Sam works on innovation policy at Progress Ireland, an independent policy think tank in Dublin, and runs a publication called The Fitzwilliam. Most relevant to us, on his personal blog, he writes a popular link roundup; what follows is an abridged version of his Links for November.  Blogs and short links 1. Is Google search getting worse? The quality of evidence around this is remarkably poor. 2. On the game theory of $1 margarita night. As this post describes, it would be great to have a standing social occasion every week at the same time and place that could serve as my friend group’s “office hours”. The changeability of plans makes me feel that more and more of my time is being spent on social coordination. 3. Rest in peace to Peter Temin. I enjoyed his paper reviewing the economy of the early Roman Empire. At some point, we should be covering the economies of pre-industrial Europe in my reading group. 4. For Progress Ireland, I recently wrote about why more academics don’t start companies. I also gave an update on our efforts to support Olympiad-level mathematics in Ireland, and turned on paid subscriptions for my blog. 5. Climate predictions have been relatively accurate. 6. Is AI going to supercharge NIMBYism? The initial hope with efforts like Tract was the opposite, and I have no prediction on how these things will shake out. 7. VAT cuts to create more readers. Do I smell an arbitrage opportunity in the paper market?1 8. The conventional wisdom in urban economics is that minimum apartment standards for floor space and other matters of personal preference are a terrible idea. The Irish government’s stated reduction in minimum apartment standards is now being delayed, or possibly cancelled entirely, because of a challenge in the High Court. The court in question is intimating that the European Union may need to get involved. Even if you think that modestly reducing minimum apartment standards is a bad idea, I’m baffled by the worldview in which democratically elected officials had the authority to introduce these regulations in the first place, but not to modestly reduce them. Is this anarchism with respect to the problem of political authority, but only when changes are in the direction of less regulation, rather than more? Is there even a worldview here, or just bitterness and cynicism? 9. Another thought: Have I been looking at weird flag cones this entire time? 10. Stephen Webb on why Britain has too many lifeguards. I’m reminded of the Mitchell and Webb sketch about how much of an outrage it is when a year goes by and zero people drown in Britain: I’m trying to draw attention to the massive waste of public money that’s led to a situation in where absolutely nobody in a whole year drowns by accident. What that must mean in terms of fencing, warning signs, swimming lessons, people coming into school to tell children to be careful, life belts and the maintenance of waterside paths is just staggering. There has clearly been a massive overspend, because in any conurbation of up to half a million people such as Westchester that’s run with the proper priorities, at least two or three people should drown every year. I am familiar with the different methodologies for how to calculate the value of a statistical life, but can anyone explain to me (a) why different countries, even at similar levels of development, chose different methods, and (b) whether the large divergence in these numbers has any practical significance? (After you’re done with that, I have the same confusion about the different methodologies for calculating social discount rates.) [E]very government has a value for a human life which determines the appropriate level of investment in, say, road safety measures. The UK is typically at the lower end here—at around £2.5m (say $3m) compared to over $12m in the US and about $4.5m in the EU. Finally, from my email inbox, I have been informed of the mystery of the Scottish lifeguards: One of my minor obsessions is that it seems that ‘lifeguard’ is an extremely common teenage summer job in Scotland but not anywhere else in the UK. I have no idea why. Every time I speak to a Scottish person now I have to stop myself from asking “did you work as a lifeguard as a teenager?”. But every time teenage jobs come up in conversation, > >65% of Scottish people I’ve met say they were lifeguards, compared to

Any book that intends to provide a complete account of a chapter covering almost 70 years in the history of ideas is an ambitious achievement by itself, especially when it is centered around a fuzzy concept like neoliberalism. If such a book also attempts to cover decades of economic history, discussing the evolution of policymaking and the intellectual and political debates that shaped it, one would probably worry that the author is trying to accomplish too much. Now, add that the author will try to do so while navigating murky waters, surrounded by the history of a violent dictatorship and the overall context of Latin American politics of the Cold War era. It seems like a recipe for failure. Yet, to the great benefit of his readers, Sebástian Edwards accomplishes all this brilliantly. The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism1 is nothing short of a monumental achievement. Project overview A native Chilean himself, Edwards got his bachelor from the Universidad Católica de Chile (Pontifical Catholic University of Chile, hereinafter PUC), worked as a young economist in Allende’s government department of economic planning, and witnessed a famous British scientist who was visiting Chile to call out the madness of the task: “my friend, you really want to determine true, social, equilibrium prices for over three thousand goods, with a fifteen-sector input-output matrix?” (p. 62). An opponent of Pinochet’s regime, he fled Chile in 1977, and received his graduate training in economics at the University of Chicago, where he became “colleague, coauthor, and close friend of [Arnold] Al Harberger, who is the intellectual father of the Chicago Boys.” (p. 23). While, as the subtitle suggests, The Chile Project is mainly a book about the story of the Chicago Boys and the rise and fall of neoliberalism in Chile, it is also a tale of Chile’s modern economic history, told in three parts. The first part (Chapters 1–3) sets the stage for the rise of neoliberalism; from the deal between the University of Chicago and PUC, to Salvador Allende’s “one thousand days of socialism.” Edwards provides a careful definition for neoliberalism: “I define neoliberalism as a set of beliefs and policy recommendations that emphasize the use of market mechanisms to solve most of society’s problems and needs, including the provision and allocation of social services such as education, old-age pensions, health, support for the arts, and public transportation. […] neoliberalism is the marketization of almost everything” (p. 14, emphasis original). Part two (Chapters 4–9) begins with Pinochet’s rise to power and analyzes the economic policies over the length of the dictatorship (1973–1990). This includes debates over the initial shock treatment and Milton Friedman’s controversial visits to Chile (Ch. 4–5), the struggles for command over policy within the regime (Ch. 6), and the details about their eventual implementation (Ch. 7). Chapter 8 deals with the deep currency crisis of 1982, and the second part ends with an analysis of the second round of “pragmatic” reforms that follow the crisis in Chapter 9. The latter also explores the growing influence of Arnold Harberger, who was likely the man influencing the “pragmatic” part. Part two shines because theory and history come together to deliver a fascinating story that reads almost like a novel. The final part of the book (Chapters 10–16) covers the fall of Pinochet’s regime and the series of economic reforms that continued under democracy. This part tells a story of the model that led to Chile’s economic miracle, but also of its downfall. It started with a series of protests and riots in 2019 that eventually led to an ambitious attempt to draft an entirely new constitution that ultimately failed. While the end seems certain, Edwards also delves into its potential causes, drawing from a perceived widespread sentiment of unhappiness: “large numbers of Chileans lived in fear of retrogressing both socially and economically and rejoining the ranks of the poor,” (p. 209) which became known as the malestar (“malaise”) hypothesis. “Edwards’ first-hand testimony, combined with his use of archival material, provides a rich historical account.” Edwards’ first-hand testimony, combined with his use of archival material, provides a rich historical account. Many of these events are surrounded by controversy, and some have been elevated to the status of outright myths. Edwards recognizes upfront the limitations of what the archive tells us and is clear when he is filling the gaps with his conjectures. The result is an extremely well-balanced narrative that – perhaps except for a more technical chapter dealing with the currency crisis – is accessible for a more general audience. Thus, the main contribution of the book is to provide new (and, in some cases, arguably definitive) historical accounts of key events of Chile’s recent economic history. Clarifying misconceptions The agreement between the University of Chicago and the Universidad Católica de Chile (PUC) is the subject of an important misconception. It is often portrayed as a nebulous U.S. plan to train economists specifically to run Pinochet’s economic policy. Yet the plan was drafted in 1954–55, a decade and a half before even Allende rose to power, not to mention Pinochet. Edwards draws from archival records and reveals that the U. Chicago-PUC deal was, in many ways, accidental. The deal was intermediated by the International Cooperation Administration (ICA), and it first aimed at the Universidad de Chile, the country’s main public university, not PUC. However, “the [U. de Chile] faculty was reluctant to enter into a partnership with an American school, and particularly with the University of Chicago, with its reputation of being a white knight for monetarism, free trade, deregulation, and free markets” (p. 29). When the ICA reached out to PUC for a similar deal, both U. Chicago and PUC had concerns about the compatibility of the university’s religious affiliation. Eventually, PUC’s dean manifested their “desire is to sign an agreement between our university and an institution in the United States, such as the University of Chicago, or the Massachusetts Institute of Technology.” (quoted in pp. 30–31). Thus, it was not clear from either the U.S. or Chilean side that the University of Chicago would be ultimately paired with PUC. The government of Salvador Allende is also the subject of many misconceptions. Edwards recognizes that part of the confusion stems from the fact that Allende was from the Socialist (and not from the Communist) Party, which led authors to mistakenly portray him as a relatively moderate candidate even though, in Chile, the Socialists were much more to the left and had close ties with Cuba and North Korea.2 The book offers a detailed overview of Allende’s economic policies. For instance, Edwards reveals that the government’s grasp over the economy went significantly beyond the well-known nationalization of U.S.-owned copper mines. It also nationalized the banking sector and enforced its right to take control, for an undetermined period, of hundreds of factories producing goods “in short supply.” This short supply was often staged by unions stopping the factory floor and creating artificial shortages. He notes that every import required a license, with some tariffs reaching 250 percent. He also describes how perverse and arbitrary mechanisms were used to set price controls, which led to confiscation of goods, often imposed huge fines, and, sometimes, sent “speculators” to prison. Turning to controversy Part II of the book sheds light on more controversial topics: the Chicago Boys’ involvement in the Pinochet regime. Some early accounts attributed the economic plan to the CIA and placed Arnold Harberger and Milton Friedman as perhaps major contributors. Edwards again relied on archival materials and interviewed several of the Chicago Boys themselves to offer, it seems, a balanced account. The plan was known as El Ladrillo (The Brick), due to its sheer size. The controversy is whether the plan was knowingly drafted by the economists for Pinochet. What is known is that the plan was written before the coup, in 1972, as a blueprint for Chile’s development in the next presidential elections; eleven of the Chicago Boys contributed individual chapters. On the one hand, it appears that only one of them, Emilio Sanfuentes, then associated with the Chilean think tank Centro de Estudios Sociales y Económicos, had contact with a retired high-ranking navy official who worked for a private conglomerate and was interested in such a plan. Edwards also recalls that much of the content of the plan were quite similar to an earlier economic plan written by some of the same Chicago Boys for presidential Jorge Alessandri, a center-right candidate who faced Salvador Allende in 1970, and were also seen as extension to reports that two of the economists (Alvaro Bardón and Sergio Undurraga) were writing for the opposition, including the moderate Christian Democrats and former president Eduardo Frei Montalva. Edwards highlights that the latter plan, El Ladrillo, included more economists, some of them centrists. The main editor of the plan, Sergio de Castro, argued that to gain the support of Christian Democrats, it even included suggestions of “Yugoslavia-style firms, where workers owned the companies and participated actively in their management” (Arancibia Clavel and Balart Páez 2007, p. 144). He also emphasizes the idea that only Emilio Sanfuentes had connections with military officials.3 On the other hand, there is evidence that all authors met in a hotel to discuss it with the retired naval officer liaison. Edwards recognizes that it is ultimately a “mystery that will never be fully resolved” (p. 80), but doesn’t shy away from conjecturing that it is likely that the rest of the economists knew, at least to some extent, that the plan was intended for the military. In what follows, Edwards provides a comprehensive analysis of the policies contained in the plan. For every policy area (e.g., healthcare), he compares what the plan proposed and what was eventually implemented by the military, creating an extremely useful guide to researchers. Another statement to Edwards’s thoroughness is that he connects some policy choices to theoretical debates that were taking place at the time, both in Chile and elsewhere.4 Friedman’s role Chapter 5 offers a carefully researched examination of Milton Friedman’s involvement with the Chicago Boys and his two visits to Chile during the military regime.5 Friedman first visited Chile between March 20 and 27, 1975, and met with Pinochet on the 21st. In their one-hour meeting, Friedman argued—in seemingly broad strokes—that the country needed a “shock therapy” to fight rampant inflation that had reached 350% a year. “Indeed, the director of intelligence was spying on the Chicago Boys to convince Pinochet that ‘the Chicago Boys were not true patriots and that their only interest was to privatize state-owned enterprises at low prices in order to have private investors (including their friends and associates) own and run key strategic industries.'” In the following days, Friedman met with Chile’s business elite, gave a lecture to a group of military officials, and gave several interviews to newspapers. Friedman again argued for shock therapy. Edwards collects some of the questions asked by the business audience and Friedman’s reply to them, concluding that businessmen wanted the same gradualism they were used to. The military was mostly against privatizations and cutting unnecessary personnel needed for the fiscal adjustment. Indeed, the director of intelligence was spying on the Chicago Boys to convince Pinochet that “the Chicago Boys were not true patriots and that their only interest was to privatize state-owned enterprises at low prices in order to have private investors (including their friends and associates) own and run key strategic industries.” (p. 100). While critics treat Friedman as the mastermind behind Chile’s 1975 Recovery Plan,6 the Chicago Boys themselves downplayed Friedman’s influence. Several biographies don’t mention Friedman’s visit to Chile at all. Earlier research also suggested that he did not influence the plan (see Caldwell and Montes, 2015, p. 271). More broadly, Friedman defended himself by arguing that meeting a politician is not the same as advising him, and by noting that he also met with Chinese leader Zhao Ziyang in 1988. Moreover, what he said about Chile was a mere reflection of broad lessons from his academic research, not specific advice. 7 However, Edwards makes a convincing case that Friedman is responsible for the recovery plan, referring to the importance of a “before Friedman and an after Friedman.” (p. 97, emphasis original). The Chicago Boys would likely have proposed the same plan regardless, but Friedman’s visit weighed the scales in favor of their plan over the more gradualist approach that was being put forth by businessmen and military officials. What to make of the Chicago Boys? Recurring in Edwards’ narrative in the third and final part of the book is that, despite the breadth of the reforms implemented during the regime, much else was also done after the return to democracy to deepen and extend the reforms. This continuation was often undertaken by center-left politicians. This insight invites reflection on the role Chicago Boys. On the one hand, their ideas undoubtedly charted the path to greater economic freedom, much needed in Chile after Allende’s populist policies. On the other hand, Chile’s experience highlights the limitations to economic growth and prosperity under a dictatorship. Recent empirical research has analyzed this issue in Pinochet’s Chile from two different sides. Escalante (2022) shows that the Chilean GDP per capita underperformed for at least the first 15 years following the coup. Arenas, Toni, and Paniagua (2024) also question the timing of the “Chilean miracle”, arguing that it only really developed following the return to democracy. Indeed, other Latin American development “miracles” (in Uruguay and Costa Rica) occurred without a similar story of a liberalizing autocrat. For more on these topics, see “Foreign Aid,” by Deepak Lal. Econlib: Concise Encyclopedia of Economics. Colonialism, Slavery, and Foreign Aid with William Easterly. EconTalk. “Milton Friedman in Latin America,” by Ibsen Martinez. Econlib, December 4, 2006. Nonetheless, it is undeniable that the Chicago Boys completely shifted the Overton window in Chile. Even if by historical accident, they transformed perceptions of policies that were unimaginable in Latin America into a status quo that endured as the country returned to democracy. Hopefully, Chile will also endure its new challenges. Note: I refer the readers to another review of the book by Pablo Paniagua, which deals more extensively with Edwards’ hypothesis about the downfall of liberalism in Chile: the “malaise” hypothesis. Footnotes [1] Sebastian Edwards (2023) The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism. Princeton University Press. [2] To readers familiar with Edwards’s work on populism (see esp. Dornbusch and Edwards, 1990), it is no secret that Allende’s macroeconomic policies were disastrous, leading to hyperinflation in 1973. [3] “It is important to point out that only one of the members of the academic group [Emilio Sanfuentes] had contact with the high command of the national Navy, something the rest of us did not know about. Thus, [in September 1973,] our surprise was immense when we realized that the Junta had our document and was contemplating the possible implementation [of our suggested policies].” (De Castro, 1992, p. 11, as quoted in Edwards, p. 78) [4] For instance, Edwards connects the macroeconomic policies put forward in The Brick to Albert Hirschman’s “The Dynamics of Inflation in Chile,” published in 1963. [5] Edwards goes deep into the archives to illuminate the context of Friedman’s visit to Chile, also relying on Friedman’s own recollections. [6] During the awarding of the 1976 Nobel Prize in Economics to Friedman, as he was about to be introduced to King Carl XVI Gustaf of Sweden, a demonstrator screamed from the balcony: “Freedom for Chile! Friedman go home! Long live the people of Chile! Crush capitalism!” [7] Friedman also visited Chile a second time, in November 1981, to attend a meeting of the Mont Pèlerin Society. References Arancibia Clavel, P., and Balart Páez, F. (2007). Sergio de Castro: El arquitecto del modelo económico chileno. Santiago, Chile: Editorial Biblioteca Americana. Arenas, J., Toni, E., & Paniagua, P. (2024). Development at the Point of a Bayonet? Challenging Authoritarian Narratives in Latin-American Growth. https://dx.doi.org/10.2139/ssrn.5026133 Caldwell, B., and Montes, L. (2015). “Friedrich Hayek and His Visits to Chile.” Review of Austrian Economics 28(3): 261–309. De Castro, S. (1992). El ladrillo: Bases de la política económica del gobierno militar chileno. Santiago, Chile: Centro de Estudios Públicos. Escalante, E. E. (2022). The influence of Pinochet on the Chilean miracle. Latin American Research Review, 57(4), 831–847. *JP Bastos is a PhD Candidate in Agricultural and Applied Economics and a PhD Fellow at the Free Market Institute, both at Texas Tech University. He also co-founded the Public Choice in Latin America project. Read more by JP Bastos. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

This is the latest in our series of posts in our series on price theory problems with Professor Bryan Cutsinger. You can see all of Cutsinger’s problems and solutions by subscribing to his EconLog RSS feed.Share your proposed solutions in the comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!   Question: Over the past several decades, the inflation-adjusted price of healthcare has increased. Based on this information alone, can you infer the source of the higher price—lower supply or higher demand? If not, what additional data would you need to determine whether higher prices are being driven by changes in supply or demand? (0 COMMENTS)

Can the promise of economic progress ever justify conquest, coercion, and control over other people’s lives? Economist William Easterly joins EconTalk’s Russ Roberts to argue no–and to rethink what “development” really means in theory, in history, and in our politics today. Drawing on his new book, Violent Saviors: The West’s Conquest of the Rest, Easterly […] The post Colonialism, Slavery, and Foreign Aid (with William Easterly) appeared first on Econlib.

If there’s one thing we can count on in America, it’s that our elected officials will see an affordability crisis and respond to it by stimulating the demand side of the market.  Today, we’re seeing this in the case of the housing industry, with Administration officials floating both a new (and improved!) 50-year mortgage and a portable mortgage.  Treasury Secretary Scott Bessent says that both of these will help break the “logjam” of owners who are stuck with their 3% mortgages and are reluctant to move, which will help with the affordability “crisis” in the American housing market.  After all, if more houses come on the market for sale, won’t that push prices down? This statement belies a fundamental misunderstanding of the difference between supply and quantity supplied.  This distinction matters not just so students can pass their economics exam, but for understanding the actual effects of policy. How do we use supply and demand in assessing the effects of any change?  Fortunately, once you have correctly drawn a supply and demand graph, there is a three-step process for allowing anyone to “command the heights of genius” as James Buchanan once described. Determine: will this affect demand or supply? Determine: will it increase or decrease? Read changes in price and quantity from the graph. The first step in understanding the impact of any change in policy is determining whether these new mortgage policies will affect the demand for housing or the supply.  Let’s start with the 50-year mortgage proposal.  The idea here is that this will make loans or credit easier for would-be home buyers to acquire.  That is a demand-side phenomenon.  At first blush, portable mortgages seem like they would affect the supply side.  After all, such a policy would make it easier for current homeowners to sell, right? However, notice that this policy only affects current homeowners who wish to move and buy a new house. Those who have a house and have no desire to move will be unaffected by this policy.  As a result, this policy also affects the demand side of the housing market. The second step in our three-step process is to determine what direction the (in this case) demand curve will be moving.  Here, it’s fairly obvious: the demand for housing is going to increase, which means it will move to the right. I depict this below in the move from D1 to D2.  The final step is to read the changes in price and quantity from the graph.  Here, we can see that as a result of these policies, we should expect the price to increase from P1 to P2 and the quantity to increase from Q1 to Q2.  Importantly, the supply curve did not move whatsoever. Note that what we have just shown is that Scott Bessent is correct! There will be more houses sold as a result of portable mortgages (and the 50-year mortgage).  The specific point-prediction of exactly how many more is beyond the scope of the analysis here, but the pattern prediction seems obvious.  But this is an increase in the quantity of houses, not an increase in the supply of houses.  As a result, he is incorrect to say that this will make housing more “affordable.”  It will most certainly not – housing prices will increase. The trick to implementing this three-step plan is to do the three steps in order.  People are often tempted to jump straight to step three and “get to the point.” After all, that’s what people really want to know! Some can jump straight to step three, but I’ve been a student of economics for almost 20 years now. I couldn’t even begin to venture a guess as to how many times I’ve drawn supply and demand on boards in front of classrooms, on sheets of paper during office hours, on exams that I’ve taken… you name it.  I still go through this exact process every single time when I’m confronted with a new problem. The reason why I go through this process every single time is simple: it works, and it avoids the trap of falling victim to the problem of reasoning from a price change.  It also forces us to really think about what is going on in the market and to think through it clearly and carefully before we rush to any judgments about what we really care about: will this allow more people more access to a good or service?  Will it allow people to live healthier and wealthier (however they choose to define those terms) or will it lead to impoverishment? These are the questions that really matter. Using supply and demand analysis and this three-step process is a crucial component to understanding the world around us. (0 COMMENTS)

Modular housing is gaining prominence as a proposed way to increase the housing supply. This is an approach where the majority of home building is done off-site. Factories will construct entire rooms of a house, including all the wiring and plumbing connections built in. At the final construction site, the actual building process consists of the final step of connecting the rooms, plumbing, and so forth, to complete the build. Building in this way is faster and less expensive than traditional home building. And in recent years, the technology has improved as well—companies around the world build modular homes that are distinctive, highly customizable, and of very high quality.  People might think that these companies increase the housing supply by, well, building more housing. But building more housing isn’t an increase in supply, it’s an increase in quantity supplied. An increase in supply means an increase in the capacity to produce something. A recent interview with engineer Ivan Rupnik describes two different ways modular housing can help increase supply.  One way is simply the technology itself. Changes in technology are important ways to increase the supply of anything. Once upon a time, all houses had to be built entirely using hand tools and by human muscle. As technology has improved, the potential number of homes that can be built by a given number of workers increases. Or, in economic parlance, the supply curve shifts to the right.  The other way to increase the housing supply is through changes in housing regulation. Rupnik talked about how Congress attempted to encourage modular housing as far back as the 1960s, and  “funded [Nixon-era HUD program] Operation Breakthrough to encourage experimentation, and to figure out the effect of local housing codes and zoning regulations on large-scale use of new housing technologies. For reasons that still aren’t clear to me, those regulatory changes — which had bipartisan support — were never implemented at scale in the U.S.” As a result, the potential increase in supply that the new technology represented was not able to be realized in the United States because regulatory barriers that would have allowed it were not removed.  But other countries were watching, and took advantage of the lessons, even if the United States did not. Rupnik points to Sweden, where he says “85 to 90 percent of single-family is made in a factory.” Japan, too, “streamlined regulation for manufacturing and innovation,” allowing the new technology to be put to use to increase the housing supply.  My favorite point that Rupnik makes is the distinction between prescriptive regulations and performance regulations. As he describes it, prescriptive regulations are those that tell a company to do very specific things – make the walls at least this thick, use these specific materials in these quantities, etc. Performance regulations, on the other hand, just stipulate thresholds that need to be met but leave it entirely up to the companies to find the best ways to go about meeting those goals. As he put it,  “Performance codes say that a wall needs to prevent fire from penetrating for X hours or minutes, and you can achieve that goal with any material that works. For example, in Sweden, instead of mixing sheathing for structural rigidity and drywall for fireproofing, they used two layers of a more expensive gypsum product because for their factory processes, it was more efficient.” A change from prescriptive to performance regulations allows companies a great deal of flexibility to find the most effective and efficient ways to achieve goals that work best with their own unique circumstances and processes. Because performance goals don’t impose a one-size-must-fit-all approach, a multitude of competing and customizable approaches can be taken, learned from, and continuously improved. This flexibility in the regulatory structure also helps increase the housing supply.  The goal of increasing the supply of housing is an important one. Any serious discussion of achieving it will require either some mention of technological improvements or regulatory reforms. If those aren’t part of the discussion, then we’re not talking about increasing the supply of housing—we’re merely discussing increasing the quantity of housing supplied. An increase in quantity supplied without an increase in supply means rising prices. (0 COMMENTS)

A recent post argued that housing affordability is not so bad as it might appear when home prices are adjusted for all relevant factors, such as size, quality, and household income growth. While houses have become more expensive in dollars, they are also significantly bigger and nicer, and the average household has significantly more income. We acknowledge, however, that there is a housing affordability problem, particularly for working- and middle-class people in certain metro areas. Bankrate found that the household income needed to afford a median-priced American home rose by 50% just since 2020, to $117,000.    The economics of housing affordability is very straightforward. If prices have gone up, either demand has shifted right, supply has shifted left, or some combination of the two. While supply constraints are the major culprit in the affordability problem, we want to acknowledge that buyers are partly responsible for the market shifts that we’ve seen—it takes two to tango. Housing is a normal good with a long-run income elasticity of demand close to one, meaning housing demand rises in tandem with household income growth. To bring prices down, we need builders to shift the housing supply curve “out and right” by a larger factor than buyers are shifting the demand curve. Builders know exactly what this would take: less restrictive zoning (especially for multifamily units), easier licensing and permitting processes, less stringent building codes and energy standards, freer markets in labor and materials, and perhaps a consumer acceptance of smaller, simpler homes. With our combined experience in home building and economic analysis, we see three major factors driving housing unaffordability: zoning, building codes, and home sizes.  Almost all U.S. jurisdictions impose zoning regulations that limit, sometimes severely, the number of homes that can be built. In the pursuit of safety and energy efficiency, ever-more-stringent building codes require costlier construction methods and materials. America’s builders have moved away from smaller, more austere starter homes to big, gaudy “McMansions.”  Zoning Prevents Affordable Housing Economists have long recognized that zoning restrictions are one of the largest factors holding back housing supply growth. Urban-planner-turned-anti-zoning-crusader Nolan Gray wrote the authoritative critique of zoning, Arbitrary Lines (excellently reviewed by David Henderson). Gray spells out exactly how zoning raises housing costs: The most obvious way is by blocking new housing altogether, whether by prohibiting affordable housing or through explicit rules restraining densities. This results in less housing being built, resulting in the supply-demand mismatches we see in most US cities today. A subtler way that zoning drives up housing costs is by forcing the housing that is built to be of a higher quality than residents might otherwise require, through policies such as minimum lot sizes or minimum parking requirements. Beyond these written prohibitions and mandates, zoning often raises housing costs simply by adding an onerous and unpredictable layer of review to the permitting process. (p. 52–53) There’s plenty of evidence supporting the theory that zoning plays a major part in limiting housing supply and raising home prices. Exhibit A is Houston, the most famous example of a non-zoned large city, which, consequently, is one of the most affordable large cities in the United States. No zoning means Houston can easily add houses, particularly in response to even small price increases. As Gray notes, “Houston builds housing at nearly three times the per capita rate of cities like New York City and San Jose… in 2019, Houston built roughly the same number of apartments as Los Angeles, despite the latter being nearly twice as large.” (p. 144) This larger supply elasticity in Houston allows the housing stock to grow in tandem with demand and accordingly keeps price increases in check. For big cities, Houston is tops in affordability as measured by the ratio of median home prices to median household incomes. Building Codes Raise Costs Continuing a family tradition begun by Grandpa Watts in 1948, we built several spec homes in 2005–2006, raking in cash until we were derailed by the emergence of the subprime mortgage crisis.  Joel started building again after an almost 10-year hiatus, while Tyler headed off into academic economics. Touring one of Joel’s builds after the restart, Tyler noticed that all exterior walls were now constructed with 2×6 lumber, instead of 2x4s as had been standard practice since the advent of stick framing. Joel indicated this was due to changes in the building code, primarily for the purpose of adding more exterior insulation and making homes more energy efficient. This code upgrade was just one of the more noticeable examples of a steady trend of ever-more-stringent requirements, usually aimed at marginal improvements in safety and energy efficiency. A series of studies commissioned by the National Association of Home Builders (NAHB) tracked the total cost impact, on a per-home basis, of specific changes in the International Residential Code (IRC). These studies found that, over the 2009–2018 IRC update cycles, code changes increased costs for construction of typical homes in Joel’s area by an estimated $13,225 to $26,210. With ongoing updates, IRC has the potential to continue ratcheting up costs indefinitely.  Another study by NAHB found that government regulations overall (zoning, building code, design, safety, etc.) accounted for nearly 24% of the sales price of a single-family home—$93,870 when applied to the median new home price in 2021. Source 1 Small + Simple = Affordable   Homes in the United States have gotten a lot bigger since the supposed golden age of home affordability in the 1950s and 1960s. Average home size grew from 1,500 square feet in 1960 to a peak of 2,700 in the mid-2010s. Currently, new homes in the United States average about 2,400 square feet, and builders appear to have largely abandoned construction of small starter homes.  Homes under 1,400 square feet, once the majority, have collapsed to well under 10% of new home starts—despite the fact that the per-household head count shrank significantly since 1960. Source 2; Source 3; Source 4 Any push for more affordability should emphasize smaller and simpler houses—true starter homes. At the 2024 national average construction cost of $195 per square foot (including everything except land), today’s 2,400 square foot home costs over $200,000 more to build than a 1,200 square foot starter home would cost. Take out expensive amenities such as granite counters, premium appliances, high-end trim, etc., and we reckon site-built homes in the 1,200 square foot range, even in the priciest metros, could be built and sold profitably for a full $100,000 less than today’s national median price of about $410,000.  So why don’t we see more builders producing smaller, more basic homes to meet the crying need for affordable housing? Put simply, the large cost burden of regulations—zoning and building codes in particular—makes starter homes relatively unappealing for both buyers and builders.  Allow us to illustrate by comparing the costs of a sample 1,200 square foot starter home against a high-end 2,400 square foot McMansion. We’ll assume the all-in costs of regulation add $100,000 per single-family home. Basic construction costs are, roughly speaking, directly proportional to home size and quality. Thus, in the absence of an extraneous regulatory cost burden, a 2,400 square foot home should run about double the cost-to-build of a 1,200 square foot home (land costs notwithstanding). The costs of a strict regulatory regime, however, are not proportionate to home size and amenities, but rather a roughly fixed amount for any size home. In other words, regulatory compliance adds almost the same amount of dollar outlay to the starter home as it does to the McMansion. The overall effect is to shrink the price gap between starter homes and McMansions, making the latter relatively less expensive compared to the former. Economists know this as the Alchian-Allen Effect.  In a less-regulated world, a starter home might be ½ the price of a McMansion, but once the regulatory burden is factored in, the starter home is instead 2/3 the price, and the larger the fixed cost of regulations, the smaller this relative price gap becomes. As the cost of regulations grows, the relative price of large, well-appointed houses declines. Unsurprisingly, builders and buyers increasingly eschew relatively more expensive starter homes. Let there be “low quality” goods The inimitable Walter Williams, our favorite econ teacher, used to say, “Low quality goods are part of the optimal stock of goods.” Of course—for how else could the material needs of poorer people be met? By this, Williams didn’t mean unsafe or non-functional, but rather made with cost in mind. In the case of homes, this would mean that they are smaller and simpler.  To ensure an abundance of lower-quality goods, governments must avoid burdensome taxes and regulations that make it unprofitable and unrealistic for entrepreneurs to operate in the low-end marketplace. Sadly, for many lower-income people looking for shelter, regulations have priced them out of the market.  To incentivize a reliable flow of affordable housing, we will need to see governments drastically peel back cost-prohibitive rules and restrictions imposed by zoning and/or building codes. “If you build it, they will come” rings true to us, but take our word for it: affordable homes won’t get built unless and until governments cut back this excessive regulatory cost burden.    Tyler Watts is a professor of economics at Ferris State University. His brother, Joel Watts, is a homebuilder. Footnotes [1] National Association of Homebuilders, “Estimated Costs of Building Code Changes.” [2] US Census. Note: 1,400 s.f. cutoff interpolated from 1,200-1,599 s.f. bin data. [3] Pew Research Center, “The state of affordable housing in the US.” [4] United States Census Bureau, Historical Households Tables. (0 COMMENTS)

Journalist and author Sam Quinones talks about his newest book, The Perfect Tuba: Forging Fulfillment from the Brass Horn, Band, and Hard Work with EconTalk’s Russ Roberts. Known for his reporting on the opioid crisis, Quinones turns to a more uplifting subject–the world of tuba players and high school marching bands. What begins as curiosity about an […] The post The Perfect Tuba: How Band, Grit, and Community Build a Better Life (with Sam Quinones) appeared first on Econlib.

Tomorrow in the United States is Thanksgiving, the American version of a harvest festival celebrating the bounty of the earth and preparing for the winter ahead. We trace the history of our holiday to a documented 1621 gathering of English Pilgrims and the native Wampanoag tribe in modern-day Plymouth, Massachusetts. The Pilgrims had immigrated from England the previous year, looking to escape religious persecution. After a perilous journey across the Atlantic, the Pilgrims landed in America. First, they landed in modern-day Provincetown. The sandy soil wasn’t ideal for agriculture, so they boarded the Mayflower again and took the (relatively) short trip across Massachusetts Bay and landed in Plymouth. The first winter was horrific. Between scurvy from the long voyage and the harsh Massachusetts winters, half of the settlers did not live to see Spring.  The next year was more normal, but life was still difficult for the Pilgrims. Agrarian society is not an ideal way to live: backbreaking work all day long, and so much depends on the weather. I grew up in a small town just next door to Plymouth; the weather is as unpredictable as anything. But that year, they managed a successful harvest. As was tradition among most peoples of the world, after the harvest, they gathered to give thanks and share in the bounty.  The tradition of harvest festivals continues, formalized into this holiday of Thanksgiving. Of course, hunger remains a problem. There are numerous regulations that should be removed to promote better access to fruits and vegetables and other healthy foods.  For example, sell-by dates lead to significant waste. Subsidies on corn and tariffs on sugar lead to the use of a lot of unhealthy additives.  Food price supports lead to unnaturally high prices.  Municipal regulations often prevent charities from distributing or providing food. Reducing these regulations will help increase access to food, lower the price of food, and reduce food waste.   In a recent EconLog post, Daniel Smith discussed how the FDA was used as a bludgeon against whiskey manufacturers.  Daniel cites Jack High and Clayton Coppin in that story.  Those same authors also wrote a book, The Politics of Purity, which examines the issue more broadly to include the food chain (I thank Econlib editor Pat Lynch for pointing me to the book). There will be far too many who go without on a day when we celebrate how much we have. I do not wish to minimize their suffering, nor the suffering of those throughout the world who still live at or near subsistence level. The fight against hunger is not nearly done. But that does not mean we cannot celebrate the massive strides made against hunger, either.  The reason for the season has changed because it’s much more rare that food insecurity is a pressing concern. As a consequence, Thanksgiving has become a day to celebrate one’s blessings.  Millions of Americans will criss-cross the nation to see friends, loved ones, and family. We celebrate our extraordinary abundance. We live in a place where less than 2% of our workers need to work in agriculture to provide the food we need. When there are droughts or other conditions that could previously have resulted in famine, we can import food, either from other places in the country or elsewhere in the world, to feed those who would have gone without because of lost crops. According to the Food and Agriculture Organization of the United Nations, less than 2.5% of Americans die of malnutrition.1 We celebrate these blessings. For those of you traveling, may your journeys be safe and may you return home. May you all enjoy the company of loved ones, wherever in the world you may be. And may you all enjoy the peace and comfort our shared and created abundance brings.   Happy Thanksgiving, everyone! [1] A note on the data from the source: “The FAO reports all values below 2.5% as ‘

In case you missed it, the Trump Administration has been using tariffs under the 1977 International Economic Emergency Powers Act since at least April of this year. The legality of doing so has been questioned and we are now at a point where the Supreme Court has heard oral arguments on the matter. One of the arguments made by the U.S. Solicitor General, John Sauer, is that the plaintiffs in the case “concede that IEEPA authorizes quotas and other tariff equivalents.” The implication of this argument is that if these two are identical and one is permissible, then the other must logically be permissible, too. I am no lawyer, so I will not comment on the strength of this particular argument. But as an economist, this raises two questions: are tariffs and quotas actually equivalent and if so, why would the government use one instead of the other? Briefly, a tariff is a tax on the importation of goods. Because tariffs are a tax, they raise the price that consumers pay, increase the cost that sellers incur, or some combination of both. Point is: someone will pay the tax and those tax dollars will then flow into the federal government in the form of tariff revenue. If you look carefully at Figure 2 on Page 9 of the Treasury’s monthly statements, you can see that they have collected $195 billion in “customs duties,” which includes revenues from tariffs. This increased cost leads to less of the activity taking place—that is, tariffs reduce the amount of goods imported into a country. This is true regardless of who shoulders the burden of the tariffs, whether it be domestic consumers paying higher prices or foreign producers earning less profit (though there is considerable evidence that it is the domestic consumers paying the tariff, not foreign producers). A quota is a legal restriction on the amount of a good that can be imported. Because it restricts the amount of a good that is allowed to enter a market, we can easily imagine a tariff and a quota having the same impact on the amount of a good that is imported. Restricting imports in this way, however, has the effect of making those imports more expensive. In fact, if the reduction in imports from the quota exactly matches the reduction in imports, then that quota’s effect on price will exactly match the tariff’s. Because tariffs and quotas ultimately have exactly the same effect on consumers and producers, there is good reason to believe that the two are economically equivalent, as Solicitor General Sauer argues. If that’s the case, why would any government use tariffs when they can instead use quotas? One reason might be that determining how many imports to allow into the country is more difficult than simply setting a tariff. How are we to know whether we should allow 100,000 cars into the US instead of, say, 99,000 or 101,000? Implementing a quota also requires that government officials keep much, much closer records of how many cars are coming in, from where, and when. The paperwork alone can be difficult.  A second reason might be that if you have a message of “importing goods is hurting America” then restricting imports is simply allowing less of the “bad” thing to happen. A tariff, though, can be portrayed as not only reducing the bad thing, but charging a fee for doing the “bad thing.” In matters of justice, it’s common to demand that we not only reduce the bad thing, but that the ne’er-do-wells engaged in the bad thing face some sort of penalty. It is possible to rhetorically frame tariffs based on this argument to fit that bill better than a quota.  But what I submit is the more likely reason that tariffs are used rather than quotas is that quotas create what are known as quota-rents, which must then somehow be disbursed. Because there will be formal restrictions on the amount of imports allowed into a country, permission to import the allowed goods must be allocated in some way. This can be done on a first-come-first-allowed basis, whereby we allow the first, say, 100,000 cars to be taken off the boats and sold in the United States, but then turn away any subsequent cars and send them back to their country of origin. In this scenario, all of the quota-rents are accrued to the importers. But this system would lead other countries to try to send their goods to us en masse in January in the hopes of being first in line. This might do for durable goods like cars, but for nondurable goods like foodstuffs, it would clearly be a disaster as rotting food piled up at the ports and spoiled before it could be sold.  As an alternative to first-come-first-allowed, governments can issue import licenses ex ante, which allows countries that secure a license to export goods to the United States whenever they see fit. What’s more, the government can sell those licenses and, under plausible assumptions, the total amount of money raised by selling licenses can exactly match the revenue generated by an identical tariff. As an academic exercise, it is trivially easy to set a quota such that it raises the same amount of revenue as a tariff. I used to assign such problems on exams in my undergraduate International Trade classes. But in practice, negotiating both the distribution of licenses and their price is extraordinarily costly in terms of transaction costs. Once we acknowledge these real-world costs that are often assumed away in economics classrooms, it’s easy to understand why governments might prefer tariffs over quotas. Adding in the moral intuition that tariffs are not just restricting imports, but are rhetorically punishing other countries for their allegedly harmful practice of selling us more things for lower prices, and from the perspective of someone looking to restrict trade, tariffs probably have a more intuitive appeal than quotas, even if the two can be identical on paper. (0 COMMENTS)