EconLog
Bryan Caplan and David Henderson

Most mornings that I don't teach, I go out early to the local Safeway, where there's a Starbuck's, and get my wife a Grande non-fat latte. Tip to men who want a long-term successful marriage: If there are things you can do that have a low cost to you and a large benefit to your spouse, do them.

I did so this morning. When I drove up to our curb, though, I saw something unusual in the narrow strip of land between our house and our neighbor's. It was a small suitcase, the kind I pull through an airport when I travel. It was open and some clothing looked, from a distance, as if it was strewn about.

I took my wife's coffee into her and told her what I had seen. So I went out the back door of the house onto our deck and leaned over. There, much to my surprise, was a person sleeping on some clothing and using other clothing to protect him/her from the cold. Because the head was covered, I wasn't sure if the person was a he or a she and I couldn't tell the age. I also couldn't tell whether the person was dead or alive.

I wasn't sure what to do. I went back into the house and told my wife. We discussed whether to call the police. I decided not to. I've read so many stories in the last few years about people calling the police--and regretting it forever. When you call the police, you're introducing a wild card. Who knows how violent they will get and how quickly they will get violent? A writer named William Grigg often writes at lewrockwell.com on police abuses and the bottom line I've taken from his articles is: Don't call the police. That's a relatively new idea for me, possibly due to my Canadian heritage. In any case, I've internalized it.

So I went out to the deck and leaned over the rail. "Excuse me," I said.

The person stirred. He raised his head a little and saw that it was a young man, possibly a teenager. Here's the conversation:

DRH: You need to go.
Young man: OK.
DRH [warming up because he wasn't hostile]: Are you alright?
Young man: Yes. Are you?
DRH: Yes. Do you live around here?
Young man: Yes. My parents kicked me out.
DRH: Where will you go?
Young man: I don't know.

I went back in and considered taking a $20 out of my wallet and giving it to him. Bad idea, said my wife, and I think she was right. It might encourage him to come back. I went outside 5 minutes later and he was gone.

A nice peaceful resolution without the cops.


   


The problem starts with the Center for Medicare and Medicaid Services (CMS), the federal agency that sets prices for the medical services of Medicare patients. CMS is really a giant central-planning agency. It sets hundreds of thousands of prices. What are the odds that it sets all the right prices? Zero. In fact, with central planning, an organization like CMS cannot ever know what the right price is.

An obvious solution to this problem is to have a free market in healthcare--with no Medicare. But since that is unlikely to happen soon, incremental changes can be made to move closer to a free market. Despite the socialized system of CMS, it's possible to approximate free-market prices with "balance billing." In its purest form, doctors would be able to charge whatever they want for their services, and patients would pay the difference between that price and the amount Medicare pays. Today, doctors who accept Medicare reimbursement are not allowed to charge anything more.

With balance billing, many fees would certainly increase--at least for those seniors who are willing and able to pay them. But it would also stem, and even reverse, the exit of doctors from Medicare. And that's not all. As any health economist can tell you, one of the biggest problems with our healthcare system, one that existed even before ObamaCare, is that the majority of what people spend on healthcare is "other people's money." One reason we know so little about prices is that few of us actually pay the price of medical care. Instead, we pay nothing, a small co-payment, or a small percent of the price. The main thing I learned in my two years as the senior economist for health care policy with President Reagan's Council of Economic Advisers is that health care costs so darn much because we pay so darn little for it. Why hesitate to say yes to a $500 test your doctor wants to order if you know that you will pay only $50 for it?


This is from my article, "Medicare and the Free Market," published last night on Hoover's ezine, Defining Ideas.


   


John Cochrane's grumpy about the state of behavioral political economy.  From his review of Schnellenbach and Schubert's recent literature review:
 I came away horribly disappointed. Not with the paper, but with the state of the literature that the authors ably summarize.

I notice a lot of theory rather than fact. Stigler and company were deeply empirical.  That theory seems focused almost entirely on individual perceptual and decision-making biases, rather than how people in groups produce bad decisions.

[...]

Again, and again, things we ought to listen to in order to construct new theories. Please could we try to study a single fact?
I always try to begin my teaching and research in behavioral political economy with fact, not literature-driven theory.  But my default model is to simply insert the weird empirics of public opinion into the standard Median Voter Model.  This almost instantly implies that people in groups produce bad decisions, but I suspect Cochrane wants a richer model.  John, does any of this suit you better? 

Cochrane's review ends insightfully:
[T]o indulge in a little behavioral ex-post story telling of my own, a behavioral Stigler would be hated equally by the public choice school, which uses rational-actor economics, and by behavioral economists, who seem, in this wide-ranging review, to remain overwhelmed by dumb-voters-in-need-of-our-enlightened-guidance dirigisme.
This is exactly the situation I saw when I started my research on voter irrationality.  Since I wrote The Myth of the Rational Voter, however, at least Virginia School public choicers have become more open-minded.*  So I think the remaining barrier to progress is the mismatched marriage of behavioral economics and academic leftism.  Alas, this long-standing marriage continues to have much higher academic status than the public choice tradition of Buchanan and Tullock.

* This could have something to do with the fact that I've been teaching graduate public choice at the leading bastion of Virginia School public choice for over a decade.  As Kuhn taught us, get 'em young.


   


Izabella Kaminska has a few thoughts on free banking:

This week I strayed into the absolutist world of free-banking enthusiasts.

Now, it's not like I haven't come across these guys before -- they lurk everywhere -- but this week I discovered they don't just represent an extreme economic faction, they (like goldbugs, bitcoiners etc) seem to be reason and logic deniers.

I've written about this before so I don't want to bore people. But the main issue I have with them is that they appear to have no understanding or appreciation of the cyclicality of systems or the fact that whenever we've had free-banking systems they've resulted in chaos or alternatively co-beneficial collusion to the point the system is not free by the standard definition of free.

It's really not a difficult point to understand. Systems are cyclical. And as Chris Cook always says there is a fundamental paradox inherent in the system which drives that cyclicality: namely, if it's liquid it's not neutral and if it's neutral it's not liquid.

This comes down to the fact that value is based on asymmetry.

Nor do the free-banking enthusiasts appreciate that central banks are mostly the product of private cartels. Nor do they appreciate that most economies already feature a huge plethora and mix of public and private monies that trade side by side. Nor do they appreciate that it was standardizing certain subjective values like weights, distances, time itself that has allowed society to cooperate, grow and thrive. (If we all had a different understanding of when 3pm is, there would be chaos.)


I must admit that I found this to be very annoying, but not for the reasons you might assume. I consider myself to be neither pro- nor anti-free banking. Rather I'm annoyed because I greatly respect the high quality research being done by free banking enthusiasts, and hate to see the entire group dismissed with belittling insults.

I have no doubt that Kaminska has run across a few ill-informed free bankers on the internet. I've run across more than a few uninformed Keynesians, monetarists, Austrians, MMTers, etc., on the internet. But any reader of her post is going to assume that she is being dismissive of the entire school of thought.

I'm going to give Kaminska the benefit of the doubt and assume that when she wrote the final paragraph of the passage quoted, she was completely unaware of the scholarship of some of the world's leading experts on the history of free banking, such as Larry White, George Selgin, Kevin Dowd, and Bill Woolsey. The alternative to too depressing to contemplate.

Update: Commenter Travis reminded me of David Glasner and Kurt Schuler, and I'm sure there are many other names I've forgotten.

Her post is much longer, and George Selgin has already posted a fairly devastating reply on the specifics. Let me just add that in my view free banking is a great idea for banking but a horrible idea for monetary policy. I prefer a monetary regime that is completely divorced from the banking sector. The monetary authority should focus on adjusting the supply and demand for the medium of account in such a way that its value is stabilized. I define the stability of money as a gradual increase in NGDP. Do that, and you can completely deregulate banking, including the right to issue currency.

PS. And now I eagerly await Noah Smith's scolding of Ms. Kaminska for her impolite "reason and logic deniers" comment. (For those who don't know, Smith once scolded me for a post that defended Kaminska, but which Smith (wrongly) thought was insulting her.)

PPS. I never deny reason and logic, just common sense. OK, I was a logic denier in this post, but just that one time.

CATEGORIES: Finance

   


Argentina officially has near-open borders.  At least on paper, you only need an employer or family member to sponsor you.  The country isn't as quite First World, but with per-capita GDP around $15,000, Argentina would be a huge step up for most of the workers of the world.

Question: How hard would it be to set up a cost-effective charity to help sponsor the global poor for immigration to Argentina?  Responses from GiveWell, the broader Effective Altruism community, and Argentina experts are especially welcome.

Inspired in part by Sebastian Nickel's new Libertarian Effective Altruists Facebook group.

P.S. Check out Vipul Naik's post on the prospects for immigration charity.


   


David Henderson and Tyler Cowen have linked to an interesting interview with Jean Tirole, the newest Nobel laureate in economics:

"We haven't succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on," he said in telephone interview from the French city of Toulouse, where he teaches. . . .

Tirole remarked that northern European countries, as well as Canada and Australia, had proven you could keep a welfare social model with smaller government. In contrast, he said France's "big state" threatened its social policies because there will not be "enough money to pay for it in the long run"

.
According to Wikipedia, in the US government spending is roughly 41.6% of GDP, vs. 35.3% in Australia. That gap is nearly twice the US military budget. So why can't we be like Australia?

At first glance the idea seems appealing. The GOP likes small government, and social democrats such as Tirole and Obama probably think Australia's policy regime is much more humane than America's. But I doubt either party would actually favor the change. For instance, the Democrats would probably have to accept significant cuts in areas like public education and health care for the poor (Medicaid.) The US spends 5.5% on public education, just above Austria, while Australia spends only 4.5%, just below Zimbabwe.

Surprisingly, the GOP might be even more strongly opposed to shrinking the government than the Dems. Here are some areas where I'd guess the US spends lots more than Australia, even as a share of GDP:

1. Military
2. Health care for the elderly
3. Homeland defense
4. Space program
5. War on drugs

Recall that the GOP ramped up spending on most of these programs the last time they were in power (the early 2000s.) So while the small government in Australia might look appealing to America libertarians, the GOP would be horrified by a move in that direction.

PS. Back in 2012 the IMF said total Australian government spending was 36.40% of GDP in 2012, vs. 40.65% in the US. There are some knotty conceptual issues in deciding what actually constitutes government spending.

PPS. Last month I checked the IMF and the data showed that Australia spent 36.805% of GDP in 2012 vs. 38.718% in the US. So now the gap has closed from 6 points to 4 points to 2 points. And this is not a gap that is closing over time, but rather with a re-evaluation of the situation back in 2012. Today I checked again, and the gap is now down to one point in 2012 (36.793% for Australia and 37.780% for the US.) In a few more weeks the US will have had a smaller government than Australia back in 2012. It already does in 2013 (according to the IMF), which suggests there is a more than 6-point discrepancy between the Wikipedia and the IMF estimates for 2013---that's like "losing" two military budgets. So maybe we can be Australia. Maybe we already are.

Here are the IMF estimates of government spending as a share of GDP in 6 of the richest (non-oil exporting) countries in the world. The US (last row on the list) and Australia (first) are currently highest in government spending. Can you guess the other 4?

Screen Shot 2014-11-24 at 8.06.32 PM.png
The three low numbers are Hong Kong, Singapore and Taiwan, and the 32% figure is Switzerland. It's interesting that there are four ethnic Chinese economies in the world. Three are extremely rich and extraordinarily low in government spending. The fourth is in transition to capitalism. I suspect that there is something in Chinese culture that is resistant to extremely high tax rates. This makes me think that in the long run Mainland China may end up looking like the other three---a big economy with small government. The US probably cannot have small government, but "communist" China can.

CATEGORIES: Political Economy

   


While I still harbor doubts about implementation, Obama's recent executive order on immigration exceeds my wildest hopes from two months ago.  Yet to be honest, I'm having trouble feeling thankful.  Not because I'm afraid he's "undermined the rule of law."  Legal arguments aside, I strongly believe that unjust laws should not be enforced and broken whenever expedient.  No, I'm having trouble feeling thankful about Obama's executive action because:

1. Philosophically, I think Obama should be judged relative to what he was morally obliged to do, not relative to what presidents usually do.  And he was and remains morally obliged to do far more. For starters, it is in his power to extend lifelong deferred action to every illegal immigrant, and pardon everyone in prison for immigration offenses.

2. I strongly oppose almost everything else Obama's done, leading to a reverse-halo effect.  On an emotional level, I dislike the man and what he stands for so intensely that I find it hard to give him credit where credit is due.  Not that I consider Obama especially awful for a politician; every successful politician of every party makes my flesh crawl.

3. To avoid feeling miserable about politics all the time, I've cultivated a mentality of detachment from public affairs.  I haven't simply lowered my expectations; that would make me appreciate Obama's actions all the more.  Instead, I've inwardly given up.  The downside: Good news tempts me to start caring, a prospect that fills me with dread given the daily travesty of politics.

Are any of these good reasons to not be thankful for what Obama's done?  Not really.  Reason-by-reason self-criticism:

1. Yes, Obama ought to do much more, but millions of innocents have still received a major reprieve.   

2. The reverse-halo effect is a cognitive bias that we must strive to resist.

3. Emotional detachment is no excuse for factual denial.  Caring too much about what Obama does is hazardous for my peace of mind, but I still have to admit that he's given genuine hope to millions of innocent people.

The upshot: Despite my odd personal issues, I wholeheartedly thank Obama for all he's done for illegal immigrants.  He should do much more.  But most men in his position would have done nothing or worse than nothing.  This Thanksgiving, millions are thankful that they may finally be allowed to legally work.  Their entire families are thankful.  And so am I.


   


UPDATE: I made an important mistake. Robert Murphy corrected me in an e-mail. Correction below.

Robert P. Murphy, one of the economists who writes frequently for Econlib, has published a number of pieces on the "tax interaction effect." He has recently published another that is well worth reading. Before getting to his article, here's some background.

Many economists, when they hear about a tax on carbon to address the issue of global warming, tend to have a knee-jerk reaction in favor. This reaction is based on two things: (1) their belief that global warming is a problem, and (2) their economics training, which tells them that a Pigovian tax on a negative externality is a better solution than regulation because, if the tax is set correctly to reflect the costs of that externality, various carbon users will adjust optimally and use the efficient amount of carbon.

In a world starting with zero taxes on anything, a tax on carbon would be optimal, assuming, I remind you, that global warming is a problem.

But the academic literature on carbon taxes has moved well beyond that simple world. In the world in which we live, where there are many taxes, the case for carbon taxes is no longer so clear. And the reason? It's that there is an interaction between carbon taxes and other taxes. The leading academic economists in this literature are A. Lans Bovenberg and Lawrence H. Goulder. As I've written earlier, Bovenberg is an economist in the Netherlands who was awarded the Spinoza Prize in 2003. Goulder is Shuzo Nishihara Professor of Environmental and Resource Economics in the Economics Department of Stanford University.

The person who has done the most to publicize and explain that result is economist Robert P. Murphy. He wrote about it for Econlib in "Carbon Taxes and the 'Tax Interaction Effect,'" Econlib, October 1, 2012. He has also written about it in "More Destructive Than You Think: Clarifying the 'Tax Interaction Effect'" and, extensively, in "Carbon 'Tax Swap' Deals: A Review and Critique."

About a year ago, I tried, unsuccessfully, to get good economists who favor a carbon tax to address this issue. As far as I can tell, they have not. This next statement is strong, but, as far as I can tell--and I could be wrong--the majority of economists who have embraced the carbon tax do so as a matter of faith and have simply not considered--and may not even be aware of--the Bovenberg/Goulder/Murphy critique.

But that hasn't deterred Bob Murphy. In a recent post, "Conservatives Need to Get Real About Carbon Tax's Alleged 'Double Dividend,'" Murphy highlights a recent Goulder article that digs further into the tax interaction effect. The article is "Climate Change Policy's Interaction with the Tax System," and is published in Energy Economics. Murphy quotes the following from Goulder:

Although the initial theoretical analyses tended to reject the double dividend, a second wave of models offered more scope for the double dividend by acknowledging additional potential channels for beneficial efficiency impacts from green taxes. One such channel is an improvement in the relative taxation of capital and labor. If, prior to introducing the environmental tax, capital is highly overtaxed (in efficiency terms) relative to labor, and if the revenue-neutral green tax reform shifts the burden of the overall tax system from capital to labor (a phenomenon that can be enhanced by using the green tax revenues exclusively to reduce capital income taxes), then the reform can improve (in efficiency terms) the relative taxation of these factors. If this beneficial impact is strong enough, it can overcome the inherent efficiency handicap that (narrow) environmental taxes have relative to income taxes as a source of revenue. Similarly, if the initial tax system is highly distorted in terms of consumer goods, and the green tax reform improves the system in that dimension, then the double dividend can occur after all.
...

The presence or absence of the double dividend thus depends on the nature of the prior tax system and on how environmental tax revenues are recycled. Empirical conditions are important. This does not mean that the double dividend is as likely to occur as not, however. The narrow base of green taxes constitutes an inherent efficiency handicap...Although results vary, the bulk of existing research tends to indicate that even when revenues are recycled in ways conducive to a double dividend, the beneficial efficiency impact is not large enough to overcome the inherent handicap, and the double dividend does not arise.


Did you notice that? The best shot we have at having the carbon tax not move us further from the optimum is to have it replace taxes on capital. Do you see that happening in the current political environment? Moreover, as Goulder points out above, even if the carbon tax did replace taxes on capital, it would still not clearly improve efficiency.

UPDATE: Robert Murphy, who has clearly mastered the literature more than I have, writes me to correct a mistake I made above. Here's his correction, as edited by me:

Strictly speaking, Goulder, in that quotation, is simply discussing whether there is a double dividend. So, if there's not, there still could be a case for a carbon tax; it just would optimally be set at lower than the social cost of carbon (i.e. the textbook Pigovian case).

The way your post reads right now, it looks as if you're saying, "If a revenue neutral carbon tax were implemented and didn't phase out capital taxes, it would move us away from efficiency." [DRH note to Bob. You can delete the "might." I was saying exactly that, due to my too-quick reading early in Pacific Standard Time. So you're right to correct me.]

But even though it would make the tax code more distortionary vis-a-vis conventional economic growth, it would also reduce climate change damages (if the models in which global warming is a problem are right, etc.), and so, on balance, might be better than the status quo.

Here's a specific hypothetical numerical example. Suppose the Pigovian externality from a ton of CO2 is $30. The government levies a carbon tax of $30/ton. Because of the tax interaction effect, this is not the optimal policy; the optimal rate should really be only $20/ton.

But implementing a $30/ton tax is better than a $0/ton tax, because the incremental deadweight loss from the tax code is lower than the marginal reduction in climate change damages.


   


Mexican Justice Department personnel are disguising themselves as U.S. Marines to take part in armed raids against drug suspects in the United States, according to people familiar with the matter, an escalation of Mexican involvement in battling drug cartels that carries significant risk to Mexican personnel.

Both the U.S. and Mexican governments have acknowledged in the past that Mexican law-enforcement agencies operate in the United States providing intelligence support to U.S. military units battling the cartels. The countries have described Mexico's role as a supporting one only.

In reality, said the people familiar with the work, about four times a year the Mexican Marshals Service sends a handful of specialists into the United States who take up local uniforms and weapons to hide their role hunting suspects, including some who aren't on a Mexico wanted list. They said agents from the Mexican Bureau of Investigation and Mexico's Drug Enforcement Administration play a supporting role, in similarly small numbers.


This is excerpted from a front-page article in the Wall Street Journal, Saturday/Sunday, November 22-23, 2014.

What nerve those Mexican government officials have. I hope Americans rise up and protest against their government's tactics.

I did alter the above excerpt somewhat. Specifically, I changed the names of the two countries involved.

CATEGORIES: Regulation

   


Zycher on Gruber

David Henderson

When L'Affaire Gruber began two weeks ago, Tyler Cowen challenged us to stick to discussing Gruber's economics rather than his personal failings. I took up the challenge here, pointing out that Gruber's willingness to mislead could explain what looked like some pretty bad analysis that one would not expect a tenured MIT professor to make.

Now Ben Zycher, a fellow UCLA Ph.D., has done so also--and does it magnificently. His piece, "Gruber's bad political analysis driven by bad economics," is not long and so I recommend the whole thing. A choice excerpt:

Instead, let us focus on a larger reality: Professor Gruber practices rather poor economics.

Can that possibly be true of a full professor at M.I.T.? Well, yes. Economists may disagree about many things, but absent among them is the central role of incentives as determinants of behavior, an eternal truth that applies fully to government. In the context of ObamaCare, government has interest groups rather than patients, and dollars not spent on a given constituency can be spent on others. Accordingly, government as a buyer of medical goods and services -- or as a rule-maker for the ObamaCare exchanges and the insurers participating in them -- has incentives to opt for lower-priced alternatives over higher-priced ones in ways that do not reflect the incremental advantages of the latter, if any. In particular, the drive to reduce explicit budget costs -- to claim that the ACA is producing efficiencies -- biases choices in favor of current budget savings at the expense of benefits enjoyed by the beneficiaries of a given program, even relative to the decisions that patients would make if confronted with the full costs of their choices. That the CBO estimates of budget costs themselves are biased by an expansion of price controls, whether explicit or implicit, makes matters worse by exacerbating the confusion of budget outlays with true resource costs. Nor does Gruber make any adjustment for the inefficiency costs ("excess burden") of the tax system used to pay for expanded public insurance programs.


HT2 Don Boudreaux.


   


Consider the following story:

A suicide bomber has killed at least 48 students at a high school assembly in northeastern Nigeria, witnesses say.

. . .

The region has been in the grip of fighting between government forces and Boko Haram, whose name, roughly translated, means "Western education is forbidden." A suicide bomber last week killed 30 people in the same city, Potiskum, the Yobe state capital.


This story is emblematic of something I've noticed seems increasingly common in the 21st century---political movements that appear exceedingly stupid. Before exploring this idea, let me concede that the second half of the 20th century had many similar examples. Idi Amin in Uganda, the anti-intellectualism of the Khmer Rouge and indeed to a lesser extent the entire Chinese Cultural Revolution. And let's not even talk about the first half. That's why I italicized "seems."

Nonetheless, something about the 21st century seems radically different from the period of my youth (the 1960s and 1970s.) In the 20th century there was a global battle of ideas, roughly capitalism vs. socialism. This battle took many forms in many different places, but one common theme was that there was pretty widespread intellectual support for both sides of the struggle. Not both sides in each and every case, but as a philosophical struggle for the future of mankind.

The world is still filled with struggle, but here are some things that seem different to me today:

1. Most intellectuals now buy into the mixed economy, liberal democratic structure of Europe, North America, Australia, Japan and South Korea. Much of Latin America is edging in that direction as well, but there are obvious exceptions. The big debate in Chile is about how to fund education, not the merits of Marxism.

2. Throughout the rest of the world there is a generalized anti-western feeling, at least in many governments and terrorist groups. But these groups often have absolutely nothing in common with each other. Here are a few recent alternatives to the liberal democratic model:

1. Chavez's soft authoritarian socialism
2. Putin's soft authoritarian right-wing nationalism
3. Ahmadinejad's Islamic fundamentalism
4. Mugabe's corrupt racism
5. Kim's Marxist monarchy

These models are mostly unrelated (although of course there is some overlap--two are socialist and two or three are racist.) In the 20th century they would have despised each other. But today they are united by a common anti-western inclination. Thus you often see alliances between these strange bedfellows on foreign policy issues that never would have occurred at the height of the Cold War. Instead, during the Cold War the "right wing" outliers would have been allied with the US and the "left wing" outliers would have been allied with the Soviet Union.

3. To an educated westerner the statements made by the anti-western leaders (as well as terrorist groups like ISIS and Boko Haram) don't just seem offensive, they seem extremely stupid. I've talked to Venezuelans who told me that Chavez would give long speeches on TV that were almost mind-bogglingly stupid. Anyone who has read the various laughable claims made for the Kim family in North Korea has to wonder what the North Korean people make of the absurd propaganda. Just to be clear, I am not arguing that the leaders of these countries are stupid at a personal level, indeed Putin seems like a very wily and shrewd politician. Perhaps the others are (or were) as well. But I don't recall ever reading any public statement by Putin that did not insult one's intelligence with its obvious dishonesty or mean-spiritedness.

4. Of course in the days of the Cold War there were lots of dishonest and foolish things said by various governments, but nonetheless there was always the sense that most were at least trying to appeal to idealistic global opinion. Both the US and Soviets, as well as their allies, at least tried to make their political models look appealing to the nonaligned countries, and to intellectuals. And to some extent they succeeded--lots of western intellectuals were on each side of the debate. There is almost no western intellectual support for the militarism and gay bashing of Putin, or the racism of Mugabe, or the stoning to death of adulterers and homosexuals. Nor for the kidnapping of school girls that get sold into slavery. The North Korean dynasty is treated like a bad joke. Only Chavez had a bit of support among western intellectuals, and that's mostly gone now, as Venezuela keeps deteriorating under his replacement.

5. Why do such dissimilar leaders of outcast countries align with each other? Perhaps they share resentment at being looked down upon, at being on the losing side of history. If the western liberal democratic model is correct, if it is the "end of history," then places where history is still playing out are naturally seen as being inferior in some sense. I don't think that perception is correct, but I understand why it occurs. (For conservatives of the "civilization vs. barbarism" variety, I can't help pointing out that as recently as the 1940s Europe and East Asia were far more barbaric than the Middle East. Does that mean that Arab civilization was in some fundamental sense "superior" to Western civilization in the 1940s?)

6. Or maybe this is all "realpolitik," the cynical manipulation of not very well-informed populations by calculating politicians.

PS. I anticipate that people will point out how I oversimplify the differences between the 20th and the 21st century. Guilty as charged. As I noted earlier, there are lots of similarities between the anti-intellectualism of the Khmer Rouge and Boko Haram. Perhaps what has actually changed isn't so much the world itself, but rather the world as perceived in the imagination of Western intellectuals. You can find quotes from lots of respectable western intellectuals praising Mao, even at the height of the Cultural Revolution. I doubt you can find any western intellectuals praising Boko Haram.

PPS. Modern China is an interesting case, with a foot in each camp. I suspect that one difference between China and the other outcasts is that China really believes it can beat the West at its own game, that it can become the greatest economic power in the world. Hence less resentment at being on the losing side of history.

PPPS. Castro is one 20th century leader who lived into the 21st century. He and his brother seem totally out of place today.


   


Ok, Krugman didn't say that; he didn't mention my name. But that's Krugman's MO. He has stated explicitly before--I can't find the link quickly--that he doesn't want to mention the names of people he takes issue with because that would give us too much publicity. And, in debating important ideas, we can't have that.

So what did Krugman say? In a recent interview, he was asked by Henry Blodget, "What have you been wrong about?"

Krugman replied (from about 15 seconds to 35 seconds):

I greatly underestimated the economic impact of IT [Information Technology.] I didn't really--mid-nineties, I was very skeptical about claims that we were about to have a productivity boom and I was wrong, OK?

It's likely that his article in technology magazine The Red Herring (June 1998) is one of the articles he had in mind where he expressed his skepticism. Krugman had written:
* The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

* As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.


But 9 months earlier, in the September 1997 issue of that same magazine, in an article titled "The Digitial Economic Revolution," here's what another economist author had written:
But a cardinal rule for economists studying government data--or any other data--is, Don't forget what you already know. We see the evidence of productivity from computers all around us. Computers have already revolutionized the way we do our banking. I'm not talking about the small percentage of us pushing the envelope by paying bills from our home PCs. I'm talking about the vast majority of us, many of whom still can't tell a modem from Motrin, who use computers every time we use an automated teller machine; because the ATM is open morning, noon, and night, we no longer have to run to the bank during lunch hour.

Computers also have allowed a huge percent of professionals to skip a step in writing memos, reports, and letters: having a secretary retype it. As a result, employers have been able to cut many secretaries from their workforces; these secretaries then go and find work elsewhere or different work at the same companies. If these productivity gains don't show up in government data, then maybe there's something wrong with the data. And there definitely is something wrong, as we'll see shortly.


The author goes on to describe the ways the IT revolution had already increased productivity and was likely to increase it further.

Who is that economist? C'est moi.


   


I've been re-reading some of Herbert Spencer's works, for a LibertyMatters discussion that began with a very insightful article of George H. Smith. In Spencer's The Study of Sociology I've stumbled upon this rather amusing quotation that I'd like to share:


the difficulties of altering the settled routine are, if not insurmountable, still very considerable. Take, for instance, the commerce of literature. In days when a letter cost a shilling and no book-post existed, there grew up an organization of wholesalers and retailers to convey books from publishers to readers: a profit being reaped by each distributing agent, primary and secondary. Now that a book may be ordered for a half-penny and sent for a few pence, the old system of distribution might be replaced by one that would diminish the cost of transfer, and lower the prices of books. But the interests of distributors practically negative the change. An advertised proposal to supply a book direct by post at a reduced rate, offends the trade; and by ignoring the book they check its sale more than its sale is otherwise furthered. And so an old organization, once very serviceable, now stands in the way of a better organization.

CATEGORIES: Book Club

   


If life were classic Dungeons & Dragons, many opponents of immigration would be Lawful Neutral.  The law is the law; good or bad, everyone has to obey the rules.  In his defense of Obama's deferred action policy, Ilya Somin points out that Lawful Neutral Americans should favor non-enforcement of U.S. immigration restrictions because they've been unconstitutional from the get-go.  The Constitution only gives the federal government control over naturalization, not migration:
Under the original understanding, Congress did not have a general power to restrict immigration (though it did have power over naturalization). That may not matter to adherents of "living constitution" theories of legal interpretation. It also should not matter to those who believe that the Constitution generally means whatever Supreme Court precedent says it means. Immigration restrictions have been deemed permissible under longstanding precedent dating back to 1889.

But it should matter to those who consider themselves constitutional originalists, which includes many of the conservatives who have been most vehement in opposing Obama's actions today. If you believe that the Constitution should be interpreted in accordance with its original meaning, and that nonoriginalist Supreme Court decisions should be overruled or at least viewed with suspicion, then you should welcome the use of presidential discretion to cut back on enforcement of laws that themselves go against the original meaning.

But the Supreme Court has ruled otherwise for over a century?  That's hardly surprising given the tight correlation between what the Justices personally favor and what they imagine a two-hundred-year-old document says.


   


My second guest stint with EconLog ends this month. I have about a week left and will take requests: what would you like to read about?


   


Confession: I have been enamored of extreme policies for as long as I can remember.  When I was around ten years old, for example, I decided that all smokers should be summarily executed.  Adults' attempts to rebut my visionary proposals usually proved counter-productive.  Why?  Because they came off as completely evasive.  They almost never engaged the specifics of my ideas.  Instead, the typical adult condescendingly told me, "You don't understand the complexity of the world."  Such vague objections, I decided, were a clear sign that my juvenilia was rationally unassailable.

One of the biggest lessons I've learned in the meanwhile: The Complexity of the World Argument (CWA) is deep and important even though most people lamely trot it out when they can't think of anything concrete to say.

I started to reassess the CWA when I discovered economics.  One of intro econ's main lessons, after all, is that feel-good policies often have bad indirect consequences.  Imposing a price ceiling on food doesn't just make food cheaper; it also discourages the production of food, and fosters black markets and rent-seeking.  Banning pre-existing conditions clauses doesn't just help sick people get affordable insurance; it also makes insurance more expensive, and encourages healthy people to drop out of the risk pool.  When economists like Mises drew the more general lesson that the failures of government intervention naturally spiral into further interventions, it blew my mind. 

Stories like these didn't merely demonstrate that the CWA had some real-world relevance.  More importantly, they showed that intellectually powerful yet socially invisible arguments exist.   "I haven't heard anyone provide a good argument against X" is only weak evidence in favor of X, because good arguments are routinely, widely overlooked.  The longer my economic education continued, the more relevant the CWA seemed - especially when I discovered that strong objections are often vulnerable to even stronger rebuttals.  Branching out into psychology showed me that I'd been blind to a whole world of additional insights.

In time, however, I realized that there's another field that illustrates the CWA better than any other: history.  Fact: A brutal Communist dictatorship rules North Korea in 2014 because one Serbian shot one Austrian in 1914.  If you know basic history, this seemingly bizarre claim should be obvious.  In 1914, however, this ripple effect was so utterly non-obvious that no one on earth is likely to have considered it!  (Disagree?  Look at how bad even experts are at far less remote predictions). 

Once you merge basic history with the biological fact that none of us would be here if our fathers had crossed their legs one more time, the CWA becomes overwhelming.  The tiniest change in your reproductive behavior eventually changes the identity of every living human.  And some of those humans will make choices that affect billions.  The tiniest change in the behavior of Lenin's parents prior to his conception would have annulled his existence - and a world without Lenin would be a very different world than the one we've known.

After you stare into the face of the CWA, there's no going back.  The only question is: How can you live with it?  Once you fully absorb the CWA, confidence in your long-run, big picture predictions sharply falls.  If you adhere to norms of rationality and candor, the CWA requires you to moderate your claims - and alienate the overconfident masses that surround you.  If you're a strict consequentialist, belief in the CWA is almost paralyzing.  How are you supposed to maximize overall X if long-run, big picture predictions are so tenuous?  How?  How?!  How?!?!?!

From other ethical perspectives, however, the CWA cuts the Gordian knot of indecisiveness.  Suppose you have a modest moral presumption against murder.  The CWA reminds you that such scruples could easily have bad long-run consequences.  After all, you could be sparing an ancestor of the 23rd century's Hitler.  But the CWA also saps the strength of every attempt to defease your presumption against murder.  It is nigh impossible for a reasonable person to be 90% confident that murdering a seemingly harmless person will ultimately make the world a better place.

The upshot: The CWA combined with homely moral presumptions logically leads to a bunch of extreme policies.  Not summarily executing smokers.  I was totally wrong about that and so much else.  But the CWA does elegantly support policies like libertarianism, pacifism, tolerance, and general passivity.  In a world as complex as our own, you have no compelling reason to get your hands morally dirty.  Just leave other people alone, wish them well, and beautify your Bubble.


   


I rarely disagree with Don Boudreaux about any economic, political, or moral issue and so in those rare cases where I do disagree, it's probably worth noting. Here's one.

In a post in September, I talked about which U.S. presidents belong on Mount Rushmore. In a comment, Don wrote:

I'd remove from Mt. Rushmore all people who are most famous for holding political office - which is to say, I'd blast off all four of the currently sculpted faces. I'd replace them with images of the faces of John D. Rockefeller, Sr., Gustavus Swift, J.J. Hill (even though he was Canadian!), and either Gail Borden or Steve Jobs - people who really define, and who helped in notable and noticeable ways to sculpt, what is good about America. (If obliged to include a non-entrepreneur among the four, there's no question that the person whose visage I would choose is that wisest of all Americans, H.L. Mencken.)

I agree with Don about the merits of Rockefeller, Swift, Hill, and Jobs. And I hadn't known about Gail Borden, but now I do, and I see Don's point.

But I want to make my case for putting only Presidents on Mt. Rushmore. It's an application of public goods theory. As David Friedman has pointed out so eloquently (see his "The Right Side of the Public Good Trap" in The Machinery of Freedom), in a society with government, good law is a public good. It is non-excludable: If someone provides good law, even those who don't pay benefit from it because it is hard to keep them from free-riding. It is non-rival in consumption: my benefiting from good law doesn't prevent you from doing so.

The fact that good law is a public good means that it will be under provided. There are many incentives for politicians to provide the opposite of good law: they benefit and their cronies benefit. And no one knows this better than Don. Read his great letters to politicians and you'll see him excoriating politicians for pushing bad laws. That, sigh, is where the incentives typically are.

So when a politician comes along who pushes good laws or vetoes bad ones, that's a big deal. How do we get better law, on the margin? By praising politicians who push for good laws and excoriating politicians for pushing bad ones. (Don does really well at the latter.) Do I want praise of entrepreneurs too, for the immense good they do for society? Yes, I do. But here's the neat thing: keep regulations to a minimum and don't tax them heavily, and the large financial incentives for entrepreneurship will get us lots of entrepreneurs and lots of benefits for society.

CATEGORIES: Public Goods

   


If you judge a book's quality by how frequently you come back to it or think about it, Daniel Klein's Knowledge and Coordination: A Liberal Interpretation is a very good book. I keep pulling it off the shelf for different things. This is a deep and provocative treatment of things economists usually take for granted: without entrepreneurs and the information-generating capacity of a profit and loss system, we can't discover the economy's underlying parameters (tastes and technological possibilities). Sometimes, this succeeds (Big Box retailers and warehouse clubs). Sometimes it fails (New Coke). Profits and losses help us figure out when people have sown wheat and when people have sown tares. I doubt that a People's Ministry of Retailing and Distribution would have let someone like Sol Price--a San Diego lawyer who didn't start adulthood looking to get into retail but who helped revolutionize the industry in the middle of the twentieth century--succeed. I sometimes wonder:

Here's a discussion from when I got back into blogging and op-ed writing. Here's the Google Books preview of Knowledge and Coordination. Volume 7 of Studies in Emergent Order contained a symposium to which I, Garret Jones, Deirdre McCloskey, and others contributed.

CATEGORIES: Austrian Economics

   


"I want to ask a question. What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. Great Britain does not punish gambling. This is not a loophole; it is a British law. The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax - he did not refer to the exemptions - implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country and its workers are not yet reduced to the status and the distress of their Russian colleagues."

--Ludwig von Mises, Defense, Controls, and Inflation

The "loophole" in question, of course, is that prosecutors have essentially absolute discretion to not enforce the law.


   


When the Deferred Action for Childhood Arrivals policy was announced in 2012, I repeatedly heard that two million would benefit.  The bottom line has been far smaller: as of March 2014, 673,000 requests were filed, and just 553,000 approved. 

I hasten to add that this is better than I would have expected back in 2011.  But it underscores the fact that we shouldn't take aspirational numbers at face value.

Prove me wrong, Obama.  Prove me wrong.


   


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