National Pork Producers Council v. Ross may be one of the most consequential cases of the Term, and I don’t just mean for the price of pork chops. A few states, most importantly California, are such large markets that—if the Supreme Court does not intervene—they can impose their notions of proper standards of production on every other state in the Union, at little cost to themselves. Because nationwide producers often cannot segment their markets, producers will be forced to follow California rules for the whole country, or face the crippling consequence of exclusion from the California market. Add to this the fact that these large states—California, Texas, New York—are also one-party states, whose views on social policy are often at one or another extreme. More moderate Americans in other states will be governed by laws they would not vote for, if they had a chance. This is contrary to the democratic postulates of our federal system. This is from Eugene Volokh, “From Prof. Michael McConnell (Stanford) on the Dormant Commerce Clause,” The Volokh Conspiracy, October 11, 2022. Professor McConnell, as Eugene Volokh points out, “is one of the top constitutional law scholars in the country.” On this one, though, I wonder. My disagreement has nothing to do with whether the law in question is a good one; I think it’s bad and I voted against it. But sometimes federalism allows bad laws. In reading over this brief, I was reminded of the great title that James Buchanan chose (I assume he chose it) for his critique of the first edition of Richard Posner’s Economic Analysis of Law. The title: “Good Economics–Bad Law.” Except in this case I’m not even sure it’s good economics; more on that anon. The Law But now to the law. If it were true that the California law “forced” (McConnell’s words) producers in other states “to follow California rules for the whole country,” then he would have a point. But nothing in the law forces them to do that. I use the term “forced” literally; McConnell apparently does not. Producers in other states are free to produce for 49 states plus D.C. and not sell to consumers in California. He calls this a “crippling consequence,” but is it really? McConnell notes that Californians “consume 13 percent of all pork produced in the United States.” Is is really crippling to forego 13 percent of a large market? I don’t see it. The essence of federalism is that voters and politicians in various states get to decide on the regulations and laws in that state. There are certain constraints, of course, that the U.S. Constitution imposes. But McConnell doesn’t succeed at saying why the U.S. Constitution forbids California voters from voting to allow only certain products to be sold in the state. It’s not as if the California government is discriminating against out-of-state producers; it applies the same rules to all pork sold in California. McConnell does make one possibly good legal argument. He writes, “California regulators will roam the land inspecting farms in other states to enforce the law.” If that were true, then he would be right: this would be a state restriction on interstate commerce. It’s hard to see, though, how it would be true. Wouldn’t every pig farmer outside of California be legally able to say, “Get the hell off my land.” Notice that McConnell tries to bolster his argument by pointing out, correctly, that California is a one-party state in which many people’s views are “at one or another extreme.” Don’t I know it, having lived in this wacky state continuously since 1984. But why should that matter under federalism? Isn’t one of the major points in favor of federalism that it allows for diversity of policies? The Economics Now to McConnell’s economics, which I think is suspect on two counts. First, monopsony. McConnell writes, “Once California is green-lighted to use its monopsony power to pressure businesses all over the country to comply with Californian social preferences, there will be no end to it.” But does control over 13 percent of a market constitute monopsony? I think that’s a reach. Second, on who will pay the cost. McConnell writes, “A few states, most importantly California, are such large markets that—if the Supreme Court does not intervene—they can impose their notions of proper standards of production on every other state in the Union, at little cost to themselves.” Elsewhere McConnell argues that this law will substantially raise the price of pork. My guess is that he’s right. So how, exactly, is it that we Californians will bear little cost? Note to Commenters: I have found, when I’ve commented on legal issues, that people, especially lawyers, tell me to stick to economics. But that’s not an argument. Notice that I didn’t say that McConnell shouldn’t make economic arguments. Rather, I challenged his arguments, showing how weak they are.There’s a reasonable chance that I’m wrong about the constitutional issues here. If so, say why. (0 COMMENTS)

Free market advocates are sometimes viewed as unrealistic ideologues, obsessed with issues such as moral hazard at a time when there is a need to stabilize financial markets.  In fact, it is the seemingly pragmatic interventionists that are being simplistic, as they overlook the long run impact of their actions.  Each bailout encourages even greater risk taking, making the financial system even more unstable. In some cases, the advocacy of intervention is based on a misreading of history.  The financial instability experienced in the US prior to 1933 was not caused by laissez-faire, it was caused by a combination of bank branching prohibitions and unstable monetary policy.  And even then, the larger banks survived declines in NGDP that would wipe out the entire modern global banking system.  Canada’s system was much less regulated than in America, and had relatively few problems during the Great Depression.  Financiers behaved more responsibly back before FDIC. Bloomberg has a good piece explaining how the Bank of England is creating ever more moral hazard, extending bailouts beyond just the banking system: So when the gilt market wobbled last week, there was no one left other than the Bank of England with the firepower to intervene. Fortunately, the BOE had already laid the groundwork. In January 2021, its executive director for markets, Andrew Hauser, made a speech in London outlining a case for its role as “market maker of last resort.” Central banks had already broadened their focus from backstopping banks to backstopping markets. But given the shifting sands under the overall system, he warned that the pace may increase: “There is every reason to believe that, absent further action, we will see more frequent periods of dysfunction in the very markets increasingly relied on by households and firms.” And this problem goes well beyond the financial system.  Unfortunately, governments are increasingly determined to protect people from their folly, whether it be borrowing lots of money to earn useless college degrees or building homes in the path of hurricanes.  These protections cause people to behave still more foolishly.  Then we’ll be told of the need for even more regulation, to protect us from the even more foolish behavior.  Perhaps I should use scare quotes for “foolish”.  Given the government protections, much of the behavior is privately beneficial while being socially wealth destroying. At a deeper level, this is all a part of what Hayek called the fatal conceit, the view that governments can control the economy.  Instead, government should focus on avoiding actions that destabilize the economy.  Hayek believed that the best way for governments to avoid destabilizing the economy is through NGDP targeting.  When NGDP is stabilized, we no longer need to fear that the failure of a large financial institution (or a major decline in asset prices) will lead to high unemployment.  NGDP targeting makes laissez-faire policies much more appealing. PS.  Some people are wrongly suggesting that the Diamond-Dybvig model of bank runs provides justification for government deposit insurance.  George Selgin does an outstanding job (here and here) of explaining why that is not the case. (0 COMMENTS)

The committee that awards the Nobel Prize in economics announced Monday it has chosen three U.S. economists for the 2022 prize: former Federal Reserve Chairman Ben S. Bernanke, Douglas W. Diamond of the University of Chicago and Philip H. Dybvig of Washington University in St. Louis. The award is for “research on banks and financial crises.” The committee praised the winners for doing work “of great practical importance in regulating financial markets and dealing with financial crises.” Many monetary economists would disagree. This is the opening paragraph of David R. Henderson, “An Economics Nobel for and by Central Bankers,” Wall Street Journal, October 10, 2022 (October 11 print edition.) I rarely prefer an editor’s title to the one I choose, but this time I do. The editor clearly picked up on my closing paragraph: The Nobel Prize in economics is funded not by the Nobel Foundation but by Sweden’s central bank. I don’t usually think that matters, but in this case I wonder if it does. The 2022 award seems to be an affirmation by central bankers of the value of central banking. I’ll publish the whole thing on EconLog in 30 days. I woke up at 2:45 a.m. PDT and turned on my computer to see who won. Once I learned, I knew right away that I knew enough to write the piece. (Sometimes I have to research for about an hour to make sure.) The main reason is that we covered all of these issues in detail in Jeff Hummel’s Masters course in Monetary Theory at San Jose State in early 2021. Larry White’s analysis of the Diamond/Dybvig model of “banking” was invaluable, and Jeff had walked us through it very carefully. (0 COMMENTS)

The only reason American international sanctions work is that they are enforced by the American government against Americans and American companies. I should say it’s “the main reason” because American sanctions are also enforced, although more indirectly, against people and companies in friendly countries. Sanctions are analogous to protectionism even if they can be invoked for other (good or bad) reasons than supporting the prices and profits or wages of American producers—reasons such as national security or countering foreign tyranny. Like sanctions, a tariff against “China,” for example, only works because it is enforced by the American government against Americans who want to buy Chinese stuff. (See my previous post “American Sanctions: Why Foreigners Obey,” October 1, 2019.) Another example of that is provided by the Wall Street Journal (“Chevron Faces Tough Job Restarting Venezuela’s Damaged Oil Fields,” October 6, 2022): Chevron in 2020 wrote down its Venezuelan assets, taking a charge of $2.6 billion, just months after the Trump administration stepped up sanctions that barred U.S. companies from drilling, transporting or selling Venezuelan crude. This logic is not well understood by the general public. Governments and special interests don’t go out of their way to explain it. Speaking of Chevron itself, the story suggests that the company may have, all in all, benefited from pandering to the Venezuelan tyrannical state: “Chevron has been operating in Venezuela for about a century and built a close relationship with the leftist government that has ruled there for more than two decades.” But note that other American producers with an interest in Venezuelan oil, including Chevron’s competitors, were harmed. Incidentally, the dire state of oil production in Venezuela also provides a good and useful, even if extreme, example of industrial policy. In an otherwise instructive report, the caption of an accompanying picture in the same WSJ story does not exactly contribute to increasing economic literacy: Oil companies are no longer motivated to drill more as oil prices rise. They may not be more motivated to drill for new, more expensive oil as the price increases, because of other factors that work in the other direction and compensate for the benefit of a higher price. But ceteris paribus, producers are certainly not less motivated, and the price may not have risen enough to motivate them yet. Ceteris paribus, higher prices are the only factor that can effectively motivate them to drill more. (0 COMMENTS)

Some monetary hawks want Jay Powell to emulate Paul Volcker. I wonder if they realize what that means. After Paul Volcker was appointed to chair the Fed in August 1979, monetary policy remained highly expansionary for another 2 years. NGDP growth averaged over 10% between 1979:Q3 and 1981:Q3. And this was not due to “policy lags”; indeed nominal growth actually sped up to an annual rate of over 14% in Volcker’s second year (the period from 1980:Q3 to 1981:Q3.) Only in the summer of 1981 did Volcker get serious about inflation. Unfortunately, the myth of Volcker has crowded out the reality.There’s currently a vigorous debate about whether the Fed’s “tight money” policy is too restrictive. But what if both sides of the debate are wrong? What if the Fed hasn’t even adopted a tight money policy? Long time readers know that I don’t view rising interest rates or quantitative tightening as being useful indicators of the stance of monetary policy.  My views are closer to those of Ben Bernanke: The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. . . . Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.   I prefer NGDP growth, as inflation is distorted by supply shocks.  (Total labor income might be even better.)  At the beginning of the year, I argued that the Fed should sharply slow NGDP growth in order to move toward their 2% inflation target.  In the long run, NGDP growth needs to be about 3.5% to deliver 2% inflation.  I didn’t expect the Fed to get there immediately, but I also didn’t expect NGDP growth to be so rapid during the first two quarters of 2022 (a 7.5% annual rate.)  The third quarter figures are not out yet, but forecasters seem to expect another big number. Some might argue that the sort of monetary tightening that I proposed would have resulted in unacceptable pain in the labor market.  That’s possible, although I doubt that with NGDP growth slowing to about 4% by yearend, unemployment would have risen above 5%.  But this is all a moot point, as the Fed actually imposed absolutely no pain on the labor market.Indeed, the unemployment rate has recently fallen to a 50-year low of 3.5%.  So if you are one of those people that believe tight money is bad because it imposes pain on labor markets, can I assume that you agree with me?  Can I assume that you also believe that the Fed has not tightened at all? To be clear, I do not view the unemployment rate as an indicator of whether money is easy or tight.   I prefer to look at NGDP growth.  But lots of people do seem to view unemployment as an important policy indicator.  And unless I’m mistaken, they often are the same people that complain the Fed has done too much tightening.  I see hand wringing about what Fed “tightening” is doing to developing countries.  Just imagine the shape those countries would be in if the Fed actually were tightening—if it actually were sharply slowing NGDP growth to a level consistent with 2% inflation! I’d like to avoid debates over semantics.  If someone wishes to argue that Fed policy in 2022 represents tightening because it’s gone from extremely expansionary in 2021 to merely very expansionary in 2022, I won’t quibble with that characterization.  Rather, I’m encouraging people to look beyond words and try to focus on what the Fed is actually doing.  And while NGDP is not perfect, it’s far superior to lazy assumptions about the stance of Fed policy in much of the media.  Also keep in mind that the fast NGDP growth of 2021 partly (not entirely) reflected a healthy return to trend, whereas the slightly less extreme NGDP growth of 2022 is occurring in an economy that has already overshot trend and is overheating.  Some argue that Fed policy affects the economy with a lag.  That’s true of sticky wages and prices, but it’s not really true of NGDP.  If NGDP growth is not slowing, then monetary policy is not tightening to any significant extent.  So why are interest rates much higher than in 2021?  Partly because the economy is much hotter than the markets expected in 2021.  (Fiscal stimulus may also play a role.) To summarize, let’s hope that Powell does not “do a Volcker”.  Let’s hope he doesn’t wait two entire years after it’s clear we have a demand side inflation problem before tightening.  Let’s hope he gets serious about inflation much more quickly than Volcker did. Update: I did this post before knowing that Ben Bernanke was awarded the Nobel Prize in Economics.  Bernanke has had an important influence on my own work, and I am very pleased to see him earn this recognition.  Also, congratulations to Douglas W. Diamond and Philip H. Dybvig for work on bank runs.  I am currently traveling, but will have more to say on Bernanke in future posts. (0 COMMENTS)

My favorite passage in Atlas Shrugged is the Hank Rearden trial scene. Here’s the whole thing. There’s so much I like, but I’ll single out two passages. First: Judge: “Are we to understand that if the public deems it necessary to curtail your profits, you do not recognize its right to do so?” Rearden: “Why, yes, I do. The public may curtail my profits any time it wishes – by refusing to buy my product.” Second: The judges retired to consider their verdict. They did not stay out long. They returned to an ominously silent courtroom – and announced that a fine of $5,000 was imposed on Henry Rearden, but that the sentence was suspended. Streaks of jeering laughter ran through the applause that swept the courtroom. The applause was aimed at Rearden, the laughter – at the judges. Rearden stood motionless, not turning to the crowd, barely hearing the applause. He stood looking at the judges. There was no triumph in his face, no elation, only the still intensity of contemplating a vision with a bitter wonder that was almost fear. He was seeing the enormity of the smallness of the enemy who was destroying the world. He felt as if, after a journey of years through a landscape of devastation, past the ruins of great factories, the wrecks of powerful engines, the bodies of invincible men, he had come upon the despoiler, expecting to find a giant – and had found a rat eager to scurry for cover at the first sound of a human step. If this is what has beaten us, he thought, the guilt is ours. By the way, I don’t agree with the last line. The people who do something are always the guilty ones; the victims are not. (0 COMMENTS)

The good news about educational reform, says Harvard economist Roland Fryer, is that we know what it takes to turn a school around. The bad news is that it’s hard work–and implementing it won’t win you any popularity contests. Listen as the MacArthur Genius Award Winner and John Bates Clark medalist speaks with EconTalk host […] The post Roland Fryer on Educational Reform appeared first on Econlib.

By early 1980, the US had decided that Iran was a much greater threat to world peace than Iraq.  That proved to be a very costly mistake. Later in 1980, Iraq invaded Iran in one of the clearest cases of naked aggression since WWII.  The goal was to annex some territory in the southwest of Iran, although there is some dispute as to how much.   Later events suggest that Saddam wanted the oil rich Khuzestan province, which contains most of Iran’s vast oil reserves.  In a shameful act of “realpolitik”, the US supported the aggressor in the war. Advocates of realpolitik like to portray their critics as fuzzy-headed idealists that don’t understand the realities of national security.  In fact, it was the realists who ended up undermining US interests in the Middle East.  We thought that Iran’s leader was the Hitler of the Middle East, whereas the 1980 invasion showed that it was Saddam Hussein that more closely resembled that famous aggressor.  As a result, the US did nothing to verbally discourage Saddam from later invading Kuwait, and this passivity led to the Gulf War of 1991 and the far more costly Iraq War of 2003. The long sad history of our policies toward Iraq and Iran have important lessons for today.  Imagine the US is confronted by two great powers.  Our foreign policy establishment insists that the larger of the two countries is the biggest threat to world peace.  Later events prove this not to be the case, as the leader of the smaller of the two great powers proves himself to be the “new Saddam Hussein”, a militarist that invades one neighbor after another, with grandiose dreams of annexing territory to enlarge his country. One would hope that our foreign policy establishment had learned the lessons of Iraq and Iran, and understood the need to update their beliefs as new information came in.  One would hope that they’d respond to evidence as to which power was the greater threat to world peace.  Alas, that does not seem to be the case. The US has decided to support Ukraine with military aid.  We’ve also decided (wisely in my view) not to go to war with nuclear armed Russia.  Unfortunately, President Biden has made it abundantly clear that the US does intend go to war with nuclear armed China if a war breaks out between China and Taiwan.  And the entire US foreign policy establishment seems on board with this project.  China is viewed as “the real enemy.” Make no mistake, in a US-China war the US would likely be the aggressor.  China has no interest in attacking the US.  And China has enough nuclear weapons to destroy all of our major cities.  While a nuclear war is unlikely, once two nuclear-armed countries go to war there is a danger of escalation getting out of control, especially if the country that is attacked ends up on the losing side of a conventional war. A Chinese invasion of Taiwan would be a morally unjustified action.  Nonetheless, China is only a threat to Taiwan (which the US and most other countries officially regard as a part of a unified China.)  Russia is a threat to many countries throughout Eastern Europe, which are internationally recognized as sovereign, independent nations.  There is simply no comparison between the two cases. When a US administration can only defend its foreign policy with a series of blatantly misleading statements, it is clear that there is something wrong with the policy.  A country that is doing the right thing ought to be able to tell the truth.   (0 COMMENTS)

“Zoning is not a good institution gone bad. … On the contrary, zoning is a mechanism of exclusion designed to inflate property values, slow the pace of new development, segregate cities by race and class, and enshrine the detached single-family house as the exclusive urban ideal.” So writes M. Nolan Gray in Arbitrary Lines: How Zoning Broke the American City and How to Fix It. This quote is a strong condemnation of zoning. Does Gray, a scholar affiliated with the Mercatus Center, successfully make his case? He does. I confess that I was somewhat convinced of this before cracking the book. Decades ago, I read a 77-page article by legal scholar Bernard Siegan, who made the case that Houston, the one major city in America that had avoided zoning, was doing well. Gray is quite familiar with Houston and, indeed, devotes a whole chapter to laying out in what ways Houston does well. Gray does much more than simply discuss Houston. He delves into the history of zoning, which began about a century ago, to show that the racial and class segregation it creates and the property values it inflates are not accidental byproducts of a well-intentioned process gone wrong. They are, instead, what the early proponents of zoning intended. To put it in the current vernacular, for the early proponents of zoning, these bad effects are a feature, not a bug. Gray makes a strong case for making zoning less bad and a further strong case for ending it. Unfortunately, he also recommends that local governments impose price controls on a portion of the new housing stock. These are the opening 3 paragraphs of David R. Henderson, “The Case for Abolishing Zoning,” my fairly comprehensive review of M. Nolan Gray’s outstanding book Arbitrary Lines. It appears in the Fall 2022 issue of Regulation. Another excerpt: When I used to visit my maternal grandparents in their 700-square foot house in Winnipeg in the early 1960s, I would almost always run into their tenant, Mr. Woolridge. He was a nice old retired man who rented a bedroom that was about 40 square feet and shared my grandparents’ kitchen and bathroom. Such arrangements, which Gray calls “single-room occupancies” (SROs), were somewhat common then for low-income owners and tenants. They are now illegal almost everywhere. SROs, notes Gray, served “as the bottom rung of the housing market.” Prohibiting them, he writes, “has served no small role in driving the contemporary homelessness crisis facing cities.” I have very fond memories of Mr. Woolridge; he was kind of like an extra grandfather. I agree with Gray’s bottom line on this: I think this prohibition is one of the major contributors to homelessness. Read the whole thing. (0 COMMENTS)

As we are contemplating a non-insignificant probability of nuclear war, the end of history (that is, the end of social discontent and major wars) envisioned by Francis Fukuyama in his book The End of History and the Last Man (Simon and Schuster, 1992) seems very, very far away. Moreover, his triumphant liberal democracy was conceived as very democratic but still far from liberal in the sense of classical liberalism. In the Fall issue of Regulation, I review Fukuyama’s this widely debated book as well as the author’s most recent Liberalism and Its Discontent (Farrar, Straus, and Giroux, 2022). I show how, between the two books, Fukuyama’s thought has moved closer to classical liberalism, although many weaknesses remain. (See “Fukuyama: Interesting Books, With Some Baggage,” Regulation 45:3 [Fall 2022], pp. 48-53; also in html version.) Fukuyama now clearly admits the need for constraining democracy, but he his practical proposals are often incoherent with the theoretical principle. One example I give in my review: There is no reason, [Fukuyama] explains, “why economic efficiency needs to trump all other social values,” a moot point when one understands that economic efficiency is simply a way in which voluntary exchange reconciles, without coercion, the preferences and values of all individuals. As an example of desirable democratic choice, Fukuyama proposes the primacy of work over consumer welfare. The question is whether “human beings” are “consuming animals” or “producing animals.” “This is a choice that has not been offered to voters under the hegemony of neoliberal ideas.” The absurdity of putting such a choice before voters is easily shown by imagining a referendum that would ask “the people”: “What animal do you (or we) want to be, a consuming animal or a producing animal?” Ask yourself what would be the meaning of X% (< 100%) deciding one way or another. “We are all producing animals and now get back to work!” More realistically perhaps, we may imagine complex baskets of practical policy measures and electoral promises related to such a choice and proposed to the rationally ignorant voters, who would understand the consequences of the measures even less than their proponents. The only liberal solution, of course, is to let each individual decide for himself what sort of animal he wants to be, given the impersonal constraints generated by the equally free choices of all other individuals. EconLog readers may find other interesting points in my critique, as well as in Fukuyama’s books themselves. This reflection helps pull together many threads in the critique of illiberalism. (0 COMMENTS)