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That's the title of a great article in Politico by Ethan Epstein. There's so much interesting in there:

1. How forward-looking San Diegans figured out how to get a better airport without using a military base--and why. (On the latter, try flying into San Diego's one-runway airport. I've done it many times and it's cool--you are almost at eye level with tall buildings as you land--but the location and the one runway are a tight constraint.)


Around the same time, a new idea began being seriously discussed by Mexican and American authorities and business leaders. Rather than build a runway on the northern side of the border, what if San Diego simply constructed a new terminal, which would provide access to the Tijuana side of the border? That would provide all of the benefits of a binational airport, but without the headaches of runways and taxiways crossing international borders. And better yet--what if the project could be completed using private funds? That made the idea particularly appealing in a traditionally tightwad, conservative area like San Diego.

Clearly, by "tightwad" the author means that they don't like taxes, which is very different.


The elegant simplicity of the idea is apparent when one visits. The firm that built the CBX [Cross Border Xpress] explains it this way: "Passengers departing from the U.S. park on CBX property, enter the building, check in, walk over the border using the new bridge, and literally descend into [Tijuana airport] to reach their flights. Returning passengers land at [Tijuana], take the bridge across the border, enter the U.S. through the new [U.S. Customs and Border Patrol] facility, and emerge from the CBX to take their preferred form of transportation." Passengers pay a fee--usually around $16--to use the facility. (That's how the private investors make their money.) And one has to possess a valid boarding pass to use it.

2. How the various players are figuring out how to relieve the congestion at the San Ysidro crossing. It's called tolls.


The project has also provided an opportunity for enhanced cross-border cooperation. Given that Mexico also has to build new roads to the crossing on the southern side, the idea is that the toll revenues on the American side will be shared with the Mexicans. And because the toll is technically only for the access roads, not the crossing itself, the feds don't need to get involved. "If we pull this off, this is a new model," Ducheny says.

3. How to pronounce Tijuana. I now know.

Signs of integration abound. You can hear it in the impeccable Mexican-Spanish pronunciation that even many Anglo San Diegans possess; the city to their south is named "Tee-hwana," not "Tee-a-wanna," they remind visitors.

But none of these excerpts does justice to the article. I found the whole piece spiritually uplifting. Ethan Epstein has a real flair.

HT2 Tyler Cowen.

CATEGORIES: International Trade

In the last few days, I've seen a number of discussions, mainly on Facebook, in which even some libertarians have claimed that two people's free speech rights were violated in two recent events. I was thinking about writing about it, but then I found that Casey Given has already done so. His article is titled "Milo Yiannopoulos and Richard Spencer remind us what free speech is and isn't." Casey nails it.

The two events I'm writing about are white nationalist Richard Spencer showing up at a bar in a hotel where a libertarian conference, the International Students for Liberty Conference (ISFLC), was held and the Conservative Political Action Committee (CPAC) disinviting speaker Milo Yiannopoulos from its annual conference.

Casey writes:

The reaction to both events have [sic] generated predictably lazy outcries that the controversial speakers' "free speech rights" have been violated. Had they been disinvited or removed from a public university, perhaps the outrage mob would have a point. But it's important for libertarians and conservatives to also recognize private property rights when discussing such flare-ups.

Casey continues:
Just as Spencer has the right to discuss his despicable views at a bar, so did the ISFLC conference-goers have the right to confront him about them. In matters of private property, it's up to the business owners to decide who gets to stay or leave. In this instance, they decided to disperse the crowd and eject Spencer.

From the extensive video I watched on line, it looked to me as if the bar manager ejected everybody. That's how the Students for Liberty, organizers of the conference, saw it also. Funny how profit-maximizing businesses don't like people arguing and raising their voices when other customers are there simply to drink and socialize.

I do want to challenge one thing Casey Given says:

Nobody's rights were violated. Indeed, given Spencer's history as the victim of a physical attack, the ISFLC crowd should be commended for respecting the non-aggression principle.

He's right that nobody's rights were violated. That's the really good news. I think Casey overstates, though, in commending the crowd for not physically attacking him. Of course, it's good that they didn't. But that hardly deserves a commendation.

CATEGORIES: Property Rights

Scott Sumner  

Whither the Ex-Im Bank?

Scott Sumner

The Ex-Im Bank is often considered a near perfect example of crony capitalism. But the politics of Ex-Im are very messy, perhaps the most confusing and complicated of any issue:

1. Obama opposed Ex-Im as a candidate, and then supported it in office.
2. Trump opposed Ex-Im as a candidate, and has recently signaled that he will support it.

But that's just the beginning. Is Ex-Im an example of special interest politics that almost all idealistic pundits oppose, like sugar subsidies? Is it a left/right issue? Is it a pragmatist/ideologue issue?

And if Trump does support Ex-Im, why does the budget his staff is preparing call for abolishing Ex-Im.

Matt Yglesias has an excellent article on Ex-Im, which looks at the issue from many different angles. (He does a good job explaining why Trump's staff doesn't agree with Trump.) But it's such a complex issue that even he doesn't really cover all the bases. For instance, Yglesias implies that support for Ex-Im is the "left" position on this particular issue. But he doesn't really explain why the left would favor crony capitalism subsidies for big corporations like Boeing. Yes, jobs are one argument, but since when does the left believe in "trickle-down economics"?

Matt also suggests that Trump would be expected to support Ex-Im because he favors protectionist policies that favor a few special interests at the expense of the broader American public. That's a good argument, but an equally strong argument can be made the other way. Protectionist policies tend to reduce the amount of international trade, both imports and exports. An export subsidy like Ex-Im tends to have exactly the opposite effect. It tends to boost both exports and imports, hurting American companies that compete against Mexican and Chinese exports. Does Trump know this? Trump also seems to oppose a stronger dollar, but Ex-Im makes the dollar stronger.

In the end I believe that the complexity of the Ex-Im issue is due to the fact that divisions occur on multiple fault lines:

1. Ideology: Interventionism vs. laissaz-faire
2. Ethics: General interest vs. special interests
3. Factual: Does Ex-Im create jobs, or not? Does it boost GDP?
4. Regional: About 40% of Ex-Im loans go to Boeing

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I always find the factual debates to be the most interesting. It's hard to know where the "left" should stand on this issue until one can resolve the factual issues surrounding things like job creation. The fact that some on the left support Ex-Im while opposing cuts in corporate tax rates suggests to me that they have a fairly primitive model of public finance. Some people on the left (and right) would benefit from reading Bastiat on "What is Seen and What is Not Seen".

On the right, it exposes a division between the ideologues and the pragmatists. But it's often hard to distinguish between normative and positive disagreements. It's quite possible that these two groups within the GOP also differ on the key factual questions. I've noticed that even people who are not utilitarians (which is most people) often resort to utilitarian arguments to make their case. They seem to (implicitly) believe that it's the only thing that will convince the other side.

As is often the case, I'm a pragmatist who ends up siding with the ideologues, and all because my view of the "factual" issues differs from the view held by the vast majority of people. And that's because I pay more attention to the "unseen" than most other people. One thing that makes Yglesias's post so good is that he's one of the rare non-economists who actually do pay attention to the unseen:

A really poorly managed loan program could, of course, still make money. But a moderately competent one -- and the Ex-Im Bank qualifies -- turns a pretty steady profit.

But that doesn't mean federal credit programs are costless. If they were, it would make sense to extend loan guarantees to everyone. But the way the American economy works is that the Federal Reserve essentially rations credit across the entire economy -- raising interest rates to prevent inflation from getting out of control or cutting them to spur growth.

This means that in normal times (a boring caveat that will be important later), the cost of a federal loan guarantee is ultimately born in tiny increments by each and every American who doesn't get a special loan. The guarantee can't expand the total amount of credit in the country, just funnel it toward certain favored purposes.

PS. One other point. Like government subsidies to NPR, the Ex-Im bank is largely a symbolic issue. There are far worse examples of crony capitalism, such as agricultural subsidies. And it's almost infinitely less important than the differential tax treatment of debt and equity.

Daniel Klein directed me to a very interesting article looking at how liberal and conservative pundits reacted to (or ignored) the debate over the Ex-Im Bank.

Bryan Caplan  

UBI Debate Video

Bryan Caplan
Video of the Wilkinson-Caplan Universal Basic Income Debate is available here.  The video quality could be a little higher, but the camera does get properly rotated after a few seconds.  Thanks again to Students for Liberty and the Institute for Humane Studies for setting it all up!

I was stuck at LAX for about 9 hours on Saturday after my wife's and my flight was cancelled. So we used our time to work and I used part of my time to watch on Facebook co-blogger Bryan's debate with Will Wilkinson about the Universal Basic Income. (No, I can't find it now, but look around and you probably will.)

I thought Bryan knocked it out of the park, both with his prepared presentation that he posted about today and with his back and forth with Will.

I had two favorite parts.

The first was his question to Will about the phase out rate. Will supported a $5,000 UBI per adult and Bryan asked him by what percent the UBI would fall as the recipient got other income and at what income threshold the UBI would fall. That was a great question to ask. Will didn't know the answer to the first part and said, if I recall correctly, that the phaseout would be gradual. I would bet he has in mind 25% or less, but he wouldn't put a number on it. Will did, though, put a number on the income one is allowed before losing a dollar of UBI: $20K. That is, $15K in other income and $5K in UBI. So if my hypothesized 25% phaseout is correct, anyone with other income of up to $35K would get some benefit. That makes the program very expensive.

The second, and my absolute favorite, was Bryan pointing out that his father, a man I met and liked, by the way, is not at all libertarian and that even he would oppose a UBI because it would give money to people who are not necessarily desperate. Then Bryan said, "I think libertarians should be at least as libertarian as my father."

Here's a point that Bryan didn't make but is important. In the UBI version that Ed Dolan supports, Dolan makes it spending-neutral by ending Social Security and Medicare as well as all the welfare programs. Consider what the Dolan $4.5K per person would mean to a 70-year-old couple who, in 2016, were getting the maximum monthly Social Security benefit: $2,639 for the high-earning spouse and half of that, $1319, for the other spouse. That's $3,958 per month, or $47,496 per year. Their income from the government would fall from $47,496 per year to $10,000 per year, a drop of $37,496. And notice that in these calculations, I haven't even measured the loss due to losing Medicare.

Will Wilkinson works for the Niskanen Institute, an organization that prides itself on coming up with partial steps that could be politically palatable. Imagine the political storm that this proposal would face. In 1981, when Reagan and Stockman proposed cutting the early retirement benefit for 62-year-olds from 80% of the benefit for 65-year-olds to 55%, they faced huge opposition and quickly took it off the table. A UBI fashioned a la Ed Dolan would be dead on arrival.

Why say this in a debate with Will when Will explicitly said that he would not touch Social Security? Because in the back and forth between Bryan and Will, Will was edging towards a UBI that would be spending neutral and would be about $5K. To get there, he would have to end Social Security and Medicare.

I gave a talk at my daughter's school, Santa Clara University, that Dan Klein sponsored in 2004 when he was on the faculty. It was titled "Social Security: The Nightmare in Your Future." I think one thing that many people do not understand is that with regard to federal spending, the cupboard is bare. If we're lucky, we're going to be trying to come up with ways of reining in the welfare state for the next 50 years.

Update: Bryan has informed me that I was unfair to Dolan. He does not advocate eliminating Medicare. Bryan quotes Dolan as follows: "In the following discussion of affordability, I will neither expect the UBI grant to cover healthcare expenses, nor will I look to any reduction of existing government healthcare spending as a source for financing the UBI."

CATEGORIES: Social Security , Taxation

Here's my opening statement for my Students for Liberty debate with Will Wilkinson.  Enjoy.

Libertarians have a standard set of fundamental criticisms of the welfare state. 

1. Forced charity is unjust.  Individuals have a moral right to decide if and when they want to help others.

2. Forced charity is unnecessary.  In a free market, voluntary donations are enough to provide for the truly poor.

3. Forced charity gives recipients bad incentives.  If the government takes care of you, you're less likely to take care of yourself by work and saving.

4. The cost of forced charity is high and growing rapidly, leading to a future of exhorbitant taxes or financial crisis.


Taken together, I think these criticisms justify the radical libertarian view that the welfare state should be abolished.   But this is an extremely unpopular view, so it's natural for libertarians to consider more moderate reforms like the Universal Basic Income.  And when you're considering moderate reforms, the right question to ask isn't: "Is it ideal?" but "Is it better than the status quo?" 

My claim: the Universal Basic Income is indeed worse than the status quo.  In fact, all the fundamental criticisms of the welfare state apply with even greater force.

1. Some forced charity is more unjust than other forced charity.  Forcing people to help others who can't help themselves - like kids from poor families or the severely disabled - is at least defensible.  Forcing people to help everyone is not.  And for all its faults, at least the status quo makes some effort to target people who can't help themselves.  The whole idea of the Universal Basic Income, in contrast, is to give money to everyone whether they need it or not.  Of course, the UBI formula normally reduces the net payment as income rises; but if a perfectly able-bodied person chooses never to work, the UBI gravy train never stops.

2. The UBI is an extremely wasteful form of forced charity.  Helping the small minority of people who can't help themselves doesn't cost much.  Giving an unconditional grant to every citizen wastes an enormous amount of money.  If you were running a private charity, it would never even occur to you to "help everyone," because it's such a frivolous use of scarce charitable resources.  Instead, you'd target spending to do the most good.  And unlike the UBI, the status quo makes some effort to so target its resources.

3. Overall, the UBI probably gives even worse incentives than the status quo.  Defenders of the UBI correctly point out that it might improve incentives for people who are already on welfare.  Under the status quo, earning another $1 of legal income can easily reduce your welfare by a $1, implying a marginal tax rate of 100%.  But under the status quo, vast populations are ineligible for most programs.  Such as?  You guys!  If you're an able-bodied adult, aged 18-64, who doesn't have custody of any minor children, the current system doesn't give you much.  Switching to a UBI would expand the familiar perverse effects of the welfare state to the entire population - including you.  And if taxes rise to pay for the UBI, the population-wide disincentives are even worse.

4. A politically acceptable UBI would be insanely expensive.  Libertarian economist and UBI advocate Ed Dolan has a detailed, fiscally viable plan to provide a UBI of $4452 per person per year.  But every non-libertarian I've queried thinks it should be at least $10,000 per person per year.  Even with a one-third flat tax, that implies that a family of four would have to make $120,000 a year before it paid $1 of taxes.  This is pie in the sky.

But doesn't the UBI give people their freedom?  In some socialist sense, sure.  But libertarianism isn't about the freedom to be coercively supported by strangers.  It's about the freedom to be left alone by strangers.

If abolition of the welfare state is extremely unlikely and the UBI is worse than the status quo, does this mean libertarians should accept the welfare state as it is?  Not at all.  There's a straightforward moderate path to a freer world: AUSTERITY.  Cut benefits.  Restrict eligibility.  Remind the world of the great Forgotten Man: the taxpayer.  We probably can't convince the majority to end the welfare state.  But "Welfare should be limited to genuinely poor people who can't help themselves" has broad appeal - and unlike the UBI, it's a clear step in the libertarian direction.

David Beckworth has done a very interesting set of interviews with leading figures in monetary economics and related fields. One of my favorite occurred a few weeks ago when David interviewed Gauti Eggertsson. Eggertsson is a prominent monetary theorist, who has also worked at the New York Fed. This gives him an excellent vantage point to evaluate the past decade.

Since there is no written transcript, I'll rely on memory. Thus keep in mind these are not exact quotes:

1. Eggertsson expressed surprise that the Fed did not try for the sort of reflationary policies that FDR adopted in 1933. Recall that Bernanke once called on the Bank of Japan to show "Rooseveltian resolve", and specifically suggested ideas such as "level targeting." Both David and Gauti argued that level targeting could have been very helpful at the zero bound.

2. David pointed out that many central bankers were afraid of making the same mistakes as we made in the 1970s, (when, many would argue, we let the inflation genie out of the bottle.) Eggertsson responded (I paraphrase) "instead they made the same mistakes as in the early 1930s."

3. Eggertsson suggested that some central bankers seemed afraid that unconventional monetary stimulus could lead to an increase in risk premia, which would actually be contractionary. Eggertsson didn't seem to think much of that theory, and neither do I.

4. As in almost all conversations these days, talk eventually turned to Trump. Eggertsson suggested that if any idea has recently taken a beating it is the claim that uncertainty is recessionary. I've made that argument about Brexit, but Eggertsson was thinking of the uncertainty created by Trump. I think that's right, even today no one seems to have a good idea as to what sort of trade policy will eventually be adopted, or what will replace Obamacare. And yet stocks are soaring, suggesting that no recession is expected. I'm increasingly inclined toward the view that "uncertainty" is a lazy way of thinking about economic shocks. Economists are better off focusing on specific shocks, such as tight money, tax cuts, or an actual trade war.

5. At one point David brought up the idea of "helicopter drops", which is a metaphor used by economists for combined fiscal/monetary stimulus. Eggertsson asked how that's different from what Japan has been doing over the past 20 years. I've made similar arguments over the past few years.

Overall I thought it was one of David's best interviews. I expected to disagree with a good portion of what Eggertsson had to say, as he's certainly more Keynesian than I am. But I ended up agreeing with most of what he said, and also learned something from the way he thought about problems.

PS. My only regret is that David didn't ask him about Iceland, where Eggertsson grew up. They had a very severe banking crisis back in 2008, and used currency devaluation to cushion the blow.

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David R. Henderson  

Taxes and Deadweight Loss

David Henderson

In his excellent post on taxes and the incidence of taxes, co-blogger Scott Sumner does not mention another important issue in taxation: deadweight loss. The deadweight loss from a tax is the part of the loss to those who bear the tax that does not go to the government. Thus the term "deadweight." (Scott's graph shows a small deadweight loss, but he does not elaborate on this.)

I noticed when checking the Concise Encyclopedia of Economics that the article on taxation, although it mentions incentive effects of taxation, does not introduce the term "deadweight loss." That's my bad as the editor.

There are three important bottom lines on deadweight loss.

1. The easier it is to avoid a tax (that's usually expressed as a higher elasticity of supply or demand), the greater is the DWL per dollar of revenue raised. That's because the tax has distorted a lot. If, for example, the number of cigarettes people buy drops a lot in response to a given increase in the per-pack tax, the tax has distorted the smoking decision a lot. Of course, some people, those who don't want people to smoke, like this distortion.

This is why the capital gains tax is so inefficient, that is, causes a large DWL. It is very easy to avoid the tax by not realizing your capital gain, that is, by not selling your asset whose value has increased.

2. A tax can cause a DWL and raise zero revenue. Here is my favorite example I've used when I've taught this. When I fly into Winnipeg every summer, I don't rent a car at the airport. Instead, I can save almost 20 days of airport taxes on the car rental by paying about $20, including tip, to take a cab to the Avis in downtown Winnipeg. I save close to $200 in taxes by spending an extra 15 minutes plus $20. The latter is the DWL. Notice that the tax raised zero revenue from me. Of course, I'm not claiming that it raised no revenue. But it led to a DWL on my part with zero revenue from me.

3. Last, and possibly most important, the DWL from a tax is proportional, not to the tax rate, but to the square of the tax rate. So doubling a tax rate will quadruple DWL. Cutting a tax rate by half will reduce DWL by 75%. So, imagine that Republicans somewhat succeed in cutting the corporate income tax rate from 35% to 20% and assume, for simplicity, no state tax on corporate income. That's a 43% drop in the tax rate and the new tax rate is 57% of the old tax rate. The new DWL will be (0.57)^2 of the old DWL. That's 0.32. So the DWL falls by 68%!

See these earlier posts by me for more on DWL from taxes.

CATEGORIES: Incentives , Taxation

Scott Sumner  

The lump of labor fallacy

Scott Sumner

Andy Puzder was one of the few Trump appointees that I sort of liked (I say "sort of", because even he had ethical issues.) He was pro-immigration and anti-minimum wage. But in the end even many conservatives opposed him so he withdrew his name from consideration for Labor Secretary.

Reihan Salam was one of the conservative opponents of Andy Puzder:

Puzder has also been an influential critic of minimum-wage hikes and overtime regulations, warning that such measures would force employers to replace low-wage workers with machines. He seems animated by the Luddite conviction that productivity-boosting automation is necessarily a bad thing, despite the fact that rising productivity levels are essential to wage growth.
This has things exactly backwards. People who subscribe to the lump of labor fallacy (there are a fixed number of jobs) are exactly the people who favor these four bad public policies:

1. Restrictions on automation
2. Higher minimum wage rates
3. Protectionism
4. Lower levels of immigration

People suffering from this fallacy think there are a fixed number of jobs, which allows the government to arbitrarily raise the minimum wage without hurting employment. This view also suggests that there is only so much to be produced, and if more is produced overseas, or by immigrants, or by robots, then less will be produced by American born workers.

In the past, commenters have objected when I claim that deporting illegals would devastate the California fruit and vegetable industry. They insist that someone will do the work, that high quality farmland won't lie fallow. That's missing the point:

Some farm jobs, like tomato picking, could be automated fairly easily in the 1960s. And ending the bracero scheme seems to have accelerated mechanisation in the tomato fields of California. Much the same happened with cotton and sugar beet. Other crops, like lettuces and asparagus, still required human pickers. Production of some such crops simply declined.

. . . In California, America's most important farming state, politicians have ensured that workers will receive at least $15 an hour by 2023. And Manuel Cunha, a citrus grower who is president of the Nisei Farmers' League, complains about other costly reforms, such as mandatory overtime pay for people who work more than eight hours a day.

In response, he says, farmers are moving from crops that require careful handling, like apricots--"just look at an apricot and it will turn brown"--to crops that can be harvested by machine. Almond trees are spreading across California. In spring the fields are white with their blossom. In September great machines shake the nuts to the ground and sweep them up.

There's simply no way that California fruit and vegetable producers could pay enough money to attract America workers. They'd go out of business, and their output would be replaced by imports. Instead they'd switch to crops that do not require significant farm labor. Thus deporting illegals will not create new jobs for American workers.

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A dramatically higher minimum wage will make America more like southern Europe. Today, Hispanic Americans are employed at a fairly high rate. Do we want to make our labor market more like France, where large numbers of Arab immigrants are unemployed, and often resentful of the country they live in?

The same article also reported:

Michael Clemens and Hannah Postel of the Centre for Global Development, and Ethan Lewis of Dartmouth College, have used archived records of American agricultural jobs and wages to test whether Kennedy was right. Did ending the bracero scheme in 1964 in fact lead to higher wages and more work for Americans in the fields?

The answer is a firm no. In states where farmers had relied heavily on foreign labour--a group that includes California and Texas--American natives found a few more farm jobs in the mid 1960s. But the rise was small and temporary; within a few years the long decline in agricultural jobs had resumed. And the trend was almost identical in states where there had been no braceros. Similarly, farm wages rose in states where there had been lots of migrant workers, states where there had been few migrant workers and states where there had been almost none (see chart). Ending the bracero scheme seems to have affected American workers not a bit.

David R. Henderson  

Michael Novak RIP

David Henderson

Michael Novak, the well-known Catholic theologian at the American Enterprise Institute, died today.

I didn't know him well and I didn't know his work well. My late friend Roy Childs, Jr., was somewhat of a fan, if I recall correctly. When I read various people talking about how generous and classy a man he was, I agree. I had one interaction with him in which he implicitly gave me advice about my speaking style.

Novak, David Friedman, a couple of other speakers, and I were speaking at a day-long event held in the Silicon Valley and sponsored by the Intercollegiate Studies Institute. There were a few hundred college students, mainly conservatives, in the audience. I can't remember my topic but it was likely about how free markets are great and solve a lot of problems. That was a standard talk I gave in the late 1990s.

I normally do well with such topics in front of such audiences. But this time, the applause was only slightly above the level of "polite" and well over half the questions were hostile. I think I did a good job of fielding them because I adjusted quickly to the tone. When I sat down, I asked Michael, who I knew had to have given over 20 times, if not 100 times, the number of talks I had given, whether he noticed the audience's hostility. He said that he had.

"I don't understand it," I said, "I usually do so well with such audiences."

"They don't like the fact that you don't believe in God," he said.

"How do they know that? I didn't say a thing about belief in God."

"Exactly," he said, his eyes twinkling.

"Why should it be different this time?"

So asks Tyler Cowen in opening his recent Bloomberg article "Industrial Revolution Comparisons Aren't Comforting." The idea of people who ask that question--I'm one of them--is that the Industrial Revolution worked out pretty well, permanently raising living standards and then leading to a growth trajectory.

Tyler gives a surprising answer, writing, "This time probably won't be different, and that's exactly why we should be concerned." He goes on to show some adjustment problems with the Industrial Revolution. I'll list the main points and respond to each. His statements are in a box; mine are not.

Consider, for instance, the history of wages during the Industrial Revolution. Estimates vary, but it is common to treat the Industrial Revolution as starting around 1760, at least in Britain. If we consider estimates for private per capita consumption, from 1760 to 1831, that variable rose only by about 22 percent. That's not much for a 71-year period.

It's true that that's not much. But it's something. And remember what preceded it, as Brad DeLong pointed out so well in his NBER study "Cornucopia." What preceded it was centuries in which private per capita consumption grew even less.
A lot of new wealth was being created, but economic turmoil and adjustment costs and war kept down the returns to labor. (If you're wondering, "Don't fight a major war" is the big policy lesson from this period, but also note that the setting for labor market adjustments is never ideal.)

Keeping down the returns to labor is different from decreasing the returns to labor. Also, I agree with Tyler about war. I hope he keeps up that part of his writing. No matter which president and party have been in power lately, they seem to be in love with war. Tyler could be a very effective critic of that tendency.
By the estimates of Gregory Clark, economic historian at the University of California at Davis, English real wages may have fallen about 10 percent from 1770 to 1810, a 40-year period. Clark also estimates that it took 60 to 70 years of transition, after the onset of industrialization, for English workers to see sustained real wage gains at all.

Notice the "may" in front of "have." Also notice, that that amounts to a 0.26% decrease annually. Not great, but not close to horrible. Also, remember the "may."
If we imagine the contemporary U.S. experiencing similar wage patterns, most of us would expect political trouble, and hardly anyone would call that a successful transition. Yet that may be the track we are on. Median household income is down since 1999, and by some accounts median male wages were higher in 1969 than today. The more pessimistic of those estimates are the subject of contentious debate (are we really adjusting for inflation properly?), but the very fact that the numbers are capable of yielding such gloomy results suggests transition costs are higher than many economists like to think.

The question "are we really adjusting for inflation properly" is one of the two main ones to ask. And the answer is no. See Michael J. Boskin, "Consumer Price Indexes," in David R. Henderson, ed., The Concise Encyclopedia of Economics. There are three other questions. By what % has median household income fallen, even using the problematic price index that Tyler presumably is using? He doesn't say. A second question is "Has the size of households changed in the last 16 or 17 years?" It has, not by a lot, admittedly, but by 3.0 percent. A third question is "Has immigration brought down the average income of U.S. households by adding a segment at the bottom, pulling the average down even though the preexisting households have not seen a fall?" If that's so, as I suspect it is, then over 90% of households could be better off, as I suspect is true.
Industrialization, and the decline of the older jobs in agriculture and the crafts economy, also had some pernicious effects on social ideas. The early to mid-19th century saw the rise of socialist ideologies, largely as a response to economic disruptions. Whatever mistakes Karl Marx made, he was a keen observer of the Industrial Revolution, and there is a reason he became so influential. He failed to see the long-run ability of capitalism to raise living standards significantly, but he understood and vividly described the transition costs and the economic volatility.

Tyler could be right here. He doesn't make the case, and, admittedly, he can't do so in a short space. But there is a competing hypothesis: the Industrial Revolution and the real income it created, gave rise to an intellectual class whose inclination was to attack free markets. Schumpeter, in Capitalism, Socialism, and Democracy, had a good bit to say about this.
Western economies later turned to variants of the social welfare state, but along the way the intellectual currents of the 19th century produced a lot of overreaction in other, more destructive directions. The ideas of Marx fed into the movements behind the Soviet Union, Communist China and the Khmer Rouge. Arguably, fascist doctrine also was in part a response to the disruptions of industrialization in the 19th and early 20th centuries.

The shift of jobs away from agriculture also poisoned economic policy. Typically the U.S. government spends more than $20 billion a year subsidizing farmers, even though virtually all economists think those expenditures are wasteful.

True, although I think that calling an annual expenditure of 0.1 percent of GDP on farm subsidies, bad as that is, "poison," is an exaggeration.
The European Union is worse yet. Although Europe has pressing problems with bank solvency, Italian and Greek debt, and refugees, an estimated 38 percent of the EU budget will be going to farm subsidies.

That is worse. A check of his link shows that it's about $90 billion per year, which is about 0.5 percent of EU GDP.
It is possible a similar logic may play out with the jobs that will be rendered obsolete by automation. That is, we may decide to subsidize and protect those jobs for centuries to come, to the detriment of long-run economic growth.

Correct. Tyler and I agree that subsidizing or protecting those jobs is a bad idea.
When it comes to automation, my all-things-considered view is still "full steam ahead," and I might have felt the same way and bit the same bullet, had I been alive in the late 18th century.

Drop the "might" and, even behind a Rawlsian veil of uncertainly, I would say the same.
But invoking the Industrial Revolution today is not going to ease my worries.

It did ease mine, not that they were large to begin with. But if this is what a well-informed pessimist thinks, then I'm still optimistic.

Bryan Caplan  

See You At ISFLC 2017

Bryan Caplan
Team Caplan is once again attending ISFLC.  I'll be in two official events.

Event #1: UBI Debate with Will Wilkinson, 3:30-4:30 PM on Saturday.

Event #2: Ask Me Anything, 5:00-5:45 on Saturday.

If you want to meet up sometime during the conference, email me.

CATEGORIES: Economic Education

Here's Business Insider:

Janet Yellen's warning about low rates causing a recession doesn't make sense

Federal Reserve Chair Janet Yellen told Congress this week that the US central bank could cause a recession if it waited too long to raise interest rates.

Wait, what? Isn't it the other way around? Yes, according to Yellen's testimony just a year earlier.

In the past, Yellen and her most recent predecessor, Ben Bernanke, have emphasized that, because interest rates are still near zero and inflation has remained persistently below the Fed's 2% target, it is safer for policymakers to err on the side of leaving borrowing costs low for longer.

People often assume that recessions are caused by tight money. It would be more accurate to say they are caused by unstable money. Money was not "tight" in any absolute sense during the 1980 and 1982 recessions, rather it was tight relative to the wildly expansionary monetary policy right before those two recessions. Yellen understands that the way to avoid recessions is a stable monetary policy. Business Insider doesn't understand that this means rate cuts are appropriate at certain times, and rate increases at other times. Early next year she may not be re-appointed as Fed chair. If so, she may end up being the most successful Fed chair in history (in terms of stable NGDP growth, not banking regulation).

Just as valleys can be caused by mountains, recessions can be caused by overheated booms:

Screen Shot 2017-02-16 at 4.12.42 PM.png

One of my pet theories is that children reveal the true nature of man.  They have the same emotions as adults; they're just terrible at hiding them.  Even when their emotions are monstrous, kids either just blurt out whatever they're thinking, or bend the truth so blatantly that you know exactly what they have in mind.

A classic case: A kid does something bad.  He gets caught.  He wants to avoid punishment.  So what does he say?  "I'll never ever ever do it again."  Kids pass out this extreme promise like candy, even when the compliance cost would be astronomical.  The kid will "Never complain again"?  "Never get mad again"?  "Never ask for anything ever again"?  I've heard all these promises, and more.

What's going on?  The charitable theory is that at the moment they're speaking, the kids are sincere.  Why don't they keep their promises?  Self-control problems; though they want to stay good, it's just too hard in practice.  But the charitable theory conflicts with two ugly facts.

First, kids casually leap to their extreme promises when they sense they're in danger of punishment.  They're not forming a long-run plan to be better kids; they implementing a short-run plan to get off the hook.

Second, once the danger of punishment recedes, the kids don't struggle, then fail, to live up to their promises.  Instead, they forget their promises as casually as they made them.

But don't kids often plead lack of self-control?  Sure: "I just couldn't help myself."  But the real story isn't lack of self-control, but Social Desirability Bias: Kids say stuff that sounds good to avoid negative consequences.  In other words, they're acting just like adults, minus the subtlety.  As I've explained before:
Part of the reason why people who spend a lot of time and money on socially disapproved behaviors say they "want to change" is that that's what they're supposed to say.

Think of it this way: A guy loses his wife and kids because he's a drunk. Suppose he sincerely prefers alcohol to his wife and kids. He still probably won't admit it, because people judge a sinner even more harshly if he is unrepentant. The drunk who says "I was such a fool!" gets some pity; the drunk who says "I like Jack Daniels better than my wife and kids" gets horrified looks. And either way, he can keep drinking.

Fortunately, there's a lot more to human beings of all ages than weaseling.  Kids' love and excitement are just as transparent as their pettiness and anger.  Which makes me hopeful about the inner lives of adults as well.

David R. Henderson  

Protectionism IS Inflationary

David Henderson

Co-blogger Scott Sumner wrote a post recently titled "Protectionism is Not Inflationary." I disagree. Thus the title of this post.

We both learned from the great Milton Friedman--Scott as one of his students, me indirectly as a student of two Friedman students, Ben Klein and Mike Darby, and from reading Milton's work and occasionally talking to him and corresponding with him.

One of the most valuable things Milton did was revive the quantity theory. It has its problems, but one virtue that remains is reminding us of the relationship MV = Py, where M is the money supply, V is the velocity of money, P is the price level, and y is real output (real GDP, in the current vernacular.)

Protectionism makes y, real GDP, lower than otherwise. Scott and I agree on that. With an unchanged M and unchanged V, P is higher than otherwise. Therefore an increase in protectionism causes an increase in P. We normally refer to an increase in P, the price level, as inflation.

Scott doesn't dispute that. What he argues is that the current Federal Reserve Board will offset any increase by adjusting monetary policy, M, keeping the inflation rate at or around 2%.

He may well be right, but that doesn't mean that protectionism is not inflationary. Protectionism IS inflationary AND the Fed can offset this inflation.

But what about Milton Friedman's famous line, "Inflation is always and everywhere a monetary phenomenon." You can regard that statement as tautological because inflation, by definition, is a reduction in the value of money. But Milton meant much more than that: he meant that every inflation we could point to was caused by an increase in the money supply. He was probably right, but that's an empirical statement, not a statement of necessity. He would not have disputed that a little change in inflation could be due to a change in the growth of real output; what he was saying was that every episode of inflation involved an increase in the money supply, not that there weren't other factors that made inflation, say, 2.2% instead of 2.0%.

One person who commented on Scott's post, Maurizio, put it well:

If you have protectionism and all other variables stays [sic] the same (and therefore the Fed does not do any offset), protectionism is inflationary. If you assume the Fed does the offset, then you are changing two variables at once.

In 1996, U.K. statisticians estimated 10 recessions between 1955 and 1995. In 2012, other U.K. statisticians "disappeared" 3 of them.

In 1966, the late Paul Samuelson stated that the stock market has predicted 9 of the last 5 recessions.

That's a propos of an email I received today from San Jose State University professor of economics Jeffrey Rogers Hummel. Jeff wrote:

As several of you know, I've criticized the regular comprehensive retrospective revisions in the U.S. National Income and Product Accounts because they sometimes change the estimates considerably. The classic example, first exposed by Rich Vedder and Lowell Gallaway in their neglected book, Out of Work, is when the 1960 revisions "discovered" a major post-World War II recession that no one knew about at the time.

I wrote about this post WWII case in my Mercatus study "The U.S. Postwar Miracle," November 2010. I wrote:
According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?

If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about "the postwar boom." They saw it as a time of prosperity. Why is there a disconnect between their perceptions and the data? There are two reasons.

I titled this section of the paper "What Are You Going to Believe: The Data or Your Own Lying Eyes?" but the editor insisted on toning down the subtitle.

Jeff continues:

In reading Ken Rogoff's The Curse of Cash, I discovered that he notes the same problem with U.K. measures of real GDP (pp. 151-52). Citing the paper "Vintage Does Matter, The Impact and Interpretation of Post War Revisions in the Official Estimates of GDP for the United Kingdom" by Enrico Berkes and Samuel H. Williamson, he points out that "the number of technical recessions experienced by the United Kingdom between 1955 and 1995 is ten if we use the 1996 official UK historical GDP series, but it drops to seven if we use the 2012 series."

Scott Sumner  

How to think about taxes

Scott Sumner

Because tax reform is currently in the news, I thought it would be useful to describe what economists know, and don't know, about taxes. I'll start with what we know:

1. Legal tax incidence doesn't matter. If a tax is imposed on a market, it makes no difference whether the buyers or sellers are legally obligated to pay the tax. Thus the payroll tax is legally split 50-50 between the employers and the employees, but the take home pay of workers would be exactly the same if the tax were paid 100% by employers, or 100% by employees. Ditto for a gas tax. If the original price of gasoline is $1, then a 25-cent gas tax might cause the price to rise to $1.24. If the gas station paid the tax, they'd just boost the price to $1.24. If the consumer had to pay the tax, the gas station would charge $0.99, and then add the 25-cent tax on at the pump (as sales taxes are collected.) This is one issue on which all economists agree, at least on the long run. (Due to sticky wages and prices, the short run outcome may be different.) If you find an economist that does not agree, I'll reply with the "no true Scotsman" argument.

2. The true economic burden of a tax depends on the elasticity of supply and demand. In most industries, supply curves are very elastic, especially in the long run. Thus most of the burden of sales taxes probably falls on the consumer. If we take the 25-cent gas tax above, it would lead to slightly less driving. This would slightly depress world oil prices. This would slightly depress wholesale gasoline prices. In my example above, I assume the wholesale price of gasoline fell by 1 cent. If so, the 96% of the gas tax would be borne by consumers, and 4% by suppliers (probably oil producers, not gas retailers). This is also an issue on which economists agree.

Here's an excellent graph from John Taylor's textbook:
Screen Shot 2017-02-15 at 12.16.10 PM.png

3. A more difficult question arises when we look at various types of income taxes. In that case, the long run elasticities are difficult to estimate. Economists do not have a good sense of how much of corporate taxes (or even top bracket personal income taxes) are borne by the rich, and how much are passed on to the general public via higher prices and/or lower wages. We also don't know much about the Laffer Curve. No one really knows the maximum amount of revenue, per capita, that a developed country can raise via taxes.

4. We do know that subsidies are negative taxes, with effects that are the exact mirror image of taxes. Taxes raise revenue but reduce quantity of what's taxed, whereas subsidies cost revenue but increase the quantity of what is being subsidized. Again, it makes no difference whether a subsidy is paid to the provider or the consumer.

5. We also know that an equal tax and subsidy exactly offset one another. Thus if gas stations must pay a 25-cent gas tax, but also receive a 25-cent subsidy for each gallon sold, it's as if nothing happened. No effect at all. If we combine this result with point one above, we know for certain that a 25 cent gas tax on producers combined with a 25-cent subsidy to gas consumers has absolutely no effect on anyone. This is not controversial. However, the price at the gas pump would rise to $1.25 in the second case. After consumers got their 25-cent rebate from the government, they would still be paying $1.00 per gallon. So it would look different.

6. When we move to the realm of international trade, economists see exports as the way of paying for imports (money is just a veil, trade is actually all about barter.) Thus economists believe that a 25% tax on all imports, combined with an equal subsidy to all exports, would have zero effect, for reasons identical to the gas example above. But there is one complication. The exchange rate would rise by 25%, so that the net price paid by importers, and received by exporters, would not change at all.

7. In contrast, if there were only a tax on imports, or only a subsidy to exports, then trade would be distorted. The exchange rate would rise by less than 25%. Importantly, both sides of the trade equation are impacted by tariffs and subsidies, as exports are the way we pay for imports. If we import less, then we export less, at least in the long run. Thus a 25% tariff would appreciate the dollar by less that 25%, and both imports and exports would decline. Protectionism would hurt West Virginia coal, Iowa farmers and Seattle jet makers. And an export subsidy (like Ex/IM Bank) boosts both exports and imports, hurting firms like US Steel, which compete with imports.

Bob Murphy asked me to address three questions:

I think you might also clarify--are you saying the following? (Because it's very counterintuitive.)

1) An import tax by itself will reduce the trade deficit.

2) An export subsidy by itself will reduce the trade deficit.

3) An import tax coupled with an export subsidy will not affect the trade deficit.

So far I've been ignoring trade deficits. When we run a trade deficit, it means we import stuff now in exchange for exporting stuff later. If it seems like we'll never have to pay for the imports (as trade deficits seem to run on year after year) it's because the accounting is flawed. To some extent we are paying for imports by earning big profits on overseas investments. That's the whole "dark matter" debate, which is worth a blog post on its own. Or we might give them some of our property. But the key point is that we must give other countries something of real value (not just paper) for all the cars they send us, unless the other countries are essentially giving us Lexuses and BMWs as gifts.

Tariffs and subsidies don't have major first order effects on the deficit. Tariffs reduce both imports and exports, and subsidies raise both imports and exports. To the extent they matter at all, it is due to the impact on national saving and investment. Thus tariffs might boost national saving, which would reduce the trade deficit, while subsidies might reduce national saving, which would increase the trade deficit. I say, "might" because there are many factors to take into account, including Ricardian equivalence. Most economists believe that Reagan's expansionary fiscal policy boosted the US trade deficit. If so, then you'd expect Trump's likely fiscal policies to do the same. But of course it also depends on what's happening in the rest of the world, not just the US. To answer Bob's three questions: yes (a little bit), no, yes.

8. Let me end up on a point where I'm not well informed. Although in theory the proposed border adjustment tax/subsidy should be completely neutral to trade, there are some real world complexities that I don't fully understand. Suppose part of our goods imports are paid for by UK tourists at Disney World. That service export probably won't be subsidized. Also suppose part of our goods imports are paid via high overseas profits earned by US multinationals. Is that going to be subsidized? What about sales of LA homes to Chinese buyers? In other words, if the actual plan differs from the textbook assumptions of 100% tax and subsidy, do we still get a 25% appreciation in the dollar? And if we do, is it possible that it occurs not through changes in the nominal exchange rate, but rather the real exchange rate. Thus because of countries like Hong Kong that stubbornly peg their currency to the dollar (nominally), might the dollar only appreciate by 12.5% in nominal terms? In that case, the real adjustment would have to occur via a combination of higher than normal inflation in the US, and deflation in places like Hong Kong, or indeed much of the world. Central banks play a key role here.

Even with all that uncertainty, it's important to know that economists do understand an awful a lot about taxes. I see many commenters who seem unaware of even points 1, 2, 4, 5, 7, which are all extremely well understood.

PS. If you think that a subsidy of 20% on sales of LA homes to Chinese buyers would be more controversial than the subsidy on goods exports, you are probably right. Which shows just how irrational we are when it comes to trade. We claim to love it when American blue collar workers build jets and bulldozers and sell them to the Chinese, but freak out when America blue collar workers build high rise condos in LA and sell them to Chinese buyers.

As you may have heard, I'm collaborating with SMBC's Zach Weinersmith on a non-fiction graphic novel on the philosophy and social science of immigration.  Working title: All Roads Lead to Open Borders.  I'm now writing chapter 4, "Crimes Against Culture," examining the main cultural arguments against immigration. 

Since I take graphic novels very seriously, I'm sticking to my standard methods of quality control.  First and foremost: Read very widely and deeply on each topic immediately before writing.  Sometimes that means a lot of review; other times, I get lost in a completely new literature.  In coming weeks, I'll be carefully exploring a literature I mostly know second-hand: social science on the costs of diversity, especially ethno-linguistic fractionalization.

Since making clear predictions is a good way to mitigate hindsight bias, I want to publicly make a conjecture about what I'll learn.  And here it is: Almost all of the alleged "costs of diversity" can just as easily be interpreted as "costs of intolerance" or "costs of identity politics."

You'll know more when I know more.

blockchain.jpg Stories about Bitcoin seemed to me to be all the rage for a while, having since tapered off. (At least in my own newsfeed...) The digital currency has long been trumpeted by libertarian-leaning types. I mean, what's not to love about a transparent, peer-to-peer currency not affiliated with any state or central bank? What I haven't heard as much about are real-world freedom-enhancing applications for Bitcoin...

Enter Jim Epstein in this week's EconTalk episode. While the conversation includes one of the best explanations of the blockchain technology underlying Bitcoin, the real fascination for me was the ways in which Bitcoin is being used by people to circumvent the state in Latin America. In one of my favorite lines in the conversation, Eptstein says Bitcoin is "turning Socialism against itself."

Take the case of Venezuela. Epstein paints a bleak picture of a city (Caracas) in which literally NO ONE goes outside after dark, where supermarket shelves are empty, and violence rampant. Ironically, the one thing that's cheap in Venezuela, also due to the effects of price controls, is electricity. And that's what makes Bitcoin mining so profitable- and increasingly dangerous- there.* Since it's virtually impossible to acquire enough food to survive, Venezuelans have turned to the black market. But it's even safer to turn to amazon. Miners like "Luis" set up computers to mine Bitcoin, then trade their Bitcoin at sites like e-Gifter for amazon gift cards, which they then use to stock up on consumables. Similar processes have also taken hold in Brazil, where people pay all or in part for items with Bitcoin to circumvent the Brazilian government's protectionist measures.

In Honduras, there has been talk of recording land titles in blockchain. In Mexico, transferring promissory notes to blockchain is apparently under consideration. Roberts and Epstein, while still citing the inefficiencies of the U.S. legal system, do a remarkable job of persuading the listener that Bitcoin may hold more significant potential for freeing up currently less free economies. Even domestically, the possibilities for reducing transaction costs in many other sectors suddenly seems stunning to me. In what other realms do you think this could occur? Check out Epstein's Reason column, which inspired this week's episode, as well as the audio or highlights from this week's EconTalk.

* One of the miners profiled anonymously by Epstein was recently a victim in Caracas of the new trend of "express kidnapping." In Roberts's favorite line, Epstein writes, "Burglars smell the Benjamins as if they were hunting dogs."


Lisa Servon is an economist in disguise.

A number of bloggers have linked to this article in the last few days and it's well worth reading. It's about Lisa Servon, a professor of city and regional planning at the University of Pennsylvania and a former dean at the New School and her on-the-ground research. To understand why people use check-cashing services, which are looked down on by many "sophisticated" analysts, she worked in one for 4 months and asked a lot of questions.

There's so much I like about the article and I highly recommend reading it. I particularly liked the point about transparency: people who go into these check-cashing stores know exactly what they will pay for what they get, unlike what often happens in banks. Indeed banks appear to me more and more to be like regulated utilities.

This quote from her is what caused me to think of Professor Servon as an economist:

I knew that the people I had worked with closely who don't have very much money know where every penny goes. They budget things. They know where to get the best deals on things. And so it struck me that if they were using check cashers, there must be a good reason for that.

Notice that Servon thinks about people the way good economists do: when people show by their behavior that they are making smart decisions elsewhere, she, rather than assuming irrationality, assumes rationality and tries to understand why making this decision also might be a good decision. But she doesn't just assume. She shows by her own behavior that she is empirical. She actually works at a check-cashing store for four months and gets to understand the economics of those stores from the viewpoint of the customers.

By the way, her website is worth looking at. One link took me to her op/ed in the Wall Street Journal on February 24, 2014 (Feb. 25 for print edition) titled "The Post Office as Payday Lender? Return to Sender." I remember reading it and learning from it at the time, but, like most readers, had not noticed who wrote it. Here's one paragraph that stands out:

Consider the one financial product that the Postal Service already sells. For a money order of up to $500, it charges a bit more than $1.20--significantly higher than the price charged by many current check-cashing businesses. RiteCheck, the New York City-based check casher where I worked as a teller for four months last year as part of my research, charges 89 cents for money orders up to $500. The PLS chain of check cashers, which operates in several states, charges nothing.

And this:
While the infrastructure and existing staff at the Postal Service are under-used assets, it's unclear how they could be deployed. The white paper notes that 59% of post offices are located in ZIP Codes with one or no bank branches. But its analysis of the potential demand ought to include the check cashers and payday lenders that typically sell the products and services the post office imagines offering. These businesses are increasing their hours--the branch of RiteCheck where I worked is open 24/7--while the post office seems to be heading in the opposite direction.

The whole op/ed, which, unfortunately, is gated, is a beautiful take apart, showing the absurdity of the U.S. Postal Service, without a residual claimant, becoming an entrepreneurial firm.

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Stan Collender, Pete Davis, Andrew Samwick
Brad DeLong
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The Economist
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