In honor of EconTalk’s 1,000th episode, host Russ Roberts reflects on his long, strange journey from pioneer of the podcast format to weekly interviewer of leading economists, authors, and thinkers. Hear him answer your–and Chat GPT’s–questions about why he got started, how he preps, and how he picks guests. He also explains why debate gave […] The post EconTalk #1000 (with Russ Roberts) appeared first on Econlib.

  Why California Gas Prices Are the Highest in America By Vance Ginn, The Daily Economy, May 23, 2025. Excerpt: According to the US Energy Information Administration (EIA), gasoline prices are generally shaped by five components: crude oil prices, refining costs, distribution and marketing, taxes, and regulations. In California, taxes and regulatory costs alone account for more than $1.30 per gallon — nearly double the national average. California has the highest gas tax in the country, at $0.678 per gallon, not including additional fees and environmental surcharges. Add in the Cap-and-Trade program, the Low Carbon Fuel Standard (LCFS), and boutique fuel blends that are required only in California, and it becomes clear why Californians pay more. And things are deteriorating further. The Mische study warns that with refinery closures due to hostile permitting processes and low expected returns under California’s climate mandates, fuel supply in the state could drop by 20 percent by 2026, even as demand stays relatively stable. Fewer refineries and rigid fuel standards will mean tighter supply and higher prices.   Don’t Put a Tariff on Barbie: Global Trade Increases the Variety and Lowers the Price of Dolls and Almost All Else We Buy by Jeremy Horpedahl, Cato at Liberty, May 23, 2025. Excerpts: President Trump, for his part, seems okay with this, and in two recent interviews he has stated that it’s fine if little girls only have 3 dolls, rather than 30. This might ring true to parents of young kids that can’t walk around the house without stepping on yet another child’s toy, but overall, this is a horrible message of degrowth. One of the main benefits of economic growth is the increasing variety and affordability of goods and services. At some point, kids might get bored with the 300th doll, but this is not something for the government to dictate. And this is the main point: consumers are choosing to buy 30 dolls, or whatever else, because they want to and it brings them joy. Consumers can always choose to buy less on their own, but they are best situated to determine how many dolls and other toys their kids can have (even though, as a parent, this is a constant struggle!). And: When the Barbie movie came out in 2023, I wrote a light-hearted but still serious post about the benefits of economic growth for women and young girls. Compared to when the Barbie doll was first released in 1959, a woman in 2023 could have 3–4 times as many dolls with the same number of hours of work. Or as Chelsea Follett put it, the number of hours needed to work to buy a Barbie fell “from well over an hour to just over 12 minutes.” We should only hope that we would see this progress for goods and services more widely. And indeed, for some categories of goods, we do see this progress.   Reagan’s Trade Doctrine by David Hebert and Marcus Witcher, Civitas Institute, May 26, 2025. Excerpts: Reagan’s commitment to free trade cannot be overstated. However, we must also understand the context in which he made these decisions. The US economy, particularly the auto industry, was in a very rough spot when he took office in 1981. After decades of low gas prices, which made driving big, heavy, less fuel-efficient cars of the sort made in Detroit affordable, an oil crisis beginning in 1973 and amplifying in late 1978 hit American car drivers especially hard. The oil crisis was so severe that it kicked off a series of mini recessions in 1980 and again in 1981. At the same time, Japan had begun exporting cars to the US, and in 1980, Japanese-made cars comprised over 20% of the US market. Their cars had three advantages over domestically produced cars: they were more fuel efficient due to their smaller size and weight-conscious construction, they were cheaper than American cars on the road, and they required significantly fewer repairs than their American counterparts. In many ways, they were superior vehicles. As a result, they were quickly supplanting US cars. Detroit’s Big Three automakers: Ford, General Motors, and Chrysler (now Stellantis) were languishing and were forced to lay off thousands of workers. And: The domestic automobile industry during the 1980s and 1990s illustrates this. Freed from the pressures of foreign competition, the domestic auto industry’s methods and practices calcified around the idea that Americans would purchase mid-size and large-car models. After all, while Japanese cars were still available, they were becoming harder and harder to come by. By contrast, Japanese automakers continued to invest in improving quality. By 1990, the quality gapbetween domestically made cars and Japanese cars (as measured by how frequently repairs were needed) had grown even larger. During the 90s, the Big Three were forced to close 42 of the 63 automotive assembly plants, resulting in tens of thousands of job losses in the industry the VER was supposed to protect. The reason for this is simple and easy to understand: Japanese cars were already better and more affordable than their domestic counterparts in 1981. Because the domestic car industry squandered the opportunity to make crucial adjustments to their fleets, Americans started buying more imported cars. Rather than short-term pains begetting long-term gains, the short-term pains of higher car prices led to greater long-term pains of reduced employment.   The Ongoing Collapse of the Climate Litigation Game by Benjamin Zycher, The National Interest, May 29, 2025. Excerpts: The climate litigation game is simple: attribute any and all damage even remotely plausible to “climate change” and then sue the fossil energy producers for purportedly causing that damage while misleading the public about those asserted impacts despite knowing about them for decades. The claims seem straightforward, and the potential uses for the many, many billions of dollars to be extracted are endless. Alas, the game is in a slow-motion collapse, the latest manifestation of which is the decision by Bucks County, Pennsylvania, Court of Common Pleas Judge Stephen Corr to dismiss the county climate lawsuit against several energy producers. Judge Corr wrote, “… Bucks County fails to state a claim upon which relief can be granted because Pennsylvania cannot apply its own laws to claims dealing with air in its ambient or interstate aspects, and, therefore, we are compelled to dismiss this lawsuit for lack of subject matter jurisdiction.” (emphasis added) And he added, “We join many other state and federal courts in finding that claims raised by Bucks County are solely within the province of federal law.” And the two “money” paragraphs: The response of many of the climate litigants is that the fossil energy producers have known all along that they were creating a climate crisis but hid that information from us. Seriously? Let us summarize what the Intergovernmental Panel on Climate Change in its 1990 First Assessment Report (page 202) made clear: It could not explain why temperatures were higher 5,000-6,000 years ago despite no evidence of an increase in greenhouse gas (GHG) concentrations. Fast forward to the most recent Sixth Assessment Report (2021-2022). The IPCC still cannot narrow down the “likely” range (p. 46) of climate effects of increased GHG concentrations and is able to predict (Table 12.12) various adverse future effects only with low confidence and only under an extreme emissions scenario. Did the fossil energy industry “know” things decades ago that were not known then and are not known today? Obviously not.   Note: I just noticed the misspelling on my pic. I’m still learning ChatGPT. (0 COMMENTS)

In the US, national security has been cited by proponents of protectionism for a wide variety of products, ranging from computer chips to automobiles to shipbuilding.  But when it comes to foreign countries, our protectionists often have a blind spot.  They cannot even imagine that any other country might also have good reasons for national security concerns.   “Everyone has their reasons” is a famous line from the classic French film Rules of the Game.  I was reminded of this line when I read a Bloomberg article about Swiss trade policy.  Switzerland eliminated all tariffs on the manufactured goods, but continues to protect its agricultural industry: Switzerland’s bid for a US trade deal risks sparking a showdown with one political force at least as feisty as President Donald Trump: its own farmers. A country whose lush Alpine pastures, cowbells and cheese underpin the national identity, and whose agricultural lobby wields outsized influence to match, is in danger of a tough reckoning over what that’s worth when economic prosperity is at stake. Countries such as Japan and Switzerland do not have a comparative advantage in agriculture.  Nonetheless, they often protect their farmers for various reasons, including “national security” considerations.  I presume the Swiss were glad that they had an intact farm sector during WWII, when they could not rely on food imports from Germany. At an international level, the political influence of farmers is inversely related to their share of the population, which is a problem for many theories of politics.  In poor countries, farmers are numerous but politically weak.  In almost all developed economies, farmers are a small minority.  But they are viewed a sympathetic lobby, even by city dwellers: Acceptance of the current design of the domestic food market is widespread, despite its burden on consumers, fostered by a national belief in self-reliance. But bigger economic interests may prevail when set against agriculture, which represents a small fraction of gross domestic product. The voice of farmers is often amplified in advanced economies, as seen with recent tractor protests from London to Paris and Brussels. In Switzerland, their influence pervades the political system. Long time readers know that Switzerland has my favorite political system.  The Bloomberg article mentions one more advantage of direct democracy: “Don’t underestimate Swiss diplomacy,” he said. “Whatever deal the Swiss may strike, it would probably have to be accepted by parliament, possibly even by referendum. That could strengthen Swiss negotiators because they can honestly say: Look, we won’t be able to get this through with our people.”     (0 COMMENTS)

Wall Street Journal editor Matthew Hennessey rightly criticied Vice-President JD Vance’s statement that the market is just “a tool, but it is not the purpose of American politics.” (“JD Vance Is Wrong: The Market Isn’t a ‘Tool,’” Wall Street Journal, May 26, 2025). Hennessey argues that markets are simply the way humans naturally trade and exchange without coercion: I give you this, you give me that. Simple exchange is what makes a market. Not faith, not mantras, not brick and mortar. Wherever people come together to trade is a market. … Markets harness supply and demand to coordinate economic transactions between people and firms. They facilitate the free exchange of goods and services. They are mechanisms for shared prosperity based on freedom from coercion. As true as that is, it misses, at least explicitly, an economically inspired philosophical argument that provides an important justification of the market. When he trades in the abstract locus that the market is, an individual aims at satisfying his preferences, whatever they are. He pursues his own ends, goals, or purpose, even when he claims he doesn’t. An individual’s possible purpose of charity, solidarity, or communality is what this individual subjectively considers such. He doesn’t pursue the “purpose of American politics,” except perhaps if he has been infected by naive democratism or becomes, to quote Adam Smith, one of these “insidious and crafty animal[s], vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs” (The Wealth of Nations, Book IV, Chapter 2). Contemporary classical libertarianism, even in its tamer forms, is more radical than Mr. Hennessey’s defense may suggest. Let me give two prime examples. Friedrich Hayek, a 1974 Nobel economics laureate, argued that in a free society, each individual is free to pursue his own ends and the state (“government”) does not impose collective ends, which would coercively impinge on individual ends. In the autoregulated order of a free society, there exists no collective purpose. Except for levying necessary taxes, the state can, in normal times, impose only general and abstract rules that forbid the use of certain means that would defeat the benefits that individuals derive from a free society. The state, for example, may ban murder and theft, in conformity with the rule of law, but it may not force an individual in a specific occupation (at least in peacetime, Hayek would say, opening a Pandora box). The “public good” can only reside in rules that facilitate the pursuit of individual ends by all individuals. (These ideas are notably defended in Hayek’s Law, Legislation, and Liberty, whose three volumes I have reviewed on Econlib: Rules and Order, The Mirage of Social Justice, and The Political Order of a Free People.) But is it possible to establish or maintain a free society without imposing this very goal enterprise as a collective purpose to be forced upon any individual? The intellectual enterprise of James Buchanan, laureate of the 1986 Nobel Prize in economics, was to answer the question. He endeavored to find a rational justification beyond Hayek’s recourse to the traditional rules that evolved in Western societies. The subtlety of his (and his co-authors’) social-contractarian solution cannot be overstated. A rational individual, he argued, does not want to be regimented at the service of a collective purpose that could turn against him and exploit him. He can only accept a set of rules that would be chosen unanimously by all individuals, thus giving him a veto right. The state is the organization charged with enforcing the set of rules that benefits each and every individual. The state is constitutionally constrained to remain within these strict limits, so as not to become a tool for the exploitation of some individuals. (The three seminal books developing these ideas are: James Buchanan and Gordon Tullock, The Calculus of Consent; Geoffrey Brennan and James Buchanan, The Reason of Rules; and James Buchanan, The Limits of Liberty—more or less in the order of the most technical to the most accessible. The links are to my reviews.) The radicalism of classical liberalism is a far cry from the economic illiteracy of the insidious and crafty animals who run governments, on the right or on the left, and their supporting mobs. ****************************** Our collective goal is the other way (4 COMMENTS)

  Co-blogger Jon Murphy, in “Why Must Americans Pay Tariffs?” May 29, 2025, points out that U.S. tariffs are largely paid by Americans. He cites the relevant literature. He then goes on to note that trade occurs between individuals and firms, not countries. This is true and important, but it’s not relevant to the issue of who bears the burden of tariffs. A tariff is a tax. There’s a straightforward way to assess who bears the burden of a tax: look at the elasticities of demand and supply. If our elasticity of demand is low and the exporters’ elasticity of supply is high, then we Americans bear most of the burden of the tax. But if our elasticity of demand is high and the exporters’ elasticity of supply is low, then the exporters bear most of the burden of the tax. Here’s what I wrote on that issue in “Tariffs Will Hurt Canadians and Americans Alike,” Defining Ideas, December 19, 2024: Many people who have, like me, been critical of tariffs, have claimed that US consumers bear the whole cost of the tariff. Writing in August 2019, for example, Rachel Layne of CBS News stated, “The fact is, companies here pay tariffs to US Customs and Border Protection when Chinese goods reach America’s shores.” It’s true that Americans write the checks. But one of the first things about taxes that we economists teach undergrads is that knowing who writes the check tells you exactly nothing about who bears the burden of a tax. What determines the split of the burden between producer (exporter) and consumer (importer) is their relative elasticities of supply and demand. Consider Canadian oil. On the one hand, many Americans in the Midwestern states depend upon oil from Canada. In response to the tariff, though, they will probably have oil shipped by train from other parts of the United States. That’s expensive, but it is a way to adjust. But Canadian oil producers have few alternative customers to sell to besides Americans. This lack of good options makes their elasticity of supply low. They’ll likely absorb most of the cost of the tariff by not raising prices very much. The result? Canadian oil producers would bear more than half of the burden of the tariff on oil. The outcome will depend on the goods in question. The fact that so many Canadians are sweating the tariffs that Trump is threatening suggests that they think they will bear a substantial part of the burden. As a generalization, it’s probably true that we U.S. consumers bear most of the burden of the tariffs that the U.S. government imposes. But there’s no necessity for that. It’s an empirical issue. Jon rests a lot of his argument on methodological individualism. But noting the relevance of elasticities of demand and supply does not contradict methodological individualism. (0 COMMENTS)

In this episode of EconTalk, Russ Roberts and Jonathan Rauch explore the instrumental and existential purpose of true religion in liberal democracy. In his new book Cross Purposes: Christianity’s Broken Bargain with Democracy, Rauch argues that the recent failure of Christianity has led Americans to transform politics into a “pseudo-religion.” Instead of relying on the protestant Christian theology that built America, both the Left and Right have replaced true faith with their radical partisan doctrines. These secular pseudo-religions fail to provide the profound values and community that liberal democracy requires to be successful, the consequences of which are apparent in the rapidly growing ungovernability and radicalism of America. To heal the nation, Rauch pleads with Christians to return to their faith and become more Christian. He points out that the founding fathers recognized liberal democracy’s inability to fulfill the necessary human need for meaning and community in life. Therefore, they made an implicit bargain with Christianity to maintain the republican virtue that American democracy needed. This bargain however has fallen through, and the liberal institutions it was supposed to support are floundering.  Although Rauch acknowledges the multi-causal nature of Christianity’s failure, his book examines the tragic decisions that Christians made about themselves that have brought us to this point. To do this, he organizes Christianity into three categories: thin, sharp, and thick. Thin Christianity refers to the secularization of the ecumenical, mainstream churches. These churches have lost their shiny counter-culturalism and have melted into secular culture. Instead of “exporting values into society,” they import secular ones into their own thin theology and become culturally irrelevant. Rather than remain distinct, they blend in and lose their dynamic appeal and influence.  Sharp Christianity refers to the secularization and arming of the evangelical church. Rather than blending in, the evangelical church picked sides and aligned themselves with the Republican party. They fell for Donald Trump’s promise of power and ignored the political importance of good character. They scream, “fight! fight! fight!” and desire domination over their secular enemies. Such extremism goes against Jesus’s teachings and drives those interested in Jesus’ message away. In doing this, they lose the essence of their faith and have morphed into right-wing radicals.  The last sector of Christianity is that which Rauch hopes to ignite: thick. This term refers to the type of Christianity that answers the existential questions of life and bolster liberal democracy, the type the founders desired, and the type that clings to Jesus’s teachings. Rauch presents these teachings in three core principles, each with significant secular ramifications. The first, do not fear, refers to Christian’s profound trust in God that all will be well. In the secular sphere, this hopeful faith counteracts the tyrannizing, apocalyptic fear both political parties exhibit, assuring them that losing the election is not the end of the world. The second principle, to imitate Jesus, promotes the protection of minorities and equal dignity of every human as an image bearer of God. These biblical precepts are key principles of liberal democracy and are embedded in the Declaration of Independence and the Constitution. Finally, the third principle of forgiveness recognizes that retribution and judgment are reserved for God. Instead of seeking vengeance, we should treat others with grace and mercy. Liberal democracy also relies on this mindset and rests in the peaceful, merciful governance of toleration, pluralism, and forbearance over the terrorization of the elected political party. These three principles are the linchpin that held America together in the past and they are the remedy for her ailment now. The Christianity that holds to them will support liberal democracy and start to rebuild the meaningful society that Alexis de Tocqueville once found in America.  In closing, Rauch leaves Roberts with a charge for non-Christians to recognize the importance of Christianity for society. Rather than neglecting or being hostile toward Christianity, non-Christians should acknowledge the importance of Jesus’s teachings and the stable, liberal society that they foster. People of faith should not be marginalized in society but welcomed and accepted. In support of this, Rauch shares his own personal journey from despising Christianity, to realizing the essential role it plays in American society. Although not entirely impossible without, American liberal democracy relies on Christianity to preserve and keep it.    Some questions for discussion: –       What distinguishes a true religion from a pseudo-religion?  –       Why cannot liberal democracy provide existential meaning? Can any political system? Why or why not?  –       Can any other religion support liberal democracy? If so, which ones can and what distinguishes them from those that cannot? (0 COMMENTS)

Without trade, life more complex than bacteria could not exist. We are literally made of free trade. It is in every cell of our bodies.  The first lifeforms to evolve on Earth, at least 3.5 billion years ago, were very simple. They were single-celled organisms that lacked a nucleus or the organelles we see in more recently evolved organisms. They live on today as archaea and bacteria. But somewhere along the way, possibly as early as 2.7 billion years ago, some of these simple cells discovered specialization and exchange. In other words, trade. These early entrepreneurs had comparative advantages, like producing energy or providing propulsion. Some of these specialists banded together as a survival tactic. If an energy-producing proto-mitochondria could give up some of its energy in exchange for a proto-flagellum’s help in escaping predators, both benefitted. Both survived, and both reproduced. Eventually, these mutually beneficial trading relationships became permanent. Members of a trading group enclosed themselves inside a common membrane, which itself specialized in protection and chemical balancing.  These early traders became the first eukaryotic cells. All life more complex than bacteria descends from these entrepreneurs. The word “eukaryotic” comes from the Greek words for “good” and “seed,” referring to the nucleus that housed some of the specialists, now called organelles.  Their archaean and bacterial ancestors are prokaryotic cells, or “before seed,” referring to their lack of nucleus and organelles. We can tell that many modern organelles used to be separate organisms because they have their own membranes, and several have their own DNA. Scientists can use mitochondrial DNA, for example, to trace matrilineal descent in humans. Chloroplasts, which can produce energy via photosynthesis, have their own DNA as well. RNA and DNA have their own origin stories.  If someone was designing a cell from scratch, they probably wouldn’t have come up with such a disorganized system of genetic storage. But if a bunch of traders spontaneously came together over time to specialize, exchange, and survive, this kludge model makes perfect sense. The benefits for these early specialists allowed them to further specialize in ways prokaryotic cells still have not, billions of years later. A modern mitochondria, for example, can generate 15,000 times as much energy as a typical prokaryotic bacterium. That provides the cell’s other specialists more energy for accomplishing their own amazing feats, to the benefit of all.  Without each organelle’s own specialized services, from hydration to chemical transport to reproduction, mitochondria would likely not be able to specialize so intensely at its task. Like human trade, this is win-win. Eventually, single-celled eukaryotes discovered a whole new level of trade. Just as organelles benefited by trading with each other inside one cell, so can entire cells benefit from trading with other entire cells. This is how multicellular organisms emerged. In a way, this was the first international trade, between different groups of organisms.  Multicellularity was an amazing innovation. While there are multicellular prokaryotes such as cyanobacteria, it took eukaryotes for multicellularity to really take off. Before long, algae, slime molds, and fungi evolved, and then plants and animals. If some ancient prokaryotic protectionist had been able to stop this process with the bacterial equivalent of tariffs, life as we know it would have evolved much more slowly, or possibly not at all. The next step of evolution required yet another level of trade. Groups of cells found that they could better survive by specializing in one task and exchanging services with other cell groups specializing in something else. This is where organs come from.  This innovation allowed plants and animals to emerge, with distinct cell types that specialize as roots, leaves, lungs, bones, and even brains that would one day think about trade.  At this level, specialization is so intense that no organ-size cell group could survive on its own. A brain cannot exist outside its body. It depends on the other organs to survive, just as they depend on it. They each specialize, exchange, and survive, just as the previous levels did, but at a larger scale than ever seen before. Now we move up yet another level of trade, between different species. Scientists call this symbiosis. Bees and plants trade with each other, with plants providing food and bees providing pollination services. Cleaner fish provide parasite removal services for other fish species, who queue up to get cleaned. These other fish species get a better quality of life and better survival odds in exchange for giving the cleaner fish a free meal, and for not eating the cleaner fish. Once humans emerged, we invented several new levels of trade. Individual humans traded with each other within their tribe, and with humans in other tribes. The specialization and productivity this enabled eventually allowed for villages, cities, states, nations, and even empires. Over millennia, people eventually developed a deep enough division of labor and the technology to trade with each other around the world, when they are allowed to. It is amazing to think that all these levels of trade are operating simultaneously. Every cell in your body, right now, two trillion of them, is engaging in internal trade among their organelles. Each of these cells is part of an organ or body part that is itself a specialist. All of these specialists work together to form an individual person with a single consciousness and free will. This person in turn specializes in certain tasks, such as writing essays about trade, which it then exchanges with specialists in other areas. Biological evolution and social evolution are tightly intertwined in what might be the world’s most intricate dance. It is all made possible by trade, from the microscopic level to the global level. Trade doesn’t just make possible modern prosperity. It makes possible life as we know it. If any one of those levels of trade were to cease, most life on Earth would cease. It is worth taking some time to ponder what this deep heritage of trade means for today’s tariff debate. President Trump’s tariff war could spark a recession or worse, if it hasn’t already. Just as prokaryotic cells still survive today, so would a protectionist America. But prokaryotes haven’t changed much in three billion years. Similarly, a protectionist world’s growth and dynamism would slow.  Liberalism’s greatest achievement, the post-1800 Great Enrichment that is still continuing today, is at risk if Trump’s trade war escalates. A more evolved trade policy has guided life from the first eukaryotic cell on up to Adam Smith and Charles Darwin, who themselves were two highly sophisticated trading blocs of eukaryotic cells. The growth in human trade from their time to ours resulted in the greatest improvement in living standards in our species’ history. Darwin was influenced by Adam Smith’s Theory of Moral Sentiments, in an act of intergenerational trade. Smith gained immortality through print, and Darwin gained insights he could apply to his own ideas. This is yet another level of trade to explore. If you think trade does more harm than good, you’re up against more than just the laws of economics. You’re up against evolution itself and, measured in biomass, the majority of life on Earth.   Ryan Young is senior economist at the Competitive Enterprise Institute. (0 COMMENTS)

In late July 1933, President Roosevelt enacted one of the most destructive economic policies in all of American history. The President’s Re-employment Agreement mandated an immediate 20% rise in hourly nominal wages. The stock market crashed.  This action aborted a promising economic recovery that had raised industrial production by 57% between March and July 1933. By May of 1935, industrial production was actually lower than on day the wage policy was enacted.Almost exactly 90 years ago, on May 27 1935, the Supreme Court saved FDR from his folly. The entire NIRA was ruled unconstitutional, including the wage fixing provisions. Industrial production almost immediately began rising rapidly, and FDR won a historic landslide victory in the November 1936 election. In other news, this caught my eye: The Trump administration’s threat to impose 50 percent tariffs on the European Union and steep tariffs of varying sizes on other critical American trading partners hung in limbo on Thursday after a panel of U.S. federal judges blocked a set of across-the-board charges. But both trade experts and America’s trading partners around the world greeted the news with caution, not celebration. Stocks rose internationally as investors hoped the decision, handed down by the U.S. Court of International Trade, might restrain the assault that Washington is waging on world markets. Of course, the decision will be appealed. It might seem unreasonable that an obscure lower level court could veto a massive change in American global trade policy.  The court was set up to rule on minor trade issues.  Aren’t we a democracy?  But it’s equally true that the president has no legal authority to enact a massive change in American global trade policy.  His recent tariff actions have been based on laws allowing narrowly targeted adjustments in trade policy reflecting issues such as national security.  The law does not allow the president to determine US fiscal policy (which is the prerogative of Congress), nor does it allow the president to change America from a free trading nation to a protectionist nation.  It only looks like the court overstepped its role because it was pushing back against a presidency that had also overstepped its role.   If Congress had enacted massive tariffs, and then the court ruled they were illegal, then it would in fact be overstepping its role.  The GOP-dominated Congress is perfectly free to enact any tariffs proposed by President Trump.  The courts would have no justification for overturning such tariffs. PS.  This is from a very informative article by Ilya Somin: It is worth noting that the panel include judges appointed by both Republican and Democratic presidents, including one (Judge Reif) appointed by Trump, one appointed by Reagan (Judge Restani), and one by Obama (Judge Katzmann). (0 COMMENTS)

A major assertion by the Trump Administration is that tariffs are paid for by foreigners.  And, indeed, under very specific circumstances, a tariff may be paid in part or in whole by a foreign producer: if the importing country is a monopsony (or has significant market power), if the exporting country has price power, and if there is no foreign retaliation, then a sufficiently small tariff could induce the exporting country to lower prices in order to retain market share.  That is, the exporter may absorb some or all of the tariff (an interesting and non-technical discussion on the theory and its history can be found here). At least on paper, the US seems to fit the description.  We are one of the largest countries in international trade.  US imports account for about 13.8% of global imports and exports are about 8% of global exports (data from the World Bank).  Furthermore, in some individual markets, we are the largest buyers/sellers by far.  So, at least in theory, there should be some part of a US tariff that is eaten by the foreign producer.  At yet, that is not the case in reality.  Indeed, tariffs imposed by the US government are pretty much entirely paid by Americans.  Why is this the case?  One could be tempted to throw away trade models and make unscientific appeals to things like greed or politics (as the White House has done).  But one shouldn’t throw out a perfectly good theory except when it cannot explain things.  And, as it happens, properly understood trade theory explains this seeming contradiction.  Most trade models treat countries as individual economic actors: The United States trades with Mexico.  This is done for pedagogical purposes to help our students see that there is little difference between domestic and international trade.  And there are times when treating countries as individual economic actors is useful or appropriate. The theoretical ability to pass on a tariff depends on treating countries as individual actors. But the reality is that trade, all trade, ultimately occurs between individuals, not countries.  The United States is not trading with Mexico.  A firm in Dallas is trading with a firm in Mexico City.  Consequently, while countries in the aggregate may have some sort of market power, individuals mostly do not.  The actual ability to pass on a tariff, or to force a foreign supplier to pay a tariff, is limited to non-existent. But isn’t this the point of tariffs?  To “collectively” negotiate for all?  Can’t we apply the same logic here to the “firm” called The United States?  Alas, no.  A country is not a firm.  Short of outright socialism, the president is not negotiating for inputs for American firms.  The firms are still the ones making buying decisions. It is their ability to pass on prices, not some fiction called “The United States Company,” that matters. The predictions and proclamations made by the Trump Administration and its economists fail to come true because they do not appreciate methodological individualism: that economic decisions are ultimately made by individuals, and that must be where our analysis begins.  Those who claim American market power can make foreigners eat the cost of US tariffs zoom out too far to the aggregate and forget that the aggregate is not independent, but rather emergent, from individuals.  This fatal conceit, this fatal error, has been the burr under the saddle of many a politician, and the Trump Administration is no different.  Reality is not optional, no matter how many fancy Greek letters you have to say otherwise. (0 COMMENTS)

  Economist Marina von Neumann Whitman died, at age 90, on May 20 this year. She was one of my 3 bosses when I was a summer intern at the Council of Economic Advisers in the summer of 1973. (I think of this as the “Watergate summer” because the hearings of the Watergate Committee were conducted that summer. Every morning, as I rode my bicycle down Capitol Hill to work in the Old Executive Office Building, I saw people lined up at one of the Senate buildings to watch the committee, chaired by North Carolina Democratic Senator Sam Ervin.) My other 2 bosses were chairman Herb Stein and member Gary L. Seevers. I started working in early June under Bob Tollison. He left at the end of June and had enough confidence in my ability that he recommended to Herb that Herb let me serve as an acting senior economist for the approximately 5 or 6 weeks before his replacement, Alan Pulsifer, arrived. Surprisingly, even though I had been a little brash and even rude in a meeting with Herb the day before, Herb said yes. I think Herb had the perspective I now have about young people: they can do stupid, thoughtless things but you should not put too much weight on those things if you’ve seen other good evidence of performance. But I’m getting away from the story. I reported to Marina, the other member, on only a few issues. I attended one major meeting with her and other people from other agencies who were at her rank, roughly the rank of undersecretary. Although I inappropriately spoke up to state the CEA’s position on something before she did, Marina didn’t chide me. I have two stories about Marina. Here’s the first, which is really about Herb Stein. It’s from Chapter 12 of my 2001 book, The Joy of Freedom: An Economist’s Odyssey. The chapter is titled “A Tour of Washington.” Herb would have made a first-rate comedian—his son, Ben Stein of Comedy Central fame, comes by it honestly. Near the end of the summer, Marina von Neumann Whitman (the daughter of the famous mathematician John von Neumann), one of the members of the Council, was set to leave, so there was a big party for her over at the New Executive Office Building, attended by various muck-a-mucks, including Arthur Burns, then chairman of the Federal Reserve Board, and George Shultz, secretary of the treasury, both economists who defended price controls knowing full well that they would hurt the economy. That summer, the Watergate hearings were going at full tilt, and it had been revealed just weeks before that (a) many conversations in the White House had been taped and (b) the ones the Watergate committee wanted were missing. So, at one point in the celebration, Herb announced that “the missing White House tapes” had been found and that he wanted to play an excerpt. He turned on the tape recorder and what followed was a skit, scripted by Herb, in which Herb did his own voice, a secretary named Margaret Snyder did Marina’s voice, and the other member of the Council, Gary Seevers, did Nixon’s voice. One segment of that skit still stands out in my memory: Nixon: Herb, inflation is rising again. What should we do? Stein: Let me ask your new member, Marina. Marina, what should we do? Marina: Impose price controls. Nixon: But we already have price controls. Marina: Then abolish price controls. People, including Burns and Shultz, laughed uproariously. I laughed too. It was pretty funny, in isolation. I go on in the book to address my upset about the broader issue of price controls, but I want to stick to this being a post on Marina, not on Herb Stein or price controls. Fast forward to September 1980, the last time I saw and talked to Marina. I told the story at length here. I was trying to talk my way on to a panel on the presidential candidates’ economic policies. This is the part I want to highlight, because Marina did me a big favor. Then I called the president of the AEA, William Baumol, and asked him if I could be on the panel. “That’s not my call,” he answered. “That’s up to Leonard Silk, who put the panel together and is chairing the session.” “When I talk to Leonard Silk, may I tell him that this has your blessing?” He answered yes. So I wandered around the convention hall and found Marina von Neumann Whitman, one of my former bosses at Nixon’s Council of Economic Advisers (CEA) when she was a member of the CEA, and, coincidentally, she was talking to Leonard Silk. So I went up to them, said hi, and introduced myself to Leonard. Just then, in another lucky coincidence, Hendrik Houthakker came along. He had been a member of the CEA when Marina was a senior staff economist. I got to the point quickly. I pointed out that Hendrik was representing John Anderson, whom everyone knew had no chance of winning the election. Therefore, I said, I thought it reasonable that Clark be represented and I had got permission from the Clark campaign to represent him. “I’m so sorry,” said Leonard, “but this is not my call. Bill Baumol is the program organizer and it’s up to him.” “Good,” I said, “because I talked to him an hour ago, he said he favors it, and that’s it actually up to you.” Leonard was nonplussed, but only for a few seconds. “The problem is,” he said, “that we have limited time and each person will get only 15 minutes or so. There won’t be time for you.” “I understand,” I said, “so how about this? Give me 7 minutes and I promise to stick to it.” I looked at Hendrik, pleading with my eyes for his support. He didn’t give it directly, but didn’t object. Finally, Marina said, “Come on, Leonard. Be a sport.” “OK,” said Leonard.   (0 COMMENTS)