Jeffrey Frankel, a member of President Clinton’s CEA, charges (Milken Institute Review, registration required) that:

When it comes to economic policy, Republican and Democratic administrations have switched places since the 1960s. The Republicans, who were so long identified with free markets and less-is-more government, have become the party of fiscal profligacy and market intervention. Democratic presidents have (by comparison) become the agents of fiscal responsibility and arms-length microeconomic policies.

Robert Ekelund and Mark Thornton have a rebuttal in the latest issue of the MIR (3rd quarter, 2003) but it’s a strange “rebuttal” that begins:

We certainly agree with Jeff Frankel (Milken Institute Review, 1st Quarter 2003) that the “Republicans have become the party of fiscal irresponsibility, trade restriction, big government and failing-grade microeconomics.” However, we would argue that there is less mystery to this exchange of economic platforms with the Democrats than meets the eye. The Republican Party was established in the 19th century as a party of big government and economic intervention.

For my take see my earlier post, The Beast Isn’t Starving.

Some fallacies just keep coming back no matter how many times they have been exploded. Jobs in the manufacturing sector are disappearing and have been doing so for 30 years. The reason this has occured, however, is not because we have “sent the good jobs overseas” and it is not because our manufacturing sector is “rusting.” Jobs have disappeared because the manufacturing sector has been spectaculary successful. When measured in terms of what ultimately matters, output, the U.S. manufacturing sector has more than doubled in size over the past 30 years. We are now producing more “stuff” than virtually ever before and because of productivity improvements we are doing it with less labor. The graph below from The Economist is for the G7 countries, not just the U.S., but it conveys the correct idea. (For the US data see Robert Hall’s recent testimony before Congress).

“Job destruction” is a vital aspect of progress. If we had not destroyed millions of farm jobs most of us would still be working in agriculture today.

In an economy based on labor, leviathan government faces an inherent, albeit weak, constraint – tax and regulate too much and you will kill the goose that lays the golden eggs (or the goose will run away). But in an economy based on oil the goose can’t run away and is almost impossible to kill. As a result, natural resource based economies tend to be corrupt, war-stricken, and slow growing. After 35 years and some 350 billion dollars in oil revenues the people of Nigeria, for example, have had no increase in per-capita GNP.

Iraq is another case in point, which is why it’s crucial that we not squander the opportunity to create new institutions for getting oil wealth away from governments and into the hands of the people. Norway and Alaska distribute revenue from “stabilization funds” but these appear not to be very effective, especially in countries that begin with weak institutions. Economists Xavier Sala-i-Martin and Arvind Subramanian argue in favor of direct payments of revenues to citizens but I think Vernon Smith, our colleague and recent Nobel prize winner, offers the best approach – distribute shares, real ownership, in the oil producing lands to every citizen.

Aside from the benefits to the Iraqi’s can you imagine what a great public relations boost this would be to the United States? In one swoop, we would credibly demonstrate to the Muslim world that the war was not about our rapacity, provide for a thriving domestic economy in Iraq, and lay the foundations for a stable democracy.

Most of the talk about the reconstruction of Iraq has been about US aid, a so-called “Marshall plan for Iraq.” But as Tyler pointed out the Marshall plan never did that much for Europe – what made the difference was economic liberalization (and recall that the key reform in Germany, Ludwig Erhard’s lifting of price controls, was done without the permission and against the wishes of the US administrators). It is heartening therefore that liberalization appears to be coming to Iraq. Here is the key information from The Economist (subscription required).

A shock programme of economic reforms signals a radical departure for Iraq. The changes, announced by the country’s provisional rulers at the annual World Bank/IMF jamboree in Dubai, could see its battered economy transformed abruptly into a virtual free-trade zone.

If carried through, the measures will represent the kind of wish-list that foreign investors and donor agencies dream of for developing markets. Investors in any field, except for all-important oil production and refining, would be allowed 100% ownership of Iraqi assets, full repatriation of profits, and equal legal standing with local firms. Foreign banks would be welcome to set up shop immediately, or buy into Iraqi ventures. Income and corporate taxes would be capped at 15%. Tariffs would be slashed to a universal 5% rate, with none imposed on food, drugs, books and other “humanitarian” imports.

Ever wonder why product quality often comes in threes? (Basic, Regular, Premium. Bronze, Silver, Gold. Third, Second, and First Class etc.) When there are only two product qualities consumers are torn between two “extremes,” either of which makes them uneasy. Add a third quality and you create a happy medium. Simonson and Tversky (the cite is in the link below) report that when offered a low-end and a midrange microwave oven consumers chose the midrange 45% of the time. But when offered the same two ovens plus a high-end oven they significantly increased their purchases of the midrange. Even when few consumers buy the premium product the mere fact that it is offered can increase sales of the midrange product. Hal Varian calls this Goldilocks pricing (see discussion beginning at p.10).