The members of the Philadelphia Convention1 had a few fundamental purposes they hoped to achieve with the Constitution they created. Some of their ideas were new at the time and some were time-tested. Others were not even stated and just adopted as commonsensical, since the theoretical developments explaining their soundness came much later as they developed from the observation of arrangements put in practice in the United States and elsewhere. The overarching purpose the framers had in mind was the establishment of limited and representative government for the recently united former colonies. All the elements of the new Constitution should be understood as instruments performing, in their totality, that function. Popular sovereignty, the rule of law, political representation, federalism, checks and balances, the division of power between the legislative, executive and judiciary branches were all considered by the framers of the constitution to constitute the ideal form to function as the guarantor of those self-evident truths stated a few years earlier in the Declaration of Independence. Two of the elements of the American constitutional order that I wish to discuss here, fiscal and monetary policies, are today among the least understood elements of that order. If it is true that at the time of the Founding, the boundaries between these two prerogatives of the state were well-defined, over the course of history the demarcation between them has been increasingly blurred. So much so that, nowadays, it is excusable that many policymakers, and even some academics no longer can distinguish where lies the border between those fields of state action. Early in the Republic, the “power of the purse” held by Congress meant that no money could leave the coffers of the federal government without the explicit and periodic consent of the legislature. That soon became formalized in authorization and appropriation bills by which Congress would define the scope and size of actions that the executive branch was authorized to engage. This is an application of the principle of legality, that part of the rule of law that establishes that any private individual is only prevented from doing something if forbidden by law, while any public agent is only authorized to do something if determined by law. The determination of any action by the federal government was intended to be given in the annual appropriations process. From this perspective, all “mandatory” and “back-door” spending are all infringements on popular sovereignty and violations of the rule of law. If a dollar leaves the coffers of the Treasury, whatever the justification, under the Constitutional order in which we supposedly live, it should be first authorized and then annually appropriated. The retirement of the federal debt, the payment of pensions to military veterans, the concession of loans, or subsidies to whatever sector of society all should be weighed by the sitting Congress. Such expenditures should further be considered in comparison with possible alternative uses of public funds before Congress authorizes the executive to spend a single penny of those funds. Consider the way the Federal Reserve and the CFPB (Consumer Financial Protection Bureau) are funded. Their expenses are paid from the proceeds of the Fed’s operations; Congress does not appropriate them. If they were, many would argue, they would lose their independence to conduct monetary policy and to exercise oversight of relations between financial companies and their customers, respectively. Yet the judiciary branch is funded by annual appropriations. Is anyone prepared to argue that because of that, the judiciary is not independent in the United States? Think about the operation of the FFB (Federal Financing Bank). They facilitate the ability of many federal agencies to borrow money in the market, and the Treasury, supported by the Fed, is compelled by law to fund its operations. From these funds, subsidized loans to agriculture, real estate development, exports, infrastructure, and a myriad of other programs are funded off-budget. The list of ways in which Congress’ constitutional power of the purse is disregarded in both spirit and intent goes on and on. To be clear, Congress is left out of the loop concerning which programs are funded by the executive branch and its agencies directly. These policies are also executed without being subject to previous authorization and annual appropriations by Congressional representatives. Voters complain that they disagree with most of the actions of the Federal government. No wonder, if more than 85% of the money disbursed by our national government is not appropriated by our representatives. Monetary policy today is also far removed from what was originally envisaged by Alexander Hamilton. The edifice of American finances was established on solid and eminently practical foundations. However, before we discuss what was originally established and what we have today, let us start by going back to an idealized model. Although ahistorical, this idealization is modeled on the same British arrangements that inspired Hamilton and the other Founding Fathers. Under this model, money, as the ultimate form of payment, was created by the state through the coinage of precious metals. At the same time, commercial banks would expand and contract the supply of banknotes redeemable in money proper according to the existence of profitable opportunities for short-term lending against good collateral, what was known as Real Bills. Under this model, the fluctuations in the demand and supply for liquidity in the economy would be produced, in part, from “outside” the market, by the state coinage, and, in part, from “inside” the market, by bank lending. Thanks to Hamilton, ever the practical man, taking into consideration the immense burden of the Revolutionary War debt, and following the example of the Bank of England, the new Constitution counted among the exclusive powers of the legislative branch, “To coin Money, regulate the Value thereof, and of foreign Coin.” Later, with the establishment of the United States Mint and the authorization for the creation of the First Bank of the United States (the first of three attempts to create a central bank in the country), the foundations of our financial system were established. The national debt would be purchased by banks to invest their capital, and they would be authorized to issue banknotes redeemable on demand in coins issued by the Mint to supply credit to private enterprise. Note that at the very beginning, there was already a close relation between the public debt, eminently an instrument of fiscal policy, and the arrangements by which money and other liquid instruments were supplied in the country, ostensibly the object only of monetary policy. However, the boundaries between them were still clearly defined. Banks would purchase Treasury bonds as long-term investments, funded by capital raised from their shareholders, while their credit operations were to be funded from their deposits on demand, with banknotes being issued against the discount of short-term commercial paper, that is, Real Bills. This ahistorical, schematic presentation is a good proxy for what was the history of our fiscal and monetary policies all the way up to the Civil War. There were still periods in which the “central bank” was abolished. For example, there was a short period during the Andrew Jackson administration in which all public debt was retired, but, by and large, this was the picture. Then came the Civil War. To fund the war effort, banks were required to buy Treasuries not only to constitute their capital, but also to have the ability to issue banknotes. In addition, the Treasury started to issue its own paper money, “greenbacks,” and last but not least, convertibility of bank deposits and notes in gold was suspended. Eventually convertibility was resumed and some of the war debt was paid. However, this created problems of its own under the banking arrangements put in place in 1862 which remained in place until the creation of the third “central bank” of the United States, the Federal Reserve (Fed), in 1913. After the creation of the Federal Reserve, the fiscal requirements brought about by the Great War, the Great Depression, and World War II forced an immense coordination between fiscal and monetary policy—so much so, that the Fed only regained operational independence inside the government in 1951. Another contradictory period occurred when, due to the Vietnam War and the Great Society programs of the Johnson administration, the Fed continued to accommodate the fiscal needs of the Treasury while still somewhat constrained by the gold redemption clause of the Bretton Woods treaty. The contradiction eventually became unsustainable, and the Nixon administration defaulted in the U.S. obligations under that treaty in 1971. With that, an inflationary period began. It lasted until some prudence was restored, if not to the fiscal policy, at least to the execution of monetary policy. Once sober monetary policy was implemented, the period known as the Great Moderation ensued. Fiscal profligacy, which had been practically uninterrupted since the 1960s and was only accelerated by the Financial Crisis of 2008 and the Covid-19 Pandemic, brought us to the situation that we face nowadays. There are some instruments, such as the public debt and the prerogatives to create money and regulate finances, which are tools of both monetary and fiscal policy. The goals of those policies are different, though. Monetary policy is concerned with price stability and a balance between the supply and demand for loanable funds, whereas fiscal policy is concerned with funding the government. For these different goals to be achieved at the same time using essentially the same tools, clear boundaries about what is permissible in each field are necessary. Those boundaries continue to be blurred in recent decades. In this article, I have tried to describe the institutional setting in which this has been taking place, what the consequences are, and what might be done to preserve, restore, and strengthen the foundations of a society of free and responsible individuals as envisioned by the Founding Fathers. We began with a discussion of the constitutional disposition about the power of the purse that Congress has, which requires annual authorizations and appropriations for any money to be disbursed by the Federal government. From that point, we discussed some ways in which “back-door” expenditures happen. We may well associate the gradual erosion of the Congressional power of the purse with a “democratic deficit”, that is, with a decrease in the accountability of political agents. That is, changes in the institutional setting have led to a change in the structure of incentives, and the checks and balances that used to maintain the boundaries between monetary and fiscal policy have been eroded. At the same time, that “old time fiscal religion” (the idea that deficits may rise in times of emergencies but are to be repaid after the emergency ceases) has been almost totally abandoned. This suggests the idea of fiscal “dominance.” That is, as long as fiscal prudence is not restored, it is pointless to try to tweak the institutional constraints on the abuses of monetary instruments for fiscal purposes. On the contrary, the current trend is not to reverse an unsustainable path that will end in disaster, but to accelerate further the trend, with ESG (Environmental, Social, and Governance) mandates for the Fed on top of the existing ones of price stability and full employment. “To realize how far we are from the original constitutional arrangements of the United States, you just need to realize that, theoretically, the Fed is ‘a creature of Congress.'” To realize how far we are from the original constitutional arrangements of the United States, you just need to realize that, theoretically, the Fed is “a creature of Congress.” That is not to say that, like the FCC or the FDA, it is an agency created via a law passed by Congress. No, that is to say that the Fed is technically part of the legislative branch of power, the one with the exclusive coinage power as defined by Art I, Section 8, Clause 5, mentioned above. Mind you, the Fed does not acknowledge this. They present themselves as independent from both the Executive and the Legislative branches.2 The last time I checked, there are just three branches of power in the constitutional structure of the United States. If an agency claims to be independent from both the executive and legislative branches, while also being clear that it is not part of the judiciary, then it is claiming to be a fourth branch of power. This is something that is clearly unconstitutional, not to mention that pesky thing about the “exclusive power of coinage” given to Congress by the Constitution. Of course, the way the Fed funds its operational expenses or the compatibility of its institutional design with the putative constitutional order of this country say nothing, at first glance, about the blurring of the lines between fiscal and monetary policy. Let us think about that. Some say that Congress is not to be trusted with responsible monetary policy, so, it is a good thing that the Fed is insulated from Congress’ direct oversight. That is a logical mistake. In the same way that Chief Justice Roberts once said, “the way to stop discrimination on the basis of race is to stop discriminating on the basis of race,” the way to have a responsible Congress is to give responsibility to Congress for their decisions. The meaning of Congress’ power of the purse is not only that it is a prerogative; it is also a duty, as brilliantly explained by Professor Katie Stith.3 For more on these topics, see “The Declaration of Independence: A Study on the History of Political Ideas,”, by Carl Becker. Harcourt, Brace, and Co., 1922. Alexander Hamilton. Online Library of Liberty. Fiscal Policy, by David N. Weil. Concise Encyclopedia of Economics. Monetary Policy, by James Tobin. Concise Encyclopedia of Economics. Money Supply, by Anna J. Schwartz. Concise Encyclopedia of Economics. New Keynesian Economics, by Gregory N. Mankiw. Concise Encyclopedia of Economics. Benn Steil on the Battle of Bretton Woods. EconTalk. The fact that we have drifted so far away from the constitutional constraints established by the Founding Fathers in the all-important questions related to taxation, public expenditure, finances, and money, says volumes about the powerful political forces against such checks on the government and does not bode well for the future. However, contrary to what may be inferred from what I have just said, there is a solution to avoid the tragedy of the US government losing its “full credit.” It is after all one of the most important weapons in the “arsenal of the Republic.” To not to alienate Congress further from the decision process, but to return the power to Congress, and with that, the responsibility of the purse. Footnotes [1] To learn more about the Philadelphia Convention, see Max Farrand’s edited volume, The Records of the Federal Convention of 1787. Available online at https://oll.libertyfund.org/title/farrand-the-records-of-the-federal-convention-of-1787-3vols. [2] See “About the Federal Reserve System” online at https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm [3] Katie Stith, “Congress’ Power of the Purse,” The Yale Law Journal. Volume 97 (1988). *Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. For more articles by Leonidas Zelmanovitz, see the Archive. (0 COMMENTS)

Clifford Winston, an economist at the Brookings Institution and someone whose work on economics I highly respect, sent me an email about some recent SCOTUS decisions. I told him that I think very differently about these issues and asked his permission to quote him. He responded that he wanted to add some words for clarity but if my quotes included these additions, I could do so. By the way, the works he added caused me to disagree with him less than I did, but I still disagree with some of his statements. Here are the five paragraphs I have permission to quote. He added the words in bold. I won’t respond to everything below, but I will respond to some of the issues on which Cliff and I most disagree. Posner made two critical points that are central to current discussions. First, he argued that because justices do not share a commitment to a logical premise for making decisions (for example, cost-benefit analysis), they must be ideological because they cannot be anything else. Note, the point is not that judges should decide cases based solely on cost-benefit analysis or explicitly ignore unambiguous rules and laws. However, cost-benefit analysis should be a consideration with experts providing guidance on identifying and estimating the costs and benefits, which judges would hopefully consider. Second, Posner was a pragmatist and he pointed out in an NYT interview that “A case is just a dispute; forget about the law—see if a recent Supreme Court precedent or some other legal obstacle stands in the way of ruling in favor of that sensible resolution.  And the answer is that’s rarely the case, or when you have a Supreme Court case or something similar, they’re often extremely easy to get around.” To that end, what would a pragmatic approach suggest about how to think about resolving the recent cases?  The web designer may benefit by exercising her religious preferences, but I suspect that she will lose a lot of business when her behavior is publicized, and certain consumers boycott her services. Consumers will lose if she offers a superior service that they eschew.  So, is a lose-lose outcome a sensible resolution? Wouldn’t society be better off if market behavior was not used to suppress output? Of course, the economic benefits of greater output should be compared with the costs of not allowing the web designer to exercise her religious preferences. The education loans and college admissions cases raise the fundamental questions of: (1) What are we trying to accomplish as a society by suspending the loans and allowing race to be a factor in college admissions?; and (2) What is the best way to accomplish that goal?  The answer to the first question is presumably that we want to help groups that will be disadvantaged in life by their financial debt and that have been disadvantaged by their race and ethnicity in various ways throughout their life. Note, whether those are worthy goals is ultimately determined by the democratic process.  In any case, it would be helpful to have a thoughtful discussion about the best way to achieve those goals. If people who are relieved of certain debts respond by accumulating new debts and if certain races and ethnic groups are better able to gain admission to certain colleges but the earnings gap between those races and ethnic groups and other groups is not affected, then SCOTUS arguably made sensible decisions, which are not impeding the aforementioned goals.  But I would like to see the evidence to back that up and I would still like to identify the best approaches to solving those problems (e.g., before individuals approach college age). As noted, economics and cost-benefit analysis should not be the entire basis for SCOTUS decisions, but those modes of analysis certainly should not be excluded. I argue in the attached paper that lawyers are siloed in their training and professional careers and that they would more likely to have a broader perspective in their rulings if the legal profession were deregulated.   Importantly, SCOTUS would be more likely to be receptive to expert panels, which could greatly help them to reach more sensible resolutions of disputes.   First, he argued that because justices do not share a commitment to a logical premise for making decisions (for example, cost-benefit analysis), they must be ideological because they cannot be anything else. Either Cliff is misquoting Posner or Posner is wrong. He leaves out the possibility of looking at the Constitution, seeing what it says, and judging accordingly. Now comes the part I most disagree on. And I disagree not only on the law but also on the economics. To that end, what would a pragmatic approach suggest about how to think about resolving the recent cases?  The web designer may benefit by exercising her religious preferences, but I suspect that she will lose a lot of business when her behavior is publicized, and certain consumers boycott her services. Consumers will lose if she offers a superior service that they eschew.  So, is a lose-lose outcome a sensible resolution? Wouldn’t society be better off if market behavior was not used to suppress output? Of course, the economic benefits of greater output should be compared with the costs of not allowing the web designer to exercise her religious preferences. Whether or not he recognizes it, Cliff is playing to the narrow stereotype of economists. My wife told me that when she told someone that her husband is an economist, the person said, “Oh, he studies money.” She replied, “No, he studies human behavior.” We are motivated by more things than money. It’s not a lose-lose outcome. The woman who wanted not to be forced to express herself in ways that she disagreed with surely understood that she would be giving up business: that’s the whole point. So giving up this business she didn’t want, although it would make her less profitable, would cause her to gain, not lose. Cliff adds, “Of course, the economic benefits of greater output should be compared with the costs of not allowing the web designer to exercise her religious preferences.” But that’s exactly what she’s doing. We don’t need a government agency, whether a court or a regulatory agency, to do that. If a government agency were to require her to trade, we know that there would be net losses: the loss to her from being forced to trade would be less than the gain to the consumers who miss out on the trade. If that weren’t so, they could raise their offer and she would accept. The education loans and college admissions cases raise the fundamental questions of: (1) What are we trying to accomplish as a society by suspending the loans and allowing race to be a factor in college admissions?; and (2) What is the best way to accomplish that goal?  The answer to the first question is presumably that we want to help groups that will be disadvantaged in life by their financial debt and that have been disadvantaged by their race and ethnicity in various ways throughout their life. Note, whether those are worthy goals is ultimately determined by the democratic process. Accomplish as a society? I remember one federal judge, in rebuking George W. Bush in a case involving a prisoner at Guantanamo, stating, “The president is not a commission.” Similarly, Joe Biden is not a society. He’s one guy. He’s the one who suspended the loans. That’s where rules come in. Cliff seems to recognize this with his last sentence above. It’s not one I agree with: it gives way too much power to “the democratic process” instead of to people’s rights. But Cliff’s the one advocating it. Given that, he should recognize that the democratic process–I assume he means Congress–didn’t see fit to suspend the loans. “We want to help groups that will be disadvantaged in life by their financial debt.” Then help them. There’s nothing stopping people from giving their own resources to help them. But, by the way, the tough love solution is to insist that they pay their debts; it will help them learn a lot about responsibility. They might be much more disadvantaged if they don’t learn that. “and that have been disadvantaged by their race and ethnicity in various ways throughout their life.” If being black per se disadvantages people, why do white people often wish they could claim, on college admission applications, that they are black? “As noted, economics and cost-benefit analysis should not be the entire basis for SCOTUS decisions, but those modes of analysis certainly should not be excluded. ” I agree. “I argue in the attached paper that lawyers are siloed in their training and professional careers and that they would more likely to have a broader perspective in their rulings if the legal profession were deregulated. ” I agree that the legal profession should be radically deregulated. I’m not sure that lawyers as judges would have a broader perspective in their rulings, but my agreement on deregulation doesn’t hinge on that. Where I fundamentally disagree with both Cliff Winston and Richard Posner on is the role of judges. Both seem to see judges as central planners. In that way lies peril.           (0 COMMENTS)

James Rebanks‘s family has raised sheep in the same small English village for at least four centuries. There are records of people with his same last name going back a few hundred more. Even his sheep are rooted in place: their DNA is from Viking times. It’s enough to make anyone feel insignificant–and according to […] The post James Rebanks on the Shepherd’s Life appeared first on Econlib.

I recently rode a commuter train through San Mateo County, California, which is just south of San Francisco. San Mateo is one of the most expensive places to live in all of America, and the view from the train made it easy to see why.Zoning restrictions in the Bay Area are almost unbelievably counterproductive. Looking outside the train window, you see lots of valuable land right next to the major commuter rail line that is used for unproductive purposes. While there are a few newer apartment buildings, mostly you see lots of ugly low rise buildings, including run down ranch houses, one story warehouses, strip malls, etc. It’s a bleak sight, and a tremendous waste of valuable real estate.While riding in the train, I thought about the Orange Line subway through Arlington, Virginia, which is the county just south of Washington DC. It’s a nice comparison, because each country is a beacon for high paid professionals working in some of our most dynamic labor markets.But there’s a big difference between San Mateo and Arlington counties. While the latter does contain lots of low-rise residential neighborhoods, it also allows dense high-rise development within walking distance of the subway line. According to a study by Emily Hamilton, this has led to a surge in apartment construction: Development along the Rosslyn-Ballston Corridor is visible (most strikingly where I live, in Ballston) as is development along the other transit corridors. In the 1970 Census, ahead of the Orange Line’s inauguration, the county’s housing stock included about 30,000 detached single-family houses, a number that has remained steady in the decades since. But the stock of other types of housing has more than doubled from about 41,000 units to nearly 88,000 units. This infill apartment construction has allowed the county’s population to increase by 60,000 residents in this 50-year period – without expanding the area developed at all. This contributes to the DC area being substantially cheaper than metro areas with lots of professional jobs but tighter building restrictions.  Not surprisingly, they are showing greater population growth: Four US metropolitan areas in particular – Los Angeles, San Francisco, New York, and Boston – have become increasingly expensive, thereby pushing out low- and middle-income families as higher-income in-migrants outbid them for a stagnant supply of housing.  Two other ‘superstar regions’ with high productivity and high average incomes – DC and Seattle – are doing a better job of accommodating new demand for housing with new housing construction. Relative to the other four superstar cities, they are losing domestic residents at much lower rates. DC, Seattle, and some other growing cities across the country are suffering from their own housing shortages, but not on the same scale as those places with the most severe impediments to housing construction. In case you think this comparison is unfair because there’s something special about the geography of the Bay Area, or reflects the effects of Silicon Valley, keep in mind that San Diego also has tight building restrictions and extremely high housing prices.  It’s a general problem wherever you combine lots of well paid jobs and tight restrictions on building. It impacts all of coastal California, as well as New York and Boston. And even the DC area is far from perfect, with many more building restrictions than would occur in a truly free market.  I cite Washington DC rather than a city like Houston, because DC is more similar to other affluent metro areas in the northeastern US and California. Nor has all this apartment construction led to deterioration in the schools: Contrary to some of the received wisdom on high-density residential construction in the U.S, Arlington has a highly-rated school district (one school ranking organization ranks it second in Virginia, behind only the city of Falls Church, Arlington’s neighbor to the west with fewer than 15,000 people) Scott Alexander recently argued that increased density would push up property prices.  While there is undoubtedly a positive correlation between real estate prices and density, the causal implications depend on why density has increased.  If density rises because of a booming job market in a specific location, then housing prices will rise.  If density rises because regulatory changes allow for more apartment construction, then prices will usually decline, or at least rise more slowly than otherwise.  Here’s Hamilton: Between 2012 and 2018, rents in DC actually rose slower than inflation. Virginia Beach, VA, was the only other large metropolitan area in the country for which this was true. The Hamilton study is full of interesting information, and is well worth reading.  Here’s another example discussing northern Virginia’s Fairfax County: Many of Fairfax County’s peers in California, Massachusetts, and New York are permitting virtually no apartment construction. For example, between 2000 and 2020, the stock of apartments in Marin County, just north of San Francisco, didn’t increase at all. Long Island didn’t do much better, with its supply of housing other than detached single-family housing increasing by about seven percent in those two decades. By contrast, Fairfax County’s increased by about one-quarter. If you don’t build it, they won’t come. PS.  Hamilton provides a map showing how the recent rise in density is concentrated along the Orange Line subway (yellow dots):   (1 COMMENTS)

“I think the (EPA) standards are a disaster,” says David R. Henderson, a research fellow at the Hoover Institution, a public-policy think tank based at Stanford University in California. “The thing is if someone buys an EV now, there are distorted incentives to do so. But at least people get to choose to do so. But mandates blow past all market signals and that’s one big argument against them.” This is from Ken Wysocky, “Large-Scale Adoption of EVs Faces Logistical Hurdles,” Motor, June 20, 2023. Wysocky does a nice job of building an article around the thinking of Alan Reynolds, Jeffrey Miron, and me. Wysocky ends with this: Given all these barriers, is mass EV adoption within a few years realistic? For answers, Henderson suggests looking to California, where emission-free vehicles must account for 43 percent of new car sales by 2027. “California is the canary in the coal mine,” Henderson says. “That’s a pretty tough goal to achieve by 2027.” One possible way to achieve that goal is to dramatically increase the price of ICE vehicles to drive consumers to EVs, he notes. “If that ever happens, I predict a huge consumer revolt,” he says. I think the relative price impacts of this have been underreported. I may do a post on that soon. Read the whole thing. (0 COMMENTS)

This information is from the Mayo Clinic: Agoraphobia often results in having a hard time feeling safe in any public place, especially where crowds gather and in locations that are not familiar. You may feel that you need a companion, such as a family member or friend, to go with you to public places. The fear can be so overwhelming that you may feel you can’t leave your home. To be clear, agoraphobics do have some reason to fear leaving their homes. Each year, thousands of Americans are killed in traffic accidents and thousands more are murdered. Life is dangerous. But taken to extremes, agoraphobia can lead to a highly limited existence, where sufferers miss out on much of what makes life worth living.I sometimes wonder if the US is becoming irrationally fearful of the outside world. Consider a recent story from Bloomberg, which describes the outrage occasioned by a proposal by a Chinese company to build a routine corn milling plant in Grand Forks, North Dakota: The city this year abandoned a project that, just two years earlier, it had aggressively sought as an economic bonanza:  a $700 million corn mill that would have risen from rich farmland on the outskirts of the community. The mill faced a groundswell of opposition, especially regarding its owner: a Chinese company,  Fufeng Group. Locals were concerned that the plant might be used to spy on the Grand Forks Air Force Base, which is located 12 miles to the west.  This raises some interesting questions: 1. What sort of spying is likely to occur?  Why would a corn mill make this spying easier? 2. Aren’t Chinese nationals pretty much free to travel anywhere in the US, even if the plant is not approved?  Couldn’t they spy just as well from a random hotel in Grand Forks? 3. Perhaps the plant would allow for the installation of some massive spying equipment, which a lone spy could not bring within 12 miles of the base.  But in that case wouldn’t the hundreds of American working at the plant notice this spying operation? Perhaps readers with more knowledge of spying than I have can help me understand how stopping this plant prevents China from spying on our air force bases.  Many Chinese critics insist that, “We don’t hate the Chinese people, we simply object to the Chinese government.”  I worry that the line is becoming increasingly blurred.   Fufeng is not a SOE, it’s a private company based on Hong Kong, with lots of American investors.  Some critics respond that even private Chinese companies are suspect, as the Chinese government can force them to turn over information.  That’s probably true, just as the US government forces our companies to turn over private information about Americans. But taken to its logical extreme, that level of suspicion makes all 1.4 Chinese citizens suspect.  Here’s Bloomberg: Local opposition focused at first on concerns such as pollution, subsidies and land use, but soon shifted to the mill’s ownership.  “Larger and louder than all of the other concerns was a fear of Communist China,” said Katie Dachtler, the only member of the city council to initially vote against the project, who has since left office. “And we can’t talk about the Chinese without them being ‘communists.'” People in Grand Forks who opposed the project from the start say their political leaders should have seen the trouble coming.“You come here because you can get away with stuff,” said Frank Matejcek, a farmer who lives just outside the city. It almost seems like Chinese people are being pre-judged to be security risks, without any specific information pointing in that direction.  And doesn’t the term “prejudice” originally derive from “pre-judgment”.  I’m having real trouble distinguishing between anti-Chinese prejudice and a worldview that the Chinese government is evil and all Chinese people are potential agents of that government.  Can someone help me out?  Isn’t this the mentality that led to the Japanese-American internment camps in 1942?  (Of course the earlier event was far worse.) As the following map shows, Grand Forks was not originally viewed as a sensitive area: So then why not move the plant to an area hundreds of miles from any sensitive military bases, like Sioux Falls, South Dakota?  Here’s Bloomberg: Bob Scott, the mayor of Sioux City, Iowa, another city Fufeng considered, said in an interview that there’s no longer any interest. “Following that, up in North Dakota, they’re going to have a very, very difficult time getting a community,” he said. Once anti-Chinese hysteria reaches this fever pitch level, there’s no longer any safe place in America. It’s not that the risk of Chinese spying is non-existent.  As we saw in the recent balloon case, China does spy on the US.  Indeed as far as I know, all great powers spy on their rivals.  Rather, I wonder whether the actual risks involved justify the recent level of concern.  In April, there were headline stories about how outrageous it was not to shoot the Chinese balloon down immediately.  Two months later, the media quietly reports that the balloon was not even transmitting data: The findings support a conclusion that the craft was intended for spying, and not for weather monitoring as China had claimed, the report said. But the balloon did not seem to send data from its eight-day passage over Alaska, Canada and some other contiguous US states back to China, WSJ said. But not one American in a hundred will read that follow-up story.  They’ve made up their minds. The irony here is that we think that our increasing nationalism will make us safer.  In fact, the rise in nationalism in the US and China makes war ever more likely. (0 COMMENTS)

How do you decide whether Abraham Lincoln really said, “Never trust the Internet”? Well, Lincoln died long before the Internet existed, so the quote must be bogus. Common sense. Simple, right? But teaching a computer such common sense turns out to be not so simple at all.  ChatGPT has become notorious for providing users with garbage information: fictitious court cases, fake quotations, made up news articles. Did the program simply invent the stuff out of thin air; did it find the “fake news” somewhere on the web; or did it combine facts, conjecture, and conspiracy theories from multiple sources to create false information? Perhaps we can use AI to filter out the most egregious fabrications. ChatGPT itself could vet its input – that is, the information it takes in from the Internet. And independent, AI front-ends could analyze ChatGPT’s output. “Facts” could be checked by gauging the quality of the source, checking multiple sources for verification, and ensuring that the claims don’t violate basic rules. Consider, for example, the common click-bait claims that this or that celebrity has just died. What are the chances that the only site posting the news is a sponsored webpage that sells herbal hair-growth products? Wouldn’t the news flash be popping up on sites from AP to Reuters?    Or what about that great quotation from an obscure 19th Century U.S. Senator. Can a search engine find it and find it on a reputable site? Doesn’t that perpetual motion machine, so convincingly described on a “science” website, violate the First Law of Thermodynamics?  The claim that women are paid 75 percent of what men earn for doing the same jobs requires that millions of employers ignore their own self-interest.  Why would they leave so much money on the table? Why not hire an entirely female workforce, pay them (say) 80 cents on the dollar, and wipe out the competition?  Does the alleged fact require that countless people are colluding? Consider, for example, the claim that inflation is caused by corporate greed. Really? Hundreds of thousands of firms simultaneously raise their prices and not one of them sees an opportunity to grab market share by underselling the competition? Is the information logically consistent or is it self-contradictory? For instance, consider the statement, “all property is theft.” Theft implies the existence of property – that is, something must first be owned before it can be stolen, and its ownership must be legitimate otherwise taking it is not theft. Therefore, the statement implies that property can be legitimately owned. But if that’s true, then ownership isn’t necessarily theft. Yet, the phrase explicitly states that all property is theft, which means that no ownership can be legitimate, but then there can be no theft. (On the other hand, the statement, “some property was obtained through theft,” while perfectly true and non-self-contradictory, is not nearly as pithy and is far less likely to get pitchfork-armed mobs into the streets.) Competing ChatGPT front ends, all using their own proprietary sets of tests and rules could offer their filtering services to users. A user would enter his question to the front end of his choice, which would then submit it to ChatGPT. The front end would then analyze ChatGPT’s response according to its ruleset. If it found discrepancies, it could optionally end the session or confront ChatGPT with those discrepancies in hopes that the ensuing dialog would result in a more reasonable answer. The conversation could be made transparent to the user to better enable him to gauge the reliability of the final response. In a world in which knowledge is power, people might be willing to pay for the service that best separates the wheat from the AI chaff.   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource. (0 COMMENTS)

There has been a long running debate going on between Bryan Caplan and Scott Alexander on how to understand mental illness. Caplan argues that mental illness doesn’t really exist. Very briefly, Caplan uses the distinction between budget constraints and preferences in consumer choice theory to analyze the behavior of the “mentally ill.” A key component of his view is what Caplan calls the “gun to the head test.” If you put a gun to the head of a diabetic and told them to normalize their insulin levels (without medical intervention), they wouldn’t be able to do anything differently. But if you put a gun to the head of someone with an overeating disorder and ordered them to put down the doughnut, they would be able to do so. This, Caplan says, shows the overeater is capable of doing otherwise while the diabetic is not. Therefore, the diabetic faces a constraint and has a true illness, whereas the overeater just has a really strong preference for eating lots of food, and therefore compulsive overeating is just fulfilling a preference and doesn’t qualify as an illness or disorder. Scott Alexander replied that consumer choice theory is inadequate for understanding or classifying mental illness for a variety of reasons. Bryan offered a rebuttal, Alexander came back with a rejoinder, and now Caplan has responded yet again. I recommend reading the entire exchange for full context. While I admire both of these thinkers greatly, I think Alexander has the stronger arguments. At the highest level, I think Caplan gives far too much credence to the consumer choice model he uses. Economic models are useful tools, but like all models in social science, they are useful because they are simplifications. The map is not the territory, and the model is not reality. And any model of human behavior that does not perfectly and completely describe reality (which is to say, all of them) can end up being more confusing than enlightening when misapplied. Consider the compulsive overeater. Overeating has many potential causes, of course, but one of these causes is leptin deficiency. Leptin is a hormone that regulates hunger and desire to eat. In his book The Hungry Brain, Stephen Guyenet describes it in the following way: While a normal child may be about 25% fat, and a typical child with obesity may be 40% fat, leptin-deficient children are up to 60% fat. Farooqi explains that the primary reason leptin-deficient children develop obesity is that they have “an incredible drive to eat”…leptin-deficient children are nearly always hungry, and they almost always want to eat, even shortly after meals. Their appetite is so exaggerated that it’s almost impossible to put them on a diet: if their food is restricted, they find some way to eat, including retrieving stale morsels from the trash can and gnawing on fish sticks directly from the freezer. This is the desperation of starvation. Yes, such a person might very well put down the doughnut (or trashcan scraps and uncooked fish sticks) if you held a gun to their head at any given moment. But so what? Their behavior still seems to me like it’s much better described as a budget constraint caused by low leptin levels, and not as someone merely fulfilling their unusual and socially disapproved preference to eat themselves into oblivion. Another reason I find the gun-to-the-head test unimpressive is that it contains a hidden premise that I don’t think can be justified. Here’s how Caplan describes this test in his most recent post: If any incentive in the universe makes you stop, you must have been able to stop all along. Incentives matter implies voluntariness implies preference implies non-disease.* That’s my Gun-to-the-Head Test. The hidden premise behind this test is the idea that any behavior someone can engage in (or refrain from) while under extreme, life-threatening duress is therefore something they are capable of engaging in (or refraining from) at all times, for their entire life. But I don’t see any reason to believe this is true. Consider, for example, the case of mothers who have lifted cars off the ground to save their trapped children. Suppose a week before that happened, you asked these women to deadlift 500 pounds in the gym and found none of them could do it. Yet, a week later, they lifted considerably more weight than that in order to save their child. I’d say this is just a case of showing that what a person is capable of doing is different in normal circumstances and in extreme circumstances. As I understand it, Caplan’s argument would commit him to saying that since there was at least one “incentive in the universe” that made them lift such immense weight, that shows they must have been able to lift such immense weight all along, and their inability to pull off a 500-pound deadlift the prior week wasn’t a real constraint, it was just them expressing their preference for not lifting heavy weights. That’s what a straightforward application of consumer choice theory would imply, but that only shows the limits of consumer choice theory. Yes, incentives did matter in their car-lifting feat, but that does not imply the inability to carry out such a feat in normal circumstances is therefore “voluntary” in any meaningful or interesting way, nor does it imply that the genuine inability to deadlift 500 pounds the week prior was actually just a preference. (As an aside, Alexander is also unimpressed with this test, offering to “tell [Caplan] about all of the mentally ill people I know about who did, in fact, non-metaphorically, non-hypothetically, choose a gunshot to the head over continuing to do the things their illness made it hard for them to do. Are you sure this is the easily-falsified hill you want to die on?” But notice the asterisk above in Bryan’s description of his test. That asterisk leads to footnote where Caplan implies that even if someone does take a gunshot to the head over altering their behavior, that still wouldn’t falsify his argument, because “incentives don’t matter does not imply involuntariness, though it leaves the possibility open.” When every possible outcome of one’s hand-picked method of testing their view can still be interpreted as compatible with that view, then it’s not a very impressive test, and holding it up as some sort of ace-in-the-hole for the argument doesn’t inspire confidence.) People are sometimes temporarily capable of things in extreme duress they couldn’t achieve in normal circumstances. This is both common sense and widely known. This aspect of human behavior doesn’t fit into the simple consumer choice model of constraints and preferences – and that’s okay! Consumer choice theory isn’t and shouldn’t be treated as a theory-of-everything, meant to explain and classify all forms of human behavior. It’s just a useful oversimplification for understanding a small subset of human life. In the closing paragraphs of Caplan’s most recent post, he cites an argument from someone named Emil Kierkegaard making the case that homosexuality is best understood as a mental disorder – a position Caplan disagrees with, arguing that homosexuality is simply a preference. Caplan closes out by saying: Emil’s position may fill you with rage, but it’s logically consistent. So is mine. Choose one, because as Emil’s namesake Søren Kierkegaard titled his most famous book, it’s Either/Or. In response to this, I would quote Ralph Waldo Emerson’s observation that “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” To go back to my observation in the beginning, economic models – including consumer choice theory – are not perfect descriptors of all reality. And when your model doesn’t fully capture reality, forming all your beliefs to be perfectly consistent with that model is not automatically a virtue. The understanding we gain of the world from any of our models will always be limited and partial. In light of this fact, being a little inconsistent will often be more truth-preserving than perfect consistency. And on this topic, I find Scott Alexander’s less-than-perfect consistency far more truth-preserving than the total consistency of either Caplan or Kierkegaard.   (1 COMMENTS)

I thought Kevin Corcoran’s recent post “Military Experience and Moral Authority” was excellent. I started to write a comment, which turned out to be too long. So instead it’s this post. Overall, I agreed with Kevin’s post. I have four comments, only one of which is a disagreement. First, unless I misunderstand the term, what Kevin discussed is not “moral authority” but intellectual authority. There are moral issues in war–big time–but he didn’t discuss those. He discussed the positive issues: what will happen? what’s true? what’s false? etc. Second, the post reminds me of a conversation I had with one of my students who came back to visit about 16 or 17 years ago. I had taught him 22 years ago. He had been to Iraq and had come back in one piece. He said that some of his long-time friends told him that they would defer to him on whether the war was right or wrong because he had been there. That IS a moral issue. He told me that he had said in response, “No, I believe in America and I believe in freedom of speech and in people’s right to judge for themselves. So please do judge.” Third, Omar Bradley is often quoted as saying “Amateurs talk strategy; professionals talk logistics.” A colleague of mine who taught logistics (naturally) had that saying on his door. Logistics can explain and predict a lot. Fourth, Kevin wrote: Prior to the invasion, there was a widespread consensus that the Russian military would quickly plow over the Ukrainian armed forces leading to a swift capture of Kyiv. Outside observers drastically underestimated both the resilience of the Ukrainian military and the ineptitude of the Russian military. I was one of the people who didn’t say that. A UCLA law professor friend on Facebook said the first day, “I give Kyiv 4 days. Does anyone disagree?” I said that I did. He asked, quite reasonably, how long I gave them. I think I answered “Many weeks at least.” What was I thinking? Three things: (1) the substantial size of Ukraine’s military; (2) the Ukrainians “local knowledge” a la Hayek; (3) the Ukrainians’ incentives versus the incentives of the Russian military. Notice what I left out but shouldn’t have: logistics. (0 COMMENTS)

Oren Cass, founder of the think tank American Compass, presents a vision of the “new right” in his recently released book, Rebuilding American Capitalism. In it, he advocates for a top-down approach to governance in response to what he perceives as free-market failures.  He tends to believe that certain politicians can and should shape markets to achieve desired outcomes rather than letting free markets, which are free people, work. This attempt to rebrand not only the right but capitalism itself is flawed, as history and sound economics prove.  Cass pinpoints growing concerns in the economy to help bolster his arguments, like poor inflation-adjusted wage growth and lack of strong social and family units. These are problems making it harder for people to prosper, but they are not, as he suggests, evidence that free-market capitalism has failed.  But these problems–if they are problems, as Scott Winship and Jeremy Horpedahl recently found that people are thriving–aren’t the results of free markets but are driven instead by government failures.  These failures include bloated government spending, restrictive regulations, high tax burdens, excessive safety net programs, costly tariffs, and other barriers to entry in the marketplace. They are imposed by politicians and government bureaucrats, hindering competition, disrupting entrepreneurial endeavors, impeding wage growth, and destroying human flourishing. Cass contends that capitalism only works under the right conditions, which must be facilitated by the government to keep the labor market and the economy strong. Rather than what he calls the “Old Right’s market fundamentalism” of fewer regulations and less government intervention being best, he welcomes more government with certain politicians in power. He proudly makes markets the scapegoat and, with it, globalization and financialization.   In the book’s foreword, Cass writes: Globalization must be replaced with a bounded market that restores the mutual dependence of American capital and labor and invites the trade and immigration that benefit American workers. Financialization must be reversed so that both talent and capital in pursuit of profit find their best opportunities in productive investment rather than extraction and speculation. Believing that more opportunities in the form of globalization inhibit rather than help Americans is the same faulty basis with which people discourage immigration and trade, which are central to thriving economies.  But the crux of Cass’s theory is that he believes markets must be molded, even referring to work by the father of modern economics Adam Smith. Conveniently, he fails to cite the economist Frederick Hayek, who built on Smith’s ideas, to identify spontaneous order, the basis of free-market capitalism that argues economic growth and prosperity arise from voluntary transactions by free people, not government guidance and control.  This “new right” idea was debunked long before Cass came along by Hayek (and others), who also highlighted the “knowledge problem” associated with central planning. He argued that no central authority can possess the information necessary to make efficient decisions for an entire economy. The complexity of economic interactions and the constant flux of information require decentralized decision-making and market mechanisms to aggregate and incorporate local knowledge effectively. Hayek’s insights emphasize the limitations of top-down control and the importance of allowing market forces and individual actors to shape economic outcomes based on their localized knowledge and preferences from the bottom-up. But Cass would have it that government is heralded as the keeper of knowledge and the arbiter of good decisions rather than encouraging freedom and liberty in individuals, i.e., the essence of capitalism. Capitalism allows individuals to pursue their economic aspirations and make decisions based on their knowledge and preferences through voluntary exchange within rules of the game set by limited government. Through this freedom, innovation, entrepreneurship, and competition thrive, leading to greater prosperity for all. History is full of successful economic transformations driven by leaders who championed limited government and free markets. Former President Calvin Coolidge cut government spending, cut taxes, and reduced the national debt, providing more paths for human flourishing. Likewise, former President Ronald Reagan cut taxes, tried to rein in government spending, and reduced regulations, unleashing economic growth and job creation.  Both of them understood that cutting spending, reducing taxes, and removing excessive regulations create an environment where businesses thrive and workers can benefit. Their approaches embraced the power of individual freedom and self-determination, not top-down control that breeds the opposite. Oren Cass’s theory of the “new right” and its embrace of government fundamentalism misunderstands the principles of capitalism and human behavior. Top-down approaches, rooted in centralized control and regulation, do not lead to economic prosperity or personal freedom no matter who is in charge but do distort the efficient allocation of resources, undermine the adaptability of markets, and reduce opportunities to let people prosper.  To achieve a thriving and prosperous economy, we must adhere to and strengthen the principles of free-market capitalism, which too much of our economy today is deprived of when considering healthcare, education, transportation, manufacturing, and the labor market. This should include embracing limited government, voluntary exchange, and individual freedom as the pillars of strong families, productive workers, and profitable employers.  Economist Milton Friedman noted what this debate is about decades ago. “The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.” And while “history suggests that capitalism is a necessary condition for political freedom,” it’s clearly “not a sufficient condition.” But capitalism is the best system yet that has supported economic prosperity and political freedom. The problem is that we have had too little free-market capitalism for people to thrive because of too much government.  There’s no need for a “new right” of big-government progressive policies offered by Cass and others when free-market capitalism of the “old right” is too often missing in our lives.    Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, senior fellow at Americans for Tax Reform, chief economist or senior fellow at multiple think tanks across the country and host of the Let People Prosper podcast. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn. (0 COMMENTS)