John Raisian, who was director of the Hoover Institution for a quarter of a century, died Monday at age 73, of kidney failure. My guess is that that was a result of the immune suppression drugs he took after he had a heart transplant some years ago. John was a fellow graduate of the UCLA economics program in the 1970s. He was a year ahead of me and so I didn’t know him well, but I liked him a lot and I didn’t know anyone who disliked him. He always had a smile for you, and an infectious laugh. The UCLA program was intense and felt intensely competitive. So John’s smile and laugh were always very calming for me. We became friends in 1982 when we both worked in the Reagan administration under another UCLA grad, John Cogan, in the Labor Department. I remember that he had hanging in his office a picture of his dad and some of his dad’s fellow workers, visiting in a General Electric factory with a visiting spokesman named Ronald Reagan. John was quite a good empirical economist, but his comparative advantage was clearly in running a think tank. Although Glenn Campbell built the Hoover Institution, which was originally called the Hoover Institution on War, Revolution, and Peace, John took it to the next level, increasing its size and scope after the Cold War ended. At the suggestion of Martin Anderson, John brought me in as a research fellow in 1990, when I was working on The Fortune Encyclopedia of Economics. I have been affiliated ever since. I remember the day he got his heart transplant. I was up at Hoover for a big event and didn’t see John. He told me later that he had been at the event earlier but had received a phone call telling him to show up at the Stanford hospital to get his new heart. He had said that he would go home and change first. “No, you won’t,” said the person on the other end of the call, “Come over here right now.” When we spoke a few months later, he told me that he had promised, as a condition of getting the heart, never again to drink alcohol. I knew that must have been hard for him because he was a real connoisseur of wine. But I also have zero doubt that, as a man of honor, he kept his word. I regret that the lockdowns imposed by California’s state government and, especially, by Santa Clara’s county government, meant that I never saw John after early 2020. John is survived by his wife, Claudia, and by his two daughters. (0 COMMENTS)

Paradoxes make good brain candy, in my opinion. As a rough approximation, statements can be deemed a paradox when they provoke the reaction “That can’t be right but I also don’t see how it can be wrong.” W. V. Quine once described how paradoxes can be put into three different categories – veridical, falsidical, and antinomy. A paradox is veridical when it seems impossible or contradictory but turns out to be true when properly understood. Statistics is full of these kinds of paradoxes. One example is Simpson’s Paradox which, as Steven Landsburg has explained, can lead to the seemingly paradoxical situation where you can see “median income shoot up in every demographic sector while the overall median remains nearly unchanged”. Russ Roberts has also skillfully unpacked this paradox as well. The second category is a falsidical paradox. This is a when the paradox is dissolved by understanding why it is actually false. A classic example is Zeno’s argument for why Achilles can never catch up to a tortoise in a race. We instinctively understand the argument must be mistaken – indeed, we know it’s mistaken because we see the supposedly impossible outcome occur in reality all the time. But for centuries nobody could explain what the error was, until mathematicians proved an infinite series can sum up to a finite total. The third type of paradox is antinomy, which is the category of “wait, are logic and reality broken?” These are paradoxes that remain unsolved. To resolve a paradox is to move it out of antinomy and into the veridical or falsidical spaces. Lately, I’ve been pondering Condorcet’s paradox in this framework. Very briefly, this describes when majority rule produces a rock-paper-scissors style of result. Individually, I might prefer waffles over French toast, and French toast over pancakes. These preferences will be transitive – which that since I like waffles more than French toast and I like French toast more than pancakes, I also like waffles more than pancakes. But voting doesn’t necessarily produce transitive outcomes. Among these three options, individuals can rank them in a different order, and voting by majority rule can produce results where waffles beat French toast, French toast beats pancakes, and pancakes beat waffles. This outcome seems paradoxical. When the majority prefers waffles, the majority prefers pancakes. But when the majority prefers pancakes, the majority prefers French toast. However, when the majority prefers French toast, the majority prefers waffles. How can we use democracy to discern and carry out the will of the majority, when what the majority wants is simultaneously not what the majority wants? We seem stuck in a contradiction. One way to resolve the seeming contradiction by recognizing there is a fallacy of equivocation. The fallacy of equivocation is when the same word is used throughout an argument but refers to different things at different points in the argument. In this case, we’re using the same word – “the majority” – to refer to partially overlapping but different collections of individuals. Let’s say there are three hundred voters in total. The “majority” that picks waffles is not the same “majority” that picks for French toast, and so on. What we actually have are three distinct “majorities” – with apologies to any monetary economists reading this, we can call them M1, M2, and M3. M1 consists of the first and second hundred voters, M2 is made up of the second and third hundred voters, and M3 is the first and third hundred. Now we can reformat our previously paradoxical statements as “M1 prefers waffles, M2 prefers French toast, and M3 prefers pancakes.” This approach might seem to resolve the logical contradiction, but there are still practical problems on the table. Democracy, we are often told, is justified because it makes the government accountable to the majority. But M1, M2, and M3 can all with equal legitimacy claim to be “the majority”, and they all want incompatible outcomes. How do we resolve this problem, in a way that preserves democratic legitimacy? The answer to this, in my opinion, is to recognize that the very question is falsidical. To speak of “the will of the majority” or “what we as a society have decided” is to commit a category error. It makes the mistake of applying concepts like decisions, desires, will, and so forth, to a category where they simply don’t apply. It treats “the majority” is though it were a thing that has an active and independent existence, as though “majorities” or “societies” are the kinds of things that are capable of having desires or making choices. But the statement “M1 prefers waffles” is meaningless. This is because a majority is not a thing that exists. Or, to phrase the point more precisely, the majority does not exist as a thing. A majority is simply a relative form of measurement, not an entity with a real existence that’s capable of having preferences or making choices. “The majority” is real and exists in the same way and in the same sense that velocity exists. That is, things have velocity, but there’s nothing that is velocity. Similarly, a certain number of people or things in various schemas can be defined as “the majority,” but there’s nothing that is “the majority.” To use phrases like “the will of the majority” or “as a society, we have decided such and such” is as fundamentally incoherent as saying “for this experiment, I’m going to need three pounds of velocity.” And that’s how I see Condorcet’s Paradox. Instead of wondering how it can be the case that what the majority wants is also not what the majority wants or wondering how a democracy can respect “the will of the majority” when there are multiple, equal majorities with incompatible “wills”, we would do better to recognize that the whole premise is ill-formed. Hayek once said, “We shall not grow wiser before we learn that much that we have done was very foolish.” Endlessly searching under the rainbow for “the will of the majority” is a foolish task – because there never was such a thing to start with. (0 COMMENTS)

One of the treats of the recent Liberty Fund colloquium on the Austrian and Chicago schools of thought was getting to read or reread various excerpts from Friedrich Hayek’s work. In a chapter titled “Government Policy and the Market” from his 1982 book Law, Legislation, and Liberty, Volume 3, Hayek nicely puts perfect competition in perspective  and lays out the incredible benefits of real-world, as opposed to “perfect,” competition. On the problem with perfect competition as a normative standard: From basing the argument for the market on this special case of ‘perfect’ competition it is, however, not far to the realization that it is an exceptional case approached in only a few instances, and that, in consequence, if the case for competition rested on what it achieves under these special conditions, the case for it as a general principle would be very weak indeed. The setting of a wholly unrealistic, over-high standard of what competition should achieve thus often leads to an erroneously low estimate of what in fact it does achieve. (p. 66) Hayek goes on to lay this out more. Two comments: First, I occasionally run into people who took economics as undergraduates, and even some how minored or majored in economics, who believe that because the market is not perfectly competitive, it has failed and that the door is wide open for government to intervene and improve things. Second, one reason I like Shark Tank is that the sharks generally appreciate markets as they are. They will often ask those who pitch their firms and products what their margins are. The margin they have in mind often seems to be the difference between average variable cost and price and sometimes seems to be the difference between average total cost and price. If someone answered, for the latter case, that the margin is zero (which would be the case for perfect competition) all 5 sharks would say, almost in unison, “I’m out.” On temporary monopoly as an incentive to innovate: The inducement to improve the manner of production will often consist in the fact that whoever does so first will thereby gain a temporary profit. Many of the improvements of production are due to each striving for profits even though he knows that they will only be temporary and last only so long as he leads. (p. 70) When I was teaching this point to my students and we were studying efficiency of perfect competition versus efficiency of real-world competition, I would ask them to imagine 2 buttons, one of which they could push. The first button would yield a world in which no one would make above-normal profits, even for a short time. The second button would yield a world in which such profits would be allowed. Which one would they push if they cared about long-run well-being? Most of them got that they should push the second button because pushing the first would reduce the incentive to innovate, thus reducing innovation, so that most innovations would come about randomly rather than due to focused effort. The injustice of requiring a monopolist to produce to where the price equals marginal cost: Quite apart from the practical difficulty of ascertaining whether such a de facto monopolist does extend his production to the point at which prices will only just cover marginal costs, it is by no means clear that to require him to do so could be reconciled with the general principles of just conduct on which the market order rests. So far as his monopoly is a result of his superior skill or of the possession of some factor of production uniquely suitable for the product in question, this would hardly be equitable. At least so long as we allow persons possessing special skills or unique objects not to use them at all, it would be paradoxical that as soon as they use them for commercial purposes, they should be required to use them to the greatest possible extent. We have no more justification for prescribing how intensively anyone must use his skill or his possessions than we have for prohibiting him from using his skill for solving crossword puzzles or his capital for acquiring a collection of postage stamps. (pp. 71-72) Later, Hayek gives what he thinks is the clinching reductio ad absurdum: There exists no more an argument in justice, or a moral case, against such a monopolist making a monopoly profit than there is against anyone who decides that he will work no more than he finds worth his while. (p. 72) I would agree with Hayek that this is a slam-dunk reductio ad absurdum. But two authors have recently taken that absurd conclusion and run with it. In their 2018 book, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, Eric A. Posner and E. Glen Weyl warm to a related proposal. Here’s what I wrote in my 2018 review of their book in Regulation: Toward the end of the book, they even toy with having people pay taxes on their human capital. They give an example of a surgeon who announces that she would perform gallbladder surgery for $2,000 and pay a tax accordingly. She would be obligated to provide that surgery to anyone willing to pay $2,000. So if the surgeon was thinking of retiring, forget it. The only satisfactory solution for her would be to estimate the value of her services at a number that really would make her indifferent between working and retiring. The authors are aware that they’re treading on sensitive ground here, writing, “A COST [common ownership self-assessed tax] on human capital might be perceived as a kind of slavery.” Might be? They claim that such a perception is incorrect, but the reasoning behind their claim is weak. They implicitly admit that their proposal is coercive when they write that it would be a mistake “to think that the current system is not coercive.” How is the current system coercive? Here’s how: “Those with fewer marketable skills are given a stark choice: undergo harsh labor conditions for low pay, starve, or submit to the many indignities of life on welfare.” In short, to Posner and Weyl, being relatively poor is akin to being coerced. I would bet that a newly freed slave in 1865, though almost certainly poor, would understand the difference between poverty and coercion better than Posner and Weyl seem to. I’ll have more to say on Hayek on these issues soon.               (0 COMMENTS)

While most people accept that business are in the business of pursuing profits, this pursuit nevertheless prompts many complaints, In two previous posts, I have outlined thirty objections to the profit motive, and I tried to counter each in turn. In this post, I offer ten more complaints that allegedly result from the pursuit of profits. See what you think of this next and final set, and let me know your thoughts in the comments!   31- Play on consumer emotions See my response to item 20. Also, consider politicians’ constant play on voter emotions (“Do it for the children!,” “Hope and Change!,” “Make America great again!”).   32- Slow progress on new technologies and refusal to embrace change A thicket of government regulations slows progress on new technologies. As economist Michael Mandel wrote: [I use] the metaphor of ‘throwing pebbles in a stream’ to describe the effect of regulation on innovation. No single regulation or regulatory activity is going to deter innovation by itself, just like no single pebble is going to affect a stream. But if you throw in enough small pebbles, you can dam up the stream. Similarly, add enough rules, regulations, and requirements, and suddenly innovation begins to look a lot less attractive.   33- Bribery of public officials Who is more to blame, a businessman who offers a bribe to a public official or the public official who accepts it? As government power grows and regulations reach into every aspect of life, the incentive to bribe – or otherwise influence – public officials grows.   34- Inadequate public disclosure The government dictates the degree to which companies are required to disclose information to the public.   35- Externalization of detrimental costs Companies can do this only with the government’s active participation. Perhaps the most egregious example was that of slavery: Federal troops were used to suppress potential and actual slave revolts. While some slave patrols were financed by slave owners, others were funded by county or state governments through general taxes. The Fugitive Slave Acts of 1793 and 1850 required citizens – whether in the North or the South – to aid in the capture of runaway slaves. From 1836 to 1844 Southern representatives were able to maintain a “gag rule” against the reading of anti-slavery petitions in the U.S. House of Representatives. From 1828 to the outbreak of the Civil War in 1861, U.S. postmasters prevented the delivery of “incendiary publications” (i.e., ant-slavery pamphlets) through the mail. Local government officials often stood by while pro-slavery Southerners violently suppressed anti-slavery voices. Newspaper offices and presses were smashed, homes were burned, people were tarred and feathered and ridden out of town on rails, and some were murdered. Southern states passed laws prohibiting teaching slaves to read. Literate slaves could read anti-slavery pamphlets, forge passes, and coordinate revolts. Government at all levels provided legal support for slavery by passing and enforcing laws that protected slaveholders and the institution of slavery, punished runaways, and criminalized efforts to abolish slavery.   36- Accrual of political power Companies have no political power that government has not ceded to them.   37- Uncertainty in economic markets Uncertainty, like risk, is a fact of life. As Benjamin Franklin once quipped, nothing is certain but death and taxes. That said, boom-and-bust cycles are usually driven by the government’s monetary policies. Expansion of the money supply leads to booms which turn into busts when the flow of new money stops.   38- Exploitation of developing countries The United States is routinely condemned for “exploiting” poor countries through trade and impoverishing other countries (e.g., Venezuela and Cuba) by refusing to trade with them. That said, trading with a dictatorship can help prop up the dictator but so does foreign aid from governments and NGOs.   39- Risk of corporate failure Corporate failure is a good thing, not a bad one. If a company is turning scarce resources that have alternative uses into goods that are less valuable than the resources, then we want that company to fail. By contrast, failed government programs (e.g., corn-based ethanol subsidies, sugar quotas and tariffs, steel tariffs, the Jones Act, the federal government’s student loan programs, the U.S. Post Office) live on. As Kevin D. Williamson quipped, when government does stupid, it does immortally stupid.   40- Failure to accept responsibility Whether a company accepts responsibility for its failures or not, failure if left unaddressed ultimately leads to bankruptcy. Failure of a government policy too often serves as “proof” that more resources are needed. In addition, politicians and government officials, rather than taking responsibility for their failures, routinely blame industry for problems that they themselves have created.   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource (0 COMMENTS)

In a recent paper for the University of Chicago’s Becker Friedman Institute, MIT health economist Amy Finkelstein and three colleagues point out the obvious: taxing higher income people and subsidizing lower income people would reduce inequality. Specifically, they examine what would happen if the U.S. government nationalized the financing of employer-provided insurance, paying for the insurance with a hefty payroll tax. Here’s their abstract: Over half of the U.S. population receives health insurance through an employer, with employer premium contributions creating a flat “head tax” per worker, independent of their earnings. This paper develops and calibrates a stylized model of the labor market to explore how this uniquely American approach to financing health insurance contributes to labor market inequality. We consider a partial-equilibrium counterfactual in which employer-provided health insurance is instead financed by a statutory payroll tax on firms. We find that, under this counterfactual financing, in 2019 the college wage premium would have been 11 percent lower, non-college annual earnings would have been $1,700 (3 percent) higher, and non-college employment would have been nearly 500,000 higher. These calibrated labor market effects of switching from head-tax to payroll-tax financing are in the same ballpark as estimates of the impact of other leading drivers of labor market inequality, including changes in outsourcing, robot adoption, rising trade, unionization, and the real minimum wage. We also consider a separate partial-equilibrium counterfactual in which the current head-tax financing is maintained, but 2019 U.S. health care spending as a share of GDP is reduced to the Canadian share; here, we estimate that the 2019 college wage premium would have been 5 percent lower and non-college annual earnings would have been 5 percent higher. These findings suggest that health care costs and the financing of health insurance warrant greater attention in both public policy and research on U.S. labor market inequality. The paper is Amy Finkelstein, Casey C. McQuillan, Owen M. Zidar, and Eric Zwick, “The Health Wedge and Labor Market Inequality,” Working Paper No. 2023-50, April 2023. McQuillan and Zidar are at Princeton University and Zwick is at the University of Chicago. Notice in the first sentence their reference to the current way of financing employer-provided health insurance as a “head tax.” My guess is that they want people to think that the current way of financing is kind of like a tax but their intellectual honesty requires them to put the term in quotation marks. Because, of course, it is not a tax. The payroll tax that they consider is large: 11 percent. They write: For our baseline analysis (with τ = $7, 758), we calculate that the counterfactual, equilibrium payroll tax t would be 11 percent. That is, switching to payroll tax financing would add an additional 11 percent to existing payroll and income tax rates. That second sentence is incorrect. Adding an 11 percent payroll tax would not add “11 percent to existing payroll and income tax rates.” It would add 11 percentage points, a different matter indeed. Interestingly, in their abstract. Finkelstein et al note that with such a tax replacing the current system, “non-college employment would have been nearly 500,000 higher.” That makes sense. But wouldn’t college employment be lower? Yes, it would. On page 8 of their Appendix, they point out that college employment would fall by 371,593, non-college employment would rise by 457,288 and total employment would rise by only 85,696. But they don’t seem to think that although an increase of nearly 500,000 jobs for workers who are not college graduates is worth mentioning in the abstract, a loss of “nearly 400,000 college jobs” is not. Their analysis is positive, not normative. So one can’t necessarily conclude that they are advocating such a hefty payroll tax. My guess is that they are, though. One reason I think that is that they quote, without commenting, Emmanuel Saez and Gabriel Zucman’s statement that the current system of employer/employee financing “is the most unfair type of tax.” They do point out how huge a bite health insurance takes out of pay, especially for workers without a college education: Average insurance premiums for employer-provided health insurance were about $12,000 in 2019. This amount is about 25 percent of the average annual earnings for a full-time, full-year worker without a college education (about $50,000), and about 12 percent of the average annual earnings for a full-time, full-year college-educated worker (about $100,000). That 25 percent number is shocking but true. Of course it’s possible that the average worker gets large value from these expenditures. But the authors don’t address that. Are there other ways of making health insurance cheaper by making health care cheaper? There are. The federal and state governments could  deregulate supply, allow more immigration of doctors, and get rid of the requirement that a doctor be a middleman for prescription drugs, as is done in some other countries. Unfortunately, the authors consider none of these ways. The second-last sentence in their abstract is interesting. Why mention reducing health care spending as percent of GDP in the United States (16.8 percent in 2019) to the much lower percent in Canada (10.8 percent), a reduction of 37.5 percent, unless the authors are treating as a serious option the imposition of Canadian-style rationing? Note: The Becker Friedman Institute is, of course, named after Gary Becker and Milton Friedman. (0 COMMENTS)

The “Inflation Reduction Act” of 2022 was one of our more inappropriately named pieces of legislation. (And there’s plenty of competition—recall FDR’s National Industrial Recovery Act.) The Financial Times has a new piece entitled: Critics warn US Inflation Reduction Act could keep prices high A scramble for workers might complicate the Federal Reserve’s efforts to cool the economy In the article, critics complain that the legislation is boosting costs: “You don’t hear the word globalisation anymore,” Fink told an energy conference at Columbia University this month. “We’re building new chip factories in the United States — at what cost?”   Fink said the Biden administration’s efforts to reshore manufacturing would mean US inflation was unlikely to fall below 4 per cent “anytime soon”.    While the IRA includes subsidies for clean energy worth $369bn, the credits are “uncapped”, meaning the final bill for taxpayers could eventually exceed $1tn, according to Credit Suisse, Goldman Sachs and the Brookings Institution.   Analysts say the sheer scale of the handouts will put a wrench in markets.   “You’re distorting free markets when you create these incentives and when you create rules that require you to buy from domestic firms,” said Ethan Harris, head of global economics at Bank of America. “If it was the most cost efficient way to do something, you wouldn’t need a subsidy for it.” On the other hand, if the Fed is truly committed to bringing inflation down to 2%, then it should offset the impact of this legislation with tighter monetary policy.  In that case, economic activity is non-subsidized sectors will suffer.    The government is not very good at allocating resources, and attempts to do so almost invariably reduce economic efficiency.  Subsidies and trade barriers lead to a misallocation of resources. In most cases, when people complain that government policies will lead to higher inflation, the actual risk is lower real output.  That’s also how much of the public thinks of inflation—something that reduces their living standards.     The final sentence in the FT article gets to the core of the problem: [T]he Biden administration’s efforts to satisfy its decarbonisation, industrial and geopolitical ambitions at the same time — all while promising to drive down costs — are causing alarm among some analysts.   “Once you go down the national security path and don’t narrowly constrain it, boy, it’s a killer to economic efficiency,” Hufbauer said. That’s the real issue—economic efficiency, not inflation. (0 COMMENTS)

In a 1930 essay titled “Economic Possibilities for our Grandchildren,” John Maynard Keynes predicted that in 100 years, “assuming no wars and no important increase in population,” the standard of living in “progressive countries” would be “between four and eight times as high” as it was then. His most optimistic scenario is being realized. In 2022, real GDP per capita (equivalent to income per capita) in the US has already been multiplied by 7.3, with eight years to go (see Bureau of Economic Analysis, National Income and Product Accounts, Table 7.1, revised March 30, 2023). Even if the rate of growth is only 1% per year between now and 2030, real GDP per capita will then be 7.9 times that of 1930. Keynes also believed that with such high incomes, the economic scarcity problem of mankind would be solved and the question would be what to do with one’s free time. This part of his forecast has not lived well. Somewhat similarly, the 1960s and 1970s hippies thought they were reentering the Garden of Eden, if only capitalism could be destroyed. San Francisco’s Blue House, sung by Maxime Le Forestier, is a reminder of the dream. Keynes is more difficult to forgive. The whole 20th century has seen an incredible increase in the standard of living. In America, real GDP per capita has grown at an annual (compounded) rate of 1.8% over that century, a higher growth than in the preceding century (see the semi-log graph below, where the slope of the curve indicates the rate of growth). And that was despite two world wars, the Great Depression (and a number of smaller ones), the New Deal, and a large growth in taxes, government expenditures, welfare programs, and regulations. In the United Kingdom, Keynes’s country, population has grown by 45%. Similar economic developments happened in Western Europe and in a few capitalist countries elsewhere. The 20th century was an intriguing century. It is sometimes difficult to avoid the impression that Mussolini was correct to expect and hope that the 20th century would be “the century of the State.” How can we explain this coexistence of economic growth and advancing state intervention? Here are a few hypotheses. One hypothesis (the data hypothesis) is that GDP data are not reliable or decisive. It is well known that GDP per capita does not measure welfare and that it may not even provide a satisfactory measure of the general standard of living. Imagine that you are living in a Middle East oil emirate where production responds to what the princes and their courts want, as opposed to generalized consumer sovereignty. This objection raises some useful caveats but, at least in Western countries, there is clearly a strong correlation between GDP per capita and the standard of living for ordinary individuals. Any passing knowledge of history should confirm that they are incredibly wealthier than even just a century ago. Other explanatory hypotheses are needed. Many mainstream analysts support the benign-intervention hypothesis (sometimes called “state capacity“) according to which  government expenditures and taxes, the welfare state, or regulation are not as detrimental to prosperity as we thought, at least when these interventions are moderated by the rule of law and limited by constitutional constraints.  My own guess is that regulation and the multiplication of criminal laws and felonies put a strong brake to prosperity and individual opportunities, much more so than the welfare state (or some implementations of it). A related hypothesis—the counterfactual hypothesis—is that economic growth would have been more rapid without state intervention. Economists John Dawson and John Seater argued that the American GDP per capita would be more than three times its current level if federal regulation had remained at its 1949 level. The counterfactual hypothesis has some historical support: it is certainly not the most regulated countries that spearheaded the Industrial Revolution—the United Kingdom and the Low Countries, rapidly joined by the United States. A mere counterfactual would not be sufficient to explain the strange mixture that the 20th century was, but we do have theories strongly suggesting that state dirigisme hinders prosperity, which is a natural consequence of the efforts of free individuals to improve their situations. Anther hypothesis along the same lines is that the social, economic, and political institutions that respect or promote individual liberty and free markets are very resilient once established (the resilient-freedom hypothesis). In this perspective, individual liberty is self-sustaining, at least up to a point. Economic growth continued and accelerated despite, not because, growing government intervention. This would be reassuring. Yet, we do not know if and where a breaking point exists at which prosperity would stop or reverse like in, say, Argentina or Venezuela. It is not clear either if or how liberty and prosperity, once lost, can be regained. Sources: Maddison Project, 2020 update, and its own sources: McCusker, John J., ‘Colonial Statistics’, Historical Statistics of the United States: Earliest Time to the Present, in S. B. Carter, S. S. Gartner, M. R. Haines et al. New York, Cambridge University Press. V-671. Sutch, R. (2006). National Income and Product. Historical Statistics of the United States: Earliest Time to the Present, in S. B. Carter, S. S. Gartner, M. R. Haines et al. New York, Cambridge University Press III-23-25. Prados de la Escosura, L. (2009). “Lost Decades? Economic Performance in Post-Independence Latin America,” Journal of Latin America Studies 41: 279–307. (Chart by P. Lemieux.) (0 COMMENTS)

  According to Feedspot, EconLog is now the 2nd best economics blogs for students. Go here for the list of the top 30. Of course, we should take this with a grain of salt because often these ratings are ways to get peoples to link to the source, which, of course, is what I’m doing here. Still, a nice sign.   (0 COMMENTS)

Matt Damon as Sonny Vaccaro in AIR In response to my post about Don Boudreaux’s and my recent op/ed in the Wall Street Journal in which we argued that ESG would get in the way of maximizing shareholder value, frequent commenter (and friend) David Seltzer pointed out that the “annualized return was 0.02% higher for the S&P 500 ESG Index than the S&P 500.” It seemed to him to follow that ESG investing does not hurt shareholder value. We had a phone call recently in which I explained why it does hurt shareholder value and why the evidence on shareholder returns is not evidence. Here’s my explanation. Let’s say a bunch of hypothetical firms decide, without warning, that they will go ESG. If I’m right that it creates uncertainty about what steps the company will follow, then the market value of those firms should fall relative to the market value of firms that haven’t made such an announcement but instead have announced that they won’t do ESG. If that happens, that won’t contradict the findings that David reports above. The reason is, essentially, arbitrage. Once the firms’ values have fallen relative to the values of the other firms, it would be a disequilibrium if their values didn’t rise just as much as those of the other firms from this point on. So someone examining the values of ESG firms will not find a lower rate of return. The rate of return, risk adjusted, will be the same. But the announcement of ESG will have caused a one-time reduction of the value. (Of course, if they get even more “ESGer” in the future than the participants in the market expected at first, the market values of those firms should rise more slowly than the market values of the other firms.) This, by the way, is why financial economists do event studies. They want to find an event that is a surprise to the market and that is expected to affect the market value of specific firms. So they look at cumulative average residuals of that subset of firms from a few days before the event to a few days after. I’m going from memory here about what I learned from dozens of financial economics presentations at the University of Rochester’s Graduate School of Management in the mid to late 1970s when I was an assistant professor, and also what I used to complete my Ph.D. dissertation in 1976. If the literature has changed substantially, I’m open to hearing about it. But here’s what ChatGPT told me: The event window is the period of time over which the effects of the event are expected to be reflected in the stock prices of the affected companies. The event window typically starts a few days before the event and ends a few days after the event. (0 COMMENTS)

Is the perfect really the enemy of the good? Or is it the other way around? In 2008, Duke University economist Michael Munger ran for governor and proposed increasing school choice through vouchers for the state’s poorest counties. But some lovers of liberty argued that it’s better to fight for eliminating public schools instead of […] The post Michael Munger on the Perfect vs. the Good appeared first on Econlib.