If there’s one thing we can count on in America, it’s that our elected officials will see an affordability crisis and respond to it by stimulating the demand side of the market.  Today, we’re seeing this in the case of the housing industry, with Administration officials floating both a new (and improved!) 50-year mortgage and a portable mortgage.  Treasury Secretary Scott Bessent says that both of these will help break the “logjam” of owners who are stuck with their 3% mortgages and are reluctant to move, which will help with the affordability “crisis” in the American housing market.  After all, if more houses come on the market for sale, won’t that push prices down? This statement belies a fundamental misunderstanding of the difference between supply and quantity supplied.  This distinction matters not just so students can pass their economics exam, but for understanding the actual effects of policy. How do we use supply and demand in assessing the effects of any change?  Fortunately, once you have correctly drawn a supply and demand graph, there is a three-step process for allowing anyone to “command the heights of genius” as James Buchanan once described. Determine: will this affect demand or supply? Determine: will it increase or decrease? Read changes in price and quantity from the graph. The first step in understanding the impact of any change in policy is determining whether these new mortgage policies will affect the demand for housing or the supply.  Let’s start with the 50-year mortgage proposal.  The idea here is that this will make loans or credit easier for would-be home buyers to acquire.  That is a demand-side phenomenon.  At first blush, portable mortgages seem like they would affect the supply side.  After all, such a policy would make it easier for current homeowners to sell, right? However, notice that this policy only affects current homeowners who wish to move and buy a new house. Those who have a house and have no desire to move will be unaffected by this policy.  As a result, this policy also affects the demand side of the housing market. The second step in our three-step process is to determine what direction the (in this case) demand curve will be moving.  Here, it’s fairly obvious: the demand for housing is going to increase, which means it will move to the right. I depict this below in the move from D1 to D2.  The final step is to read the changes in price and quantity from the graph.  Here, we can see that as a result of these policies, we should expect the price to increase from P1 to P2 and the quantity to increase from Q1 to Q2.  Importantly, the supply curve did not move whatsoever. Note that what we have just shown is that Scott Bessent is correct! There will be more houses sold as a result of portable mortgages (and the 50-year mortgage).  The specific point-prediction of exactly how many more is beyond the scope of the analysis here, but the pattern prediction seems obvious.  But this is an increase in the quantity of houses, not an increase in the supply of houses.  As a result, he is incorrect to say that this will make housing more “affordable.”  It will most certainly not – housing prices will increase. The trick to implementing this three-step plan is to do the three steps in order.  People are often tempted to jump straight to step three and “get to the point.” After all, that’s what people really want to know! Some can jump straight to step three, but I’ve been a student of economics for almost 20 years now. I couldn’t even begin to venture a guess as to how many times I’ve drawn supply and demand on boards in front of classrooms, on sheets of paper during office hours, on exams that I’ve taken… you name it.  I still go through this exact process every single time when I’m confronted with a new problem. The reason why I go through this process every single time is simple: it works, and it avoids the trap of falling victim to the problem of reasoning from a price change.  It also forces us to really think about what is going on in the market and to think through it clearly and carefully before we rush to any judgments about what we really care about: will this allow more people more access to a good or service?  Will it allow people to live healthier and wealthier (however they choose to define those terms) or will it lead to impoverishment? These are the questions that really matter. Using supply and demand analysis and this three-step process is a crucial component to understanding the world around us. (0 COMMENTS)

Modular housing is gaining prominence as a proposed way to increase the housing supply. This is an approach where the majority of home building is done off-site. Factories will construct entire rooms of a house, including all the wiring and plumbing connections built in. At the final construction site, the actual building process consists of the final step of connecting the rooms, plumbing, and so forth, to complete the build. Building in this way is faster and less expensive than traditional home building. And in recent years, the technology has improved as well—companies around the world build modular homes that are distinctive, highly customizable, and of very high quality.  People might think that these companies increase the housing supply by, well, building more housing. But building more housing isn’t an increase in supply, it’s an increase in quantity supplied. An increase in supply means an increase in the capacity to produce something. A recent interview with engineer Ivan Rupnik describes two different ways modular housing can help increase supply.  One way is simply the technology itself. Changes in technology are important ways to increase the supply of anything. Once upon a time, all houses had to be built entirely using hand tools and by human muscle. As technology has improved, the potential number of homes that can be built by a given number of workers increases. Or, in economic parlance, the supply curve shifts to the right.  The other way to increase the housing supply is through changes in housing regulation. Rupnik talked about how Congress attempted to encourage modular housing as far back as the 1960s, and  “funded [Nixon-era HUD program] Operation Breakthrough to encourage experimentation, and to figure out the effect of local housing codes and zoning regulations on large-scale use of new housing technologies. For reasons that still aren’t clear to me, those regulatory changes — which had bipartisan support — were never implemented at scale in the U.S.” As a result, the potential increase in supply that the new technology represented was not able to be realized in the United States because regulatory barriers that would have allowed it were not removed.  But other countries were watching, and took advantage of the lessons, even if the United States did not. Rupnik points to Sweden, where he says “85 to 90 percent of single-family is made in a factory.” Japan, too, “streamlined regulation for manufacturing and innovation,” allowing the new technology to be put to use to increase the housing supply.  My favorite point that Rupnik makes is the distinction between prescriptive regulations and performance regulations. As he describes it, prescriptive regulations are those that tell a company to do very specific things – make the walls at least this thick, use these specific materials in these quantities, etc. Performance regulations, on the other hand, just stipulate thresholds that need to be met but leave it entirely up to the companies to find the best ways to go about meeting those goals. As he put it,  “Performance codes say that a wall needs to prevent fire from penetrating for X hours or minutes, and you can achieve that goal with any material that works. For example, in Sweden, instead of mixing sheathing for structural rigidity and drywall for fireproofing, they used two layers of a more expensive gypsum product because for their factory processes, it was more efficient.” A change from prescriptive to performance regulations allows companies a great deal of flexibility to find the most effective and efficient ways to achieve goals that work best with their own unique circumstances and processes. Because performance goals don’t impose a one-size-must-fit-all approach, a multitude of competing and customizable approaches can be taken, learned from, and continuously improved. This flexibility in the regulatory structure also helps increase the housing supply.  The goal of increasing the supply of housing is an important one. Any serious discussion of achieving it will require either some mention of technological improvements or regulatory reforms. If those aren’t part of the discussion, then we’re not talking about increasing the supply of housing—we’re merely discussing increasing the quantity of housing supplied. An increase in quantity supplied without an increase in supply means rising prices. (0 COMMENTS)

A recent post argued that housing affordability is not so bad as it might appear when home prices are adjusted for all relevant factors, such as size, quality, and household income growth. While houses have become more expensive in dollars, they are also significantly bigger and nicer, and the average household has significantly more income. We acknowledge, however, that there is a housing affordability problem, particularly for working- and middle-class people in certain metro areas. Bankrate found that the household income needed to afford a median-priced American home rose by 50% just since 2020, to $117,000.    The economics of housing affordability is very straightforward. If prices have gone up, either demand has shifted right, supply has shifted left, or some combination of the two. While supply constraints are the major culprit in the affordability problem, we want to acknowledge that buyers are partly responsible for the market shifts that we’ve seen—it takes two to tango. Housing is a normal good with a long-run income elasticity of demand close to one, meaning housing demand rises in tandem with household income growth. To bring prices down, we need builders to shift the housing supply curve “out and right” by a larger factor than buyers are shifting the demand curve. Builders know exactly what this would take: less restrictive zoning (especially for multifamily units), easier licensing and permitting processes, less stringent building codes and energy standards, freer markets in labor and materials, and perhaps a consumer acceptance of smaller, simpler homes. With our combined experience in home building and economic analysis, we see three major factors driving housing unaffordability: zoning, building codes, and home sizes.  Almost all U.S. jurisdictions impose zoning regulations that limit, sometimes severely, the number of homes that can be built. In the pursuit of safety and energy efficiency, ever-more-stringent building codes require costlier construction methods and materials. America’s builders have moved away from smaller, more austere starter homes to big, gaudy “McMansions.”  Zoning Prevents Affordable Housing Economists have long recognized that zoning restrictions are one of the largest factors holding back housing supply growth. Urban-planner-turned-anti-zoning-crusader Nolan Gray wrote the authoritative critique of zoning, Arbitrary Lines (excellently reviewed by David Henderson). Gray spells out exactly how zoning raises housing costs: The most obvious way is by blocking new housing altogether, whether by prohibiting affordable housing or through explicit rules restraining densities. This results in less housing being built, resulting in the supply-demand mismatches we see in most US cities today. A subtler way that zoning drives up housing costs is by forcing the housing that is built to be of a higher quality than residents might otherwise require, through policies such as minimum lot sizes or minimum parking requirements. Beyond these written prohibitions and mandates, zoning often raises housing costs simply by adding an onerous and unpredictable layer of review to the permitting process. (p. 52–53) There’s plenty of evidence supporting the theory that zoning plays a major part in limiting housing supply and raising home prices. Exhibit A is Houston, the most famous example of a non-zoned large city, which, consequently, is one of the most affordable large cities in the United States. No zoning means Houston can easily add houses, particularly in response to even small price increases. As Gray notes, “Houston builds housing at nearly three times the per capita rate of cities like New York City and San Jose… in 2019, Houston built roughly the same number of apartments as Los Angeles, despite the latter being nearly twice as large.” (p. 144) This larger supply elasticity in Houston allows the housing stock to grow in tandem with demand and accordingly keeps price increases in check. For big cities, Houston is tops in affordability as measured by the ratio of median home prices to median household incomes. Building Codes Raise Costs Continuing a family tradition begun by Grandpa Watts in 1948, we built several spec homes in 2005–2006, raking in cash until we were derailed by the emergence of the subprime mortgage crisis.  Joel started building again after an almost 10-year hiatus, while Tyler headed off into academic economics. Touring one of Joel’s builds after the restart, Tyler noticed that all exterior walls were now constructed with 2×6 lumber, instead of 2x4s as had been standard practice since the advent of stick framing. Joel indicated this was due to changes in the building code, primarily for the purpose of adding more exterior insulation and making homes more energy efficient. This code upgrade was just one of the more noticeable examples of a steady trend of ever-more-stringent requirements, usually aimed at marginal improvements in safety and energy efficiency. A series of studies commissioned by the National Association of Home Builders (NAHB) tracked the total cost impact, on a per-home basis, of specific changes in the International Residential Code (IRC). These studies found that, over the 2009–2018 IRC update cycles, code changes increased costs for construction of typical homes in Joel’s area by an estimated $13,225 to $26,210. With ongoing updates, IRC has the potential to continue ratcheting up costs indefinitely.  Another study by NAHB found that government regulations overall (zoning, building code, design, safety, etc.) accounted for nearly 24% of the sales price of a single-family home—$93,870 when applied to the median new home price in 2021. Source 1 Small + Simple = Affordable   Homes in the United States have gotten a lot bigger since the supposed golden age of home affordability in the 1950s and 1960s. Average home size grew from 1,500 square feet in 1960 to a peak of 2,700 in the mid-2010s. Currently, new homes in the United States average about 2,400 square feet, and builders appear to have largely abandoned construction of small starter homes.  Homes under 1,400 square feet, once the majority, have collapsed to well under 10% of new home starts—despite the fact that the per-household head count shrank significantly since 1960. Source 2; Source 3; Source 4 Any push for more affordability should emphasize smaller and simpler houses—true starter homes. At the 2024 national average construction cost of $195 per square foot (including everything except land), today’s 2,400 square foot home costs over $200,000 more to build than a 1,200 square foot starter home would cost. Take out expensive amenities such as granite counters, premium appliances, high-end trim, etc., and we reckon site-built homes in the 1,200 square foot range, even in the priciest metros, could be built and sold profitably for a full $100,000 less than today’s national median price of about $410,000.  So why don’t we see more builders producing smaller, more basic homes to meet the crying need for affordable housing? Put simply, the large cost burden of regulations—zoning and building codes in particular—makes starter homes relatively unappealing for both buyers and builders.  Allow us to illustrate by comparing the costs of a sample 1,200 square foot starter home against a high-end 2,400 square foot McMansion. We’ll assume the all-in costs of regulation add $100,000 per single-family home. Basic construction costs are, roughly speaking, directly proportional to home size and quality. Thus, in the absence of an extraneous regulatory cost burden, a 2,400 square foot home should run about double the cost-to-build of a 1,200 square foot home (land costs notwithstanding). The costs of a strict regulatory regime, however, are not proportionate to home size and amenities, but rather a roughly fixed amount for any size home. In other words, regulatory compliance adds almost the same amount of dollar outlay to the starter home as it does to the McMansion. The overall effect is to shrink the price gap between starter homes and McMansions, making the latter relatively less expensive compared to the former. Economists know this as the Alchian-Allen Effect.  In a less-regulated world, a starter home might be ½ the price of a McMansion, but once the regulatory burden is factored in, the starter home is instead 2/3 the price, and the larger the fixed cost of regulations, the smaller this relative price gap becomes. As the cost of regulations grows, the relative price of large, well-appointed houses declines. Unsurprisingly, builders and buyers increasingly eschew relatively more expensive starter homes. Let there be “low quality” goods The inimitable Walter Williams, our favorite econ teacher, used to say, “Low quality goods are part of the optimal stock of goods.” Of course—for how else could the material needs of poorer people be met? By this, Williams didn’t mean unsafe or non-functional, but rather made with cost in mind. In the case of homes, this would mean that they are smaller and simpler.  To ensure an abundance of lower-quality goods, governments must avoid burdensome taxes and regulations that make it unprofitable and unrealistic for entrepreneurs to operate in the low-end marketplace. Sadly, for many lower-income people looking for shelter, regulations have priced them out of the market.  To incentivize a reliable flow of affordable housing, we will need to see governments drastically peel back cost-prohibitive rules and restrictions imposed by zoning and/or building codes. “If you build it, they will come” rings true to us, but take our word for it: affordable homes won’t get built unless and until governments cut back this excessive regulatory cost burden.    Tyler Watts is a professor of economics at Ferris State University. His brother, Joel Watts, is a homebuilder. Footnotes [1] National Association of Homebuilders, “Estimated Costs of Building Code Changes.” [2] US Census. Note: 1,400 s.f. cutoff interpolated from 1,200-1,599 s.f. bin data. [3] Pew Research Center, “The state of affordable housing in the US.” [4] United States Census Bureau, Historical Households Tables. (0 COMMENTS)

Journalist and author Sam Quinones talks about his newest book, The Perfect Tuba: Forging Fulfillment from the Brass Horn, Band, and Hard Work with EconTalk’s Russ Roberts. Known for his reporting on the opioid crisis, Quinones turns to a more uplifting subject–the world of tuba players and high school marching bands. What begins as curiosity about an […] The post The Perfect Tuba: How Band, Grit, and Community Build a Better Life (with Sam Quinones) appeared first on Econlib.

Tomorrow in the United States is Thanksgiving, the American version of a harvest festival celebrating the bounty of the earth and preparing for the winter ahead. We trace the history of our holiday to a documented 1621 gathering of English Pilgrims and the native Wampanoag tribe in modern-day Plymouth, Massachusetts. The Pilgrims had immigrated from England the previous year, looking to escape religious persecution. After a perilous journey across the Atlantic, the Pilgrims landed in America. First, they landed in modern-day Provincetown. The sandy soil wasn’t ideal for agriculture, so they boarded the Mayflower again and took the (relatively) short trip across Massachusetts Bay and landed in Plymouth. The first winter was horrific. Between scurvy from the long voyage and the harsh Massachusetts winters, half of the settlers did not live to see Spring.  The next year was more normal, but life was still difficult for the Pilgrims. Agrarian society is not an ideal way to live: backbreaking work all day long, and so much depends on the weather. I grew up in a small town just next door to Plymouth; the weather is as unpredictable as anything. But that year, they managed a successful harvest. As was tradition among most peoples of the world, after the harvest, they gathered to give thanks and share in the bounty.  The tradition of harvest festivals continues, formalized into this holiday of Thanksgiving. Of course, hunger remains a problem. There are numerous regulations that should be removed to promote better access to fruits and vegetables and other healthy foods.  For example, sell-by dates lead to significant waste. Subsidies on corn and tariffs on sugar lead to the use of a lot of unhealthy additives.  Food price supports lead to unnaturally high prices.  Municipal regulations often prevent charities from distributing or providing food. Reducing these regulations will help increase access to food, lower the price of food, and reduce food waste.   In a recent EconLog post, Daniel Smith discussed how the FDA was used as a bludgeon against whiskey manufacturers.  Daniel cites Jack High and Clayton Coppin in that story.  Those same authors also wrote a book, The Politics of Purity, which examines the issue more broadly to include the food chain (I thank Econlib editor Pat Lynch for pointing me to the book). There will be far too many who go without on a day when we celebrate how much we have. I do not wish to minimize their suffering, nor the suffering of those throughout the world who still live at or near subsistence level. The fight against hunger is not nearly done. But that does not mean we cannot celebrate the massive strides made against hunger, either.  The reason for the season has changed because it’s much more rare that food insecurity is a pressing concern. As a consequence, Thanksgiving has become a day to celebrate one’s blessings.  Millions of Americans will criss-cross the nation to see friends, loved ones, and family. We celebrate our extraordinary abundance. We live in a place where less than 2% of our workers need to work in agriculture to provide the food we need. When there are droughts or other conditions that could previously have resulted in famine, we can import food, either from other places in the country or elsewhere in the world, to feed those who would have gone without because of lost crops. According to the Food and Agriculture Organization of the United Nations, less than 2.5% of Americans die of malnutrition.1 We celebrate these blessings. For those of you traveling, may your journeys be safe and may you return home. May you all enjoy the company of loved ones, wherever in the world you may be. And may you all enjoy the peace and comfort our shared and created abundance brings.   Happy Thanksgiving, everyone! [1] A note on the data from the source: “The FAO reports all values below 2.5% as ‘

In case you missed it, the Trump Administration has been using tariffs under the 1977 International Economic Emergency Powers Act since at least April of this year. The legality of doing so has been questioned and we are now at a point where the Supreme Court has heard oral arguments on the matter. One of the arguments made by the U.S. Solicitor General, John Sauer, is that the plaintiffs in the case “concede that IEEPA authorizes quotas and other tariff equivalents.” The implication of this argument is that if these two are identical and one is permissible, then the other must logically be permissible, too. I am no lawyer, so I will not comment on the strength of this particular argument. But as an economist, this raises two questions: are tariffs and quotas actually equivalent and if so, why would the government use one instead of the other? Briefly, a tariff is a tax on the importation of goods. Because tariffs are a tax, they raise the price that consumers pay, increase the cost that sellers incur, or some combination of both. Point is: someone will pay the tax and those tax dollars will then flow into the federal government in the form of tariff revenue. If you look carefully at Figure 2 on Page 9 of the Treasury’s monthly statements, you can see that they have collected $195 billion in “customs duties,” which includes revenues from tariffs. This increased cost leads to less of the activity taking place—that is, tariffs reduce the amount of goods imported into a country. This is true regardless of who shoulders the burden of the tariffs, whether it be domestic consumers paying higher prices or foreign producers earning less profit (though there is considerable evidence that it is the domestic consumers paying the tariff, not foreign producers). A quota is a legal restriction on the amount of a good that can be imported. Because it restricts the amount of a good that is allowed to enter a market, we can easily imagine a tariff and a quota having the same impact on the amount of a good that is imported. Restricting imports in this way, however, has the effect of making those imports more expensive. In fact, if the reduction in imports from the quota exactly matches the reduction in imports, then that quota’s effect on price will exactly match the tariff’s. Because tariffs and quotas ultimately have exactly the same effect on consumers and producers, there is good reason to believe that the two are economically equivalent, as Solicitor General Sauer argues. If that’s the case, why would any government use tariffs when they can instead use quotas? One reason might be that determining how many imports to allow into the country is more difficult than simply setting a tariff. How are we to know whether we should allow 100,000 cars into the US instead of, say, 99,000 or 101,000? Implementing a quota also requires that government officials keep much, much closer records of how many cars are coming in, from where, and when. The paperwork alone can be difficult.  A second reason might be that if you have a message of “importing goods is hurting America” then restricting imports is simply allowing less of the “bad” thing to happen. A tariff, though, can be portrayed as not only reducing the bad thing, but charging a fee for doing the “bad thing.” In matters of justice, it’s common to demand that we not only reduce the bad thing, but that the ne’er-do-wells engaged in the bad thing face some sort of penalty. It is possible to rhetorically frame tariffs based on this argument to fit that bill better than a quota.  But what I submit is the more likely reason that tariffs are used rather than quotas is that quotas create what are known as quota-rents, which must then somehow be disbursed. Because there will be formal restrictions on the amount of imports allowed into a country, permission to import the allowed goods must be allocated in some way. This can be done on a first-come-first-allowed basis, whereby we allow the first, say, 100,000 cars to be taken off the boats and sold in the United States, but then turn away any subsequent cars and send them back to their country of origin. In this scenario, all of the quota-rents are accrued to the importers. But this system would lead other countries to try to send their goods to us en masse in January in the hopes of being first in line. This might do for durable goods like cars, but for nondurable goods like foodstuffs, it would clearly be a disaster as rotting food piled up at the ports and spoiled before it could be sold.  As an alternative to first-come-first-allowed, governments can issue import licenses ex ante, which allows countries that secure a license to export goods to the United States whenever they see fit. What’s more, the government can sell those licenses and, under plausible assumptions, the total amount of money raised by selling licenses can exactly match the revenue generated by an identical tariff. As an academic exercise, it is trivially easy to set a quota such that it raises the same amount of revenue as a tariff. I used to assign such problems on exams in my undergraduate International Trade classes. But in practice, negotiating both the distribution of licenses and their price is extraordinarily costly in terms of transaction costs. Once we acknowledge these real-world costs that are often assumed away in economics classrooms, it’s easy to understand why governments might prefer tariffs over quotas. Adding in the moral intuition that tariffs are not just restricting imports, but are rhetorically punishing other countries for their allegedly harmful practice of selling us more things for lower prices, and from the perspective of someone looking to restrict trade, tariffs probably have a more intuitive appeal than quotas, even if the two can be identical on paper. (0 COMMENTS)

Will Storr talks about his book The Status Game with EconTalk host Russ Roberts, exploring how our deep need for respect and recognition shapes our behavior. The conversation delves into how we constantly judge others and compare ourselves to them, the pain of losing status, and the freedom of escaping judgment. Storr and Roberts discuss how […] The post The Status Game (with Will Storr) appeared first on Econlib.

Beginning on July 1, 2020, the United States-Mexico-Canada Agreement (USMCA) superseded the North American Free Trade Agreement (NAFTA) as the trade deal among the three countries.1 Unlike NAFTA, which only included a transparency provision, the USMCA contains specific measures aimed at fighting corruption. This addition demonstrates a shared commitment among the participating nations to enhance efforts to prevent bribery and corruption within their borders. Including provisions in trade agreements unrelated to trade that address issues such as corruption, human rights,2 and the environment is becoming common. These clauses are more likely to be included when OECD countries negotiate treaties with non-OECD countries and when the income disparity between the countries is more significant. Why all the additional provisions? Generally, trade agreements promote trade liberalization, which can have numerous positive effects, including fostering long-term economic growth, increasing foreign investment, and even initiating positive institutional change. Economist Russell Sobel argues that trade openness is a critical first mover in improving economic freedom. Liberalizing trade and improving economic freedom can reduce corruption or generate moral behavior.3 Corruption reduction could emerge from formal institutional changes (e.g., laws and legislation) or informal ones emerging from increased business with a less corrupt country. Beginning in 2004 with the US-Morocco Free Trade Agreement, the United States started including provisions in its free trade agreements to promote transparency and combat corruption.4 These measures require trading partners to criminalize both active and passive bribery.5 In 2015, the European Union argued that free trade agreements should include anti-corruption provisions. Amy Fuentes claims that including anti-corruption provisions in trade agreements could effectively reduce demand-side corruption when foreign firms or officials instigate the solicitation of bribes.6 While several positive effects can result from increased free trade, corruption may hinder free trade and economic growth in developing countries. Global bribery costs are estimated to be one trillion dollars, or five percent of global GDP annually.7 Corruption affects economic growth and development in both the short and long term. In the short term, it might facilitate economic transactions that wouldn’t happen otherwise by “greasing the wheels.” Jac Heckelman and Benjamin Powell8 argue that where economic freedom is the most limited, corruption allows entrepreneurs to generate growth by avoiding policies and regulations (i.e., bribing the right people to get things done).9 Corruption of this type may be beneficial when the size of the government is a significant portion of the overall economy and there are excessive regulations. However, as nations progress, corruption leads to various inefficiencies and can hinder long-term economic growth, acting as “sand in the wheels.”10 Michael Munger argues that there is a “political Coase theorem”11 at work where corruption can lower transaction costs to improve efficiency, given poor economic institutions. Munger argues that public officials will not give up their positions of power, nor rents that provide benefits to themselves, for an uncertain collective benefit from eliminating the corrupt systems in place. Thus, Munger concludes that “corruption is neither efficient nor irrational; it is the result of a pervasive transitional gains trap.”12 Gordon Tullock explains that once rent-seeking activity occurs, the rents become capitalized over time, so that removing the policy that created them will impose costs on those who currently benefit from them. Thus, corrupt officials cannot anticipate how improving economic institutions will enhance their well-being when it means giving up the rent from corruption, leading to Tullock’s trap.13 Omer Gokeekus and Yui Suzuki14 found evidence that increased trade openness between the European Union and African countries, facilitated through the Cotonou Partnership Agreement, mitigates corruption. This agreement predates the European Union’s use of corruption clauses. “We examine whether corruption is different between Latin American countries that enter into a trade agreement with the United States compared to those that do not.” What about other parts of the world? In our recent paper with Taylor Crawford,15 we investigate the effect of trade agreements with the United States on corruption in Latin American countries. The United States currently has regional or free trade agreements with 20 countries worldwide, 11 of which are located in Latin America. Latin American countries have a history of volatile and corrupt regimes, and combined with the high number of trade agreements between the United States and Latin America, the region is worth studying. We examine whether corruption is different between Latin American countries that enter into a trade agreement with the United States compared to those that do not. Anti-corruption measures between the United States and foreign countries are not a new phenomenon. In 1977, Congress passed the Foreign Corrupt Practices Act (FCPA). The FCPA focuses on prosecuting U.S. businesses that pay bribes to foreign officials. It distinguishes between “corrupt payments” and “facilitating payments” such that payments to foreign officials to secure permits or licenses may not be subject to penalty. In addition, it does not cover foreign officials who attempt to solicit bribes.16 The limits of the FCPA are one reason some argue that including transparency and anti-corruption provisions in free trade agreements could effectively prevent demand-side corruption. In 2004, the United States was the first to include anti-corruption measures directly into its trade agreements, and the European Union and Canada quickly followed.17 Anti-corruption provisions require countries to change their laws to address the treaty’s requirements. Formal laws and legislation, what Gerard Roland refers to as fast-moving institutions, can be changed quickly by centralized decision-makers.18 However, the issue with the inclusion of anti-corruption clauses is enforcement. Frank Brown19 and Amy Fuentes20 note that enforcement is at the will of the foreign country and that many Latin American countries have exerted little effort in enforcement.21 On the other hand, slow-moving institutions, such as customs and norms, are continuously evolving.22 Peter Boettke, Christopher Coyne, and Peter Leeson argue for institutional stickiness: if formal institutions are going to be effective, then informal institutions must underlie the formal institutional arrangements.23 Thus, formal anti-corruption laws must be consistent with the informal institutions and culture of corruption to be effective. When combining the areas of free trade and corruption, the issue that emerges is whether having a trade agreement where transitional gains traps (like those explained by Tullock) exist can lower the transaction costs enough to reduce corruption. Can the presence of a trade agreement encourage moral behavior, reward virtues, and make us ethically better people, as Langrill and Storr24 and McCloskey25 contend? Does participating in a trade agreement with the United States lead to a reduction in corruption over time? Our results contradict the hypothesis that entering into a trade agreement with the United States reduces corruption in Latin American countries. Trade agreements with anti-corruption clauses appear to increase corruption as measured by the International Country Risk Guide26 and Global State of Democracy corruption measures.27 Upon examining the subcomponents of these corruption indexes, it appears that bribery within the executive branch may be the primary driver. Given that the anti-corruption clauses in question specifically address bribes, they may not have the intended effect. These findings seem consistent with Richard Epstein’s argument that simple rules are better than complex rules for promoting markets.28 When the United States attempts to add formal rules through trade agreements, these countries may be unable to enforce them, leading to more corruption to avoid the complexity. It also seems consistent with Holcombe and Boudreaux that more regulation increases corruption.29 To the extent that the anti-corruption clauses lead to the creation of regulations to combat corruption, they could have the opposite effect. Thus, while trade can increase economic growth and freedom and improve economic institutions, requiring countries to create complex rules via trade agreements may dampen some of these otherwise positive economic effects. For more on these topics, see “Five Essential Books on Public Choice,” by Jayme Lemke. EconLog, August 22, 2020. Michael Munger on Obedience to the Unenforceable. EconTalk, June 19, 2023. “Public Choice,” by William F. Shughart II. Econlib. Additionally, if anti-corruption clauses are not reducing corruption, then the transaction costs of negotiating these clauses (as well as other provisions, such as environmental regulations) into trade agreements could be high, relative to focusing solely on increasing free trade. Public Choice has, unfortunately, been largely overlooked by those studying Latin America.30 The role of governments in attempting to prevent corruption through trade, while ignoring the rent-seeking and transitional gains traps related to corruption, is only one possible application of where we may be asking too much from trade agreements. Footnotes [1] Henderson, D.R. (2019). NAFTA 0.0: Why the USMCA is a bad agreement. Hoover Institution. [2] Aaronson S.A. & Chauffour, J-P. (2011). The Wedding of Trade and Human Rights: Marriage of Convenience or Permanent Match? World Trade Organization. [3] Sobel, R. S. (2017). The rise and decline of nations: thadvocated that free trade agreements should include provisions addressing anti-corruptione dynamic properties of institutional reform 1. Journal of Institutional Economics, 13(3), 549–574. [4] Taylor, C.O. (2009). Of Free Trade Agreements and Models. Indiana International and Comparative Law Review, 19(3), 569–609. [5] Jenkins, M. (2018). Anti-corruption and transparency provisions in trade agreements. Transparency International. [6] Fuentes, A. N. (2016). How Free Trade Agreements Can Improve Anti-Corruption Enforcement: A Case Study of the United States and Colombia. Public Contract Law Journal, 45(3), 479–498. [7] Ibid. [8] Heckelman, J. C., & Powell, B. (2010). Corruption and the institutional environment for growth. Comparative Economic Studies, 52(3), 351–378. [9] Ibid. [10] Méon, PG., & Sekkat, K. (2005). Does corruption grease or sand the wheels of growth? Public Choice. 122, 69–97. [11] Munger, M. C. (2019). Tullock and the welfare costs of corruption: there is a “political Coase Theorem”. Public Choice, 181(1), 83–100. [12] Ibid, p. 99. [13] Tullock, G. (1975). The Transitional Gains Trap. The Bell Journal of Economics, 6(2), 671–678. [14] Gokcekus, O., & Suzuki, Y. (2013). Trade with the EU Reduce Corruption in Africa? Journal of Economic Integration, 28(4), 610–631. [15] Calcagno, P., Crawford, T., & Maldonado, B. (2024). Do U.S. Trade Agreements Affect Corruption in Latin America? A Difference in Difference Analysis. Public Finance Review, 52(6), 826-861. [16] Fuentes, A. N. (2016). How Free Trade Agreements Camend their laws to comply withan Improve Anti-Corruption Enforcement: A Case Study of the United States and Colombia. Public Contract Law Journal, 45(3), 479–498. [17] Lejárraga, I., & Shepherd, B. (2013). Quantitative evidence on transparency in regional trade agreements. [18] Roland, G. (2004). Understanding institutional change: Fast-moving and slow-moving institutions. Studies in comparative international development, 38(4), 109–131. [19] Brown, F. (2014). The Role of International Trade Agreements in Fighting Corruption. Center for International Private Enterprise: Anti-Corruption & Governance Center. [20] Fuentes, A.N. (2016), as above. [21] The typical language used in these FTAs is under the article Ensuring Integrity in Procurement Practices, and reads as follows: “Further to Article 19.9 (Anti-Corruption Measures), each Party shall establish or maintain procedures to declare ineligible for participation in the Party’s procurements, either indefinitely or for a stated period of time, suppliers that the Party has determined to have engaged in fraudulent or other illegal actions in relation to procurement. On the request of a Party, the Party receiving the request shall identify the suppliers determined to be ineligible under these procedures, and, where appropriate, exchange information regarding those suppliers or the fraudulent or illegal action.” [22] Roland, G. (2004). Understanding institutional change: Fast-moving and slow-moving institutions. Studies in comparative international development, 38(4), 109–131. [23] Boettke, P.J., Coyne, C.J. & Leeson, P.T. (2008), Institutiona, while ignoring the rent-seeking and transitional gains traps related to corruption,l Stickiness and the New Development Economics. American Journal of Economics and Sociology, 67: 331-358. [24] Langrill, R., & Storr, V. H. (2012). The moral meanings of markets. Journal of Markets and Morality, 15(2). [25] McCloskey, D. N. (2006). The Bourgeois virtues: Ethics for an age of commerce. University of Chicago Press. [26] The PRS Group (n.d.) The International Country Risk Guideimpose formal rules through trade agreements, these countries may be unable to enforce them, leading to increased corruption as a means of avoiding. [27] International IDEA (n.d.) The Global State of Democracy Initiative. [28] Epstein, R. A., (2009). Simple rules for a complex world. Harvard University Press. [29] Holcombe, R. G., & Boudreaux, C. J. (2015). Regulation and corruption. Public Choice, 164(1), 75–85. [30]  Bastos, J-P., & Cachanosky, N. (2025). “Welcome to Public Choice in Latin America.”  Substack: Public Choice in Latin America. (0 COMMENTS)

Political views are often misleadingly discussed as though they span a single left/right spectrum. I want to suggest that a similar mistake gets made when thinking about economic systems and policies. As a corrective, consider that economic systems can be understood along more than one axis or spectrum – and these different axes are often conflated with each other.  Here I propose four axes for evaluating a country’s economic system. Each axis should be thought of as a sliding scale, rather than a binary switch. It’s not a matter of if a country is entirely on this or that side, it’s a question of what side the balance tends toward.  The first axis is whether an economic system is capitalist or socialist. The primary way this axis is defined is that a capitalist system upholds private property, most significantly so in the ownership and operation of the means of production. To the extent that the means of production are privately owned and operated, an economy is more capitalist. To the extent that the means of production are directed by the state instead of private actors, an economy is more socialist.  A separate axis considers whether an economy has a free market. Capitalism and free markets are often used interchangeably, but they are distinct concepts. What distinguishes a free market is the ability of buyers and sellers to make mutually agreed-upon exchanges without government interference. This axis can also be applied to specific markets within an economy. In America, the majority of health care institutions and pharmaceutical companies are privately owned and operated. To that extent, one could say America has a capitalist health care system. But that doesn’t mean we have a free market in health care. Health care and pharmaceutical production are among the most heavily regulated and legally restricted sectors in the country. A third axis is free trade. I think of free trade as being about the scope of people with whom you can exchange without state interference. Because countries rarely restrict trade within their borders (Minnesotans can freely trade with Floridians, etc), as a practical matter free trade almost always refers to international free trade. An economy has free trade to the extent that people across political borders can make mutually beneficial exchanges with each other without tariffs, import quotas, or other such restrictions. Just as we don’t have a free market in health care, we also don’t have free trade in health care. Medications that are inexpensive, have been proven safe and effective, and have been used for decades in other countries are forbidden from being imported to the United States, for example.  The last axis is the presence of a welfare state. The welfare state is often conflated with socialism, but they are distinct from each other. Hayek explicitly endorses a welfare state in The Road to Serfdom (pp. 147–149), after all!  You can have a country that is highly capitalist, has free markets, engages in free trade, but also has a large welfare state. The Nordic countries, so often pointed to by socialists like Bernie Sanders as examples of a desirable system, certainly have large welfare states. But they also are highly capitalist, engage in free trade, and have free markets – to an overall greater extent along all these axes than the United States!  Treating all of these different ideas as though they lay along a single axis can be very misleading. Many Americans want a more robust welfare state. Because so many people envision economic policy on a single axis, they might mistakenly assume that “welfare state” and “socialism” both exist on this one axis and on the same side. So, it seems to them that wanting a stronger welfare state means they must be opposed to capitalism, free trade, and free markets. Separating some terms helps avoid this common pitfall.   As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Cooperation is both the most fragile and the most necessary condition of political life. It is fragile because individuals and groups often pursue short-term gains at others’ expense, yet it is essential because no political community endures without mutual accommodation and understanding. Politics, as Aristotle taught, is the art of living together—not the sum of private interests but the shared effort to sustain a common life. The enduring question is how cooperation survives amid constant temptations to betray, deceive, or act unilaterally. One answer lies in reciprocity. Robert Axelrod’s The Evolution of Cooperation revealed what statesmen have long intuited: strategies that reward cooperation and punish defection generate stable patterns of trust over time (pp. 3–5). Although based on computer models of the Prisoner’s Dilemma, Axelrod’s insights resonate deeply with political issues. His logic parallels the work of Robert Putnam, Vincent Ostrom, and Elinor Ostrom, who show that reciprocity, trust, and rule-bound cooperation sustain political communities against division and decay. Tit-for-tat thus offers more than a theory—it provides a foundation for genuine political collaboration. Axelrod and the Evolution of Cooperation Robert Axelrod’s The Evolution of Cooperation explored how cooperation can emerge among self-interested actors. The puzzle was the Prisoner’s Dilemma, in which two rational players tend to defect even though cooperation would benefit both (pp. 8–12). Axelrod examined the repeated version of the game, inviting scholars to submit computer programs to compete in the simulation. The simplest entry—Anatol Rapoport’s tit-for-tat—won (p. 32). It began with cooperation, mirrored the opponent’s moves, punished defection, and returned to cooperation once the opponent did the same. Its strength lay in clarity and balance: it inspired trust, deterred exploitation, and forgave quickly (pp. 54–56). Axelrod concluded that repeated interaction allows cooperation to emerge without altruism or coercion. Tit-for-tat—friendly, retaliatory, forgiving, and straightforward (p. 58)—demonstrated how reciprocity can sustain stable relationships over time. Politics mirrors this dynamic: parties compete across elections, legislators bargain across sessions, and nations negotiate for generations. The “shadow of the future” shapes their choices, reminding political actors that betrayal today invites retaliation tomorrow, while restraint and cooperation build enduring trust. From Civic Trust to Polycentric Governance–Reciprocity in Practice. Robert Putnam and Vincent Ostrom each deepened the understanding of reciprocity as the foundation of political cooperation, connecting Axelrod’s abstract model to the lived reality of civic and institutional life. In Making Democracy Work, Putnam examined Italy’s regional governments, which shared identical formal structures yet produced starkly different outcomes. The North’s centuries-old culture of guilds, cooperatives, and local associations fostered trust and reciprocity, while the South’s hierarchical and patronage-based society bred suspicion and fragmentation (pp. 81–88, 115–17). The key variable was social capital—the networks of mutual obligation that make cooperation habitual rather than exceptional. Where reputations mattered and interaction was frequent, tit-for-tat dynamics produced trust and stability; where distrust prevailed, institutions decayed despite identical designs. Vincent Ostrom expanded this insight into the domain of institutional design. In The Meaning of American Federalism, he portrayed political life as polycentric, a field of overlapping centers of decision-making, from local governments to courts and associations (p. 52). Cooperation, he argued, emerges not from hierarchy but from negotiation among equals who must rely on reciprocity rather than coercion (pp. 59–63). Each encounter (whether a city bargaining with a water district, a court reviewing an agency, or citizens deliberating in associations) mirrors an iterated game in which trust, once earned, compounds across arenas, and betrayal carries reputational costs that ripple through the system. Together, Putnam and Ostrom demonstrate that reciprocity is both cultural and structural, arising from the habits of civic life and the design of institutions that reward cooperation and constrain opportunism. Political communities flourish when reciprocity becomes the common language of governance—woven into daily practices, institutional arrangements, and the moral expectations that bind citizens and officials alike. Elinor Ostrom and Governing the Commons Elinor Ostrom provided the theory of reciprocity with empirical depth in Governing the Commons, challenging the prevailing belief that shared resources must be either nationalized or privatized to prevent overuse (pp. 1–2). Through studies of irrigation systems, fisheries, and forests, she showed that communities can sustain common resources through self-governance. Their success rested on reciprocity, which involved rules for contribution, limits on use, and proportional sanctions for violations (pp. 90–93). Cooperation was rewarded, defection punished, and redemption allowed. Her design principles (clear boundaries, collective choice, monitoring, and conflict resolution) embody the logic of tit-for-tat, proving that reciprocity can be institutionalized as a rule of governance (pp. 102–02). Ostrom’s findings reveal that when reciprocity erodes, commons collapse; when maintained, communities flourish without central coercion (pp. 143–46). Reciprocity bridges the gap between individual rationality and collective order, showing how cooperation can endure through shared norms rather than imposed authority. Reciprocity and the Renewal of Political Cooperation Axelrod, Putnam, and the Ostroms converge on a single insight: reciprocity sustains political life. Axelrod supplied the model, Putnam the civic culture, Vincent Ostrom the institutional framework, and Elinor Ostrom the empirical evidence. Politics is a web of repeated interactions in which actors can cooperate or defect, and the “shadow of the future” encourages restraint and rewards trust. Stability arises not from coercion but from shared norms of reciprocity and proportional response. Tit-for-tat captures the essence of politics—firm yet forgiving, deterrent yet hopeful. It accepts conflict but contains it within a framework that preserves community. Reciprocity, in this sense, is not merely moral but constitutional: the hidden grammar by which free individuals sustain a common life together. Yet this grammar is under strain. Polarization, distrust, and the erosion of civic norms tempt actors to defect for short-term gain, each betrayal weakening the foundations of cooperation. Axelrod warns that short-term advantage breeds long-term isolation (p. 176); Putnam demonstrates that declining social capital erodes reciprocity (pp. 185–86); and the Ostroms reveal that when trust and proportional enforcement are absent, governance collapses into coercion or chaos (Governing the Commons, p. 179). Reviving cooperation requires restoring reciprocity. Institutions must reward cooperation and punish betrayal proportionately; civic culture must rebuild trust through repeated engagement. Political community depends not on perfection but on predictability—on beginning with trust, responding firmly to defection, and welcoming renewed cooperation. Reciprocity remains the logic of living together in freedom. Conclusion Tit-for-tat in politics is the story of community itself. From Axelrod’s simulations to Putnam’s civic traditions and the Ostroms’ studies of governance, the lesson is constant: reciprocity sustains political life. Politics cannot eliminate conflict or rest on goodwill alone, but it can cultivate reciprocity—beginning with trust, responding firmly to betrayal, and forgiving when cooperation returns. This balance is the art of politics and the condition of its endurance. A community rooted in reciprocity grows in trust, while one ruled by suspicion decays; tit-for-tat is thus not merely a strategy but the enduring logic of living together in freedom.   As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)