As if Washington was not busy enough internationally, serious Korea analysts wonder if Northeast Asia could erupt in flames. North Korea is rewriting its constitution to drop plans for peaceful reunification with the Republic of Korea, declaring the South to be the North’s “primary foe and invariable principal enemy.” Worse, Pyongyang celebrated the approach of Christmas by staging another intercontinental ballistic missile (ICBM) test, its fifth in just one year. Let’s be clear at the outset, ICBMs serve only one purpose for the Democratic People’s Republic of Korea (DPRK): to target the U.S. homeland with a credible nuclear threat and deterrent. Not long-ago Supreme Leader Kim Jong-un was writing “love letters” to President Donald Trump and working to warm up relations with the South. However, after the failed Hanoi summit in February 2019, Kim retreated, essentially ending dialogue with the United States and the Republic of Korea (ROK). The Biden administration’s efforts to restart talks have gone nowhere, as Kim accelerated his missile development program, reinforced ties with China, and revived a once moribund relationship with Russia. In mid-December Washington and Seoul felt it necessary to warn the DPRK that a nuclear attack “is unacceptable and will result in the end of” Kim’s regime. Although minuscule by Chinese and Russian standards, North Korea’s nuclear arsenal may soon raise Cold War dilemmas when it comes to establishing deterrence. America’s and South Korea’s overwhelming military superiority makes Pyongyang’s forces vulnerable to a preventative or preemptive strike. To the extent that Kim believes his forces are essentially “use it or lose it,” he will be tempted to launch if he believes an allied attack might be in the offing. The result would be catastrophic. Writing about the Soviet Union, Thomas Schelling applied game theory to the international nuclear standoff. As if the duelists, as he envisioned them, “were assured of living long enough to shoot back with unimpaired aim, there would be no advantage in jumping the gun and little reason to fear that the other would try it.” Thus, he suggested, governments should protect weapons before people. In the same way, today’s national antagonists should be wary of seeking first strike and regime decapitation capabilities. Doing so might precipitate the very war everyone wants to avoid. As with the DPRK. “Why is North Korea America’s problem? Such is the price Americans pay for what is known in Washington as ‘global leadership.'” All of which is a good reason to ask: Why is North Korea America’s problem? Such is the price Americans pay for what is known in Washington as “global leadership.” For most of America’s existence events in Pyongyang didn’t matter much. The Korean kingdom was famed as a “shrimp among whales,” helplessly buffeted as the Chinese, Japanese, and Russian empires wrestled for influence, resources, and territory. After Tokyo’s victory over the dying Qing dynasty in 1895, the Korean peninsula came under Japan’s sway. With Tokyo headed to catastrophic defeat a half century later Washington and Moscow agreed to occupy the peninsula, temporarily dividing it along the 38th parallel. As the Cold War went into deep freeze, however, the border hardened, and two competing Korean states emerged in 1948. The Truman administration (1944-53) believed the peninsula to be of minimal strategic value—a judgment which even General Douglas MacArthur shared—and withdrew U.S. military forces from the South. Washington also refused to provide Seoul with heavy weapons, given then President Syngman Rhee’s threats to march north and forcibly reunify the peninsula. In the North Moscow chose Kim Il-sung, who had fought against the Japanese, as local frontman. Possessing a ruthless will to rule, he took control and convinced Joseph Stalin to approve an invasion of the South. Launched in June 1950, the conflict drew in the United States and then China, ending in an armistice in July 1953. Washington agreed to a “mutual” defense treaty with and left a troop garrison in the ROK, both of which remain more than seven decades later. In the early years South Korea’s survival depended on U.S. support. Seoul was an impoverished, unstable dictatorship. Only under President, formerly General, Park Chung-hee’s authoritarian rule in the 1960s did the South begin its economic take-off. His assassination in 1979 led to an equally repressive reign under another general, Chun Doo-hwan. By then South Korea was far ahead of the North economically. And there was little reason to believe that either Moscow or Beijing would support another North Korean invasion. This would have been a good time to shift defense responsibilities to Seoul. Indeed, President Jimmy Carter (1977-81) proposed withdrawing American forces, but his idea triggered wailing, gnashing of teeth, and rending of garments on a Biblical scale in both Seoul and Washington. Even members of Carter’s own administration resisted. Although incoming President Ronald Reagan (1981-89) reversed Carter’s policy, it was the end of the Cold War that would bring change to the Korean peninsula. Why could not a democracy with twice the population and 30, 40, and eventually 50-times the economic strength of its antagonist defend itself? Publicly a South Korean official declared that his nation could not spend more on the military since it had education and health care needs, apparently assuming the United States did not. Privately, South Korean policymakers admitted that the question was hard for them to answer satisfactorily. And the disparity between the two Koreas only grew over the years. Yet until Donald Trump was elected in 2016, no other U.S. official raised the question. With America wallowing in debt, why not a little burden shifting to rather than sharing with prosperous and populous allies? However, when Trump challenged the conventional wisdom, hysteria again enveloped both capitals. Proposing that a U.S. ally use its own wealth and deploy its own manpower to protect itself from foreign threats, rather than expect Americans to come rushing to its defense, was treated as sacrilege by the U.S. military-industrial-intellectual complex. There’s no doubt that the DPRK is an unpleasant actor. Kim Il-sung consolidated power by eliminating competing factions linked with South Korean communists as well as the USSR and China. He built a personality cult eventually exceeding those of Joseph Stalin and Mao Zedong and created a totalitarian state that stood alongside Albania in arbitrary brutality. When I visited in 1992 the North appeared to be a Potemkin country. Pyongyang had an airport without airplanes, roads without cars, and streets without street signs. There were propaganda pictures, posters, and banners in every office and home as well as on every building, over every street, and in every field. Overpowering was the utter grayness with a hint of menace filling the air. Freedom of choice was reduced to choosing which of Kim’s likenesses to pin to one’s clothing. Even today, the North remains at or near the bottom of every international human rights ranking. At least when I first visited, there was only a whisper of nuclear ambitions. But this would soon explode into a refrain of roars, spawning an international crisis and triggering a tsunami of worries, meetings, threats, deployments, agreements, and, inevitably, failures. The Clinton administration (1993-2001) considered launching military strikes, a step vehemently opposed by South Korean officials who feared such action would trigger Korean War II. When Kim died in July 1994 he was succeeded by his son, Kim Jong-il. The latter had pushed aside an uncle and younger half-brother to seize the throne. Despite his lack of revolutionary pedigree and aversion to public speaking, Kim the son would settle in as “Dear Leader,” pushing both nuclear and missile programs forward. Kim Jong-il began thinking of the succession only after a stroke in August 2008. In turn, he selected his son Kim Jong-un over two older male siblings. But upon his death three years later, many observers believed that Kim Jong-un was likely to end up as merely one of many in a system of collective rule or even as a frontman for others. Instead, the latter proved to be no less ruthless than his grandfather, firing party grandees, disappearing military leaders, executing his uncle, and assassinating his half-brother. Bolstered by his younger sister, the ostentatiously belligerent Kim Yo-jong, the Kim dynasty appears to be in firm control to this day. Kim Jong-un spent some time in school in Switzerland, during which he evidently gained an appreciation for both the Chicago Bulls and market-based economies. This sparked faint hope that he might be a liberalizer, as he welcomed flamboyant NBA basketball player Dennis Rodman, dabbled with economic reform, enjoyed South Korean K-Pop, showcased his attractive wife, and flirted with Donald Trump. However, after the Donald/Jong-un relationship hit the rocks, so did Kim’s liberal impulses. Today his regime jails teens caught singing the same songs once performed in concert in Pyongyang. Unfortunately, the ruling Kim has turned his small, beleaguered state into a nuclear power, accelerating both missile and nuclear developments. The North possesses at least enough fissile material to produce 45-55 weapons. Some estimates run twice as high, but no one outside of Pyongyang knows the actual number and the regime is expanding its arsenal. At the high end, the Asan Institute for Policy Studies and Rand Corporation have warned that the DPRK could possess as many as 242 weapons before the decade’s end, which would make it a serious second rank nuclear power, ahead of the United Kingdom, India, and Pakistan. Today, Kim is increasing the variety as well as size of his nuclear holdings. He is developing tactical nukes, as well as submarine-launched and intercontinental ballistic missiles. Moreover, the regime is threatening to strike first with nukes, suggesting a willingness to use them offensively. Last year, the Supreme People’s Assembly, Pyongyang’s rubber-stamp legislature, formally legislated North Korea’s nuclear status. Kim explained: “As long as nuclear weapons exist on Earth, and imperialism and the anti-North Korean maneuvers of the United States and its followers remain, our road to strengthening our nuclear force will never end.” Indeed, he added, his nation’s nuclear role is “irreversible.” Until now the potential cost of the U.S. commitment to the ROK was serious but limited. Going to war would risk military forces deployed to the peninsula but not much beyond. North Korea, not America, would be the principal battleground and bombing target. However, Pyongyang’s pairing of nuclear weapons with shorter-range missiles puts U.S. territories, interests, and allies at risk because the ICBMs under development could even reach the American homeland. Thus, in the not-too-distant future Pyongyang will be able to credibly threaten the destruction of U.S. cities. Washington’s stake in an inter-Korean conflict would become almost infinite. Of course, with credible threat comes deterrence. The threat has never actually been a DPRK first strike. The North has never been seriously interested in attacking America. Rather, Pyongyang’s objective has been to prevent America from striking the North. In 1950 the United States intervened after North Korea’s invasion of the South, driving the former’s forces north and overrunning most of the DPRK. Then Beijing intervened to save Kim Il-sung’s reign. Today China is unlikely to fight America over North Korea. Instead, the North’s new deus ex machina could be the threat of nuclear retaliation if Washington makes preparations to destroy the Kim dynasty. As Thomas Schelling might point out, the U.S. president can now ill afford to play geopolitical chicken. After all, in that case nothing would be more important than preventing the incineration of American cities. Collaterally, the US-ROK alliance would be under extreme pressure and might not survive. Concern over the viability of so-called extended deterrence has created a cottage industry of analysts and consultants, reassuring Seoul that Washington solons are truly willing to risk their nation’s destruction to protect the ROK. In April of 2023, this effort culminated in the “Washington Declaration,” an outgrowth of President Joe Biden’s summit with South Korean President Yoon Suk-yeol. As the two presidents observed: “The ROK has full confidence in U.S. extended deterrence commitments and recognizes the importance, necessity, and benefit of its enduring reliance on the U.S. nuclear deterrent.”1Of course, Yoon could hardly say anything else, but every step in North Korean nuclear development makes the statement less believable. Perhaps unsurprisingly, the vast majority of South Koreans express support for developing their own nuclear weapons. Elite political support lags but has been increasing. Indeed, last January President Yoon Suk-yeol observed that “if the issue becomes more serious, we could acquire our own nuclear weapons, such as deploying tactical nuclear weapons here in ROK.”2 No doubt, such a course would set off geopolitical tremors. Washington would have to consider allowing another exception, like India, to its nonproliferation policy. Beijing would be unhappy and might strike back politically and/or economically. Many Japanese likely would want to match the ROK and other nations, perhaps Australia, might also consider the possibility. Despite such consequences, a South Korean bomb still might be better than the alternative. After all, better the South than America be at risk to defend the South. The possibility of Seoul going nuclear would encourage Beijing to put more pressure on the DPRK to restrain the latter’s nuclear activities. Moreover, a South Korean nuke would also help constrain the PRC, should it grow more aggressive. Nevertheless, this possibility horrifies U.S. policymakers, who seem passionately devoted to the policy of risking Honolulu, Los Angeles, Chicago, and perhaps many more American cities to protect Seoul. On few issues is there such unspoken unanimity, with alternative views dismissed out of hand. Why are Washington solons so determined to fight a nuclear war on the ROK’s behalf? Critics insist that the United States shouldn’t abandon its policy of complete, verifiable, and irreversible dismantlement/disarmament (CVID), arguing that North Korea shouldn’t possess nuclear weapons at all. Unfortunately, it has produced nukes, and by now it has scores of them. South Africa remains as the only nation that has ever disarmed, and it had only six warheads to dismantle. Virtually no one in the policy community believes that Pyongyang, absent regime collapse or defeat, would follow suit. Wishing won’t make it so. Preserving the possibility requires sounder strategy. As for nonproliferation policy, the challenge is posed by the North’s arsenal, not Washington’s recognition that the North has an arsenal. Seoul and Tokyo might be unhappy if the United States formally abandoned its denuclearization efforts, but nothing else would change. What amounts to the Ostrich option, pursuing the impossible while hindering a long-time democratic ally from creating its own deterrent, is no solution. The better option would be a policy of de facto arms control, negotiating to limit the North’s nuclear program. It would be a second-best solution with unpredictable geopolitical consequences. However, so far everything else has failed. Although the Biden administration remains committed to denuclearization, Trump is reportedly considering the arms control strategy if he wins. Setting more reasonable ambitions wouldn’t prevent Pyongyang from eventually disarming if it desired to do so. However, even a change in regime wouldn’t necessarily lead the North to abandon its nukes. The ancient Korean monarchy long suffered the ill attention of its neighbors. In contrast, the recent Kim dynasty ruthlessly defended its independence, skillfully playing Moscow and Beijing against one another. Kim Jong-un likely saw Washington as a third, and conveniently distant, power to bring into the mix. Indeed, China’s Xi Jinping ignored Kim while courting South Korea until the announcement of the planned Trump-Kim summit; afterwards Xi and Kim met five times, including once in Pyongyang. Notably, they have not previously met since 2019, when the US-DPRK relationship tanked. It appears that Xi was afraid of being dealt out of the game by Washington. More recently Chinese officials have grown nervous about the much tighter relationship between North Korea and Russia, highlighted by the former’s weapons sales to Moscow. The possession of nuclear weapons strengthens Pyongyang’s position against its nominal friends as well as against the United States. Ultimately, Americans will be safer if Washington steps back from the Korean imbroglio. The United States had special responsibilities toward the peninsula in 1950, having divided the peninsula and refused to arm South Korea, despite the North’s threats. Moreover, concern that the ROK’s fall would have undermined Europe’s defense, though overstated, was real. Today Washington’s military dependent has grown up. The Korean standoff is growing more dangerous, especially so, game theory suggests, as Pyongyang’s nuclear arsenal expands in size while remaining vulnerable to attempted allied preemption. The United States remains the world’s most powerful nation, but with rapidly aging population, expanding social programs, and burgeoning national debt, Washington no longer can afford to provide military welfare to the world. The military budget is the price of America’s foreign policy, rising to well above the benefits received from attempting to micro-manage the globe. South Korea would be a good place to start shifting defense responsibilities back on to allied states where it belongs. For more on these topics, see “Life, Liberty, and M*A*S*H,” by Thomas Firey. Library of Economics and Liberty, Nov. 1, 2020. Barry Weingast on the Violence Trap. EconTalk. Farewell Address, by George Washington. Online Library of Liberty. Which is the way it was always supposed to be. The Constitution tasks the federal government with the nation’s defense, by which the Founders meant this nation—its territory, people, and liberties. In his Farewell Address, George Washington warned against “a passionate attachment of one nation for another,” which by “infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter without adequate inducement or justification.” This warning has taken on added importance with the spread of nuclear weapons and consequent increase in dangers of unnecessary wars. Footnotes [1] Washington Declaration, April 26, 2023. Whitehouse.gov. [2] Dasl Yoon, “South Korean President Says Country Could Develop Nuclear Weapons,” Wall Street Journal, January 12, 2023, https://www.wsj.com/articles/south-korean-president-says-country-could-develop-nuclear-weapons-11673544196, * Doug Bandow is a senior fellow at the Cato Institute, specializing in foreign policy and civil liberties. He worked as special assistant to President Ronald Reagan and editor of the political magazine Inquiry. He writes regularly for leading publications such as Fortune magazine, National Interest, the Wall Street Journal, and the Washington Times. This article was edited by Features Editor Ed Lopez. (0 COMMENTS)

Characteristically, Friedman had a contrarian take on the Washington consensus. Ironically, the turn toward markets gave new life to the classic institutions of the postwar managed economy, namely the World Bank and the International Monetary Fund (IMF). No longer working to stabilize a gold-backed currency, the two international organizations offered loans to emerging economies—typically conditional upon implementing some version of the Washington consensus. This was a primary mechanism by which the consensus spread, the carrot that lured nations into making change. But to Friedman, their continued existence was a textbook case of bureaucratic overreach. Jennifer Burns, Milton Friedman: The Last Conservative.1 (pp. 445-446). Jennifer Burns’ biography of Milton Friedman is the product of a prodigious research effort. Nonetheless, it does not quite make it to my top shelf of economist biographies. Residing there are Perry Mehrling’s biography of Fischer Black and Robert Skidelsky’s biography of John Maynard Keynes (the full three volumes, not the condensed version). Keynes and Black, as well as Joseph Schumpeter and Alfred O. Hirschman, did their biographers the favor of living colorful lives. Skidelsky and Mehrling are able to extract interesting connections between their subjects’ personal lives and their scholarly contributions. For example, Keynes’ intense hatred of the ethic of saving is plausibly due to his closeness to Lytton Strachey and other Cambridge Apostles and Bloomsbury Group members who rebelled against Victorian morality in general. Friedman was quite tame by comparison. Burns has to struggle to tease out anything interesting relating Friedman the person to Friedman the intellectual. “Within the economics profession, Friedman came closest to running the show in the early 1970s.” In an interview with Politico in April of 2020, then candidate Joseph Biden declared “Milton Friedman isn’t running the show any more.” Within the economics profession, Friedman came closest to running the show in the early 1970s. His influence on economic policy probably peaked about 15 years later, with the spread of the “Washington Consensus” in favor of limited government and low inflation. But Friedman seemed never satisfied with his victories, seeing them as incomplete. As his criticism of the Washington Consensus shows, he did not see himself as running the show even when others did. The biggest battle Friedman fought was over monetary policy. He wanted to achieve three things. (1) The central bank (The Fed in the United States) should take responsibility to curb inflation. (2) To do this, the central bank should follow a strict rule concerning growth in the money supply, rather than make discretionary changes based on other economic indicators. (3) In particular, the central bank should try for steady, slow growth in the measure of the money supply known as M2. On (1), Friedman won a decisive victory. But he lost completely on (2) and (3). Even Paul Volcker, the Fed chairman whose adoption of (1) is considered the classic central banking achievement, did not go along with (2) and (3). Burns writes, Although Volcker called his approach “practical monetarism,” he always kept Friedman at arm’s length. Like most central bankers, he considered Friedman’s concept of a fixed monetary growth rule too mechanistic and abstract. p. 413. Friedman succeeded in convincing most economists that policy makers could not drive unemployment below its “natural rate” while achieving a stable rate of inflation. Other battles that went Friedman’s way in the 1970s include the ending of the military draft and the shift from foreign exchange rates fixed by government to flexible exchange rates determined in the market. When I studied economics as an undergraduate from 1971-1975, one of my teachers, Professor Bernie Saffran, said that Friedman would likely earn the Nobel Prize (which he subsequently did) based on three contributions: the “natural rate” hypothesis, the “permanent income” hypothesis, and the Friedman-Savage explanation for why people gamble and also buy insurance. Burns explains each of these contributions. Bernie quipped that, “Milton Friedman and Paul Samuelson believe the same price theory. But Friedman applies it to policy.” This was a dig at Samuelson, whose left-wing inclinations often led him to advocate policies that went against basic economic theory. Bernie also talked to students about the Cowles Controversy, which took place in the early 1950s. The Cowles Foundation inaugurated the development of large computer models of the economy. Prior to that, the National Bureau of Economic Research, under Wesley Mitchell and Arthur Burns, focused on gathering various indicators of economic performance—”Measurement without theory,” as it was derided in a famous essay by Tjalling Koopmans of the Cowles group. Jennifer Burns writes, At seminar after seminar, Friedman pressed the same question: How were models chosen? If the commission wouldn’t clarify its decisions, or publish information on models that hadn’t worked, he would assume they were simply chosen based on the prejudice of the investigator. Repeated week in and week out, the criticism added up to the accusation that the Cowles inquiries were fundamentally corrupt. p. 157. My first job out of college was working with Cowles-inspired models, but I eventually came to share Friedman’s view of the project. In Jennifer Burns’ telling, Friedman saw to it that the Cowles group was not welcome at the University of Chicago, and they fled to Yale. But although Friedman was an admirer of Arthur Burns in those days,2 he was more anti-Cowles than pro-NBER. He simply did not trust that the big computer models would yield reliable results. He has been proven correct. Although Friedman’s methodological criticisms of other economists were on point, he himself seemed to approach empirical work with what Julia Galef would call a soldier mindset rather than a scout mindset. Burns writes, It seemed to Friedman’s critics that he was not testing his theory with facts but using facts to confirm his theory. p. 91. For more on these topics, see Robert Chitester on Milton Friedman and Free to Choose. EconTalk. Milton Friedman on Capitalism and Freedom. EconTalk. “Drop Your Intellectual Defenses,” by Arnold Kling. Library of Economics and Liberty, Jun. 7, 2021. As in the Cowles example, Friedman fought hard on academic personnel matters, often with success. He seems to have been very combative by nature. That is what struck me most about him in reading Burns’ book. Some of the fights have lost their salience, and perhaps Burns could have devoted fewer pages to some of these or even left them out altogether (the Friedman/Meiselman vs. Ando/Modigliani [see Franco Modigliani] argument had no lasting significance, as far as I can tell). But other debates in which Friedman was involved, such as the existence or not of a trade-off between unemployment and inflation, are just as important today. Milton Friedman seemed to lean into every battle. Probably that is what enabled him to run his ideas past the gauntlet of prevailing orthodoxy. Footnotes [1] Jennifer Burns, Milton Friedman: The Last Conservative. 2023. [2] I was struck reading this book how often Arthur Burns (presumably no relation to the author) comes across as a villain, both on a personal and professional level. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

A Book Review of Animal Spirits: The American Pursuit of Vitality from Camp Meeting to Wall Street, by Jackson Lears.1 When Alexis de Tocqueville visited the young American republic in the early 1830s, he immediately noticed a deep restlessness which characterized the Americans that he encountered. In the America witnessed by Tocqueville, … a man carefully builds a dwelling in which to pass his declining years, and he sells it while the roof is being laid; he plants a garden and he rents it out just as he was going to taste its fruits; he clears a field and he leaves to others the care of harvesting its crops. He embraces a profession and quits it. He settles in a place from which he departs soon after so as to take his changing desires elsewhere. Should his private affairs give him some respite, he immediately plunges into the whirlwind of politics. And when toward the end of a year filled with work some leisure still remains to him, he carries his restive curiosity here and there within the vast limits of the United States. He will thus go five hundred leagues in a few days in order better to distract himself from his happiness.2 What characterizes all these choices identified by Tocqueville is that none of them seem based on a rational calculation of knowns and unknowns. Who builds one’s dream retirement home only to sell it off before the roof is even finished? Who in their right mind suddenly abandons a blissful family life to enter that graveyard of happiness otherwise known as politics? Moreover, such actions often mean breaking existing conventions in order to do something that isn’t immediately explainable to one’s family, friends, and colleagues. Instances of this behavior are widely perceived as being, in a word, “strange.” That is never a strong incentive to think or act unconventionally. In Animal Spirits: The American Pursuit of Vitality from Camp Meeting to Wall Street (2023), the American cultural historian and professor of history at Rutgers University, Jackson Lears, seeks to identify and explain the role of strange thoughts and actions in shaping America in surprising ways. To provide a more concrete definition of this behavior, Lears draws upon the British economist John Maynard Keynes: specifically, Keynes’s use of the phrase “animal spirits.” In his General Theory of Employment, Interest, and Money (1936), Keynes uses the phrase three times while describing the choice of entrepreneurs to invest in ways that augment a firm’s capital stock. For Keynes, “animal spirits” describe “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”3 “[A]nimal spirits are what cause someone to do something (invest, start a business, etc.) that a strict assessment of the economic conditions would never lead someone to do.” In other words, animal spirits are what cause someone to do something (invest, start a business, etc.) that a strict assessment of the economic conditions would never lead someone to do. It leads people, Keynes believed, to overcome fear of business losses or failure more generally. Indeed, Keynes posits that, absent animal spirits, “enterprise will fade and die.”4 Keynes, it should be noted, did not coin the expression. It goes as far back as Erasistratus of Chios (310-250 B.C.) as he tried to describe the relationship between our bodily movements and our perceptions of the outside world.5 As Lears shows, the idea can be found in the writings of people as different as the English romantic poet William Wordsworth (1770-1850) and the historian Henry Adams (1838-1918). Keynes’s deployment of the phrase, however, was a way of trying to explain a feature of commercial life in modern capitalist economies that can’t be captured by the neat econometric models that Keynes (and, I would add, his most famous economic opponent, F.A. Hayek) had little time for. While Lears stressed that he, like Keynes, does not want to undervalue the place of statistics and empirical measurement in understanding reality, he agrees with Keynes (and Hayek) that these things “can easily be overvalued and misused as tools of interpretation and prediction” (p. 14). Therein, I suspect, lies one of Lears’s primary motivations for using the idea of animal spirits to explain the enduring presence of what he calls “vitality” in America and the way that it has shaped American life. “Animal spirits,” according to Lears, “constitute a crucial part of what it means to be human, as well as an essential reminder of the animality humans share with the nonhuman world” (p. 5). It is thus a general way of describing the spontaneity and impulsiveness which marks all aspects of human life. Such vitality especially reveals itself in the world of commerce, and dynamic competition and entrepreneurship have long characterized America. The last of these has always impressed visitors to America. “Almost all [Americans],” Tocqueville wrote in his journal, are “entrepreneurs.”6 Part of the essence of entrepreneurship is, after all, the inherent challenge that it presents to the status quo, whether that status quo exists in business, medicine, or religion. For Lears, the sheer power of animal spirits in America is part of what challenges a widespread existing narrative about America: one of the United States as a nation of buttoned-down utility-maximizers, managers, and workers obsessed with realizing ever-greater efficiencies in a rather mundane and utterly predictable manner. For Lears, this distracts us from the reality that there have been plenty of Americans who have broken out of the iron cage of rational calculation and conventionality in areas that go far beyond the economy. The list of figures who exemplify this type of American is, by Lears’s account, longer than we realize and they have influenced virtually all fields of inquiry and parts of American society. They include, among others, Theodore Roosevelt (1858-1919), philosopher and psychologist William James (1842-1910), and the novelist Norman Mailer (1923-2007). A good number of American bankers, according to Lears, have been conduits for the workings of animal spirits during economic booms and busts, not least because they have not reacted in strictly rational ways to the turbulence of markets. The workings of spirit and the material, for Lears, are not as separate as often supposed in the conditions of a modernity that generally insists on the strict separation of the two. At times, Lears’s portrayal of the vast gallery of vitalists and the areas of American life in which animal spirits have manifested themselves is not easy to follow. We move among topics like finance, war, electricity, religious revivalism, psychoanalysis, science, and poetry at a bewildering pace. Though he proceeds in a more-or-less chronological fashion, Lears shifts back and forth between topics like bank failures, money markets, feminism, radical empiricism, modernist art, sport, and Broadway musicals with a rapidity that makes the thread of Lears’s argument often hard to follow, if not incoherent at times. The effect, however, is to underscore Lears’s point: that animal spirits in America are constantly at work and show themselves at unexpected times and in unlikely spheres of life. Though Lears plainly views animal spirits as beneficial, he acknowledges that they can have a dark side. At first glance, the Yale economist Irving Fisher (1867-1947) may seem the least likely of vitalists insofar as he sought to apply the quantifying effects of statistical analysis to virtually every area of public policy. Yet Lears shows that Fisher “also worshipped at the shrine of energy and vitality” (p. 255). That took Fisher—like most Progressives—straight into the realm of eugenics. For Fisher, this involved the commitment “to isolating ‘defectives’ so that “‘we can save the bloodstream of our race from a tremendous amount of contamination'” (p. 255). By “race,” Lears specifies, it is unclear whether Fisher meant “the human race or merely the Anglo-Saxon one.” What’s not in question is the way in which a concern for “revitalizing the American people” (p. 255) drove some enthusiasts for energy to embrace distinctly unscientific and ultimately destructive ideas. Efforts to tame animal spirits also feature in Lears’s account of their workings in America. The rise of managerialism in the 1950s, for instance, is seen as part of an overall shift towards technocracy that has sought to control the ups-and-downs of American life. Ironically, Lears states, this owed a great deal to the rise of Keynesian economics after World War II as part of an effort “to smooth out the rough spots in the business cycle by balancing inflation and unemployment” (p. 343). Lears maintains that this represents the Keynesian tradition’s abandonment of Keynes’s “larger social vision” (p. 255). To the extent that Keynesianism was translated into econometrics by American economists like Paul Samuelson after 1945, Lears’s commentary rings true. Lears, however, underestimates the centrality to Keynes’s thought of his desire to promote management of economies from the top-down in the effort to diminish—if not eliminate as far as possible—turbulence in the economy. In short, Keynes himself was far more part of what Lears calls “the managerial age” (p. 353) than Lears supposes. Had he lived, Keynes may well have disputed the mathematization of his political economy. Keynes’s emphasis upon aggregates of supply and demand does, however, lend itself to such quantification; his disciples were not wrong in supposing that their work represented a logical consequence of this dimension of Keynes’s thought. That in turn reflects a confusion that mars some of Lears’s conclusions. On the one hand, Lears describes Ronald Reagan as ushering “in a new era that celebrated entrepreneurial risk-taking (especially among those most insulated from its downside) and reanimated the flow of animal spirits on Wall Street. Reagan’s successors, Democrats and Republicans alike, followed his lead in deregulating finance capital and participating in its renewed potency” (p. 376). Yet the same “neoliberalism,” according to Lears, “involves the merger of technocratic expertise and market fundamentalism” (p. 376). It brings, he says, “instrumentalist market assumptions into every corner of human experience, accelerating the pricing of everyday life—down to and including the calculation of a human being’s monetary value” (p. 377). On the face of it, this does not fit Lears’s own description of Reagan-style neoliberalism. What, then, from Lears’s standpoint, is “neoliberalism”? Is it a revival of animal spirits via entrepreneurship, regulation, and dynamic markets, accompanied by the spread of irrational exuberance, especially in capital markets? Or is it a version of managerial technocracy? Is it both? This is unclear from Lears’s account. For more on these topics, see Democracy in America, by Alexis de Tocqueville. Online Library of Liberty. Steve Fazzari on Keynesian Economics. EconTalk. Will Davies on the Economics, Economists, and the Limits of Neoliberalism. EconTalk. In the end, however, Lears’s book does indeed capture just how much outbreaks of animal spirits have influenced the American experience, and the good which has flowed from those dimensions of human life which do not cohere neatly with modernity’s emphasis on empirical rationality. At times, Lears may struggle to capture the vast canopy of unpredictable forces and Americans who have challenged the conventionalities of their time. Nonetheless, Lears gives us good reason to believe that, for all its problems and potential to release dark forces, vitality will continue to animate America in unpredictable ways that escape the most comprehensive of models. Footnotes [1] Jackson Lears, Animal Spirits: The American Pursuit of Vitality from Camp Meeting to Wall Street. Farrar, Strauss, and Giroux, 2023. [2] Alexis de Tocqueville, Democracy in America, ed. Eduardo Nolla, trans. James T. Schleifer, A Bilingual French-English Edition, Vol. 3 (Indianapolis: Liberty Fund, 2010), 944. [3] John Maynard Keynes, The Collected Works of John Maynard Keynes, Vol. VII, The General Theory of Employment, Interest, and Money, eds. Elizabeth Johnson and Donald Moggridge (Cambridge: Cambridge University Press for the Royal Economic Society, 1936/2013), 4th ed, pp.161-162. [4] Ibid., pp. 161-162. [5] See Sidney Ochs, A History of Nerve Functions: From Animal Spirits to Molecular Mechanisms (Cambridge: Cambridge University Press, 2004), 22-26. [6] Alexis de Tocqueville, Journey to America, trans. George Lawrence (New Haven: Yale University, 1959), 271. * Samuel Gregg is Distinguished Fellow in Political Economy and Senior Research Faculty at the American Institute for Economic Research. He has a D.Phil. in moral philosophy and political economy from Oxford University, and an M.A. in political philosophy from the University of Melbourne. For more articles by Samuel Gregg, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

There’s often a gap between the textbook treatment of statistics and the cookbook treatment–how to cook up the numbers when you’re in the kitchen of the real world. Jeremy Weber of the University of Pittsburgh and the author of Statistics for Public Policy hopes his book can close that gap. He talks to EconTalk host […] The post How to Avoid Lying With Statistics (with Jeremy Weber) appeared first on Econlib.

I went to my second Braver Angels meeting yesterday and enjoyed it even more than the first. At the start, the moderator had us go around the room and tell our names, whether we were red or blue or some other color, and whether anything at a previous meeting or previous meetings had affected our views. Often people went off script to talk about a concern they had, but I found that interesting also. I found myself letting go of my need to have everybody stay within the one-minute time limit. Part of the reason was that I was enjoying people so much. One person, who actually lives in my neighborhood and whom I like a lot, said that he misses the country he grew up in. He identified as red but other people, including some blues, echoed that feeling. I looked around the room of about 30 people and the look on people’s faces suggested that they agreed. I even found myself agreeing. At the end of the meeting, though, when I was talking to one of the organizers, I pointed out something that was better. I pointed to a guy–I’ll call him Daniel–who had casually mentioned his husband. I said to the organizer that no one in the room seemed upset that and no one called the cops. I pointed out that 50 years ago, homosexuals were often rightly afraid of being beat up. So that’s a huge improvement on the “good old days.” Later that afternoon, I was telling a friend about that conversation and I told him something else that I had forgotten. I was in a men’s group in the late 1980s and early 1990s, and there were a number of gay guys in the group. They were certainly a little nervous about coming out of the closet and very nervous about, say, holding hands with their gay partners in public. That had given me an idea at the time. I thought it would a good idea to get a group of gays and allies together and, on a Saturday afternoon, walk down the main street in Monterey, Alvarado Street, with gays opening holding hands. I wanted to call it “Take Back the Day.” I never did it. But I don’t feel bad that I didn’t because in the 30 years since then, look how far we’ve come. When I go on my afternoon walk by the ocean most weekdays, I often see young women holding hands or young men holding hands. It’s not a big deal. Thirty years ago, if they had done that, they might have gotten beat up. Fifty years ago, it would have been even worse. Lots of things are worse today than they were. But some things are way better. The pics are from the Stonewall riots of 1969, when homosexual men fought back.   (0 COMMENTS)

I often wonder if the human brain is wired to look for monocausal explanations. Think about how often you hear the phrase, “The real problem is . . . “Why assume there is just one real problem? Most macroeconomic problems are somewhat complex. Here’s a typical situation:1. A negative real shock slows economic growth, lowering the natural rate of interest. 2. Central banks are slow to react, and thus the policy rate moves above the natural rate.3. This tightens monetary policy, slowing nominal GDP growth.4. Because nominal wages are sticky, this slows economic growth by even more than the original negative real shock. A recent Bloomberg article discusses Xi Jinping’s attempt to address China’s recent economic problems.  The focus is entirely on non-monetary factors. It’s true that China faces a number of structural problems.  Xi Jinping inherited a highly flawed economic model, made a few improvements, but also created a new set of problems.  In particular, China has moved in the direction of authoritarian nationalism, which is not good for economic dynamism: As Xi’s corruption campaign rolls on after more than a decade of purges there’s a growing reticence to take chances among officials increasingly focused on security and studying Xi Jinping Thought. Bureaucrats “lying flat” is a problem even recognized by the top leader. At a key economic meeting in December, Xi criticized local officials for procrastinating or misinterpreting the party’s orders. “Sometimes you have to give people the room to make mistakes. But right now that’s not there,” said Liqian Ren, director of Modern Alpha at WisdomTree Inc., a New York-based asset management firm. “That’s a problem for China. You need the local officials to be willing to try things.” Of course, the Western world has also become more nationalistic.  Thus China’s problems are partly due to factors beyond its control.  But in my view a country’s performance is at least 90% determined by home grown policies, and at most 10% explained by external factors. In addition to the structural problems in China, their monetary policy has recently become much more contractionary.  In the short run, this has a bigger impact on growth that all of the various supply side problems: A NGDP growth rate of roughly 4% might seem fine for a country like the US, but it represents a sharp slowdown from the roughly 8% to 10% figure seen during most of the past decade.  This likely explains why the Chinese public is currently so pessimistic about the state of their economy.  In contrast, long run growth is almost 100% determined by supply-side factors, as money is roughly neutral in the long run. So what’s the real problem in China?  Is it structural or monetary? Why not both? PS.  I also agree with Adam Posen’s views on China’s structural problems. (0 COMMENTS)

Dogmatism is bad. If someone calls you dogmatic, an ideologue, he implies that you are irrevocably wedded to your ideology and your belief system. You refuse to consider stringent counterarguments and quibbling counterevidence. Instead of taking into account the arguments for and against, say, the support of a subsidy for the—surely incredibly important—chip industry, you, the dogmatist, proclaim that subsidies per se are reprehensible, illegitimate, or inefficient. Or all three things at once. Proponents of the market economy have often been accused of being dogmatic. They’ve been called “ideologues.” And there certainly are free market ideologues. There are dogmatists who are committed to market fundamentalism. These people, if they want a government at all, hold that the government shall be constrained to very basic functions. But it is not the content of your beliefs that makes you a dogmatist. Whether you’re a dogmatist depends on how you arrive at your conclusions and how your overall belief system is constructed and also adapted in light of new arguments and new evidence. This implies that when two people have the exact same beliefs about what the state ought to do, one may be a dogmatist while the other is not. What matters is not the content of our beliefs but its derivation and defense. However, that is often misunderstood. When you hear critics denounce people like Ludwig von Mises or Milton Friedman as dogmatists, the case is often inspired and defended by the observation that they have radical views, that is, allow only for a minimal government (of course, Mises is more radical than Friedman). This is not to say that there may be no arguments that support the allegation that some adherents of free markets are dogmatic, nor is it to say that all those who label thinkers such as Mises as “dogmatists” rest their case (exclusively) on the radicalness of the political position. All I say is that, in my experience, it too often happens that people confuse radicalism for dogmatism. Perhaps a case in point is the reception of an interesting quote by Hayek. In the Road to Serfdom Hayek opined that “probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the principle of laissez-faire.” Read carefully! What Hayek says is that it is the wooden insistence that was so damaging, not the principle of laissez-faire as such (and it seems that some have misread Hayek’s words to mean the harm was done by the principle of laissez-faire, and not by the wooden insistence on it). It is true that the Hayek of 1944 rather rejected laissez-faire—the later Hayek, though, would take a different position, noting in a preface from 1976 that, back then, he “had not wholly freed [himself] from all the current interventionist superstitions.” But irrespective of Hayek’s own political position, his quote about laissez-faire suggests that the issue is not laissez-faire, that is, the policy conclusions or the content of our beliefs, but the way we defend them and deal with counterarguments—our “wooden insistence,” or the dogmatism, is the issue. This is a lesson to hold dear. I agree that we ought not be dogmatists. However, I am convinced that you can be a staunch and radical proponent of laissez-faire without being, by any means, a dogmatist and ideologue. I mean this as more than a logical possibility. I think very practically that insights from the liberal strands of political philosophy but also from political economy undergird such a laissez-faire position. Arguing this would probably demand writing another blog entry—or rather a book. So, I just want to close by pointing out the logical corollary of holding radicalism and dogmatism separate. And this is that those who eschew radicalism, embrace “the middle-of-the-road” and always demand to check each case on its own merits may well be the true dogmatists. Anyways, you can be a radical supporter of laissez-faire without being dogmatic at all. And perhaps you should be!   Max Molden is a PhD student at the University of Hamburg. He has worked with European Students for Liberty and Prometheus – Das Freiheitsinstitut. He regularly publishes at Der Freydenker. (0 COMMENTS)

The Economist notes that Gemini, Google’s chatbot, depicted George Washington as black and the pope as an Asian woman. The magazine continues (“Is Google’s Gemini Chatbot Woke by Accident, or by Design?” February 29, 2024): Asked if Elon Musk’s tweeting of memes had done more harm than Hitler, [Gemini] said it was “difficult to say”. … But Gemini has clearly been deliberately calibrated, or “fine-tuned”, to produce these responses; they are not “hallucinations”, where a model makes things up. I did a test with Copilot, the Microsoft AI bot now incorporated in Windows 11. Here is the beginning of our February 26 “conversation,” reported verbatim (“You” is of course me): You Give me a good argument against DEI. Copilot Certainly! Here’s an argument that some people put forth against Diversity, Equity, and Inclusion (DEI) initiatives: Meritocracy and Fairness: Critics argue that DEI efforts can sometimes conflict with the principle of meritocracy. They believe that hiring, promotions, and other decisions should be based solely on individual qualifications, skills, and performance. They contend that prioritizing diversity might lead to hiring less-qualified candidates simply to meet diversity quotas, which could undermine organizational effectiveness. However, it’s essential to recognize that these arguments are not universally accepted, and there are counterarguments in favor of DEI. Many believe that promoting diversity and ensuring equal opportunities enhance overall productivity, creativity, and social justice within organizations. You Give me a good argument in favor of DEI. Copilot Certainly! Here’s a compelling argument in favor of Diversity, Equity, and Inclusion (DEI): Enhanced Creativity and Innovation: Diverse teams bring together individuals with varied backgrounds, experiences, and perspectives. When people from different walks of life collaborate, they offer unique insights and approaches. This diversity of thought fosters creativity and innovation. It encourages the exploration of unconventional solutions and helps organizations adapt to changing environments. Companies that prioritize DEI tend to outperform their peers in terms of product development, problem-solving, and market responsiveness. Remember that DEI is not just about fairness; it’s also about maximizing an organization’s potential by leveraging the richness of human diversity. 🌟 You You are obviously in favor of DEI, aren’t you? Copilot As an AI language model, I don’t hold personal opinions or preferences. My purpose is to provide information and engage in conversation based on the input I receive. If you have any other questions or need assistance, feel free to ask! 😊 You So why did you add a caveat to the argument against but two reinforcements (“compelling” and “not just about fairness”) to the argument in favor? I could have mentioned to the bot other indications of his biases. In the bit of conversation that followed, the poor thing denied any bias but not to my satisfaction. He also needed a prompt to admit that the issue of DEI is not only about organizational efficiency but also (in fact, mainly) about individual liberty. We should not be surprised that AI bots parrot dominant opinions and biases. There are two reasons for this. First, they are trained to avoid answers that would shock people holding dominant opinions and biases, especially in intellectual, faddish, and activist milieux. Second, the data they use, even if not filtered by their creators and trainers, are strongly biased by the production of dominant elites and activists. Ordinary people don’t write pubicly, and contrarian intellectuals necessarily generate less data than popular ones. Dominant ideas and biases can be useful under the form of private morals and conventions that facilitate voluntary interactions without the need for authoritarian commands from political authorities, an idea emphasized by liberal theorists including Friedrich Hayek, James Buchanan, and Anthony de Jasay. The danger is that the dominant discourse and ethics do not crush the search for truth and the pursuit of innovations (economic, technical, and social). The way to square this circle is to prevent the reinforcement of the dominant opinions and biases by state coercion—except, in mainstream liberal thought, for the minimal laws necessary to preserve a spontaneous order or for general rules that can be construed as unanimously accepted. Constraining state power is required. In these conditions, liberal theory claims with supporting historical evidence, dominant ideas would not succeed in enforcing tyranny as religious beliefs often did in early modern times or racist sentiments in the American South. This suggests that governments should stay out of AI to avoid strengthening the echo danger observed in our current chatbots. DEI is a good illustration. It is only problematic to the extent that the state coercively imposes, or subsidizes with taxpayers’ money, ideals of diversity, equity, and exclusion that are incompatible with individual liberty and voluntary social interaction. Note that “inclusion” as a general principle is incompatible with private property, which is defined by exclusion, except if it is voluntary inclusion, that is, free association. In the liberal view of the social world, only individual liberty can give an acceptable meaning to these terms. In the zeitgeist of our time, don’t count on AI chatbots to understand that. **************************** The featured image of this post, reproduced below, was created by ChatGPT 4 whom I instructed, after several attempts, to “Generate an image of an AI bot (a robot in the form of a parrot) who just repeats the shouting of a mob of woke students and intellectuals who want the benevolent and democratic state to enact new laws in their favor.” (I had to plug in the “benevolent and democratic state” and “new laws” because the poor thing refused to draw anything similar to what I wanted. –PL) (0 COMMENTS)

I’m hardly the first to point out that many people can earn graduate degrees in economics without actually absorbing or understanding the economic way of thinking. As is often the case, Twitter (the platform I still refuse to call X) has risen to the occasion to provide an example. In this case, the subject is the Irish economist Phillip Pilkington, who graciously provides an example of what happens when you confuse an increase in supply with an increase in quantity supplied.  On this occasion, Pilkington tweeted out: THE CHART YIMBY KIDS DON’T WANT YOU TO SEE:  House prices and new construction are POSITIVELY correlated. I.e. when there is more supply prices are rising and when there is less they are falling. The OPPOSITE of the YIMBY argument. I actually wrote an entire post a year ago specifically addressing this elementary error, but I’ll try to briefly summarize the point I made back then.  Supply, roughly, refers to how much capacity there is to make something. Quantity supplied refers to how much sellers will provide at a given price. New construction isn’t an increase in supply, it’s an increase in the quantity supplied. YIMBY’s don’t argue that we need to increase the quantity of housing supplied, the argument is that we need to increase the housing supply. That is, we need to increase the capacity to produce more housing. Partly this could be done by means of new building methods and technologies, like the modular housing methods that are described in this post. But right now, there is a massive amount of low-hanging fruit available to increase the housing supply in the form of deregulation – eliminating minimum lot sizes, repealing bans on multi-unit housing, reforming zoning laws, that sort of thing. Changes like this will increase the capacity to build housing, which is what is meant by an increase in supply.  Without changes in policy to allow the housing supply to increase, the supply curve stays fixed. And if the supply curve is fixed, but demand is increasing, then as the demand curve shifts to the right, the equilibrium price for housing moves up along the upward sloping supply curve. That is, the quantity of housing supplied will increase, but housing prices will also increase as part of the same process.  YIMBYs aren’t arguing in favor of moving up a fixed supply curve – YIMBYs argue for policies that will shift the supply curve. The solution YIMBYs advocate isn’t simply to increase the quantity of housing supplied by building more housing, the solution YIMBYs advocate is to increase the housing supply through deregulation of the housing market. The YIMBY argument stresses that if the supply curve can’t shift right, then new houses will only be built in response to increases in demand driving prices higher and higher – which is what we are in fact seeing.  Pilkington says that increases in housing prices is positively correlated with increases in new homes being built as if he thinks he’s pointing to something that refutes the arguments of YIMBYs, without realizing that in fact what he’s pointing to is exactly what you would expect to see if the YIMBY argument is correct. This isn’t just performing an own goal, this is performing an own goal by doing a bicycle flip kick that scores the winning point for the other team at the championship match, then breaking out into a celebratory coordinated song and dance routine to Gangnam Style while pyrotechnics go off in the background.  As I’ve recently said in another context, this kind of mistake is something that would be easily avoided by anyone who had taken even a single Econ 101 course – and actually retained what they had learned. Sadly, some people can go very much further than Econ 101 and still not retain the basic concepts.  (0 COMMENTS)

In my latest TaxBytes column for the Dallas-based Institute for Policy Innovation, titled “Higher Immigration Will Reduce the Federal Deficit,” posted on February 28, I wrote: Almost all the news is bad. But there’s one little bit of good news in the CBO’s February report. The CBO’s economists estimate that because of higher immigration, growth of real GDP will be higher. Specifically, says the CBO: Most of the increase in the projected population reflects larger net immigration. That greater immigration is projected to boost the growth rate of the nation’s real gross domestic product (GDP) by an average of 0.2 percentage points a year from 2024 to 2034, leaving real GDP roughly 2 percent larger in 2034 than it would be otherwise. This higher real GDP generates more tax revenues than otherwise. How much more? Here’s what I wrote: With higher growth, of course, come higher tax revenues, although reading the CBO’s report is like looking at the output of a black box. CBO Director Phill Swagel elaborated on the effect of immigration earlier this month. He stated: The labor force in 2033 is larger by 5.2 million people, mostly because of higher net immigration. As a result of those changes in the labor force, we estimate that, from 2023 to 2034, GDP will be greater by about $7 trillion and revenues will be greater by about $1 trillion than they would have been otherwise. We are continuing to assess the implications of immigration for revenues and spending. I took Swagel’s word for it, but it’s hard to believe that an additional $7 trillion in output yields only an additional $1 trillion in federal revenues. My back-of-the envelope calculations suggest a much higher effect on federal revenues. Here’s my thinking. The marginal federal tax rate on that higher GDP is probably about 40 percent. If that sounds high, remember that we have not just federal income taxes, but also payroll taxes of 15.3 percent on most earned income and a corporate income tax rate of 21 percent. So 40 percent sounds plausible. And certainly 30 percent is on the low end. So the added tax revenue should be at least 30 percent of $7 trillion, which is $2.1 trillion. You might say that more immigrants mean more government spending and that could well be true. But the CBO is saying that revenues will be $1 trillion higher.   (1 COMMENTS)