In my previous post in this series, I described how Randall Holcombe separates our instrumental preferences (the outcomes we prefer) from our expressive preferences (what we prefer to express). But there is another, more important preference classification he outlines. Holcombe suggests a major factor in how our preferences are formed is through the interaction of what he calls anchor preferences and derivative preferences. What are these different kinds of preferences? Let’s start with anchor preferences: Anchor preferences are those that define people’s political identities. They define how people see themselves, and how they want others to see them. Derivative preferences are, as the name might suggest, preferences that are derived from one’s anchor preferences. As Holcombe puts it: People may identify as members of a political party, a political movement, an ideology, an issue, an individual candidate, or a religion. Their political preferences anchor on this identity. Most policy preferences are derivative preferences, derived from the preferences associated with the person’s anchor. People’s political identity forms an anchor, and most of their policy preferences are derived from that anchor. Anchor preferences can be broadly defined. People might anchor on a particular issue of principle – single issue voters are a classic example of how this can work: Consider the contentious issue of abortion. Some people may hold strong views that women have the right to determine whether to continue a pregnancy. As the slogan goes, “My body, my choice.” Others may hold the strong view that abortion is murder. They will anchor on candidates and parties that reflect their strong views. Having anchored onto the political party most aligned with their anchor preference, people will tend to adopt the rest of the platform of that party as derivative preferences: American voters who favor a woman’s right to make the choice are likely to favor the Democratic party, and policy preferences on other issues like gun control, the tax structure, government involvement in health care, and redistribution programs are likely to be derivative of those of their anchors. Those who oppose abortion, likewise, are likely to have derivative preferences that follow the Republican party. It is not a coincidence that people who tend to be pro-choice on the abortion issue also tend to favor stronger gun control. Having chosen an anchor, most policy preferences are derivative. However, people may not anchor on particular issues, but might anchor onto their political identity as a member of a party. They think of themselves as being Republicans, or Democrats, and anchor to those parties, deriving their political preferences from those anchors: Individuals who anchor as Democrats will tend to support more government gun control, more government involvement in health care, and a woman’s right to have an abortion. People do not start with those preferences and then decide, “I am a Democrat.” Rather, they start with their political identity as Democrats and conclude, “I am a Democrat, so I favor gun control, more government involvement in health care, and a woman’s right to have an abortion.” These preferences are derivative preferences, derived from the policy positions advocated by the individual’s anchor. When people anchor to a political party, one consequence is that the official party platform can reverse its position on what was supposed to be an issue of major importance, and citizens who anchor on their party identity will simply alter their derivative preferences to follow along with the party: The Republican party, at least since Ronald Reagan’s presidency, supported free trade, but after President Trump won on a protectionist platform aimed at China, Mexico, and other countries, most Republicans did not push back and argue that Trump’s protectionist policies were out of step with the party’s values. Rather, they supported Trump’s trade policies. These are voters whose beliefs about free trade were simply a derivative preference, derived from their anchor preference of identification with the Republican party. When the Republican party advocated free trade, so did they. And when the Republican party turned away from free trade, so did they. In the same way, after Trump’s rise to prominence in the Republican party, support for free trade among Democrats shot up dramatically, to significantly higher levels than Republican support for free trade during the presidency of George W. Bush. Putting it mildly, it is highly unlikely that this rapid rise in support for free trade among Democrats was caused by millions of members of the party suddenly reading a basic economics textbook and simultaneously realizing the case for free trade is very strong, nor can the sudden loss of support for free trade among Republicans be realistically explained by the reverse process. The far more likely explanation is that voters, by the tens of millions, will simply alter their positions on issues to fit whatever the partisan politics of the moment dictates. This is just one of many examples where major political parties in the United States can alter their positions on issues of great importance, even swapping positions with the opposing party, yet the people supporting or opposing those parties remain largely unchanged. Holcombe reviews a wide range of literature that helps explain why most policy preferences are derivative for most people. Among the relevant factors is the endowment effect – people value their political identities simply by having them and will be reluctant to change them. There is also the bandwagon effect – when it seems like most members of your identity group, peer group, or social circle are going in a particular direction, most people go along, particularly when there is nothing instrumental to gain by dissenting. The desire to reduce cognitive dissonance is also at play. Holcombe uses the metaphor of grocery shopping to outline some of the differences between market preferences and political preferences: Shoppers who shop at a supermarket take their carts from isle to isle, placing goods in their carts that they want to purchase. Every item in the cart is chosen by the shopper because the shopper wants the item, and the items the store stocks that the shopper does not want does not go into the shopper’s cart. Shoppers get exactly the bundle of goods they want. However, the contents of a political shopping cart are formed in a very different way: If shopping were done in supermarkets as it is done in elections, competing candidates would fill shopping carts with items they wanted to offer the voters, and voters would then be offered the choice of a cart filled by one candidate or another. Rather than shoppers personally deciding what would go into their carts, candidates would decide, and shoppers would be offered only the choice of carts filled by one of the candidates. To extend the analogy, supporting a party or candidate means expressing a preference for everything in that candidate’s cart. If shopping were done this way, it’s all but certain that everyone’s cart will lack many desired items and contain other items they’d never buy if it were up to them. But since the contents of the cart isn’t up to them, voters simply go along with whatever the bundle contains: The voters are offered one total bundle of public policies or another and cannot customize their political shopping carts the way they can their market shopping carts. To minimize cognitive dissonance, citizens can adjust their preferences to conform with the contents of their anchors’ carts. There is no reason not to do so, because the cart they actually get will be the same regardless of the preference they express. So far, I’ve focused on Holcombe’s analysis of how preferences are influenced and formed among voters. But a key component in Holcombe’s book is how policy preferences are formed by the elite. In what way do the preferences of the elite differ from voters, and more importantly, what are the differences in the incentive structures faced in preference formation between elites and voters? That will be the subject of the next post. (0 COMMENTS)

In a recent post, Scott Alexander doubled down on his argument that building more housing generally results in higher housing prices. In his previous post, he pointed to the fact that housing is generally more expensive in bigger cities. I provided a counterexample, citing Houston and Austin. I also argued that big cities are expensive for reasons unrelated to their large quantity of housing, such as the advantages provided by agglomeration. Exogenous supply increases, such as making it easier to build new housing, generally reduce housing prices. Here’s how Alexander responded to one of my arguments: I started the post with a graph of about 50 cities, showing a positive correlation between density and price. I’m having trouble seeing how Sumner’s point isn’t just “if you remove 48 of those cities and cherry-pick two, the relationship is negative”. I think Alexander misunderstood this argument, so let me go back and make the point more carefully.  It will be helpful to make two separate arguments: 1. You’d expect big cities to be more expensive even if building housing reduces housing prices. 2. Austin and Houston are not the only counterexamples; there are many other such anomalies. Let’s start with a simple model where there are zero restrictions on housing construction in all cities.  Assume that America has 100 cities, each with industries of varying productivity.  In that model, the largest cities will be next to the areas of greatest productivity.  (Those areas of productivity were once linked to natural factors such as ports and mineral resources, but are increasingly linked to industries with network effects like finance, energy, entertainment and tech.)  Again, assume there are no barriers to building, that is, construction of housing is so unconstrained that every single city makes modern Houston seem like a NIMBY stronghold.  Housing prices in this hypothetical economy will be higher in the larger cities, ceteris paribus, even though building additional housing might well depress prices.  That’s because in a larger city, people will pay more for convenience (i.e. a good location).  That would be true even if those bigger cities were not more productive.  For instance, people would pay extra to reduce commuting costs, or to be close to amenities.  But the bigger cities are (by assumption) also more productive, which provides another reason for housing prices to be higher in bigger cities—higher wages.  This thought experiment suggests that the empirical relationship Alexander relies upon to make his argument would apply even if his argument were not true. One response is that these industries with network effects only exist in places like New York because there are lots of people, and that you can’t have lots of people without lots of housing.  That’s true, but has no bearing on the question of how additional housing affects prices at the margin.  And from the previous thought experiment, it’s clear that looking at simple correlations doesn’t resolve that problem. Alexander might reasonably respond that my model is overly simplistic.  Building restrictions differ from one city to another.  In that case, you might expect some exceptions to the iron law that bigger cities are more expensive than smaller cities.  And since (he assumes) I found only one such anomaly, the correlation among the remaining cities is too strong to explain by (exogenous) factors other than city size.   Actually, I cited Austin and Houston merely as one example, and I picked this example because they are located in the same state.  In fact, there are many, many examples of larger cities that are cheaper than smaller cities.  And in virtually every single case the explanation is that the smaller but more expensive cities have more restrictions on building.  In the list below, the metro areas on the left are larger and cheaper than the metro areas on the right: Chicago > > > San Francisco Bay Area Dallas/Forth Worth > > >  Washington DC Houston > > >  Boston or Seattle San Antonio > > > Portland Phoenix > > >  San Diego Colorado Springs > > > Boulder In each case, the larger metro area is cheaper than the smaller one.  And in each case there are stricter limits on building in the more expensive city. That doesn’t prove Alexander is wrong.  It’s possible that the reason for more expensive housing in the NIMBY cities has nothing to do with restrictions on building.  But I doubt it.  I suspect that if Houston had adopted severe restrictions on building in the 1980s, then people would now attribute the resulting high housing prices as being due to all the oil money sloshing through its economy.  But Houston decided to open its doors to anyone who wished to move there.  As a result, even though Houston is the global energy capital and is full of well paid petroleum engineers, and even though energy is one of the world’s largest industries, Houston is still a cheap place to live.  Instead, it got much bigger. BTW, Houston also has well paid aerospace engineers, well paid business executives and well paid doctors, etc.  There’s more than enough money in Houston to drive up housing prices if they had restricted building. It may appear that Alexander is “Reasoning from a quantity change.”  After all, it makes no sense to discuss the impact of a change in quantity on price, without knowing why quantity changed.  If Oakland gets more housing because it deregulates, prices will probably fall.  If Oakland gets more housing because it becomes trendier, then prices will probably rise.  Alexander seems to understand this problem, and thus at least implicitly seems to believe that every single factor that might boost Oakland’s housing supply would have the effect of boosting demand by more than supply.  That is, he seems to believe that NIMBY policies make cities cheaper.  That’s theoretically possible, but seems unlikely in most cases. To recap my argument: 1. The correlation Alexander cites proves nothing–you’d expect bigger cities to be more expensive even if (at the margin) building more housing did not raise prices. 2. Alexander is correct that if his model were wrong then you’d expect some exceptions to the generally positive relationship between density and price, due to differential restrictions on building.  But plenty of such exceptions do exist, and almost always in exactly the places predicted by YIMBY proponents of more building.  Elsewhere in his post he dismisses intercity comparisons between trendy coastal cities and heartland cities.  Nonetheless, the examples I provide show that I didn’t just cherry pick one exception with my Austin/Houston comparison, there are many such anomalies.  And one can find such anomalies even within coastal areas.  The Bay Area is more expensive than LA, despite being smaller.  It has more restrictive zoning.  The Boston metro area is more expensive than metro DC, despite being smaller.  Boston has more restrictive zoning.   And you can’t say that LA and DC are not desirable markets. Just to be clear, our dispute has absolutely no policy implications.  For instance, I said: If building more housing raises its price, then the argument for more construction is even stronger. And Alexander responded: I agree with all this. This is important, because his previous post had seemed to indicate that he thought it was a “problem” that new construction led to higher housing prices.  He previously said:  This is a coordination problem: if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work. What “hard work”? In the new post he makes it very clear that this is not a “problem”.  He supports the YIMBY position. Thus we both support making it easier to build housing in Oakland, although he thinks this would raise prices and I think it would lower them.  If I’m wrong, that is, if more housing boosted house prices in Oakland, then we both agree that this would be an especially good result.  And I concede that I might be wrong. PS.  Slightly off topic, it’s worth recalling why new houses should be “unaffordable” for average Americans.  Think of a steady-state society with only 100 families, living in 100 houses of varying quality.  Assume that each house lasts 100 years.  Each year, the worst house is torn down, and a new house is built.  In order for the quality of the housing stock to rise by 1%/year, the new house must be twice as good as the average existing house.  Each year, the families all shift over one house, moving gradually to better and better properties.  The richest family lives in the newly built house, which is (by assumption) unaffordable to the other 99 families. In a more realistic model with population growth, not every new house is unaffordable to the bottom 99%.  But even with population growth, new construction in an economy with rising living standards will tend to be much nicer than the existing stock of housing, which means that new construction will generally be “unaffordable” to the average family.  If new housing is affordable to the average family, then society will not progress. PPS.  Alexander describes my previous post as follows: 6. Comments By Famous People Who Potentially Have Good Opinions Scott Sumner is an economist and blogger I don’t see myself as a famous person, but I share his view that I have the potential to hold good opinions. As far as the question of whether I do actually hold good opinions, I’ll let readers decide.  (0 COMMENTS)

  Lind’s misleading language about wages. To follow what I’m about to say, it’s best to start with Michael Lind’s recent article titled “Libertarians’ Big Lie on Wages,” Compact, May 9, 2023, and then read Don Boudreaux’s critique of it. Don’s critique is quite good. I noticed a few things, though, that he didn’t comment on. It’s clear from context that Lind is discussing the minimum wage and so that’s the issue Don addresses. But what I noticed is that Lind subtly biases the case against libertarians by claiming that they are against higher wages for workers. Lind starts with: Are higher wages bad for low-wage workers? One of the most common arguments against higher wages and better benefits for low-income workers is the assertion that, while higher wages might make some workers better off, by making the goods and services that workers provide more expensive, those higher wages will make other low-wage workers worse off as consumers. Do you see the term “minimum wage” in there? Neither do I. As I said above, it’s clear that Lind is discussing the minimum wage but you wouldn’t know it from the opening paragraph. Who would be against higher wages and better benefits for workers when they result from free markets? Indeed, that is the history of the last approximately 200 years. Workers’ wages have risen, with dips during recessions and depressions. And free-market economists, many of whom could reasonably be called libertarians, have been among the most vociferous cheerleaders for these higher wages. As we have pointed out agains and again, the average worker in the United States is much better off than he/she was 40 years ago, was much better off 40 years ago than 40 years before that, etc. But what Lind does is make the careless reader think that we are a bunch of misanthropes who want workers not to be better off. And notice this: This kind of brazen promulgation of an obvious falsehood is typical of libertarian propaganda, which is a mishmash of dubious assertions and outright lies: Higher wages hurt those whom they are meant to help; free trade always and everywhere benefits both sides; mass immigration has no effect on wages; high CEO salaries mysteriously don’t lead to price increases, but slightly higher wages for low-wage workers always do; and so on. (italics added) The reason I italicized the clause above is that the part about high CEO salaries is like the issue of higher wages but is not like the issue of higher minimum wages. Free-market economists don’t generally have a problem with high CEO salaries that come about in a free market just as we don’t have a problem with, and even strongly favor, higher wages for low-wage workers that come about in a free market. Were Lind to make his point straightforwardly so as not to mislead the reader, the italicized part would have to be “high CEO salaries dictated by law don’t lead to price increases, but slightly higher minimum wages for low-wage workers always do.” But in that case, he wouldn’t find many free-market economists holding that view. Most of us would say that a government that made CEO pay higher than the market pay would lead to price increases, however small. But then Lind’s rhetorical point would lose its power. Lind generously throws around the word “lies” to refer to thoughts of people who disagree with him. I won’t reciprocate. But I will say that Michael Lind is very confused and that if you don’t notice his rhetorical switch, you will be too.     (0 COMMENTS)

In total, JCT [Joint Committee on Taxation] estimates the value of the value of fossil fuel tax expenditures at approximately $11.8 billion for the five-year period of 2022-2026. The tax expenditures denoted as de minimis and the ones not quantified are not included in this estimate. This is from “Statement of Ted Gayer,” before the U.S. Senate Committee on the Budget hearing on “Who Pays the Price: the Real Cost of Fossil Fuels,” May 3, 2023. Gayer is the president of the Niskanen Center. The whole thing, which is only 7 pages long, is worth reading. Here’s what I find striking: how low the numbers are. They average $2.4 billion annually. This is strikingly from so many claims we often hear that fossil fuels are subsidized by hundreds of billions annually. The number Gayer comes up with is just 1.2 percent of $200 billion. Moreover, nowhere in his testimony does he mention gasoline taxes. In 2020, state and local governments collected $53 billion in revenue from taxes on motor fuels. Of course, it is true that most of these revenues go to road building and maintenance. The pic above is from his testimony, and covers one of the 4 types of “tax expenditures” that Gayer discusses. (0 COMMENTS)

The annual report of the Social Security Board of Trustees on the long-term financial status of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds released on March 31 showed that from 2034 Social Security won’t have enough money to pay all beneficiaries the amount they are entitled to. There is no great mystery in how we got here. In 1978, the economist Paul Samuelson wrote: “[O]ur Social Security system is also an actuarially unfunded system” in that current payouts were funded by current receipts, or ‘Pay-As-You-Go’. That is how Ida Fuller, the first person to retire under Social Security, received over $20,000 in checks despite having made just $22 in contributions. But Samuelson noted in the same column that: …there is no obligation for this generation to have children at the same rate as did previous generations. Therefore, when those born during the baby-boom period of the ‘50s reach retirement age in the next century, their stipends will be felt as more of a burden by the thinner ranks of the then working population. This is exactly what is happening. Falling birthrates and longer lives mean that from more than three workers supporting every beneficiary between 1974 and 2008 there will be just 2.3 by 2035. What is to be done? One option is to do nothing and just let those 20% across the board cuts kick in. For all the political fuss about cuts to Social Security being the ‘third rail’ of American politics, those cuts are already coming. Or we could raise taxes. The trustees’ report says that, to keep the program solvent for the next 75 years, taxes would have to immediately rise by 3.44 percentage points to 15.84%. Someone on the national median annual wage of $58,130 would see their Social Security payroll tax rise by 28% under these circumstances, by either $1,000 or $2,000 annually depending on whether you put the whole incidence of the tax on the workers, as evidence suggest you should. Such harsh medicine has prompted a desperate search for alternatives. Yusuke Narita, an economics professor at Yale, claimed that, in Japan’s context at least, the “only solution” is mass suicide of the elderly, including ritual disembowelment. Fortunately, there is a less gruesome solution. Remember, that in an “actuarially unfunded,” ‘Pay-As-You-Go’ system, your contribution to its capacity to pay benefits out to you in the future isn’t the money you pay in today, that immediately gets paid out to some retiree, it is your contribution to the tax base of the future: your children, in other words. We could fix Social Security by making payouts dependent on how many children you have had. This might strike some as unfair. But the generation now retiring is the one which voted for the politicians who passed across-the-board benefit increases of 7% (1965), 13% (1967), 15% (1969), 10% (1971), 20% (1972), and 11% (1974). In 1972, benefits were tied to the Consumer Price Index, yielding an annual ‘cost of living adjustment.’ All this was at a time when, as Paul Samuelson was explaining, the capacity of the system to meet such commitments depended on “this generation [having] children at the same rate as did previous generations:” And they didn’t. The Boomers voted themselves ever higher Social Security benefits without having the children to pay for them. And, since we’re talking about unfairness, how unfair would it be to hike taxes on today’s workers to fund commitments yesterday’s voters made to themselves years before those workers were born? We have always known that a ‘Pay-As-You-Go’ system depends on people having children at the same rate as previous generations. We have known since the Baby Boom bust in the 1960s that this was no longer a potential problem but an actual one. Today’s workers should not be required to cash checks written by their forebears.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Reading about the poor condition of free trade agreements, including that they don’t mention “free trade” anymore, one may be forgiven to believe that trade—exchanging x units of good X for y units of good Y or currency Z—is the most complicated thing in the world. (This post was inspired to me by reading “In New World of Trade Diplomacy, Free Trade and Tariffs Take a Back Seat,” Wall Street Journal, May 7, 2023.) To cut the Gordian knot, consider two general theories of free international trade. One starts with the admission that your own government may prevent you from importing or exporting as you wish, and so can foreign governments against their own subjects. In this perspective, a “free trade agreement” is a treatise between two or more governments to allow their subjects to trade together under certain well-defined conditions. This has become more complicated as political clashes between the ambitions of national governments (or customs union) have deepened. “Free trade agreements” between governments have become rarer, more restrictive, and only remotely concerned with what merchants call trade. The other general theory is that a free trade agreement is simply an agreement between two parties, an importer and an exporter, to exchange something (good or service or money) over an international border. Whether you are an exporter or an importer, what matters is not so much, or not really, whether foreign tyrants prevent their subjects from trading with you, but whether your own national government will interfere in any contract you are willing to conclude with another voluntary and capable party. This second theory is the essence of what classical economists, in the wake of Adam Smith, David Hume, or David Ricardo, considered free trade. It is not that complicated—if you live in a free country. I neglect a third theory, not very credible, that implicitly claims that nations or states are big biological organisms or superindividuals and the subjects of the verb “to trade.” The objection that free trade requires everybody in the world to be as free as you are, or as you should be, is not realistic. The world is full of obstacles, surmountable or not, man-made or not, surmountable or not, which get baked in what we call “comparative advantage.” The prosperity of the country you live in depends mainly on your freedom and that of your fellow citizens (“fellow residents” is a more proper expression) to adapt without further constraints from your own government. To paraphrase Joan Robinson, it is not because your customers have rocky coasts that your own government is justified to throw rocks in your harbour. To use another analogy, protectionism is like if, confronted wit a foreign tyrant prohibiting his subjects to travel to visit you, your own Leviathan retaliated by forbidding you to travel to meet them. The main, if not the only justification, of a “free trade agreement” between your government and the government of somebody else is to tie the hands of your government, to chain your own Leviathan and limit its “state capacity.” In this, you stand in solidarity with your fellow human of the other country who wishes to defrang his own Leviathan. When nobody, or at least nobody in power, believes in that goal, no wonder that free trade agreements have become unpopular. (See also my 2017 EconLog post “Taking Comparative Advantage Seriously.”) (0 COMMENTS)

Economic crises pervade the history of Argentina, though the main characters in these stories sometimes change. In the last few decades, however, there is one actor that stands out over others: the International Monetary Fund, which only a few days ago disbursed a fresh 5.4 billion dollars to the Argentine government. So why is the IMF a recurring character in this story? Why is it that economic crises strike Argentina again and again if the IMF is supposedly always trying to avoid them? Ever since 1958, the year in which the first loan to the Argentine government was approved, the country has kept a more or less steady relationship with the IMF. The logic of IMF interventions has been that of a lender of last resort; whenever Argentina is not attractive enough for private investors and the government seeks to pay for its deficit through loans instead of money creation, the IMF shows up and ‘fills the void.’ For Argentina, this is advantageous, as the IMF interest rate is low relative to that of the market. For years, criticism of the IMF in Argentina has come from the left. According to leftists, by accepting IMF funds, Argentina becomes subject to a group of insensitive bureaucrats who starve the population to enrich the already rich countries that run the IMF. But we should raise a red flag when we realize that many of these people are currently part of the Fernández administration, so perhaps they do not dislike the IMF as much as it seems. Indeed, the IMF is in practice not the ‘neoliberal’ actor that the left denounces. It is still evil, but in a different sense. Granted, some of its recommended policies would result in a freer economy and a better public sector. But reality shows that the IMF keeps reaching agreements with fiscally irresponsible governments and, time after time, also relaxes their conditions with the result that their goals are never achieved. In this way, government deficits are prolonged over time; Argentina never escapes its permanent fiscal crisis and the IMF ends up becoming the best ally that the spendthrift left can have to preserve the status quo. What incentives can Argentine goverments have to balance the budget if they know that the IMF will always bail them out? In a recent book called Diario de una temporada en el quinto piso, historian Juan Carlos Torre tells the story of how the Argentine government would falsify data to meet the IMF’s targets and continue to receive financial assistance back in the 1980s, during the Alfonsín administration. This, which is now public knowledge, was not even the last time that Argentina manipulated official statistics to deceive foreign investors, as it happened again during the Kirchner administration in the 2000s. Yet the IMF continues to bail Argentina out. Today, the IMF is still disbursing money to a government which does not even pretend to meet their targets. The IMF is still projecting positive GDP growth for Argentina in 2023, even though Argentine market analysts expect the economy to fall by 2.7%. The nation can also expect a 110% annual inflation rate, up from 94.8% in 2022 — Yet the IMF is predicting a decrease to 88%, a figure that no local actors believe the government will be able to ‘achieve.’ If these are the starting points, what is going to happen when Argentina also (and predictably) fails to meet the fiscal deficit target currently at 1.9%? Experience tells us that the IMF will forgive the government for failing, blame some exogenous factor for this failure (like the ongoing drought), and keep disbursing money to an irresponsible administration. This dynamic of permanent bailouts to fiscally irresponsible governments perpetuates Argentina’s crisis by maintaining a status quo where the share of government expenditures remain at about 37% of the GDP, up from 23% in only two decades. With good intentions, some classical liberals still welcome IMF debt in order to implement reform, but the results have been consistently negative for decades: The money that Argentina receives is not used to relieve taxpayers, reduce government spending, or implement long-lasting reforms that deregulate the economy. Instead, fresh funds are rapidly spent. One final problem is that rational expectations for the IMF are as pessimistic as for Argentine governments. Indeed, by granting the country the biggest loan in IMF history, Argentina has now become too big to fail. If the economy, which is entering a recession as the government places more and more restrictions to avoid devaluating the peso, finally collapses, the IMF will lose the scarce credibility it still retains. Experience and basic logic teach us that the relationship between Argentina and the International Monetary Fund is toxic. But other major IMF debtors include Egypt, Ukraine, Pakistan and several Latin American and African countries where government continues to be big and corruption continues to be high. Perhaps we should not put the blame entirely on Argentina, then. Perhaps we could help developing countries grow by encouraging true reform. Perhaps we should end the IMF.   Marcos Falcone is the Project Manager of Argentina’s Fundación Libertad the host of the Téngase presente podcast and a bi-monthly contributor to Argentina’s edition of Forbes. (0 COMMENTS)

For most of the past 50 years, there’s been a consensus among economists that “industrial policies” are counterproductive. Nothing has occurred in recent years that would lead a reasonable person to alter that view. And yet as Noah Smith recently pointed out, neoliberalism is rapidly losing ground to advocates of regulation, subsidies and protectionism: The really important thing about Biden’s policies, though, is that they don’t even gesture halfheartedly in the direction of “free trade”. The idea of free trade never carried much water with the general public; now, it carries essentially no water with the political class or the intellectual class either. The free-trade consensus is dead as a doornail. . . .  These fights over the nature of industrial policy will be fierce, and sometimes even bitter. But we shouldn’t let them obscure the larger point, which is that both parties now agree on the need for industrial policy, and on many of its broad contours. It appears that America has found its new economic policy consensus. What remains to be seen are the results — how effectively the new policy regime can be implemented, and how well it achieves its goals. It’ll also be interesting to see how the economics profession contributes to the effort (a topic for another post). I would like to believe that the economic profession would stick to its principles, but I fear that influential policymakers will always be able to find economists who tell them what they wish to hear. (At least it won’t be Larry Summers.) Almost everywhere in the world, nationalism and statism are on the rise. Not long ago, economic development in a developing nation containing 1.4 billion of our fellow human beings would be regarded as good news, now Smith seems to almost relish the fact that our policies have damaged the Chinese economy: Overall, the outcomes were negative for the U.S., which was hurt by the [Trump] tariffs and which didn’t see a reshoring boom. But China was hurt more, both by the tariffs and by the export controls. As industrial policy, Trump’s policies failed; as economic warfare, they showed promising signs of effectiveness. Smith seems to be saying that while we suffered, Trump’s policies “showed promising signs of effectiveness” because China suffered even more. That’s an incredibly bleak vision. I find it sad that there are fewer and fewer people willing to defend free trade with China. Warren Buffett and Charlie Munger recently warned that economic nationalism could lead to war with China, but they are in their 90s. I fear that the world of economics is entering a new dark age, similar to the first half of the 20th century. We are forgetting all of the lessons learned so painfully by previous generations. Buffett and Munger are among the few people left who are old enough to recall that dark era. Smith referred to the bipartisan nature of the new statism. But there are important differences. While both the extreme left and the extreme right are increasingly skeptical of free markets, their views on identity politics differ. Both engage in identity politics, but the left favors women, minorities and gays, while the right favors straight white males. This leads to some strange bedfellows. Here’s Politico, referring to a controversial column in the left wing American Prospect that praised Tucker Carlson: In fact, for progressives, the debates like the fracas over the Carlson column could, perversely, be seen as a side-effect of good news. Instead of a furious argument over internal dissent against political tactics, it was a furious argument over (alleged) new external support for policy positions. Even for folks who don’t buy the idea that the market-skeptical bits of Carlson’s schtick were at all genuine, it’s a situation that’s presenting itself more frequently as elements of the GOP move beyond Reaganite positions and instead talk up things like opposition to monopolies, support for living family wages or protectionist treatment of embattled stateside manufacturing. The challenge is that the rising GOP populists whose views on economic issues might appeal to progressives also often have social views that are way more extreme than the average Chamber of Commerce lifer. Sometimes, in fact, those social views may even be their motivator for their hostility to businesses. Witness the fulminations about “woke capitalism.” For students of history, this is nothing new. The same dynamic occurred in the 1930s, when both the far left and the far right turned against what is now called “neoliberalism,” or “globalization.” Leftists in America were intrigued by fascists such as Mussolini in much the same way that some progressives are now intrigued by the economic views of people like Tucker Carlson and Josh Hawley. Juan Peron (pictured above) adopted these ideas in the late 1940s, and turned Argentina into a developing country. The far left and the far right both oppose free markets for the same reason. They have a vision as to which groups should benefits from wealth creation, and they fear that the free market won’t deliver the outcome that they favor. Noah Smith and Tucker Carlson have almost diametrically opposed views on most political issues. It’s a pretty safe bet that both of these individuals will not get the US industrial policy that they would prefer. When the government starts running the economy, the outcome will depend upon which side is in power. (FWIW, Smith’s vision is easily the lesser of evils.) History suggests that free markets are the least bad option. They aren’t perfect, but the truly disastrous economic policy mistakes always come from misguided government intervention. (1 COMMENTS)

Eliezer Yudkowsky insists that once artificial intelligence becomes smarter than people, everyone on earth will die. Listen as Yudkokwsky speaks with EconTalk’s Russ Roberts on why we should be very, very afraid and why we’re not prepared or able to manage the terrifying risks of AI. The post Eliezer Yudkowsky on the Dangers of AI appeared first on Econlib.

As described in my first post in this series, Randall Holcombe’s new book Following Their Leaders: Political Preferences and Public Policy was written to examine how political preferences are formed. To start, Holcombe separates preferences into two different categories – expressive preferences, and instrumental preferences. Expressive preferences are, as the name suggests, what we prefer to express. In this case, “express” isn’t limited to what we communicate verbally or in writing, though it does include those. Something is “expressive” when its purpose isn’t to bring about some result, but to reflect a particular attitude. Bumper stickers, yard signs, and tweets are all expressive, but modes of behavior meant to serve as a “show of support” are expressive acts. Instrumental preferences, by contrast, are about the outcomes we prefer. Our instrumental preferences may or may not align with our expressive preferences. Instrumentally, we might prefer A over B, but we might also prefer to express support for B over A. Consider the case of someone who expresses strong support for the idea of shopping at small and local businesses, but when it’s time to do their shopping will drive right past all the local mom and pop shops and make their way to Target. Their expressive preference is for local shopping and small business, but their instrumental preference is for big box retail stores. There are many reasons why our expressive preferences may not align with our instrumental preferences. Some preferences feel more virtuous to express – it just feels better to express support for small local businesses than for giant retail corporations. Or our expressive preferences could be formed by peer pressure – you might receive social opprobrium if you outwardly express that big box retailers are a better deal than local shops. Whether we go with our expressive or instrumental preferences will be context dependent, particularly when it comes to market activity and political activity: When engaging in market activity, people have an incentive to choose the outcomes they most prefer, because they get what they choose. There is no such incentive when people vote. Because their political choices have no effect on political outcomes, people may express political preferences for outcomes they would not choose if the choices were theirs alone. Moreover, we shouldn’t underestimate the importance people place on satisfying their expressive preferences: Once people’s basic needs for food, clothing, and shelter are satisfied, their demand for additional goods and services is driven largely by expressive concerns. Their desire for status, to impress others, and to feel good about themselves can even overshadow their desire for necessities. People will give up meals to spend money for expressive purposes. When our expressive preferences don’t align with our instrumental preferences, and when fulfilling our expressive preferences comes with no instrumental cost, we would expect people to indulge in their expressive preferences. This is why someone might put up yard signs on the importance of supporting local business, and nod sagely along with their friends who express the same idea, yet still drive to Target when it comes time to do their shopping. In the former cases, the expressive preference is cheap, but in the latter case, fulfilling that preference is costly. When acting as voters, Holcombe argues, expressive preferences will win the day. Unlike in markets, where the direct link between what we choose and what we receive makes us likely to favor our instrumental preferences over our expressive preferences, the lack of any such strong link makes engaging in voting or other political activity likely to be driven by our expressive preferences over our instrumental preferences: [Voters] are acting expressively, not instrumentally, and as individuals they are not choosing an outcome, they are expressing a preference. There are many reasons to think that the preferences they express at the ballot box may differ from outcomes they would prefer if the choice among social alternatives were actually theirs to make. This can explain why voters may vote for a particular outcome, but in practice show little no concern about whether that outcome is successfully achieved. For example, with regards to welfare and transfer programs, Holcombe points out that: …most government redistribution does not go to the least well-off. It is targeted to students, to farmers, and to the elderly without regard to their economic status…People who are voting for redistribution are, in large part, not voting to help the needy, but voting to help the politically well-connected. The poor have relatively little political clout compared with the elderly, the education establishment, and even supporters of the arts. This seems odd. If voters really cared about supporting the needy, and if redistribution in practice doesn’t make the needy much of a priority, why does this state of affairs continue to exist for decades, without a widespread demand for change from voters? Because casting votes is an expressive act, not an instrumental act, and achieving a specific outcome wasn’t the point of the exercise to any given voter: By casting a charitable vote, voters can get a good feeling about doing something to help the less fortunate, but at no personal cost to themselves. They feel good about expressing charitable views without having to give up anything, because voting is a nonlogical action. Voters could vote for government redistribution programs as expressive acts, even though if the decision were theirs alone, they would choose not to fund those programs. People, as voters, can express support for programs and candidates they would not choose if the choices were theirs alone. The disconnect between the common justification for redistribution (helping the needy) and the actual outcome of redistribution (helping the politically powerful) is largely unnoticed by voters because the voters weren’t seeking to create an instrumental outcome to begin with. The point was simply to express a preference for helping the needy – whether or not the needy actually receive help as a result was never really the point. The difference between expressive and instrumental preferences presents another problem. Recall in the first post where I described Holcombe’s formula for how democracy works – votes are cast to show voter preferences, the votes are aggregated, and a collective choice is made. The internal components of that process, P1 to Pn, are implicitly assumed by political scientists to be instrumental preferences – voters reflecting the outcomes they prefer. But if voters are acting expressively rather than instrumentally, then the output of the voting process doesn’t provide any real information about what outcomes voters actually want: If people do not reveal their instrumental preferences when they vote, there is no way to relate aggregate outcomes of elections back to the underlying preferences of voters for actual outcomes. One cannot identify the degree to which social choices reflect the instrumental preferences of voters, because the social choice mechanisms being analyzed do not aggregate instrumental preferences; they aggregate expressive preferences. Thus, voting mechanisms could only provide insight about voters’ preferences for outcomes if voters’ instrumental preferences were identical to their expressive preferences. If voters’ instrumental and expressive preferences aren’t identical, however, then even if it was possible to perfectly aggregate votes in a socially optimal way (which it isn’t) and even if policymakers were entirely incorruptible seraphim exclusively motivated to faithfully serve the public (which they aren’t), elections would still fail to deliver the outcomes the public wants. However, this disconnect between expressive and instrumental preferences still doesn’t get to the core of Holcombe’s analysis. In the next post, I’ll describe another way of looking at preferences he identifies, and how this influences the way people form their political opinions.   (0 COMMENTS)