between good economics and bad. The bad economist
sees only what immediately strikes the eye; the good economist also looks beyond. The bad
economist sees only the direct consequences of a proposed course; the good economist
looks also at the longer and indirect consequences. The bad economist sees only what
the effect of a given policy has been or will be on one particular group; the good economist
inquires also what the effect of the policy will be on all groups.”
~ Henry Hazlitt, ‘One Lesson’

Labour leader Andrew Little has achieved rare headlines, for announcing he would require a government he leads to make job creation an objective of government procurement policy.

As Eric Crampton says, this “is a terrible idea.” Little argues:

The government spends $40 billion a year purchasing goods and services.
That’s huge buying power but, currently, government bodies only consider their own bottom line when they make purchasing decisions. Not the country’s bottom line, just their own.
They buy ‘cheaper’ options, often from overseas, regardless of the impact on New Zealand, even if it means Kiwis will lose work.
That’s the kind of dangerously short-sighted thinking that has been behind some of the biggest government botch-ups in the last few years.

Actually, What really is a kind of dangerously short-sighted thinking that has been behind some of the biggest government policy botch-ups in the last few years is the utterly mistaken idea that buying more-expensively from locals is better for all locals than buying more cheaply elsewhere. To understand why, then as Henry Hazlitt advised all good economists should do, you need to look beyond the immediate consequences for one group (workers at Hillside workshops in Dunedin; kiwi businesses “shut out” of the $1.9 billion IRD computer system contract) to the longer-term consequences for all groups (taxpayers; the unemployed).

If you ignore those consequences, what happens is this:

• Government either spends more to get the same thing, or the same to to get less.
• If the former, then this raises the cost of government services
• If the latter, then more has to be spent elsewhere to get the services desired, which raises the cost of government services
• If the cost of government services go up, them taxpayers have to pay more.

And what do higher taxes do?

Yes, Virginia, they make it harder to pay wages. Which means either fewer would-be wage-earners are earning wages, or wage-earners who are earning wages are earning less—all to help pay for a Labour leader’s desire to help workers in one place that he can see, at the expense of would-be workers elsewhere that he simply ignores.

So in other words, this is simply another shoot-the-workers-in-the-foot policy from a party whose founding principles include advancing the cause of all workers.

Go figure.

(Eric Crampton has more, as he often does.)

The jobs machine

Peter Cook shows How to Cure Unemployment with just a small sacrifice and a little push. For which, fast forward immediately to 2:05.

Or if you prefer, a short lecture first on the causes of unemployment. Obvious really, and no less insane than most of what you hear from around the cabinet table ...

[Hat tip Russell W.]

Timidity [updated]

Prime Ministers like to use their keynote addresses at party conferences to announce major measures to move a country forward. Yesterday Prime Minister John Key used his keynote address to announce the extension of the existing ninety-day probation employment period from smaller businesses to larger one.

Not exactly a major announcement, even though both those who despise Key and those who’d like to have his babies conspired to talk nonsense pretending it was.  But it wasn’t a major announcement at all, because if getting 70,000 young unemployed into work was your ambition then you’d get rid of Sue Bradford’s penalising ban on youth rates, under which youth unemployment has soared to record levels.  You’d get rid of the ridiculous minimum wage law, which in both the Great Depression and this one kept workers out of jobs. You’d pull the teeth of the milk-the-boss welfare conveyor belt that is the Employment Court (which would have the added benefit of making unemployed the ambulance-chasing lawyers making a living a living out of this personal grievance industry.) And you’d dump Nick Smith’s Emissions Tax Scam, which is going to cost every producer (for which, read employer) dear.

Instead, Key offers just another sign that even on the rare occasion it does move in the right direction, his government doesn’t have the balls to move very far:  Ninety days probationary unemployment.  Now with fries.

No wonder other minor issues sometimes threaten to take over.

UPDATE 1: Said Fran O’Sullivan in Saturday’s Herald:

National is rapidly mor­ph­ing into a party that has lost its appetite for full-blooded pol­icy debate. Instead it defers to the incli­na­tion by its Polit­buro … for mere stage-management.”

Fran, you’re using the wrong tense. It morphed into that party long ago—about the time John Key assumed the top chair, and began swallowing dead rats instead of grasping nettles.