How can we create a radically different atmosphere at American universities? Easy, says historian Niall Ferguson of Stanford University’s Hoover Institution–have meaningful rules about free speech, and ensure that they’re upheld. As with humans, as with institutions: It’s all about incentives. Ferguson discusses the current state of free speech on American campuses and how the […] The post Niall Ferguson on Free Speech and Kissinger’s Role in the Middle East appeared first on Econlib.

Recently, the demand for EVs has been at best stagnating and purchase intentions are cooling off. This has pushed down the demand and prices of battery minerals: thus far this year, battery-grade lithium prices fell by 60%; nickel, graphite, and cobalt, by 30%. So far, so good. But if we believe a Wall Street Journal report, the lower price of these inputs will bite back and, in turn, lead to lower prices and higher demand for EVs and battery materials, canceling the previous effects; the snake is biting its tail and will completely eat itself (“Biden’s Electric-Vehicle Push Hits a Speed Bump,” November 21). A typical blurb: Milewski, Nickel 28’s CEO, said the steep fall in metal prices could also spark another phase of the boom-bust cycle. Falling prices can make EVs more affordable, which in turn could boost demand for batteries—and drive metal prices higher again. “Low prices are a cure for low prices,” Milewski said. This faulty reasoning is well-known to economists. Economic theory teaches us to distinguish between demand and quantity demanded, and similarly between supply and quantity supplied. Demand is the whole schedule (or curve) of quantities demanded at different prices. Supply is the whole schedule (or curve) of quantities supplied at different prices. A price determines the quantity demanded along a given demand curve and the quantity supplied along a given supply curve. Decreases or increases in demand or supply happen when other factors than prices change. A few years ago, I wrote an EconLog post on the confusion exemplified in the quote above: “A Frequent Confusion and the Yo-Yo Economic Model” (January 29, 2018). It contains a supply-demand graph which, if you are not familiar with standard economics, might help you better understand. What I called the yo-yo model suggests that a price will automatically go up because it has gone down before; it’s a model with fuzzy concepts and fuzzy relations between them, like a blob which you can’t get a grip on. With a correct supply and demand analysis, we can give a coherent, not blobby, explanation of what has presumably been happening. A lower demand (a shift of the whole demand curve—not a movement along the curve) has led to a lower demand for battery metals, whose prices have thus fallen. The falling prices of battery metals cannot boost demand for EVs (and battery metals) because it is precisely the fall (or expected fall) of the latter that has caused the prices of battery metals to fall. This would be like saying that an increase of demand causes a reduction of demand—a new version of pre-Socratic philosopher Parmenides’s claim that all motion and change are illusions. The real-world issue we are dealing with is complicated by the fact that, observing the presumed reduction of demand (in EVs and battery metals), some suppliers (mining companies and manufacturers) have reduced their future supply by postponing investments. This means that not only are they responding to lower current demand and prices by reducing their current quantity supplied, but they are also reducing their future supply. Another Wall Street Journal story, “Are Americans Falling Out of Love With EVs?” (November 17), gives a more sensible, or less economic-less, view of the situation. To summarize: If one does not have a clear idea of what economics calls a change in demand, that is, a shift up or down of the whole demand curve as opposed to a move along a given curve (and similarly for a change in supply as opposed to quantity supplied), he is likely to fall into egregious errors like thinking that a price reduction will necessarily be neutralized by a price increase. When one knows these distinctions, it becomes easy to see that if a price gets out of equilibrium, it will tend, ceteris paribus, to return to its equilibrium through changes in quantity demanded and quantity supplied; but if demand or supply changes, a new equilibrium is created which is not self-defeating. (0 COMMENTS)

There are highlights from my weekly reading and viewing. “Glenn Greenwald Interviews Rep. Thomas Massie About Gaza and Israel,” December 5, 2023. Glenn Loury and John McWhorter, “New Evidence on George Floyd’s Death Changes Everything,” December 5, 2023. I had been positive that Derek Chauvin murdered George Floyd. Now I, like Glenn Loury and John McWhorter, am not. “There’s Nothing Mystical about the Idea that Ideas Change History,” Matt Johnson interview with Steven Pinker, Quillette, December 1, 2023. Excerpt: And for all its fiascoes, the UN has accomplished a lot. Its peacekeeping forces really do lower the chance of a return to war—not in every case, but on average. And members of the UN are signatories to an agreement that war is illegal, except for self-defense or with the authorization of the Security Council. Even though that’s sometimes breached, most flagrantly with the Russian invasion of Ukraine, we have to remember that whenever there are laws there are scofflaws, but that doesn’t mean the laws are useless. The legal scholars Oona Hathaway and Scott Shapiro have argued that even though the outlawry of war did not eliminate war, it reduced it by making conquests no longer recognized by the community of nations. That is, if Russia holds onto territory taken from Ukraine, it cannot count on other nations recognizing the conquest—which is a big change from the practice of millennia, when the policy was “to the victor go the spoils.” As it happens, I recently debated John Mearsheimer, the foremost Realist theorist. “Realism” is a misnomer—it’s a highly unrealistic idealization of the relationships among states, barely more sophisticated than the board game Risk. It assumes that countries seek nothing but power and expansion, because the only defense against being invaded is to go on offense first. I think I sometimes dump too much on the UN. This is a nice bit of offsetting reasoning. Also, my opinion of Mearsheimer had been fairly high but after seeing him speak about 6 weeks ago, I thought less of him. Pinker puts his finger on a big part of what I saw and found unsatisfactory. Russ Roberts, “Does [sic] the Media Hate Israel?” Listening to the Sirens, December 3, 2023. The incentives of the information landscape ratchet up the outrage on both sides. The New York Times will eagerly repeat stories that make Israel look bad. That’s what their readership wants. They want to feel outrage about the oppressor. The BBC will eagerly repeat stories that show the suffering of the Palestinians to further cement the feelings of their viewers that the Palestinians are oppressed and deserve sympathy. Of course their coverage is more nuanced than this, but for those of us who support Israel, it feels like the coverage is completely one-sided. It isn’t. But our news feeds make it feel even more extreme than it actually is. The same is true for people on the conservative side. Fox News and the social media feed of pro-Israel users will be filled with example after example of Hamas cruelty, vindicating the view that this is not just about Israel but about the future of civilization. Stories that make Israel look less civilized will either not show up or will be glossed over or excused. Stories of Palestinian suffering will either not show up or will be excused—after all, they will say, so many Palestinians support Hamas. Did you see how ordinary citizens treated those Red Cross vehicles carrying the hostages home from Gaza? Somehow, a crowd of 100 jeering Palestinians becomes a representative sample. (0 COMMENTS)

People with Disabilities Individuals with targeted or “severe” disabilities are the most under-represented segment of the Federal workforce. The People with Disabilities Program (PWD) ensures that people with disabilities have equal Federal employment opportunities. The FAA actively recruits, hires, promotes, retains, develops and advances people with disabilities. The FAA meets the goals of the PWD Program through a variety of practices: Targeted Disabilities Targeted disabilities are those disabilities that the Federal government, as a matter of policy, has identified for special emphasis in recruitment and hiring. They include hearing, vision, missing extremities, partial paralysis, complete paralysis, epilepsy, severe intellectual disability, psychiatric disability and dwarfism. This is from the Federal Aviation Administration. Here’s what I wonder: does the FAA target disabled people with, say, “severe intellectual disability” for positions as air traffic controllers? That makes me nervous. One of the things that has been done very well in this country, mainly by the airlines but possibly also by the FAA, is to make commercial flying extremely safe. It would be tragic to reverse that on purpose. (0 COMMENTS)

In late August, private equity firm Roark Capital announced plans to purchase fast-food giant Subway.  The Federal Trade Commission quickly jumped in, announcing a federal antitrust probe into Roark on the basis of a potential sandwich shop monopoly.  Roark Capital already owns Jimmy John’s, Arby’s, McAlister’s Deli, and Schlotzky’s, so the addition of Subway would put them in a dangerous position of “market power” according to the sandwich trust busters. Senator Elizabeth Warren, a well-known antitrust advocate and ever keen on burnishing her anti-big business credentials, was quick to raise the alarm. In a post on X, Warren warned, “We don’t need another private equity deal that could lead to higher food prices for consumers.  The FTC is right to investigate whether the purchase of Subway by the same firm that owns Jimmy John’s and McAlister’s Deli creates a sandwich shop monopoly.” Is this really fair?  Would the acquisition of Subway really give Roark a monopoly? On the surface, Roark’s newly-formed sandwich empire might plausibly fit this definition, given that Subway and Jimmy John’s are two of the nation’s largest brands in the fast-food sandwich restaurants category. According to market research firm IBIS World, for the “sandwich and sub store franchises” category, Subway and Jimmy John’s have 38% and 9% market share, respectively (I’m excluding Arby’s as they are not mainly a sub sandwich restaurant). The other sandwich joints owned by Roark are very small, but let’s assume that all together Roark would own more than 50% of the “sandwich and sub store” business post-merger—not quite a monopoly, even with the loosest definition.  The larger problem with antitrust worrywarts, however, is a failure to understand what markets are for and the nature of competition. Why do any of us buy a sub sandwich, anyway? Is it because we need a sandwich right now, or because we’re hungry and a sandwich sounds good? Food businesses exist to feed us, and those which do so with great food at good prices will succeed. Those that don’t will fail, regardless of past market share tallies. The open market is full of great fast food options, from burgers to pizzas to tacos to subs. If subs are overpriced, we can easily switch over to other food options. Even if we’re insistent on a deli sandwich, there will still be multiple options even if the big bad “sandwich monopoly” comes to own every franchised-deli shop in the land. I live in a college town of about 10,000 people in northwestern Michigan, and when discussing the specter of the sandwich monopoly recently in an economics class, we were able to identify nearly a dozen alternatives specifically for sub sandwiches—even excluding Subway and Jimmy John’s—within our very small town. If we expanded our list to all fast food purveyors we’d add at least another dozen options, and we’re still not even including the prepared foods offered by gas stations and grocery stores. We live in a wonderful world of open, competitive markets, and perhaps nowhere is this more evident than food service, where entry costs are low and lots of people have the knowledge and ambition to make a go with small business entrepreneurship.  So, even if Roark Capital achieved 100% ownership of “sandwich shops” and tried to raise prices to exploit hungry consumers, they will not succeed. Customers will reliably abandon Roark’s shops in favor of more affordable food offerings of similar quality. But even if some entity monopolized all restaurants and was able to successfully raise prices, the fact that the knowledge and skills required to make and sell good food are widely dispersed among the people, and the costs of opening a small food place are relatively low, no “monopoly” in food could last. As economists understand, it’s not just the presence of current businesses that makes for competition, but the potential  for new enterprises to arise that makes for a robustly competitive marketplace.  Overall, the fundamentals of competition in a free market certainly prevail in case of Roark Capital and the not-to-be-feared sandwich monopoly.  The universe of market competition in general, and specifically in the case of food service in the United States today, is vast and hearty. There is nothing to be feared when an investment firm adds a third or fourth franchise to its holdings.  So, next time you hear Elizabeth Warren or any other proponents of antitrust legislation exclaim that the federal government needs to step in to ensure a free market, remember that we’re already living in a world of vast and deep competition, both within and especially outside of narrow industry categories. Nobody’s going to pull off a sandwich monopoly, and even if it happened, it wouldn’t last long enough to be worthwhile. Rest easy, and enjoy your next meal courtesy of the competitive market economy.   Brendan Cairney is a student at Ferris State University studying Economics and Finance. (0 COMMENTS)

Karl Smith has a new piece in Bloomberg discussing the impact of monetary policy on economy. He argues that the standard model doesn’t explain what’s been happening to the economy. I partly agree, but only because what is now the “standard model” is not a state of the art model of monetary policy. I’ve done numerous posts pointing out that prior to 2008, prominent economists like Ben Bernanke, Frederic Mishkin and Milton Friedman completely rejected the claim that interest rates represent the stance of monetary policy.  But we’ve entered a new Dark Ages for macroeconomics, reverting to the once discredited Keynesian views of the 1950s.  Here’s Smith: The way monetary policy is understood to work is that the central bank boosts rates to suppress demand throughout the economy and lowers them to achieve the opposite effect. And the latest data would suggest the Fed tightened policy precisely enough to temper demand and squeeze out excess inflation without sparking a massive rise in unemployment. Yet it’s difficult to identify any sector of the economy outside of housing in which monetary policy has been instrumental in curbing demand. Unfortunately, this does accurately describe the current view, but it is not how monetary policy works.  Instead, the Fed adjusts its policy tools to impact the supply and demand for base money, which then impacts nominal GDP growth.  Monetary policy is not credit policy.   This leads to confusion about inflation: The Federal Reserve Bank of Cleveland produces a measure that calculates how much supply-side factors contribute to inflation. Subtracting that measure from actual inflation gives a rough estimate of how much excess demand is contributing to rising prices. The most striking thing to note is that the portion of inflation attributed to excess demand has declined a mere 2.3 percentage points since its peak in September of 2022, from 7.3% to 5.0%. The overall consumer price index, though, has decreased by 5.9 percentage points since peaking at 9.1% in June 2022. Here it’s worth noting that the Fed prefers the PCE inflation index, which peaked at 7.1% and has fallen to 3%.  But I do not dispute the claim that only about 2.3 percentage points of the inflation decline (however measured) is related to a slowdown in the growth of aggregate demand.  At the peak, headline inflation was briefly pushed above the underlying inflation rate by supply problems, and recent data shows an inflation rate currently below the underlying rate due to improvement in the supply side of the economy.  A reasonable guess might be that the underlying inflation rate fell from roughly 5.8% to 3.5%—that’s the part of inflation caused by monetary policy. In previous posts, I’ve shown that virtually all of the cumulative excess inflation since 2019 can be explained by excess growth in aggregate demand (NGDP).  Supply shocks push inflation higher during some periods, and lower during others, but do not affect the long run inflation rate.  There is no mystery to explain—monetary policy explains the long run trend in inflation. Why did economists assume that a recession would be required to bring inflation back to normal?  Probably because the US has never had a soft landing.  But there’s no obvious theoretical reason why a soft landing is impossible.  In theory, if you gradually slow NGDP growth to a sustainable rate of about 4%, you can get back to 2% inflation without a recession.  I don’t know if we’ll be able to do that (NGDP growth is still running at about 6%), but it might happen. Because American economists had never seen a soft landing, they built a flawed theory that monetary policy worked by impacting real output, which then slowed inflation.  To bring inflation down to 2% (it was assumed), you needed to create a recession.  This is often called the Phillips Curve theory.  But it’s not actually how monetary policy works.  Here Smith seems to use data for real output as an indicator of aggregate demand: If tighter monetary policy has had a small effect on consumers, then it must have had an outsize effect on businesses. Indeed, growth in business investment slowed from 5.8% year-over-year in the third quarter of 2022 to 4% in this year’s third quarter. But the slowdown is small both in absolute terms and relative to past tightening cycles. . . .  So, if tighter monetary policy has mostly failed to curb demand in the broader economy, then what did?  There are two problems here.  Aggregate demand is GDP, not investment.  In addition, it’s nominal GDP, not real output.  I believe Smith is citing growth rates for real investment, which slowed only modestly.  But 12-month nominal business investment growth slowed sharply between 2022:Q3 and 2022:Q3, from 13.1% to 6.8%. Monetary policy does not work by slowing real consumption or real investment.  It does not even work by slowing real GDP.  It works by slowing nominal spending growth (NGDP growth.) How that slowdown affects real output depends on the speed at which NGDP growth slows, and the pace at which wage moderation occurs. If the Fed’s 2% inflation target has some credibility, then wage moderation is easier to achieve.  And if wage moderation occurs at a time when NGDP growth is slowing gradually, then a soft landing is possible.  If you go back and read the past 55 years of the business media, you’ll see one article after another discussing “puzzles”, which are anomalies that cannot be explained by the flawed Keynesian model that many economists and journalists utilize.  Smith is correct that there is something wrong with the conventional model of monetary policy.  But that’s because today’s conventional model relies on once discredited Keynesians ideas, such as the claim that higher interest rates represent tighter money.  (Check out interest rates in Argentina!)  We need to rediscover the insights of people like Ben Bernanke (from 2003, before macroeconomics entered a new Dark Age): The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart. PS.  One reason why people wrongly assume that monetary policy works by changing investment is that investment is especially cyclical.  But that’s because the public smooths consumption for reasons explained by Milton Friedman way back in the 1960s.  If consumption is smoother than national income, then investment will necessarily be more volatile than GDP.   PPS.  I mention the past 55 years of media because the first example I can recall is from the late 1960s, when economists were “puzzled” by the fact that higher interest rates and tax increases were failing to slow inflation.  This led the government to opt for price controls.  We are still being puzzled by the failure of interest rates to do what we expect, as we’ve never learned the lessons taught by Milton Friedman.  Here he has a similar lament in 1998: Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. . . . After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die. I guess not.   (0 COMMENTS)

  There has been a lot of discussion of newly elected Argentine president Javier Milei’s proposals for economic reform. Much of that discussion has been on how successfully he will implement his ambitious proposals for freeing Argentina’s highly statist economy. He has proposed getting rid of the central bank and putting Argentina on the US dollar standard that, if successful, would bring Argentina’s inflation rate down from triple digits to single digits. He has proposed slashing government spending by as much as 15 percent of GDP. To put that in perspective, if the US federal government did that, it would cut spending from about 24 percent of GDP to about 9 percent of GDP. He has proposed eliminating eleven government ministries and agencies and privatizing many of Argentina’s government-owned enterprises. What he will achieve is difficult to know. As Danish physicist Niels Bohr said, in a famous line often also attributed to baseball legend Yogi Berra, “Prediction is very difficult, especially if it’s about the future.” But what we can say is that Milei has a highly developed understanding of the most important ideas in economics. He will almost certainly make better decisions and more-thoughtful trade-offs than if he had the low-level, or even zero, understanding that is typical of politicians. A look at some of his pronouncements in interviews shows a sophisticated analytic mind at work.   This is from my latest article for Hoover’s Defining Ideas, titled “New Argentine Leader’s Economic Savvy,” Defining Ideas, December 7, 2023. Javier’s economic understanding is quite impressive. Read the whole thing. (1 COMMENTS)

I recently completed a multi-post deep dive into the book Conservatism: A Rediscovery by Yoram Hazony. My own views have relatively little alignment with Hazony on many significant issues. Yet, I suspect that may not have come across in the review itself – my review, I believe, cast Hazony’s work in a very positive light. There are a few reasons why that is, and they seem worth unpacking.  The first reason is fairly simple. When doing these sorts of reviews, I dedicate the bulk of the review to presenting the author’s argument as forcefully as I can, in a way I believe they themselves would sign off on. Or, to put it another way, I try to make sure my summary of their work passes the Ideological Turning Test. This includes how I respond in the comments – for the purpose of that discussion, I am also attempting to pass the ITT.  In my final critique of Hazony, I also ended on what seemed like a very positive note, when I said “Hazony has written an excellent and thought-provoking book” and that on “many points I agree with what he says, and I think he offers strong arguments for many of his views I don’t share.” So why would I have such kind words for a book I disagreed with more often that not, written by someone with a worldview very far from what I believe is true?  Let’s start with thought-provoking. This may be a personality quirk of mine, but I find it almost impossible for someone to write a book that’s thought-provoking without it arguing for ideas different from what I hold. A book that’s filled with nothing but things I already think is going to have a hard time provoking thoughts in me. This isn’t always the case – I’ve mentioned before how Dan Moller’s book Governing Least took things that were only nascent, poorly formed ideas in my own mind and was able to articulate them in a way that brought those ideas into much clearer focus for me. But as a general rule, it’s the books filled with ideas I don’t already agree with that are the most thought-provoking (and also most fun) to read.  I also say Hazony’s book has strong arguments in the many areas I disagree with him. This, too, may seem odd, but it really shouldn’t. Our ideological opponents are not made up entirely of morons or knaves, after all. Hazony is a smart guy who’s been thinking and writing about these things for decades. If he managed to spend hundreds of pages outlining his ideas without ever presenting any decent arguments, that would be odd. The world is complex, and virtually everyone is overly confident in their political ideology. So when an intelligent, well-educated person like Hazony writes an entire book arguing that perhaps I’m mistaken in my political ideology, I have to read that book with serious consideration that he may be right and I may be wrong. He didn’t change my mind in any fundamental way, but I can still acknowledge that he has some good arguments on his side.  There is a trap I think we can fall into if we’re not careful, a trap that leads us to reading someone’s argument only to try to figure out why they must be wrong, rather than trying to see if perhaps they are right. There’s a popular trick of mathematics one can find online “proving” that 1 = 2. When someone puts forth a set of equations they claim proves 1 = 2, the natural reaction is to immediately hunt for the error we know must be there, because obviously 1 does not equal 2. In a nutshell, I think that is also how many people approach the work put forward by their ideological opposites. Hazony has written a book arguing for a particular notion of conservatism, and we know that conservatism is wrong just as surely as we know 1 does not equal 2, therefore Hazony’s book should be read (if at all) for the sole purpose of finding the errors we know must be there. But this is a mistake. Neither you nor I should hold a level of certainty in our political views within a lightyear of the certainty with which we know 1 does not equal 2.  Stepping away from politics for a moment, I found a nice example of the mindset I’m advocating for in a science video a while ago. The video explores the possibility that there may be a ninth planet (with apologies to Pluto!) in the solar system. But this hypothesized planet has some pretty extreme parameters – a terrestrial planet with about five times the mass of Earth, and a highly elliptical orbit that takes 10,000 years to complete a full revolution. The host of the video discusses the idea with two different scientists, one who supports the idea and one who is skeptical. In the opening seconds of the video the skeptical scientist, Professor David Jewitt of UCLA, calls the idea “wishful thinking” with a big smile and through a big laugh. The scientist who supports the idea, Professor Konstantin Batygin of Caltech, describes what he thinks are key pieces of evidence supporting the idea. This is usually followed by the host talking to Professor Jewitt, who offers a counterpoint explaining why he doesn’t think the evidence holds up. At one point, Professor Batygin talks about how certain bodies in the solar system have orbits perpendicular to the planets, and others orbit in the solar system in the opposite direction of everything else, and there has never been a good explanation for why that would be. However, this observation is exactly what you would predict if Planet 9 did exist and had the properties ascribed to it. And when the video turns to Professor Jewitt being asked about this, he responds by saying the Planet 9 hypothesis would indeed explain this, and it counts as good evidence in favor of the idea.  This, I contend, is an example of what we should all be capable of doing. Professor Jewitt can simultaneously laugh at the idea of Planet 9 and describe the whole project as wishful thinking, while also effortlessly acknowledging there is at least some good evidence in favor of it. The world is not divided into Correct Ideas That Have All The Evidence, and Bad Ideas That Have No Evidence Whatsoever. Even well-established, good ideas have fair arguments against them, and even ideas that are ultimately incorrect can still have good arguments and evidence in their favor. We should not feel at all troubled in admitting this – as William Graham Sumner noted, someone who has truly developed critical thinking “can hold things as possible or probable in all degrees, without certainty and without pain.” A good exercise in mental hygiene can be taken from this. Every now and then, think about the things you believe, and think about what people of opposing political views believe. What are the legitimate criticisms they could level against your views? What are the good arguments and evidence supporting their ideas? If you cannot think of anything to put forward in response, take that as a sign there is something wrong that needs to be fixed.  (0 COMMENTS)

There are a whole bunch of puzzles related to changes in the economy after 1973:1. Why did productivity growth slow after 1973?2. Why did growth in real wages slow after 1973?3. Why has labor productivity growth in construction stalled, while labor productivity growth in manufacturing has remained quite robust? Undoubtedly, there are many factors that contribute to these trends.  A recent post by Matt Yglesias points to one that has received too little attention.  In the period up until 1973, construction of manufactured homes was soaring: Because the manufactured home competed directly with low-end conventional construction but could be executed more quickly, it started to take over. And as of 1973, the Commerce Department was expecting manufactured housing shipments to continue to rise on the simple logic that productivity was rising in factories but not really on constructive sites. Yglesias points out that this boom was killed by regulation: the code explicitly prohibits homes from being transported on a chassis and then placed on a standard chassis-less foundation . . . Mechanically, the chassis requirement adds costs. Even worse, from a banking standpoint, it means that financing a small manufactured house is more like getting a car loan than getting a mortgage. The chassis is also a target for exclusionary zoning. Towns can (and do) make rules against chassis-mounted homes (or against placing them in certain areas), knowing there’s a federal rule against removing the chassis. So instead of spending the 1980s and 1990s watching small manufactured single-family homes become an increasingly significant player in the non-apartment market, we strangled them. Meanwhile, productivity in the American construction sector went from stagnant to negative. Yglesias points out that there is a bill in Congress to repeal this regulation: Fortunately, there’s a good bill from John Rose (R-TN) and Lou Correa (D-CA) to repeal the chassis requirement. The manufactured homes regulations are just the tip of the iceberg.  The 1970s saw a huge surge in other productivity killing regulations, such as the EPA and OSHA.  The various environmental bills ended up hurting the environment in all sorts of ways.  Because of requirements such as “environmental impact statements”, it is now far more difficult to build clean infrastructure.   It is also much more difficult to build multi-unit housing.   Reason magazine points out that a wind farm capable of powering 500,000 New Jersey homes was recently killed by regulation—the Jones Act made it too expensive to build. It is also more difficult to get permission to build single-family homes, which has also slowed the growth in living standards.  There’s an alternative reality where large firms could achieve enormous economies of scale building manufactured homes, and selling them in all 50 states.  But that would require the elimination of the various zoning laws and building codes that distort the market. I am old enough to remember 1973.  We had recently experienced several decades of fast economic growth and fast rising living standards.  The public, politicians, and even professional economists began to take for granted the idea that growth was almost limitless.  We were so overconfident that we enacted a set of regulations that killed the golden egg-laying goose.   I see parallels to recent events.  Decades of low inflation convinced policymakers that reckless stimulus would not trigger high inflation.  Those who warned of inflation were likened to the boy who cried wolf.  It turns out that bad regulations really can hamper productivity.  And excessive monetary and fiscal stimulus really can create high inflation. PS.  Many other factors have slowed the growth in living standards.  These include rapid growth in the highly inefficient (and subsidized) health care sector and rapid growth in spending in the highly inefficient (and subsidized) education sector.  Labor legislation also led to growth in non-productive “human resource” jobs.  Excessive litigation has reduced productivity.  The list is endless. (0 COMMENTS)

In 1846, Richard Cobden’s long campaign bore fruit with Britain’s repeal of the Corn Laws, the tariffs which kept cheaper foreign wheat out of the country. The less well-off benefited most and ‘free trade’ became a touchstone of British politics as the country reached the pinnacle of its power. By the end of the 19th century, however, Britain faced increased economic competition from Germany and the United States. A group of concerned ‘Imperialists’ sought to consolidate the British Empire and one method they advocated was tariffs. Robert Blake explained: The core of the argument was that political unity could only be achieved if economic unity came first. Just as a zollverein, or customs union, had preceded the political union of the numerous kingdoms into which Germany had been divided fifty years earlier, so a great tariff union embracing the whole of Britain’s possessions overseas would be the surest way of preserving the political unity of the British Empire. In practice, this meant ‘Imperial Preference,’ a general duty on imports with a remission for those from the Empire. In 1902, Lord Salisbury’s Conservatives imposed a duty on imported wheat to help fund the Boer War. When the war ended later that year, Colonial Secretary Joseph Chamberlain, a leading Imperialist, recommended the duty be retained but not on imperial imports, as a first step toward Imperial Preference. Opposition from the cabinet’s Free Traders scuppered the plan; a young Conservative MP, Winston Churchill, ‘crossed the floor’ to sit as a Liberal. Chamberlain – always a maverick – resigned from the cabinet to campaign for tariffs. While tariffs split the Conservatives they united the fractious Liberals who, in 1906, were elected in a landslide. This – followed by a string of escalating political crises; the People’s Budget, Home Rule for Ireland, and the First World War – sidelined the tariff issue. But no political idea ever truly dies. When the Conservatives returned to sole power in November 1922 they promised that no tariffs would be introduced without a further election. In May 1923, Stanley Baldwin became Prime Minister. He had worked in the iron industry and seen his business’s American trade lost to the McKinley tariff of 1890. With unemployment at 12%, Baldwin saw protection as the answer. In October, he said “this unemployment problem is the most crucial problem of our country” but “I cannot fight it without weapons…I have come to the conclusion myself that the only way of fighting this subject is by protecting the home market.” But “Baldwin consulted no one, even though there was a wealth of official information available,” Kenneth Young writes; …Lloyd-Graeme, President of the Board of Trade, knew quite well, wrote [Cabinet Secretary Maurice] Hankey, that the figures were against tariffs helping unemployment; when Nevile Chamberlain, Chancellor of the Exchequer, instructed his secretaries to gather figures to support Protection, he ‘found that they all told the wrong way!’ The economist John Maynard Keynes condemned the policy as the “protectionist fallacy in its grossest and crudest form.” Undeterred, Baldwin called an election for December 6. It was, AJP Taylor wrote, “the only election in British history, fought solely and specifically on Protection.” Whereas Labour and Liberal policy was clear – “Tariffs are not a remedy for Unemployment,” Labour said; “Trade restrictions cannot cure unemployment,” argued the Liberals – the Conservative’s was not. “The impression left on everyone’s mind is of doubt and perplexity,” Conservative M.P. and Joseph’s son Austen Chamberlain wrote, “We have had six columns of speeches from the P.M. in less than a week and no one knows what he means.” The results were calamitous. The Conservatives lost 86 seats and their Commons majority and Labour formed its first government. Protectionism was discredited and tariffs dropped as Conservative policy. Again, though, protectionism refused to die. Lord Beaverbrook, owner of the Daily Express, and Lord Rothermere, owner of the Daily Mail, exerted intense pressure on Baldwin. Unemployment rose further after 1929 and when a financial crisis hit in 1931 it brought down the Labour government and returned Baldwin to power if not office with a hefty majority. “The Government,” he said, “must…be free to consider every proposal likely to help, such as tariffs, expansion of exports and contraction of imports…” The Conservative dominated coalition not only took Britain off the gold standard but imposed a range of tariffs. Such was the fashion; one-third of parliament’s Liberals now supported protection and “in the spring of 1931 Keynes announced publicly his support for a revenue tariff,” Barry Eichengreen writes, basing “his argument on the reduction of unemployment.” Richard Cobden’s achievement was repudiated. The tariffs enacted by the Conservatives were part of an international movement toward economic autarky which saw trade shrivel in the early 1930s and reaped a bitter political harvest. It would take many years of hard work to undo them. John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)