“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” –FA Hayek, The Fatal Conceit: The Errors of Socialism, pg 76 Hayek wrote these words back in 1988, but they could apply just as easily today.  The past two months have demonstrated in no uncertain terms just how little some men know about what they imagine they can design.  The so-called “Liberation Day” tariffs were supposed to usher in an era of unparalleled prosperity for the US.  Not only were we going to be freed from the evil machinations of foreign governments, but prices would fall, stocks would rise, the dollar would strengthen, interest rates would fall, the debt would fall, foreigners would come begging to deal with Trump, and America would stand on top of the world.  This plan was endorsed by Very Smart People™ with advanced degrees from Harvard (Navarro, Miran) and Yale (Cass).  Invoking an odd combination of MMT and bizarrely-understood strategic trade models, everything was going to be perfect.  Why, the model even had fancy Greek letters in it, so you know it was legit!   But since the announcement, absolutely nothing has worked out as the central planners intended.  The stock market lost trillions of dollars worth of wealth, and the S&P 500 had its worst performance in a president’s first 100 days since the 70s.  The US dollar plummeted in value.  Interest rates, especially treasury yields, have risen, as investors have looked for alternatives to America.  Debt is likely to rise due to more interest payments at higher rates and the administration’s plan to bail out industries negatively affected by the tariffs.  Foreign governments are giving lip service to Trump while coming up with alternative deals (mainly involving China). What “deals” have been announced involve higher tariffs on Americans.  America, rather than standing atop the world, has become a dangerous prospect in both politics and economics thanks to Trump’s capricious nature and his apparent tendency to be influenced by the last voice that talked to him. Despite the fancy mathematics, the ivy league degrees, and the assurances of the elite, “Liberation Day” has failed in a spectacular fashion.  In fact, it’s failed so spectacularly that the Trump Administration is already setting up scapegoats.  After all, the one thing the central planners can never, ever do is admit fault or that they were wrong.  Just like the failure of Fauci et al’s central plans to stop COVID didn’t fail because the plan itself was flawed (why, it too was endorsed by Very Smart People™ and had fancy Greek letters!) but because of the unvaccinated, Trump is in desperate search of scapegoats. Why has this plan failed?  The math was perfect. They failed to account for one thing: economics is a social science.  Ultimately, we are not dealing with mindless automatons.  There are not, to borrow Adam Smith’s famous metaphor, pieces on the chessboard to be directed by the visible hand of the player.  The economy is not top-down, with incentives acting as computer inputs, directing behavior.  Economics is the study of human action and human behavior.  We are dealing with people.  People with hopes, dreams, desires.  People who want to live their best lives.  And those hopes, dreams, desires are in direct conflict with the Central Plan.  They are impossible to coordinate with the Central Plan.  In short, these men misunderstood the very nature of the system they imagined they can design.   Just like every planner before him, the Trump Administration will find it has to resort to more and more restrictions, regulations, threats, tariffs, taxes, etc., to get what it wants.  Scott Sumner said it best: this is very much Trump’s “Great Leap Forward” moment ).  Let us just hope it ends before the consequences get disastrous.  (0 COMMENTS)

[Given the recent American trend of political alliteration, I was thinking of entitling this Build Back Better By Borrowing Billions for Big Beautiful Baby Bonds.] The administration has proposed giving newborn babies (whose parents have Social Security numbers) a savings account containing $1000, which must be saved at least until the child reached the age of 18. Here is Ryan Teague Beckwith at MSNBC: If a lower-income family added no money to their Trump account, after 18 years that $1,000 would have grown to around $2,000, if we assume a generous 4% rate of return. So how should we think about this policy? At first glance, it seems sort of like a natalist policy, as the money is going to babies. But the babies don’t actually benefit until reaching the age of 18, at which point that money goes to almost all 18-year olds, regardless of whether or not they later choose to have children. So unless I’m missing something, I don’t see how it encourages fertility. Why not just give all qualified individuals a $2000 check at age 18? What’s the purpose of these special savings accounts? Perhaps the goal is to encourage thrift, get people in the habit of saving. But the proposed plan would be funded with borrowed money, so I have difficulty understanding how it would encourage thrift. Isn’t the public being encouraged to believe in “something for nothing”, i.e., in deficit spending? Imagine the typical baby were to invest the $1000 in government bonds yielding 4%. Then at age 18, they would come into possession of two things: A $2000 government bond. An expectation that they’ll have to pay an extra $2000 in future taxes (in present value terms) in order to service that debt. In other words, on average they will be no better off than if the program had never been created. Under the assumption of Ricardo/Barro equivalence, they should just hold onto the bonds forever. In other words, there’s no such thing as a free lunch. The previous discussion is looking at the average impact of the program, but not everyone is identical. Perhaps half the population is marshmallow eaters and the other half is misers. At age 18, the marshmallow eaters sell their bonds to the misers, and splurge an extra $2000 on consumption. But the misers reduce spending in consumption by an equal amount, as they need to cut back to buy the bonds being sold by the less thrifty. [Technically, until the age of 30 the funds can only be spent on certain approved items, but money is fungible.] Of course you can develop more realistic models where aggregate consumption does change. But in most of those models the change would be in the direction of more consumption and less saving. That is, the marshmallow eaters would spend $2000 more and the (presumably richer) misers would reduce consumption by less than $2000. This does not seem like a policy that would increase aggregate saving and investment. Beckwith suggests another argument for the Trump policy. He sees it as creating an opening for a much more expansive policy, which would presumably be created by a future Democratic administration: Under the Booker-Pressley proposal, every child would get $1,000 in a savings account and as much as $2,000 more each year up to age 18, depending on the family’s income. By contrast, the Trump accounts only include the initial $1,000 deposit, though parents could add up to $5,000 a year of their own money up to age 18. Those seemingly minor changes make a huge difference. If a lower-income family added no money to their Trump account, after 18 years that $1,000 would have grown to around $2,000, if we assume a generous 4% rate of return. . . . By comparison, a poor kid with a Booker-Pressley account would have more than $50,000 at age 18 and more than $85,000 at age 30 — literally life-changing amounts of money. Beckwith doesn’t like the Trump proposal, but supports it anyway: The biggest mistake that both Republicans and Democrats make when considering a proposal from the other side is to treat it as static. Good ideas often start as bad ones, and good policies often grow out of flawed ones. When it started in 1935, Social Security didn’t cover agricultural or domestic workers, which meant it disproportionately excluded African Americans. But over time, it was expanded. Today, it is more fair — and actually helps Black and Hispanic workers more due to the way benefits are structured. Beckwith is a progressive, and sees this policy as a form of income redistribution. Everyone receives the same amount, but the future taxes that will pay for the program fall disproportionately on the rich. Alternatively, you can view the program as a way of leveling the playing field. Today, the federal government heavily subsidies young adults that go to college, through programs like 529 accounts and Pell Grants. An egalitarian might argue that it would be better to subsidize all 18-year olds by an equal amount, regardless of whether they went to college or whether they went immediately into the workforce. In recent years, non-college voters have switched to the GOP, while college grads have switched to the Democrats. Beckwith seems to see the poor as the group that progressives should favor, whereas Trump sees those who don’t go to college as the group that should be favored. Not sure how voters align in the long run, but the political equilibrium of 2025 is certainly not going to last very long. The politics of the 2030s will likely be almost unrecognizable to today’s pundits. I have very mixed feelings on this sort of policy. On the plus side: I see the utilitarian argument for income redistribution. I favor treating college and non-college youth equally. On the minus side: A recent study suggests that giving money to poor people doesn’t provide durable gains. I hate the complexity of our tax system, and this proposal makes it even worse. We already have IRAs, Roth IRAs, SEP IRAs, 401k plans, 403b plans, 529 saving plans, etc. The proposed plan has a very complicated tax treatment, which depends on all sorts of factors. We are broke, and should not be creating even more new programs with borrowed money until we have made our fiscal situation sustainable. For me, the final item is the most important. I’d be far more likely to support the plan if it were combined with an equal reduction is federal spending on things like college grants and loans. A while back, I argued that President Trump might end up being one of those “Nixon to China” situations, where a GOP president ushers in a European style welfare state. I don’t see it happening during his term, but down the road I could see tariffs eventually turning into VATs, and baby bonds eventually turning into a much more generous income redistribution scheme. The artificial intelligence boom creates a sort of barrier that I cannot see beyond. If it ends up being as transformative as its boosters suggest, then all bets are off the table as to how future public policy will play out. As with almost all of my posts, this one analyzes things from a 20th century mindset, which might soon be viewed as obsolete. PS.  Like most social science experiments, the Stanford marshmallow eater study doesn’t seem to hold up. (0 COMMENTS)

We’re bringing back price theory with 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: One common argument against public assistance taking the form of direct cash handouts is that the recipients will use the money to buy things that taxpayers find objectionable, e.g., illicit drugs, gambling, etc. To avoid this outcome, the argument goes, public assistance should take the form of in-kind transfers, e.g., food, housing, medical care, etc. What does this argument assume about the income elasticities of objectionable goods? Suppose the recipients could costlessly resell the in-kind transfers. In this case, is there any difference between direct cash handouts and in-kind transfers? (0 COMMENTS)

Recently, co-blogger David Henderson offered some ponderings about the limits of self-ownership. He argued that the government shouldn’t put limits on the self-ownership of adults of sound mind, but such limits could appropriately be placed on children and adults of unsound mind. That raised the issue of how we set about determining when a child stops being a child and counts as an adult, or at what level an adult is of unsound mind. Of course, through policy we can set particular hard and well-defined limits. If you’re over 18 years of age, you’re an adult. If you’re younger, you’re a child. If your IQ is above, say, 85, you’re of sound mind, but if it’s below that, then you’re not. This approach is clean, neat, simple, and as David points out, comes with two big difficulties. One difficulty is that drawing a hard line at a specific threshold will always be arbitrary to a certain degree. In day-to-day life, the mental capacity of someone with an IQ of 85 is basically the same as someone with an IQ of 84. Yet the former will be classified as of sound mind, while the latter is considered of unsound mind, despite there being no real practical difference between them. Someone who is 17 years and 364 days old isn’t going to change in any meaningful way when the clock strike midnight and they turn 18 – but should they happen to have been charged with a heinous crime, whether they get charged as a minor or an adult can very well turn on if the act occurred before or after midnight. The second problem is that there will always be cases on either side of the line that are wrongly classified. There are some people with an IQ of 80 who, despite not being intellectual powerhouses, can still conduct themselves well and make sound decisions. And there are people with an IQ of 180 who go mentally off the rails and make nutty decisions. I’ve known people who at 16 years old were more mature and insightful than some 26 year-olds. How do we solve these two difficulties when it comes to establishing limits? If you were hoping I’d be solving that problem, I’m going to have to disappoint you. But I was reminded of an insight from Daniel Dennett’s book Intuition Pumps and Other Tools for Thinking where he described how we can tie ourselves up with this question. He begins by offering a simple argument that mammals don’t exist, starting with two premises that initially seem plausible: Every mammal has a mammal for a mother. If there have been any mammals at all, there have only been a finite number of mammals. But if there has been even one mammal, then by (1) there have been an infinity of mammals, which contradicts (2), so there can’t have been any mammals. It’s a contradiction in terms. Of course, Dennett isn’t seriously suggesting there are no mammals. He instead invokes a Moorean shift, arguing that since the conclusion is obviously absurd we can justly conclude that something is wrong with the premises or the inference, thus “we take this argument seriously only as a challenge to discover what fallacy is lurking within it.” One way we are tempted to solve the issue is by disputing the first premise. Along the evolutionary path, there were precursors to modern mammals called therapsids, animals that weren’t quite reptiles but not really mammals yet either. So, Dennett suggests, perhaps along this line we could, in principle, identify the birth of what he calls the Prime Mammal – the first animal born that was Objectively And For Real A Mammal. Thus, when this Prime Mammal was born, we have a mammal that was born from a therapsid, falsifying premise one and preserving the existence of mammals. Hooray! Except, hold on, it’s not that simple. Let’s just imagine we had godlike technology allowing us to look back through time to try to spot the birth of this Prime Mammal. When this Prime Mammal was born, how would we know it? What would be the characteristics that make it essentially and fundamentally unlike its therapsid parents? And here we run into the problem of arbitrariness. We could just stipulate that, perhaps, there are ten features that define a mammal, and the first animal born with all ten features is the Prime Mammal. But that’s clearly arbitrary. Why ten features? Why not eight, or seventeen? And why that particular set of ten and not some other set of ten? And along the evolutionary chain, we would find all kinds of instances where a specific animal with ten of those features (and therefore a mammal) mated with another that had only nine (and therefore a therapsid), producing new generations of mammals born of therapsids alongside therapsids born of mammals. Dennett suggests we handle this problem in a way that would probably make many philosophers very upset – we deal with it by not dealing with it: What should we do? We should quell our desire to draw lines. We don’t need to draw lines. We can live with the quite unshocking and unmysterious fact that all of these gradual changes accumulated over many millions of years and eventually produced undeniable mammals. Similarly, the differences between lakes, ponds, and wetland or marshes do not need to be calibrated, even by limnologists (those who study inland waters). This runs counter to how philosophers like to think about things: Philosophers, however, tend to be tidy, fussy users of words. Ever since Socrates persisted in demanding to be told precisely what marked the defining features of virtue, knowledge, courage, and the like, philosophers have been tempted by the idea of stopping a threatened infinite regress like this one by identifying something that is – must be – the regress-stopper: the Prime Mammal, in this case…So, as a general rule, consider ignoring the philosophers’ demand for an essence, a defining feature, a “truth-maker.” It typically – not always – starts a wild goose chase that may be diverting but is only moderately illuminating at best. The upshot – the act of where and how to set limits is itself an activity that has limits. We shouldn’t worry too much about our inability to set exact limits in a way that correctly handle every case, because that’s simply not a possible task. (As I once heard a mathematician quip, it’s very difficult to prove a theorem that’s false!) Now for some things, we simply can’t take Dennett’s advice to just avoid drawing any lines at all. Attempting to solve everything on a case-by-base basis has prohibitively high transaction costs. But when we draw these lines, we should do so with the full awareness that any line we draw will necessarily be imperfect and will get things wrong some of the time. (This, perhaps, is another reason to ensure rules allow for the possibility of exceptions.) However, one mustn’t make a different sort of mistake from this – the mistake of going from the observation that there is no objectively correct, nonarbitrary spot to draw a line for these distinctions, to concluding that the distinctions themselves are meaningless, anything goes, and it doesn’t matter at all where the line ends up. Matt Zwolinski talked about how people can make this mistake when they move from pointing out that certain features of property rights require enforcement through social conventions that are inevitably arbitrary regarding specific details, to embracing the non-sequitur that the very idea of property rights is arbitrary and entirely determined by social conventions. As Zwolinski put it, One way of sidestepping the philosophical puzzles involved in these questions is to simply stipulate an answer through the establishment of a convention. The Homestead Act of 1862, for instance, stated that families could claim up to 160 acres of land once they’d lived on it for five years. Why 160 and not 180? Why five years and not three? Obviously it’s not because those numbers are uniquely mandated by the correct theory of natural rights. Does that make the theory of natural rights worthless? Of course not. A theory of natural rights establishes general principles, and those principles demarcate a range of morally acceptable solutions to the problem of appropriation. Within that range, societies are free to choose. But the open-endedness is not unlimited. It doesn’t really matter if you specify that families can claim 160 acres or 180. It matters a lot that you specify that they can’t take land that somebody else is already living on. So what does all of this mean? It’s true that there is no one, unique set of rules and institutions that counts as a “free market.” Neither natural law nor economic theory can tell us exactly what a libertarian utopia should look like. But that doesn’t mean that anything goes. It might be impossible to specify in a non-arbitrary way exactly where blueish-green shades into greenish-blue, or when a child becomes an adult, or when a free-market ceases to become free. But only someone who has allowed philosophical puzzles to blind them to the world in front of them would conclude from this that there’s no difference between green and blue, or a child or an adult, or capitalism and socialism. The same, too, can be said of someone who insists that there is no difference between a mammal and a reptile. We can’t draw an exact line justifiable with mathematical precision. The best we can do is find a point in the proverbial grey area, draw a line somewhere in there, and say “well, that’s good enough.” And in much of life, “good enough” is going to be the best we can do. (0 COMMENTS)

  I’m glad that co-blogger Scott Sumner took on one of the fears about ending the production of pennies. His post made me realize that I had neglected to post on my article on the demise of the penny that I published at Hoover in March. The article is “Thoughts for Your Penny?“, Defining Ideas, March 13, 2025. No, I didn’t come up with that great title. My editor did. Some highlights: The US government makes a pretty penny (pun intended) on seigniorage. It’s not as much as it used to be because more and more people use credit cards and even cryptocurrency to buy goods and services. Still, it’s a good amount. The biggest gain from seigniorage is on the $100 bill. Printing one costs the federal government just 9.4 cents. So, when the feds spend this $100, they make a nice profit of $99.90. Not bad. Printing a $1 bill costs the feds 3.2 cents. So even on a $1 bill, the feds make 97 cents. But minting small coins loses money for the feds. In its 2024 Annual Report, the US Mint reports the cost of producing each coin denomination. The cost of producing a penny was $0.03. In other words, the cost of producing a penny was three times the value of the penny. Interestingly, the feds went underwater even on the nickel, whose cost, at $0.11, was over twice the value of the nickel. That’s why I stated earlier that the federal government should stop producing nickels also. It isn’t until you get to the dime that you find a coin that the feds make money on. Interestingly, the cost of producing a dime, at $0.045, is less than the cost of producing a nickel. That surprised me at first, but it shouldn’t have. First, the nickel is bigger than the dime. Second, the nickel and the dime are made up of almost the same metals. The nickel is made up of 75 percent copper and 25 percent nickel; it’s actually an alloy called cupronickel. Interestingly, since 1866, except for a period during World War II, when the US government wanted nickel for military uses, nickels have been made of cupronickel. The dime is made up of a copper core within an outer layer of cupronickel; the overall composition of a dime is 91.67 percent copper and 8.33 percent nickel. Unlike with the nickel, the dime’s composition has changed dramatically. Before the Coinage Act of 1965 removed silver from dimes, dimes were composed of 90 percent silver and 10 percent copper. I still have some silver dimes and quarters hidden away in my sock drawer. It should be obvious why the feds changed the composition of the dime: with increases in the price of silver, producing a dime the pre-1965 way was a losing proposition. And: Because the bigger gains would come from getting rid of the penny, not the nickel, that’s what I’ll focus on here. How would we make the transition? First, no real transition would be necessary for the vast majority of transactions. Most people use credit cards or debit cards to buy items. If you bought an item on your Visa card for, say, $19.99, the merchant could charge you $19.99. No penny would need to change hands. Let’s say that that’s the only thing you bought that month and that you pay off your credit card in full each month. You would pay the credit card either by transferring funds from your bank electronically, or, as is rare now, writing and sending in a check. Again, no pennies would be necessary. So, the only transition required would be for people who pay cash. How would that work? We can look to Canada for guidance. Under Conservative former prime minister Stephen Harper, Canada’s Royal Mint quit producing pennies in May 2012, and Canada’s government stopped distributing them in February 2013. I go to my cottage in Canada every summer and the few times I have paid cash, it has been seamless. If the bill came to, say, $19.97, the cash register rounded down to $19.95. But if the bill were $19.98, the cash register rounded up to $20.00. Interestingly, pennies are still legal tender in Canada, but for the past ten years, I have not seen anyone using them. Gone are the days with the little dish on the retail counter labeled “Take a penny, leave a penny.” There’s no need. Read the whole thing.   (0 COMMENTS)

Assume for the sake of the argument that the run-of-the-mill nationalist’s expression “our national resources” is meaningful. These resources—physical resources, capital, talents, expertise, etc.—constitute a sort of “public good” belonging to, and to be consumed collectively by, the nation’s members, if not by “the Nation” herself. Consider a first contradiction. Nationalists are usually mercantilist: they want “protection” against imports and maximization of exports—the largest possible trade surplus. But this means using “our national resources” to produce goods for foreigners (the definition of exports), and using state coercion (tariffs and other barriers to imports) to limit our fellow citizens’ consumption of the production from (output of) foreigners’ own national resources. The contradiction is obvious. To be consistent, nationalists should instead favor maximum imports and minimum exports. A nationalist could offer the counter-argument that “we” export production from “our” national resources in order to be able to import the foreigners’ production from their national resources. If that is true, “we” would want the best terms of trade, that is, as much importation and as little exportation as possible. But why would “we” want to do this? Answering by invoking comparative advantage and the benefits of trade generates a second contradiction (this one more institutional than purely logical). For then, why would “we” limit imports to what our government’s political and bureaucratic geniuses think should and should not be imported and under which conditions? Economic freedom is generally more efficient than government planning and industrial policy. What does “efficient” mean? Different schools of economic thought provide different answers: maximizing economic benefits measured in terms of money (mainstream neoclassical school); maximizing social welfare (welfare economics); favoring economic growth and prosperity (Adam Smith and classical economics); “increas[ing] the opportunities for any unknown person picked at random” (Friedrich Hayek); coordinating individual actions (see, for example, Robert Sugden, The Economics of Rights, Cooperation, and Welfare or, for the matter, Anthony de Jasay); realizing the common preferences of all individuals for the basic rules of social interaction (James Buchanan). The underlying ideal is to satisfy as much as possible the demands of all individuals, all being assumed formally equal. In international trade as in domestic trade, comparative advantage simply follows from free individuals (and their private organizations) producing what each can produce efficiently enough to find willing customers, in order to be able to purchase individually what they want at the lowest price available. Economic efficiency refers to the satisfaction of individual preferences. A corollary of these individualist theories is that property of “our national resources” is held by individuals in severalty, as opposed to in commonalty (a legal term to mean “in common”). Otherwise, the principal-agent problem prevents the efficient use of resources on the Pareto frontier. (See Chapter 13 of de Jasay’s Justice and Its Surroundings.) What belongs to everybody belongs to nobody except the state. Nationalism, on the contrary, refers to the satisfaction of the national collective, which means in practice its majority or a plurality. Nationalism is a form of collectivism. In reality, the satisfaction of a collective amounts to the satisfaction of the preferences of its rulers and their political supporters. In a free society, “national resources” are private. (Exceptions for communal lands, streets, roads, and such can be justified, perhaps with a contractarian argument, but they would be exceptions.) Trade from the outputs of private resources is, at least in peacetime, freely open for individuals and their private organizations to conduct as they want. ****************************** Waiting in line to hug our national-collective tree, by ChatGPT and your humble blogger (0 COMMENTS)

One of the myriad of justifications given for Trump’s love of tariffs is that they are actually a negotiating tool to get the rest of the world to be more fair to American firms.  American firms supposedly face high trade and non-trade barriers and these tariffs are to show that “we mean business” and force other countries to the negotiating table.   Let’s take that explanation as given.  In theory, if tariffs are short-lived enough and can reduce barriers, then that could be acceptable.  But, as economists since Adam Smith have noted, the success of such a maneuver is highly dependent on the skill of the negotiator.  We have empirical evidence from Trump’s first term as to his skill in such negotiations.  The evidence is not in his favor. In Trump’s first term, there were two major trade deals:  the conclusion to the China-America trade war he started the renegotiation of NAFTA, called the US-Mexico-Canada Agreement (aka USMCA or NAFTA 2.0) Let us look at each of these in turn. First, the trade war with China was a monumental loss.  Even figuring in tax revenue (which is not a welfare loss but a transfer to government), US total welfare was down following the trade war (see here, in particular Section 6, for a discussion and various estimations on welfare).  What’s more, the trade war resulted in permanently higher tariffs.  Both US tariffs on Chinese goods and Chinese tariffs on US goods are permanently higher after the trade war than before.  According to Dr. Chad Brown of the Peterson Institute for International Economics, before the trade war, US tariffs on Chinese goods were approximately 3% while Chinese tariffs on US goods were approximately 8%.  Following the trade war, Chinese tariffs on American goods were approximately 21% and American tariffs on Chinese goods were about the same.  Furthermore, approximately 1% of American exports to China were subject to tariffs before the trade war.  After the trade war, that percentage rose to 58%.  If the trade war was meant to open China to American firms, it failed miserably.* Second, the renegotiation of NAFTA has been lambasted by Trump.  He stated that it allowed Canada and Mexico to take advantage of American manufacturers.  “Who would sign something like this?”  he asked.  He would sign something like that.  The USMCA was signed and championed by Trump in his first term.  In Trump’s eyes, his own negotiated deal failed.  Of course, the bizarre thing is that the USMCA is actually a pretty good deal.  It’s essentially NAFTA; relatively little was changed.  But in Trump’s eyes, it failed. So, Trump’s trade negotiation track record, both by-the-numbers and in his own estimations, is abysmal.  What to make of all this?  The weird thing is: Trump can actually be a good negotiator.  In his first term, he scored some major diplomatic coups.  For example, the Abraham Accords normalized relations with Israel and many Arab countries.  But he often lets his emotions rule his reason.  In trade, that seems to be the case, doubly so.  If Trump could show some restraint in trade negotiations, he might be able to reduce tariffs and increase trade.  But he also fundamentally misunderstands trade.  He is openly and shamelessly mercantilistic.  He is utterly obsessed with trade deficits and thinks trade is something one can win.  One cannot negotiate when one does not fundamentally understand the topic at hand; it’s like negotiating to buy a car without understanding what a car is supposed to do. *Decoupling (i.e., removing US firms and trade from China) is sometimes given as a reason for this trade war, but that has failed too.  There was almost no decoupling following the trade war. (0 COMMENTS)

A recent article in the OC Register discussed a proposal to stop producing pennies: Consumers could get shortchanged by a new U.S. policy to stop making pennies by early next year.While the U.S. Treasury would save tens of millions of dollars by eliminating the 233-year-old 1-cent coin, an unintended consequence would be higher prices pushed to millions of poor consumers.Bill Maurer, dean of the School of Social Sciences at UC Irvine, says removing the penny will harm those who don’t use bank cards or digital money options.He pointed to two congressional proposals that he says ignore the gap between the rich and poor — the “Common Cents Act,” which was introduced by a bipartisan group of lawmakers that includes U.S. Rep. Robert Garcia, a Democrat from Long Beach, and the “Make Sense Not Cents Act.”Both proposals would halt penny production within a year of enactment. And while the penny would remain legal tender, businesses would round cash transactions to the nearest nickel under either of the new laws — a key concern for Maurer and others. I see two problems with the claims made in this article.  First, it seems very unlikely that the penny plays a useful role in our economy.  Second, removing the penny would not cause higher prices–indeed the reverse is more likely. Today, the CPI is roughly 38 times higher than back in 1900.  At that time, the smallest coin produced by the US government was the penny—just as today.   In terms of today’s dollars, the Americans of 1900 chose not to produce any coins of a denomination below 38 cents.  Not only is it not at all clear that we need pennies, even nickels and dimes are of very questionable utility.  We seemed to do fine without coins of that purchasing power back in 1900. Even in the mid-1960s (when I was about ten years old), the penny was viewed as being so worthless that children were taunted for picking one up off the sidewalk.  And yet the CPI today is 10 times higher than in the mid-1960s. So the efficiency argument for pennies is exceedingly weak.  But what about the equity argument?  Would removing the penny increase prices, as retailers round up the price of sneakers from $29.99 to $30?  I doubt it.  It seems more likely that they would round down to $29.95.   But even if I am wrong, even if retailers did round up prices from $29.99 to $30, removing the penny would not increase effective prices facing consumers, and would probably reduce them.  To understand why, we need to take a closer look at the dynamics of highly competitive markets. In most of the industries where firms price at just below a round number, competition is fierce.  Examples include clothing retailers, grocery stores and gas stations.  In those sorts of industries, long run economic profits are close to the normal rate of return in other similar competitive industries.  Any action that increases or reduces costs gets passed on to consumers.  Maybe not immediately, but certainly in the long run. It’s a hassle for retailers to handle small coins.  Removing them from circulation would slightly reduce transactions costs (although admittedly the effect would be tiny.). Even if a few products were rounded up from $29.99 to $30, on average the price level would be slightly lower than if pennies were still in circulation, as the cost saving from reduced handling of bulky coins would eventually be passed on to customers. This is similar to an argument I made in a previous post, which showed that regulations preventing price gouging actually result in higher prices to consumers in the long run. (0 COMMENTS)

  When I started to write this article, I was ready to blame Krugman for not discussing this far more important economic restriction. Then I did some research. Research is most useful when it changes your mind, and my research did change my mind. It turns out that Krugman has been very good at laying out the large costs to the economy of making housing artificially expensive. Caplan, in Build, Baby, Build, quotes the following from Krugman: High housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs, and other policies constrict housing on both coasts. Krugman also notes, “Meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.” Many economists, to their credit, criticize these restrictions on building. But they are, on average, less outspoken against these incredibly destructive restrictions than they are against the less damaging restrictions on international trade.   The above is from my most-recent Hoover article, “Housing Restrictions Hit Harder Than Tariffs,” Defining Ideas, June 5, 2025. Read the whole thing. (1 COMMENTS)

Economist Noah Smith was so focused on libertarianism’s theoretical flaws, he overlooked its political importance. Trump’s tariff policy opened his eyes and made him re-assess the virtues of both libertarianism and Econ 101. Listen as he and EconTalk’s Russ Roberts explore the way political competition has shaped economic policy in surprising ways in recent years. The post Two Cheers for Libertarianism and Econ 101 (with Noah Smith) appeared first on Econlib.