I recently took my first trip to the Middle East, and have a few observations. Please consider the following post to be highly speculative, based on a limited understanding of the region.   As soon as I boarded the Qatar Airways flight from LAX, I noticed the diversity of the cabin crew, which included blond Europeans, East Asians, Africans and Middle Easterners.  One thing they had in common is that they were all young, attractive women.  Then I recalled reading that nearly 95% of the Qatar workforce is foreign workers.  On the second leg (from Doha to Abu Dhabi) I sat near a bunch of young German men who looked like they might be engineers.  A fast growing economy like the UAE presumably needs a lot of foreign technical expertise, and thus it’s no surprise that foreign labor plays such a big role in the Gulf region. A US airline must recruit its staff from the US labor market.  The Gulf states can recruit their airline personal from the entire world.  Because so much of the world is poorly governed, there are millions of highly talented people stuck in countries with very low wages.  Qatar can recruit smart, hard working and attractive cabin crew from Nigeria, Ukraine, Vietnam and Egypt, all places with low average incomes.   When New York City builds infrastructure, they must deal with inept US companies, inefficient labor unions and a corrupt and over-regulated political process.  When Abu Dhabi builds infrastructure that can have the best German, Chinese and South Korean builders compete for the contract, using cheap South Asian labor to do most of the heavy lifting. To readers involved in international business, none of this is surprising.  But it got me thinking about the so-called “resource curse”, which actually represents two distinct issues.  One type of resource curse occurs when a natural resource boom appreciates the real exchange rate, making other firms less competitive.  This is called the Dutch Disease.  A second problem occurs when reliance on natural resources causes governments to become less efficient and/or more corrupt.  This problem is associated with places like Nigeria and Venezuela. I had always assumed that a natural resource boom either made the remaining parts of an economy less efficient, or at best had no major impact in either direction (as in Norway.)  It seems to me, however, that oil and gas have made even the non-oil and gas parts of Gulf economies much more efficient than in most other similar countries. If so, how should we think about that outcome? Let’s assume that the most efficient economic system is a free market, perhaps with some regulations to deal with things like monopoly and externalities.  In that case, why are even relatively successful economies such as the US so full of inefficient rules and regulations?  One answer is that special interest groups often oppose free markets.  US born flight attendants don’t wish to compete with flight attendants from low income countries, and hence the US refuses to allow Qatar Airways to serve domestic US routes.  US construction companies and workers don’t wish to compete with international firms using German engineers and Pakistani laborers, so we end up with far inferior subways systems.  So how were the Gulf countries largely able to avoid these burdensome restrictions that reduce efficiency?  Recall that prior to the discovery of oil, these nations had very small populations that engaged in traditional lifestyles.  There was no large urban proletariat clamoring for protection against cheap foreign labor.  The oil wealth allowed these governments (mostly monarchies) to essentially buy off the support of the native born population.  Openness to international trade and investment led to greater economic efficiency, which led to ever higher living standards.   It’s only natural to view the economic success of this region as being almost entirely due to its oil wealth, and that used to be my view as well.  But I no longer think that’s true, or at least it’s not true in the sense that people assume it to be true.  In some respects, the most impressive parts of the Gulf economies are their non-oil sectors. As an analogy, if you explain to an average person that Switzerland is much richer than other European countries, they’ll immediately reach for some sort of explanation that they can visualize.  “It must be those mysterious Swiss banks, with all of their secret bank accounts.”  While Switzerland has some successful banks, that industry plays only a minor role in Switzerland’s overall success, which is based on very high productivity in a wide range of industries.  Similarly, if you mention to people how rich Singapore is, they immediately gravitate toward explanations such as the role of wealthy Chinese and Indian migrants.  People have trouble understanding how various small nations might simply have much more productive people than their neighbors.  Do the Swiss and Singaporeans work harder than other people?  Let me try to anticipate some objections to this view.  You might argue that Qatar Airways isn’t more efficient than American Airlines, they simply pay their flight attendants lower wages.  But those lower wages presumably reflect the fact that flight attendants from poor nations have a lower opportunity cost of labor in their home country.  So it really is more efficient to use a talented person from Nigeria or Ukraine than to use an equally talented person from Bavaria or Illinois.  From a global utilitarian perspective, the Gulf states are “doing the right thing” by bringing in foreign labor, and it’s also the most profitable approach. A second objection is that there are reports of foreign workers being badly mistreated in the Gulf region.  This problem also occurs in other parts of the world (such as nannies working in Hong Kong), but it seems to be especially widespread in the Gulf.   I won’t deny that the abuse of foreign workers makes the Gulf model less impressive than otherwise.  But I would deny that this problem completely overturns the case for globalization.  Any American or European nationalists looking down their noses at working conditions in the Gulf need to consider the deeper structural factors that lead to these abuses.  The root cause is the dramatic mismatch between the poverty of one part of the world and the affluence of another part of the world.  As long as those disparities exist, there will be some appalling situations whenever the two worlds come into contact. An American or a European might smugly assume that we don’t have the bad working conditions that they’ve read about in the Gulf.  But why is that?  Isn’t that largely because we’ve built barriers to stop tens of millions of desperately poor people from reaching our countries?  For every story of a Filipino worker being abused in the Gulf, there are a dozen stories of migrants being robbed, raped or drowned while attempting to reach the US or Europe.  These tragedies exist because desperately poor people are willing to put up with things that most of us cannot even imagine, in order to have a shot at a better life. From this perspective, the Gulf is not so different from the US or Europe.  It has a system with some strong positives and also some serious negatives.  The difference is that the negatives occur right within their economies, whereas the equivalent problems created by our wealth occur out of sight of American and European residents. Fortunately, the international flow of goods, investment, and labor is not a zero sum game.  The Gulf region is growing rapidly, and despite the very real abuses that occur on occasion, the net effect is to provide new opportunities to people from all over the world, especially South Asia. There are very few economic systems that are as efficient as Singapore or Switzerland.  Presumably, that’s because the public choice hurdles are simply too formidable for most governments to overcome.  If I am correct, then instead of viewing oil as the sole source of the Gulf’s economic success, it might be more accurate to view oil as the currency that Gulf governments used to buy a relatively efficient economic model for their non-oil sectors.  I used to believe that Norway was unique—an oil-rich country with an equally high quality non-oil sector.  Now I wonder if the Gulf states are not becoming successful in much the same way.  I hope so, as the world needs more highly successful models to emulate.  One success story can be written off as a fluke—it’s much harder to brush aside success in a half dozen countries.  How long will the Iraqi people accept the incompetence of their current regime? Prior to the trip, I’d read many articles on the boom in the Gulf, such as this Bloomberg piece: Demand for Dubai property is booming as the government’s handling of the pandemic and its liberal visa policies attract more foreigners. The luxury end of the market is also benefiting from an influx of investors such as Russians seeking to shield their assets, crypto millionaires, and rich Indians setting up second homes. “The global super rich continue zero in on Dubai, with the city’s lifestyle and relatively affordable luxury homes being the top pull factors,” said Faisal Durrani, head of Middle East research at Knight Frank. “There is also an element of a pooling of global wealth in Dubai, which is helping push the emirate to a state of critical mass, which itself has become a new magnet for the global elite.” But it wasn’t until I visited Abu Dhabi that I finally understood what’s going on in this region.  Places like Abu Dhabi are surprisingly similar to the US, but much easier to get into.  Why wouldn’t they be booming?  I also encountered many “Middle Eastern-looking” people in the Gulf who did not speak Arabic but did speak English, as they come from places like South Asia.  They complain that they can’t get visas for America but tell me it’s easy to get visas for the Gulf.  It’s like a new America is being created because the real America (wrongly) thinks it’s full. Land use is another area where this region may have advantages.  Even in the US, NIMBYism is a bigger problem in areas with attractive countryside (Coastal California and the Northeast) than in places like Texas and Arizona.  Internationally, it’s probably easier to build a giant new airport in a Middle Eastern desert region than it is to add even one runway to Heathrow.  Thus the Arabian peninsula is a sort of blank slate where ambitious governments can add people and infrastructure according to the whims of their planners.  And South Asia has plenty of people to add to the mix.   Will Arabia become the new America? PS.  When I refer to the Gulf region I am mostly thinking about the UAE, Qatar, Kuwait, Saudi Arabia, Oman and Bahrain.  On this trip, I visited the UAE (specifically Abu Dhabi), Oman and Qatar.  Iraq and Iran are very different places. PPS.  Janan Ganesh’s columns are almost always insightful, and this recent piece on Dubai is no exception. (0 COMMENTS)

I’ve often cited the UN’s Intergovernmental Panel on Climate Change’s (IPCC) conclusion that if we do nothing about global warming this century, GDP in 2100 will be 3% lower than it would have been. This November 2022 report by Charles Kenny, a senior fellow with the Center for Global Development puts the number even lower. He writes: By AR6 the IPCC was suggesting “under high warming ( >4°C) and limited adaptation, the magnitude of decline in annual global GDP in 2100 relative to a non-global-warming scenario could exceed economic losses during the Great Recession in 2008–2009 and the COVID-19 pandemic in 2020.” (World GDP fell from $62.9 trillion to $62.1 trillion 2008 to 2009, and $84.7 trillion to $81.9 trillion 2019 to 2020, these are one-year declines, and the IPCC is suggesting climate change might cause the same impact over 90 years). The IPCC’s estimates are toward the low end. A recent review of the literature using estimates of the impact of past temperature changes (alone) to forecast future impacts suggests global GDP will be 1-3 percent lower than otherwise in 2100 due to the impact of climate change (with a 95 percent confidence interval of -8.5 percent to +1.8 percent) consistent with most integrated assessment models, although some of those models suggest an impact up to 10 percent in the presence of extreme events like the collapse of the Greenland Ice Shelf. He goes on to point out: But even with Burke et al.’s approach, the annual global growth rate under their baseline scenario is 3.1 percent. Absent climate change, the global economy would be about 15.6 times larger in 2100 than 2010. They suggest the impact of climate change might be to bring that down to about 12 times larger. A friend who lives in Miami called yesterday and said, “What if I accept the 3% claim? That doesn’t tell me what happens to wealth.” He explained his point with an example. With global warming, coastal Florida might get seepage of seawater into their fresh water. That would he a wealth loss because they would have to spend substantial resources to use, say, desalinization. I answered that that’s Florida and I don’t how general that is, so that in the grand scheme of things, it might not be a large wealth loss. But we both recognized that I’m speculating. There could be other effects in various parts of the United States and the rest of the world that would cause large wealth losses. It turns out that Kenny makes a related point. He writes: One of the greater war crimes of the second half of the twentieth century was the massive and indiscriminate bombing of Indochina by the United States in the 1960s. The aerial campaign dropped more bombs than were used in the entirety of World War II. In North Vietnam, Operation Rolling Thunder destroyed more than half of the bridges and nearly 60 percent of the power plants alongside schools and houses, and killed at least tens of thousands of people. In 2011, Ted Miguel and Gerard Roland went looking for evidence of the long-term economic impact of the devastation. But they could “find no robust adverse impacts of US bombing on poverty rates, consumption levels, electricity infrastructure, literacy, or population density through 2002.” It was as if the mass destruction and loss of innocent life had never happened. It would take an obscene amorality to suggest “well then, it didn’t matter.” I think those who look at long-run economic forecasts of the impact of climate change and ask: “how can they be so small?” or look at those impacts and argue “see, it doesn’t matter” might be falling into a related error. It is true the long-term aggregate GDP impact of climate change might look underwhelming in much of the economics literature. In a way that should come as little surprise, in that the long-term aggregate impact of past disasters often looks pretty small in the literature too. But that doesn’t mean climate change is a small problem any more than those past disasters were; it means that long-term global GDP trends probably miss a large part of a big problem. “Lukewarmers” who use long-term global GDP forecasts to downplay the urgency of climate change are considerably too sanguine, then. But “doomsayers” who see the whole world heading toward a future amounting to a hotter version of the stone age are also wrong. The economic impact of climate change will vary considerably by country, with much of the effect driven by shorter-term shocks. And misdiagnosing the climate problem—either as small or universally existential—matters: it drives poor choices in the global policy response. The upcoming climate conference in Sharm El Sheikh is an opportunity to fix that. Kenny’s analogy with bombing causes him to fall into a trap. It causes him to look just for the negative effects of global warming. But global warming is not like bombing: it also would have positive effects. Kenny links to an IPCC chapter that discusses many of the bad effects of global warming that might be expected. But the IPCC chapter falls into the same intellectual trap that Kenny has fallen into: looking only at bad effects. There are also good effects and, as far as I can tell from perusing the lengthy chapter, the authors discuss literally none of them. “What good effects?” you might ask. Well, that’s easy for someone [me] from the cold Manitoba prairie to answer. There would be warmer weather further up north and, therefore, there would be farming further north in Manitoba, in Canada generally, in Norway and Sweden, and in Russia than there is now. Take a look at that chapter and you will see none of this. David Friedman has done a great job on this specific issue of farming and food (here and here, for example.) It’s hard to find much else. Here’s my more-thought-out prior on why the wealth losses would be relatively small. People would have time to adapt. Think about buildings on the coast that might be sitting in a foot of water. If that happened, it would likely happen in 40 or so years. So when people replace old buildings with new buildings, much of which they would have done anyway, there’s not much added cost. Has anyone taken a careful look at the wealth losses and compared them to the wealth gains? If you answer, please include links. Comments that have lots of links generally get held up before they are posted. So a safe way is to type out the link rather than include a hot link. Your option.   (0 COMMENTS)

It is my favorite time of year. The end of the NFL regular season! I’m not a hater of the NFL. I’m a lover of seeing economic principles in real life! Many players have incentives in their contracts if they achieve certain statistics over the course of the season. For instance, the Chicago Bears kicker, Cairo Santos, made $500,000 for having a field goal rate above 90% for the season. Denver Bronco wide receiver, Courtland Sutton, made $100,000 for having 10 touchdowns for the season.  Each year heading into the last weekend people track who is close to their contract incentives. And each year after the last weekend of the season ESPN publishes an article detailing who made their incentives and who fell short. Without fail, each year players and coaches demonstrate the economic principle that incentives matter. Incentives do indeed shape individual’s behaviors. Incentives change the relative price of different behavior.  The Kansas City Chiefs had a great storyline that juxtaposes two players. Going into the last game of the season the Chiefs had already qualified for the playoffs. The game had no meaning for the post season. So many key players did not play. However, many people were surprised when tight end, Travis Kelce decided not to play despite only being 16 yards short of 1,000 yards on the season. Not playing would mean this was the first season since 2015 that he did not reach the 1,000-yard mark. It made it all the more puzzling when defensive lineman, Chris Jones did choose to play in order to try and get his 10th sack of the season. But it was really only puzzling to anyone that did not know the behind the scenes contracts of the two players. There was no monetary incentive for Kelce to reach 1,000 yards. On the other hand, Jones would receive $1.25 million-dollar bonus if he reached 10 sacks on the season. The cost of choosing to play or not was extremely different for the two players.  Two other examples of incentives impacting behavior were Detroit’s Jared Goff and receiver Josh Reynolds. Goff admits he was aware of Reynolds being 10 yards short of a $250,000 bonus. So, in the final possession of the fourth quarter, Goff threw to Reynolds four times in a row to help ensure he got there. Ryan Tannehill wanted to make sure his receiver hit 75 catches and 1,050 yards for a $500,000 bonus. Tannehill admitted that since he is a free agent at the end of the season, he was willing to go against play calls that didn’t favor his receiver in order to get him to the bonus. While Tannehill didn’t end up having to go rogue, he also demonstrated that the cost of disobeying a coach’s play call when you know you are a free agent is much lower than if you are still under contract with the team.   Because incentives impact decisions, it is essential that those incentives align to the goal the organization is trying to achieve. You don’t want players only going after statistics if those plays don’t help the team get to the larger goal of winning. You want to structure contracts so players have individual incentives that align their actions to the goals of the team. Many players have incentives for making the playoffs. This focuses the player on making sure the team reaches a goal.  The principle applies to everything in life. Individuals respond to incentives. Incentives impact the relative cost of different actions which can impact which decisions individuals make.    Amy Crockett is a PhD Candidate in the Department of Economics and a Graduate Fellow in the F.A. Hayek Program at the Mercatus Center, both at George Mason University. (0 COMMENTS)

Today I continue my on-again-off-again theme of “Kevin complaining that economists are terrible at naming ideas.” The inspiration for this post comes from the pricing system used by a clothing store my wife enjoyed perusing.  At this location, items of clothing carried price tags that were interestingly different from what you would find at most clothing stores. Each item of clothing had multiple prices listed on the tag, along with a series of dates associated with the price. The longer an item of clothing went unsold, the lower its price would drop – and the date of each decrease was listed on the tag. So, a sweater might be marked as $50 today, but on March 1st it would be $40, and on April 1st it would be $35. When she told me about the whole system, my first comment was “That’s a really clever way to engage in price discrimination.” And then I felt the old annoyance inside me about that term, because what most people would think when hearing it is very different from what it actually describes.  Imagine talking to someone who has never studied economics and telling them a particular business engages in price discrimination. What would they likely take that to mean? Probably something similar to the line in the song America in West Side Story, where one of the singers complains “One look at us and they charge twice.” Or, perhaps, something like the reports one sometimes sees claiming that homes owned by a black family get significantly higher appraisals if the appraiser thinks the home is owned by a white family. But actual price discrimination is different from this.  Let’s assume that Snickers is willing to sell candy bars for at least 75 cents. And assume I’m willing to buy a candy bar from Snickers for upwards of $1.25. Let’s also assume the market price for Snickers is $1 per candy bar. When I buy a Snickers, I get something for $1 that I valued at $1.25, and they get $1 for something they valued at 75 cents. As a result, I get 25 cents in consumer surplus, and they get 25 cents in producer surplus. So far, so good. Of course, what Snickers would really like to do is charge me in particular $1.25 per candy bar, since that would lead to larger producer surplus for them. But while they know that some consumers out there would be willing to pay more than the current market price, they have no reliable way of knowing who they might be, and the transaction costs of attempting to work that out are prohibitively high. If they could reliably figure out that they could sell candy bars to me at $1.25 and $1 for you, they would successfully be engaging in price discrimination.  So, lets bring it back to the clothing store. The workability of price discrimination depends on the seller being able to reliably know a specific consumer’s willingness to pay. There’s no feasible way to do that with Snickers bars. But it’s very easy to do in, say, an auction. Auctions, by design, sell items to the person with the highest willingness to pay. Of course, auctions don’t guarantee perfect price discrimination. I might win a Snickers in an auction by bidding $1.15 – this falls short of the full $1.25 I’d have been willing to pay but it does provide Snickers with a higher producer surplus than an ordinary market transaction. The clothing store, by contrast, operated on a sort of reverse auction pricing system. They’d be willing to sell the hypothetical sweater for at least $35, but they know that at least some customers out there would be willing to pay more. If I valued the sweater at $50, I’d of course still prefer to pay $35 for it instead of $50. But if I wait for the price to get that low, I might lose the sweater if someone else is willing to buy it when the price drops to $40, so that gives me a reason to buy it before that happens. By using this system, the store can make sure that more of their sales go to people who value the products the most, while also gaining a larger producer surplus.  Price discrimination is also more feasible outside of auction-style scenarios where sellers are able to get more individual information on potential buyers. You’ve probably heard the advice that if you’re going to buy a plane ticket online, you should first clear your internet browser cache and cookies and view the website in incognito mode, or behind a VPN. The reason for this advice is because websites can use that kind of information to engage in price discrimination. Instead of selling tickets at a flat rate to all consumers, they can have their websites programmed to use that information to try to determine the maximum price this specific consumer will pay for a plane ticket. Having access to that information reduces the information asymmetries that exist between buyer and seller – I know what my maximum willingness to pay is, but they don’t. While Snickers doesn’t have a feasible means to reduce that gap, some other sellers do. That’s why everyone pays the same price for a Snickers bar, but why the person on the plane seat next to you might have been charged a different fare or why two students in the same college course might be paying different tuition.  So the idea is interesting and valuable – but I still say it’s terribly named.    (1 COMMENTS)

Yesterday, I posted on the part of Michael Oren’s views that I strongly agreed with: that the U.S. government should not fund Israel’s government, either for war or for anything else. I promised to look at some other issues he raised. Here they are. Number of Gazans killed Russ asks: Let’s move to the current moment, which you’re writing about a lot on your Substack, and let’s dig into it. Let’s start with the question of the number of civilian dead in Gaza, which is horrifying. And, the situation there is horrifying. You said you see the number over and over again of 23,000. That will stop soon, because it will go up–for many possible reasons–but it may sadly go up because more people will die as this war continues. And, I don’t know what the actual number is. Like you, I recognize Israel says that 9,000 of the 23,000 were Hamas fighters. So it’s, quote, “only 14,000 civilians.” That’s still an enormous number. Still a tragedy. What should Israel do, if anything, to fight this war humanely and whatever that–I don’t even know what–that’s a hard phrase to define. But, what might it mean to you? And, certainly as someone who has been involved in the government in a number of different ways, how could Israel–how can it do better? Should it? And how should we think about it as observers? Those are all good questions, and good for Russ for asking them even though he is clearly on one side on this. Oren answers: Yeah. We have to also add, Russ, that out of the 23,000, 9,000 are terrorists, but about 30% of the remaining 14,000 are casualties caused by Palestinian rockets. So, you’re down to–I said it before–a ratio of about two to one, civilian to soldier. Soldier to combatant deaths: that is roughly half the ratio of United States and Iraq and Afghanistan, half the rate of NATO [North Atlantic Treaty Organization] and Kosovo–something of a world record by the way. Certainly a world record for intense urban combat against an enemy that is dug in and using its civilian population as a shield. The criticism in this country is not that we’re killing too many Palestinians. The criticism in this country is not doing enough to protect our soldiers and that we are taking unnecessary risks with our soldiers’ lives in order to curry favor internationally. Now, that argument, of course, is more complex because we need that favor in order to gain time and space for the IDF [Israeli Defense Forces] to get ammunition, for example, from the United States. If we killed too many Palestinians, that supply of ammunition might be threatened. So, even that–even the way we’re conducting this war and trying to minimize Palestinian deaths also has not just a moral component, but a strategic component. A couple of thoughts. First, Oren’s math is wrong, and in a direction that undercuts his case. If it’s true that the IDF has killed 9,000 terrorists, and if it’s true that 40% of the other 14,000 deaths were caused by Palestinian rockets, then the math is even more favorable than Oren says. That would mean that 60% of 14,000 deaths of non-terrorist Palestinians were caused by the IDF, which makes 8,400. So the ratio of civilian deaths to soldiers’ deaths (I’m assuming he’s equating soldiers and terrorists) is 8,400 to 9,000, which is close to 1:1. Second thought. I have no idea how accurate his 9.000 and 40% numbers are. Oren is way more informed on this than I am. But I still would like to know how he reached this conclusion. Then Oren says: This is one of the many grueling, fundamental dilemmas we face. We face a whole series of dilemmas around the hostages. But this is one of them. And go tell the parents who have just lost their 21-year-old son or daughter that that son or daughter had to die in order to take greater care to limit Palestinian casualties. This was the lesson of the Jenin Battle in 2002 where we lost something like 24 paratroopers trying to limit civilian casualties. And afterwards we were accused of perpetrating a massacre, the Jenin massacre. So, we lost the 24 soldiers and we still got blamed for producing a massacre that never occurred, by the way–completely fabricated. And within Israeli society–that was within the IDF–in the Israeli society, people said, ‘Enough. We’re not going to do this anymore.’ And, those 24 were reservists with kids and we’re just not going to do this anymore. I note two important things. First, Oren contradicts himself. He goes from “We’re trying to minimize Palestinian deaths” to “we’re just not doing to do this any more.” Which is it? I’m guessing the latter. Second, Oren seems to think that reason to limit civilian casualties is to get credit. Notice what he says about the Jenin Battle: we tried to limit civilian casualties and even succeeded but we didn’t get credit. So if limiting civilian casualties doesn’t get us credit, then let’s not. The Jewish State and anti-semitism Oren states: But the basic reason our public diplomacy–I would call it–is so bad is because we are the Jewish State. And, as much as we like to think we’re not–that we’re a normal state, we’re just like any other state–we are far from being like any other state. We are judged by a completely different set of criteria. Held under that microscope of a power that no other country is examined. And much of the criticism leveled at us, if you would look at it closely, echoes classic antisemitic tropes. Whether it be the Massacre of the Innocents from the Book of Matthew, whether it be the blood libel, whether it be deicide. And it just comes up. Notice that after pointing out that Israel is a Jewish State rather than a secular one, Oren immediately goes to anti-semitism as a motive. I’m sure he’s right that it’s often, maybe even usually, a motive. But there’s an obvious other one that should be considered: when a country’s government explicitly ties itself to a particular religion, many people will react badly even if they share that religion or have no religion. How would Oren account, for example, for anti-Zionist Jews, of whom there are many? I often ask my fellow Americans, hoping that they cherish the U.S. Constitution as much as I do, whether they like the part of the First Amendment that says, “Congress shall make no law respecting an establishment of religion.” I point out that Israel, being a Jewish State, doesn’t have that. Also, imagine that the United States government decided it’s a Christian State and imagine that its spokespeople, in pretty much every speech, referred to the United States as the Christian state. Wouldn’t that naturally stir up a lot of anti-Christian feeling? I realize that it shouldn’t. People should be able to separate their feelings about what the state is doing to them from their feelings about Christianity. But many people wouldn’t. Who has the tin ear? Near the end, Oren states: I thought that–personally, the Secretary’s [Antony Blinken] remarks here, totally look any Israeli feelings–he was talking again about too many Palestinians killed on a day that nine Israeli soldiers were killed. And, there’s a total detachment from our reality. In essence, Oren is stating that Blinken has a tin ear for Israeli sensibilities. Guess who else has a tin ear? Oren. Nine Israeli soldiers were killed in one day. Presumably that’s above the average or Oren wouldn’t have mentioned it. How many civilian Gazans did Israel’s military kill on an average day? By his math, it’s 8,400 over 120 days, which is 70 in a day. 70 is about 8 times 9. Who’s preventing Gaza from getting food? Russ states: It looks to me like we’ve pushed about a million people south. They don’t have enough food. That’s not our fault, Israel’s fault: that’s probably Hamas’s fault. I think that’s a stretch. It seems pretty clear that Israel’s government is preventing food from getting to Gaza. Postscript: A long-time libertarian friend who knows I’m a libertarian wrote me the following: “I have a question about your blog on the Oren podcast: is there something special about the effects of US aid on Israel? Why wouldn’t the same arguments apply to aid to Egypt or other countries?” I thought that he would know that since I’m a libertarian, of course, I’m against U.S. government aid to the Egyptian government. But if he, a libertarian, doesn’t know that that’s my view, then the odds are high that a non-libertarian would think that I’m making an exception for Israel. I’m not. I’m against all foreign aid. (0 COMMENTS)

Social scientists use both controlled and natural experiments to estimate the impact of various sorts of public policies. One problem with this approach is that it is very difficult to ascertain the long run effects of policy, which might differ dramatically from the short run effects.Consider how rates of alcoholism vary in different parts of the world:   1. Alcoholism tends to be more of a problem in northern Europe than in the Mediterranean countries of southern Europe. 2. Alcoholism rates are especially high among indigenous peoples in the Americas, Australia and the Pacific islands. How can we make sense of this pattern? One possibility is that alcoholism is least severe in areas with the longest history of drinking alcohol.  Wine has been a popular beverage in the Mediterranean area for millennia.  In contrast, indigenous peoples in the New World had little exposure to alcoholic beverages until recently.   This might seem an odd example to use when thinking about the effects of public policy, as these differences were due to cultural factors, not differing legal systems.  But this example does illustrate that cultures evolve gradually over very long periods of time, in such a way that one group of people may react quite differently to the availability of alcohol than another group, even if the two groups currently face the same legal and economic constraints.   This fact is important when considering experiments on public policies such as “Universal Basic Income”.  You can certainly imagine an experiment where you give a group of people a lump sum of money.  But what does that tell us about the long run impact of such a program?  Suppose the program continued over many generations, until there was no longer a stigma associated with living your entire life on UBI and putting no effort into work?  Any time we institute a permanent new public policy such as Social Security or federal deposit insurance, we are running a very long run experiment with our society.  We don’t know how these programs will shape attitudes and behavior over the ultra-long run, as we don’t have the patience to run such experiments before the program is instituted.   In these cases, I rely more on my intuition about how society is likely to be affected in the very long run, and put little weight on social science experiments (many of which fail to replicate, even in the short run.) (0 COMMENTS)

Nayib Bukele, the dictatorial president of El Salvador, provides a good illustration of a few themes I have discussed on this blog. Let me emphasize two. A six-minute YouTube video from The Economist and an article in the magazine (“Gangsters in El Salvador Are Terrified of Strongmen Nayib Bukele,” February 2, 2024) provide some background. First, Bukele’s policies illustrate my dystopian post “A Simplistic Model of Public Policy.” I noted that if all young Americans between 18 and 24 were imprisoned, the murder rate would, at first sight, decrease by 39%. Like many South American countries, El Salvador had a very serious gang problem—a consequence of corrupt or incompetent governments, the demand for illegal drugs by Americans combined with the war on drugs here, and no doubt the practical and legal impossibility of ordinary Salvadorans to defend themselves against thugs. Bukele was elected in 2019 and reelected on February 4 despite the country’s constitution barring a second term. On flimsy evidence if any, his government has arrested and imprisoned 8% of the young male population. These suspected gang members have not been tried yet and, when trials come, they will be collective trials where dozens or perhaps hundreds will be “judged” together. Violence has dropped dramatically, and Bukele is “one of the most popular leaders in the world,” according to The Economist. The danger now is the police state, prefigured by mothers whose sons are snatched away by the police without any due process and imprisoned in dire conditions and without any family visit. As usual, the subversion of judicial independence has been necessary to obtain this result. My second point relates to the answer of Gustavo Villatoro, Bukele’s minister of justice and internal security, to whom the Economist’s correspondent asked how he reacted to criticism from human rights organizations. He replied contemptuously (see the video): We don’t work for human-rights organizations, we work for Salvadorean citizens. If he meant “the Salvadorean citizens” (his command of English may not be perfect), he was obviously wrong: he certainly does not work for the innocent citizens who are imprisoned and their families and loved ones. What the minister is really saying, consciously or not, is that he works for some Salvadorean citizens against others, even if the former are (still) more numerous than the latter. “The people” is not one big person. A majoritarian Police State is still a Police State. A (classical) liberal society is very different, even admitting that reality did not always live up to the ideal. At least, there is a guiding ideal, which is that the government does not “work for” a portion of the citizens, but instead supplies public security (and arguably other “public goods”) that everybody presumably wants, and treats equally all citizens—in fact, all residents and even foreign visitors. The details differ in different liberal theories. To simplify a bit too much, theories à la Hayek claim that the government protects the rule of law for everybody equally, while theories à la Buchanan make government the enforcer of general rules to which all citizens have presumably consented. (Anthony de Jasay, who defined himself as a liberal anarchist, argued that the state is always more or less a Bukele state: it cannot avoid harming some individuals and favoring others, which is what is meant by “governing.”) In another EconLog post, I told the story of my late friend George Jonas, who visited communist Hungary as a tourist two decades after fleeing the country. One night, as he was walking with his woman companion along the pitch-black Grand Boulevard of Budapest (pitch-black was the color of the night under communism), she became apprehensive. George recalled in his memoirs (Beethoven’s Mask: Notes on My Life and Times [Key Porter Books, 2005]): She reached for my hand and huddled closer to me. “Relax,” I said. “You’re in Hungary. Here you’ve nothing to worry about, until you see a policeman.” (0 COMMENTS)

    U.S. Military Aid to Israel is Like Food Stamps. Russ Roberts’s recent EconTalk interview of Michael Oren, former Israeli ambassador to the United States, is fascinating. It’s titled, “Should Israel Depend on the US?“, February 5, 2024. I learned a lot. I’ll post about some of it later, but I want to focus on one of the biggest issues confronting the U.S. Congress: whether to provide more military aid to Israel. Oren is against it. Also, libertarian Marc Joffe is against it. They come at it from different angles, but not entirely different. First, Oren. Here’s part of his reasoning, from the transcript: And I have long been [an] opponent–me, Mr. America-Israel, right?–I’ve been an opponent of the aid, for many, many reasons. And it’s everything from the fact that we are an affluent society. We’re a strong society. Receiving aid at this point is not consonant with our being. It sends the wrong message to the region–of dependency and weakness–certainly at a time when America’s foreign policy is unclear, when America is withdrawing from many areas of foreign affairs. The value of the aid was always greater than its monetary value [DRH: I think], the strategic value of that aid. It sent a message to everybody: Look, the greatest superpower in the world stands behind the State of Israel, and everyone should get that message. Well, how strong is that message today? And we pay a price for the aid. We pay a price in terms of opportunity costs. You’re an economist. And we pay a price in the fact that we don’t actually get to buy what we want to buy. And, sometimes we buy things that we may not need that remain very costly. And, I’m thinking of one thing is the F-35 jet, which costs twice as much as any other jet to maintain. And it is the last manned fighter aircraft in history. And we’ve got it now for about 30, 40 years. Very, very expensive jet. Many issues like that. But, the biggest issue now is the control it gives America over our foreign policy. It is a concession of sovereignty and the decision-making. And we see it now very poignantly. If you would have asked most Israelis on October 6th whether they believed that Israel could defend itself, by itself, against any Middle Eastern adversary or any combination of Middle Eastern adversaries, most Israelis would have said, “Of course, we can.” Ask the same question to Israelis on October 7th, and you get the same percentage of Israelis saying, ‘We can’t do that.’ We can’t get these [?]–we can’t tell the aircraft carrier strike groups, “Okay guys, we got it. You can go home. We’re in control here.”And no one’s willing to say that. And here we have the Secretary of State [U.S. Secretary of State Antony Blinken] sitting in our War Cabinet–which is an extraordinary concession of sovereignty. I think there’s a deepening realization in this country–and I hate being the person ahead of his time–that we’re going to have to move on to something else. That one of the great goals of Israel, post-Gaza War, will be to achieve strategic independence from the United States of America. When I read the first two paragraphs of the quote above, I had the thought that U.S. military aid to Israel is like food stamps. Later, Oren said: Well, actually, if you do the math, it comes out to something like $1 a month per American in aid to Israel. I mean, by the way, the aid is about $4 billion a year. And, you know what $4 billion buys you today in military terms? It buys you half of one Zumwalt-class destroyer. So, you’re paying a huge price for an aid package, which–okay, 40 years ago was 50% of our defense budget, but now it’s closer to 16%. And, you’re right. I did some similar calculations a little over 12 years ago on John Stossel’s show when I was advocating that the U.S. government end its aid to Israel. Here’s what I wrote: One thing that surprised me, when I researched to prep for the “debate,” is how small a percent of Israel’s GDP U.S. foreign aid to Israel is. It’s under 1.5 percent. As I noted, it’s hard to believe that without this aid, Israel would disappear. Israel’s GDP is now about $500 billion. So $4 billion is now only 0.8 percent of Israel’s GDP. Now here’s Marc Joffe of the Cato Institute. His post is titled “Does Israel Need U.S. Aid to Fight Hamas?” Marc’s Substack, February 4, 2024. Marc argues largely from a fiscal viewpoint. Here are two key paragraphs: Current budget projections show that Israel plans to spend another $33.5 billion on war operations on the assumption that they continue through the end of March. This is a large amount, but the Israeli government can accommodate it by cutting other spending, raising taxes, and borrowing. Israel’s Debt/GDP ratio is only around 63% which is much lower than that of the United States at roughly 120%. Since the Biden supplemental does not have matching revenue, Congressional approval would increase US debt to assist another country facing a lower debt burden. I agree with both Oren and Joffe. I do have some major disagreements with Oren, especially on one issue in which he showed his tin ear in arguing that Antony Blinken had a tin ear. But I’ll leave that for another post, which will be up soon. The pic above is of Michael Oren.   (0 COMMENTS)

In an earlier post, I pointed out that we do not exist in a state of nature.  As many economists have been pointing out since at least Ronald Coase’s famous 1960 paper The Problem of Social Costs, we exist in a complex world of pre-existing social, economic, legal, and legislative arrangements.  These arrangements influence our actions.  Like Chesterton’s Fence, we cannot pretend they do not exist, nor discard them because we do not understand their purpose.   And yet, many interventionists do ignore current arrangements.  The models they use ignore important aspects of reality, aspects that may show their interventions will do more harm than good.  Models are an important aspect of any reform proposal, but they are hardly sufficient.  Just because some model implies some desirable outcome does not mean the outcome will come about in reality.  Further, since models are dependent on their assumptions, any model can be used to justify any outcome.   To prevent this issue of dueling models, allow me to propose some questions for interventionists.  These are questions to help justify their proposed interventions.  But first, two quick comments: First, I am using “interventionist” is a very broad sense to mean any scheme that uses the power of government to intervene in economic relations for any purpose.  Interventionism includes (but is not limited to): market failure corrections, non-revenue taxes/subsidies (eg Pigouvian taxes), protectionism, industrial planning, nudges, etc.   Second, I am placing the burden of proof squarely on the shoulders of interventionists.  In this sense, my approach here is very conservative: the status quo is taken as preferred over change unless shown otherwise.  This burden of proof can be met and overcome.  In that sense, my approach here promotes change.  The point here is to avoid radical and unproductive changes often advocated by interventionists while allowing potentially useful changes to arise.   With the preliminaries out of the way, let’s get to the questions. Question 1: What is the current state of affairs?  This question is important because it sets the stage.  Of course, it is impossible to articulate every single aspect of the current state of affairs.  Rather, one should focus on the most salient (eg, direct laws, institutions, etc).   Answering this question also helps prevent critical empirical errors that most interventionists make.  For example, if you ask almost any advocate of a carbon tax in the US, they will say “there is no price for carbon in America.”  That statement is factually incorrect.  There is no monetary price, sure.  But there is a price of carbon.  There are all sorts of preexisting arrangements that influence the price of carbon.  These preexisting arrangements, as Coase pointed out, are crucial.  If they are misunderstood, then interventions can make the situation worse. Answering this question also helps understand why existing patterns are what they are.  And that leads us to our next question. Question 2: Why have pre-existing arrangements failed? If the answer to Question 1 leads one to conclude that there is indeed a failure, now we need to understand why that failure has occurred.  Is there something about the current state of affairs that triggers that failure?  What are the actual causes of the failure?  What are the incentives people face? Understanding both pre-existing arrangements and why they fail help prevent cascading failure, where a mistake keeps getting repeated and repeated.  For example, a justification for tariffs is that trade can displace workers and it may take them time to adjust.  But current programs, like Trade Adjusted Assistance and Unemployment Insurance already exist to take care of those problems.  Research shows, however, that those programs actually extend the time it takes for workers to adjust to trade shocks.  Why have they failed? In many cases, interventionists just assume the cause and go from there.  For example, it is often just assumed that public goods cannot be provided by the market in optimal quantities.  But research by Ronald Coase, Elinor Ostrom, and even Adam Smith shows that is not the case; public goods are often provided in sufficient quantities.  Despite the models, interventions could cause a failure to appear where there is not one.   Question 3: Is your proposed solution the best method achievable?  Hopefully, by this point, the interventionist has a pretty good understanding of the current state of affairs.  Now is the time to start considering proper interventions.  Note that this question actually has two elements to meet: 1) the intervention is the best method to achieve the goal, and 2) the intervention is achievable. There are many ways to address this first element.  The word “best” here is deliberately vague and subjective: what is “best” will ultimately be determined by the analyst given their goals and preferences.  Consequently, there are many ways to determine “best.”  Calculating net present value is one way.  Utilitarianism is another way.  And so on.  But what is best may not be a positive intervention (meaning that one takes a new action) at all.  Indeed, while investigating Questions 1 and 2, one may discover that the best thing to do is remove an existing intervention!   The second element relates back to our first question.  Whether or not some intervention is achievable will depend on the current institutions.  A system where policy is decided by direct voting will have different achievable options than a dictatorship, which will have different options than one where a deliberative body acts, etc.   Considering achievability will also force the interventionist to come to terms with the data they have.  We rarely have the data we want.  Costs and benefits are subjective and psychological; they depend on the situation one faces.  Monetary costs still matter, of course, but they are not the same as total costs once we move into collective decision making (for more on this point, see James Buchanan’s Introduction in L.S.E. Essays On Cost).  Confusing the two has led to many interpretive mistakes.   These three questions are just the beginning.  Answering these can help shape interventions, but they still do not justify them.  More questions abound: ethical questions, political questions, legal questions.  But I hope they can provide a useful framework for discussing reforms.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

A couple of years ago, a pickleball acquaintance who was on the Monterey County Civil Grand Jury asked me if I would be interested in applying. He told me what the jury does and I was interested. Whereas I agree with James Buchanan’s famous statement that not all things worth doing are worth doing well, many of them are. I would not even consider taking on that task if I couldn’t do it well. So I asked my pickleball partner how many hours one would have to spend per week to be competent and responsible in the position. His answer stunned me. I thought he would say 3 or 4. Instead he said that, averaged over the year term, it would be 8 to 10. That made it a non-starter for me. When I retired in 2017, my goal was to reduce my work week from 50-55 hours to 30 hours. I’ve been relatively successful. The only way to make that work, given that I didn’t want to reduce my other work activities or leisure activities by more than 2 hours per week each, was to increase my work week to about 35 hours. I thought of this again a couple of Fridays ago. The local Libertarian Party chapter invited me to speak on how to make housing more affordable. My talk went well. One of the organizers also invited 3 current or past members of Monterey County’s 19-person civil grand jury to make a pitch for people to apply. They spoke after me. Before my speech, I went up and introduced myself and told them my pickleball partner’s estimate of 8-10 hours per week. One of them said that in the busiest weeks, it could be as many as 20 hours. The three gave their pitch and opened it up to questions. I asked if all the proceedings were confidential. Of course, I was thinking that I might get material for this blog or for articles. They said that everything was confidential forever. One of them even added that a woman who had walked into the room during my talk and sat at the back, Judge Stephanie Hulsey, who supervised the grand jury, would throw me in jail if I broke confidentiality. Still, I wanted to give the three their best chance to make a case for participation. So I asked for examples of reports they were particularly proud of. One was this one, which they appropriately titled “A Bike Path to Nowhere?” Many of us saw the $10 million disaster as it was happening. Almost no one uses the path. Most times I drive down North Fremont, I see not even one bicyclist using it. If I had been on the civil grand jury, I would have made 2 points, the first of which they made implicitly and the second of which they made not at all. The first is that this is what happens when local governments get “free money” from higher level governments: their incentive is to spend. The second is that the $10 million price tag leaves out a major cost: the time lost by drivers due to the slowdown in traffic over the 15-month time taken for construction. The report notes that traffic averages 24,000 car trips per day. If even 5,000 of these trips were slowed down by 2 minutes, that’s a huge cost. Here’s the math/economics. Assume 400 days of use over the 15 months, clearly an underestimate. Assume $20 an hour in time value net of income and payroll taxes. Assume one person per car, also an underestimate. Then the cost in lost time was 400 days*$20/hour*5,000 drivers*0.03 hours = $1.2 million. The presentation did get me thinking about uses of my time on local issues. I write occasional letters to the editors of local newspapers (there are 3) and have about a 90% acceptance rate. I also give “free” edits to a friend who writes such letters and he seems to have about a 100% acceptance rate. Those edits take less and less time as he has become a better and better letter writer: down from about 2 minutes to 1 minute, which is essentially nothing. My letters often take about 10 minutes to write. What if I spent only an additional hour a week following the issues and wrote an additional 2 letters a month, up from about one every 2 months? Why so few? Because editors might get tired of publishing my letters. So my cost in time would be about 4 hours and 20 minutes per month. The number of people reading my letters is certainly in the hundreds and could be over 1,000. I would bet that fewer than 1,000 people read the civil grand jury reports. Of course, the grand jury brings a certain prestige to the issue. So let’s say my effect is 5% of theirs. If I spent 8 hours per week on the grand jury, I would spend about 400 hours per year. But my research and letter writing on local issues would be about 50 hours per year. So my effect is 5% of theirs for spending 12% of the time. But that’s the wrong comparison. The right comparison is with the incremental impact I would have by being on the grand jury. I wouldn’t persuade everyone. In fact, persuasive as I am, I wouldn’t persuade most people. So my incremental effect would be relatively small. The bottom line is that it’s not worth it. There are 2 other factors to consider, one in each direction. By being the lone wolf, I bring prestige and attention over time to me. That makes me more effective and argues against my being on the grand jury. But by being on the grand jury, I would make friends with at least a few interesting people. All 3 of the former and current grand jurors mentioned that as a major factor. If I didn’t have friends, that would be more of a draw. But I have 5 or 6 good friends locally plus another 4 or 5 friendly acquaintances. And that doesn’t even account for 2 friends and about 10 friendly acquaintances at pickleball. (0 COMMENTS)