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Daniel Sutter, of the Manuel Johnson Center for Political Economy at Troy University in Troy, Alabama, interviewed me last month of how economists helped end the draft.

Here it is. It's about 30 minutes long.

David Henderson has a recent post discussing the likelihood of the US government defaulting on its debt, at some point in the future:

That motivated me to go back to an article that San Jose State University economist Jeff Hummel and I had published in Independent Review back in 2014 that, for some reason, I don't seem to have posted about here. It's titled "The Inevitability of a U.S. Government Default." In it, we argue that the feds are likely to default, that money creation as an alternative is not likely to get them out of their fiscal fix, and that default is actually better economically than massively high inflation.
There is much that I agree with in their paper, but in the end I am somewhat skeptical of the claim that the US government will default. In the paper cited above, David and Jeff make this comment:
Nevertheless, the spending increases in the three federal programs highlighted-- Medicare, Medicaid, and Social Security--cannot go on forever. As one of author Henderson's previous bosses, Herb Stein, put it, "If something cannot go on forever, it will stop."

Because these spending increases won't go on forever, they will stop. How will they stop? Of the answer to that, we are less sure. A reasonable guess is that eligibility for Medicaid will be tightened, and Medicare and Social Security will be means tested, all well before 2050.

But if these reforms are not made well before 2050, then a very likely outcome is a government default on the federal debt. The default could range from outright repudiation to partial repudiation.

This is precisely why I think default is unlikely. The fiscal trends in the US are unsustainable. They are unsustainable even if the US government defaults. Thus I see two options:

1. Stop running excessive budget deficits, and do not default.
2. Wait until immediately after defaulting to stop running excessive budget deficits.

Obviously the first option is much better, as default solves no problems, and causes much future distress. So why not avoid default?

A cynic might point to Greece as a cautionary tale. Perhaps the government will not cut back on deficit spending until it is forced to. A cynic might also point to the current trajectory of fiscal policy, which has become extremely irresponsible over the past 12 months---indeed worse than anything previously seen in America (when taking account of where we are in the business cycle.) So why am I less cynical?

The Greek government hid its fiscal problems through dodgy accounting tricks. The US fiscal problem is too big to hide. Thus the bond market would begin to show signs of worry long before a default was imminent. And this would put pressure on the federal government to slow the increase in spending.

Note that it does no good to say that both tax increases and spending cuts are politically impossible. Not only are they possible, they are certain to occur for precisely the reason provided in the Herb Stein quotation. Some combination of tax increases and entitlement reform will occur during the 21st century. The only question is when. Because doing this reform before a default is a far more sensible and far less painful option, I continue to see that outcome as the most likely, while acknowledging that default remains a possibility if the political system remains highly dysfunctional.

by Pierre Lemieux

Don't Trump and Xi have a different vision of international trade? Not really.

china trade.jpegNobody knows how the protectionist tug-of-war between Chinese president Xi Jinping and U.S. President Donald Trump--each one deciding for his flock--will end. Perhaps we'll have a disastrous trade war and recession. Perhaps Chinese consumers and businesses will persuade Xi to back off, as the latter's April 10 speech was first interpreted (Lingling Wei, "Xi Vows Greater Access to China, Warns Against 'Cold War Mentality'," Wall Street Journal, April 10)? Or perhaps American consumers and businesses will oblige Trump to back off, as corporate and stock-market resistance in America hopefully suggests? Chinese resistance may save the Americans from their ruler, and American resistance may save the Chinese from theirs. Either would be welcome.

Don't Trump and Xi have a different vision of international trade? Not really.

Xi's recent declarations suggest that he does not want a trade war. He said:

In a world aspiring for peace and development, the Cold War and zero-sum mentality look even more out of place.

This reference to trade as a positive-sum game looks strangely free-trade. But it only looks so. Yet, a collectivist has some reasons to favor international trade.

I take collectivism to mean a doctrine favoring choices at the level of the collective, which in the modern world is best represented by the state. By opposition, individualism is based on the primacy of the choices made by each individual. Whether the state is the Party or the Republic does not essentially matter for this distinction.

If we follow these definitions, Donald Trump and Marine LePen (leader of the Front National in France) are collectivists of the Right; Bernie Sanders or Xi Jinping are collectivists of the Left. This explains their strange agreement against free trade. The political distinction between individualist and collectivist is more useful than the one between Left and Right.

Here is the catch: collectivism is not against international trade per se, only against free trade. Try to think like a coherent collectivist for a moment. Exporting means using "our" (collective) resources to produce goods and services for foreigners. Importing means using the resources of foreigners to produce goods and services for "our" own consumption. Therefore, the less "we" export and the more "we" import, the better it is for our collective. Of course, we need exports (or foreign investment) to pay for our imports, so we must tolerate exports. End of collectivist parenthesis.

Garden-variety nationalism is merely one form of collectivism: it draws the borders of the acting collective around a national territory. Mr. Xi, who is often described as an "unabashed nationalist," has a good collectivist justification to favor trade with the United States. He should long for a current-account deficit. Besides the balance of goods, the current-account balance incorporates the balance of services--such as financial services. Interestingly, liberalizing imports of financial services is one thing that Xi said his government would do. Why not have those bad Americans produce financial services for the Chinese?

The reader may object that collectivists ignore trade theory and cannot see the collective benefits of international trade. This may be true, but assuming that people are irrational is generally a poor explanation, for it can explain anything and everything. Moreover, there is another broad reason why collectivists share a dislike of free trade while they favor some international trade: in free trade, what they don't like is the "free," which refers to individual liberty, not trade per se.

For adherents of individualism--such as most economists are--free trade basically means the freedom of individuals or their private organizations and intermediaries to import what they want from where they want--even if the degree of freedom of their trading partners is lower. Your country's electorate has little influence on liberty in foreign countries, but it has some influence at home (at least a bit more). So instead of fighting for foreigners' liberty, let's do it at home; let's be free even if foreigners are not.

Collectivists can only conceive of international trade as the capacity of national collectives to control their imports and exports. They see the collective as the actor who imports and imports. Individuals have to follow. In his April speech, Mr. Xi illustrated the need for collective control by declaring about market opening (see Lingling Wei, "Xi Pledges a More Open China, Increased Imports and Lower Auto Tariffs," Wall Street Journal, April 10):

While we're crossing the river by feeling the stones, we're also strengthening top-level planning.

Is Mr. Trump's approach that different? For him, the government can coercively sacrifice some individuals to the collective. He tries to sugar-coat the pill with promises of future rewards, but any government does this, explicitly or implicitly. In a speech to the Farm Bureau, Trump explained that the farmers threatened by a possible trade war with China "are great patriots" who "understand that they are doing this for the country," and that "we'll make it up to them" (see Michael C. Bender, "Trump Acknowledges Farmers to Feel Impact From China Trade Actions," Wall Street Journal, April 9). The administration is considering special subsidies to compensate farmers hit by Chinese retaliation, so the taxpayers will become the sacrificed "patriots" instead. "More government debt to pay off voters hurt by U.S. government policy," wrote a Wall Street Journal editorial. "Saturday-morning-cartoon central planning," said Senator Ben Sasse (R-Nebraska).

If collectivists do have economic reasons to favor international trade, they have many political reasons to fear anything resembling free trade. Free trade promotes individual autonomy. It favors the circulation of ideas and "cultural appropriation." In his recent book A Culture of Growth, Joel Mokyr explains how the West overtook the East because early modern Europeans had no prevention against importing goods and ideas from abroad, while Eastern societies such as China were resistant to foreign ideas and new ways. Europeans unabashedly called "chinaware" dishes imported from China--as if Americans now proudly called flat-screen TVs "mexicanware" or washing machines "southkoreaware." From a collectivist viewpoint, free trade is problematic because it renders the individual less dependent on the national collective.

Mr. Xi understands better, at least intuitively, the collectivist economic case for international trade, but he also has more reasons to fear the political impact of anything like free trade. Besides that, the opinions of the two men converge. Mr. Xi favors international trade, but only to the extent that the collective, "the country," that is, "the Party," reserves the power to decide what will be imported and exported, and under which conditions. Mr. Trump hides similar opinions under expressions such as "fair and sustainable trade," as the Office of the United States Trade Representative shamelessly says; this expression has no meaning except as stating that the collective, "the Nation," and in practice its rulers decide what is worth importing and exporting, and under which conditions.

There is a collectivist case for trade, but not for free trade.

CATEGORIES: International Trade

I've often expressed skepticism about survey questions regarding macroeconomics. Thus why ask the public whether they like inflation, if less than 5% of the public even knows what inflation is? (I ask my class if the cost of living has risen when both wages and prices rise by 10%, and 95% say no.)

I recently came across a graph in a Financial Times article that almost perfectly encapsulates my problem with macro surveys:

Screen Shot 2018-04-07 at 5.04.19 PM.png
I see three major problems with the FT interpretation of this survey of Chinese opinion:

1. The FT headline suggests that the appetite to consume has fallen sharply, but the downward blip in March looks like random noise. Overall, all three categories look pretty stable in recent years.

2. The three categories are also quite peculiar. In any principles of economics textbook, you'll see the following identities:

GDP = C + I = C + S = GDI

This implies that S = I.

Saving is the portion of income that is used to finance investment, and investment is the portion of output that is not consumed.

But if saving and investment are two sides of the same coin, then what does it mean to talk about saving and investment as two alternatives?

3. It is true that the public may conceive of saving and investment in a different way from how economists define the terms. But this leads to a third objection. What makes you think the public is going to provide any sort of coherent answer to the following question?

Considering current prices, interest rates and income levels, are you more inclined to consume, invest or save?
What do people mean when they say they are not "inclined to consume"? People who don't consume will die. Obviously people have something else in mind, perhaps "not consume at above normal levels." But the question is so vague that it's not at all clear what the answers might indicate. After all, it's always been fashionable to say that it's wise to save, wise to avoid consuming too much. In many cultures, people are taught that saving is virtuous, or at least prudent. So perhaps survey respondents are merely giving a politically correct answer.

Notice that the share of the public that believes it's a good time to consume has stayed around 12% or so, even as Chinese consumption levels have risen dramatically. My hunch is that if very few people say it's a good time to consume, it is because it sounds better to say it's a good time to save or invest.

Case Against Ed.jpg Email from EconLog reader Joshua Fox, reprinted with his permission.  There's no reason, of course, that you couldn't have a similar job training model without the injustice of conscription.

Bryan, I loved The Case Against Education.

Further support for your thesis comes from the Israel Defense Forces, where twenty-year-olds control air traffic, direct large organizations, and develop software.

In civilian life, such levels of responsibility would require  an advanced  education. 

The IDF sorts  candidates partially by their formal schooling. But since the process starts in the beginning of the  senior year, and certainly before matriculation tests are finished, academic progress is not the most important criterion. 

The IDF  administers IQ tests. They also give  personality tests (created by no other than Daniel Kahnemann!). Other  markers of personal "quality" are used, with less weight, as for example leadership in extracurricular activities. 

New soldiers get taught exactly the needed skills. For example, software developers get a few months of training focused  on software development. The  army  allows a a few recruits in relevant areas, like engineering and medicine, to delay their service until after their degree.

And amazingly, the software developers, air traffic controllers, medics and others seem to do as good a job as any in civilian life. In fact,  their levels of   responsibility would otherwise require many years of experience, another twist on your thesis. And these soldiers are not just a select few: Israel has broad mandatory conscription. 

The next questions are whether and why these soldiers have to step down to a lower level of responsibility when they enter civilian life, and  whether and why they need a B.A. to get hired.



P.S. My four kids didn't attend school.

Today, I'll be giving a talk at Indiana University East in Richmond, Indiana.

Title: How Economists Helped End the Draft
Time: April 18 at 4:00 p.m.
Location: Tom Raper Hall 124

If you're an EconLog reader and you live nearby, please come. If you do, come up and say hi before or after.

Today, I flew from Monterey to LAX on United, then on to Washington Dulles, with a connection planned to Dayton, Ohio. My plan was to rent a car in Dayton and drive to my hotel in Richmond, Indiana, and then go to a late dinner with some of the faculty at Indiana University East. I speak tomorrow afternoon at Indiana University East.

One problem: when I got to Dulles, I found out that my flight to Dayton had been cancelled. There wasn't another flight to Dayton until the morning and this involved a connection in Newark.

I asked the customer service rep if she could get me on another airline. My little upset: I'm pretty sure that if I hadn't asked her, she wouldn't have mentioned it. But she worked the problem and came up with an alternate: take a Super Shuttle to Washington Reagan airport (DCA) and take American Airlines late this evening to Dayton. Done. So I'm sitting here in Washington Reagan waiting until I get hungry for a Five Guys hamburger.

There are two economic components to this experience.

1. Sunk costs.

I could have got all pissy and woe-is-me about the cancelled flight, but what's the point? Then I would have paid for it twice: by missing a meal I had been looking forward to with some faculty and by having a fit. The loss due to the cancelled flight is a sunk cost.

When I have taught sunk cost in the past, I would sometimes remind my students of the expression "Don't Cry Over Spilt Milk." Then I would say that that wasn't quite the right expression. Maybe you need to cry, but recognize that it's spilt and that you can't get it back.

Now I think it's an apt expression. The crying over the missed flight would, as noted above, have added to the cost.

2. Compensating Differentials

Because the flight was cancelled due to a mechanical problem, United was responsible for making amends. The customer service rep gave me a $29 voucher to cover the Super Shuttle to Reagan, a $10 voucher for a meal either at Dulles or Reagan, and a ticket on American to Dayton.

It occurred to me that some people might scoff at the $10 voucher. But not me. I'm an economist. I recognize that $10 doesn't cover a really nice meal. But think through what would happen if United's policy changed to where they give you a $20 voucher. That extra money has to come from somewhere. Where does it come from?

Here's where compensating differentials enter. The new equilibrium would be for United to charge a very slight amount more for tickets. I would rather pay slightly less each for a whole bunch of tickets and face the small probability that sometimes it means that instead of having a nice dinner with a glass of wine, get a Five Guys burger. (Truth be told, I'm actually looking forward to a Five Guys burger.)

Bryan Caplan  

Divine Clarity

Bryan Caplan
My favorite passage from Ali Rizvi's The Atheist Muslim:
[M]ost moderately religious people, especially here in the West, approach their religious scriptures very differently from how they would read, say, Alice in Wonderland, or this book you're reading right now.  As I write this, I am making a conscious, deliberate effort to be as clear as I possibly can and minimize any potential ambiguity.  I know I will not be given the luxury of generous "interpretation" beyond what these words say at face value.  I will literally be held to a much higher standard as a writer than God himself.  It isn't uncommon for critics of Richard Dawkins or Sam Harris to quote decontextualized excerpts from their writings to accuse them of being bigots, while also hurling the same accusation at those who don't adequately "interpret" verses in the Quran that endorse in plain language the beheading of disbelievers or beating of wives.  In a 2014 tweet, Reza Aslan gave Harris some unsolicited advice: "If you're constantly having to explain away horrid things you've written, don't write them in [the first] place."  Note that this is from a man who has partly made a career out of constantly explaining to people why violent passages in the Scripture don't really mean what they say.
The book was a birthday present from my courageous friend, Ish Faisal of Ex-Muslims of North America.

David R. Henderson  

Default or High Inflation?

David Henderson

I was on a discussion on Facebook yesterday with an economist about default and high inflation.

This economist and I agree that the U.S. federal government has an enormous deficit and debt problem in its future. What we disagreed about is whether there's much difference between the feds defaulting on their debt or creating high inflation. He saw not much difference. I see a lot.

That motivated me to go back to an article that San Jose State University economist Jeff Hummel and I had published in Independent Review back in 2014 that, for some reason, I don't seem to have posted about here. It's titled "The Inevitability of a
U.S. Government Default
." In it, we argue that the feds are likely to default, that money creation as an alternative is not likely to get them out of their fiscal fix, and that default is actually better economically than massively high inflation.

I recommend that you read the whole article if you want both to comment and to maximize the probability that I will pay attention to your comment.

Some highlights:

The problem is this. Three components of the federal government budget--Social Security, Medicare, and Medicaid--are highly likely to take an increasing share of gross domestic product (GDP). Overall federal government spending, including interest on the debt, could exceed 40 percent of GDP by 2050. For more than sixty years, overall federal revenues as a percentage of GDP have almost always been within a narrow range. They have never gone over 21 percent of GDP and have almost never gone below 17 percent. Even during the crisis years of World War II, they never exceeded 22 percent of GDP (White House 2013).1 The result, if the government does not change policy, will be annual deficits of approximately 20 percent of GDP. This is unsustainable.

The question then becomes: What will change? This is difficult to predict. But we give the following predictions in decreasing order of certainty.
First, federal government revenues are unlikely to be more than 22 percent of GDP for more than a few years.
Second, well before spending reaches 30 percent of GDP, the federal gov- ernment will face a renewed, more serious fiscal crisis.
Third, likely cuts in the growth of Medicare and Medicaid spending would at best delay, but not prevent, this crisis.
Fourth, the probability is therefore fairly high that the federal government will be forced to default on some or all of its debt.
Fifth, outright default on the federal debt will occur despite any increasing inflation.

Why Seigniorage Won't Do It
Assuming that revenues from explicit taxes remain capped at 20 percent of GDP, whether for structural or political reasons, and that politicians will have little incentive to cut spending, seigniorage would have to come up with the difference. Given that 10 percent inflation during the 1970s generated revenue amounting to 0.5 percent of GDP in the United States, a straight-line extrapolation suggests that covering the growing fiscal shortfall would require more than a tripling of the price level year after year after year. Within three years, the dollar would be worth only about 2.5 percent of its value just three years earlier. Such continual triple-digit inflation would be unprecedented, the highest the United States has ever experienced outside of its two hyperinflations. Moreover, seigniorage itself faces its own Laffer Curve (known as the Bailey Curve, after economist Martin Bailey). In order to avoid higher taxes on their real-cash balances, people spend money faster as inflation rises, thereby exacerbating the price increases. Higher rates of inflation thus generate proportionally ever-smaller revenue increases. Once we also acknowl- edge that the CBO's projections are probably too optimistic, we can see why our estimate that financing the explosion in Social Security, Medicare, and Medicaid payments will necessitate a 246 percent annual inflation is probably too low. How likely is it that governments in any developed country will be willing or even able to unleash such appalling currency depreciation? Recall how politically unpalatable the mere double-digit inflation of the 1970s was. The bottom line is that inflation's implicit tax on real-cash balances will not be much more able to resolve the escalating budgetary problems of the U.S. government than would an excise tax on chewing gum.

To be clear, we are not denying that a Treasury default might be accompanied by some inflation. Inflationary expectations, along with the fact that part of the monetary base is now de facto government debt, can link the fates of government debt and government money. This is all the more reason for the United States to try to break the link between U.S. currency and debt. We still may end up with the worst of both worlds: outright Treasury default coupled with serious inflation. We are simply denying that such inflation will forestall default.

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Thinking About War

Contributing Guest

by Pierre Lemieux

A war, even a just war, becomes a reason or an excuse for your own state to increase its power over its own citizens--against you.
gas mask.jpg
As the scientific study of the social consequences of rational or incentivized individual actions, economics can help us think about war and even about the morality of war. Here are a few ideas.

It seems that war has always existed, and that Rousseau's idyllic savage never did. In Constant Battles: The Myth of the Peaceful, Noble Savage, Steven A. LeBlanc provides archeological evidence of primitive tribes regularly fighting over resources. (I owe this reference to Daniel J. D'Amico, who, some years ago, directed a Liberty Fund conference on statelessness.) Our hope for the future is that cooperation through trade (if allowed to flourish), the limitation of power, and the enrichment of peaceful peoples will reduce the frequency of wars. But they are unlikely to disappear. Free and rich societies, if they still exist, will always be tempting prey. The empowerment of irrational religious ideologies only gives another justification for war.

Many theorists sympathetic to anarcho-capitalism believe that protection against foreign states is the chink in the armor of ordered anarchy. In Social Justice and the Indian Rope Trick, Anthony de Jasay suggests that anarchic societies may survive only "in relatively geographical remoteness that isolates them from other societies." He invokes David Hume's belief that quarrels between different societies could give rise to government. But even if the state should not exist at all, there are things it should still do to substitute for the private institutions it displaced. Defense against aggression by foreign states is the paradigmatic case, at least if the aggressor would violate individual preferences more than the current state. In this sense, the state is justified in waging defensive wars.

As always when evaluating coercive interventions (normally called "public policies"), moral judgments are ultimately required to define efficiency, because the latter concept is based on a starting status quo. One moral judgment underlying my reflections lies in the usual recognition of the value of individual preferences, which is a natural moral principle for economists. Ancillary moral judgments are required for thinking about war.

As philosophers would say, the war must be a "just war" (see Eric Mack's article "Rights, Just War, and National Defense"). A good illustration of the interface between economics and ethics lies in the issue of whether a just war incorporates a prohibition on hitting "innocent shields" (innocent people caught in the crossfire because they are unwittingly shielding aggressors). Such a prohibition would create perverse incentives: an aggressor could always shield its forces with innocent people, by installing its missile bases in populated cities, for example. Presumably, a moral war only requires to not intentionally target innocent civilians (see my Econlog post "Attacking Civilians in War"). I think that a just war also prohibits physical conscription--as opposed to indirect taxpayers' conscription. The Swiss model is appealing, if it could be made voluntary.

What is a defensive war is as much an economic as an ethical question, for the choice of different means of defense brings about different consequences. Legitimate self-defense cannot require that the bullet have left the barrel of your aggressor's gun before you shoot at him; otherwise, self-defense would never be morally allowed. The same applies to a group of individuals directly threatened by a foreign tyrant. In this sense, preventive strikes are not morally unacceptable, provided they are economically prudent and guided by the general principles of a just war.

The Latin dictum si vis pacem, para bellum (if you want peace, prepare war) also reflects the importance of incentives, and thus the interplay of economics and ethics in war. If a potential aggressor knows that you won't be capable of defending yourself, the expected cost of his aggression diminishes, and he is therefore more incited to attack you. This may justify a permanent army. It also justifies inter-state defense alliances. Such alliances, however, also increase the incentives of their nation-state members to bully other states, knowing that they would only shoulder part of the costs if the bullying degenerates into war.

The case for military intervention against some barbarian state that is not an immediate threat to "us" but may be gassing its own subjects, is more complicated. Economically--that is, considering the possible incentives, consequences, and available resources--the evaluation would depend on the probability that such a state becomes emboldened by its impunity or gains imitators, thus threatening us in the future. If your neighbor is regularly shooting his guests in his living room, you may fear that he will soon cross the property line and come into your own living room.

The ethical case for intervention against a rogue state is also complicated. On the one hand, one may argue, like Eric Mack, that your state does not have a mandate to protect you against hypothetical threats elsewhere in the world. On the other hand, perhaps we could read Chapter 2 of John Locke's Second Treatise of Government, as saying that, in the state of nature, anybody has the right to execute the law of nature, and that this principle applies to states because they are in a state of nature towards each other.

All this ignores what may be the main argument against war: what it does to "us." A war, even a just war, becomes a reason or an excuse for your own state to increase its power over its own citizens--against you. When the state has already, like today, accumulated extraordinary powers that cannot, except by a heroic stretch of mind, be reconciled with individual liberty, any new power, likely to long survive the end of a war, becomes a grave and immediate danger. The danger will only be intensified by the habits that the warriors will bring back home. The torturers will roam our streets. The danger is further intensified if the warriors don't know what they fight for except the country, the Nation, the leader, "us" against "them."

This domestic argument against war is attenuated, but not invalidated, when the conditions for a just war are realized. The consequences of foreign tyranny may be worse than those of domestic tyranny, but both sets of consequences must be somehow factored in. (Such consequences are of course difficult if not impossible to predict, but they must still be part of one's thinking.)

One would hope that our own state, before committing to a just war, would declare something like this: "We apologize to our citizens for having constantly infringed against their liberty with a long train of abuses and usurpations that have removed many of the reasons for fighting foreign tyrants. These abuses and usurpations go from occupational licensure to other bans or controls on domestic trade as well as ban or controls on foreign imports. In order to reinstate these reasons of liberty, we have decided to repeal a large number of measures of surveillance, control, and criminalization of peaceful behavior that have made the citizens fear us more than we fear the citizens."

Bryan Caplan  

My WSJ Interview/Profile

Bryan Caplan
I'm in the weekend edition of the WSJ, talking to James Taranto about The Case Against Education.  Gated, unfortunately!

Scott Sumner  

Don't tax death

Scott Sumner

Here's the Economist magazine, in an article advocating death taxes:

Advocates of the tax were unable to counter with anything nearly as powerful. A few pointed out that double taxation occurs on a daily basis in the form of sales taxes (people buy things with taxed income), or that it is what the person leaves behind, rather than the person, which is subject to the estate tax.
I understand the impulse that leads people to favor inheritance taxes. But death taxes are not the way to go about it. When economists complain about "double taxation", they have something very specific in mind---taxing future consumption at a higher rate than current consumption. Combining a sales tax with an income tax does not lead to the double taxation of future consumption. However an income tax alone, indeed any tax on capital income, does lead to the double taxation of future consumption.

Death taxes are not bad because a bunch of old rich people have to pay money to the government, rather they are bad because thrifty rich people are taxed at a much higher rate than profligate rich people. I have no problem with progressive taxes, which tax high rates of consumption more heavily than low rates of consumption. I do have a problem with taxing future consumption at a higher rate than current consumption.

Consider Sweden:

Sweden, which is usually seen as egalitarian, has gone one step further. In 2004 its inheritance tax was repealed, with the support of a former communist party, among others. What prompted such a radical transformation from the 1960s, when the largest estates could face an effective tax rate of 60%? By the end of the 1970s there was a growing sense that the Swedish state was bloated; a turning-point came when Astrid Lindgren, the creator of Pippi Longstocking and a national hero, revealed that she faced marginal tax rates of more than 100%. A financial crisis in the early 1990s reinforced the sense that the country needed to become more competitive.

Politicians noted the special disgust that Swedes reserved for inheritance tax. According to Swedish Enterprise, a lobby group, entrepreneurs such as Ingvar Kamprad, the founder of IKEA, were leaving the country to avoid high taxes. Stories abounded of family firms broken up to pay the bill. At first, tweaks were introduced to the Swedish system. Yet the resulting complexity met with disapproval. Sweden is a small country with high levels of social trust; people are allergic to bureaucracy, says Janerik Larsson of Timbro, a think-tank. "It was easier to get rid of it entirely." After abolition Mr Kamprad returned to Sweden. The economy has grown quickly in recent years, and anti-tax advocates claim they have been vindicated.

Sweden is not just "usually seen as egalitarian", it is fairly egalitarian. And the Swedish case shows that there is nothing inconsistent with abolishing the inheritance tax and being an egalitarian country.

My main frustration in debates about politics and economics is the difficulty many of those I argue with have in admitting my points. Often on Facebook, for example, I will make a point, someone will respond critically, and I'll respond to that point. If I'm persuaded, my response is something like "Touche." (I learned that line from Leland Yeager when he taught a course at UCLA in 1975. Leland was, and probably still is, great at admitting it when you had a good argument against him.) And then I move on. If I'm not persuaded but I think I'm right and I seem to have answered the other person's point, a response from that person is often--nothing. No admission of a mistake on his part.

I've been thinking lately about why it's so easy for me to admit mistakes and why it's so hard for many others to do so. I don't have a good answer for the latter, but I do have a good answer for the former.

I think back to two things in my childhood: (1) my learning style, and (2) a painful apology I made when I was about 12.

My Learning Style

I was interested in many issues in government policy from a very early age, starting at about age 7 or so. We didn't have a good library in my small town, so most of what I knew was from reading the Winnipeg Free Press and talking to adults around me. (I didn't learn anything from TV because my family didn't get TV until January 1961, when I was 10 years old.) I think we are hard-wired to have opinions on things. We hear a few facts and we come up with hypotheses or theories to connect them. Based on the few facts we have, the odds that we get it right are fairly low. I learned this at an early age.

So what I did was come up with my loosely held hypothesis and then test it by asking adults around me what they thought, listening to their responses, and evaluating, changing my view if I heard good enough responses. I guess you could said I was an early Bayesian. Given that I came up with this learning style in my home town of Boissevain, you could call me a Boissevain Bayesian.

That style worked pretty well. I'm not saying that I usually came out with the right answer, but that style helped me readily admit mistakes.

I remember one incident when I was about 11, living in Carman, Manitoba, where my family had moved when I was 9. The janitor at my church, an older man, had taken a liking to me, and vice versa. One Sunday, he invited me to come over to visit him and his wife in the afternoon. My parents approved and so I went. Somehow we got talking about politics. The New Democratic Party (NDP) had formed the previous year as a merger of the old Cooperative Commonwealth Federation and the Canadian Labour Congress. My friend, the janitor, dismissed them as Communists. That didn't ring true with what I had read in the Winnipeg Free Press and so I challenged him on it. He dug in his heels. I had always trusted my mother to be good on facts when she was pretty sure of the facts and so I told him I was going to call my Mom (in Canada, we said "Mum") and ask her. So I did. My mum said that that was false. I thanked her and hung up and told him that was false. I don't remember whether he admitted that he had badly exaggerated. I'm telling the story mainly to say that this was how I fact checked and learned.

It has served me well. It is so easy to check facts now and so there is even less excuse for getting them wrong. But the point is that I don't have a lot of emotional energy tied up in holding to my position. I do have a lot of emotional energy tied up in being right, but that's what makes it easier to admit mistakes. If I see that I've made a mistake, I change my view--precisely because I want to be right.

The Apology

Our family moved to Carman, Manitoba in July 1960. Within a few months, my mum formed a close friendship with a very outspoken younger woman in our town. Her name was June Staite. The Staites lived only about half a block away in a town of about 1,800 people. June was a pistol. She was full of energy and had strong views on many things. She was the first adult I ever heard call a politician by a bad name for thinking that the rules that applied to the rest of us shouldn't apply to him. That actually happened a couple of years after the incident I'm about to relate, but I found it charming.

A woman named Mrs. Durham lived in a small house beside the Staites' house. Her husband was dying of cancer and she had a tough life, taking care of him, raising her son, Johnny, and making a living. She didn't have a washer or dryer--many people didn't in those days--so one day she was hauling a basket of laundry to the laundromat. For some reason she needed to turn around and go home and so she left the basket on the sidewalk. On top of the basket was a camera. Shortly after, my friend Dirk and I came along and saw the basket. We didn't know it was hers, but that didn't matter: we shouldn't have done what we were about to do. One of us thought it would be fun to pick up the camera and take a picture of the other. I don't remember who instigated. So we took turns taking pictures of each other. Ho, ho, isn't that fun.

Then we left. A few minutes later Mrs. Durham came along and saw that the camera had been disturbed. She took the laundry back to her place and went next door to vent to June. At this point, she didn't know who had done it. But Mrs. Durham was distraught. She felt overwhelmed by her circumstances and this was the final straw. She actually talked about moving out of the neighborhood.

June let her vent and calm down somewhat and then told her that she would get to the bottom of it. I guess Dirk and I were wandering around the neighborhood because June quickly found us and asked me point blank what we had done. I had always respected her and so I quickly confessed. Then she told me what Mrs. Durham had said and how I needed to go over and apologize. I asked her if she could tell Mrs. Durham I was sorry. No, said June, you need to do it.

The prospect of apologizing felt awful. But I knew June was right and so I knocked on Mrs. Durham's door and, when she answered, told her what I had done. I told her through tears. I don't remember her reaction and it's not as if I expected that she would feel all warm and fuzzy to me for confessing that I had violated her property rights.

After apologizing, I went next door to June's house and told her I apologized. I'll never forget what happened next. I started crying and June hugged me, and that made me cry even more and sob on her shoulder. It was like having a second mother.

What I learned is that apologizing for doing something bad gave me enormous relief. And compared to apologizing for doing something bad, admitting that I made a mistake in facts or in reasoning is nothing.

I'm looking for highly quotable immigrant memoirs. What are your top picks?

shef 2.jpg

One of my favorite blogs, both for its balance and for its focus on important facts and issues, is that of the Conversable Economist, written by Timothy Taylor, the managing editor of the Journal of Economic Perspectives.

I would have written my note below as a comment on his recent post on spending on higher ed, but his post does not accept comments.

Tim starts by writing:

"Everyone" knows that the future of the US economy depends on a well-educated workforce, and on a growing share of students achieving higher levels of education.

I know Timothy a little, mainly through email and partly by having attended a 3-day conference in Montana with him in 1985. In other words, I don't know him well enough to understand the reason he put "Everyone" in quotation marks. Is it irony, because he has my co-blogger Bryan Caplan's dissent in mind? Is it because he knows that when people say "everyone knows something," that's not really true but it's almost true because everyone who counts knows that thing? I don't know.

But what's striking is that in a well-researched piece on higher education (all Tim''s posts are well-researched), he doesn't even mention Bryan's book. It's a pity. Tim brings thoughtfulness to every issue he tackles, but he takes it as given that of course the government needs to spend more on higher ed.

Even, by the way, if one rejects Bryan's view that higher ed is 80% signaling and 20% learning, and holds to the view of my Hoover colleague Eric Hanushek that the numbers are reversed, one would still have to justify having government spend more on higher ed. Most of the gains from higher ed, whether they are from signaling or from learning, are captured by the person received the education. So it's hard to justify handing taxpayer money to people most of whom will, because of that expenditure, be in the top third of the income distribution.

In any case, although Tim sees the news on government expenditures and tuition as bad, from Bryan's and my viewpoint, it's good. Here's his key paragraph summarizing the point:

This figure clarifies a pattern that is apparent from the green bars in the above figure [DRH note: the figure with green bars is a figure he posts on his site--it is not the one above]: the share of spending on public higher education that comes from tuition has been rising. It was around 29-31% of total spending in the 1990s, up to about 35-36% in the middle of the first decade of the 2000s, and in recent years has been pushing 46-47%. That's a big shift in a couple of decades.

I just paid someone $3500 to do my income taxes. And even with that expenditure, I had to spend a lot of time and aggravation on the project.

I just paid someone zero dollars to do my payroll taxes. And I spent zero hours on the project.

Is it any wonder that I prefer payroll taxes to income taxes? That $3500 and my foregone time is pure, 100% deadweight loss.

A new NBER study suggests that I'm not alone, they used a clever statistical technique to estimate the compliance costs of taxes:

Many Americans complain about how much of their earnings each year go to taxes. But in How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs (NBER Working Paper No. 23903), Youssef Benzarti shows that many taxpayers forgo tax savings in order to save the time, effort, and other costs required to itemize deductions on their returns. . . . Aggregate compliance costs appear to have risen over time, from $150 billion in 1984 to $200 billion in 2006 (both figures in 2016 USD). This suggests that compliance costs are about 1.2 percent of GDP in recent years.
The following graph illustrates the intuition behind the study:

Screen Shot 2018-04-01 at 4.47.52 PM.png
PS. Some on the left would suggest that I should stop complaining, as I was in the "top 1%" during 2017. That's wrong. It's true that the reported taxable income on my tax form put me in the top 1%, but that reported income was about three times my actual income. And that's because the government forced me to include the (nominal) capital gain on the sale of my house, even though that gain represented housing inflation and even though I immediately turned around and bought another house of roughly equal value. From a "consumption" perspective, nothing changed.

In economics we assume that it's consumption that determines utility, not income. But the IRS doesn't agree; they insist I report that capital gain as "income". Academics like Thomas Piketty then use that same highly misleading "income distribution" data to try to understand "inequality" in America.

BTW, one of silliest talking points I hear is: "Why would voter X oppose high capital gains taxes on the rich, given that his income is merely middle class?" Yes, it's middle class, until you earn that big capital gain. Remember, 73% of Americans spend at least part of their life in the top 20%.

What exactly are the strategic advantages of using poison gas?  Militarily, it's hard to see the temptation; by the standards of modern weaponry, poison gas sure doesn't seem remarkably cheap or effective.  Politically, moreover, the danger is obvious.  Since almost every major country deplores the use of poison gas, deploying it is a great way to make powerful enemies.

So how would a good game theorist make sense of the decision to use poison gas?  I don't know, but this 2017 piece by journalist Gwynne Dyer is the best analysis I could find.  Highlights:
When a crime is committed, the likeliest culprit is the person who benefited from the deed... [W]ho stood to benefit from the chemical attack in the first place?

There was absolutely no direct military advantage to be derived from killing 80 civilians with poison gas in Khan Sheikhoun. The town, located in al-Qaida-controlled territory in Idlib province, is not near any front line, and it is of no military significance. The one useful thing that the gas attack might produce, with an impulsive new president in the White House, was an American attack on the Syrian regime.

Who would benefit from that? Well, the rebels obviously would. They have been on the ropes since the Assad regime reconquered Aleppo in December, and if the warming relationship between Washington and Moscow resulted in an imposed peace settlement in Syria, they would lose everything..

Chemical weapons were stored in military facilities all over Syria, and at one point half the country was under rebel control...

The results have already been spectacular. The developing Russian-American alliance in Syria is broken, the prospect of an imposed peace that sidelines the rebels -- indeed, of any peace at all -- has retreated below the horizon...

Just Pro-Putin propaganda?  I think not.  Dyer continues:

But we should also consider the possibility that Assad actually did order the attack. Why would he do that? For exactly the same reason: to trigger an American attack on the Syrian regime. From a policy perspective, that could make perfectly good sense.

The American attack didn't really hurt much, after all, and it has already smashed a developing Russian-American relationship in Syria that could have ended up imposing unwelcome conditions on Assad. Indeed, Moscow and Washington might ultimately have decided that ejecting Assad -- though not the entire regime -- from power was an essential part of the peace settlement.

Assad doesn't want foreigners deciding his fate, and he doesn't want a "premature" peace settlement either. He wants the war to go on long enough for him to reconquer and reunite the whole country --with Russian help, of course. So use a little poison gas, and Trump will obligingly over-react. That should end the threat of U.S.-Russian collaboration in Syria.


Either of these possibilities -- a false-flag attack by al-Qaida or a deliberate provocation by the regime itself -- is quite plausible. What is not remotely believable is the notion that the stupid and evil Syrian regime just decided that a random poison gas attack on an unimportant town would be a bit of fun.

Note: Dyer is analyzing last year's Syrian gas attack, not the latest news...

David R. Henderson  

Adam Smith on the Glory of War

David Henderson


Yesterday I posted two quotes from Adam Smith's The Theory of Moral Sentiments to back up a Glenn Greenwald claim. Based on that, it seemed that Glenn had given a very rough precis.

Well, it turns out that Glenn's summary of Smith's point was actually dead on. Because it turns out that the relevant Smith quote is from The Wealth of Nations. Here it is:

In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory, from a longer continuance of the war.

HT2 Liberty Fund and Andrew G. Humphries.

With what impatience does the man of spirit and ambition, who is depressed by his situation, look round for some great opportunity to distinguish himself? No circumstances, which can afford this, appear to him undesirable. He even looks forward with satisfaction to the prospect of foreign war, or civil dissension; and, with secret transport and delight, sees through all the confusion and bloodshed which attend them, the probability of those wished-for occasions presenting themselves, in which he may draw upon himself the attention and admiration of mankind.
From Adam Smith, The Theory of Moral Sentiments, I.III.20


Foreign war and civil faction are the two situations which afford the most splendid opportunities for the display of public spirit. The hero who serves his country successfully in foreign war gratifies the wishes of the whole nation, and is, upon that account, the object of universal gratitude and admiration. In times of civil discord, the leaders of the contending parties, though they may be admired by one half of their fellow-citizens, are commonly execrated by the other. Their characters and the merit of their respective services appear commonly more doubtful. The glory which is acquired by foreign war is, upon this account, almost always more pure and more splendid than that which can be acquired in civil faction.

From Adam Smith, The Theory of Moral Sentiments, VI.II.38.

Thanks to Glenn Greenwald for a rough paraphrase and to GMU Ph.D. econ student Jon Murphy, a regular commenter, for tracking down the two Adam Smith quotes.

Next Wednesday, April 18, I'll be giving a talk at Indiana University East in Richmond, Indiana.

Title: How Economists Helped End the Draft
Time: April 18 at 4:00 p.m.
Location: Tom Raper Hall 124

If you're an EconLog reader and you live nearby, please come. If you do, come up and say hi before or after.

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