It’s widely expected that the Fed will cut its target interest rate in September.  Nonetheless, Fed chair Powell insists that the decision will be data dependent.  Suppose the Fed decides not to cut interest rates in September—what will that imply about growth prospects for the fourth quarter of 2024?  Should that lead us to revise down our forecasts, or should we increase the forecast for growth? Here the answer depends on whether you are making a conditional prediction, or an unconditional prediction.  Let’s start with conditional predictions: Suppose that at the time of its September meeting, 12-month PCE inflation has been running at about 2.5% and the Atlanta Fed continues to predict that 3rd quarter real GDP will grow by 2.8% (which is its current prediction.)  Under those conditions, a Fed rate cut would likely lead to faster economic growth expectations than a decision not to cut rates. Now let’s look at an unconditional forecast.   Would I expect faster economic growth after a rate cut, or after a decision not to cut rates?  Probably the latter.  That’s because the Fed would only refrain from cutting rates in September if the economy were to show significantly more momentum than is currently expected.  A decision not to cut rates would likely reflect an unexpected change in the trajectory of the economy.  If all I knew was that the Fed opted not to cut rates, I’d raise my forecast for 4th quarter GDP growth. This is one reason why I don’t like to talk about interest rates.  When I hear pundits predicting a rate cut in September, I’m never clear as to whether they are making a prediction about the future path of monetary policy, or the future path of the economy.  I’d rather they tell me what sort of NGDP growth they expect over the next 12 months, but I almost never see that sort of prediction. (0 COMMENTS)

President Biden recently announced a plan to impose a 5% cap on yearly rent increases by large-scale landlords. Rent control is a notoriously counterproductive policy. The reason is simple: rent control disincentivizes the construction of new housing units because it makes that construction less profitable. And a reduction in housing supply is precisely what we don’t want if our goal is widespread affordable housing. Indeed, only 2% of surveyed economists agree that rent control has had a positive effect on “the amount and quality of broadly affordable rental housing in cities that have used them.” In an effort to avoid this outcome, Biden’s proposed price cap wouldn’t apply to new units. At first glance, it looks like this policy would deliver the best of both worlds. It aims to lower the price of existing units without discouraging the construction of new units. Yet while this proposal is an improvement over old-fashioned rent control, it suffers from two problems. First, it threatens to produce policy uncertainty. Imposing rent control with an exemption for new units still shows that policymakers are willing to cap rents on old units. Crucially, though, new units become old units. If developers are concerned that policymakers will continue to favor caps on rental increases for old units, they have reason to fear that any new units they build will eventually be subject to a cap. As a result, they will be disincentivized from building new units because their expected long-term profitability is lessened. Second, even if new construction is not disincentivized, rent control misallocates housing. Markets route resources to their highest value use. Suppose a seller has one bag of ice left. Alice needs the ice to chill her son’s insulin. Bob needs the ice to chill his daughter’s Mountain Dew. All else equal, Alice will outbid Bob for the ice—and this is the efficient outcome. It’s better that her son have chilled insulin than that Bob’s daughter have chilled Mountain Dew. But if price controls cap the amount that Alice is able to offer for the ice, she’s not able to outbid Bob and he may well end up with the ice instead. Housing is no different. Suppose Caroline is an extraordinarily talented surgeon who has received a lucrative job offer at a big city hospital. She’s looking for nearby housing. Dave is a professional Youtuber who films his content in an apartment near the hospital, although he could do his job anywhere. Without rent control, Caroline could outbid Dave for the apartment, which, again, would be the efficient outcome. It’s more important that a surgeon live near the hospital so that she can perform surgeries than that a Youtuber live near the hospital because he enjoys the local coffeeshops. But if rent controls cap the amount that Caroline is able to offer for the apartment, she’s not able to outbid Dave and he may well end up with the apartment instead. And if Caroline is unable to secure nearby housing, she may be unable to accept the job. This outcome is not only bad for her, it’s also bad for the patients who would have benefited from her surgical expertise. So while rent control with exemptions is better than rent control without exemptions, it is still unable to match the productive and allocative virtues of a free market.   Christopher Freiman is a Professor of General Business in the John Chambers College of Business and Economics at West Virginia University. (0 COMMENTS)

In this episode, host Russ Roberts welcomes Zvi Mowshowitz to discuss the merits of AI, causes for optimism and concern, AI as a ‘man of system’, and technology as a last bastion of the freedom to innovate. Artificial intelligence is still in its infancy, but learning to walk quickly. What was once just some chatbots has become a generative AI revolution, redefining the way we communicate, learn, and do business, and it’s just getting started. AI will consistently get smarter, but “smart” in what sense? In this episode, Mowshowitz makes the point that Google  isn’t “smart,” it just has much more access to information, so is generative AI different? Mowshowitz says yes, but it’s complicated. Generally, “smart” means a high level of comprehension, problem-solving, and creative ingenuity. For some questions, chatbots do indeed show comprehension, but Mowshowitz clarifies, that also has a lot to do with the way questions are asked. Roberts adds that he doesn’t know if Chat GPT can think of metaphors that change people’s conceptions of the world, that carry powerful intellectual creativity.  Mowshowitz is a short-term optimist. He puts concerns such as employment destruction to bed, arguing there are many jobs waiting under the surface. However, Mowshowitz distinguishes between short-term, but present and visible concerns such as misinformation and confusion over deepfakes and the long-term existential questions casting doubt over a prosperous partnership with AI. One such question surrounds creative intelligence itself. How ought AI be maintained? Is it even possible? On the other hand, a key point for AI optimism lies within the dial of progress. The dial of progress, as outlined by Mowshowitz on his Substack, Don’t Worry About the Vase, is a metaphorical dial displaying a collective decision on whether societies allow individuals to freely innovate and take risks, or require permission to be given and progress to be observed. In Mowshowitz’s eyes, AI is one of the few places that can shoot the dial up. Mowshowitz sees a scourge of red tape in various industries handcuffing prospective innovators, hence the flocking to AI, crypto, and CIS in general. In a sense, AI is a last bastion of opportunity for innovation, for ingenuity, for chaotic dynamism, and potential for rapid progress. …over the years we’ve moved from a United States that was very much on the, ‘You go out there and there’s an open field and you do more or less whatever you want to do as long as you don’t harm someone else or someone else’s property,’ to a world in which vast majorities of the economic system require detailed permissions that are subject to very detailed regulations that make it very, very hard to innovate and improve. And, I strongly agree with Andreessen and Cowen, and I think you and many other people, that this is very much holding us back. This is making us much less wealthy. This is making us much worse off. And that we would be much better off if we loosen the reigns.”   However, Mowshowitz is not a long-term AI optimist. On the contrary, he argues many optimist models don’t have gears, they’re too simple. To Mowshowitz, these models lack structure, coherence, and logical carryover. Not enough time is spent investigating the inner workings of the world within the model. “When you have AI in the brain, everything is in some way a metaphor for the problem. Marx writes this huge thing about how capitalism is terrible; we’re going to overthrow it; we’re going to create this Communist utopia. And then, he writes five pages that are completely vague about what the Communist utopia is going to be. We have many other people who do similar things. AI is another example of this where a lot of people are saying, ‘We’re going to build this amazing AI system that’s going to have all these capabilities and then we’re going to have this Brave New World where everything is going to be awesome for us humans and we’re going to live great lives.’ And then, they spend one paragraph trying to explain, ‘What are the dynamics of that world?’ Like, what are the incentives? Why is this system at equilibrium? Why do the humans survive over the long run given the incentives that are inherent in all the dynamics involved?” Roberts adds fuel to the pessimism, challenging the argument that AI will run amuck. Roberts suggestst AI will embody the goals of its creators, regulators, and users. In his words, the driverless car doesn’t aspire, the more likely concern is human beings using AI to perpetuate harm. He then points to Adam Smith’s man of system. The man of system believes he can solve problems within society by orchestrating individuals just like moving the pieces on a chessboard. However, what he doesn’t understand is the pieces all operate via their own principle of motion completely separate from the will of the man of system. Roberts believes AI faces the same problem, there are clear limits on AI’s ability to impact the world through control, namely a lack of information, particularly when it comes to subjective information which lies in the minds of individuals themselves. Mowshowitz goes on to state that the man of system is a human being, with a limited ability to access, store, process, and use information. AI does not have this limitation to the same extent. “You have to ask yourself: ‘Okay, what is going wrong in some important sense with the man of systems?’ The man of systems has a very limited amount of compute–in some important sense. Right? This man of systems is a man. He can only understand systems that are so complex, he can have all the data in the world in front of him, he can’t actually meaningfully use that much of it… And, he is trying to be one man dictating all of these things. He’s got a hopeless task in front of him. He’s going to fail…However, when we’re talking about the AI, it doesn’t necessarily have to think about the bigger picture…” The connecting vein between the dial of progress and the consistent failure of the man of system lies with individual separateness. There is no form of aggregate knowledge the man of system can access, because this only exists in the minds of distinct individuals. Because of this, progress flourishes when individuals, who have the most information on their specific strengths and preferences are left to pursue their vision for their own life. The man of system seeking to place his vision of progress on the rest of society fails to understand that individuals are ends in themselves, not means towards a unilaterally decided view of social welfare. However, this does not mean that shifting the dial of progress towards requiring permission to innovate is not harmful. Though separateness ensures the man of system is doomed to fail in pursuing his own aims, by fixing the rules of the game, the aims of the individuals treated as chess pieces can be easily sacrificed at the altar of nationalism, corporate monopoly, or power acquisition. Although AI has the potential to push the dial upwards, a man of system could very well utilize the same technology to stifle further innovation and overall human freedom.   Related EconTalk Episodes: Eliezer Yudkowsky on the Dangers of AI Nick Bostrom on Superintelligence Erik Hoel on the Threat to Humanity from AI Dan Klein on The Theory of Moral Sentiments, Episode 6 Michael Munger on Permissionless Innovation   Related LF Network Content: Katherine Mangu-Ward on AI: Reality, Concerns, and Optimism, Great Antidote Podcast Harari and the Danger of Artificial Intelligence, by Pierre Lemieux, at Econlib Accelerate Rather than Regulate Artificial Intelligence, by John O. McGinnis at Law and Liberty Neoliberalism on Trial: Artificial Intelligence and Existential risk, by Walter Donway, at Econlib ChatGPT and Economic Planning, by Pierre Lemieux, at Econlib (0 COMMENTS)

Nationalism is the support of one’s national interests, often to the detriment of other nations’ interests.  Protectionism and nationalism often go hand-in-hand as protectionist tariffs are seen as necessary for promoting and protecting national interests.   I am no nationalist (indeed, I regard it as an evil ideology on par with socialism and fascism); here I want to question the link between nationalism and protectionism.  I argue that, if one is a nationalist, one should oppose protectionism, as protectionism weakens the body politic and national unity. Protectionism, through tariffs and subsidies, aims to support various industries that are designated by the government as vital to serving national interests.  These can be military industries (shipping, arms manufacturing, key inputs and natural resources, etc), technologies (superconductors, AI research, etc), or goods necessary for national life (food, arts, entertainment, etc).  There is, of course, the mundane and general point that resources are scarce and that support of these industries necessarily comes at the expense of other industries.  This favoritism can sow the seeds of national discord and division, but it is unlikely to alone weaken the body politic.   Rather, what is likely more important is the fact that industries tend to cluster and become regional.  In technical terms, there are external economies of scale: firms may cluster together to take advantage of a common resource, reduce transaction costs, or reduce other costs, allowing them to produce more at a lower average cost.  Famous examples of these external economies of scale include Silicon Valley, Dalton Georgia, Detroit, or the biomedical research cluster in Boston Massachusetts.   The fact that industries cluster, rather than are spread out randomly, throughout a nation is what leads to protectionism weakening the body politic.  Certain regions of the nation are favored at the expense of other regions.  The other regions may be upset that they are being deliberately harmed at the expense of other groups.  In the language of Carl Schmidt, the “friend-enemy” distinction is no longer aimed at people outside the nation, but rather at the nation itself; the unity is severed as people within the nation start seeing other nationals as an “enemy.”  This internal disunity subsequently leads to internal discord and, in extreme cases, breaking up of the national identity. In the US, there are several examples of this regional disunity weakening the body politic.  Indeed, the American Revolution was partially fought because of protectionist tariffs.  In the list of grievances against “pretend legislation” contained in the Declaration of Independence, one of them is: “cutting off our Trade with all parts of the world,” a reference to the Navigation Acts.  The Navigation Acts favored British shipping and trade at the expense of Colonial trade.  In turn, this made the Americans feel discriminated against and lesser as British subjects.  Indeed, Adam Smith, himself a (cautious) supporter of the Navigation Acts, argued that they were a “stop in that great blood-vessel” of trade and will “bring on the most dangerous disorders upon the whole body politick” (Wealth of Nations Book IV, Chapter 7, Part III, page 605).  How right he was. After the Revolution, tariffs remained a source of debate among the Founding Fathers and early Congresses.  Some, like Alexander Hamilton, wanted tariffs to be for revenue and disrupt trade as little as possible.  Others, like James Madison and Thomas Jefferson, argued the new nation should use tariffs to try and compel Great Britain to open trade with the US.  Generally speaking, the Hamiltonian idea of a revenue, rather than a protectionist, tariff won out, although there were attempts at protectionism.  The most famous, and most dangerous, of these resulted in the Nullification Crisis.  Starting in 1816, the federal government began imposing protectionist tariffs to support Northern manufacturers, but at the expense of Southern manufacturers and farmers.  These tariffs culminated in the Tariff of Abominations of 1828.  The Southern States, in particular South Carolina, were outraged that the federal government was disadvantaging them so.  South Carolina openly challenged the federal government’s authority by declaring the tariff null and void within its borders.  Ultimately, the crisis was wound down in 1833 with a new bill that generally gave South Carolina and the southern states much of what they wanted.  But that event came dangerously close to fractionating the newly-formed nation (for a longer discussion of this history, see Clashing Over Commerce by Douglas Irwin, Chapter 2). More recently, such regionalization of industry was weaponized by China during the Trump administration’s trade war.  By favoring some industries at the expense of others, the administration opened the door for Chinese retaliation.  China retaliated by targeting US agricultural exports in regions that were also swing states.  These protectionist tariffs created divisions a supposed enemy could exploit to weaken the body politic.   In conclusion, nationalists should oppose protectionist tariffs given they weaken the body of nation.  Perhaps in a small, homogeneous nation-state, where there is little economic diversity, nationalism and protectionism could complement each other (although this is unlikely given that a tariff in such conditions would lead to a net reduction in national welfare).  But that is not the case for most nations of the world today, not least of all the United States of America.     Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

Economics education has major problems. Doctoral programs are churning out applied mathematicians and statisticians with little to no knowledge of price theory. At the undergraduate level, social control (“market failure!”) and activism (“inequality!”) have replaced careful reasoning about markets and politics. Very few programs instill in students an appreciation for the power and universality of the economic way of thinking. Economics curricula look the way they do because of decades of incremental and disconnected choices about topics and methods. These may have been defensible at the time. But the result is a course of study that leaves students ill-prepared to speak or write intelligently about economics. We need a reboot. Even at this late hour, there are enough good economists in positions of responsibility within the academy to make a difference. It’s time to remove the “dismal” from “dismal science” and rethink what we teach. We should start with our core texts. There’s no universally best syllabus for all schools. Different programs can emphasize different things, especially in their specialty subfields. But there are several texts that have stood the test of time and continue to offer deep insight. If I were responsible for designing a curriculum, here are the books around which I would build a program:   Introductory economics. Econ 101 is the most important course in the curriculum. As the accomplished economics educator Paul Heyne realized, we should teach the introductory economics class as if it’s the only one our students will take. Show them the big picture. Give them the key to unlocking the secrets of wealth and poverty. Convey the wonder and breadth of the economic way of thinking. Do this well and it won’t be students’ only class but the first of many. There are several good options for an Econ 101 text. But in my opinion one stands head and shoulders above the rest: Universal Economics by Alchian and Allen. From basic topics such as scarcity, property rights, and demand, to advanced topics such as price-searchers’ strategy, interdependencies, and even unemployment and inflation, two of the 20th century’s best economists guide readers through the subtleties of economic reasoning without excessive complexity or jargon.  Make no mistake, this is not an easy book. It demands significantly more from readers than, say, Mankiw’s widely used introductory text. But the effort is worth it. No other text does as good a job at teaching the fundamentals. If students stop taking economics after Econ 101, they will know all they need to for practical purposes. And if they progress towards a minor, major, or graduate work, they will have a stronger foundation from this book than any other currently available. As I wrote in a recent review, Universal Economics “should be required reading for all Bachelors and Masters students, as well as a prerequisite for doctoral study.”   Intermediate economics. Most intermediate courses are taught as watered-down PhD seminars. The abstraction and lack of relevance leave students confused and unprepared to solve real-world problems. Obviously, this is a mistake. While we should encourage our intermediate students to think more deeply about the assumptions and content of workhorse models, we must never lose sight of the goal: refining students’ analytical toolkit so they are prepared to think like economists. My favorite texts at this level are Steven Landsburg’s Price Theory and Applications, Hirshliefer et al.’s Price Theory and Applications, and David Friedman’s Price Theory: An Intermediate Text. All of them do a good job showing students what’s under the hood of the models they learned in Econ 101. However, they will not overly tax students mathematically. They also retain the all-important focus on problem solving. After a semester spent with one of these texts, students will be well on their way to competency as applied economists.   Advanced economics. It doesn’t much matter whether we consider “advanced” the final (elective) stage at the undergraduate level or the first (required) stage at the graduate level. Instead, what matters is the focus. An advanced economics course should help students cross the bridge from consuming economics to producing economics. That doesn’t necessarily mean scholarly papers. But it does mean sophisticated analyses of ongoing controversies among economists and contemporary problems in markets and politics. Avoid fashionable texts like Mas-Colell et al. and its knockoffs. If you must have a fancy presentation, Varian and Kreps are better. But keep in mind that even at the advanced level, very few students need to know the abstract mathematics of preference relations or equilibrium existence proofs. Rigor shouldn’t come at the expense of relevance. I recommend Gary Becker’s Economic Theory and Jaffe et al.’s Chicago Price Theory. Ideally, instructors will use them both. Becker’s text contains many topics Jaffe et al. don’t cover. Jaffe et al. go into a little more depth on the topics that overlap. Together, these books will help students critique and build partial-equilibrium models that are just complex enough to yield meaningful insights.   Mathematical economics. I dislike most mathematical economics texts. They usually do a poor job of explaining their relevance for practical economic reasoning. And they usually do a very poor job of rooting their models in economic intuition. A notable exception is a little-known book last revised in the year 2000: Silberberg and Suen’s Structure of Economic Analysis.  Every math econ text will introduce readers to and prove the envelope theorem. Silberberg and Suen is among the few that explains why it’s economically important. Although much of the presentation is dated—economists rarely use linear programming and matrix algebra to solve their models these days—the text still does a good job conveying the fundamentals of constrained maximization and comparative statics. Knowing these is essential for doing price theory at the highest levels.   Companion texts. Some good all-around texts to supplement the above are McCloskey’s Applied Theory of Price, Milton Friedman’s Price Theory, and George Stigler’s Theory of Price. When students get stuck, sometimes a different way of presenting the material can drive a point home. Augmenting core topics with the relevant sections from these books will help to build economic intuition. McCloskey’s in particular is valuable because the end-of-chapter problems are very good.   Problem solving. Unless you’re Gordon Tullock, the only way to get good at economics is by solving many problems. Although the economic way of thinking is simple, applying it is not easy. It will take lots and lots of practice. Consult Khan’s Price Theory Problems and De Meza and Osborne’s Problems in Price Theory for a thorough list of accessible yet challenging exercises. Those interested in graduate school should work through every problem in these books   Papers. Everything on Waddell’s and Williams’s lists. These are classic readings in economics that all advanced students and practitioners should know. I also highly recommend Mulligan’s recent papers, especially his price-theoretic perspective on externalities and his analysis of how public policy affects opioid consumption. Finally, if readers will excuse the self-promotion, I direct their attention to Salter and Cutsinger’s exploration of the state of price theory within the economics profession.   Fixing economics will take a lot of work. But it is work worth doing. These texts can help us get the job started. We have nothing to lose but our ignorance.   Alexander William Salter is the Georgie G. Snyder Associate Professor of Economics in the Rawls College of Business, the Comparative Economics Research Fellow at TTU’s Free Market Institute, a Senior Fellow with AIER’s Sound Money Project, and a State Beat Fellow with Young Voices. (0 COMMENTS)

In a recent post, Kevin Corcoran expresses skepticism about the desirability of Pigovian taxes.  He makes the following observation about taxes aimed at discouraging the consumption of unhealthy foods: One of my favorite recent explanations of this problem came from Scott Alexander. Alexander used the example of how in theory, taxes and subsidies could be used to nudge people into eating a healthier diet. But Alexander then goes on to note: You’re probably thinking this is an argument that vouchers + taxes/subsidies are a great solution. Nah. I’m saying that in principle they’re a great solution. In practice, they’ve failed spectacularly, because we subsidize the least healthy foods and restrict the production of healthy ones. After providing numerous examples of the kinds of subsidies and restrictions that result from the political process as it actually exists, Alexander concludes “Given our existing government, it shouldn’t be let within a light-year of getting to determine anybody’s diet. Speculating that maybe the people who administer the program will be virtuous competent individuals who act for the good of the public, is saying that the thing which has already happened won’t happen.” I’m not convinced that the consumption of unhealthy food creates negative externalities–so I don’t disagree with Alexander on this issue.  Unhealthy people collect more Medicare and less Social Security.  How it all nets out is hard to say.  I recall studies of smokers that suggest it’s roughly a wash.  So let’s set aside the food question, and consider goods that clearly do create negative externalities, such as the burning of coal. If we accept that some taxes will exist, it makes sense to raise the tax revenue in the most efficient method possible.  That means higher taxes on goods with negative externalities than on goods with positive externalities.  Unfortunately, the US government tends to do the opposite, heavily taxing work, saving and investment, but not the consumption of goods that emit CO2. Here in Orange County, the government recently adopted a congestion tax on the left two lanes of “the 405”.  I love this tax, and choose to drive in those two lanes when I travel to my libertarian social events in LA.  Some might argue that this is not a tax, as you are free to use the right 5 lanes.  Nonsense.  That’s like saying that a tax on gasoline is not really a tax because you are free to use a horse.  Drivers in the left 2 lanes must pay the congestion tax; it’s not an option.  The lanes are even separated by those flexible plastic poles. [As an aside, these tolled lanes do not substantially favor the rich.  I’ve observed that the kind of cars that drive in the pay lanes are very similar to those that drive in the free lanes.] This example shows that not all Pigovian taxes are a failure.  Other successes include congestion charges in cities like Singapore, London and Stockholm.  New York City recently decided not to implement its planned congestion charge, even though the history of these policy regimes shows they become much more popular after they are enacted. In a recent comment, Jon Murphy said: The pigouvian tax does raise some revenue, but that’s not its goal. The amount it raises is relatively small (in theory, none as all the revenue should be used to offset the dead weight loss from the externality). I disagree on two points: 1. I see Pigovian taxes as having two goals—revenue raising and negative externality reducing.   2. I don’t agree that in theory the revenue should be used to offset the negative externality.  Governments may do this for political reasons, but it’s not a good use of public funds.  I know of no theory that says this is a wise way to determine public spending. One other point.  There is a great deal of cynicism about the effectiveness of governments.  I share the cynicism, up to a point.  But many people draw the wrong conclusion from their cynicism. The phrase “getting to Denmark” in development economics refers to the idea of making your public sector as efficient and uncorrupt as possible.  In Denmark, even major airports and fire departments have been privatized.  Of course most countries are more corrupt than Denmark, which leads to a certain healthy skepticism about the role of government.  I share that skepticism. But cynicism can go too far, and veer into fatalism.  If we start believing that it’s hopeless to reform government, and that in the long run we’ll all end up with something as dysfunctional as the Venezuelan government, then it’s hard to see how we can make progress as a society.  The key is to move toward reform with eyes wide open as to the problem of public choice. Thus in the past I advocated that the party most opposed to taxes (presumably the GOP) might offer to support a carbon tax, but only if combined with offsetting reductions in some other tax.  Thus a carbon tax might be paired with ending the requirement that 401k funds must be withdrawn at age 73.  That tax reform package would encourage more saving and investment, and improve the environment. A cynic might say that such a win-win tax reform is impossible in our highly polarized society.  If true, then perhaps we will eventually end up like Venezuela.  But I recall a time when this sort of bi-partisan reform was possible.  In 1986, Democrats and Republicans agreed to reform the income tax system by combining a Republican goal (much lower tax rates) with a Democratic goal (many fewer loopholes.) If the cynics are right about the inevitability of government corruption, then there is no hope for the future.  More and more inefficiencies will build up over time.  I understand that at the current moment in time there is little or no hope for bipartisan reforms.  But I also believe that economists should continue to explain the most efficient way to run a fiscal regime, in the hope that at some point in the future the political tide will turn back toward a more idealistic zeitgeist. (0 COMMENTS)

Jon Murphy recently posted an explanation for why he is skeptical about the use of taxes to offset market failures. His reasoning was that the use of tax policy will inevitably be distorted by political incentives, and such incentives may not be at all aligned with what is socially beneficial. I agree this is a major issue. One of my favorite recent explanations of this problem came from Scott Alexander. Alexander used the example of how in theory, taxes and subsidies could be used to nudge people into eating a healthier diet. But Alexander then goes on to note: You’re probably thinking this is an argument that vouchers + taxes/subsidies are a great solution. Nah. I’m saying that in principle they’re a great solution. In practice, they’ve failed spectacularly, because we subsidize the least healthy foods and restrict the production of healthy ones. After providing numerous examples of the kinds of subsidies and restrictions that result from the political process as it actually exists, Alexander concludes “Given our existing government, it shouldn’t be let within a light-year of getting to determine anybody’s diet. Speculating that maybe the people who administer the program will be virtuous competent individuals who act for the good of the public, is saying that the thing which has already happened won’t happen.” But there’s another reason why I am skeptical of this approach, one that holds even if we assume away all problems about political incentives. But first, here’s a (seemingly) random digression – what is the impact of time-restricted feeding on how much people weigh? Time-restricted feeding (also known as intermittent fasting) is a somewhat popular method people use to help lose weight. Time windows vary, but the most common method is called the 16:8 method, where one goes 16 hours between eating, and consumes all their food during the remaining 8 hour window. A person who does this might skip breakfast, wait until noon before they consume anything with any calories, and then eat between noon and 8pm. Then, they’d wait until noon the next day to start eating again.  Diet and nutritional studies are notoriously difficult to carry out and often have very divergent findings. But there was a really interesting meta-analysis that looked at the effect of time-restricted feeding among Muslims who observe Ramadan. This is the practice of fasting between sunrise and sunset which, as the study notes, could be a fasting window of between 9 and 22 hours depending on how far one lives from the equator. It’s also a practice observed by hundreds of millions of people, which gives a much better sample size than most nutritional studies.  So, what effect does this have on people’s weight? The answer is “all of them.” It has every possible effect on people’s weight. Some people who observe Ramadan fasting lose weight, others maintain their weight, and others actually gain weight. Some people lose weight because restricting the time they have available to eat leads to them consuming fewer calories than they otherwise would. On the other side, some people approaching the end of their fasting window find themselves in a physical state known, to use a technical term, as being “insanely fricking hungry” and will gorge themselves when their eating window begins, ultimately consuming more overall calories than they would have if they had just eaten throughout the day. And for others, these two effects basically balance out and their total caloric intake remains unchanged. As the meta-analysis put it, “Effects of Ramadan fasting on weight vary between individuals, ranging from weight loss to weight gain, depending on whether or not energy intake in the non-fasting period under- or over-compensates for the lack of energy intake during the fasting period.” So what does this have to do with the use of taxes and subsidies to offset market failure? Well, the use of such taxes and subsidies implicitly assumes that people will respond to taxes or subsidies in a specifically predictable and desired way – and people can in fact react in all kinds of different ways to taxes and subsidies, just as people’s total calorie intake can respond in every kind of way to time-restricted feeding.  One famous example of this is the cobra effect. As I have described it before: The British government wanted to reduce the number of cobras [in India], and so decided to pay people for every cobra they killed. Seems reasonable, right? But the policymakers didn’t anticipate how people would react. Many people simply began to breed cobras in large numbers, in order to kill them and turn in their skins for money. Eventually, the British government realized what was happening and terminated the program. This in turn led the snake breeders to release their now worthless breeding stock. As a result, the cobra population actually increased.  Culling the cobra population was judged to produce positive externalities, and was thus judged to be underprovided on the market. Policymakers subsidized the killing of cobras because they anticipated it would lead to an increased amount of cobra hunting, thus offsetting the market failure by increasing cobra culling to a socially optimal level. But people reacted differently than policymakers anticipated. Instead of cobra hunting, people began cobra breeding. So the attempt to use subsidies to decrease the cobra population had the opposite effect.  But is this just some isolated case? Or is there reason to believe that the inability to predict the specific ways people will respond to taxes and subsidies is the rule rather than the exception? In my extended review of Jeffrey Friedman’s book Power Without Knowledge, I outlined an argument Friedman made that this issue is the rule rather than the exception, and why this undermines the arguments made by economists with technocratic aspirations, who imagine they can skillfully guide behavior across society by just using taxes and subsidies to create the “right” incentives. Friedman argued that “incentives alone cannot actually produce behavioral predictions or, therefore, policy advice.” This, Friedman argues, is because “knowing that the perceived incentive will affect these agents’ behavior is useless—for predictive purposes—if the economist does not also know exactly how it will affect it. But this requires knowing exactly how agents will interpret their situations in light of the perceived incentive. Only if they interpret their situations the way the economist does will the incentive ‘matter’ in a way the economist will be able to predict.” But, as Friedman goes through great pains to argue, different people perceive things in different ways and think in different ways, which means the way people will respond to any given incentive will be variable and unpredictable. As a result, economists (and policy makers more generally) lack “the ability to predict future agents’ subjective interpretations of how to behave under future circumstances as the agents themselves will perceive and interpret them.”  A book length demonstration of this very issue is Scott Hodge’s recent book Taxocracy: What You Don’t Know about Taxes and How They Rule Your Daily Life. It’s a fairly fun and breezy read. Hodge outlines all kinds of examples over the course of centuries where people’s responses to taxes – responses that were not anticipated by the policymakers levying the tax – have created all kinds of unanticipated outcomes. Some of them are merely amusing, like how some old houses in France are built rather like mushrooms – relatively small and narrow first floors with wider floors above. Homes were built this way because “property taxes were based on the square footage of the land a house occupied. So, people cheated on the tax collector by designing a small ground-floor level and wider stories above it.”  But other times the results are less amusing and more disastrous. King William III instigated a tax on windows, on the assumption that dwellings and buildings with lots of windows were likely to be owned by the wealthy, and thus this would serve as a way to tax the rich. However,  the tax “led to especially wretched conditions for the poor in the cities, as landlords blocked up windows and constructed tenements without adequate light and ventilation.” Some buildings were constructed with no windows on some floors leading to the “propagation of numerous diseases such as dysentery, gangrene, and typhus.” Granted, in neither of those cases were the taxes passed as a means of correcting a market failure. But the fundamental problem – that people will react to taxes (or subsides) in all kinds of ways that you can’t predict – is just as true whether the taxes (or subsidies) are meant to correct a market failure or are simply for the more generic purpose of raising revenue. Friedman argues that this undercuts the arguments in favor of technocratic policy – including the use of taxes and subsidies to alter behavior in a way that corrects market failure. Friedman wrote “if we have reason to think that we cannot accurately know the results of a certain action (such as a specific technocratic action), then our knowledge of the beneficial outcome of taking that type of action cannot serve as the rationale for it, as technocracy demands, since we lack such knowledge. Likewise, if the defender of technocracy concedes that it is likely to produce unintended consequences but allows, too, that she does not know what they are likely to be, then her putative knowledge of the beneficial results of technocracy (the prevention, alleviation, and solution of social problems) cannot serve as the rationale for it, for she lacks knowledge of what lies on the cost side of the ledger.”  So even without politically misaligned incentives (a very real problem in its own right) there is another problem with attempting to use taxes and subsidies to correct market failure. Because, paraphrasing Friedman, if we have reason to think we cannot accurately know the specific ways people will change their behavior in response to Pigouvian taxes or subsidies, and I think we do in fact have good reason to think this, then the claim that claim that the taxes or subsidies will alleviate a market failure cannot serve as the rationale for that policy. (0 COMMENTS)

Neuroscientist and author Sam Harris of the podcast Making Sense talks with EconTalk’s Russ Roberts about rising Jew-hatred in the West and what Harris sees as the dangers of radical Islam and Jihadism. The post Sam Harris on Jew-Hatred, Radical Islam, and the West appeared first on Econlib.

House Budget Committee Seeks to Reform Emergency Spending as Senate Prepares to Raid Rainy Day Funds by Romina Boccia and Dominik Lett, Cato at Liberty, July 24, 2024. Excerpt: The Senate is ready to raid the figurative emergency rainy day fund again. As we highlighted in a recent Debt Digest, Senate Appropriations Chair Patty Murray (D‑WA) and Vice Chair Susan Collins (R‑ME) have reportedly struck a deal to increase fiscal year (FY) 2025 discretionary spending by $34.5 billion by designating some ordinary spending as emergency funding. This is a common trick legislators employ to get around spending limits when sticking to a budget seems too politically difficult. Over at the American Enterprise Institute, Jim Capretta has pointed out how Congress has already fully reversed all of the $1.3 trillion in 10-year savings from the June 2023 Fiscal Responsibility Act (as scored by the Penn Wharton Budget Model) when it included emergency designations in FY 2024 funding bills and passed the unpaid-for Ukraine-plus foreign aid bill.   Home-Based Businesses Win Relief From Regulators by J.D. Tuccille, Reason, July 26, 2024. Excerpt: Recent years have seen a renewed surge in new small business start-ups after decades of slowing entrepreneurialism. Spurred by pandemic-era closures of large employers and in need of side hustles in the era of a higher cost of living, Americans are eager once again to be their own bosses. Standing in the way, though, are local regulations that often make it difficult to launch businesses out of private homes, where most startups are born. Fortunately, some localities are slowly getting out of the way. (italics in original)   The FTC Goes Evidence-Free by Joel Zinberg, Wall Street Journal, July 23, 2024. In this report, which addresses pharmacy benefit managers, the FTC argues that “amidst increasing vertical integration and concentration,” PBMs “may be profiting by inflating drug costs and squeezing Main Street pharmacies.” The qualifier “may” appears throughout the report, signaling a lack of empirical evidence and analysis to support its conclusions about PBMs. In fact, many studies, including several by the FTC itself, contradict those conclusions. PBMs are private businesses that manage prescription drug benefits on behalf of insurance-plan sponsors. They negotiate with drug manufacturers and pharmacies. Manufacturers trade lower prices for formulary access and more sales. Pharmacies trade discounts and increased retailing requirements for favorable placement in plan networks and more customers. This selective contracting allows PBMs to obtain rebates and discounts that lower drug costs. It also allows them to encourage the use of drugs that are cheaper (such as generics), more effective, or both. While plan sponsors aren’t required to contract with PBMs, most do, suggesting they value PBMs’ services. My own study for the Competitive Enterprise Institute, as well as studies by University of Chicago economist Casey Mulligan, found that PBMs foster competition that lowers drug costs. Mr. Mulligan estimates that PBMs produce at least $145 billion in annual value to society beyond their resource costs. The whole op/ed is gated.   Effects of the Immigration Surge on the Federal Budget and the Economy Congressional Budget Office, July 2024. Excerpt: The increase in immigration boosts federal revenues as well as mandatory spending and interest on the debt in CBO’s baseline projections, lowering deficits, on net, by $0.9 trillion over the 2024–2034 period (see Table 1).2  Some of the effects on the budget result from the increase in the number of people paying taxes and collecting federal benefits. Other budgetary effects stem from changes in the economy over that period that are brought on by the surge, including increases in interest rates and in the productivity of workers who are not part of the surge. Venezuela: How Monetary Mismanagement Contributed to Maduro’s Weakness by Daniel Raisbeck, Cato at Liberty, July 26, 2024. Far less speculative are the root causes of Maduro’s current predicament. It is thus fitting to ask how the once-formidable Chavista regime, which was so certain of its grip on power that it attempted to export its revolution aggressively across the region, ended up with its back against the wall on its home turf, even in Hugo Chávez’s old regional strongholds. The following graphs, pertaining solely to inflation and currency devaluation, will provide some hints.   (0 COMMENTS)

“Triangle Man” is now 100 years old. Long-time University of Chicago economist Arnold Harberger turned 100 years old today. Unless I am mistaken, he is still going relatively strong, even in the classroom. The Wikipedia article on some of Harberger’s accomplishments is actually quite good and so I won’t try to restate them. Rather, I’ll tell 3 stories about my interactions with, and observations of, Al. Number one: I first met Al at a cocktail party at the home of my colleague Ron Hansen in the late 1970s when I was a young assistant professor of economics at the University of Rochester’s Graduate School of Management (now the Simon School.) To me he was already a god because of ability to use basic price theory to reach important conclusions. But he didn’t act like a god. He was a normal and very welcoming human being. Number two: When I was at the Cato Institute in 1979, Al helped me with data for an article that my friend Roy Childs was writing. Here are the details. Number three: While the Chatham House rule applies to proceedings at the Mont Pelerin Society meetings, I can hue to the spirit of the rule in telling this story without naming names. At one of the events at the MPS meetings at the Hoover Institution in January 2020, there was a breakfast, if I recall correctly, at which Al spoke; he talked about what was going on in Chile. In the 1970s and later, Harberger had been very important, much more important than Milton Friedman, in helping move Chile’s economy in a free-market direction. I discuss his role very briefly in my review of Sebastian Edwards’ excellent 2023 book, The Chile Project: The Story of the Chicago Boys and the Downfall of Economic Liberalism.  (I would guess that his support of the Chicago Boys, even though he didn’t support Pinochet, is one reason he never was awarded the Nobel Prize in economics.) He had a long and tender relationship with various “Chicago Boys” from at least two generations and it was apparent in the way they questioned him and, to put it bluntly, showed their love for him. If you’re wondering why I call him “Triangle Man,” check out this link. It’s a nice extensive and understandable treatment of Harberger’s classic 1954 article in the American Economic Review, “Monopoly and Resource Allocation.” Economists had been stating for decades that monopoly caused deadweight loss but he was the first to try to estimate the size of the deadweight loss. Harberger found that, for U.S. manufacturing, it was unlikely to be above 0.1 percent of GNP. (Gross National Product was the conventional measure of the size of an economy at the time.) There are, to be sure, various criticisms of his argument and estimate. The point is that he did it and no one before him had done so. The deadweight loss from monopoly is typically measured by a triangle. Thus the nickname, one which was used in various skits put on by University of Chicago students and one that he wore proudly. Note: The pic above is of Al Harberger and me after his breakfast talk. (0 COMMENTS)