In my previous post, I described what I consider to be the two most important prices in the Argentine- or any!-economy. Having indulged in such extended preliminaries, let us address  what is going on in Argentina nowadays. Soon after the inauguration of Javier Milei as the new president of Argentina, his government devalued the official rate of the local currency from about 400 pesos per US dollar to about 800 pesos per dollar. That brought the “multilateral real exchange rate index” (ITCRM), which compares the real purchasing power of the local currency in comparison with the purchasing power of other relevant trade partners from an index of 75 (December 2015 = 100) to above 150, reflecting the effect of devaluation.  I say the “official” rate, but perhaps it would be better to say the “reference” rate, since there are many “official” rates. Now, about six weeks later, the reference rate is about 830 pesos, and the ITCRM is down to an index of 125, showing the appreciation of the reference exchange rate thanks to inflation of 25% per month as measured by the consumer price index. Mr. Milei came to office with the promise of dollarization for Argentina’s economy. His libertarian agenda was much broader than that, but that was what captured the imagination of many voters. However, Mr. Luis Andrés Caputo, his finance minister, has decided against dollarization, at least for now, and the reasons he gives  are two: first, the negative position of foreign exchange reserves of the Argentinean central bank, and secondly, the short-term obligations of the bank with the banking system. If money holders are allowed to exchange their pesos for dollars, there would not be enough dollars for available, fears Mr. Caputo. If money holders are allowed to exchange pesos per dollar, the (very short) time deposits in the banking system, the counterpart to the short-term obligations of the central bank, it is feared, will collapse, and the central bank would be forced to monetize them. Those seem to be very odd objections to offer, though. Nowadays, in Mr. Milei’s Argentina, the peso is not just a “legal” tender; it is a “forced” tender.  Argentineans are forbidden from using any other currency to denominate contracts, to make regular payments to each other, and to save. They do all of that, of course. Argentina is one of the most “de facto” dollarized countries globally, but they cannot do that legally. Mr. Caputo could allow people to contract in US dollars without committing the central bank to redeem a single penny in dollars from its reserves. One thing has nothing to do with the other.  It is true that to allow payments in dollars and not in its equivalent in local currency, a change in the Civil Code would be necessary, but if there were only one exchange rate freely determined by the market with freedom of entry and exit, payment in local currency would be indifferent to the traders.  What is impeding  Argentineans from using the dollar as a medium and as a rudder for their trades is not the need to change the Civil Code, but the fact that the government continues to impose different exchange rates, none of them a freely established one.  By revoking the “forced” tender status of the peso and giving “legal” tender status to other currencies, the Milei government could provide Argentineans with the monetary tools they need to cooperate and prosper. That would, marginally, I concede, reduce still more the demand for pesos, and that is perhaps why Mr. Caputo has advised against that. An alternative would be to unify and liberalize the official exchange rate, allowing it to float freely, as I have just mentioned. Again, fearing that reducing the demand for pesos would trigger hyperinflation seems to paralyze Mr. Caputo. Of course, I would not like to be in his shoes, but the ghost of hyperinflation will not fade away until confidence that pesos have a stable value, something that would motivate people to exchange dollars for pesos tomorrow as much as today; and most importantly, that holding pesos is not a money losing proposition. The peso, however, is appreciating fast, if measured by the “reference” exchange rate, distorting relative prices of tradable goods and leaving in place the same incentives for corruption that so markedly Mr. Milei campaigned against. The exchange rate is the second most important price in the economy precisely because of that. The information that a market exchange rate gives is the gauge by which Argentineans can compare prices in the domestic market with prices abroad. Considering the relatively small size of the Argentinean economy (about 0,5% of global GDP) as previously mentioned, trying to do rational economic calculations without such information is very damaging to the economy.  In my next and final post, I will discuss the role of the MOST important price in the Argentine economy- the interest rate.   Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. (0 COMMENTS)

Co-blogger David Henderson recently posted about how political partisanship makes people more disposed to ignore or deny basic facts in a way that sports partisanship does not. I agree completely with what he says. In fact, I would say what he describes shows how many – perhaps most – people talk about politics in a way I will describe as political noncognitivism. To unpack what I mean by that, indulge me for a moment with a digression into metaethics.  In metaethics, noncognitivism is a metaethical theory that differs from realism, antirealism, and subjectivism. Moral realists believe that moral statements assert propositions, and these propositions can be objectively true or false – that is, true or false independent of the attitudes of any subject. Moral subjectivists believe moral statements assert propositions that are subjectively true or false – that is, the truth or falsity of the statement depends on the attitudes of a subject. Moral antirealists believe ethical statements assert propositions, but those propositions are always objectively false, because there are no moral facts or moral properties. Noncognitivists argue that moral statements are neither true nor false, because moral statements don’t have any propositional content. Noncognitivism generally comes in two flavors – expressivism, and prescriptivism. The former says that what seem like propositional statements about morality really just express attitudes. To the expressivist, when someone says “It’s wrong to murder” what they are really saying is “Boo for murder!”, which does not assert a proposition, and is neither true nor false. Prescriptivists says that what seem like moral propositions are actually just commands, so when you say “it’s wrong to murder” what you’re actually saying is “Don’t murder!”, which is also neither true nor false and does not assert a proposition.   That said, let’s start with something readers of this blog likely already know – the general public is wildly misinformed about issues of basic economics. And as Bryan Caplan has pointed out, the errors the public makes in their economic beliefs are not random, but systemic – they tend to lean in a very anti-market direction. A recent paper examining the phenomenon of “lay economic reasoning” points out one striking example of the gap between what is commonly believed and reality – “The general public believed the average profit margin made by American corporations to be 46.7%, while the actual average that year was just 3%.” That is, a typical member of the public believes that profit margins for corporations are over fifteen times higher than they actually are. This is not a small error.  Over the years, I’ve encountered mistakes like this in conversations about economics many times. And I’ve noticed a consistent pattern in how people respond to the information. They might say “Corporations are making too much in profits!” Then, you ask them what they think corporate profit margins are, and what they should be. They respond by saying that corporations are making over 40% profit margins, and they think that a “fair profit margin” would be 5%. Now, suppose they discover profit margins are in fact 3%. What response would you expect?  One response is to deny the basic facts, as David Henderson correctly points out. But that’s not the only response I’ve seen. Some people, when shown the data, will in fact admit they were wrong and that corporate profits are nowhere near as high as they initially believed. Now, if a person’s political views were meant to describe what they believed the facts were, the response consistent with their stated beliefs and the facts should be to decide that corporate profits are actually too low. After all, corporate profits, it turns out, are 40% lower than what they just declared was a fair rate! Yet I’ve seen this happen precisely zero times in my life. It’s a similar story with taxes. Often I’ve heard people say something like “The top 1% doesn’t pay their fair share of income taxes!” Ask them what percentage of income taxes are paid by the top 1% and what percentage they think it should be, and they might say something like “the top 1% only pays 10% of income taxes and they should pay 25%.” And if you point out to them that actually, the top 1% pays over 40% of total income taxes, significantly higher than the amount they just said it should be, you see the same pattern. There is a zero point nothing percent chance they will say this means they top 1% are actually overtaxed, because it turns out the top 1% are paying significantly more in taxes than what they had just declared would be the “fair” rate. They will still go on insisting that the amount paid by the top 1% should be higher.  I think this shows that a lot of people are political noncognitivists. People will say “corporate profits are too high” or “the top 1% doesn’t pay their fair share” without any reference to what those numbers actually are or even what they themselves think those number should be. When sports fans talk about how a game went down, they are asserting propositions, which makes what they say responsive to facts. But when political partisans say “corporate profits are too high” they aren’t really trying to assert specific propositions about the current state of the world and some alternate state they think would be better. This is why if it turns out the actual state of the world is superior to their stated goal by their own standards, they don’t cheer with victory – they simply move the goalpost while sticking with the original slogan. All the slogan was really meant to communicate is “hooray for the Blue Tribe!”  I pointed to a similar way this thinking can manifest in a previous post where I was critiquing Yoram Hazony’s book on conservatism. Hazony claimed that free trade has reduced America’s manufacturing capabilities – and I pointed out that while America’s manufacturing employment has fallen, America’s manufacturing capabilities have risen, in the same way and for the same reasons that American agricultural capacity has risen even though agricultural employment has fallen. In both cases, technological improvements allow for much greater output to be produced with fewer workers. As I said in that post, “If the loss of manufacturing employment is truly Hazony’s concern, he’s unduly focused on what amounts to a trivial factor in that regard – he should be spending far more time attempting to put an end to technological progress itself. If, however, Hazony is concerned with manufacturing capabilities, as he says, then he has one less thing to worry about – America’s manufacturing capabilities have only been increasing.” Yet, the people who think American manufacturing is dying will often continue to say so even when they become aware that American manufacturing capacity is greater than ever. Claims about what manufacturing is currently like or how it should be are not what is actually meant by many people who express this concern – what they really mean to say is “hooray for the Red Tribe!”  As a metaethical theory, noncognitivism is hopelessly muddled (and thankfully, not taken seriously by most moral philosophers these days), but I think there is a significant element of noncognitivism in most people’s political speech. People rarely update their stated political beliefs in light of new facts because their stated political beliefs were never meant to express propositional beliefs about the state of the world. They are simply a form of political, expressive noncognitivism – a declaration of attitude and alignment to a tribe.  (0 COMMENTS)

A document I saw on the web last week illustrates a thousand others like it. It pretends to celebrate the life and thought of Thomas Jefferson, and ends the litanies with several quotes from him. Except for one of these I knew and some that could be genuine, the rest were suspicious. I tested two, chosen more or less at random: one was a paraphrase, the other one was fake. The underlying problem of this sort of enterprise seems to lie in an invalid syllogism: Statement P is true; Jefferson only made true statements; therefore, Jefferson could have made statement P. Granting the premises, the conclusion is valid but useless. And the corollary “he said it” is clearly invalid. This approach can be seen as a simple case of circular reasoning. Consider the claim “Statement P is true, therefore Jefferson could (or must) have said it.” But how does the speaker know that statement P is true? I suspect he would say that it is “because Jefferson said it.” In short, the quote comes from Jefferson because it is true, and it is true because it comes from Jefferson. It seems that many people’s whole political-philosophical outlook is based on faulty logic or circular reasoning and thus false information. Believing them on their word has, for some others, the benefit of confirming their prior biases. By giving each person his own printing press, social media has deepened the problem. It is often historically obvious that a quote cannot be genuine—when, for example, Cicero is quoted about the government deficit, which could not exist at the time of the Roman Republic. In other cases, following a simple principle prevents the danger: if a quote has no credible source, assume it is spurious, intentionally or not. (Some sources are more credible than others, whether or not they echo what you believe.) A person who wants you to believe a statement and who has some respect for you will make sure that the statement meets some minimum standards of truth. With AI’s capacity to manufacture “deep fakes”—instead of the ordinary fakes I have been speaking of—much worse is coming. How can we hope that people will have the ability to be critical of the information they receive without being cynical (“Everything is false, except what I know in my guts”)? This is not merely a psychological danger. From those who think that they have a right to prevent other individuals from living peacefully as they want to, it is a mortal political risk. (0 COMMENTS)

One of the wonders of human society is how the individuals of our species found a way to coordinate our actions to collaborate without anyone being in command. Sure, there are governments, but they earn their legitimacy to the extent that they protect individuals’ lives, limbs, and possessions from violence and fraud- not from telling them what to do to make a living. Once the magistrates establish protection against violence, security of possession is all that is needed for a market economy with a price mechanism to develop. The price mechanism tells the economic agents all they need to know to go after their businesses. The relative utility and scarcity of the different goods and services are adequately conveyed to the market participants by the signals given to them by the prices of said goods and services. If I want to know how valuable a particular service is to my fellow man, I just need to check how much I can earn by supplying that service; the same goes for all other goods and services. For about two and a half millennia, human societies have benefited from the existence of coined money as a tool to facilitate the division of labor and to communicate the essential information economic agents need to allow them to act and for society to benefit from the rationalization of economic activities that come from that. It is not that prior to the introduction of coined money, no other instruments were used as media of exchange, units of account, or stores of value. Still, all those functions that we associate with money became much more accessible once coined money was introduced in society. Consequently, the sophistication of our social relationships grew exponentially, and money evolved in its complexity to what we have today. Such is the importance of money that rulers grasped from the beginning that the money supply monopoly would allow them to accrue enormous rents, in the long term by seignorage, and in the short term by manipulating its value, in case of urgent needs. However, manipulation of the value of money, at the time of coined money by debasement, and at the time of fiat money by inflation, good as they may be for the coffers of the state, are the cause of distortions in the price system, giving wrong information to the economic agents and leading them to incur errors.  It is because money is a counterpart in the vast majority of transactions and a necessary measure of relative scarcity in all transactions that the “price of money” is by far the most important in the economy. The “price of money” is purchasing power; it is what you can get in exchange for the money you have. This price illustrates the relation between the supply and demand for money. When the supply of money varies according to the demand for money, the purchasing power of money remains stable; when that relation changes, the purchasing power changes accordingly. Let us assume for a moment that the purchasing power of money is determined “endogenously,” that is, from inside the market, since the government of our hypothetical society has a “hands-off” approach to the money supply. Still, two other relationships determine the “price of money” as essential references for all traders; they are the price of money over time and the price of money in relation to the monies of other societies. They are the interest and the exchange rates. Like the determinations of the purchasing power of money, the interest rate also has a “natural” equivalent, that is, the “time preference” of the economic agents. That is, how much the traders prefer to dispose of goods now compared to some time in the future. The closer the actual interest rates “on money” are to the “natural” rate, the more efficient the capital allocation in society will be. Once the purchasing power of money is established, the most important price in the economy is, therefore, the interest rate, or, in other words, the changes in the purchasing power of money over time. The second most important price is the exchange rate. The reason for that is easy to understand. Every politically organized society is a tiny fraction of the global economy; a medium-sized country like Argentina, for example, produces about 0.5% of the worldwide GDP. If you do not have a freely established exchange rate, one which reflects the actual supply and demand of the local currency in comparison with the currency of the rest of the globe, you are distorting the signs about the relative value of what you produce and consume domestically in relation to 99,5% of all that is made in the world. The chances of error when you distort your information about what is going on outside your borders are immense. In my next post, I will turn to the current situation in Argentina.   Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. (0 COMMENTS)

The answer to this question depends entirely on how one defines “cause”. There’s a sense in which wages do not cause inflation, and an equally plausible sense in which wages do cause inflation. I’ll begin with the negative view, by responding to a recent FT story: The Fed expects the labour market to cool this year, but it believes that — unlike in the past — a sharp rise in unemployment will not be necessary to bring inflation to their 2 per cent goal. One reason why is a big influx of foreign workers into the US, helping to contain wage growth and, ultimately, prices. While immigration has become a politically charged topic, with lawmakers on the Hill locked in a months-long debate over migrants entering the country via Mexico, the impact of a post-pandemic wave of new arrivals has been positive for the US economy. The Congressional Budget Office, Congress’s independent watchdog, said on Wednesday that the wave would boost output by $7tn over the next 10 years, with the US labour force likely to have 5.2mn more people by 2033 compared with estimates taken in February 2023. The phrase “contain wage growth and, ultimately, prices” suggests that causation goes from slower wage growth to slower inflation.  Perhaps people are thinking in microeconomic terms; how would an individual firm react to higher wages?  At that level, it really does make sense to speak of wages driving prices higher, as in the case where a restaurant must pay its workers $20/hour instead of $10/hour.   Unfortunately, it’s dangerous to use microeconomic analogies in macro.  For instance, borrowing costs are also important to many businesses.  If firms must pay higher rates to borrow money to finance inventories, then they will have an increased cost of doing business.  But does that mean that the Fed can reduce inflation by reducing interest rates?  Obviously, things are not that simple.  The fallacy of composition says that what’s true for the individual firm may not be true for the economy as a whole. In fact, higher wages probably do not “ultimately” cause higher inflation in the sense that most people view causality: Wages —- > Prices Instead, both wage and price inflation are driven by the third factor: Monetary policy —- > Nominal GDP growth —- > Wages & Prices So if someone tells me they don’t believe wages cause inflation, I won’t disagree. On the other hand, if someone tells me that lower wages will lead to lower inflation, I won’t disagree with that either.  There is a sense in which lower wages lead to lower inflation. The Fed has a dual mandate, stable prices and high employment.  You can think of wage moderation as a factor that allows the Fed to bring down inflation without created high unemployment.  In a technical sense, it’s a tight money policy that slows NGDP growth that ultimately causes lower wage and price inflation.  But downward wage flexibility makes the Fed more willing to undertake that policy. So what’s the most likely source of the wage moderation?  There seems to have been a surge in immigration, which has boosted both labor force growth and real GDP growth.  Because of this extra supply of labor, nominal wages are growing less rapidly than otherwise.  And the faster RGDP growth means lower price inflation for any given NGDP growth rate. That italicized qualification is essential.  I am not saying that faster RGDP growth causes lower inflation.  That would be reasoning from a quantity change.  Rather, faster RGDP growth for any given NGDP (i.e. any given aggregate demand) leads to lower inflation.  But of course there is only one way that RGDP growth can rise if NGDP growth is stable—a positive aggregate supply shock.  And that’s what we’ve had in 2023. To be clear, I am not suggesting that all’s well and that we now have a soft landing.  Today’s disappointing CPI report supports the claims made by those of us worried about the difficulty of achieving the “last mile” of inflation reduction.  But the immigration surge has certainly made a soft landing somewhat more plausible than before.  Now the Fed needs to finish its job and get NGDP growth back down to about 4%. PS.  Whenever I do a wage post, people confuse real and nominal wages.  Nothing in this post has any bearing on the issue of whether higher real wages are desirable.  Personally, I’d love to see workers get much higher real wages.  My focus here is the completely unrelated concept of nominal wage growth, which needs to slow in 2024 from the excessive rate of 2023. (0 COMMENTS)

I’ve often been involved in debates in politics in which people deny actual facts. At first, it’s easy to attribute that to partisanship. But it takes more than partisanship. Consider sports. On Sunday night, I was disappointed when Patrick Mahomes threw the touchdown pass that ended the game in overtime and handed the win to the Kansas City Chiefs. But I didn’t deny that there was a touchdown. I bet there were a few million households in northern and central California and elsewhere in which there were 49ers fans who were quite disappointed. But I have yet to hear from, talk to, or read about a 49ers fan who thinks that Kansas City didn’t score a touchdown. Yet all 49ers fans are, by definition, partisans of the 49ers. Consider, by contrast, politics. I often talk to people about political issues who won’t admit basic facts. So, for example, someone will tell me that the rich don’t pay their “fair share” in taxes. They are usually talking, not about the rich, but about high-income people. I’m long past the days when I would correct them on that, unless it really matters for the discussion. We both know that we’re talking high-income, so I proceed with the discussion. It’s hard to know what their fair share is; that’s a normative issue. But it’s not hard to know what percent of income is paid in taxes by people in various income groups. When I point out that the higher the income, the higher the percent paid (except for, in some countries, a tiny percent at the top), they often deny it. But they don’t show me any data that contradict that. It’s true that it’s a little tougher to find data on that than to notice whether the football player caught the ball in the end zone. But, with Google and other search engines so readily available, it’s only a little tougher. And they often stick with their view. They could argue the economically relevant point that you can’t judge the burden of the tax by who explicitly pays but, instead, have to consider elasticities of supply and demand to figure out who really bears the burden. But that’s not typically what happens. (0 COMMENTS)

When a price is capped under its market equilibrium level, what happens? Few people seem to know the answer except for economists. And even some economists do as if they didn’t know, perhaps distracted by their, or their bosses’, ideology. The answer: price caps create shortages, that is, the stuff disappears from the shelves, waiting lines form, and illegal suppliers are the only recourse if you can’t wait or go without. We had many examples of this during the Covid emergency. It is easy to see all that on a simple supply-demand graph: quantity supplied decreases while quantity demanded increases. (Understanding precisely how the demand and the supply curves are built is a bit more complicated: that’s what classes in microeconomic theory are useful for.) A current example: property-casualty insurance (“Buying Home and Auto Insurance Is Becoming Impossible,” Wall Street Journal, January 8, 2024). In half the states, property-casualty rates require government approval, at least for the non-commercial sector (information for 2011; it may be worse now). Because of higher car and house values, more frequent storms and fire risk, and increasing reinsurance rates (which government controllers don’t necessarily take into account), some property-casualty insurers have left a few states, notably California. For the consumer, there is one thing worse than a price increase: it is to find no supplier, which is exactly what a price cap and a shortage entail. Some of the empty-handed buyers would prefer to pay more but are legally forbidden to or, what amounts to the same, their suppliers are forbidden to respond to bid-up prices. Price caps would be a great way to stealthily nationalize an industry. Perhaps this has started for property-casualty insurance in states with “last-resort insurers,” which are government bureaus or private companies backed by state governments. There are other current examples. The Consumer Financial Protection Bureau is proposing to cap bank overdraft fees with the virtuous goal, the Financial Times tells us, of “saving consumers billions of dollars a year and stepping up US President Joe Biden’s war on so-called junk fees ahead of the 2024 election” (“US Consumer Regulator Proposes Capping Overdraft Fees,” Financial Times, January 17, 2014; see also Nicholas Anthony, “CFRB Targets Overdraft Fees in Biden’s War on Prices,” Cato Institute Blog, January 23, 2024). The targeted large banks will likely stop offering overdraft protection (or other services) to their more risky customers, sending them to smaller and less convenient banks—less convenient as revealed by these consumers’ original choice. Contrary to market competition, political and bureaucratic processes provide no built-in check on prices remaining higher than costs (including normal profits). As more government controls are imposed, shortages become endemic, consumers get more dissatisfied, and they cry for further controls. On this dystopian path, nationalization under the applause of the populace would not be inconceivable. Leviathan would cap more prices and more shortages would develop. “It’s because of the supply chain.” “Is because of corporate greed.” Aren’t consumers already getting a glimpse of this future? Where is John Galt? (0 COMMENTS)

How far back should you go to understand the current moment in the relationship between Israel and its Palestinian neighbors and the attack of October 7? Some would say 2005, or 1967, or maybe 1948 when the State of Israel was founded. But for historian and author Hillel Cohen of Hebrew University, year zero was […] The post Year Zero of the Arab-Israeli Conflict (with Hillel Cohen) appeared first on Econlib.

China’s economy has recently become a subject of widespread concern. The FT has an article with the following headline: China’s consumers tighten belts even as prices fall The term “even” caught my attention.  Surely the FT editors don’t believe that falling prices would be expected to boost consumption?  That would be an EC101-level error.  And yet, the article also contained this odd claim: Weak price growth is not automatically encouraging people to spend. “Theoretically low prices should increase purchasing power of consumers, but that hasn’t been the case,” said Louise Loo, lead economist at Oxford Economics. “We think the reason is because the deflationary mindset has been quite entrenched.” “I think this is the start of a pretty structural trend,” she added. “People have become a lot more precautionary . . . They think a lot harder about how they want to spend an additional dollar of income.” I have no idea what theory Louise Loo is referring to, as it’s one I’ve never seen. Indeed, this sounds a lot like reasoning from a price change. Here it might be useful to review the economy’s circular flow, which says that gross spending equals gross output equal gross income.  Falling prices do not increase purchasing power, unless the fall in prices is caused by a rise in aggregate supply.  But if the fall in prices was caused by a fall in aggregate demand, then you’d actually expect a fall in consumer purchasing power, as a decline in AD typically reduces real output and real income.   Never reason from a price change. In China’s case, the recent fall in prices is almost certainly due to a fall in AD (or more precisely a slowdown in the growth rate of AD).  We know this because output growth is also fairly weak.  This suggests that China’s monetary policy is too contractionary. Milton Friedman once said that persistent inflation is always and everywhere a monetary phenomenon.  Here’s what I’d say: Excessively tight monetary policy is always and everywhere misdiagnosed as some other problem. This misdiagnosis occurs for several reasons.  First, most people—even most economists—have no idea as to how to evaluate the stance of monetary policy.  To put it bluntly, most economists wouldn’t recognize tight money if it were right in front of their nose.  Second, most economies that suffer from tight money also suffer from other problems.  Thus the falling prices and weak output are attributed to other aspects of the economy, not monetary policy.  (Recall when the 2008-09 decline in AD was wrongly blamed on housing and banking problems.) As an analogy, I recently had two consecutive illnesses.  At first, I thought the second was my first illness getting worse.  Only last Wednesday did I go to the doctor and discover I had diverticulitis (a condition I’d never even heard of.)  I’ve also had colds that morphed into pneumonia.  In those cases, I failed to initially see the problem, assuming it was just a “bad cold”.  This sort of error is excusable, as colds do actually make one more susceptible to pneumonia.  Similarly, various “real problems” with an economy make it more likely that a central bank will adopt an excessively contractionary monetary policy.  That’s partly because many central banks target interest rates, and real problems usually lower the natural or equilibrium rate of interest. Mark Leonard recently interviewed a number of economists and other policy experts in China: The critical question behind all this is how well the economy is actually doing. Among the Chinese economists I put this to, the most common answer was “very bad.” But they reject the Western analysis of peak China as a result of demographic issues, an absence of domestic reform and a negative international environment. Instead, they point to China’s structural advantages. Of its 1.4 billion citizens, only 400 million are middle and high income. The remaining billion are still low income — hundreds of millions of them in the countryside — and can still be brought into an urban industrial economy, boosting domestic demand as well as economic growth. The key challenge for China is stimulating that demand. China has a lot of fiscal head room to do this.       At least they understand that the problem is aggregate demand, which the FT article doesn’t even discuss.  But China needs monetary stimulus, not fiscal stimulus. The Chinese economists understand that China has a lot of potential, if they can get the policy right: The demographic situation is not the problem that Westerners think, they feel, at least in the short-term. China is not desperately short of workers: there is 20% unemployment for young people, and it is always possible to bring more workers in from the countryside. Economists are also positive about advances in new technologies. China is overtaking Japan as the world’s largest car exporter this year, and the Chinese company BYD is the world’s biggest manufacturer of electric vehicles, with sales that leave Tesla in the dust), and it is making progress in AI. Economists at Tsinghua and Peking University told me they have built models which show that China’s growth potential for the next decade is between 5 and 6% annually, through a combination of advanced industry upgrades and clean energy technology. In short, Chinese experts feel the economic fundamentals are not as bad as Western debate suggests. Where they are really pessimistic is about the politics. “The United States can’t stop China’s growth,” one economist said, “only the stupidity of our leaders and the sycophancy of their advisers can do that.” The entire article is excellent—well worth reading.  It’s also one of the saddest articles that I’ve read in years. HT: David Levey. PS.  The title and subtitle of Leonard’s article caught my eye: Sunset of the Economists Two decades ago, China’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Wouldn’t these headlines also be somewhat accurate: Two decades ago, America’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Two decades ago, Russia’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Yes, what happened to the entire world? PPS.  Instead of an article with hundreds of ambiguous words, if only the FT had given us this graph: (0 COMMENTS)

Here are some highlights from my weekly reading and viewing. Create Wealth Without Making Anything by Art Carden, AIER, February 5, 2024 A popular and pernicious fallacy that Thomas Sowell calls “the physical fallacy” holds that you’re not creating value if you’re not turning material stuff into another kind of material stuff. In this view, you take some stuff, hit it with something enough times that it becomes other stuff, and presto! You have created wealth. And industrial policy doesn’t seem to account for any other kind of creative value, leading to the all-too-common, and clearly fallacious, claim that “Americans don’t make things anymore.” The statement that we only create wealth by creating physical objects is wrong in both tenets. Just because you’re making something doesn’t mean you’re creating value. You could very well be destroying it, as someone does when he raises cattle on land that would be more profitably used for housing and office space. And conversely, someone creates wealth when they move assets from a lower-valued use to a higher-valued use. Everyone selling things on eBay is creating wealth — or trying to — by matching things with people who want them at prices that make the sale worthwhile to both parties. I’ve been buying a bunch of junk on eBay recently that I find very meaningful. Other people might disagree. My favorite part of Thomas Sowell’s 1980 book Knowledge and Decisions is the one that discusses the physical fallacy and gives great examples. Some Facts about Fires by Timothy Taylor, Conversable Economist, February 6, 2024. As you can see from the above figure, the number of career fire-fighters has expanded by about 50% over the last 40 years (from about 240,000 to 360,000). In that time, the number of fire department calls has more than tripled (from about 11 million to over 36 million). However, the number of calls related to fires has dropped by more than half, reflecting the decline in number of fires. Medical aid or rescue was already a more common fire department activity back in 1980, but it has expanded quite rapidly. Fire department also end up involved in a number of other situations like downed power lines, disaster relief, or even bomb threats. What it means to “be a fire-fighter” has been evolving over time.   OUTRAGEOUS “PET TAX” BILL INTRODUCED IN COLORADO HOUSE BY DEMOCRATS RAISES The Lobby, February 3, 2024. Not only does this bill require pet owners to register their pets with the state, but it also mandates the assignment of a “designated caregiver” for each pet. Failure to name a caregiver would result in an annual cost of $25 per pet. There is no limit or cap on the taxation, meaning that pet owners could potentially face exorbitant costs. This tax would be in addition to any local taxes, such as dog licenses, further burdening pet owners.   Law-Abiding Immigrants: The Incarceration Gap between Immigrants and the US-Born, 1870–2020 by Ran Abramitzky and Juan David Torres, Stanford University; Leah Platt Boustan, Princeton University; Elisa Jácome, Northwestern University; and Santiago Pérez, University of California, Davis, Cato Research Briefs in Economic Policy, February 7, 2024, Number 369 Our data do not enable us to precisely pinpoint why there has been a sharp relative decline in the immigrant incarceration rate since 1960. Nevertheless, we can rule out three plausible explanations. First, the relative decline in immigrant incarceration is not driven by rising incarceration rates of US‐​born black Americans; the decline is also apparent when comparing immigrants with US‐​born white men only. Second, the decline is not driven by changes in immigrants’ observable characteristics—namely, their countries of origin, age, race, marital status, state of residence, or educational attainment. If anything, immigrants’ lower educational attainment in recent decades would predict that they should have higher incarceration rates than they do. Third, the decline is not driven by immigrant offenders becoming more likely to be deported (and thus absent from the incarceration data); the decline is present even among immigrants who are US citizens and thus cannot be deported. Moreover, the timing of the decline is also inconsistent with this explanation; whereas the relative decline in immigrant incarceration emerged in the 1960s, the sharp rise in deportations occurred around 2000.   A Visit to Julian Assange in Prison by Jeffrey Sterling, Antiwar.com, February 8, 2024 I fondly remember Charles Glass. He wrote to me while I was in FCI Englewood, the prison I was bound in after being convicted of violating the Espionage Act in 2015. He and others sent me a few of his books, notably Americans in Paris and Tribes with Flags. I was extremely grateful for such support. I had read them before, but reading from prison allows a different perspective, even on paths previously traveled. My prison eyes were reading them for the first time. In some ways, his visit with Assange was a similar overture of support for me and my experience in prison. I make no attempts to compare myself to Julian Assange, but I know what he is going through and what he is facing. Glass’s statement that Assange’s “…days are all the same: the confined space, the loneliness, the books, the memories, the hope that his lawyers’ appeal against extradition and life imprisonment in the United States will succeed” also applied to me. But, what was particularly profound for me was reading about Glass’s experience as a visitor to someone confined to prison. For me, time with a visitor was a highly-desired oasis in the never-ending desert that is prison. It was the one time I could have a more substantial connection with the world outside the prison walls. Email and letters were always appreciated, but nothing could replace actual contact, or at least being in the same room as a loved one or supporter. The value of having a visitor cannot be understated, the other days fighting against the droll, oppression, and monotony of prison were all endured for the singular experience of a visit. I imagine that Assange has had the same longing anticipation of an upcoming visit, the one time in prison when you can be reminded that you are still alive, still human. Surging Immigration Will Reduce Deficits by $1 Trillion by Eric Boehm, Reason, February 8, 2024 More immigrants will also help reduce future budget deficits—which are expected to average $2 trillion annually over the next 10 years, meaning any help is desperately needed. The changes in the labor force over the past year will translate into $7 trillion in greater economic output over the next decade, the CBO estimates, “and revenues will be greater by about $1 trillion than they would have been otherwise.” Remy: All Oil Everything (Trinidad James Parody) by Remy, Reason, February 9, 2024 My favorite line (at the 1:57 point): “You all should have thought of that before I never read a book.” NOTE: The pic above is of Julian Assange. (0 COMMENTS)