For students of economics and the curious non-economist layman, I previously explained the concept of “sunk cost.” Here is another example, from what I do. Suppose I have worked a few hours on an EconLog post. From my first reflections and draft to the final post ready for publication, through some complementary research, a few editing passes, and the choice of a featured image, I might have spent four or five hours over a couple of days, a high cost since I could have done something else productive or directly enjoyable during that time. Time is short and its opportunity cost high. Suppose I now reckon that most of my readers will likely find my newly-minted post at best banal. They will not even feel challenged to learn more. They may conclude that they are unlikely to benefit from reading me anymore, which represents a reputation cost for me. In short, I now think that clicking “Publish” will, from now on, carry a net marginal cost for me. It would be irrational to go ahead “because of all the time I spent on it.” Wasted time is a sunk cost that will not be erased by incurring further costs. Past time is gone forever. It won’t be “reimbursed” to me. I think and hope that I usually don’t succumb to the sunk-cost fallacy. I sometimes delete, as I just did, a post ready to publish. (0 COMMENTS)

Some commenters on my recent post on the Universal Basic Income (UBI) seemed to claim that there would be no big effect on most people because the UBI they received would be taxed back. So, according to this argument, the net effect on most people would be approximately zero. But some basic economics says that that’s false. Imagine the government gives you $10,000 per year but tells you that once your overall income reaches $40,000, you will lose $1 of that $10,000 for every additional two dollars you earn. That means that on top of your regular marginal tax rate you pay (which includes the federal income tax rate, the state income tax rate, and the payroll tax rate), you will pay an implicit tax rate of 50%. That will have a strong disincentive effect. Moreover, one of the ways economists think about incremental taxes is to divide the effect into an income effect and a substitution effect. The income effect is that additional taxes make you poorer and so you “demand” less leisure: you work harder. The substitution effect is that the price of leisure has fallen and so you “demand” more leisure: you work less. Which outweighs which is an empirical issue. For married women, the substitution effect typically is much stronger than the income effect, so they work less when marginal tax rates rise. But the UBI introduces a new wrinkle. The $10,000 that everyone gets increases people’s real income and, therefore, increases their demand for leisure. So the overall effect of the UBI that is phased out is made up of three components: (1) the income effect due to the UBI which reduces work: (2) the income effect due to the phasing out, which increases work; and (3) the substitution effect due to the phasing out, which strongly reduces work when the phaseout is on the order of $1 lost for every $2 earned. A way to reduce this strong disincentive effect is to phase out the UBI more slowly. For example, the government could reduce the UBI by $1 for every $3 earned past a total income of $40,000. Then the added implicit marginal tax rate would be “only” 33.3 percent. This has two added problems, though. First, it makes the UBI more expensive than otherwise because everyone whose total income is between $50,000 and $80,000 nets some portion of a UBI. Second, it subjects a much wider swath of people to the implicit marginal tax rate. Giving people money and then taxing it back as you earn more is particularly perverse tax policy. (0 COMMENTS)

An essay on Essays of Montaigne (1588) Michel de Montaigne articulates a zero-sum theory of market exchange as a special case of a general law of conservation in Nature: THE PROFIT OF ONE MAN IS THE LOSS OF ANOTHER. Demades the Athenian condemned one of his city, whose trade it was to sell the necessaries for funeral ceremonies, upon pretence that he demanded unreasonable profit, and that that profit could not accrue to him, but by the death of a great number of people. A judgment that appears to be ill grounded, forasmuch as no profit whatever can possibly be made but at the expense of another, and that by the same rule he should condemn all gain of what kind soever. The merchant only thrives by the debauchery of youth, the husbandman by the dearness of grain, the architect by the ruin of buildings, lawyers and officers of justice by the suits and contentions of men: nay, even the honor and office of divines are derived from our death and vices. A physician takes no pleasure in the health even of his friends, says the ancient Greek comic writer, nor a soldier in the peace of his country, and so of the rest. And, which is yet worse, let every one but dive into his own bosom, and he will find his private wishes spring and his secret hopes grow up at another’s expense. Upon which consideration it comes into my head, that nature does not in this swerve from her general polity; for physicians hold, that the birth, nourishment and increase of every thing is the dissolution and corruption of another.’”—Michel de Montaigne, Essays At first glance, one might simply dismiss Montaigne’s theory, which shows its age. Zero-sum thinking reflects hardships and conflicts of16th-century France, marked by great wars of religion. Then came Adam Smith and the industrial revolution. The zero-sum theory of exchange is so yesterday after the invisible hand.  Not so fast. Let’s take a closer look.   Supply & Demand Markets have a supply side and a demand side. Montaigne’s various examples of profit indicate several kinds of causes on the demand side:  Vice: “The merchant only thrives by the debauchery of youth […] even the honor and office of divines are derived from our death and vices.” Disequilibrium shortages (famine, earthquake): “the husbandman by the dearness of grain, the architect by the ruin of buildings.” Sharp conflicts (torts, wars): “lawyers and officers of justice by the suits and contentions of men.” Montaigne also mentions soldiers. Illness. Montaigne mentions physicians. It is striking that Montaigne focusses only on negative causes of demand.  Montaigne then impugns the motives of actors in every occupation on the supply side:  A physician takes no pleasure in the health even of his friends, says the ancient Greek comic writer, nor a soldier in the peace of his country, and so of the rest. The psychology is subtle. Persons on the supply side (physicians, soldiers) “take no pleasure” if potential clients perchance enjoy blessings (health, peace) that reduce demand for their services. Given Montaigne’s emphasis on zero-sum interaction, it is notable that he does not portray any overt malice or fraud on the supply side. He makes no mention of unethical behaviors by suppliers to create or increase demand.  Were Montaigne to write today about the healthcare industry and about the military, might he highlight misleading advertising (e.g., the Oxycontin case), scare tactics (e.g., the WMD contrivance), and heavy lobbying by big pharma, the military-industrial complex, and so the rest?   Zero-Sum Self-Interest & Social Psychology Next, Montaigne moves beyond markets and broadens the sociological scope of his observations about zero-sum psychology. To engage the reader intimately, Montaigne makes a plea for introspection. Soul-searching takes a plunge into innermost desires: And, which is yet worse, let every one but dive into his own bosom, and he will find his private wishes spring and his secret hopes grow up at another’s expense. Notice that Montaigne specifies private wishes and secret hopes. These are desires that cannot stand the light of day. Any culture or community has a characteristic normative hierarchy of motivations. For example, revenge is noble in traditional cultures of honor, but ambiguous in modern culture. Montaigne’s deep insight is that a particular social motivation, zero-sum self-interest, is at once part of human nature and contrary to social norms. Social norms pressure a person to hide his zero-sum self-interest motive from others (deception) and even from himself (self-deception). A hidden ignoble motive might instead present itself in lofty camouflage. A well-known instance is the psychological transmutation of envy (an ugly motive) into righteous indignation (a noble motive). Similarly, the zero-sum self-interest motive might camouflage itself as a mission to use one’s special skills to serve persons in need. (And sometimes a cigar is also a cigar. Altruism, too, is real. Motives may be complex and plural.) Self-deception makes accurate introspection elusive. Because Montaigne convincingly makes himself an open book here, there, and everywhere in his Essays, we come to trust his remarks about introspection. What fraction, and which domains, of a normal person’s behavior are motivated by zero-sum self-interest? Montaigne does not say. Nonetheless, he clearly does imply that the zero-sum self-interest motive governs market behavior. Today, some critics of markets argue that ‘the market motive’ (self-interest) tends to crowd out nobler motives, such as altruism or the public good. For example, some critics say that a market for blood for transfusions will undermine willingness to donate blood. The thought is that markets corrupt community and human nature. By contrast, Montaigne argues that profit is a supply-side expression of a zero-sum self-interest motive, which is part of human nature and an expression of the cycle of Nature.   Montaigne after Adam Smith and Robert Sugden Montaigne’s emphasis on the zero-sum nature of market exchange is indeed outdated and misplaced in various important ways. When buyer and seller are honest and tolerably well-informed, each side gains from voluntary exchange. Markets respond dynamically on the supply side to shortages and to consumer needs and preferences. The invisible hand is awesome. Producer surplus and consumer surplus are real. Monopoly on the supply side, not market exchange per se, stacks the deck. And so on—What Adam Smith said. But Montaigne’s theory is a tonic reminder to scrutinize markets for any zero-sum aspects, too.  Consider matching markets—markets in which one must choose and be chosen. The marriage market is an example. If A marries B, then C cannot marry A. C will hope to find (or endeavor to earn) a backup match. If we change the rules and allow polygamy (marriage of more than two persons), and if there emerges relatively high prevalence of polygyny (marriage of one man and more than one woman), then the market relegates a large fraction of men to involuntary celibacy (incels). More generally, markets have an intrinsic element of unfairness in opportunity. Robert Sugden explains: In a market, each person’s opportunities are opportunities to transact with willing others. Each individual is free to choose from his own opportunity set, but the contents of that set are largely determined by the choices that other individuals make from theirs. In a developed market economy, most people’s most valuable opportunities consist of the terms on which other people are willing to transact with them. It is an unavoidable consequence of this fact that everyone can have a wide range of opportunities only if everyone’s opportunity set is liable to expand or contract as a result of other people’s decisions about how to use their opportunities. In this sense, unfairness is intrinsic to markets.—Robert Sugden, The Community of Advantage: A Behavioural Economist’s Defence of the Market (Oxford U. Press, 2018) p. 192 Montaigne locates ‘the zero-sum’ in the direct outcome for participants in a particular market exchange. Profit and loss are two sides of the same coin, exchange. By contrast, Professor Sugden situates unfairness in an indirect outcome of particular exchanges, namely, any negative spillover effects of those exchanges on market opportunities of other persons. My profit and yours—our gains from two-sided exchange—may constitute something akin to a zero-sum situation for bystanders in the rest of the market. Montaigne’s theory of profit ignores dynamic supply and neglects consumer surplus. Nonetheless, it displays a crucial saving grace. It rejects political suppression of profit-makers—because profit manifests Nature’s organic law of conservation. Thus, his theory is economically mistaken but politically correct. (See what I did there?) Montaigne’s theory of profit comes with a bonus, too, as his chain of reasoning also plumbs the depths of social psychology.   John Alcorn is Principal Lecturer in Formal Organizations, Shelby Cullom Davis Endowment, Trinity College, Connecticut.  Scruples about principles of historical inquiry, and a stint teaching in Columbia’s ‘great books’ core curriculum led him to explore methodological individualism and the social sciences.  As in the Dry Bones song, a concatenation of authors—Jon Elster, Diego Gambetta, Thomas C. Schelling, Robert Sugden, David Friedman, and Michael Munger—eventually brought him to discover EconTalk and EconLog.   (0 COMMENTS)

Every Veterans Day, I try to do something special to remember or honor a veteran. I don’t like the standard flag-waving event that this day has become for many people. In many Veterans Day speeches, the speakers talk about the hundreds of thousands of American veterans who gave their lives for our freedom. The problem with that is twofold: (1) Very few of those who were killed in war literally gave their lives but instead had their lives ripped away, and (2) very few of them fought for our freedom. So my tribute this time is to a veteran who did not give his life and knew that he wasn’t fighting for our freedom. That veteran is Richard H. Timberlake, Jr. Dick Timberlake, who has become a personal friend, is a fairly well-known monetary economist and a veteran of World War II. Timberlake’s book They Never Saw Me Then is his account of his time in World War II, first training to be a pilot in the United States and then being a co-pilot of a B-17 on bombing raids over Germany. The book ends with his being wounded in one such raid and then recuperating in hospitals in England and the United States. The title of his book, he explains, comes from the thought that he and his buddies had about their wish for various friends, relatives, and “enemies”: “Boy, if they could see me now.” But because they couldn’t see him then, he writes, his recourse is to tell the story himself. He tells it well. One thing that is clear throughout the book is that Dick Timberlake had one main goal during the war: to preserve the life of Dick Timberlake. And, he points out, this was the norm. He quotes from Arthur Hoppe, a journalist for the San Francisco Chronicle: “I suppose there were a few in World War II who were fighting for freedom or democracy, but in my three years in the Navy I never met one of them. … [W]e were fighting to stay alive. And that is the true horror of war.” Arthur Hoppe, writes Timberlake, “had it right.” But if this is how everyone thought, what makes Timberlake’s book special? Not mainly that he’s a good writer, but that he is willing to speak out about the horror of war. It helps, also, that Timberlake is a free-market economist who understands the harmony that markets lead to and the chaos and destruction that war causes. We often hear about soldiers in World War II trying to go after Hitler. But Timberlake recognizes the reality. He writes: All of my fellow airmen and I knew that Hitler and his henchmen were atrocious and loathsome examples of the human race. Yet, any U.S. soldier or airman who thought even briefly about his job of trying to kill and destroy ‘the enemy,’ knew that he was not within range of damaging Hitler and other Nazi leaders. We could not reach their personal environments or influence their decisions; our activities were many magnitudes removed from hurting them. We could only chip away at the peripheries of their domain and hope that they would realize the futility and fallacy of their ways. To do so, we had to try and kill our enemy counterparts with whom we had no personal quarrel at all. We aimed our bombs at their strategic war-making industries and infrastructure, but in the process we knew that we could not avoid hitting churches, schools, and innocent people. Many of us thought that a better way must exist. Fifty-six years later, I still think so. Reading the line about killing counterparts with whom he had no personal quarrel, I thought of a vignette I read years ago: General: “Men, we’re surrounded, but the enemy has the same number of soldiers we do. So some man out there is going to try to kill you, and your job is to kill him first.” Private: “General, could you point to the man you want me to kill? I believe that he and I can make another arrangement.” Timberlake gives a pithy statement of the essence of war: “War is the mutual destruction of capital, both human and non-human.” Timberlake also recognizes the cause of war. He writes: Finally, in their external affairs governments must resist any temptation to intervene in the affairs of other peoples. It takes a government to wage a war. So governments must take the same oath of nonintervention – live-and-let-live – with other governments as each individual observes with other individuals. The model for this point-of-view is the political system the Founding Fathers put together when they wrote the Constitution of the United States. So what do we owe our veterans on this Veterans Day and, indeed, on all days? Timberlake has an answer: Surely, if societies owe anything to the veterans of former wars and the innocent soldiers and people destroyed in these catastrophes, it is a responsibility to avoid further warfare by every practicable means. So far as I can see from my vantage point, societies and governments are not following my simple prescription – or any other effective strategy – for preventing wars of all varieties. In not doing so, they are betraying the trust that my wartime colleagues, especially those who made the ultimate sacrifice, and I reposed in them. This was first published at antiwar.com in November 11, 2008. Here’s my tribute to him when he died in 2020. (1 COMMENTS)

When Alexandra Hudson took a job at the Department of Education in Washington, D.C., she found herself faced with two extremes she was not prepared for- people who seemed good and nice, but were actually ruthless and cruel. This prompted her to think about the distinction between people’s inner and outer manners, which led her to the comparative study of civility and politeness. Later, when Hudson move from DC to Indianapolis, she experienced a “surprising reprieve” with her neighbor Joanna and her practice of “porching.” What’s the difference between civility and politeness, and why does it matter? In this episode, EconTalk host Russ Roberts invites Hudson to discuss these ideas and her new book, The Soul of Civility.     1- Hudson describes civility as a disposition of the heart arising from a respect for the inherent dignity of the individual. She also notes that such respect sometimes requires being impolite. How can one be civil and impolite at the same time? What are some circumstances in which you think this sort of impoliteness is necessary and beneficial? Explain.   2- Hudson describes politeness as more of a tool, while civility is both instrumental and inherently good. How can politeness be used for Machiavellian ends? To what extent might politeness be a tool of the patriarchy, a critique Hudson mentions. If it is, to what extent should we still regard it as valuable?   3- Is the disposition of civility more a function of nature or nurture? How does civility bridge the gap between our social nature and our inherent self-love? What is the role of education and formal schooling in cultivating civility?   4-What is the relationship between civility, law, and trust? Roberts and Hudson talk about the example of the Code of Hammurabi. Do social norms precede the formalization of law, or is law more often a reaction to the degradation of norms? How do higher levels of social trust affect the nature of laws in a polity? What role does the disposition for civility play with regard to social trust?   5- Roberts reflects on Hudson’s neighbor Joanna and draws a distinction between two types of “porchers”- the raconteur and the networker. Which one better describes you (or someone you know)? What does this suggest to you about the power of face-to-face networking? To what extent can such a practice of civility flourish digitally? That is, is it possible to inhabit an online porch? (0 COMMENTS)

Economics textbooks tell us that what really matters is relative prices, not the absolute price of a good or service.  A recent trip to China provided a number of interesting examples. In a shopping mall in Xian my wife and I encountered a food court that was a foodies paradise, with more than 50 varieties of (mostly) Asian cuisine.  It wasn’t just Korean food, there were specific varieties such as “North Korean restaurants” (insert joke here.)  We chose a delicious seafood meal at a Yunnan restaurant: A price of 30 yuan is roughly $4.20 in US dollars.  The same meal would cost at least $20 in California (especially if you factor in tax and tip), and would not be nearly as tasty.  At the same food court, my wife saw this help wanted ad: The first three lines are monthly salaries for restaurant workers at various skill levels, and the last one is the hourly wage for part-timers.  (One yuan is about 14 cents.)  Part-timers only earn about $2.50/hour in US dollar terms, but they can buy a nice lunch with about 1 1/2 hours of labor.  (The meat dishes were cheaper.) My wife and I each paid $4.20 for a haircut in Beijing, and it was higher quality than the $20 cut I get in California.  You expect haircuts to be roughly equally affordable in each country, as the main cost is labor, and the technology for cutting hair is essentially the same in both places.  There’s also a roughly 5-1 difference in ride share prices, although in this case Uber is higher quality that China’s Didi.  Even so, the huge price advantage makes Didi far cheaper. You’d expect China to lag behind the US in areas where there’s a great need for physical or human capital, or where that capital is employed less efficiently.  That makes it a bit of a puzzle as to why China is so poor.  It’s per capita GDP is $12,500, vs. $80,400 in the US.  Even in PPP terms it’s only about $23,300 (according to the IMF).  And yet China seems to have lots of capital: 1. It’s subways, intercity rail and airports seem far superior to those in the US.  And yet subway rides are only 28 cents, or roughly 56 cents for long rides.  A new York City subway costs $2.90, and seems like the Black Hole of Calcutta compared to the clean, safe, and efficient Chinese systems.  The roads are also in great shape, and they’ve built a vast expressway system. 2. China has an enormous capital stock in manufacturing, and produces lots of electric cars.  I was told a BYD electric car costs about $14,000—it would probably cost twice that in America (if we allowed it to be sold here.) 3. China has built such a large housing stock that many pundits claim that China has too much housing.  But in Beijing we saw an ad for a mediocre apartment of 1100 sq. feet that cost $2.2 million in US dollar terms.  Given the low Chinese wages, how are those housing prices reflective of too much housing?  More likely, the real problem is misallocation—too much housing in second and third tier cities, and not enough in the places where the Chinese most want to live (the biggest cities in the east.) In America, we measure housing prices in terms of “rental equivalent”.  Here China looks better, as the monthly rents are nowhere near as astronomical as the price of buying a property.  Perhaps the very high price/rent ratios reflect a lack of good alternative investments for Chinese citizens? Even after spending a few weeks traveling around China, it remains a bit of a mystery to me.  Not everything is cheap, even in the service sector.  Places like Starbucks charge US prices.  An ice cream cone might be 28 cents, and a few steps down the road it might be $2, even for roughly the same quality.  There seems to be a sizable subset of urban Chinese with western style incomes and lifestyles, and a service sector that provides them with expensive goods.  But working class Chinese can live very cheaply. I didn’t see any homeless people in China, which might reflect several factors: 1. Lower income people in China are willing to live in very spartan and tightly packed conditions.  There might be 8 migrant workers in bunks in a single room. The poor in China don’t seem to worry as much about the poor people they live with being involved with alcohol, drugs, or crime.  That makes high density living easier.  A lot of California’s homelessness would go away if minimum wage workers could live together peacefully in college dorm level density.  A full time worker at a California McDonalds makes about $40,000.  Four of those workers would make $160,000/year. 2. Even so, you would still expect at least some homeless people living on the streets of cities as big as Beijing.  Perhaps the government doesn’t allow camping on the sidewalk, and removes the homeless to an out of sight location. When you travel around Latin America, it feels like you are visiting a bunch of middle income countries.  China’s per capita GDP (PPP) is a bit below Mexico, but the country feels much different.  You see lots of things that make you wonder, “Why isn’t this a high income country?”  If they can build so much fantastic infrastructure so quickly, what’s stopping them from becoming high income?  Again, it may partly reflect misallocation of capital, especially from the large state-owned sector. In almost every hotel we visited, the room service was delivered by robots (which is a really weird thing to see).  But you go outside and you see lots of zero marginal product workers aimlessly sweeping dust along in the street gutter.  Why?  (In Chile, I saw no robots and no ZMP workers.) China seems like the classic glass half full/half empty situation.  Compared to the China of Mao Zedong, the glass is half full.  Compared to where China should be based on their talent for building great infrastructure quickly, the glass seems half empty.  More economic reforms? PS.  To channel John Lennon, imagine there are no countries.  Chinese firms would build fantastic subway systems for places like NYC, very cheaply and very quickly.  We could pay for them by supply Chinese firms with all sorts of high tech goodies that we currently embargo.  Politics makes the world a poorer place. (0 COMMENTS)

The 30-day waiting period since publication of my Wall Street Journal op/ed on Claudia Goldin’s Nobel Prize is up. So I am now allowed to post the whole thing. Claudia Goldin Deserves That Nobel Prize Her work on women in the workforce clarifies a politically charged debate. The Royal Swedish Academy of Sciences on Monday announced its award of the Nobel Prize in Economic Science to Harvard’s Claudia Goldin, an economic historian. She received it for advancing the “understanding of women’s labour market outcomes.” The prize is well deserved. Ms. Goldin, who earned her doctorate in economics at the University of Chicago in 1972, has worked over many decades on the “gender gap.” There are two kinds of gender gaps in the labor market: the gap in employment and the gap in earnings. Economic progress has narrowed both gaps. In her entry on the gender gap for The Concise Encyclopedia of Economics, Ms. Goldin wrote that in 2000, “of all twenty- to sixty-four-year olds, women made up 47 percent of the labor force.” The female-to-male ratio of average earnings for full-time year-round jobs, she noted, rose from 60% in the 1980s to 75% by 2000. Since then, it has increased to 82%. One of Ms. Goldin’s contributions was to show that women moved out of the labor force in the 19th century. She did this by uncovering underreported data on women’s work. By digging up and combining various data sets, she showed that in the early part of the century, women did much of the work on farms, the dominant source of employment. As farming productivity and industry rose, women’s labor participation began to fall, presumably because it was hard to juggle raising children while working outside the home. A major reason for employment growth among women since 1960, Ms. Goldin found with her Harvard co-author and husband, Lawrence Katz, was the introduction of the birth-control pill. In some states, the pill was legally available only to women who were married or were over 21. This changed in the 1970s, when many state governments lowered the age of majority to 18 and Eisenstadt v. Baird (1972) struck down Massachusetts’ law making marriage a prerequisite for access. This change led to young women getting more formal education. By 2005 women made up half or almost half of first-year students in professional programs such as law, medicine, and dentistry. It was natural that earnings would follow and that the wage gap would fall. What accounts for the remaining wage gap? Many labor economists point to the choice of occupation, which reflects the choice of college major. A 2008 study cited by the Nobel committee found that for women who had a labor-force attachment like that of men, the choice of college major accounted for more than half of the gender earnings gap: Women are substantially underrepresented in STEM fields. One way to adjust for choice of occupation is to compare earnings of men and women in the same occupation with the same or similar schooling. Ms. Goldin, Mr. Katz and Marianne Bertrand of the University of Chicago made that comparison in a 2010 study, which found that the primary factor behind long-term differences in earning was child-rearing. For M.B.A. students who graduated from the University of Chicago’s business school between 1990 and 2006, the authors found almost no gender gap in employment or wages just after graduation. But 10 years later, women had taken an average of one year off from work, while men had taken off only 1½ months. Presumably, the reason is that women were having and raising children. The authors noted that three factors—the particular M.B.A. courses taken and performance in the courses, time away from work, and the number of hours worked—explain 84% of the wage gap. It makes sense. In a 2010 study, Ms. Goldin and Mr. Katz pointed out that women often receive a wage penalty for demanding a job that’s flexible enough for the woman to be the “on-call” parent. Men are more apt to receive a wage premium for being willing to be the “on-call” employee. Economists and politicians often jump to policy conclusions based on their empirical evidence. Ms. Goldin has usually been hesitant to do that. In the Concise Encyclopedia, she asked to what extent Title VII and affirmative action narrowed the gap. She concluded, “There is only scant evidence that either law has had any effect on the gender gap in earnings or occupations, although not enough research has been done to justify strong conclusions one way or the other.” Her caution is refreshing. Mr. Henderson is a research fellow with Stanford University’s Hoover Institution and editor of the Concise Encyclopedia of Economics. (0 COMMENTS)

The Weimar Republic, born at the end of World War One in November 1918, inherited debt and political instability.  Germany borrowed heavily to finance the war planning, like the other combatants, to make the losers pay. In 1915, Treasury Secretary Karl Helfferich told the Reichstag: “It is the [Allies] who deserve to bear this lead weight of billions. Let them drag it through the decades to come, not us.” Defeat meant that, not only was that impossible, but the Allies were likely to make Germany pay.  In addition, revolution simmered below the surface, occasionally boiling over as in the leftist Spartacist uprising in January 1919, the rightist Kapp Putsch of March 1920, and numerous assassinations of high profile political figures.  The government spent money to buy social peace. When railway workers struck for higher wages in May 1919, Prussia’s Finance Minister said, “Every price and every kind of concession is justified to prevent the shutdown of railroad traffic in Prussia.” Initially, Germans were willing to lend to their government to finance this: Until late 1921, the proportion of treasury bills held outside the Reichsbank never fell below 50%.    But in May 1921 the Allies finally presented Germany with the bill: 132 billion in gold – inflation proof – marks. The terms were not as onerous as they appeared, but one billion in approved foreign currency or Treasury bills was due by September. The government complied, but only via such expedients as shipping out 560 cases of Reichsbank gold, borrowing a quarter of a billion, and dumping paper marks on foreign exchange markets.      Unwilling to finance the payment of reparations almost universally regarded as unjust, Germans stopped lending to their government. The Reichsbank stepped in as lender of last resort, buying government debt with newly printed money. Between December 1921 and July 1922, the amount of domestic bills and cheques held by the Reichsbank rose by 616%, from 922 million marks to 6.6 billion. In May, just 21% of the government’s income came from taxes, the rest from selling Treasury bills to the Reichsbank in return for newly printed marks.  July 1922 saw prices rise 50%, the generally accepted definition of hyperinflation, and the cost of living rose a further 71% between August and September. “The unprecedented fall of the mark in the last few days differs from the previous falls,” the Guardian reported, “This time it is a general psychological panic wave…” As the mark’s rate of depreciation accelerated, people looked to swap them for other things – anything – as quickly as possible before they lost their purchasing power. This could take comical forms: In early 1923, the Guardian reported:  There is a current story in Berlin of a woman who went shopping with a basket to carry her paper money. She put it down for a minute, and on looking round found that the basket had been stolen – but the paper money left behind! In January 1923, in response to non-payment of reparations, France and Belgium occupied Germany’s industrial heartland, the Ruhr. This was a grave economic blow, compounded by the Berlin government covering the wages of workers idled in a campaign of non-cooperation with the occupation. An attempt to borrow $200 million to finance this failed and the Treasury increasingly turned to the central bank. Apart from the State Printing Office, 130 other printers were producing marks. Sometimes only one side was printed to save time and cost.  This new money no longer bought social peace. By late 1923, Germany’s real income was barely half that of 1913. Unemployment among the unionised workforce rose from 4% in July 1923 to 23% in October. Bread riots broke out. Leftist uprisings in Saxony and Thuringia were crushed but there were rumbles from a new rightist group, the National Socialist German Workers’ Party, in Bavaria.  A new government under Gustav Stresemann – the eighth Chancellor in five years – took office in August armed with dictatorial powers. It announced plans to improve tax collections and cut spending by dismissing a quarter of its employees over four years. It also introduced a new currency. “With the introduction of the Rentenmark the process of borrowing by way of discounted Treasury bills and thereby increasing the note circulation is to cease,” the Times reported, “It is obvious that unless the budget is balanced by combining economy with taxation the Rentenmark is foredoomed to the same fate as the paper mark.” The Rentenmark went into circulation on November 15 and the hyperinflation ended surprisingly rapidly. The government was helped by a resolution of the reparations issue with the Dawes Plan in 1924, which reduced annual payments though not the overall amount. Foreign capital poured into Germany and the economy recovered. All would be well if this flow of capital continued. It would not…   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

The Maine referendum initiative that would have nationalized “by right of eminent domain” the private electric transmission and distribution companies in Maine lost by 70% to 30% on Tuesday. According to the “indirect initiated state statute” that provided the full text of the ballot measure, the new state-created, non-profit, consumer-owned corporation, called Pine Tree Power Company, shall purchase or acquire by the exercise of the right of eminent domain all utility facilities in the State owned or operated or held for future use by any investor-owned transmission and distribution utility, in accordance with this subsection. Incidentally, the Pine Tree Power Company, would not have been truly “consumer-owned,” because no consumer could have sold his share without moving out of Maine, and then getting nothing for “his” share. Bernie Sanders, the Vermont congressman who remains at the forefront of the proletariat’s liberation, had declared: Mainers have a rare chance to take control of an important part of their daily lives. Instead of a private power system that last year sent $187 million in profits out of the country, Mainers can have cheaper, more reliable power—and help fight climate change at the same time. I’m proud to support the Pine Tree Power campaign, and I urge Mainers to support it as well. It is encouraging that 70% of the voters (of those who actually did cast a ballot) have not been bewitched by that siren. It is still disturbing that 30% believe that a state company—even if disguised as “consumer-owned” with a tightly regulated private subcontractor—can be more efficient than private companies. More than a century of grandiose socialist experiments should have put this question to rest. Ballotpedia, a non-partisan site about voting, further explained (“Maine Question 3, Pine Tree Power Company Initiative (2023),” Ballotpedia): According to the initiative, the Pine Tree Power company would use its access to low-cost capital and an ability to be managed in a manner that is not focused on ensuring shareholder profits. The measure also included a provision that the Pine Tree Power Company would deliver electricity safely, affordably, and reliably to customers, to assist Maine in meeting and exceeding climate action goals, to improve Maine’s internet connectivity through more affordable access to unserved or underserved parts of the state, to advance economic, environmental and social justice and to benefit company workers and state communities, to provide transparent and accountable governance, and to support Maine’s economic growth. Only that? What about racial justice, inclusivity, and dental services? Wasn’t the idea that the Pine Tree Power Company would provide social nirvana to Mainers? (0 COMMENTS)

On Bryan Caplan’s substack, Chris Freiman, a philosophy professor at William & Mary, recently stated his case for a universal basic income (UBI). Not surprisingly, given that he makes arguments, most of which I had already responded to in my article “A Philosophical Economist’s Case against a Government-Guaranteed Basic Income,” Independent Review, v. 19, n. 4, Spring 2105, I was not persuaded. I’ll hit a few highlights. Freiman starts by making the correct economic argument that it’s better for someone to get cash than to get a particular good or service that costs the same amount, because the person can always take the cash and buy the bundle that the government wants the person to have. Notice, though, that that’s not an argument for a universal basic income. Instead, it’s an argument for changing existing welfare programs from payment in kind to payment in cash. A universal basic income would be far more expensive. Or maybe it wouldn’t. What if the government gave everyone $1,000 a year? Clearly, that would be relatively cheap. Equally clearly, no one is advocating that. Unfortunately, Freiman never tells us what he is advocating. It might be $10,000 a year or $12,000 a year or some other number. He doesn’t say. What about the idea that a UBI is wasteful because it goes to everyone? Freiman deals briefly with that, stating that “we can make a UBI progressive with adjustments on the tax end.” In other words, it is wasteful, but the government can increase taxes to pay for it. I don’t know if Freiman has any sense of how huge UBI expenditures would be. I pointed out, using 2013 data, that about 206.8 million adult citizens would qualify for the UBI. At $10,000 each, that would bring the total to $2.068 trillion. Assuming that Freiman would get rid of all anti-poverty programs–federal, state, and local–that would have saved $952 billion. Net result: an increase in government spending of over $1.1 trillion annually. He advocates that taxes be increased for a lot of the high-income recipients. He doesn’t specify magnitudes. But I do. In discussing a similar proposal by philosophy professor Matt Zwolinski, I wrote: How would Zwolinski fund this major increase in federal spending? If his goal were to keep the already bloated half-trillion-dollar federal deficit constant rather than increasing it, he would need to have the federal government increase taxes from their estimated $2.993 trillion to $4.361 trillion, an increase of 45.7 percent. One of the most well-established facts in the economics literature on government finance is that raising a tax rate by x percent raises the revenue from that tax by less than x percent. The reason for this relationship is that the higher tax rate discourages the activity being taxed, so the tax base on which the tax is levied is smaller than otherwise. So if the federal government were to raise all tax rates by the same percentage to generate the revenue needed, it would have to raise all tax rates by more than 45.7 percent and probably substantially more. Assume, for simplicity, a 50 percent increase in all tax rates, although the percentage would probably be more. Why more? Assume conservatively that a 45.7 percent increase in tax rates would reduce by only 5 percent the base on which the taxes are levied.Then a 45.7 percent increase in tax rates would increase the federal government’s tax revenues by only 38.4 percent.6 Thus, tax rates would have to be increased by substantially more than 45.7 percent. That conservatively estimated 50 percent increase in tax rates means that the current Social Security payroll tax (Federal Insurance Contributions Act or FICA tax), instead of its current 6.2 percent each on employer and employee, would be 9.3 percent. The bottom marginal tax rate on individual income, instead of being 10 percent, would be 15 percent. The top marginal tax rate on individual income, instead of being its current 39.6 percent, would instead be 59.4 percent. I go into a lot of other problems with the UBI in my 2015 article. So you can read it. In my remaining space, I want to focus on that $1.1 trillion number. We are already in the hurt locker, as my Navy students would have put it, with the current federal budget and the current federal deficit. I’m not sure if Freiman has any idea how much hurt. If we are going to keep federal debt from going much above 100% of GDP and if we are to avoid major tax increases, we need to cut programs. Adding over $1 trillion a year to federal spending would hasten the likely budget catastrophe to this decade rather than the next one. If you want to see some relatively up to date numbers on this, read the transcript of David Beckworth’s March 2023 interview of Manhattan Institute’s budget analyst Brian Riedl. Here’s one excerpt: Ultimately, the only two choices we have as a country are to address Social Security and Medicare or nearly double middle class taxes. Everything else doesn’t come close to closing the gap. Ultimately, this is what Europe does. Europe finances its large government spending with payroll taxes and value added taxes. You can’t do it all from taxing the rich. In fact, what I calculated was, just to stabilize the debt, not balance the budget, but stabilize the debt at about 95 or 97% of GDP, if you don’t do anything on the spending side, you would have to both raise the payroll tax from 15% to 24%, that’s the combined payroll tax, employer and employee, and do a 20% value added tax. The UBI, already a bad idea in 2015, is a non-starter today. The pic above is of Chris Freiman. (0 COMMENTS)