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Chris De Muth has written a wonderful tribute to Allan Meltzer. It is a piece that accounts for a strong bond of personal friendship that goes beyond intellectual esteem. DeMuth brought Meltzer to the American Enterprise Institute as a Visiting Scholar when the latter left President Reagan's Council of Economic Advisors: "It took us perhaps four minutes to settle on business arrangements, sealed with a handshake and never any sort of written contract". Well, those were the days - and those were the gentlemen who could be happy with such trustworthy informality!

DeMuth defines Meltzer as "that rare and wonderful intellectual avis, the libertarian institutionalist". The word "institutionalist" here is happily ambiguous. On the one hand, DeMuth remarks, Meltzer understood that "liberty is an artifact of human institutions, from banks to nations to the rule of law". That is not particularly rare, among libertarians. What is rarer is that from the understanding that "our institutions may rise and fall through evolutionary trial and error, but they are also subject to human reason, criticism, and purposive reform" Meltzer derived a passion for directly engaging in this very activity of criticism and purposive reform. 514gsOEKlzL._AC_UL160_.jpg

Meltzer joined committees, advised politicians and institutions, all of this while writing his masterful History of the Federal Reserve. DeMuth alludes to the fact that this willingness to engage with reality did show a profound optimism but not an eagerness to settle on intellectual compromises. (Political compromises are a different matter).

So concludes his tribute to Meltzer:

Allan Meltzer led a life of complete integrity. He devoted himself to the most difficult and consequential of policy conundrums; subjected them to the highest levels of intellectual scrutiny over sustained periods of time; solved more than a few of them; promoted his solutions with indefatigable zest; and selflessly encouraged the like efforts of many others. It is only fitting that he left us with a few unsolved conundrums to wrestle on our own--along with a shining example of how to go about it.

CATEGORIES: Obituaries

by Pierre Lemieux

Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don't they now represent a comparative advantage?

A recent Wall Street Journal story reports that the longer growing season of Mexican farmers is seen as a cause of dumping and that a renegotiated North American Free Trade Agreement may have to compensate for this comparative advantage of Mexico:

American farmers, however, complain that their Mexican rivals enjoy unfair advantages, including low-cost farm labor, state subsidies and a year-round growing season that lets them dump cheap berries on the U.S. market when the two countries' growing seasons overlap in the late spring.

Perhaps the reporter's or editor's interpretation was a bit loose (the reporter did not respond to my inquiry regarding whom exactly he was citing). But note how, in a similar way, French farmers complain against the unfair weather advantage of their Spanish competitors:

French farmers and winegrowers dumped some two tons of peaches and nectarines in front of the Spanish consulate ... in order to denounce Spanish competition, deemed "unfair." ... For [a fruit growers' spokesman], "a European solution is needed."

It is difficult to believe if you haven't seen it with your own eyes, but economic savvy is even less common in France than in America. This is a bit distressing nearly two centuries after French economist Frédéric Bastiat wrote his petition of candle makers disadvantaged by the competition of the sun. "If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun," Bastiat noted.

In The Wealth of Nations, Adam Smith defended the importation of wine even if "[b]y means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them." As he explained, domestic production would cost "about thirty times the expence for which at least equally good can be brought from foreign countries." Or, to borrow an example from William Taussig, very good pineapples could be grown in Maine with similar means.

Geography, weather, and other natural conditions create justifiable comparative advantage in trade. Except if one is an ascetic, it is not rational to produce by oneself what somebody else can produce more cheaply in another climate.

However - and here is a little challenge - the distinction between "natural" and "artificial" conditions is not as neat as one might think. Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don't they now represent a comparative advantage? Ski resorts can be built and artificial snow made, possibly with government subsidies. Ignorant people can be instructed, even in government schools. Moreover, some phenomena straddle the distinction between the natural and the artificial, that is, phenomena like language, culture, and morals (see chapter 1 of Friedrich Hayek's vol. 1 of Law, Legislation and Liberty).

The question is which features of the world count in comparative advantage? Swiss producers' strong work ethic and Canadians' use of English help determine their comparative advantage. Economies of scale benefit producers who have come to serve a larger market. Market institutions and a political system favorable to enterprise also help determine comparative advantage. But don't the Chinese government's subsidies and other assistance to Chinese businesses also help determine the latter's comparative advantage? Similarly, aren't the subsidies that aircraft maker Bombardier got from the Canadian and Québec governments now part of the company's comparative advantage?

Such interrogations are related to an important argument made by Paul Krugman in an article later published in the Journal of Economic Literature ("What Should Trade Negotiators Negotiate About?" 35-3: 113-120). Krugman argued that government regulations and taxes are part of the comparative advantage landscape; they do change relative prices, but trade proceeds - and should be left to proceed - from that point on.

This comprehensive concept of comparative advantage does not invalidate arguments against inefficient or immoral regulations, taxes, or subsidies. We may wish (often contra Krugman) that these measures do not exist in our own country, and try to persuade foreigners that they should not be subjected to them either. But they do not extinguish comparative advantage and negate all benefits from trade.

Except perhaps in extreme cases (for example, trading in stolen goods, such as goods made with slave labor), a foreign governments' interventions do not justify another government prohibiting its own residents from trading with the regulated or subsidized foreigners. One can wish that one's trading partners were freer and thus more productive and wealthy, but it remains beneficial to trade with them, even if not as much as it would be in an ideal world where everybody were perfectly free.

As Krugman suggests, this wide view of comparative advantage reconciles free trade and political decentralization at the world level. It is beneficial and possible to have both. On the one hand, political decentralization is necessary to preserve liberty and experimentation, as opposed to a world government. Different peoples can have different sets of regulations, including less regulation. There is no need to impose standards or regulatory harmonization in "free trade" agreements. On the other hand, the benefits of free trade are preserved because comparative advantage continues to exist under intervention, although with some distortions. The distortions introduced by a world government monopoly would certainly be worse.

This line of argument supports the idea that unilateral free trade is beneficial: it is in the interest of (most of) a country's residents to be free to import at will whatever obstacles other national governments impose on their own citizens or subjects.

Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email:

CATEGORIES: International Trade

David R. Henderson  

Caplan on Communism

David Henderson


Before the Russian Revolution of 1917, "socialism" and "communism" were synonyms. Both referred to economic systems in which the government owns the means of production. The two terms diverged in meaning largely as a result of the political theory and practice of Vladimir Lenin (1870-1924).

Like most contemporary socialists, Lenin believed that socialism could not be attained without violent revolution. But no one pursued the logic of revolution as rigorously as he. After deciding that violent revolution would not happen spontaneously, Lenin concluded that it must be engineered by a quasi-military party of professional revolutionaries, which he began and led. After realizing that the revolution would have many opponents, Lenin determined that the best way to quell resistance was with what he frankly called "terror"--mass executions, slave labor, and starvation. After seeing that the majority of his countrymen opposed communism even after his military triumph, Lenin concluded that one-party dictatorship must continue until it enjoyed unshakeable popular support. In the chaos of the last years of World War I, Lenin's tactics proved an effective way to seize and hold power in the former Russian Empire. Socialists who embraced Lenin's methods became known as "communists" and eventually came to power in China, Eastern Europe, North Korea, Indo-China, and elsewhere.

These are the opening two paragraphs of Bryan Caplan, "Communism," in David R. Henderson, ed., The Concise Encyclopedia of Economics.

With the 100th anniversary this month of the Communist takeover in Russia, it's worth reviewing Communism's record. Caplan does that very well. I recommend the whole piece. Notice also Bryan's insightful use of production possibility curves to make his point.

Another excerpt explaining how the Communists achieved their grip on power:

The most important fact to understand about the economics of communism is that communist revolutions triumphed only in heavily agricultural societies. Government ownership of the means of production could not, therefore, be achieved by expropriating a few industrialists. Lenin recognized that the government would have to seize the land of tens of millions of peasants, who surely would resist. He tried during the Russian Civil War (1918-1920), but retreated in the face of chaos and five million famine deaths. Lenin's successor, Joseph Stalin, finished the job a decade later, sending millions of the more affluent peasants ("kulaks") to Siberian slave labor camps to forestall organized resistance and starving the rest into submission.

The photo above is from "Mass killings under Soviet regimes," Wikipedia. It shows bodies being uncovered in 1943; the people were killed in Ukraine under Stalin in 1937-38.


Tyler Cowen and I have an ongoing dispute about "immigration backlash."  Reading these June Gallup poll results, I'm tempted to hail a "backlash to the backlash."
Though preventing illegal immigration was one of the president's key campaign promises, the general desire to decrease immigration is near its historic low in Gallup's trend over more than half a century.
If you look at the numbers, however, they've been quite steady for the last five years.  We're not living in a period of rising hostility to immigration.  We're not living in a period of rising support for immigration.  We're living in a period of stable but relatively high support for immigration.  The numbers speak:

gallupimmig.jpgIf public support for immigration is so high, why has political opposition become so vocal?  Because public support for immigration, though relatively high, remains absolutely low.  And that's all it takes for anti-immigration demagoguery to work.  The real puzzle isn't, "Why did Trump take a strong anti-immigration stand in 2016?" but "Why doesn't every presidential candidate take a strong anti-immigration stand in every election?"  And the obvious solution to this puzzle is elite-on-elite pressure: elites are more cosmopolitan than the masses - and shame fellow elites who dissent.  Trump won by being the sort of elite who treats elite shame as a badge of honor.

Of course, you could flatly declare that polls are meaningless, and insist that "real" public opinion has indeed turned against immigration.  But this is mere circular reasoning.  There are endless ways to explain Trump's victory.  And the best theory is that Trump was a maverick who defied elite norms to tap into a vast but dwindling reservoir of nativism.

P.S. When I first became interested in the immigration issue in the mid-90s, support for "more immigration" had been stable at 7% for decades.  Since then, my eccentric view has more than tripled in popularity.  I still doubt immigration is the next marijuana, but I'm mildly hopeful.  Who knows, maybe we're just one fine graphic novel away from freedom!

The Economist recently reviewed a biography of Herbert Hoover:

Why was it that Hoover, hitherto so talented at overcoming crises, was unable to overcome the Great Depression? Perhaps he had come to believe his own propaganda about ordinary people collectively solving problems without government aid. Or maybe the scale of the problem was too great even for someone of Hoover's abilities. Mr Whyte does an excellent job of describing the qualities that brought Hoover his early successes--but provides too little guidance as to why, in the end, he failed his severest test.
Hoover is widely regarded as one of the most talented people ever to serve as President of the United States. He was very successful in business, and also in managing complex and difficult relief efforts in Europe (during and after WWI). He was clearly a highly skilled individual.

Elsewhere I've argued that people tend to overestimate the influence of the President over the economy (or anything else.) And that's still my view. But I also think it needs to be said that to the extent that Hoover did have influence, he almost invariably got things wrong:

1. He supported inefficient farm policies.
2. He advocated much higher taxes on the rich (in 1932).
3. He signed the Smoot Hawley tariff in 1930.
4. He opposed tinkering with the gold standard (until it was too late.)
5. He was not a good leader.

There's a big difference between being a good manager or entrepreneur, and being a good politician. Hoover may have been very good at putting together resources in order to achieve a well-understood goal, but not at all good at identifying the proper goals of government. Lots of very smart people thought that his policy views were quite sensible. But they weren't.

Given the fact that (under the gold standard) Presidents had only limited control over monetary policy, I view Smoot Hawley as Hoover's biggest mistake. In the US, industrial production fell by 12.3% between July 1929 and December 1929, and then by only 2.3% between December 1929 and April 1930. Stocks rose strongly during the latter period. Thus the Depression was not yet "Great" in the early spring of 1930. Things seemed to be stabilizing a bit. So what went wrong?

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During the spring of 1930, stocks fell repeatedly on news that Smoot-Hawley was progressing through Congress. In June 1930, stocks saw their biggest single day plunge of the year on the day following Hoover's decision to sign Smoot-Hawley. (This despite the fact that Hoover was expected to sign the law---but there had been some uncertainty about this due to his reputation as being a "globalist".) If Hoover had vetoed the bill then stocks likely would have soared dramatically higher, and an international trade war would have been avoided.

The economy did extremely poorly after the spring of 1930, with industrial production plunging by another 17.3% between May and December 1930.

Most economists don't agree with my view of Smoot-Hawley, as the tariff itself was not all that consequential. It made the US economy a bit less efficient, but nothing even close to explaining the severity of the Great Depression. What they miss is the way that Smoot-Hawley interacted with monetary policy to produce a decline in "animal spirits" (aka NGDP growth expectations.) So yes, the Depression was primarily about bad monetary policy leading to falling aggregate demand, but Smoot-Hawley played an indirect role. There is no "monetary offset" under a gold standard.

It's true that the gold standard has a stabilizing feature that we lack today---level targeting---but that mechanism was weakened after WWI, when central banks propped up the global price level to a position nearly 50% above pre-WWI levels. Thus there was plenty of room for prices to fall before the stabilizing properties of the gold standard kicked in.

Of course Hoover didn't understand any of this, and why should he have? If FDR had been elected President in 1928, he might also have gone down in history as a failed president. His one successful policy (dollar depreciation) would have been politically unacceptable in 1930. And FDR's other policies made the Depression worse. The one area where he would have clearly done better is trade; FDR probably would not have supported Smoot Hawley.

So was Hoover a victim of bad policies or bad luck? Both.

Here are the slides from today's talk on my graphic novel.  Enjoy!

P.S. Comments welcome.

Someone tells you that you have to buy something, and levies a penalty if you don't. So you buy it. Then someone else countermands the first person's order. You no longer have to buy it. So, assuming it's not because the price of what you had to buy rose, you don't buy it. Are you worse off?

Various media outlets have reported on the loss of health insurance that the Congressional Budget Office thinks will come about if Congress gets rid of the mandate that requires individuals to buy health insurance. Estimating the effects of changes in laws is always tricky, of course. What's not tricky is to explain to readers something that many of the reports don't do a good job of.

Are you ready?

Many of the people who will "lose" health insurance if the mandate is repealed are people who want to lose health insurance. That is, according to the CBO, what is causing them to get health insurance now is the mandate. So, by their standards, even if we, observing them paternalistically, might think different, they would be better off.

How many of the millions who lose health insurance are people who want to lose it? We can't tell exactly but we can probably come close.

Let's take the number that many people are focusing on--the number of people who will be without health insurance in 2027 who would otherwise have it: 13 million. Of these, we know, if the CBO is correct, that fully 5 million people want to be without health insurance. How do we know? Because they would otherwise be on Medicaid. They would choose to be without Medicaid even though they could be on it. And it's not because the price to them of Medicaid would change. The price, excluding their time cost to apply and qualify, is zero with or without the mandate.

Another 5 million would drop their non-group coverage, according to the CBO. Some of these would be healthier people willing to do without health insurance who don't find the current rates attractive. Let's guesstimate that this would be half of the five million, or 2.5 million. I think that's probably an underestimate. Why would the other half drop their insurance? Because, estimates the CBO, with fewer healthy people in the pool, insurance rates for non-group coverage would rise by about 10%.

So arguably over half of the 13 million without health insurance in 2027 would choose not to have it, not because the premiums would go up, but because the coercion would be gone.

Check the CBO's Table 1 for a breakdown that shows why the CBO estimates a multi-billion dollar saving in government subsidies in each year, adding to over $300 billion for the 10-year time period.


A reader asked me, "Would you mind clarifying exactly what your takeaway message was in your Reformation post?"  I'm happy to oblige.

Popular views about the Protestant Reformation are absurdly sugarcoated.  It's tempting for libertarians to jump on this sugarcoating bandwagon and praise the Reformation as a triumph of religious freedom.  But given the staggering body count - not to mention the violent fundamentalism of the leading Protestant reformers - it's actually a telling counter-example to libertarian optimism.  Despite all its oppression, "corrupt" pre-Luther Catholic Europe was far freer than the multilateral bloodbath that succeeded it. 

So how's a thoughtful libertarian to respond?  Leading possibilities:

1. Libertarian absolutism.  The Protestant Reformation was a disaster, but there's still an absolute duty to leave religious dissenters alone until they actually start violating the rights of innocent people.

2. It could have been worse.  Many millions were killed, but even more would have been killed under continuing Catholic hegemony.

3. In the long-run, it was worth it.  Despite a century of horrors, Luther and Calvin unwittingly built the foundations of modern freedom.

4. An exception to religious toleration was warranted.  The consequences of the Reformation were so godawful that the Catholic Church (or anyone else) would have been justified in preemptively coercively suppressing it before it endangered the peace of Europe.

5. Libertarian presumptivism.  While the Reformation turned out to be a disaster, people at the time could not have foreseen the horrors with sufficient certainty to overturn the libertarian presumption in favor of religious freedom.

Ultimately, I believe #5, but #4 is my second choice. 

P.S. Ilya Somin seems to hold a mix of #2 and #3.

P.P.S. Followup from Ilya:

A small correction: My view on 2 is not that things would have been even worse under Catholic domination, but that such domination was likely to be seriously challenged by a fundamentalist movement in the 16th century even if Martin Luther had been suppressed early on (or remained loyal to the Pope). I am not actually certain that 2 and 3 are correct. But I give them a much higher probability than you do.

Scott Alexander takes us through a whirlwind tour of David Friedman's book, hopefully soon to be published but available in draft form here, titled Legal Systems Very Different From Ours.

I often find myself impatient with Alexander's meandering style but either this long review doesn't meander or I find the topic so interesting that I didn't notice. The whole thing is well worth reading.

But a few highlights:

Medieval Icelandic crime victims would sell the right to pursue a perpetrator to the highest bidder. 18th century English justice replaced fines with criminals bribing prosecutors to drop cases. Somali judges compete on the free market; those who give bad verdicts get a reputation that drives away future customers.

"Anarcho-capitalism" evokes a dystopian cyberpunk future. But maybe that's wrong. Maybe we've always been anarcho-capitalist. Maybe a state-run legal system isn't a fact of nature, but a historical oddity as contingent as collectivized farming or nationalized railroads. Legal Systems Very Different From Ours, by anarcho-capitalist/legal scholar/medieval history buff David Friedman, successfully combines the author's three special interests into a whirlwind tour of exotic law.

I just realized that I picked up "whirlwind tour" from this second paragraph.

Some insightful humor:

First, something kept seeming off about all the legal systems mentioned, which only clicked into place about halfway through: they really, really didn't seem prepared for crime. A lot of them worked on a principle like: "If there's a crime, we'll call together a court made of all the town elders, plus at least three different religious leaders, plus the heads of the families of everybody involved, plus a representative of the Great King, plus nine different jurists from nine different universities, and all of them will meet on the Field Of Meeting, and a great tent will be erected, and..." The whole thing sounded like it might work as long as there was like one crime a year. Any more than that and none of the society's officials would ever have time for anything else.

More insightful humor:
Whenever I read a book by anyone other than David Friedman about a foreign culture, it sounds like "The X'wunda give their mother-in-law three cows every monsoon season, then pluck out their own eyes as a sacrifice to Humunga, the Volcano God".

And whenever I read David Friedman, it sounds like "The X'wunda ensure positive-sum intergenerational trade by a market system in which everyone pays the efficient price for continued economic relationships with their spouse's clan; they demonstrate their honesty with a costly signal of self-mutilation that creates common knowledge of belief in a faith whose priests are able to arbitrate financial disputes."

Alberto Mingardi  

Kling on Bruno Leoni

Alberto Mingardi

Arnold Kling has published on EconLib a fine article on Bruno Leoni's Freedom and the Law. Leoni passed away fifty years ago, on November 21. The Liberty Fund has kept in print Freedom and the Law, Leoni's book which originated out of a series of seminars at Claremont College in 1958. At the same event, F.A. Hayek presented lectures based on what was to become The Constitution of Liberty and Milton Friedman lectures based on what was to become Capitalism and Freedom. It is an event that, in the history of classical liberalism, may have the same importance as Bob Dylan's performance at the 1965 Newport Folk Festival, when he first went electric.

Freedom Law.jpg Of the three books, Leoni's was certainly the least successful, not least because he was not part of Anglo-American academia and because he died a few years later. But he had an impact both on law and economics and on contemporary libertarianism.

I think Arnold provides and excellent summary of Leoni's work. Notice, in particular, these two bits:

Leoni claimed that the socialist calculation problem applies to legislation. That is, just as a central planner lacks the information that emerges in a market, a legislator lacks the information that emerges in case law.

This is the gist of Leoni's argument. He was a devotee of Austrian economics and he applied his core insights to legislation. He also noticed that socialism was "legislation," so to say, in the sense that you cannot have one without the other in a modern society. Planning required law making.
Our intuition tells us that legislation, by putting rules in writing, provides citizens with certainty. In theory, legislation gives us precise boundaries of what is legal and what is not. Against this, Leoni argued that in practice, legislation creates uncertainty, because laws can be changed suddenly and without warning. A business that is planned under one set of rules may become unprofitable under new legislation.

This is another core insight of Leoni's work, which was highly skeptical about modern democracy. In our societies, Leoni argued, it isn't true that we are governed by laws and thus we aren't governed by men. Quite the opposite: the fact that we consider laws to be the product of Parliaments enables majorities of men to make and change the laws as they wish.

Leoni thought that a better kind of law could emerge by precedent, being "discovered" by the work of judges adjudicating controversies.

Arnold is skeptical of this argument, because "society today is highly complex in terms of the types of interactions and the number of people involved in interactions." He sees this increase in the division of labour, and, thus, in the complexity of production, to require legislation to avoid multiplication of conflicts.

While I'm a fan of Specialization and Trade: A Re-introduction to Economics, I'm not so sure I would side with Arnold against Leoni on this. This argument suspiciously sounds too much like "all that is real is rational." Well, indeed things exist for a reason. Once the modern world went for legislation, instead of taking other ways, legislation expanded gloriously, claiming that by so doing conflicts were to be minimized. Parliament-produced laws, and even more so regulatory agency-produced norms, are seen as more flexible and "efficient" than the extenuating work of judges appealing to precedents for their own legal reasoning.

But at the same time legislation is nowadays often considered not flexible enough, for example to accommodate technological novelties which threaten the status quo. And it doesn't stop conflicts from proliferating, whenever they are considered worth the cost by conflicting parties: after all, legislation is certainly highly permeable to special interest groups' bargaining and it is inevitably politicized.

Sure moving into the kind of "legal system" Leoni considered more conducive to a free society would be problematic, and perhaps altogether impossible in the world we live in. And yet it seems to me that we see a good number of people now looking outside the boundaries of state-monopolized law (think of private arbitrartion but also to the blockchain technology) in their search for systems of norms that do not show the same deficiencies of legislation which Leoni identified more than half a century ago.


Scott Sumner  

Do the right thing

Scott Sumner

My daughter is now taking her first college economics class. Occasionally I like to provide her with examples from everyday life.

For instance, my wife spends a lot of time on the phone with insurance companies, mostly dealing with complex and confusing rules and regulations. One day after a particularly frustrating set of calls trying to get coverage for the purchase of my daughter's contact lens, we discussed the root cause of all this distress. I pointed out that in a normal country you'd just go to the store and buy contacts, instead of working through a so-called "insurance" company. (I use scare quotes as this has nothing to do with "insurance" as an economic concept--it doesn't reduce risk.)

Our government uses the tax and regulatory system to push people towards buying more expensive contacts via employer insurance. (And let's not even talk about "prescriptions".) Without these provisions, my company would have no reason at all to provide contact lens insurance for my daughter. I'd buy catastrophic health insurance (which I'd probably go through my entire life never using), and then pay for health care out of pocket. Even if health care were a bit more expensive, my wife would be much happier. And in fact I'd probably spend far less on health care.

Recently I've been disturbed by some of the comments that I read about tax reform. One argument is that it's a mistake to repeal certain deductions, because that will allow the government to collect more revenue---in other words, the closing of loopholes will not be offset by tax cuts elsewhere. I see lots of problems with this argument:

1. The GOP clearly plans to offset the loophole closing with tax cuts elsewhere.

2. One counterargument is that the Democrats would later raise the tax rates back up again. Maybe so, but if the Democrats are determined to raise taxes, they will do so regardless of whether the GOP cuts out some loopholes or not.

But let's say I'm wrong in these claims. I'd still argue that we should close tax loopholes, regardless of the impact on later decisions regarding how much to tax. To see why, let's divide public policy questions up into what we know and what we don't know:

1. There is wide bipartisan agreement among experts on both the left and the right that tax complexity is harmful. Fixing the tax system is like picking up $100 bills lying on the sidewalk. It's a no-brainer.

2. There is no agreement among experts about the proper size of government. Some prefer a government that spends about 18% of GDP, like Singapore or Hong Kong. Some want to spend about 35% of GDP, like Switzerland or Australia. And some want to spend about 57% of GDP, like France or Denmark.

If we are to be a successful society then we need to come together on issues where there is broad agreement, and then agree to disagree on other issues, which will be fought out in the political arena. Given American culture and politics, the near-term outcome of that fight will probably be pretty similar to what we have now; we aren't going to suddenly drop government spending down below 20% of GDP, or raise it up above 55%. The votes aren't there.

If we become so tribal that we squash win-win reforms because it might, and I emphasize might, help the "other tribe" at some future date on some future issue, then we will almost all end up worse off. That's the mentality you see in failed tribal societies in the third world, say Afghanistan or Libya.

Similarly, a person's views on tax reform should not depend on how it affects their pocketbook. I favor eliminating state and local tax deductions even though I live in California and pay a lot of taxes. If you always support sensible reforms, then the net effect of all of these reforms will eventually benefit you as well. It's not a zero sum game!

If you support a bad policy in the hope that down the road it might lead to good policies elsewhere, then you are likely to be disappointed. It's like a four cushion shot in billiards, theoretically possible but difficult to pull off. We simply don't know enough about our highly complex world to make those sorts of calculations. Better to support sensible policy reforms as they come up and then let the chips fall where they may on other issues. And what makes you think that your opinion on the highly contentious issues is even correct?

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The focus of public policy should be on doing things that we know will make society better off.

allroads.jpg At Wednesday's Public Choice Seminar, I'm giving a sneak peak at my next next book, All Roads Lead to Open Borders: The Ethics and Social Science of Immigration (co-authored with Zach Weinersmith, creator of Saturday Morning Breakfast Cereal). 

This work in progress is a non-fiction graphic novel.  If you have no idea what that is, never fear.  My talk opens with an introduction to the genre, then presents the substance of the book.  I'll also share some of my favorite drawn pages at every stage of development: from previsualizations to pencils, inks, and colors. 

The seminar is open to the public, as always.

George Selgin has a new post discussing three pieces of legislation being considered by the Senate. Here's one:

The Independence from Credit Policy Act (H.R. 4278), introduced by Rep. French Hill (R-AR), is intended to restrict the Fed's asset holdings, apart from gold, foreign exchange, and IMF-issued SDRs, particularly by requiring it to swap its current MBS holdings for Treasury obligations. In future emergencies the Fed could temporarily acquire certain non-Treasury assets in connection with its 13(3) lending operations (concerning which see below); but it would be allowed to hold such assets for no more than a year, after which it would also have to trade them in for Treasury securities.
I have mixed feelings about this proposal. I would prefer the Fed hold Treasuries rather than mortgage backed securities, but I also worry about restrictions that might be perceived as limiting the ability of the Fed to hit its targets when at the zero bound. Here are a few provisions that could be added to this sort of bill:

1. The restriction on asset purchases could be limited to periods where the Fed holds less than 50% of Treasury securities outstanding. As far as I know, the Fed has never come close to that milestone, so the bill would still have exactly the effect its proponents hoped for, under all but the most unusual circumstances. But this provision would also make clear that the Fed never "runs out of ammunition" and hence make its policy commitments more credible.

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2. I also think it would be helpful for legislation to spell out more clearly what Congress wants and expects from the Fed when at the zero bound. Thus Congress might want to instruct the Fed to do whatever it takes to achieve its Congressional mandate (currently stable prices and high employment, but I'd prefer stable NGDP growth.) Congress should tell the Fed that macroeconomic stability is far more important than any profits or losses on the Fed balance sheet. The Fed should be told that it is free to set the rate of interest on reserves at negative levels. (That's assuming we keep IOR; I'd prefer the entire policy be abolished, as it has not worked well.)

Trying to keep the Fed focused on monetary policy rather than credit allocation is an entirely laudable goal. Indeed I might go even further, and recommend abolishing the discount window. But I also think we need to focus not just on limiting what the Fed can do, but also making it clearer that we want them to do whatever it takes to hit the more limited goals that we provide. We need less credit allocation and more macroeconomic stability.

A Malibu church that has helped the homeless for years has been asked to stop feeding people who are down on their luck.

No, this is not the Onion. This is from a news story about the city government of Malibu asking the United Methodist Church not to feed homeless people.

It appears that all the city government did was ask rather than force the church to stop. I'm disappointed that the church didn't respond with a resounding no.

My interview with RT about Richard Thaler, 401(k)s, and humans and icons is posted here.

It starts at about the 6:00 point.

I wrote about Thaler's Nobel earlier here.

Make sure you watch it to the end of my segment.

Over the years I've done many posts pointing out that income distribution data doesn't mean what people think it means. I spent the first 8 years of my adult life in the bottom 20%, and more recently I've been in the top 20%. Roughly 73% of Americans spend at least part of their lives in the top 20%. This year I'll be in the super rich class (as I sold a house in Boston with a big capital gain), but next year my income will drop by 70%. And yet none of this tells us anything interesting about my economic situation.

Consider this typical press report about University of Michigan students:

Just 16 percent come from families in the bottom 60 percent of earners combined. The median income of parents of students at the university is $156,000, roughly three times the median income of Michigan families.
Now there is no doubt that students at an elite school like Michigan tend to come from richer than average families. How could it be otherwise? But the specific data here is almost meaningless. The bottom 60% of the income distribution is heavily dominated by both retired people and younger versions of me. Lots of 24-year olds and lots of 80-year olds make below average incomes. And guess what, very few Michigan college students come from families headed by either 24-year olds or 80-year olds. They tend to come from families headed by 50 year olds, that is, people near the peak of their earning years. Often with two earners.

This confusion over income distribution data has affected our tax debate. Consider this typical article:

On the income distribution charts at the center of tax overhaul plans, Courtney Mishoe knows she's doing well. She works as a tax manager at a firm in the Atlanta suburbs. Her husband is a police officer. Together they make more than $180,000 a year. They are solidly in the upper middle class. But they have a mortgage and three kids, including one in day care and another in high school with plans to go to college. It all adds up. They depend on tax deductions to make their budget work. "I don't feel wealthy,"
Yes, $180,000/year is far above average for household income, it's even well above average for middle aged two income couples. But in a sociological sense a cop and a tax manager are not "rich". To claim they are is to suffer from innumeracy. When most Americans hear the term "rich" they have something else in mind:

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In Alpharetta, many people said they could not determine how they would make out under a confusing plan littered with caps and phase-ins.

As he ate lunch at Alpha Soda, a popular local restaurant, Chris Krogh said he hadn't followed the debate closely but was troubled by what he heard. Krogh runs a custom cabinetry business and depends on homeowners as customers.

"I always thought Republicans were supposed to be good on the tax breaks," he said.

Here's what I think is going on here. The GOP is buying into the progressive's view of income inequality. They feel under pressure to avoid tilting the tax plan toward "the rich". In trying to avoid doing so, they'll end up imposing higher taxes on some members of the upper middle class. That may or may not be a good idea, but it's not how upper middle class Republicans envisioned the term 'rich', or how they envisioned the GOP. There are likely to be some disappointed GOP taxpayers.

PS. It is certainly fair to argue that by global standards the American upper middle class is rich, but that's not the issue being debated. It's also true that by global standards most of America's poor don't deserve any of the welfare programs that progressives advocate.

PPS. Here's another way of thinking about the tax debate. Under Reagan (and Clinton), the GOP seemed to be proud of its supply-side ideology. Supply-side economics seemed "progressive", as the entire world was trending in a neoliberal direction. Now the GOP seems slightly embarrassed by its supply-side ideology. Once a party becomes embarrassed to hold a particular political view, it's only a matter of time before they stop holding that view. The Democrats are winning the tax fight; they just don't know it yet.

case.jpgMy next big book, The Case Against Education, is now available for preorder.  Yes, I know, it's been a long time coming: I actually posted the first page on EconLog ten years ago, and have been working on the project in earnest since 2011. 

Should regular blog readers buy it?  Absolutely.  While it's a book-length defense of the empirical importance of the signaling model of education, it's also an interdisciplinary odyssey through the subtleties of the economics, psychology, sociology, and philosophy of education.  It's probably the longest and most research-intensive book I'll ever write.  EconLog fans will know the gist of my story, but I've never blogged most of the topics in the book.  Furthermore, in the process of writing, I've changed my mind about several key issues - including the practical relevance of the so-called "ban" on IQ testing for employment.  And if you've ever found my writing entertaining, the sentences in The Case Against Education are as entertaining as I get.

Physical books should ship in January, but a homemade preorder certificate still makes a great holiday stocking stuffer.  Isn't the book too depressing for the holidays?  Not at all.  The discovery that major policies could be vastly improved is always reason for joyous celebration...

Tyler Cowen has written a mainly excellent piece on the Republican tax cut bill. I want to add to part of his analysis and challenge him on one of his numbers.

But first some highlights.

Tyler leads with this paragraph:

The tax plan released by the House last week limits deductions for a variety of expenses, including tuition debt, mortgage interest, alimony, medical expenses, state and local taxes, gambling losses, tax-preparation expenses, and moving expenses. The details are likely to change in the Senate, but the important point for long run is that the deductions are being challenged. Many of the changes -- in particular, mortgage interest, medical expenses, and state and local taxes -- are taking on powerful lobbies and constituencies. Several months ago I would not have thought the Republicans would be so bold.

That's mainly description, but, like Tyler, I didn't expect them to be so bold and I am heartened by it, along with, of course, my favorite part, the cut in the corporate tax rate. Another one he doesn't mention: getting rid of the expensive gift to people who buy electric cars: the $7,500 tax credit.

Tyler points out some interesting political dynamics:

If the bill succeeds in limiting these deductions, a logic is set in motion for future tax reforms. Let's say the Republicans eliminate tax deductions for new mortgages above $500,000. That would become a sign that the homeowner and real-estate lobbies are not as strong as we might have thought. The next time tax reform comes around, legislators will consider lowering the value of the deduction further yet. After all, the anti-deduction forces won before and, in the new battle, those who expect to have future mortgages above $500,000 don't have a stake anymore [sic].

I would also point out something that is, I'm sure, obvious to him, but not obvious to many of his readers. Limiting the deductibility of mortgage interest to interest on the first $500K means that even most people with mortgages well above $500K will still benefit a lot from the deduction. Take my co-blogger Bryan Caplan, who mildly laments this loss of tax deductibility for his own mortgage. I would be surprised if Bryan's mortgage is much above $600K. Let's say it's $600K and assume that his mortgage interest rate is 4.25%. So he will lose deductibility on 4.25% of $100K, or $4,250. Assuming he and his wife are in the 33% bracket, his extra federal taxes in a year will be only 0.33 * $4,250, or $1,400. Substantial? Yes. But not huge.

One correction. Tyler writes:

There even seems to be a rate of 45.6 percent on some earners, in the range of $1.2 million to $1.6 million a year. That is a far cry from Jeb Bush's call in the Republican presidential primaries for a 28 percent top marginal rate, in the tradition of President Ronald Reagan. Some well-off Californians could possibly face a total marginal rate, all taxes considered, of over 62 percent.

Actually, the top rate, as co-blogger Scott Sumner has pointed out numerous times, is 43.4 percent (the 39.6 + the 3.8% tax rate on "net investment income".) So the phaseout for high-income people of the benefit of a 12% tax rate on the first dollars of income will add 6 percentage points (which is what Tyler had in mind) to the 43.4% for some taxpayers. Some high-income people, therefore, will pay a top rate of 43.4% + 6% = 49.4%. In California, people with an income of over $1 million pay a top rate of 13.3%. So, with deductibility of income taxes gone, the top tax rate (state + federal) for some very high-income Californians with substantial net investment income will be 62.7%.

Update: Vivian Darkbloom has pointed out that I did the math wrong. It is now corrected above.

P.S. I posted some years ago on high marginal income tax rates in California. See here and here.

CATEGORIES: Tax Reform , Taxation

Doug Irwin is one of my favorite economists, and David Beckworth's recent interview of him is well worth listening to. Here are a few points that caught my attention:

1. Special interest groups create inertia, which makes it hard to liberalize trade. But Doug pointed out that this same inertia also makes it hard to reverse liberalization, as Trump is finding out.

2. There was an interesting echo of the Laffer curve debate back in the late 1800s. Government revenues were twice government spending, and the Federal government didn't know what to do about the "problem". (And note that this was during a period when there was no personal income tax, corporate income tax, or payroll tax---the three big taxes today.) The Dems wanted to reduce revenue by cutting tariffs. The GOP also wanted to reduce revenue, but used "Laffer curve" arguments in favor of raising tariff rates as a way of reducing revenue. Who knew that the GOP liked Laffer curve arguments back in the 1800s?

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3. In many cases, the trade policy was driven by purely political considerations, not special interest groups.

4. They also discussed the 1937 recession. Doug pointed to the policy of gold sterilization by the Treasury, which increased global demand for gold, reducing the price level in gold terms. (The dollar was fixed to gold at $35/oz. at the time.) I do think that's an underrated factor. Here are some factors that I'd point to, in order of importance:

a. The switch from massive private sector gold dishoarding in late 1936 and early 1937 to massive gold hoarding in late 1937 and early 1938.

b. Gold sterilization in the US.

c. The Fed raising reserve requirements.

d. A 1% increase in the employer-side payroll tax (a supply shock)

e. Punitive anti-business policies by FDR.

f. Fiscal austerity (reducing AD)

swastika.jpgWhen he was living in Burma, graphic novelist Guy Delisle noticed quite a few swastikas.  Indeed, much of south Asia is full of swastikas.  It's not because they're Nazi sympathizers.  The swastika was a south Asian symbol until the Nazis ripped them off.

Now imagine you're visiting south Asia and see a group of natives strolling around in swastikas.  How should you react - and what should you do?  There are two main routes.

Route #1: After a swift negative visceral reaction, you remind yourself that they're not Nazis and mean no offense.  So you calm down and keep your complaints to yourself.  Eventually, you hedonically adapt: swastikas stop bothering you, and the swastika-wearers live in happy ignorance of your initial offense.

Route #2: You allow your swift negative visceral reaction to blossom into seething resentment.  Even if they're not Nazis, they're negligently hurting your feelings.  With anger as your muse, you shame the swastika-wearers: "Do you people have any idea how offensive that is?!"  In all likelihood, they'll be taken aback.  After all, you're just a stranger freaking out over a symbol they enjoy wearing.  Maybe they'll go out of their way to defy you.  But even if you successfully shame them into burning all their swastikas, you had to badly upset a bunch of people who meant you no harm in order to get your way.

Which is the better route?  It's partly a numbers game.  If there are a million Holocaust survivors and one oblivious swastika-wearing south Asian, expressing a little anger goes a long way.  The complainer feels extra anger and the target feels extra shame, but 999,999 people have a more pleasant day.

If the numbers are more evenly matched, however, Route #1 is clearly superior.  Why?  Because it is a less circuitous, more reliable route to social harmony.  In Route #1, people who take offense quietly calm themselves.  In Route #2, people who take offense give into anger, which inspires conflict with the accused, who in turn feel some combination of sad and angry.  If the sadness dominates, they probably stop; if the anger prevails, they probably escalate.

Couldn't you say the same about murder?  Absolutely not.  Murder is intrinsically bad.  Swastika-wearing, in contrast, is only bad because it's currently a symbol of intrinsically bad things (like murder).  We can easily imagine a world where the swastika is a symbol of maternal love.  But we can't imagine a world where murder is good.

So what?  Especially on social media, I often encounter people who decry novel offensive symbols and promote Route #2 as the appropriate response.  I hereby urge them to reconsider.  Yes, we have a few symbols closely identified with heinous evils: swastikas, klan outfits, blackface, the hammer-and-sickle.  Since almost everyone in our culture who brandishes these symbols intends to insult innocent people, flipping out at those who so brandish has little collateral damage.  But if a symbol is not yet closely identified with heinous evil, we should strive to not only leave well enough alone, but deescalate.  Indeed, in the best of all possible symbolic worlds, fans of heinous evils would have no well-understood symbols to concisely express themselves.  They'd have to spell it all out in longhand.

As usual, I'm not saying this to favor any prominent political faction.  If you want to "raise awareness" about offensive Halloween costumes, you should stop.  The same goes if you want to rally fellow patriots against football players who take the knee during the national anthem.  If a symbol is ambiguous - as it almost always is - fomenting anger is just childish.  But the other side won't extend you the same courtesy?  Take comfort in the fact that anger is its own punishment - and be the change you want to see in the world.

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