The beatings will continue until morale improves. In her book Milton Friedman, The Last Conservative, Jennifer Burns notes that Arthur Burns, one of Milton’s mentors and friends, had signed a letter to the New York Times in April 1946 that called for extending wartime price controls for another year. I was familiar with the letter because Hugh Rockoff, in “Price Controls,” in David R. Henderson, ed. The Concise Encyclopedia of Economics, mentions it. One of the other signers, disappointingly, was Frank Knight. The letter has to be read to be believed or, should I say, to be disbelieved. It reads as if it wasn’t written by economists. Consider this reason for retaining controls: As soon as supply and demand of any important commodity are once more in balance at ceiling prices, price control should be suspended and then removed. See the problem? What is keeping supply and demand (more correctly, quantity supplied and quantity demanded) from being in balance? Price controls. I’m reminded of the sign in the old workplace joke, “The beatings will continue until morale improves.” Four years later, though, in his December 1950 presidential address to the American Economics Association, titled “The Role of Principles in Economics and Politics,” Knight went back to actually sounding like an economist. He stated, in one of my favorite passages: Can there be any use in explaining, if it is needful to explain, that fixing a price below the free-market level will create a shortage and one above it a surplus? But the public oh’s and ah’s and yips and yaps at the shortage of residential housing and surpluses of eggs and potatoes as if these things presented problems–any more than getting one’s footgear soiled by deliberately walking in the mud. By the way, one of my senior colleagues at the University of Rochester in the late 1970s, Martin Weinberger, was a young economist at the time and attended the talk. He told me that Knight got a standing ovation.   (0 COMMENTS)

The Minnesota Vikings’ season was effectively over before my Christmas tree came down. The state’s sports journalists are donning their gloves and sharpening their scalpels, preparing to conduct the annual autopsy. The Vikings suffered from some negative exogenous shocks, to be sure, primarily the loss of quarterback Kirk Cousins. But such persistent failure suggests a persistent malady. Two pieces of research suggest that the Gopher State’s high taxes might be a factor.  In a 2018 paper titled ‘Touchdowns, Sacks and Income Tax – How the Taxman decides who wins the Super Bowl’, economist Matthias Petutschnig looked at data for a 23-year period from 1994 to 2016 and found “a significant negative relation between the amount of the net (after-tax) salary cap represented by the personal income tax rate of the teams’ home states and the success of the teams.” Why would tax rates matter for results? The NFL’s salary cap limits what each team can spend on player salaries. The cap is $225 million this season, an average of $4.2 million per player for a 53-man roster. But that is gross pay; it doesn’t take state income taxes into account. In higher tax states, like Minnesota, a greater share of that gross income is swallowed up by state taxes than in a lower tax state like Florida. So, to offer the same net pay as a Florida team, a Minnesota team must offer higher gross pay. But that comes out of the $225 million cap, reducing the amount available to attract other players: “This reduces the average talent level of the whole roster of a team in a high tax state and diminishes its chances of winning,” Petutschnig says.  Another 2018 paper supports this finding. ‘State Income Taxes and Team Performance: Do Teams Bear the Burden?’ by economist Erik Hembre investigates “the effect of income tax rates on professional team performance using data from professional baseball, basketball, football, and hockey leagues.” “Regressing income tax rates on winning percentage between 1995 and 2017,” he writes, “I find robust evidence of a negative income tax effect on team performance.” Three points lend strength to Hembre’s findings. First, looking at college games, where the athletes are unpaid, we would expect to find this effect absent and, indeed, Hembre finds that college teams in low tax-states performed no better than college teams in high-tax states. Second, of the leagues investigated, teams’ results were the least correlated with their states’ tax rates in baseball. This, again, is what you would expect: There is no limit on the salaries MLB teams can pay their players so baseball franchises in high-tax states don’t face the constraint of a salary cap. Third, when Hembre pushed the analysis back to 1977, he finds that “the income tax effect only arose after players gained unrestricted free agency, allowing them to shift the income tax burden on to teams.” We know anecdotally that taxes are a factor in the location decisions of top players. The evidence presented in these two papers seems to bear that out. Sadly, given the state government’s $10 billion tax hike in the most recent legislative session, the legendary suffering of Minnesota’s sports fans looks set to continue.    John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Journalist Matti Friedman worked for the Jerusalem Bureau of the Associated Press from 2006 to 2011. Looking back at that experience, Friedman argues that little has changed in the journalism landscape. Listen as Friedman discusses with EconTalk host Russ Roberts the media’s obsession with Israel and how and why the media often sidelines facts in service of ideology, […] The post The Challenge of Covering the Most Important Story on Earth (with Matti Friedman) appeared first on Econlib.

Some highlights of my weekly reading. Ilya Somin, “Canadian Immigration Officials Block Citizenship Grant for Russian Immigrant Because She Was Convicted of the ‘Crime’ of Speaking Out Against Russia’s War of Ukraine,” Reason, Volokh Conspiracy, January 5, 2024. Excerpt from the article quoted by Somin: Kartasheva, 30, learned via her family that in late 2022 she was charged by Russian authorities with a wartime offence of disseminating “deliberately false information” about Russia forces. The charges related to two blog posts she wrote while living in Canada. Kartasheva notified Immigration, Refugees and Citizenship Canada about the charges and uploaded translated court documents last May. Days later the department gave her an invitation to her citizenship ceremony. On June 7, 2023, she logged into the ceremony alongside her husband. In the pre-interview that takes place before someone is allowed into the ceremony room, they were asked if anyone had been criminally charged, as part of a list of standard questions. When she explained what had happened, an official pulled her out of the ceremony, though her husband went ahead and was given his citizenship….. Last month, the department sent her a letter, saying that her conviction in Russia aligns with a Criminal Code offence in Canada relating to false information. For those who want to head down Canada’s path of making “false information” a crime, be warned. Mitch Daniels, “I surrender. A major economic and social crisis seems inevitable,” Washington Post, January 2, 2024. Most important excerpt: Then there’s that little matter of our unconscionable and unpayable national debt, current and committed. Erskine Bowles led the last serious effort to rein it in, before his commission’s report in 2010 was torpedoed by President Barack Obama. Bowles called what’s coming“the most predictable economic crisis” — there’s that word again, aptly applied — “in history.” And that was many trillions of borrowing ago. I was at a Better Angels event in Monterey yesterday and when my turn came to talk about the election, I said that the two most likely candidates, Trump and Biden, are quite content with driving us further to the budget cliff, with their refusal to touch Social Security or Medicare. By the way, I learned about this article by turning on CNN early Saturday morning, something I almost never do, and seeing Smerconish interview Daniels and others. It was refreshing. Smerconish actually asked non-gotcha questions and let his guests speak. Revolutionary!   John Mearsheimer, “Genocide in Gaza,” John’s Substack, January 4, 2024. Excerpt: I am writing to flag a truly important document that should be widely circulated and read carefully by anyone interested in the ongoing Gaza War. Specifically, I am referring to the 84-page “application” that South Africa filed with the International Court of Justice (ICJ) on 29 December 2023, accusing Israel of committing genocide against the Palestinians in Gaza.1 It maintains that Israel’s actions since the war began on 7 October 2023 “are intended to bring about the destruction of a substantial part of the Palestinian national, racial and ethnic … group in the Gaza Strip.” (1) That charge fits clearly under the definition of genocide in the Geneva Convention, to which Israel is a signatory.2 The application is a superb description of what Israel is doing in Gaza. It is comprehensive, well-written, well-argued, and thoroughly documented. The application has three main components. Rose D. Friedman, “Poverty: Definition and Perspective,” American Enterprise Institute, 1965. Excerpt: This criterion of nutritive adequacy implicitly underlies the figure of $3,000 of money income per family that has received so much attention since its presentation by the President’s Council of Economic Advisers in its 1964 report. The Council presents this figure of $3,000 as the dividing line between the poor and the not-poor, and uses it to count and describe the poor. It concludes that 20 percent of the families in this country are poor. Though the Council implicitly uses the criterion of nutritive adequacy, it uses it incorrectly. A correct application of the criterion, using precisely the same data and the same concept of nutritive adequacy, yields a figure around $2,200 as the relevant income for a nonfarm family of four rather than a figure of $3,000. In addition, the Council uses the same income of $3,000 as the dividing line for all families regardless of size. The combined result is that the Council exaggerates greatly the extent of poverty on its own criterion and gives a misleading description of who are the poor. I was motivated to read Rose’s study after seeing Jennifer Burns refer to it quite critically in her book Milton Friedman: The Last Conservative. (I’m writing a lengthy review of the book.) I ended up thinking that Burns’s harsh treatment of Rose was unjustified. The pic above is of Rose Friedman. (0 COMMENTS)

Matt Yglesias directed me to an interesting NBER study by Kyle Carlson, Joshua Kim, Annamaria Lusardi & Colin F. Camerer.  Here is the abstract: One of the central predictions of the life cycle hypothesis is that individuals smooth consumption over their economic life cycle; thus, they save when income is high, in order to provide for when income is likely to be low, such as after retirement. We test this prediction in a group of people—players in the National Football League (NFL)—whose income profile does not just gradually rise then fall, as it does for most workers, but rather has a very large spike lasting only a few years. We collected data on all players drafted by NFL teams from 1996 to 2003. Given the difficulty of directly measuring consumption of NFL players, we test whether they have adequate savings by counting how many retired NFL players file for bankruptcy. Contrary to the life-cycle model predictions, we find that initial bankruptcy filings begin very soon after retirement and continue at a substantial rate through at least the first 12 years of retirement. Moreover, bankruptcy rates are not affected by a player’s total earnings or career length. Having played for a long time and been well-paid does not provide much protection against the risk of going bankrupt. I suspect that poverty has multiple causes, including bad circumstances and bad decision-making.  But if this study is correct, it suggests that poverty in the US is heavily influenced by bad decision-making.  After all, if circumstances played an important role, then you’d expect at least some correlation between pre-existing wealth and likelihood of becoming bankrupt. To be clear, I’m not suggesting that decision-making explains all forms of poverty.  I suspect that people born on small farms in low-income countries are more likely to become poor as adults than people with equal decision-making skills that are born into wealthy families in the same countries.  But I also suspect that as countries become richer, a greater share of poverty is due to poor decision-making and a smaller share is due to circumstances.  At the level of wealth associated with professional football players, poverty is almost entirely due to poor decision-making. If this is true, then a field experiment in Africa on a public policy such as Universal Basic Income may have little or no relevance for the situation in the United States. PS.  Whenever I post on these sorts of topics, people tend to misconstrue my claims.  Thus I am not saying that the poverty of former football players is some sort of moral failure.  Perhaps frequent concussions make people less likely to make wise decisions.  If so, their poverty would be caused by poor decision-making, even as the poor decision-making had external causes.  People who moralize sociological issues generally end up with very shallow views of the situation.  At the deepest level of analysis, 100% of what happens in the world is due to circumstances.  I separate causation and decision-making to make it easier to evaluate the public policy implications of a problem.  That is, we need to think about what factors must public policy take as a “given”? (0 COMMENTS)

It is an old and strange idea that political authority–say, Joe Biden, Donald Trump, or Louis XIV–can “inject money” in the economy. Speaking of a recent federal law, a Wall Street Journal report matter-of-factly mentions “the Inflation Reduction Act, a broad clean-energy, tax and healthcare law that injects nearly $400 billion into the U.S. economy (“Biden Struggles to Push Trade Deals With Allies as Election Approaches,” December 28, 2023. This formulation can convey a misleading impression, for a dollar injected in the economy by a government is ipso facto extracted from it, either by current or future taxes or by inflation. To speak in terms of real resources, the government has to obtain command over the resources (labor and other inputs) that it wants to divert to its projects. Keynesian economic theory claimed that during a recession, when many resources are idle, the government could stimulate the economy, even if it paid people to dig holes and refill them (as Keynes’s General Theory of Employment, Interest and Money famously suggested). Such an injection was meant as short-run solution but it was bound to become a permanent activity, and it was already drifting there in the General Theory. Jean-Baptiste Say, the famous 19th-century economist and successful entrepreneur, emphasized the gross error of considering government expenditure as an injection in the economy. In his Treatise on Political Economy (Elliot & Co, for the 4th edition), a translation of the Traité d’économie politique (1803 for the original edition), he wrote: Madame de Maintenon mentions in a letter to the Cardinal de Noailles that, when she one day urged Louis XIV to be more liberal, in charitable donations, he replied, that royalty dispenses charity by its profuse expenditure. … When Voltaire tells us, speaking of the superb edifices of Louis XIV, that they were by no means burdensome to the nation, but served to circulate money in the community, he gives a decisive proof of the utter ignorance of the most celebrated French writers of his day upon these matters. Rulers of course had a personal interest in this sort of voodoo economics. J.-B. Say also quotes Frederick II of Prussia: My numerous armies promote the circulation of money and disburse impartially amongst the provinces the taxes paid by the people to the state. The money disbursed by Louis XIV as wages or input purchases came either from taxes that his subjects had been forced to pay or from other exactions such as trade monopolies, sale of government jobs and privileges, occupation of the royal domain, obstacles to private enterprise and social mobility, and so forth. Whether monarchic or democratic, a government spends its subjects’ money. These expenditures may serve to produce “public goods” for the subjects, but if they are not to result in a waste, the value produced must be higher than the value taken (see my post “Is It True that the State Produces Nothing?”). The question under consideration here is different: Does the mere injection or circulation of money from the government’s expenditures generate something over and above the value of the final goods or services produced for the subjects? The answer to this question is no. To reformulate Say’s argument differently: The person who gets money from the Prince as wages or profits has to work for it, but he had already worked to pay the taxes that pay his remuneration. The government’s money that circulates and is supposed to benefit him makes him work twice (at least) to get the same remuneration, that is, to allow him the same consumption of private goods. The government does not inject anything that it has not extracted. (0 COMMENTS)

Is The Washington Post in full-scale collapse? A recent look at the numbers provides a fairly convincing answer to that question. According to the report, not only is the Post losing $100 million a year, but it lost over half of its online engagement by the end of 2023. The signs were already there by mid-year, and the worst has come to pass. This is from Bonchie, “The Washington Post Is in Full-Scale Collapse,” RedState, January 5, 2024. Bonchie goes on to write: Having a billionaire sugar daddy [Jeff Bezos] has helped mask some of the issues plaguing the Post, but the tide can only be held back so long. To lose over 50 percent of its online viewership is catastrophic for an outlet with such high overhead costs. Subscriber numbers have also nosedived throughout the Biden administration. I’m reminded of my favorite scene from one of my favorite movies, Citizen Kane. I actually found a source decades ago, way before the web, that had the dialogue printed out and it was on my cork board at work for decades. It’s a beautiful exercise in numeracy. Here’s the dialogue: Walter Parks Thatcher (Charles Kane’s legal guardian): Don’t you think it’s rather unwise to continue this philanthropic enterprise, this Inquirer that’s costing you a million dollars a year? Charles Foster Kane: You’re right, Mr. Thatcher. I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars next year. You know, Mr. Thatcher, at the rate of a million dollars a year, I’ll have to close this place in [pause] 60 years. Let’s say that Bezos’s losses rise to $200 million a year and stay there. His net worth in 2022 was $167 billion. So if he makes only a 1% return on his assets, that’s $1.67 billion a year. At that rate, he’ll have to close the Washington Post in– never. There’s one other big difference besides the fact that for Bezos it’s rounding error and for Citizen Kane it wasn’t. I think I can figure out from the movie what Citizen Kane’s motivation was for running the Inquirer the way he did. I’ve never had a clue about what Jeff Bezos’s motivation is in owning the Washington Post.   (0 COMMENTS)

Do you suffer from scarcity brain? According to Michael Easter, the answer is, “probably.” Many (perhaps most) of us often have the feeling that we can’t get enough, and in this episode, host Russ Roberts welcomes Easter back to talk about it.  Easter argues that modern technology has figured out how to get us not to moderate and even push us into more-whether we’re talking about snacks, social media, or slot machines. Consuming less has never made sense in grand historical perspective, says Easter; “more” has long conferred a survival advantage. How, then, have we arrived at this “evolutionary mismatch?” Will you share your thoughts with us? Let’s keep the conversation going.     1- What are the three parts of the scarcity loop, according to Easter? How have slot machines and social media, respectively, perfected the scarcity loop? In what other contexts can you see the scarcity loop operating, and how? How has our transition to the digital world changed how we experience compulsion?   2- What do we tend to get wrong when thinking about dopamine, according to Easter, and why does he believe people have more agency than our typical conversations regarding dopamine suggest? (And what do you think previous guest Robert Sapolsky would say in response to this claim of Easter’s?)   3- Roberts and Easter discuss misogi challenges. What is the nature of such challenges, and how might they help us overcome the temptation of the scarcity brain? Have you ever undertaken such a challenge? If so, in what way(s) did it help you? What are some misogi challenges you might be willing to try?   4-  What advice does Easter offer to change your mindset by changing each part of the scarcity loop? Which parts of the loop are the most challenging to combat, and why? Is there any additional advice you might offer?   5- How have the ways in which we spend our attention changed over the last 100 years? Easter describes the time he spent in a monastery. What did he learn from this? Why might Benedictine monks be happier on average? (0 COMMENTS)

The Financial Times has an excellent interview with the writer Giuliano da Empoli, who discusses the use and abuse of political power. Here he evaluates Vladimir Putin: “I think he knows he’s made a strategic mistake [the invasion]. But one rule of that kind of power is to never go back, never show any crease in the absolute will and certainty. He wasn’t strong enough to impose his order on Ukraine. But he might be strong enough to impose chaos on Ukraine. And he did take the opportunity to consolidate his order internally, and to make it much more ruthless. This is working, for now.” Putin’s “mistake” might be “playing out not so bad”, he concludes. This is one reason why I favor market-based rules over discretion in monetary policy.  Markets are willing to admit mistakes and reverse course, while individual policymakers stubbornly stick to failed policies.   Like me, da Empoli has become very pessimistic about current trends: I’m part of this, so I also suffer in Italy. I can’t stand the quality of public debate, I can’t turn on TV, I can barely open a newspaper. The media ecosystem that shapes public discourse is so degraded — conspiracy theories, all sorts of weirdness. It’s going in the wrong direction, the whole thing. I guess the US is not the only country suffering from this virus.  This makes him more content with flawed systems that at least preserve some form of civilization: Da Empoli has peered deep into power. Does he still have political ideals? “If you’d asked me in the past, I would have given you lots of convictions. But what’s left now, to me, is this idea that we try not to kill each other. We’ve been successful in the European Union in not doing so for an extraordinary lapse of time. It looked dull, but I think it’s not dull any more, and not obvious any more. So this European thing is the only strong ideal I have.” In my previous post, I said the most successful monetary regimes were boring.  The same is true of politics.  Can you name the President of Switzerland?  I cannot.  Can you names the leaders of Venezuela and North Korea?  I can.  And yet Switzerland is in many ways a far more important country, playing a significant role in the global economy.  Why don’t we care who leads it?  Perhaps because it doesn’t matter. Surveying the diners in Jack’s, he remarks: “In Russia, power is a big beast. In Switzerland power is a kitten, and it’s been domesticated. Through history, it’s been diluted, distributed, at local level and through referendums. Swiss politicians are boring. That’s quite a good thing. The more spectacular a political system, the worse it is, in many ways.” Read the whole thing. (0 COMMENTS)

We must learn from history or be doomed to repeat it. This includes honestly assessing the economy in 2023 so that we have better information for making decisions in 2024.  Starting with a bang on many people’s minds is housing affordability.  The year commenced with a surge in the average 30-year fixed mortgage rate from 6.5% in January to nearly 8% in October but has declined recently to about 6.6%. These higher mortgage rates and record-high housing prices contributed to an unaffordable housing market.  While existing home sales were up 0.8% in November, they are down 7.3% over the last year, indicating a struggling housing market for families that will unlikely improve much in 2024.   Another concern is costly inflation. Rampant hikes in the cost of a typical basket of goods and services have meant less purchasing power for us. This contributes to making housing, food, education, and other expenses for that basket less comfortable or worse for many families.  As of November 2023, the core consumption personal expenditures increase was 3.2% year-over-year. This price measure of a basket of goods and services excludes food and energy and is what the Federal Reserve prefers to watch. While core PCE inflation has moderated from close to 6% in 2022, the recent 3.2% inflation rate remains 60% higher than the Fed’s average inflation target of 2%.  Although moderating inflation represents some relief for many Americans, the challenge is that average weekly earnings adjusted for core inflation declined in 23 of the last 35 months since January 2021. In total, these real average weekly earnings are down 0.8% since then, indicating why inflation is a top concern.    An additional problem is debt. Because earnings haven’t been keeping up with inflation, credit card debt soared to more than $1 trillion as people struggled to make ends meet, which is a bad sign for 2024. And many people have been going through their savings and retirement funds quickly.   What about jobs? The White House recently celebrated “total job gains achieved under the Biden administration reached 14.1 million through November 2023.” But this metric becomes less impressive considering that 9.4 million of those jobs were just recovering jobs lost during the pandemic lockdowns. So, there have been 4.7 million new jobs added since January 2021, which is 134,000 per month. While this is positive, it is not record-breaking.  The weaker labor market in recent months indicates that 2024 could be tough for many workers.   Most people’s pocketbooks did not grow but diminished this year, and the job market similarly lags. But what about the nation’s overall growth? Hasn’t GDP soared? Not exactly.  In the third quarter of 2023, the annualized real GDP growth hit 4.9%, which appears robust. But when you dig into the details, it’s more complicated.  Government spending, which is a drag on the economy as it must take taxes from the private sector and distort market activities, threw in 0.99 percentage points. And private inventories, influenced by the whims of fluctuating interest rate expectations, chipped in 1.27 percentage points. When you exclude those contributions to consider stable real private GDP, there was just a 2.6% bump up. This slower pace didn’t just pop out of nowhere. It’s been a saga since early 2022, when we hit a two-quarter decline in real gross domestic product, waving a big red flag for a recession. And when you consider the valuable metric of real gross domestic output, which is the average or real gross domestic product and real gross domestic income, the economy has declined in three out of the last seven quarters. While these economic issues suggest stagflation triggered by misguided pandemic lockdowns and subsequent trillions of new money printing of deficit-spending, there may be some relief.    The Fed’s slow correction to its bloated assets of $9 trillion at its peak to $7.7 trillion contributed to interest rates soaring since March 2022. But with Congress continuing to deficit spend of about $2 trillion per year and net interest payments soaring to $1 trillion per year, there are massive economic challenges ahead.  These deficits will make it more difficult for the Fed to correctly normalize its assets quickly to get them back to at least the pre-pandemic $4 trillion. This is because the budget deficits would contribute to higher interest rates, so the Fed will likely monetize the debt more to help Congress avoid needed spending restraint. While these truths are tough to swallow, many beacons of hope also emerged throughout the year that should be noted.   In 2023, a momentous shift unfolded with a transformative surge in educational choice.  Twenty states expanded school choice, and a record-breaking 10 states passed some form of universal school choice, making 36% of American students eligible for a private choice program.  Some states have been slow to increase educational freedom, but this revolution’s overall impact is historical. Recognizing that children are the cornerstone of our nation’s future and acknowledging that improved education is a pivotal predictor of their success, the catalyst for change is undeniably rooted in more universal school choice.    The second bright light is the flat state tax revolution.  Many states took bold steps to enhance their economic landscapes. Notably, prominent states like California and New York faced ongoing out-migration as individuals sought refuge from progressive policies, and less heralded states embraced free-market principles, propelling them onto the national stage. More conservative Florida and Texas continued to lead the way in places where people moved in 2023.   The third thing to cheer is a responsible movement toward a sustainable state budget revolution.  Some states are pushing toward improving their spending limits to one that covers more of the budget, limits budget growth to no more than population growth plus inflation, and has a supermajority vote to bust the limit or raise taxes. The synergy of these reforms demonstrates the power of federalism as states experiment with policies, revealing effective strategies and fostering a healthy laboratory of competition. We need lawmakers at the federal, state, and local governments to recognize what works and implement them.  The trajectory in 2024 and beyond hinges on embracing free-market capitalism, which is the best path to let people prosper. This includes less government spending, less money printing, more school choice, and more tax relief. In short, less government.  That’s how we get a more prosperous 2024. Happy New Year!    Vance Ginn, Ph.D., is the president of Ginn Economic Consulting, host of the Let People Prosper Show, and was previously the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on X.com at @VanceGinn. (0 COMMENTS)