The price of flying from the US to China has risen very sharply in recent years. The primary cause is economic nationalism. Here’s the Financial Times: The US has offered to grant Chinese airlines the same number of weekly flights between both countries as American carriers — but only if they agree not to fly over Russia, according to six people familiar with the talks. Moscow banned US carriers from flying over the country after Washington prohibited Russian airlines from flying to the US in the wake of Russia’s full-scale invasion of Ukraine. Chinese airlines are not banned from Russian airspace. US carriers have 12 weekly flights to China, while Chinese airlines have eight to the US. The American carriers face higher fuel costs than their Chinese rivals whose routes over Russia to the US are much shorter. Some pundits defend economic nationalism on “national security” grounds.  And yet that argument obviously does not apply to commercial airline flights.  Nor is this about a mythical “level playing field”, as the punitive action is aimed at Chinese airlines, not those of other countries that fly over Russia: The Chinese official said another reason not to accept the US condition about circumventing Russia was that airlines from other countries, such as India and the UAE, flew over Russia without facing repercussions in the US. Russia’s ban on US airlines flying over their territory does give China a comparative advantage—but so what?  A warm climate gives Honduran banana producers a comparative advantage over Minnesota banana producers.  Consumers benefit when they can buy from the cheapest producers.  So does society as a whole. If the US government got its way, large quantities of jet fuel would be consumed for no good reason.  What happened to climate change as a goal of the Biden administration?  Is protecting the profits of US airlines more important than climate change? And what happened to this mutually agreed upon goal? The Chinese diplomat added that Xi and Biden had agreed on the need for more people-to-people exchanges between the countries when the leaders met at the G20 summit in Bali in November and stressed that more flights were needed to meet that goal. Is discouraging interaction between the people of the world’s two greatest powers the best way to promote world peace? I am frustrated by the frequent references to “national security”.  Very little of US protectionism relates to sensitive areas.  For instance, the Trump/Biden tariffs on Chinese goods were imposed with the expressed aim of reducing the US current account deficit.  They failed miserably, because the deficit is caused by saving/investment imbalances, not a lack of tariffs. PS.  Larry Summers has a good twitter thread on how we are overdoing economic nationalism.  Here’s an excerpt: PPS.  I hope to visit China later this year—if I can afford a ticket.  As of now, I’d probably have to first fly to a third country, such as Japan. (0 COMMENTS)

In the zeitgeist, “marginalized” seems to mean any group that a mainstram speaker must love. A loved group is typically a set of individuals who deserve some privileges required by “social justice” as understood in the chattering classes, who complain of “micro-aggressions,” and who are not sufficiently empowered to boss others around. By a strange reversal of their root meaning (“at the margin”), “marginal” and “marginalized” now often refer to those who are the current bien-pensants. For example, I read an apparently innocuous explanation in a Wall Street Journal report (“Tucker Carlson’s Vulgar, Offensive Messages About Colleagues Helped Seal His Fate at Fox News,” April 26, 2023—my): On air, Mr. Carlson had turned up the volume on commentary that had expanded beyond a conservative viewpoint on politics into more of an attack on marginalized groups. From what I know about him, I don’t share Mr. Carlson’s contempt of truth nor most of his intuitions. Nor would I want to be associated with leftwing or rightwing bigotry, ignorance, and authoritarianism. But although I grant that many nuances are involved, I suggest that we should stick with the standard definition of “marginal.” In that perspective, marginal is neither necessarily bad nor necessarily good. And the most “marginalized” group is certainly the set of individuals who are not part of any politically influential faction and who have a strong preference to be left alone when they want to, who are happy to live and let live. Moreover, “marginalized,” from the verb “marginalize,” implies some actor and some action against the marginalized. Despite John Stuart Mill’s idea that “society” can be oppressive, collective action through the state is the most effective marginalizer. Government dictats are to social pressure what aggressions are to micro-aggressions. In an interesting conversation with Hartmut Kliemt, Anthony de Jasay said, “What economics does for you is it teaches you to think.” He had a point, even if we should admit that other disciplines, if well taught, also help learning how to think, although not necessarily about social matters. A necessary, but obviously not sufficient, condition of rational thinking requires to use words that have a clear meaning. (0 COMMENTS)

A few months back, I did a MoneyIllusion post that discussed a fantastical airport project mentioned in an old Life magazine. The same issue (from March 18, 1946), has a few other articles worth thinking about. Here’s one example: The phrase “iron curtain” brought back a lot of memories.  It was a term one often heard back in the 1960s.  When the Berlin Wall came down in 1989, I recall being mildly surprised to learn that it had gone up as recently as 1961.  I suppose that as a young person in the 1960s I thought in concrete terms, and mentally conflated the (metaphorical) “Iron Curtain” of 1946 and the (physical) Berlin Wall built in 1961.  If you’ll allow me to indulge in a few meandering observations about time, I’ll eventually derive a few policy implications. In 1989, I was 34 years old.  It seemed like the Berlin Wall had been there forever, and I never expected to see it come down. I was too young to follow world affairs in 1961, and thus had no memory of the 16-year period after WWII when there was an “Iron Curtain” but East Germans were still free to travel to the West.  As one gets older, time seems to pass more rapidly.  Today, the Berlin Wall has already been down for longer than it was up.  My 96-year old mother probably doesn’t recall the wall as lasting as long as I perceived it to last, as she was already 35 years old when it went up.  And to my daughter, it’s just a footnote in the boring history of the 1900s:  Berlin Wall (1961-89).  For me, it was a formative experience. Back in 1965, I was a ten-year old boy playing WWII games, at a time when WWII seemed like ancient history.  The Vietnam War was already underway, and WWII wasn’t even the previous war (recall Korea).  Today, the Iraq War doesn’t seem so long ago to me.  Time is subjective. Policy problems that seem insolvable to one generation, are just a footnote to the next.  I recall when there was a long struggle to contain Soviet expansionism in the third world.  Then there wasn’t.  This was immediately followed by worry over Japan’s increasing economic power.  That concern faded just as quickly.  Later there was expected to be a long struggle against Islamic terrorism, a struggle that was mostly over (in America) long before we realized that it had ended.  I’m not quite sure what we worry about today.  The left seems worried about right wing militias trying to overturn elections, while the right worries that woke schools will indoctrinate our children.  And almost everyone worries about China and Russia. Because of the way that we perceive time, when we are in the midst of a problem we don’t tend to perceive it as a blip in history, which will soon be replaced by another set of concerns.  For this reason, there can be real benefit to foreign policies that “kick the can down the road”, if we are able to avoid outright war.  Today, it seems as though places like Russia, China, Iran, North Korea, Cuba and Venezuela will never become free.  But who knows what the world will look like in another 30 years. The same issue of Life magazine also has a long article by Joe Kennedy (JFK’s dad), discussing foreign policy.  Some of his takes haven’t held up well: Others have held up extremely well: Replace “Communism” with “fascism” and that almost perfectly describes Putin’s Russia.  As does this: We avoided war with the Soviet Union through a policy of containment, and I hope that we can avoid war with Russia in a similar way.  Let’s hope that at some point in the future, Kennedy’s description of Russia seems just as out of date as his 1946 comments on China. PS.  For my generation, the Berlin Wall discredited communism.  Yes, America has a wall on its southern border, but (although counterproductive) it’s not there to keep people from escaping a flawed system in America.  It’s to keep people from escaping to America.  Some democratic countries had (misguided) policies that banned foreign travel during Covid, but these “walls” were seen as temporary. The Berlin Wall was different. Back when I was young, the Berlin Wall was seen as permanent, in much the way that the division of Korea seems permanent to the millennial generation.  When the Churchill made his speech in 1946, it was not obvious to every thinking person that the Soviet Union was an evil empire.  Just a year earlier they were our ally, playing a major role in defeating Nazi Germany (and to a lesser extent Japan.)  The Berlin Wall was such a perfect expression of failed tyranny that even poorly informed Americans understood the true nature of the Soviet Empire. In retrospect, 1961 was the beginning of the end for communism, the point at which it became obvious that it was failed regime. Reading old magazines and newspapers is an interesting way of learning about history.  By reading the NYT from 1929-1938, I gained a great deal of insight into the US during the Great Depression, an insight I never would have gained from history books. PS.  I originally wrote this post in January.  In February, The Economist made a similar observation: Those still feeling dour should take courage from recent experience. For all the considerable difficulties of the past decade or so, global trade as a share of GDP has only retreated a little from the peak it reached in 2008. Recent history demonstrates, moreover, that nothing in geopolitics is for ever—and trends which look inexorable come to an end. The cold war divided the world and then, suddenly, it did not. Supreme confidence in the inevitable spread of democracy was displaced by the worry that an authoritarian China would dominate the globe, which is now barely a worry at all. The stalemate between America and China will one day be old news, perhaps sooner than most currently think. Mistakes led the world to its current uncertain state, it is true. And more mistakes will certainly be made. But the past shows only what has gone wrong, not what will. It is by remembering this that we find the wisdom to do better.   (0 COMMENTS)

When the Washington state Supreme Court says it’s not. But in 2021, the [Washington] state legislature ignored the plain language of the constitution, plus decades of precedent, to impose a special 7 percent tax on one type of income, capital gains. That blows through the constitutional strictures in two ways. First, as we pretty much all learned in first grade if not earlier, seven is greater than one. Second, because the tax is on the part of a capital gain that is above $250,000, it’s not uniform. So you would think the state’s Supreme Court would easily bat down that tax. If so, you would be wrong. On March 24, the Supreme Court voted, by a lop-sided 7-2 margin, to uphold the constitutionality of the tax. How did the seven justices—I use that word loosely—justify their decision? Simple. They claimed that a tax on income was really an excise tax. Debra L. Stephens, one of the justices, wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” Excuse me? If it were an excise tax, it would be levied on the sale of an asset. But the plain language of the law that the justices upheld says that it’s levied on capital gains. This is from my latest piece for the Institute for Policy Innovation, “When Is Income Not Income?” TaxBytes, April 27, 2023. Read the whole thing, which is not long. (0 COMMENTS)

We’ve long been told how much we can learn from our mistakes. (This week’s guest even wrote a book about it!) But what if a mistake is so awful, not only do we not learn from it, we can’t even live with it. This is the sort of mistake Washington Post columnist Megan McArdle calls an Oedipus trap. In this episode, EconTalk host Russ Roberts welcomes McArdle back to discuss this trap, describing some fascinating examples. In their conversation about confronting our errors and the challenge of confirmation bias, McArdle shares the story of Dr. Walter Freeman a “pioneer” in using lobotomies to treat mental illness. Despite overwhelming evidence to the contrary, Freeman died convinced of their efficacy. He even spent the last years of his life tracking down and corresponding with his lobotomy patients, thinking he’d found “proof” of his success. How could he have been so wrong? While I’m not going to ask if you’ve ever fallen into an Oedipus trap (as if you would know!!!), we would love to hear your reactions to this conversation. Share your responses to the prompts below in the comments, or use them to start your own conversation offline. Let’s keep the conversation going.     1- In recounting the story of Freeman, McArdle says, “One of the things that comes out of a lobotomy is a different idea about informed consent.” What does she mean? Were there “satisfied customers?” To what extent should we consider Freeman an entrepreneur?   2- McArdle cautions listeners, “…we should remember that it is easy to pass judgment when we have alternatives.” She also points to the continuing mysterious nature of health care. (Remember Semmelweis and the midwives!) While all this is true, we might still want to consider safeguards to avoid the Oedipus trap. What might such safeguards look like? Are they more internally or externally oriented?   3- Roberts changes course to consider the Oedipus trap as it relates to politicians. How often have politicians (or perhaps military leaders) made decisions that if they reconsidered they could not love with? Did Truman ever (publicly) regret dropping the atomic bomb, for example? Perhaps in many similar cases, the foregone alternative is equally unthinkable. Still. can you answer Roberts’ challenge and think of a major such event that was later- again publicly- regretted?   4-McArdle says that avoiding or getting out of the Oedipus trap is hard because the people who can resist that pull and see the thing that is true, even if it is going to be socially costly for them and psychologically costly for all of the people around them, tend not to be pleasant people. Why do you think this is? Roberts wonders about other dissenters, troublemakers, and contrarians- all pejorative terms. To what extent do those who shatter the status quo tend to be outsiders?   5- What’s wrong with “Following the Science,” according to McArdle and Roberts? To what extent do you agree that the higher the stakes, the less likely people are to follow the consensus? Explain.     (0 COMMENTS)

J.P. Morgan CEO Jamie Dimon is making international headlines with his recent claim that the current U.S. banking crisis is “not yet over, and even when it is behind us, there will be repercussions from it for years to come.” With Congress’s ongoing excessive spending and the Federal Reserve’s continued monetary mischief, Dimon’s prediction seems pretty safe.  Following the collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate shut down shortly thereafter. Depositors with uninsured amounts above the Federal Deposit Insurance Corporation’s (FDIC) insured amount of $250,000 at both banks withdrew large sums, forcing the banks to sell assets that had lost significant value. Silvergate voluntarily liquidated itself, while bank regulators forcibly closed Signature Bank.  While the specific circumstances of SVB’s collapse may be unique, the factors contributing to its failure are not. SVB, Signature, and countless other banks that have yet to make headlines invested in risky assets such as environmental, social, and governance (ESG) initiatives and less risky assets such as government securities. These actions were fueled by government interventions in the economy that pumped excess liquidity into the market, creating an artificial “boom.” Since early 2020, Congress has added more than $7 trillion to the national debt, and the Federal Reserve helped keep interest rates artificially low. This resulted in a flood of liquidity that found its way into the banking system, which led to banks taking on those less profitable investments, particularly interest-rate-sensitive government bonds. But banks weren’t prepared for the Fed to change its interest rate tune, raising its target for the federal funds rate from 0 percent to the latest range of 4.75 percent to 5 percent, and for those assets to lose significant value so quickly. This made these banks take a huge hit to their balance sheet when they marked-to-market those assets, and they didn’t have sufficient capital in a fractional reserve banking system to fund deposit withdrawals, hence bank runs.   Now, we’re witnessing the beginnings of the inevitable bust that follows a prolonged “boom” fueled by government actions that just redistributed resources while distorting markets. Perhaps the worst part in all of this is that the Treasury, Fed, and FDIC are creating moral hazard for banks by insuring many deposits at big, “systemically important” banks. This has created a shift of deposits from smaller regional banks to bigger banks, given this guarantee for now. Therefore, there’s more reason for bigger banks to take on more risks with this backstop and flood of new deposits at the expense of smaller banks and the economy. To make matters worst, the Fed recently added even more liquidity to the market. After reducing its balance sheet by about $700 billion from its peak of $9 trillion in April 2022, the Fed added $400 billion to provide loans to financial institutions. Its balance sheet is now down about $100 billion since then to $8.6 trillion, or only 4.4 percent below its record high last year, when it should be down substantially more to get ahold of inflation.  The Fed’s balance sheet provides a good indicator of inflation, which has started to improve, but including the aberrations in the Fed’s balance sheet and underlying inflationary indicators in the food and services sectors, inflation could easily stay elevated at a much higher rate than the Fed’s preferred 2 percent average for much longer. Adding to the pressure on the banking sector includes how the Atlanta Fed’s GDPNow estimate for inflation-adjusted GDP in the first quarter of 2023 is only 2.5 percent (and Blue Chip consensus estimate is 1.5 percent) as of April 14. This is after less than 1 percent growth from the fourth quarter of 2021 to the fourth quarter of 2022, which is the slowest growth during a year of recovery in decades. This will exacerbate problems at banks if Americans can’t pay their bills.  And we’re likely to see even higher interest rates soon, even though the Fed expects to raise rates just one more time this year. Based on the well-respected Taylor rule, which calculates a federal funds rate target based on inflation and output gaps, the Cleveland Fed’s Taylor rule utility suggests at least a 6 percent federal funds rate target. This would further devalue the government securities on banks’ balance sheets.  So strap up, Americans, as we’re in for a bumpy ride in the banking sector and overall economy. Only by allowing people to exchange freely with limited government interference that simply sets the rules of the game but is a referee thereafter, not a participant, can we better avoid these boom and bust cycles in the banking sector and across the economy that threaten our freedom and prosperity.  A big part of this will be to unleash the banking sector from excessive regulations like those imposed by Dodd-Frank after the financial crisis. There should also be an effort to not increase the FDIC’s insured amount by $250,000, as depositors should also take losses if they’re not doing their due diligence to research where they deposit their funds. And there should be support for increasing capital requirements by banks in the marketplace rather than policy avoiding some of the problems with fractional reserve banking.  Finally, the Fed should be led by a monetary rule, like the Taylor rule, and Congress by a fiscal rule, like the Responsible American Budget, to remove the discretion that plagues our economic activity and future. If not, there will be many more “booms” and busts and many more failures from government actions over time. We must let free people succeed and fail, as failure is essential for us to learn lessons, or we will keep making the same mistakes. But we should be eliminating government failures by ultimately shrinking government and ending the Fed.   Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, senior fellow at Young Americans for Liberty, and chief economist or senior fellow at multiple think tanks across the country. 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)

In the same chapter of Friedrich Hayek’s Law, Legislation, and Liberty that I discussed two days ago, Hayek has some excellent discussion of the benefits of competition and on the optimal size of firms. The benefits of competition Competition, if not prevented, tends to bring about a state of affairs in which: first, everything will be produced which somebody knows how to produce and which he can sell profitably at a price at which buyers will prefer it to the available alternatives; second, everything that is being produced is produced by persons who can do so at least as cheaply as anybody else who is not producing it; and third that everything will be sold at prices lower than, or at least, as low as, those at which it could be sold by someone who in fact does not do so. (p. 74) I stated in our Liberty Fund colloquium that this was a beautiful, succinct statement of the benefits of competition. Fellow participant David Friedman pointed out that the first one is not quite true. He noted that the argument against monopoly is that it underproduces even though more could be sold at a profit (just a lower profit.) I immediately agreed with David. Still, the second clause of the first point is spot on, as are the second and third points. It’s possible that Hayek could avoid David Friedman’s criticism by pointing out that he uses the word “tends.” Also, in the paragraph that follows, Hayek writes that this state of affairs “is approached remarkably closely in all fields where competition is not prevented by government or where governments do not tolerate such prevention by private persons or organizations.” So Hayek admits that it’s close, not necessarily all the way. Hayek also points out that only a market can bring about this situation. On the optimal size of firms The most effective size of the individual firm is as much one of the unknowns to be discovered by the market process as the prices, quantities or qualities of the goods to be produced and sold. (p.78) Hayek goes on to explain that the optimal size will depend on technology and economic conditions, both of which are “ever-changing.” Hayek then lays out how size is often an antidote to the power of size, writing: It may well be that, say, in the electrical industry of one country, no other corporation has the strength or the staying power to ‘take on’ an established giant intent upon defending its de facto monopoly of some of the products. But as the development of the great automobile or chemical concerns in the USA shows, they have no compunction about encroaching on such fields in which the backing of large resources is essential to make the prospects of entry promising. Size has thus become the most effective antidote to the power of size. (p. 79)   (0 COMMENTS)

If the report is true, which would not be surprising, there is a certain irony—a very certain irony—in the US government’s intent to handicap the Russian government by preventing imports into that country from producers of G7 countries (“Allies Resist US Plan to Ban All G7 Exports to Russia?” Financial Times, April 25, 2023). Aren’t imports bad and dangerous for national security, as both Donald Trump and Joe Biden agree? Shouldn’t our statocrats encourage Russians to import and producers from G7 countries to export there? Shouldn’t the US government be bold and subsidize exports to Russia? Wouldn’t that weaken their domestic manufacturing industry and thus handicap their economy and their government’s war machine? Memorandum: Trump imposed tariffs on steel and aluminum from friendly countries under the excuse of national security; he toyed with the idea of doing the same for foreign cars. Biden kept many of Trump’s tariffs, and the subsidies of his CHIPS Act are supposed to protect Americans from dangerous imports of foreign technology. The American political class now seems unanimous in supporting the emotions underlying this approach. Coincidentally, a story in the Wall Street Journal documents the fact that despite, or because of, playing commissar, the Pentagon has run out of domestic suppliers for a special sort of gunpowder. Fortunately, they could buy some from Germany, Poland, Switzerland and, if Trump returns to power, even from Brazil (“The U.S. Military Relies on One Louisiana Factory. It Blew Up,” April 26, 2023). I suspect that many suppliers in the wide more-or-less free world would happily fill the void. (Incidentally, and pardon my pedantry, the author of this interesting story or his editor seems to think that gunpowder “is used … in bullets.” Should an employment condition for journalists be that they own at least one gun and one cartridge?) We can imagine one response to my ridiculing the US government for wanting to make Russia great again by encouraging its autarky. The response would be that, given Putin’s savage invasion of Ukraine and its bellicose nuclear threats, it is justifiabe to handicap his government even by strangling the economy of its subjects. Although my former self would not agree, I would now tend to grant that embargoes and sanctions, although they also hit the very subjects of the government imposing them, may help prevent the worse alternative of open war and general conscription. But such a response, at least a prudent one, would still suggest that imports are unequivocally beneficial in peacetime. The reported American crusade to prevent imports into Russia is not the only incoherence of protectionism, a sentimental and authoritarian doctrine. As the saying goes (somewhat reformulated to make it less collectivist), protectionism is what nationalist states do against their subjects in times of peace that would be imposed to their same subjects by foreign enemies in times of war. (1 COMMENTS)

There are many indicators analysts use to check if the US is heading into a recession (or is already in one). Macro statistics (e.g., Quarterly GDP growth), production measures (such as Industrial Production or the Conference Board Leading Index), labor signs (JOLTS or Initial Jobless Claims), and many other clues regarding housing, confidence and stock market indexes, etc. But there is one that seems to be viewed by analysts as especially efficient in this regard: the yield curve. Or, in simpler terms, the yield spread between a longer maturity Treasury asset and a short duration Treasury asset (say, the 10-year Treasury yield minus the 2-year Treasury yield). Why is this so? Primarily, because assets with longer durations usually show higher yields (there is a term premium) than those with shorter duration, and banks tend to borrow short-term and lend long-term to profit from this spread. So, you could easily picture the process: if the yield spread is negative, there is no incentive for banks to lend, which reduces investment and therefore production and employment. Hence, a recession (which logically takes place sometime after the yield curve inversion). Another possible interpretation is simply that the Fed sets short-term rates at an arbitrary level that may not be related with savings and supply and demand of funds. Therefore, it could be the case that short-term rates would be higher than otherwise had the Fed not intervened. In this scenario it is sensible to think that there is a great demand for long-term Treasuries because there are no attractive alternative investments at the prevailing long-term rates (due to deglobalization, or higher expected taxes because of larger expected deficits, etc.). So, if you mix that with the Fed pushing short-term rates up, you get an inverted yield curve that naturally precedes a recession (already implicit in the lack of bidding for long-term funds). But not so fast. Although empirical evidence shows that usually before a recession there is a yield curve inversion (except in 1990, where although it got close it did not occur), this does not mean that the latter will trigger a recession or that this will be the inevitable outcome. Short-term yields may rise above long-term yields because of tight financial conditions where more leveraged or fragile businesses bid up for funds short-term to stay afloat. And this surely shows problems in the economy. Another bearish scenario would be implied by lower short-term expected rates (hence lower expected growth as well as lower long-term rates). But it may also be the case that short-term rates stay the same and long-term rates fall due to a lower term premium. Although an unlikely event, that would be bullish (yet it would not persist for long). Another similar situation would be that both short and long yields fall at the same time, but at a different rate. True, there would be an inverted yield curve, but for very different reasons than in the bearish scenarios (e.g., a sudden increase in the demand of long-term Treasury holdings). Also, Fed monetary policy may cause this as well, for instance by reducing or stopping its asset sales program, thereby decreasing the supply of Treasuries in the open market (and therefore stabilizing its price upwards, i.e., lower rates). Moreover, take inflation. If long-term rates are incorporating a lower expected inflation rate that would be a good sign for the economy, despite an inverted yield curve. A simple explanation, but nevertheless highly sensible. So, what is the situation now? As in the bearish scenario, both short- and long-term rates are rising. That signals a bidding up of resources short-term as well as a decreased incentive for banks to lend. Not good. But Bank Prime Rates are almost twice the Effective Fed Funds rate, so banks are still lending, and profiting for doing so. It is not a good sign that both be rising. However, during a recession quality bond issuers must increase rates to receive capital. Yet, if we now see the Moody’s Seasoned AAA Corporate Bond minus the Federal Funds Rate, we see a very low spread. So, that’s not happening. Alternatively, a possible interpretation is that the Fed is simply increasing short-term rates to fight inflation and long-term rates have a lower inflation rate priced in. So, that would not be bearish. Other factors, such as Japan selling Treasuries (thereby pressuring rates up), or the Fed’s reverse repo rates policy, may be at work in the current yield curve inversion. Hence, using the yield curve as a barometer of the economy is a bit more complex than looking at a chart at the website of the Federal Reserve Bank of St. Louis. Two consecutive quarters with negative GDP growth signals a recession, but a hot labor market shows a strong economy. Is a recession probable? Yes. Is the yield curve pointing in that direction? Not necessarily. We will just have to wait and see.   Alan Futerman is professor of Institutional Economics at UCEL (Argentina). His work has been appeared in various journals and media outlets such as the Financial Times. He recently co-authored Commodities as an Asset Class with Ivo A. Sarjanovic. (0 COMMENTS)

Irvine is a master planned community in Orange County, California, with a population of just over 300,000. It is one of the few areas of coastal California where home building is still quite robust, perhaps due to the influence of the Irvine Company.A recent article in the Orange County Register provides a good example of Coasean economics in action. Recent growth in Irvine has pushed new housing construction ever closer to an asphalt manufacturing plant.  (New housing construction is in the upper center of map below, the asphalt plant is on the right): This led to an “externality problem”: Odors from the plant are particularly strong in the nights and early mornings, Lien said. Every night, he checks his hood ventilation and laundry room ventilation systems to ensure odors won’t seep through. “We basically keep our house shut. It’s all sealed, and (we) never open windows,” Lien said. Due to the large number of homeowners, it is difficult to negotiate a satisfactory solution to this problem. But this case was special in several respects. First, real estate development is extremely profitable in Irvine, if you can find available land. In addition, the Irvine Company plays such a major role in Irvine that it needs to maintain a good relationship with the city.   In the end, the plant was sold to the Irvine Company for $285 million. I’m not expert on asphalt plants, but that seems like a huge sum of money for such a modest sized facility (see picture in the article). The article suggests that the owners had no interest in selling, and only did so because they reached very favorable terms: “All American Asphalt plant was not interested in selling, and they are only selling right now because we’ve been able to reach a price that they feel is commensurate with the long-term profits that the asphalt plant would have generated,” said Chi. I suspect that “commensurate” is an understatement, as they knew they were in a strong negotiating position. Of course, the value of land in places like Orange County is strongly dependent on whether the local government will grant permission to build new homes. As part of the deal, the city of Irvine will allow the Irvine Company to develop a modest portion of the land.   The funding for the purchase of the plant is set to come from a “concurrent deal” the city made with Irvine Company. In the deal, the Irvine Company will give the city approximately 475 acres of land, with about 80 acres (worth around $330 million, according to city documents) allocated for housing development. For you land developers in Oklahoma City, that’s not a typo. In Irvine, 80 acres of buildable land is worth $330 million. (BTW, I believe that some of the 475 acres being donated for parkland is extremely hilly land, which is difficult to develop.) This example illustrates the complexity of the Coase Theorem. In some cases, negotiation among the parties leads to a free market resolution of externalities. In other cases, regulation might be required due to the existence of “transactions costs.” Master planned communities make it easier to overcome the problem of externalities, which is one reason why Irvine allows more new construction than do other Orange County communities. In this case there are several externalities lurking in the background, which impacted the final result. In addition to the bad smell, Irvine residents worry about traffic congestion. As a result, they are not always happy to see new development. The Irvine Company (implicitly) struck a deal with the city that will eliminate the bad smell problem while slightly worsening the (less severe) traffic issue. This overcomes the normal “public choice” problem by turning nearby homeowners from being the most opposed to new development to the most supportive of new development.  NIMBY policies impose external costs on an even more invisible group—people that would like to live in Irvine but cannot afford to purchase a house in the city. That’s a more difficult problem to solve. In recent years, the state government in California has been pushing local governments to allow more housing construction. Almost everyone wants more housing—but somewhere else. (0 COMMENTS)