Over the past few years, consumer sentiment has increasingly run far below the level predicted by models based on economic data. The Economist illustrates the issue with a graph: The Economist attributes the gloomy outlook to the lingering effects of Covid.  I suspect the actual explanation is growing political polarization.  Consider the growing partisan gap in how voters evaluate the economy: Back in the 1990s, there wasn’t much partisan difference in how voters evaluated the condition of the economy.  This was before the public had come to view people with different points of view as the enemy.  I suspect that the responses to polls were more honest back then.  After 9/11, opinion became more polarized.  After Trump was elected, polarization increased even further.  Today, voters in the two major parties live in completely separate worlds, consuming media that is tailored to fit their prejudices.  Thus it’s not surprising that they have radically divergent views of the world. Voters seem to rate the economy much more highly when their preferred candidate is in power, perhaps partly due to the mistaken assumption that presidents somehow control inflation and the business cycle.  (A myth that is encouraged by our media.) Until 2021, the biases of the two parties roughly offset, leaving the overall rating roughly equal to the rating one would expect based solely on the economic data.  This changed after Joe Biden became president.  Unlike with President Obama (who inherited a weak economy), Democratic voters are only lukewarm on the current president.  In contrast, Republican voters have an extremely negative view of President Biden.  With only lukewarm sentiment from Democrats, there is nothing to offset the extremely low economic rating of Republicans.  This leaves the overall rating for the economy far below the level you’d expect with rising real wages, 3.8% unemployment, and 3.7% inflation.  At one point in 2022, consumer sentiment fell below the lowest reading of the early 1980s, when the economy was in far worse shape. I don’t believe these consumer sentiment figures represent the actual views of the public.  Consumer spending is still very strong, an indication that people feel pretty good about the economy.  Actions speak louder than words.  I suspect the low reported sentiment is mostly a reflection of GOP voters expressing anger at the current political situation. My own view is that recent economic policy (since 2017) is quite bad, but the negative effects will show up in future years, at a point where we will need to confront the effects of an out of control federal budget.  If people think the current economy is bad, wait until they see what’s coming down the road in a few years! PS.  Note to commenters:  If you think the economic model is wrong, you need to explain why it fit the data for the 40-year period from 1980 to 2020. (0 COMMENTS)

Natalię Dowzicky, “How Florida Beat California to High-Speed Rail,” Reason, September 20, 2023. Excerpt: Not only is Brightline the first privately funded intercity rail line in the U.S., but it’s also the fastest train in the country outside of the northeast corridor. Topping out at 125 mph in Florida, it will travel from Miami to Orlando in about three hours. For comparison, the Amtrak in the area takes about six and a half hours to complete that same trip. Mike Reininger, CEO of Brightline, told Reason that passenger rail makes commercial sense under specific conditions, such as the case in Florida, where it connects two populous, tourist-friendly cities that are about 250 miles apart. At that distance, Reininger says, “It is too far to drive and too short to fly. You can approximate the time of flying significantly, improve the time of driving, and you can offer it at a price point that makes it an economic proposition.” Not surprisingly, though, Brightline has become a subsidy sucker. Romina Boccia, “Social Security Benefits are Growing Too Fast,” Cato at Liberty, September 21, 2023. Excerpt: When a Social Security‐​eligible worker’s benefits are first calculated, this worker’s past wages are indexed to bring them to the same level as today’s earnings. This is called wage indexing and is based on the growth in average wages in the economy. When the Social Security Administration (SSA) first indexes a worker’s lifetime covered earnings, it does so using the SSA’s Average Wage Index (AWI). The AWI includes all wages that are subject to federal income tax, including wages in excess of the taxable Social Security maximum payroll tax threshold. Wage indexing gives retirees a benefit amount that reflects the increase in the standard of living over their working careers—even if they didn’t earn commensurate wages. It’s like giving workers retroactive credit for improvements in the economy, including for wage improvements among the highest income earners. Definitely worth reading carefully. Christopher Wilcox, “Truck This: Why I’m Leaving the Long-Haul Industry,” American Institute for Economic Research, September 21, 2023. Excerpt: More recently, environmental regulations requiring manufacturers to reduce emissions gave us the diesel particulate filter (DPF), an exhaust treatment system that replaces a standard muffler. While there is no current federal mandate requiring a DPF, the filters are required by the 2008 California Statewide Truck and Bus Rule, which has incentivized many nationwide fleets to adopt them. The problem with DPFs is the filter system clogs. A lot. When DPFs go down, trucks roll to a stop. Truckers report having to have a DPF serviced as often as every 5,000 miles, which means lots of lost productivity and stranded cargo. I’ve had four breakdowns over the past two years, and three were due to my DPF. A tow truck driver I spoke to on one of those occasions told me half of his business comes from malfunctioning DPFs. Repairs are a specialized affair, and replacements can cost up to $2,000. When my truck isn’t moving, I’m not earning. And these regulators have required that my truck stand still far too often. Of course California is in the forefront of regulation. Fiona Harrigan, “Biden Administration Announces New Measures to Get Migrants to Work,” Reason, September 21 2023. Excerpt: Yesterday, the Biden administration announced new actions to help get recent immigrants to work, including offering almost half a million Venezuelans a status that will let them live and work in the U.S. legally for the next 18 months. The new measures come at a critical time, as labor shortages persist and cities struggle to provide for newcomers. Certain Venezuelan migrants are eligible for temporary protected status (TPS), a designation offered to migrants who can’t safely return to their home countries due to armed conflict, environmental disaster, or another temporary safety hazard. Venezuela was first designated for TPS in 2021 due to a severe political and economic crisis perpetuated by Nicolás Maduro’s regime. Under that designation, Venezuelans who came to the U.S. before March 2021 qualified for protection; now, the status will apply to Venezuelans who arrived before the end of July this year. There are currently 16 countries designated for TPS. If I understand the program correctly, it sounds good: let them work instead of forcing taxpayers to subsidize their living expenses. It’s win-win-win for immigrants, employers and consumers, and taxpayers. James Herndon, “Keep the Washington Consensus,” Law & Liberty, September 21, 2023. Excerpt: Despite those deliberate omissions, synergies still allowed the Consensus to exceed the sum of its parts. Opening up foreign direct investment eased privatization. Privatization enabled balanced budgets. Balanced budgets limited inflation, which encouraged foreign direct investment. The common denominators were respect and restraint: leaders had to trust that firms and citizens knew better than the bureaucrats how best to allocate their own labor and resources. That’s why the Consensus’ first beneficiary was always likely to be the poor. After all, funding for primary education and basic healthcare does far more to reduce poverty than subsidies for diesel fuel and national airlines. In short, Williamson promoted policies that enabled sustainable growth in developing countries with respect for their autonomy and an emphasis on raising prospects for the least fortunate. The Left never forgave him. It’s the nicest treatment of the Washington Consensus that I’ve read. Lots of good nuggets.   (0 COMMENTS)

The Economic Freedom of the World: 2023 Report came out this week. The Fraser Institute in Vancouver, Canada publishes a new report each year. The data are for 2021. In this report, the United States is rated #5. The top rated jurisdiction last year, Hong Kong, switched places with Singapore this year. Big picture: Economic freedom of the world hasn’t been this low in over a decade. I’ll have more to say in the next few days about some of the very interesting results you find when you dig into the report. One such result: Where do low-income people (the poor) get a slightly higher percent of income: in a country with lots of economic freedom or in a country with little economic freedom? (0 COMMENTS)

Mario Rizzo, the well-known economics professor at New York University (and author with Gerald O’Driscoll of The Economics of Time and Ignorance), wrote about writing on his Facebook page: I do not particularly like writing. It is hard. But I like even less not-writing. You cannot really know what you think about something unless you write it down. And if you have figured out something it is good to share it with others. But, still and all, writing is a pain. It is the price we pay for our (and everyone else’s) ignorance. I have often thought about this problem, but Mario wrote it better than I non-wrote it. Writing is a pain but non-writing is a worse pain. (I am not sure if computers and word processing made writing more or less painful, but I would guess the latter at least for me.) I see Mario’s reflection as related to a short section in Ludwig von Mises’s Human Action: A Treatise on Economics (Third Edition, 1963): The achievements of the creative innovator, his thoughts and theories, his poems, paintings, and compositions, cannot be classified praxeologically as products of labor. They are not the outcome of the employment of labor which could have been devoted to the production of other amenities for the “production” of a masterpiece of philosophy, art, or literature. Thinkers, poets, and artists are sometimes unfit to accomplish any other work. At any rate, the time and toil which they devote to creative activities are not withheld from employment for other purposes. … It is, furthermore, impossible to substitute other people’s work for that of the creators. If Dante and Beethoven had not existed, one would not have been in a position to produce the Divina Comedia or the Ninth Symphony by assigning other men to these tasks. Neither society nor single individuals can substantially further the genius and his work. The highest intensity of the “demand” and the most peremptory order of the government are ineffectual. The genius does not deliver to order. Men cannot improve the natural and social conditions which bring about the creator and his creation, It is impossible to rear geniuses by eugenics, to train them by schooling, or to organize their activities. But, of course, one can organize society in such a way that no room is left for pioneers and their path-breaking. The creative accomplishment of the genius … is by no means the result of production in the sense in which economics uses this term. Mises was focusing on the creative genius. Preceding the above quote, he also wrote (and I think it’s even worse for the quasi-genius or the would-be genius): [The genius] lives in creating and inventing. For him there is no leisure, only intermissions of temporary sterility and frustration. His incentive is not the desire to bring about a result, but the act of producing it. … Creating is for him agony and torment, a ceaseless excruciating struggle against internal and external obstacles; it consumes and crushes him. … Nietzsche compared himself to the flame that insatiably consumes and destroys itself.  Such agonies are phenomena which have nothing in common with the connotations generally attached to the notions of work and labor, production and success, breadwinning and enjoyment of life. Isn’t that an interesting and intriguing way to compare creation and economic action? Yet, it is arguably simpler to use a Beckerian approach: you write because it is less painful than the alternative, and less pain implies more utility (a more preferred situation). (0 COMMENTS)

Science writers like to suggest that anyone can understand the intuition behind theories such as special relativity and quantum mechanics, if only they will read this book, or that essay. Don’t believe them—I’ve tried. At best I get a bit of the intuition behind relativity, and none at all behind QM. Yes, I hear the words, but I don’t understand enough of the underlying physics and mathematics for the words to form a coherent picture in my mind.  I’m too dumb. Some economists believe that the public can understand why protectionism is bad, or why price controls hurt consumers, if only the ideas are explained to them in clear language.  I doubt it. Tyler Cowen recently linked to an interesting paper that addresses this issue.  Here’s the abstract: During disasters, citizens call for “anti-price gouging” policies. However, majorities of economists oppose such policies. For democracy to function, citizens should be responsive to policy-relevant information—especially from experts. What impact does exposure to the potential negative externalities have on public support for anti-price gouging policies? We hypothesize that if the public were exposed to such information, they would be less supportive of anti-gouging policies. We employ two survey experiments: one administered in Florida (n = 2085), a state prone to hurricane activity, and the second in the United States (n = 2023) at the onset of the COVID-19 pandemic. Both show that the public overwhelmingly supports anti-price gouging policies, regardless of exposure to information about negative externalities, even when it comes from experts. Having taught economics for 35 years, this is no surprise to me. You might object that surely economics is not as hard as modern physics.  Yes, that’s true in one sense—you do not need an extremely high IQ to understand economics.  On the other hand, the quantity of information required to understand economics is vastly larger than the quantity of information needed to understand modern physics.  It’s a far more complex field, despite being much “easier”. For this reason, economists will often take shortcuts when trying to persuade the public on a policy issue.  They might argue that a ban on banks charging a fee for ATM use would hurt consumers because this would reduce the availability of ATMs.  Or they might argue that tariffs would hurt the economy by raising the prices that consumers must pay.  It’s true that an ATM fee ban would hurt bank customers and it’s true that tariffs hurt the economy.  But not for the reasons that are usually given.  After all, it might be the case that the saving in not paying ATM fees is worth more to consumers than the negative of fewer machines being available.  And it might be the case that the benefit tariffs provide to our producers exceeds the extra costs incurred by consumers.  Neither of those arguments (for price controls and tariffs) is actually true, but they might be true.  In order to show they are not true, you must first learn a whole lot of economics.  In theory, students majoring in economics are able to understand these ideas.  As a practical matter, most students don’t actually understand these concepts until they get to graduate school. A science writer can tell me that quantum mechanics is true because of blah, blah, blah, but it won’t sink in.  I can explain to the man on the street why price gouging is actually a good thing, but my explanation won’t sink in.  It requires too much background information.  Here’s just a portion of what you need to know—and I mean really know in your bones: 1. Supply and demand elasticities are far greater than common sense suggests. 2. Public policy is a repeat game—policies need to be evaluated as a long run regime, not as an ad hoc decision. 3. Retailing is a highly competitive industry, with zero economic profits in the long run. 4. Willingness to pay is far less correlated with wealth than you might assume. 5. Price controls are not an effective way to redistribute income. 6. The economy is not a zero sum game. All of these ideas (and many more) need to be understood before considering the question of price gouging.  And not just “understood” in the sense that someone tells you the words; you need to understand the ideas well enough so that you could persuasively explain the claims to your friends. A while back, I recall some intellectuals claiming that two well-informed rational people should not disagree over a factual claim.  Once all the facts are laid out on the table, there is only one rational conclusion.  The problem here is that no one has a complete model in their mind, and when debating an issue I don’t have time to teach a 3-year course in Chicago graduate economics, or a 3-year course in MIT graduate economics (which would present a different set of models.)  Thus rational people will continue to have good faith disagreements. Nonetheless, we should not give up just because the public can never reach the desired level of enlightenment.  Over the past 12 years, I’ve had numerous people tell me that my blog posts have helped them to better understand a specific economic issue.  So we should continue trying to nudge the public toward greater enlightenment, even as we understand that we’ll always be a bit disappointed with the results.  PS.  Persuasion can take many forms.  Perhaps it would help to point out all of the price gouging that we already allow to occur: We allow gas stations to sell gasoline at very inflated prices after a war breaks out in the Middle East. We allow a grocery store to sell eggs at a very high price after a problem with bird flu. We allow a homeowner in Palo Alto to sell their house for an obscene profit after zoning rules are tightened to reduce supply. Those are all cases of price gouging.  Why don’t we have price controls in those cases?  Getting the public to think through each case might help to clarify their thought process. (0 COMMENTS)

In a previous post, I pondered whether certain critics of market outcomes might be committing an error that is inaccurately projected on economists – the assumption that money is all that matters. It turns out, another unfair criticism of economists also seems to follow a similar pattern. The unfair criticism goes something like this: Economists misunderstand what motivates people. They speak as if people are only interested in narrow monetary rewards, but in reality we are driven by so much more than that. People are motivated by a wide range of values, and care about more things in life that just money. Of course, no halfway decent economist fails to recognize this. But there are some people who do seem to be guilty of this error.  Redistribution is a controversial issue, supported by some and opposed by others. Among those who oppose redistribution, some do so for practical reasons, arguing that redistribution makes things worse overall with bad incentives, moral hazard, or other negative consequences. Others oppose redistribution for ethical reasons. As Dan Moller puts it in his book Governing Least, “Insisting on the right to improve our position at the cost of other people, by threats or violence if need be, is the moral mistake that animates this version of libertarianism.”  As I’ve mentioned before on this blog, this is the version of libertarianism to which I subscribe. While I’m well situated now, I grew up in a very low-income family and I financially struggled for a significant portion of my adult life. But it was never obvious to me why that would make me entitled to receive involuntary financial benefits at other people’s expense. Or, as Moller puts it, “the core impulse isn’t outrage about being asked to give; it is in the first instance a bewilderment at the suggestion that we are entitled to demand.”  Now, I realize not everyone shares that view. But even if you disagree with that take, and don’t see insisting “on the right to improve our position at the cost of other people, by threats or violence if need be” as a “moral mistake” in the way Moller and I do, it doesn’t seem to me that this view should be baffling either. If I say, “I don’t see myself as entitled to demand others be made worse off for my benefit,” I wouldn’t expect you to say, “How can you possibly believe that?” in response. At most, I would expect pushback to take the form of “I can see why you would think that, but actually you’re mistaken, and you are entitled to make those kinds of demands of other people, because [insert some argument here].”  And yet, the very notion that some people would oppose redistribution despite ostensibly being able to benefit from it seems to baffle many people. For example, the political scientist Gweneth McClendon, in her book Envy in Politics, speaks of her confusion about some “citizen’s puzzling opposition to redistribution policies that would put more money in her pocket.” Similarly, Katherine Cramer, in her book The Politics of Resentment, wonders, “why is it that many low-income voters who might benefit from more government redistribution continue to vote against it?” But this should only seem puzzling if we assume that people necessarily equate “puts more money in my pocket” with “good and worthwhile” – that is, if we assume people are entirely motivated by mere financial self-interest, with no other values or priorities guiding their actions.  In the same way, many people I know were baffled by the fact that my wife and I both opposed the various plans for student loan debt forgiveness, despite the fact that my wife still carries a substantial amount of student loan debt. The simple fact that such a program would benefit us financially somehow leads people to assume to mean we must support it. But again, that only makes sense if you assume people treat “personally benefits me” as logically equivalent to “good and justified public policy.”  But money isn’t all that matters, and financial gain isn’t the only thing that motivates people. Other things matter too – there are things in the world that are more important than a narrow focus on money. The fact that many people who find themselves facing difficulties in life would still prioritize these values even when abandoning them would “put more money in their pocket” is something deserving of admiration, however much it baffles and frustrates those pontificating from their armchairs. (0 COMMENTS)

Why are American housing prices so high? How have zoning laws impacted the supply of housing? Is urban sprawl the answer to American housing and environmental problems? Judge Glock joins EconTalk host Russ Roberts to discuss the case for zoning laws and property taxes, the importance of competition among local governments, and the under-reported success in housing policy of cities like Houston. Judge Glock is the director of research and a senior fellow at the Manhattan Institute and a contributing editor at City Journal. Glock says two Cheers for zoning! He believes that poor housing affordability is not simply caused by over-restrictive zoning regulations. Those who disagree with Glock will say that unaffordable housing tends to concentrate in states like California, New York, and Massachusetts, but Glock wants people to look at where zoning has been successful as well: …from a lot of measures, American housing is pretty good and pretty affordable. And, that also makes one think about it and look at the places in America that are very affordable. And, there happen to be a lot of places that do have actually extensive single family zoning, extensive powerful local governments. If you look at places like Nashville or Atlanta or Oklahoma City, these places, for growing cities, have some of the most affordable housing on earth. However, California, New York, and Massachusetts didn’t always have such high housing prices.  So, what happened? Glock says that the equalization of property taxes for school districts in the Serrano vs. Priest case in California started a trend. The problem is that with the redistributive effects of property taxes, property owners received less direct benefit from their taxes, and consequently vote to keep property taxes as low as possible, leading to underfunded schools and a disincentive to build new property developments. This is an example of the free-rider problem- those who use public goods such as public transportation don’t pay their full cost. This leads to a decline in the availability and quality of these resources as there’s a low incentive for individuals to contribute to them. To Glock, zoning policy is a good way to increase this incentive to pay for public goods and to help offset the free rider problem. …some economists like Bruce Hamilton and others realized, well, zoning solves that problem. That, if you have zoning that determines how much property people could afford or should afford in these kind of competitive local suburban environments, and you had property taxes that were commensurate with the amount of zoning and amount of property that was allowed in these local governments, you basically had something that looked–kind of, if you really squint–a little bit, maybe like a business. That you have these owners who have a lot of equity invested in this area…And, they would have kind of a goal to maximize the value of their housing wealth, which can have both good and bad effects, but they would also have a lot of incentive to pay for good public goods. Glock advocates for zoning policy because it encourages housing competition among local governments, as seen in areas where housing is relatively affordable, such as Nashville, Oklahoma City, and Houston. Glock believes this is because these municipalities emphasize single family housing with less restrictions, whereas California and New York emphasize multi-family housing developments, which don’t seem to affect housing affordability in a positive way. …in those areas we know that have a lot of this single-family zoning, housing seems to be pretty affordable. You seem to have these very successful local governments. We know these local governments tend to be more competitive and more efficient by many measures than more distant, centralized governments. So, if you care about that kind of local competition in public goods and you want some sort of mechanism to encourage that, zoning is one means to do that. This limitation of competition is another reason California’s housing prices have skyrocketed. Glock explains how in the 1960’s, LAFCOs (Local Agency Formation Commissions) exploded in California’s counties. These agencies are able to decide when new municipalities can be created. This of course led to rent seeking existing municipalities denying the creation of new ones. Glock believes that loosening these restrictions would make it much easier for people to grow new communities outside of those already established, hence increasing competition, and decreasing housing prices. To counter Glock’s argument in favor of suburbanization, Roberts plays devil’s advocate and highlights urban sprawl; Glock pushes this aside with his view that urban sprawl can be a positive. Glock thinks that many of the arguments against urban sprawl are solutions searching for problems that sprawl can help ameliorate in the first place. He declares that there are in fact significant problems with urbanization, especially regarding the environmental issues typically attributed to suburbanization. Furthermore, Glock states that Americans have a preference for single family housing, so why not focus on how to make the suburbs more sustainable as opposed to seeking to eliminate sprawl? So, why does Glock only propose two cheers? A large downside of zoning policy is the reduction in housing supply, especially if it’s too strict, as Glock believes it is in America. Glock doesn’t advocate for more zoning, he wants policymakers to examine the cases of successful zoning, and explore how those tactics can be applied to their respective constituencies. Another drawback of modern American zoning policy is propagation of a form of bootleggers and Baptists problem. In the context of zoning, the Baptists are NIMBYs (not in my backyard), who favor zoning laws because they genuinely want to preserve the historical, aesthetic, or environmental aspects of the area they live in, whereas the bootleggers are those who could care less about the state of the neighborhood, but simply care about increasing the value of their property through decreasing local competition. This problem relates to the question of why municipalities aren’t maximizing the value of their land. Glock’s answer is the flypaper effect, which is when municipalities receive additional funding, they don’t tend to spend it on improving public services, they tend to spend this money on special interest groups. …there’s some studies on what’s known as the flypaper effect. That, if a government gets a ton of free money from usually a higher level of government or a boost in property taxes, do you keep it? If you were an efficient city manager, you should pretty much just return it down in tax cuts to people because you already had the right proportion of public services that you all wanted. And, what you find is small governments do that, by and large. If you have a small suburb that gets a boost in property taxes, they keep their total public service spending flat and they just cut taxes. The larger cities are much less likely to do that. They’re much more likely to have what’s called the flypaper effect: it sticks to that city and they use it for interest groups and log-rolling and all of the rest of it. What are Glock’s solutions to the ubiquitous rent seeking and inefficient public spending, and poor incentives? More competition and subdivision to strengthen local governments, and restoring property taxes to internalize their benefits. …when we’re talking about how we can force governments to do something which we agree they should do, which is build more, to me, instead of focusing on how we can create more state mandates, well, we should look at how we encourage them to build more. If we think there are gains from trade, if we think there are net benefits to be gained from development, which there are, how can we make sure that local governments, those areas have that incentive? And, one thing would be restoring property taxes. After listening to this episode, I was left with some questions in addition to that takes outlined above. We hope you’ll take a moment both to consider them, and to leave a comment sharing your thoughts.   1- How might Glock’s proposed housing solutions affect the massive racial disparities in home ownership? A topic little discussed in this podcast was the impetus for zoning laws in the first place. What impact have these laws had on de facto segregation, and economic immobility for black Americans?   2- How might increasing competition among public schools through school choice result in fixing the poor incentives that an increase in the funding of schools and local services through state dollars?   3- Another policy that Houston has had success in addressing is homelessness, a topic not discussed in the podcast. What role can homeless policy play in alleviating the housing crisis?   4- One of Glock’s reasons for why urban sprawl isn’t as bad as people tend to think is due to the American preference for living in single-family homes. As one commenter pointed out, can Glock hold this perspective along with the reality of city-living being highly expensive, partly due to a large demand for condensed living? Furthermore, Americans are increasingly choosing not to have children, making suburban housing less reasonable. How will this shift in preferences change the impacts of urban sprawl in the near future?   Kevin Lavery is a student at Western Carolina University studying economic analysis and political science and was a 2023 Summer Scholar at Liberty Fund. (0 COMMENTS)

The Economist has an excellent article discussing the gradual extension of government into the business of banking. With the recent bailout of Silicon Valley Bank depositors, authorities have signaled that virtually all deposits are implicitly backed by the US government. When you deposit money in your local bank, you are essentially lending the funds to the US Treasury, which then re-lends the money at the exact same interest rate to the commercial bank.  We’ve already socialized a big portion of our banking system. Here’s how The Economist concludes its essay: Another looming change is the issuance of central-bank digital currencies, which could give the public another alternative to bank deposits. In recent years economists have worried about the risk of such currencies becoming de facto narrow banks that drain the legacy system. But some argue banks would work fine if the public switched their deposits for central-bank digital currencies, so long as the central bank stepped in to replace the lost funding. “The issuance of [such currencies] would simply render the central bank’s implicit lender-of-last-resort guarantee explicit,” wrote Markus Brunnermeier and Dirk Niepelt in 2019. This scenario seems to have partly materialised since the failure of SVB, as deposits have fled small banks for money-market funds which can park cash at the Fed, while the Fed makes loans to banks. The prospect of banks becoming de facto government-funded should alarm anyone who values the role of the private sector in judging risk. Yet the difference between deposit financing underwritten by multiple layers of the state and funding that is provided directly by the state itself is getting harder to distinguish. A more explicit role for governments in the banking system may be the logical endpoint of the road down which regulators have been travelling for some time.  Many people are concerned that a central bank digital currency (CBDC) could increase the role of the government in our financial system.  Unfortunately, that ship has already sailed. There are good reasons to oppose a CBDC, but in my view they relate more to issues of privacy.  It is unlikely that a government issued digital currency would allow the sort of privacy associated with paper currency.  As they like to say on one of David Henderson’s favorite TV shows:  “For that reason, I’m out.” (0 COMMENTS)

What’s more, Mr. Musk says he would have complied if President Biden ordered him to turn on his privately owned network for Ukraine: “While I’m not President Biden’s biggest fan, if I had received a presidential directive to turn it on, I would have done so. Because I do regard the president as the chief executive officer of the country. Whether I want that person to be president or not, I still respect the office.” This is from Dennis Kneale, “Elizabeth Warren Owes Musk an Apology,” Wall Street Journal, September 17, 2023 (September 18 print version.) I agree with Kneale that Elizabeth Warren owes Elon Musk an apology. But I strongly disagree with Musk’s view of the role of the U.S. president. The U.S. president is not the CEO of the United States. Fortunately, there is, at this time, no such entity. The president is not even the head of the federal government; he’s the head of one of the three branches of the federal government. By the way, I also agree with Musk’s decision not to put his Starlink in the service of war. Unlike Musk, though, if I had his position and had received a directive from Biden to aid in this war, I would have refused. But who knows? I’m not in his position. Musk might fear certain sanctions from Biden that I can only imagine. (0 COMMENTS)

James M. Buchanan was an economist known for his affiliation with the “Virginia School of Political Economy,” otherwise known as Public Choice theory. Trained at the University of Chicago, his academic journey led him to teach at the University of Virginia, Virginia Tech, and George Mason University. Buchanan’s contributions to public choice theory, which extends economic analysis to political domains, earned him the Nobel Prize in economics in 1986. Although Public Choice theory maintains a somewhat subdued presence in mainstream economics, Buchanan’s theories are held in disproportionately high regard within libertarian circles. This can be attributed to the fact that public choice theory takes a more realistic view of government benevolence than does mainstream economics. Just as important, however, Buchanan was one of the last libertarians to receive the highest honor in the field of economics, propelling him to a place of elevated status. Despite Buchanan being a prolific writer and a meticulous scholar, his ideas are leading libertarians astray in some areas and may help explain the lack of progress in Austrian economics in recent decades. There are at least three aspects of Buchanan’s work that deserve closer scrutiny. Buchanan’s Perspective on Cost: In the 1960s, Buchanan authored a brief text titled “Cost and Choice: An Inquiry in Economic Theory.” The organization and writing of this work resemble more a set of disordered musings than a structured publication. Nevertheless, the book has been highly influential among libertarians. One could encapsulate its core message in the single phrase: “cost is subjective.” Buchanan at times characterized himself as a “radical subjectivist.” Despite Buchanan’s somewhat nuanced stance in the book, his disciples have often interpreted his writings to mean that costs are a psychological phenomenon and “not measurable in monetary terms.” This leads to the ironic situation whereby libertarians misunderstand the idea of opportunity cost and overlook the substantial opportunity costs that governments inflict daily through their inefficient policies. Costs, by their nature, are objective and quantifiable magnitudes in the real world, even if psychological factors shape the market prices used to measure them. Buchanan’s Views on Social Welfare Functions: In the mid-20th century, economists were searching for a coherent way to measure human welfare. They seemed to be making progress when Kenneth Arrow published a groundbreaking paper in which he proved that no social welfare measure can be formed from the preferences of the members of a community, which also satisfies certain criteria of “reasonableness.” Buchanan correctly criticized Arrow for this “impossibility” theorem. However, his criticism was based largely on the grounds that social outcomes shouldn’t be expected to adhere to a notion of individual rationality. In a twist of irony, Buchanan’s stance probably inadvertently advanced Arrow’s ideas. Buchanan’s dismissal of the reasonableness of the social welfare function concept altogether likely contributed to many libertarians accepting Arrow’s theorem in a knee-jerk fashion. Yet, the market process itself operates under the guidance of a particular social welfare function (as Arrow understood, despite Buchanan arguing the opposite). Thus, libertarians who accept Buchanan and Arrow’s ideas inadvertently reject the process underlying the market, which forms the foundation of modern civilization. Buchanan’s Stance on Deficits and Debt: During Buchanan’s active years as a researcher, Keynesian economics dominated academic discourse. Keynesians at that time viewed government deficits as essentially costless during periods of resource idleness. Buchanan, by contrast, endeavored to resuscitate the common man’s belief that deficits burden future generations. While the Keynesians probably exaggerated their case, the reality is that current resources in the form of land, labor and capital must be marshalled to “finance” any increase in government expenditure. In that sense, larger deficits are “paid for” today and do not necessarily burden our children and grandchildren. The government issues bonds to pay for deficits, it is true, but when the payment comes due, some future taxpayer or bond buyer ultimately finances the payment. Moreover, the government can, in its unique position, perpetually roll over its obligations, thereby avoiding ever having to “pay back” some debts. (Granted, this is contingent on obligations not ballooning out of control.) The crux of how deficits impact the future lies not in the issuance of paper bonds, but in the nature of the spending, specifically the break down between consumption and investment, as well as the form investment takes. Moreover, just as with public spending, a substantial amount of private spending can be wasteful too. Buchanan’s influence has likely led libertarians to focus too much on deficits and debt, rather than on the character of spending—both public and private. Undeniably, Buchanan has made positive contributions to economics, particularly in the field of public choice. However, it was probably inevitable that someone would eventually recognize the applicability of economic concepts to politics. Buchanan’s elite academic credentials and impressive publication record made him well-positioned to seize the opportunity, resulting in his Nobel recognition. Yet, if not Buchanan, would it not simply have been someone else? Friedrich Hayek’s observations about the prize resonate here. The Nobel can unduly amplify the recipient’s influence, especially in areas where their wisdom might be less profound than in the domain that earned them their reputation. Buchanan cautioned us against taking an overly-optimistic view of politics. It’s time libertarians removed the rose-tinted glasses and saw Buchanan’s ideas in their true light.   James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.  (0 COMMENTS)