A topic that gets a lot of play in most undergraduate microeconomics courses is the issue of market failure. Unfortunately, while the concept is sound, many people and even many economists err in one of three ways. First, they often attribute problems to market failure that are actually the result of government intervention. Second, economists often fall into the trap of doing “armchair economics” and fail to look at the real world where some of the things they call market failures are often market successes. Third, although non-economists and economists can sometimes point to examples where markets fail to achieve the economist’s ideal and to the fact that no apparent government intervention causes it, they often conclude, without examining how government works, that the government will do better. This is the opening paragraph of David R. Henderson, “A Skeptical Look at Market Failure,” Defining Ideas, July 14, 2023. Under the second item, I discuss lighthouses and contracts between bee owners and orchard owners. I also quote one of my favorite lines from Ronald Coase, which, it turns out, was not original with Coase. Under the third item, I discuss Demsetz’s distinction between the “Nirvana approach” and his preferred “comparative institutions approach.” Read the whole thing. The picture above is of Harold Demsetz. (0 COMMENTS)

I have supported economic sanctions on Russia after the Ukraine invasion. Thus I clearly believe that they have at least some impact. But there’s a lot of evidence that sanctions aren’t actually very powerful.  Russia’s economy has done pretty well despite last year’s enactment of what most pundits regarded as extremely severe sanctions.   A recent issue of The Economist provides two more examples of the relatively weak impact of sanctions.  Here’s the title of an article discussing the impact of China’s sanctions on Australia: Australia has faced down China’s trade bans and emerged stronger The “lucky country” may be uniquely able to endure Chinese bullying Uniquely able?  Really?  The US couldn’t survive Chinese trade sanctions?  And what about all of the other countries that China has tried to pressure? In the same issue, they provide a second example of this sort of “unique” outcome: Europe has shaken off Putin’s gas embargo Now it needs to think about how to deal with China Some have argued that Europe “got lucky”.  In fact, just the opposite is true.  They got very unlucky: Far from falling into an abyss, Europe’s largest economy suffered only the mildest of technical recessions. Some have put this down to luck, notably a mild winter in much of Europe reducing the demand for heating. In fact, the economists find, the weather was in line with recent years. If anything, other factors compounded the effect of missing Russian gas. French nuclear plants turned out to need unexpected maintenance at the worst possible time, for example. The gas cutoff also occurred just after Germany had closed down some nuclear power plants.  During a normal year, the Russian sanctions would have been even less effective.   So we have three recent examples where almost all of the so-called “geopolitical experts” badly misjudged the impact of sanctions.  The devastating impact predicted for Russia and Europe, and to a lesser extent Australia, turned out to be wildly overstated. Now many geopolitical experts say the US needs to be prepared to go to war with China—an outcome that might accidentally lead to a catastrophic nuclear war—because our economy would be devastated without the supply of computer chips from Taiwan.   Sorry guys, you’ve cried wolf too many times.  Yes, by all means support Taiwan with military aid.  But just as in Ukraine, a direct war between two nuclear-armed superpowers would be madness. (0 COMMENTS)

Sam Quinones is an American author and journalist who writes narrative non-fiction. His two most recent books Dreamland: The True Tale of America’s Opiate Epidemic (2015) and The Least of Us: True Tales of America and Hope in the Time of Fentanyl and Meth (2021) are both critically acclaimed. In this episode, Russ Roberts welcomes Quinones for a discussion of Dreamland, which provides a pluralistic view on the key players and the underlying pressures which caused the disaster.     Consider the motivations of the young men from Xalisco who are coming to America to sell opioids. Quinones shares the standard set by those who come back after selling drugs successful and build ostentatious homes. There is a great amount of social pressure, which Quinones likens to building a home in either 9 years or 9 months for the men from Mexico. How can the pressure of coming home wealthy build a man to become “addicted” to it? How does the young men’s addiction to wealth compare to those addicted to the opioids they sell?   Quinones points to the close-knit nature of the drug ring in terms of similar “family” names and everybody knowing each other in the late 1990’s as something which made the sellers vulnerable to the DEA. Police also learned of the areas where people would meet to make their exchanges. Responding to the issues, new families became involved, and the sellers produced a pizza delivery type system where their customers would call and have a driver come to bring them the pills. What advantages do a loyal labor structure have for illegal businesses, with its executors being related? To what extent do you think the demand for opioids suffered from police officers locating the areas of exchange? What could be a new concern for sellers with the pizza delivery-type system put in motion for the opioid-money exchange?   The rise of opioids began with their success in treating pain in patients. The medicine was pushed hard when pain specialists built the narrative that the opioids were non-addictive, and the drugs were marketed heavily by big pharmacy organizations like Purdue Pharma. What should be the role of opioids in treating pain today? How did the sentiment of qualifying pain as a fifth vital sign in medicine complicate the opioid epidemic?   Roberts and Quinones discuss the perfect storm of causation leading to people receiving and becoming addicted to opioids. For example, the new supply of opioids met a great amount of demand from patients looking for an easy fix to solve their pain issues. Doctors were pressured into prescribing the pills because of the immense supply of pills and their role as a middle ground for the vast number of people trying to get Medicaid. How did the incentives line up for doctors, pharmaceutical companies, and users to further the opioid epidemic? How have doctors seen a blowback of liability problems due to their patients’ addiction to opioids?   Quinones argues that Medicaid encourages people to become opioid sellers because they could receive the prescription drugs for extremely cheap and sell them on the street for a huge profit. Roberts ties the issue of American taxpayers covering the lion’s share cost of pills for Medicaid eligible users as a huge problem. Quinones and Roberts also share that many of those people who wanted to sell ended up using the drugs before they could even sell them because of their addiction weighing them down. What are your feelings on Medicaid and the issues it caused during the height of the opioid epidemic? Who is most responsible for the opioid epidemic?     Brennan Beausir is a student at Wabash College studying Philosophy, Politics, and Economics and is a 2023 Summer Scholar at Liberty Fund. (0 COMMENTS)

  No area of tax policy has changed more over the past four decades than corporate income taxation. Since 1980, corporate tax rates have fallen as countries have vied for business investment in an increasingly global economy. More recently, however, lower corporate tax rates have triggered concerns about a “race to the bottom” and, in turn, sparked a multinational effort to create a global minimum tax. Between 1980 and 2017, the United States fell behind in the race to reduce corporate tax rates and even briefly levied the highest corporate tax rate in the industrialized world. The 2017 Tax Cuts and Jobs Act (TCJA) brought the corporate tax rate down and restored U.S. competitiveness, but the 2022 Inflation Reduction Act (IRA) clawed back some of the benefits by creating two new and untested corporate tax provisions. As countries continue to work to establish a global minimum tax, economists have demonstrated that the corporate tax is the most harmful tax for economic growth, with much of its burden falling on workers in the form of lower wages. This is from Scott Hodge, “Corporate Income Taxation,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. One of the articles in the Encyclopedia most in need of updating was the one on corporate income taxation. So much has changed since the print version of the Encyclopedia was put to bed in 2006. I saw Scott speak at a Stanford Institute for Economic Policy Research (SIEPR) event last October. I was impressed. I thought he would be a good person to write the new version. I was right.   (0 COMMENTS)

Are there journalists or editors at The Economist who read EconLog? Or perhaps they have not lost all their classical liberal heritage, as the venerable magazine was created to advocate the abolition of the protectionist Corn Laws in the mid-19th century? Anyway, I do hope I am not outing anybody who worked on the article “‘Greedflation’ Is a Nonsense Idea” in the July 6 issue. I believe the authors should have elaborated on the idea that “[w]ith too much cash chasing too few goods, it was inevitable that companies would make more money,” which refers to the inescapable monetary theory of inflation. They could also have explicitly mentioned the difference between inflation and relative prices. Yet, my goal is not to criticize them (for the Nth time, a story of love and hate as I previously explained), but to praise them for explicitly expressing a basic economic idea that seems to be very mysterious for most of our contemporaries, including for many journalists and even the financial press. The Economist writes: Regardless, the fact that companies raise their prices in response to shortages is not only defensible but desirable. The alternative to letting the price mechanism bring supply and demand into line is to rely on something worse, such as rationing or queues. With some knowledge of economics, there is a good future. (0 COMMENTS)

I recently posted how a passage from David Schmidtz’s Living Together: Inventing Moral Science reminded me of a line from a decades old essay written by Theodore Dalrymple. But that was far from the only time a passage in his book triggered a long dormant memory. In another case, David Schmidtz outlines an idea for evaluating politics I learned many years ago from my father.  My dad held a wide spectrum of views over his life. He described himself in his younger years as a ponytailed hippie – definitely not a persona that made one popular in those days in Texas. By the time I was becoming aware of and interested in politics, he had shifted towards being largely Republican in his political orientations, with some libertarian leanings thrown in for good measure. Those leanings led him to cast his vote for the Libertarian candidate in the 2016 and 2020 elections – he couldn’t accept the idea of voting for Trump, whom he saw as antithetical to everything conservatives and Republicans should support. But the lesson I’m referring to came up in a discussion we had in the early 2000s.  In those days, the PATRIOT Act was being hotly debated. Like so many issues, supporting or opposing it seemed to sort very neatly into party lines. One day, I asked my dad what he thought about the PATRIOT Act. The standard response from most Republicans in those days was to offer their support for it – after all, it was passed under a Republican administration, and in response to a massive terrorist attack. It also seemed to line up with standard Republican points about the importance of a strong defense against foreign threats. But that was not the response I got. Instead, he told me that he opposed the PATRIOT Act – and when I asked why, he told me because it failed what he called the “Hillary test.”  What was this test? Simple. He just asked himself if he would be okay with the federal government wielding the kind of powers granted to it by the PATRIOT Act if that government had Hillary Clinton as its chief executive. And he didn’t like the idea of that – so he didn’t support the PATRIOT Act. After all, there is no guarantee that the government will always be headed by trustworthy people with good values. Government shouldn’t have the level of power that would best enable good work to be done by wise and trustworthy public servants – government should only have as much power as you would be comfortable being held by someone who is your worst political nightmare. Because, one day, someone that nightmarish will actually get elected, and they will gladly pick up any of the tools made available to them.  Republicans should ask themselves what’s the most power they would want the government to wield, if that government was headed by people like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez. And Democrats should ask themselves how much power they would want the government to wield if that government was headed by people like Ted Cruz, Ron DeSantis, or Donald Trump. (Insert your own personal political boogeyman as needed.) Odds are, you wouldn’t want the government in those hands to wield too much power – and if your response to this conundrum is to say the government should wield greater powers anyway and just make sure only good people get elected to wield it, you’re playing a very dangerous game that history shows you cannot win.  David Schmidtz makes this same point in his book, charging much of what passes as “ideal theory” in political science as asking fundamentally the wrong question. As Schmidtz put it: Officials not only enforce rules, but also interpret, amend, and so forth. Smith saw this and perceived a further chronically tragic reality: this power to oversee markets is what crony capitalists are buying and selling.  Smith’s observation changes everything. Imagine concentrated power in the hands of the worst ruler you can remember. Now, assume what you know to be true: concentrated power has a history of falling into hands like that. As a preliminary, then, when theorizing about what is politically ideal, we can ask two questions. (1) “Ideally, how much power would be wielded by people like that?” or (2) “Ideally, how much power would be wielded by ideal rulers?” Which of these two versions of ideal theory is a real question? Can political philosophy answer the one that truly needs answering?  Why isn’t it trying?   (1 COMMENTS)

On his Substack, Arnold Kling, formerly a blogger at EconLog, wrote: If people pay for their own health insurance, the market is subject to selection games. The individuals with the most incentive to buy health insurance are those that will cost the insurance company the most in claims. (Although it turns out that there is a selection effect that goes in the other direction. People who are high in conscientiousness are more likely both to obtain health insurance and to take better care of themselves.) Insurance companies, by the same token, have an incentive to try to avoid writing policies for people who most need health insurance. Nobel Laureate Joseph Stiglitz was known for pointing out that this selection game might have no viable solution: the health insurance market could collapse entirely. (italics added) I think Arnold engaged here in what Ronald Coase called “blackboard economics.” The idea is to think through the incentives that the various players face and, on that basis, make conclusions about the way the world is. It’s appropriate that he cited Joe Stiglitz because Stiglitz has been one of the masters of blackboard economics. The problem is two fold. First, under this approach, you can sometimes be tempted not to think through the incentives all the way. A clear incentive is for the insurance company not to deny insurance to a high-risk person in the individual market but to underwrite insurance. That means assessing risk and charging a premium that reflects that risk. Second, the blackboard approach ignores the evidence. In a blog post in 2010, I discussed some interesting economics in the 2010 Economic Report of the President and the way the author of the health care chapter, whom I assume was the CEA’s health economist Mark Duggan, now head of SIEPR at Stanford, twisted himself into a pretzel to justify Obamacare. The whole post is worth reading. Here’s the particular part I want to emphasize here: A House committee investigation found that three large insurers rescinded nearly 20,000 policies over a five-year period, saving these companies $300 million that would otherwise have been paid out as claims (Waxman and Barton 2009). (p. 188) 20,000 policies over 5 years is 4,000 policies per year. So the average number of policies rescinded by the 3 companies individually was about 1,333. Is that a large number? Given that the author says these were large companies, I don’t think so. As one commenter on my post noted at the time: The five largest insurers nationwide each have between 10 and 40 million members, which is ~4-15M policies. The next half-dozen or dozen are all million+. The bottom line is that it appears that very few people who wanted health insurance and were willing to pay a premium that reflected their risk went without.         (0 COMMENTS)

In several recent posts, I pushed back on a claim by Scott Alexander than making cities denser will also make them more expensive. That claim is certainly true for many factors that boost density. But I argued that those density increases that are spurred by the deregulation of construction would usually lower housing prices. Even in that case Alexander might be correct, but I view the claim as unlikely. For it to be true, the boost to housing demand flowing from an improvement in city quality due to new construction would have to outweigh the supply side effects of adding to the housing stock.I have a similar objection to Tyler Cowen’s recent claim that New York City’s new congestion charge will reduce welfare. He might be correct, but I believe he puts too much weight on one factor, and too little on several others. Tyler correctly notes that places like Manhattan generate positive external benefits, due to the productivity-boosting impact of agglomeration (bringing lots of talented people together.)  In anything, Manhattan may not be crowded enough.  So far I agree.  Tyler then suggests that a congestion charge will keep people out of Manhattan, and hence make the place less dense, reducing the productivity of the US economy.  That claim seems doubtful, for several reasons. 1. Yes, density and traffic congestion are positively correlated, but they remain clearly distinct phenomena.  For instance, imagine that a congestion charge for driving into Manhattan caused commuters from New Jersey and Connecticut to switch to mass transit.  That would reduce traffic congestion without reducing density.  Unfortunately, mass transit is not a particularly close substitute for the car, and Tyler correctly argues that this factor would not be enough to overturn his result.  But now suppose that commuters to Manhattan decided to avoid the congestion charge by moving to the city.  Builders might respond by putting up more of those high-rise condo buildings.  It might actually make the city denser. It would make no sense to argue that “a measly congestion charge wouldn’t make people move to Manhattan”, as if that were true it would be equally true that a measly congestion charge would not cause jobs to flee to New Jersey.  If it is significant enough to affect behavior, it might affect it in the direction toward more density.  In addition, the congestion charge might make Manhattan a nicer place to live, which would encourage more people to wish to move there.  Orange County is about to put tolls on “the 405”, which makes me feel much better about my decision to locate here.  I can’t wait to drive to LA on the new toll road.  If I had retired in Manhattan, I’d strongly favor the proposed congestion charge.  So why would we expect Manhattan to become less dense.  Am I that atypical? 2. Singapore adopted a basic congestion charge back in 1975, and implemented a flexible electronic system in 1998.  Since that time, the city has become far denser.  You might argue that this is because lots of people have immigrated to Singapore, and has nothing to do with the congestion charge.  But isn’t Singapore’s allure partly due to the perception that it’s very well run, and isn’t the congestion charge a part of being well run?  London also instituted a congestion charge, and I’m not aware of any of the anti-density effects that Tyler worries about.  Would Tyler recommend that London and Singapore abandon their congestion charges and go back to the old system?  After all, those cities also share significant positive externalities from the interaction of talented people in a dense place.  Yes, density and congestion are positively correlated.  But they are not identical.  There’s no logical reason why a policy that encourages density through less restrictive zoning need conflict with another policy that reduces time wasted sitting in traffic through a congestion charge.  The issues are related, but not identical.  Thus I cannot accept this argument in Tyler’s recent post: On net, do you think our most important cities should be more or less dense?  If you support YIMBYism, which surely does make traffic worse, have you not already answered that question?  So either become a NIMBY or — better yet — be a little more consistent applying your intuitions about the net positive externality from Manhattan density.  A simple way to put the point is that an export tax on your TFP [total factor productivity] factory is unlikely to be the best way to reduce congestion. He’s right that an export tax on Manhattan would be counterproductive.  But a congestion charge is not an export tax.  It’s not even a transport tax.  It’s an auto transport tax.  Here’s why I was reminded of the earlier debate with Scott Alexander.  Deregulating construction will certainly add to housing supply, which tends to reduce prices.  It might also make the city more desirable, which would push in the other direction.  But note that many homeowners oppose housing construction precisely because they fear for the quality of their community.  So the latter affect is ambiguous.  Similarly, a congestion charge will certainly reduce time wasted sitting in traffic, which has a clear positive impact on welfare.  Also less noise and air pollution.  (It’s also an efficient way to raise revenue, allowing for reduction of more distortionary taxes (or spending on mass transit, if you prefer.)) It might reduce density, by making it hard to drive into the city, but it also might raise density by making Manhattan a more desirable place to live.  Thus a clear benefit (less congestion) and a possible harm (less density?) On balance, I suspect that both Scott Alexander and Tyler Cowen have put too much weight on a single factor.  I cannot say for certain that they are wrong, but I lean toward the boring conventional wisdom on both issues.  (Which annoys me, as I prefer to be a contrarian.)   (1 COMMENTS)

Last Saturday evening, my wife and I watched the movie Living on Netflix. I highly recommend it. I rate movies on a scale of 1 to 10. If I rate a movie a 7 or higher, I’m glad I saw it. I would rate Living as at least a 9. If I tell you much about it, I will give away too much. Here’s what I will say. It seems to move slowly, but after a while you realize that it moved quite quickly. The whole movie, sans credits at the end, is under 100 minutes. Why do I mention it here? Because it’s a nice story of the stultifying effects of government bureaucracy. It takes place after World War II, when there were still a number of bombed out places in London. According to Wikipedia, it takes place in 1953. I think the date is closer to 1949. Why? Because there’s a mention of two of the characters going to see the 1949 Cary Grant/Ann Sheridan movie I Was a Male War Bride. Reruns weren’t that common in those days, so they probably saw it within months of its release. As Hayek noted briefly in his 1944 book The Road to Serfdom, there was already a large bureaucracy controlling land use. So three women who want permission to have a park in one little bombed out area approach the “Parks” bureaucracy, where Rodney Williams, a senior bureaucrat played by Bill Nighy, works. They get shuffled from bureaucracy to bureaucracy in what seems like an endless loop. My understanding is that the three women want the government to pay for the park, so it’s not a simple “we want permission” story. Nevertheless, it does show how deadening bureaucracy is. The stultifying effect of the bureaucracy, as we learn in the film, is not just on the citizens who want things done but also on the bureaucrats themselves. I won’t say more. If you comment and give away some of the plot, please say, in CAPITAL LETTERS upfront, “WARNING: SPOILERS AHEAD.” (0 COMMENTS)

Last week’s Economist featured an interesting article on migrations caused by climate change. I am, for one, rather agnostic on climate change. While keeping our minds open to rational demonstrations, we should recall that environmentalists have forecasted other imminent catastrophes before, notably in the 1960s and 1970s. Many ideologues are happy to jump on any excuse for oppressing their fellow humans, oblivious to the high likelihood that they will themselves be oppressed by their fellow revolutionaries. Let’s admit for now, as The Economist believes, that the climate is changing due to human activity and has started pushing many people to move—especially, in poor countries, from the countryside to the cities. (See “The Surprising Upside of Climate Migration,” The Economist, July 1, 2023.) The first interesting reality is that, as any economist should tell you, individuals are not plants. They will move to mitigate the effects of any detrimental event, just as they move to pursue new opportunities. Nobody has to force them to do so. Following imperative incentives, they will also discover new information they were not aware of. By trying to stop their conditions from deteriorating, they will often improve their welfare. This is already happening when more frequent droughts and floods incite poor people in poor countries to move to cities. About poor farmers and herders who have moved to the capital of Niger, The Economist writes: “It’s better here. There’s work,” says Ali Soumana, an ex-herder who now makes bricks. Back in the village he did not have enough to eat; now he does. When flames approach and you don’t have a fire extinguisher, you move. By the same token, as parts of the Earth grow less habitable, people will migrate. … Climate-induced migration will often be traumatic. Yet it will also be an essential tool for adapting to a warming planet. And it may have some positive side-effects. If it causes more subsistence farmers to move to cities, they will probably find better work, health care and schools. They may also start having smaller families. Niger, where climate change is already spurring large-scale migration, gives a sense of how things might unfold. … When rural migrants move to urban areas, their lives tend to improve. Throughout the developing world, poverty is less common in cities. Urban wages are higher and depend less on the weather. Climate change may jolt some into making a decision (to migrate) that would long have been in their interest anyway. … Villages can be stifling places, where old men enforce rigid traditions that, among other things, treat women abominably. In the hurly-burly of a city, those rules weaken. Old men may lament the shift to immodest dress and individualism. “In a village, when we make a decision, everyone follows it. Here [in the city], it’s everyone for himself,” sighs Mr Hassone, who is 66. Yet he admits that his children prefer urban life, because there is more to do (and, whisper it, more freedom). In government, old black men are not better than old white men. As usual, governments—as they are in reality, not those of legends—are not always helpful: Amazingly, many governments discourage domestic mobility. Roughly half have policies to reduce rural-urban migration, according to the UN. A second reflection concerns the unmistakable parallel with what happened in the Industrial Revolution. In 18th- and 19th-century Western countries, about to become rich partly for this very reason, people who were starving in the countryside moved to cities and factories. There, conditions were better than starvation and soon to improve as never before in history. In the United Kingdom during the 80 years following 1820, life expectancy at birth increased from 40 to 50 years. In 1900, it was still only 24 years in China and 32 in Russia, pretty much what it had been during all of mankind’s history (statistics from Angus Maddison, The World Economy, OECD, 2006). Third lesson: Assuming that climate change has serious detrimental consequences, mitigating them is likely to be less costly (to most people) than the short-term and long-term consequences of unleashing leviathans with still more power to conscript their subjects in another collective war that will be “the health of the state” (as Randolph Bourne said of conventional wars). In the same issue of the Economist, another article was, in my opinion, less economically literate (see “The choice between a poorer today and a hotter tomorrow”). It did emphasize the importance of economic development for poor countries—so that their inhabitants become rich, just as our recent ancestors in the West did, although the venerable magazine did not put it that way. The importance of growth and prosperity transpires in the simple fact it is the taxpayers of wealthy countries that are called upon to help the governments of poor countries in climate matters, not the other way around. It is often forgotten, even by the Economist, that the best way to help people in poor countries would be to stop harming them with the protectionist measures that limit our imports from them. That is the most efficient and ethical way to share our prosperity. Let me add that, of course, “share” can be a misleading word because an inhabitant of a rich country who decides to trade with a producer from a poor country also benefits from the exchange; free exchange is never a zero-sum game. (1 COMMENTS)