Although Paris still gets fed, our economy is facing turbulence. There’s presumably more than one reason for this. One reason I want to highlight here is the failure of many economists to recognise the importance of systems thinking—and act accordingly. So, what do I mean by systems thinking? Essentially, it means analysing a complete system, where “system” refers to an institutional framework and the individual actions taking place within it. This analysis can then be extended to compare different systems, although I should add that the institutional framework usually receives most attention. The paradigmatic example of systems thinking is the analysis and comparison of the planned economy and the market economy. This was one of the central tasks that occupied economists in the first half of the 20th century. It manifested in the socialist calculation debate, in which different economists arrived at different conclusions about the viability of the different systems they compared. The opposite of systems thinking is analysing specific issues as isolated phenomena. The objective here isn’t to set out how an overall system works. Rather, the aim is to analyse the different issues considered pressing in order to determine the optimal solution for each respective problem. A good example of such an approach would be analysing the housing crisis and developing an appropriate policy response to it. Such an isolated analysis may diagnose a lack of sufficient housing and identify heavy zoning laws and persistent rent control as the reasons for this. Recommendations may range from amending zoning laws to abolishing price regulations and increasing subsidised housing. However, the complete analysis is confined to the specific issue at hand and its solution, considered in isolation. Today, argues Randall Holcombe, “economists do not focus on economic systems in the twenty-first century as they did in the twentieth.” Put simply, economists tend not to engage in systems thinking, but centre on analysing issues within market-based systems, where they mainly develop recommendations on how to solve specific issues. They take the (hampered) market system as it is and analyse how a specific aspect of it works (or fails to work) and how it can be improved, primarily through government interventions, be it changing it, implementing a new one, or lifting an old one. However, this is dangerous, and the chief danger is that economists don’t see the forest for the trees. There are two closely linked aspects to this danger. Firstly, there is a risk that, through their recommendations, economists will accidentally produce a different system that, overall, yields negative outcomes from their perspective. By this, I mean that the economic system may change its nature in a fundamental manner as result of governmental action. The system may then turn into one that is far removed from what the economist would recommend. However, as their focus hasn’t been on systems thinking, they overlook the overall danger of system change. Secondly, and closely related, the economist may only have a poor understanding of the system that she takes for granted, the stability of which is impacted by her recommendations. This in light of the fact that she does not engage in this kind of systems thinking.  There is a huge, monumental difference between rejecting someone’s approach to public policy and rejecting public policy per se. However, a systems analysis may reveal that it is part and parcel of the system that most economists support that public policy will not be undertaken in a manner that they approve of. In other words, what kind of public policy a system will have is a systemic issue. However, to see this, an analysis of the system as a whole, rather than of isolated measures within it, may be necessary. In other words, economists may be unaware that their recommendations could be responsible for the economic foolishness they now deplore. This, in essence, is a variation of Michael Munger’s repeated advice not to make a sword so powerful you’d fear it in your enemy’s hands. So, what economists need to ask is the question of what it means that it is generally possible to intervene, or do public policy. Economists need to think about the bigger picture again. So, let’s return to systems thinking and the comparative analysis of different systems. The aforementioned Holcombe and his book on Political Capitalism is a splendid place to start!   Max Molden is a PhD student at the University of Hamburg. He has worked with European Students for Liberty and Prometheus – Das Freiheitsinstitut. He regularly publishes at Der Freydenker. (0 COMMENTS)

I really enjoyed Scott Sumner’s recent post about how people are bad at understanding coincidences. There are many reasons why we can be bad at this, but one I want to talk about here is that we only selectively recognize certain coincidences, making them appear far more striking than they really are. Here’s an example of this phenomenon I frequently catch myself making. Growing up, my family developed a tradition of playing spades – usually my dad and myself on a team against my mom and younger sister. Every now and then, I would get a hand that made me think “wow – what are the odds of getting a hand like this?” And then I’d (usually) catch myself and remind myself that the odds of my getting this particular mix of 13 cards are exactly the same as any other mix of 13 cards. Why did I have this reaction to some hands, but not others (or even most)? I’d tend to have that knee jerk reaction when I got a hand that seemed unusual in a really noticeable way and would particularly impact how many tricks I could expect to win for that hand. If I received a total of seven cards with the spades suit in my hand, that would mean my hand was unusually strong and I could pull off an above average number of tricks. Or, if every card in my hand was, say, a seven or lower, then my hand was usually weak and I might consider making a zero bid. Most hands I was dealt, though, weren’t composed in a way that made them look immediately distinctive. Most hands had an even-ish mix of black and red cards, of suits, and of card values. To use the extreme case, consider these two possible spades hands I might be dealt: Hand one: Ace of Spades, Seven of Hearts, King of Clubs, Two of Diamonds, Ten of Spades, Five of Clubs, Jack of Hearts, Three of Spades, Queen of Diamonds, Nine of Spades, Six of Hearts, Eight of Clubs, Four of Spades. Hand two: Two of Spades, Three of Spades, Four of Spades, Five of Spades, Six of Spades, Seven of Spades, Eight of Spades, Nine of Spades, Ten of Spades, Jack of Spades, Queen of Spades, King of Spades, Ace of Spades. If I had the first hand, I’d just glance over it and start thinking about how many tricks I should bid, but I wouldn’t give it a second thought beyond that. If I had the second hand, I’d fall out of my seat with amazement at this once-in-a-thousand-lifetimes coincidence, and nobody who played spades would ever believe it was real. Indeed, if I were playing a game with someone and they got that second hand, I’d immediately assume they had cheated (or that they were a skilled card magician, which is kind of the same thing). And yet, each of these hands has exactly the same odds of being dealt. But the second one just feels intuitively more unlikely, because the first one basically looks like what we imagine randomness looks like, while the second does not. The strength of the first hand is within the normal range, while the second hand is invincible. That’s why I’d never take notice of the one-in-a-thousand-lifetimes coincidence of the first hand. Even though the odds of that first hand are very low (about 1 in 635 billion*), the effect of having that particular hand isn’t very noticeable. Every time you’re dealt a 13-card hand in spades, you are witnessing something that is thousands of times less likely than winning the Powerball – but that’s just the kind of coincidence we selectively overlook. (*The total number of 13-card hands you could be dealt comes out to 52! / (13! * (52 – 13)!), leading to 635,013,559,600 possible hands.) If I told you “The odds of X happening to you are approximately 1 in 635 billion,” you might reasonably conclude that you can be near-certain that X will never occur in your lifetime. And yet, every time you are dealt a hand in spades, something with a 1 in 635 billion chance occurs. Massively improbable occurrences happen all the time—but we mostly don’t notice them. Even more staggeringly improbable is the arrangement of any given deck of cards you shuffle. There are 52! ways a deck of cards can be arranged—or, fully written out, there are 80,658,175,170,943,878,571,660,636,856,403,766,975,289,505,440,883,277,824,000,000,000,000 possible unique arrangements into which a deck of cards can be shuffled. (See this for an attempt to illustrate just how mind-meltingly huge that number is.) Every time you shuffle a deck of cards, it is all but certain you are creating an arrangement that has never existed before and will never exist again until the heat death of the universe. But even knowing that, I’ll never shuffle a deck of cards and be floored at the nearly impossible odds of the arrangement I just created—unless it looks distinctive in some way (maybe by alternating red and black cards throughout the entire arrangement). This is all stuff I know intellectually, but still fail to grasp instinctively—hence my knee-jerk reaction to particular spades hands as if they were unusually unlikely to happen. But even though my “system one” mind has this knee jerk reaction, it’s still good train your “system two” mind to jump in and remind yourself that the mundane things around you are just as miraculously unlikely as other things that seem much more striking—and that dramatic coincidence that caught your eye maybe isn’t all it’s cracked up to be. (0 COMMENTS)

According to the IMF, America’s GDP per capita (in PPP terms) is 35.6% higher than in Canada. In a recent post, I pointed out that to the casual observer, Canadian living standards seem fairly close to those in the US, albeit slightly lower. In this post I’ll try to address the question of why the gap in GDP per capita appears to be much larger than the gap in living standards. Health care is a good place to start.  The US spends just under 18% of GDP on health care, whereas Canada spends a bit less than 12% of GDP.  In my view, much of the US spending on health care is pure waste, caused by heavy explicit and implicit subsidies, combined with severe restrictions on the supply of health care.  But even if you assume that 100% of American health care spending is useful, the gap in spending could help to explain why the perceived gap in living standards is smaller than the gap in per capita GDP.  A tourist visiting Canada notices things like houses, home appliances, cars, clothes, restaurants, infrastructure, and other aspects of living standards.  Unless they visit a hospital, they are unlikely to notice the part of GDP that goes into health care. A similar argument applies to military spending, an area where the US outspends Canada by 2.1% of GDP (3.4% vs. 1.3%).  Once again, there are differing views as to whether this spending is useful or wasteful.  But there is little doubt that military spending doesn’t factor into perceived living standards. Those two factors alone can explain 8% of the 35.6% gap in GDP/capita.  But there are numerous other areas that also might help to explain a portion of the gap.  According to ChatGPT, the US spends 6.0% of GDP on education and Canada spends roughly 5.2% or 5.3% of GDP (both public and private).  Again, tourists might not notice that difference. I recently got a note that my umbrella insurance premiums would almost double next year.  They cited this reason: Rising personal injury settlements and litigation costs: California is known for high jury awards and legal settlements in personal injury cases, such as those from auto accidents or premises liability. This is influenced by factors like California’s comparative negligence laws and the absence of caps on non-economic damages in many cases, leading to larger payouts. Driving around California, you see hundreds of billboards encouraging people to sue for real or imagined slights that they might have received.  You got drunk and smashed up your car?  Sue the bartender.  I suspect that Canada has a less predatory legal system, which might contribute to higher living standards for a given quantity of GDP.  (Please correct me if this is incorrect—I did not see those billboards on a recent trip to Canada.)   The US has a much higher crime rate than Canada, and as a result it probably spends more on crime prevention.  This includes obvious expenditures such as police and prisons.  But crime also has indirect effects, such as making urban living in Canada more pleasant than in many American cities.  Metro Chicago is richer than Toronto, but urban crime affects how Chicago is perceived.  This factor might also contribute to the perception that America’s living standards are not quite as high as you’d expect for a country that is 35.6% richer than Canada, which is itself a relatively affluent country by global standards. In the end, I estimated that US living standards—in purely material terms—seemed more like 10% or 20% higher than in Canada, not 35.6%.  I’d be curious what other people think, especially those of you with substantial experience traveling in both countries. PS.  Canada is a perfectly normal developed country.  The most interesting question is not, “Why is Canada poorer than the US?”  Rather, the key question is, “Why is the US richer than almost every developed country other than Switzerland and Norway?” (0 COMMENTS)

Lately, President Trump has been pressuring Federal Reserve chairman Jerome Powell to cut interest rates.  This has set off concerns about Federal Reserve independence.  And reasonably so.  Generally speaking, the more independent the central bank is from political pressure, the better the country’s economy performs on monetary measures like inflation (interested readers can find a survey of the literature here).  Indeed, the Banking Act of 1935 significantly changed the Federal Reserve’s structure to make it more independent from the Executive branch, and Congress in general. To be fair, Trump isn’t the only one trying to reduce Federal Reserve independence.  Libertarian-leaning folks also call for reduced Fed independence with slogans like “Audit the Fed!” But how much influence would an individual president have over Federal Reserve monetary policy?  Probably not much. Monetary policy is determined by the Federal Open Market Committee (FOMC), a 12-person committee made up of the 7 members of the Fed’s Board of Governors, the president of the Federal Reserve Bank’s New York branch, and 4 rotating Federal Reserve Bank presidents from other branches.  Of these 12 members, only the Board of Governors are appointed by the President (and confirmed by the Senate) to 14-year terms.  Of the current members (Jerome Powell, Philip Jefferson, Michelle Bowman, Michael Barr, Lisa Cook, Adriana Kugler, Christopher Waller), only one has a term expiring during this Trump administration (Adriana Kugler).  Powell’s term as chairman expires, but he remains on the board until his 14-year term is up.  Assuming each individual serves out their entire term, Trump could only appoint one person to this 12-member committee.  Even if this person is a puppet, one vote does not a majority make.  Even if one wants to include the three current members appointed by Trump in his first term, that still only means 4 votes out of 12. Now, readers will notice a problem in that last sentence.  “Jon, you sly and handsome devil,” I hear you cry,  “These are 14-year terms.  How could Trump have appointed 3 people in his first term?”  Not all Fed governors stay for their whole term.  These are some of the most in-demand people in the finance world.  A 14-year term represents a huge opportunity cost for them in terms of foregone salary from other alternatives.  Many quit before their term is up to take jobs elsewhere. Let us assume, for the sake of conversation, that all 7 on the board resign before their terms are up and a president can appoint (and get confirmed) all 7 new members who will follow lock-step with whatever he wants.  In that (extraordinarily unlikely) scenario, it is possible the president will be able to manipulate monetary policy. However, as Jason Furman (former CEA head under Obama and current Harvard professor) reminds us, the Federal Reserve is not a central planner, strictly speaking: President Trump’s focus on a Fed Chair who will slash rates is misguided even on his own terms: 1. The Fed Chair is 1 of 12 votes, a political hack Chair won’t get majority 2. Even if FFR slashed the rates people care about, like mortgage, could go up w/ higher expected inflation The Federal Reserve only sets a handful of interest rates, and those are limited to rates between banks—the discount rate (the rate at which banks can borrow from the Fed) and the interest rate it pays on bank reserves at the Fed.  The Fed tries to influence the Federal Funds Rate (the rate at which banks borrow from each other) through FOMC operations, but they do not set that rate. The actual rates you and I see are still determined by market factors: risk, inflation, supply, demand, etc.  The Fed cannot set interest rates for mortgages, credit cards, and so on.  It does not have that power.  It tries to influence those rates, yes, but it does not set them. So, even if a president were able to fully manipulate monetary policy, it is not likely to lead to the outcomes they want.  If Federal Reserve interest rates are unjustifiably lowered, commercial banks will anticipate more inflation, leading to higher nominal interest rates charged to consumers.  If a president is upset by this (predictable) turn of events, threats of price controls and other “solutions” could follow, making a bad situation even worse. Concerns over Federal Reserve independence are legitimate, but a lot of things would need to go wrong for it to lose its independence. (0 COMMENTS)

The second use is more resource-saving  than the third. At my cottage in Canada, I have running water from a pump in the lake but not safe water. So in what we call the “bath hut” I have a bottle of clean water from which I pour a little into a Dixie cup when I brush my teeth. After I’ve finished brushing, I swirl the toothbrush around in the Dixie cup water and then empty the water. I used to throw away the Dixie cup immediately after, but when I had a friend visiting last week, I noticed that he reused his. So I started doing the same. What I found, though, is that the cup lost a lot of resilience after the second use. So I started throwing the cups away after the second use. Then my numerate mind went to work. I realized that getting the second use was more important than getting the third use. Why? Here’s why. Imagine that I’m at my cottage for 18 days, which is approximately right. If I use each Dixie cup once, I use 36 (one in the morning and one in the evening.) If I use each cup twice, I use 18 of them, saving 18 Dixie cups. If I use each cup 3 times, I use 12 of them, saving an additional 6.   So the saving in resources from a second use is triple the saving in resources from a third use. The point generalizes. What if I went for a fourth use? Then I would use 9 cups. The saving from the fourth use would be only 3 cups. And so on. What’s the point? There are really two points. The first is the power of thinking on the margin. The next use, in going from 2 to 3 uses, is less resource-saving than in going from 1 to 2 uses. The second relates to an issue I worked on when I was the senior economist for energy with President Reagan’s Council of Economic Advisers: the CAFE mandate. CAFE is short for Corporate Average Fuel Economy. The mandate was part of the Energy Policy and Conservation Act, a law that President Ford signed in 1975. It was an indirect result of the price controls on gasoline, imposed by Nixon and kept by Ford. People were facing an artificially low price of gasoline and, OMG, were acting as if they were facing an artificially low price of gasoline. They weren’t switching to fuel-saving cars as quickly or extensively as many government energy planners thought they should. So rather than get rid of the price controls, Congress and the president came up with a requirement that each auto manufacturer, for a given model year, reach an average fuel economy of x miles per gallon, where x steadily ratcheted up over the years. I had 2 bosses at the CEA, chairman Martin Feldstein and member William Niskanen. Bill and I would have liked to repeal CAFE but that wasn’t going to happen. So we argued against further increases and in favor of relaxing the standards. We were unsuccessful. But here’s an argument that I didn’t emphasize but should have. The fuel economy saving from moving from a mandate of, say, 20 mpg to a mandate of 22 mpg is greater than the fuel economy saving of moving from 22 to 24. Imagine that in the United States, people drive their 100 million cars an average of 10,000 miles, for a total of 1 trillion miles. With an average mpg of 20, they use 50 billion gallons of gas. If the mandate is raised to 22, they use 45.5 billion gallons, for a saving of 4.5 billion gallons. But if the mandate is raised from 22 to 24, they use 41.7 billion gallons, for an extra saving of 3.8 billion gallons. If the mandate is raised from 24 to 26, they use 38.5 billion gallons, for an extra saving of 3.2 billion gallons. Notice that, just as with Dixie cups, each increment of required mph saves less gasoline than the previous increment. I’m assuming away behavioral effects. The so-called rebound effect is that with higher mandate fuel economy, the price of an extra mile falls, and so people will drive more miles. But this assumption doesn’t hurt my reasoning because with each increment of mandate mpg, the rebound effect attenuates also. So this is one of the things a microeconomist who studies regulation does on his vacation. Oops. I’m in Canada. Not vacation, but holiday. (0 COMMENTS)

In this episode of EconTalk, host Russ Roberts welcomes back philosopher and professor Leon Kass, to delve into the complex thoughts of Jean-Jacques Rousseau. It’s more than a discussion about Rousseau’s profound influence on Western philosophy. It is an opportunity to witness the art of deep reading as these two colleagues of Shalem College model the untangling a short excerpt of Jean Jacques Rousseau’s Discourse on the Origin and Foundations of Inequality among Men (trans. by Roger Masters).  Their conversation navigates through Rousseau’s life, his insights on human nature, and the evolution of his thoughts on inequality. As Kass and Roberts explore Rousseau’s ideas, they reflect on the implications for modern society, questioning whether advancements in civilization have indeed led to greater happiness or if they have, instead, led us to new forms of discontent. We hope you will share your thoughts as you watch, listen, and perhaps read along from your copy of the Discourse.    1- How does Rousseau define inequality in the context of human society, and what are the implications of his view on contemporary society?   2- In what ways does Rousseau’s distinction between true needs and mere wants challenge our understanding of consumerism and materialism in modern life? Adam Smith talks about our pursuit of gadgets in The Theory of Moral Sentiments. Do you agree with Roberts that it is primarily the beauty of things that seduces us?   3- How does Rousseau’s exploration of love and jealousy reveal deeper insights into human relationships, and what lessons can we take from this in terms of personal and societal dynamics?   4- What does Rousseau suggest about the relationship between social interactions and the development of moral responsibilities, and how can this understanding inform our behavior in today’s society?   5- Given Rousseau’s assertion that civilization may corrupt our happiness, how can we reconcile the benefits of modern advancements with the potential costs to our emotional well-being? Do you believe that our opportunity for happiness has diminished?   (0 COMMENTS)

In my last post, I discussed reasons why rage bait is so depressingly successful. And I see a lot of discourse in favor of libertarianism that seems to lean into the rage bait angle. Sometimes it takes the form of “look at this outrageous and awful thing” done by the government or caused by government regulations. Of course, one could try to frame such an article as explaining a tragic and sad tale, rather than using it to promote anger and outrage. But this is not a good strategy for engagement – stories that provoke sadness actively discourage engagement. Another method of rage bait I sometimes see takes a lower track, along the lines of “here’s why anyone who disagrees with us must be stupid, evil, or both.” Neither of these are routes I particularly enjoy taking. Still, the news is not entirely bad – and there is at least one promising alternative to rage bait that can be used to make ideas more engaging. According to the study I cited in the previous post, there’s one particular form of engagement that is almost as successful at creating engagement as anger – and it’s one I think libertarians can take advantage of. You can see it on Figure 2 on page 8 – while anger is the most motivational emotion, a close second is awe. This is something libertarian ideas can very easily accommodate. Leonard Read’s classic essay I, Pencil has had a tremendous amount of staying power precisely because its message, when fully understood, is truly awe-inspiring. The ideas of decentralized and spontaneous order, too, can be awe-inspiring when first absorbed. I was awestruck reading the Ostrom’s work on how people can come to voluntary, decentralized, bottom-up solutions to collective action problems that most social scientists insisted could only be solved by coercive, centralized, top-down approaches. I think Hayek understood this on some level – in his paper The Use of Knowledge in Society, Hayek refers to the price mechanism as a “marvel” and follows up by saying, I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. I myself have attempted to make my own contributions to this kind of discourse, such as the time I used something as seemingly simple as bananas. I pointed out how, if you think about it, the fact that on a twenty-below-zero winter day in Minnesota I can go to any grocery store in the area and buy seven pounds of fresh tropical fruit for three dollars is utterly amazing. I think awe beats anger as an overall approach. For one, it’s just more psychologically healthy. Wallowing in anger, and encouraging others to do so, is a miserable way to spend your limited life. (As the comedian Patton Oswalt once said to a heckler in his audience, “You’re going to miss everything cool, and die angry.”) But more importantly, awe has far more staying power in the long term. Anger burns bright but burns out quickly – and that’s why it so often seems like the zeitgeist is so quickly hopping from one outrage of the moment to a new one the moment after. Anger can’t sustain itself. But awe can capture someone’s imagination for a lifetime. (0 COMMENTS)

If a free country is defined as a place where an individual or private organization is free to engage in voluntary cooperation—including trade—with whoever is willing or able to and on terms accepted by both parties, it follows that “trade war” is a contradiction in terms. Free trade is peaceful trade. Why is this definition of a free country useful? Why should we see individual action as inseparable from social life? For two sorts of reasons. First, a free society is desirable to the extent that equal liberty, along with the opportunities and general prosperity that follow (as economics demonstrates), are themselves desirable. Second, understanding the consequences of social interaction requires methodological individualism—that is, to start the analysis from individual preferences, incentives, and self-interest. In the context of our topic, it is easy to see the importance of individual motivations. Suppose that “France” and “Canada” stop trading. Only methodological individualism can explain the smuggling that will result. There are justifiable exceptions to free trade when the very possibility of free trade is compromised—killer-for-hire contracts, for example, or the trade or ownership of slaves. Other restrictions can be argued for (see notably James Buchanan’s The Limits of Liberty or, co-authored with Gordon Tullock, The Calculus of Consent). That a state may restrict its own subjects’ liberty because another state ruler does the same, constitutes, at least in peacetime, an invalid justification. All that is different if one believes that “countries” trade. A moment of reflection suggests that they do not. How can “France” trade with “Canada”? Neither has a brain, arms, or legs, with which it can choose to trade and approach the other with arms full of goodies to exchange. Nobody in his right mind, even with only basic information, can believe that this happens in reality. What most people (alas) intuitively believe is that the political authority in France trades with the political authority in Canada; or, in practice, that the political authority in a country decides with whom and on what conditions its subjects and their private associations may trade; and that there is no other society possible or desirable. Outside of a free society, a trade war is just as possible as an all-out war. Often, if not nearly always in the history of mankind, the two sorts of war went hand-in-hand. The rulers of France and Spain could engage in war because it was in their interests to do so. Whether the rulers are elected or not matters little; what does matter is the scope and extent of their power. But note how methodological individualism is still essential to explain the rulers’ actions—to which extent, for example, they respect the international-law principle pacta sunt servanda. ****************************** “Trade War” by ChatGPT, with some guidance (0 COMMENTS)

A year ago, I had this to say: The progressive left will never be able to achieve their dream of a Euro-style welfare state by taxing the rich. If you read the smarter progressives, they all know this. They understand that the US would have to add a large tax on consumption in order to get government spending up to 45% of GDP. Until now, that idea has been a complete non-starter, because of intense opposition from the GOP.But now, Trump is proposing a big new tax on consumption, indeed a tax that is even more regressive than a VAT. He’s advocating a 10% tariff on all imports (and 60% on China.) Yes, that falls far short of a 20% VAT on goods and services. But it’s the foot in the door. The next step is when the Dems reclaim power and complain that tariffs hurt the poor because the consumption basket of the rich is skewed toward services. “Why should services be exempt?” They switch us from a 10% tariff to a 10% VAT. Then, when more money is needed, it becomes a 12% VAT. Rinse and repeat . . . we are on the way to becoming a Euro-style welfare state. A few days ago, Noah Millman observed in the NYT that proponents of tariffs: sometimes proclaim these as a great source of revenue, but in reality even very high tariff rates won’t do much to fill our fiscal hole because trade, while economically crucial, is still only a modest percentage of the American economy (imports of goods totaled approximately 12 percent of our G.D.P. in 2024). Furthermore, higher tariffs would reduce the volume of trade. But tariffs are a tax on consumption, and higher taxes on consumption are almost certainly going to be part of any serious attempt to solve America’s looming fiscal crisis. Our federal tax revenues are already unusually skewed toward income taxes, which are themselves unusually progressive compared with those of other O.E.C.D. countries. The gap between American tax receipts and the O.E.C.D. average can be almost entirely accounted for by the fact that America doesn’t have a value-added tax. Under normal circumstances, passing a VAT — a regressive tax on consumption — would be political suicide for either party. But in the context of a fiscal emergency, and with the cost partly offset by cuts to even more regressive tariffs, it just might be a plank that both parties could agree to walk together. A recent post by Matt Yglesias shows that the rate of capital taxation in Europe isn’t much different from in the US; it is European consumption taxes that are much higher than in the US.  Although tariffs are a tax on consumption, they are not a true “consumption tax“, as they also apply to investment goods.  A value-added tax is a true consumption tax and is thus generally considered by economists to be more efficient than a tariff. As time goes by, I am becoming more and more convinced that a high tariff policy will eventually lead to a big VAT, which is the sine qua non of a European-style welfare state.  We are still a long way from that outcome, but the door has been cracked open and I believe that we can already see how this will play out in the long run. (0 COMMENTS)

In almost any discussion of political and social issues, someone will use the argument that a discrepancy between two groups is per se evidence of discrimination against one group.  However, statistical analysis reveals that the latter is not necessarily true.  For example, it is true that women make less than men, but women also tend to go into professions that pay less than men.  These professions may offer more flexibility along other margins than women prefer (e.g., more time with family, more safety, etc).  Once adjusting for these factors, the pay gap almost disappears.   Could discrimination still be going on against women?  Absolutely.  For example: There may be social pressures that discourage women from pursuing certain professions.  For example, the idea that women should be homemakers and men should be breadwinners encourages women to take on more flexible and secure work. There could also be phenomena like “tracking” by academic advisors: when my mother was growing up in the 60s, the school counselors would put each student on a “track” that would determine what classes they would take.  Girls were exclusively tracked along fashion, home ec, and education, while boys tended to be tracked along science, mathematics, and athletics. There may also be unpleasant working conditions that discourage women from going into certain professions.  I have seen students (both male and female) treat female professors horrifically compared to male professors. In each of these cases, wages might be the same once adjusted for certain variables, but they are instances of discrimination.   This tells us that mere discrepancy is not sufficient evidence of discrimination in and of itself.  It can only suggest that we gather more evidence. The same holds in politics.  Lately there have been claims that the unusual number of nationwide injunctions against executive orders are per se evidence of “lawfare” against the current administration, arguing that there is a judicial coup going on.  However, for the same reason as just discussed, this argument needs more evidence. There have been an unusual number of nationwide injunctions against the Trump administrations compared to other presidents.  In his first term, there were some 84 injunctions issued against the administration, compared with 28 in the Biden administration, 12 in the Obama administration, and 6 under George W Bush’s administration.  In the current term, there have been approximately 25 (source for these numbers).  But it is also true that President Trump has issued an unusually high number of executive orders.  In his first term, he issued 220 orders, an average of 55 per year.  That is the highest since Jimmy Carter.  If the current administration keeps the pace set so far, it will issue an average of 1,312 orders per year.  That’s the highest since FDR’s first term (source).  With so many more executive orders, just by random chance we should expect more nationwide injunctions.  Furthermore, many orders are extraordinarily broad and deal with topics that affect every American.  The broad effects of these orders mean more people are likely to be affected, also increasing the odds of nationwide injunctions in response.   Discrimination is extraordinarily hard to prove.  Basically, you’d need to show that an identical executive order before an identical judge would have gone the other way if a different administration had issued the order.  That is hard to manage (albeit not impossible).   Just like the wage example above, discrimination may be a factor.  But a discrepancy does not imply one is there.  We need more evidence.   — PS: To head off an anticipated objection: The Supreme Court’s ruling in Trump v CASA does not provide evidence that courts were discriminating.  The opinion does not address that issue.  In fact, the opinion explicitly notes that the state of affairs for presidents of both parties is “where almost every major presidential act [is] immediately frozen by a federal district court” (see pgs 4–5). (0 COMMENTS)