University of California President Michael V. Drake, M.D., issued a statement yesterday on the U.S. Supreme Court’s decision in Dobbs v. Jackson Women’s Health Organization. He starts as follows: For nearly 50 years, people in the United States have had the right to make private, informed choices about their health care and their futures. Wow! Where has Michael Drake been? Are people allowed to buy bare bones catastrophic health insurance? If employers want to provide health insurance to employees that doesn’t have all the features the federal government wants, are they allowed to? Are people allowed to get prescription drugs without a prescription from their pharmacist? Was I allowed to buy the Moderna or the Pfizer vaccine before the FDA had approved it? I could easily ask 20 more such questions. I bet many of my readers could too. Health care and health insurance are among the most regulated industries in the United States. Dr. Drake’s ignorance is off the charts.     (0 COMMENTS)

Imagine that in January 2021 you bought 100 shares of a company at $100 per share. Since then, the consumer price index, one of the standard measures of inflation, has risen by 11.74 percent. Coincidentally, the stock price has kept pace with the inflation rate, rising from $100 to $111.74. Your shares are now worth $11,174. Their value, adjusted for inflation, has stayed the same. But the IRS doesn’t see it that way. If you sell today, you will get a capital gain of $1,174. The federal government will tax you on that whole gain. If you’re in the 15 percent bracket for capital gains income, you will pay $176 in capital gains taxes. So you paid $176 on a phantom gain, which means that you lost money. Whatever you think of capital gains taxes, basic fairness dictates that people who get capital gains should be taxed on the real gains, not the phantom gains. This is from David R. Henderson, “End the Tax on Phantom Gains,” Institute for Policy Innovation, June 22, 2022. (0 COMMENTS)

In the late 2010s, I frequently had to deal with commenters who complained about Fed policy. They echoed President Trump’s complaints that the Fed was holding back the economy. Inflation was slightly too low.  They felt there was unused potential.  They had all sorts of grand ideas for reforming Fed policy. Let’s review the data: Unemployment in December 2017 was 4.1%, and then fell gradually to 3.6% in December 2019. PCE inflation averaged 1.8% in the final three years of the decade, about 0.2% below target. To an economist like me that lived through the Great Inflation and spent his life studying the Great Depression, that’s almost paradise. While I agreed with critics that things were not exactly perfect, I also understood that things could be far, far worse. And now they are. To succeed, one must recognize what success looks like.  Don’t let the perfect be the enemy of the good. (0 COMMENTS)

Most discussion about the possibility of recession focuses on the Federal Reserve’s monetary policies. But there are also factors on the supply side of the economy that may tip the U.S. economy into a recession. Among them are the tax and regulatory policies of the Biden administration. This is the opening paragraph of David R. Henderson and Casey B. Mulligan, “Biden is Practically Engineering a Recession,” Wall Street Journal, March 22, 2022 (March 23 print edition.) Another excerpt: The combined effect of increased regulation and increased taxation of capital is a reduction in employment growth by about 0.25 percentage point a year and of real GDP growth by about 1.1 points a year. Read the whole thing. It’s gated, but I’ll publish the whole thing here on July 23. (0 COMMENTS)

I recently reviewed Janek Wasserman’s book The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas for EH.net, the website of the Economic History Association. I enjoyed the book, which offers a very engaging history of the Austrian school of economics. One thing I appreciated about Wasserman’s book was his description of the contentious debates that Austrian economists had in Vienna, especially their debates with Marxists. I was especially intrigued by Wasserman’s discussion of debates between Austrians and Marxists regarding the causes of imperialism. When we think of Marxist analysis of imperialism, we often think of Vladimir Lenin’s Imperialism, the Highest Stage of Capitalism. But Lenin’s analysis was heavily influenced by an Austrian-born Marxist named Rudolf Hilferding. And as Wasserman explains, Hilferding’s influential book Finance Capital was shaped by his debates with Austrian school economists: “In the confines of the Böhm seminar, Hilferding fleshed out the core arguments of his magnum opus. The book bears the imprint of repeated exchanges with Schumpeter and particularly Mises. Hilferding introduced Finance Capital as an inquiry into money and capital. Only by examining the “processes of concentration” that eliminate free competition in industry and the ever-closer relationship of bank and industrial capital—which he calls “finance capital”—can one grasp the contours of “the current phase of capitalism,” with its cycles of boom and bust. He also offered a penetrating observation about the connection between finance capital and imperialism. Because of capitalism’s need for continued expansion, and the industrial and financial sectors’ desperate quest for profits, capitalists constantly sought new sources of raw materials, new markets for goods, and new sites for capital investment. This tendency led to larger and larger empires, based on economic imperatives but sustained by political and military force. Contrary to liberal apologists, Hilferding rejected the idea that capitalism was inherently pacifistic; capitalist expansion came at the tip of a bayonet.” That’s right, one of the most influential Marxist analyses of imperialism was honed through arguments in Austrian school icon Eugen von Böhm-Bawerk’s seminar. Was Hilferding right that capitalism leads to imperialism? Major Austrian school economists disputed his claim. Joseph Schumpeter, for example, challenged Hilferding’s analysis of imperialism: “Like Hilferding, Schumpeter devoted considerable attention to the relationship between capitalism and imperialism, and he acknowledged the penetration of Hilferding’s insight. He agreed that capitalism had a tendency toward cartelization, monopoly prices, aggressive economic and foreign policy, and war. That said, it was political action and not the logic of competition and capitalism that produced those phenomena. He therefore rejected Hilferding’s historical argument about the nexus of finance capital and imperialism: “It is fundamentally false that imperialism is a necessary stage of capitalism. . . . We have seen that imperialistic dispositions are in fact unfavorable for the life form of the capitalist world.” Schumpeter maintained that capitalism tended toward peace.” While Schumpeter observed many of the same tendencies as Hilferding, he argued that the problem was not capitalism, but political action. Ludwig von Mises went further still in his challenges to Hilferding. Wasserman explains that Mises’s book Nation, State, and Economy “flipped Hilferding’s argument on its head.” Mises argued that capitalism promotes peace while socialism engenders imperialism and war. As Wasserman puts it: “Only a liberal capitalist society, he averred, could safeguard civilization from socialism and its authoritarian, imperialistic tendencies. Since socialism required heavy state intervention in the economy, it also encouraged interstate rivalry and violence. Liberalism, on the other hand, engendered irenic relations between individuals based on noncoercive economic exchange.” Mises saw capitalism as a source of social cooperation and socialism as a system that leads societies down a violent path. Hilferding, Lenin, Schumpeter, and Mises were all grappling with an important question: what are the causes of war and imperialism? Given the devastation wrought by warfare, political economists of all stripes should continue rigorously investigating these issues. Nathan P. Goodman is a Postdoctoral Fellow in the Department of Economics at New York University. His research interests include defense and peace economics, self-governance, public choice, institutional analysis, and Austrian economics. (0 COMMENTS)

Co-blogger Scott Sumner has written an excellent post on how a temporary cut in the federal gasoline tax (from its current 18.4 cents to gallon to zero) will cause the 4 effects he mentions. I think Scott leaves out a 5th effect that swamps his 4: it will increase Americans’ demand for price controls on gasoline. The one thing I want to take issue with in Scott’s post is his statement that “Most of the tax cut goes to suppliers in the short run, helping refiners.” Scott may well be right, but it’s important to uncover an implicit assumption that he doesn’t mention: his assumption that the demand for gasoline is substantially more elastic than the supply of gasoline. I agree with Scott that the supply of gasoline is highly inelastic. But we energy economists are also used to thinking of the demand for gasoline as being highly inelastic. It’s true that we don’t know much about the elasticity of demand for gas at current prices because we haven’t had much experience with prices at this level, even inflation-adjusted. Helping Scott’s case is the basic idea that the higher the price you start at, the more elastic is demand. Hurting Scott’s case is that there is some degree of discretion on the part of refiners in the extent to which they produce gasoline or produce other refined products. So even with a completely fixed refining capacity, an increase in the price of gasoline as seen by refiners can increase the amount of gasoline produced. Let’s set a base case. If the demand for gasoline is just as elastic as the supply, then an 18.4 cent tax cut will be shared equally between producers and consumers. Producers will get a price net of tax that is 9.2 cents higher; consumers will get a price gross of tax that is 9.2 cents lower. But if, as Scott expects, the demand is substantially more elastic than the supply, producers will get a much larger share of the 18.4 cents and consumers will get a much smaller share. Say consumers get 5 cents of the tax cut per gallon. What happens next? A lot of them are going to be angry. “Those so-and-so oil companies were greedy and they kept the lion’s share of the tax cut. Let’s have the feds impose price controls so that we can get a bigger share.” We all know what happens with price controls. When the price control keeps the price below the free-market price in a relatively competitive industry, there’s a shortage. People line up for gasoline. And the deadweight loss from their time in line can be a bigger factor than any of the 4 factors that Scott mentions. A case in point is Proposition 13 in California, which, when passed in June 1978, immediately cut property taxes by a massive amount. I had some economist friends who were finishing their PhDs at UCLA and were in rental apartments. Their landlords, and many other landlords in California, sent fliers to their tenants before the vote telling the tenants that if Proposition 13 passed, their rents would fall. We economists knew that was unlikely because governments in coastal California were heavily restricting supply, making it highly inelastic, whereas demand was somewhat elastic. Proposition 13 passed, rents didn’t noticeably fall, and tenants were pissed. What did they do? Call for rent controls, which were imposed in many cities in California. In some cities, such as Santa Monica, over 40 years later, rent control is still in force, with all the distortions it causes.   (0 COMMENTS)

I don’t know wherefrom the strange idea comes that a slippery-slope argument is a kind of logical fallacy. It is an institutional or political-economy concept, not a logical one. Slippery slopes occurs in social affairs, and a contribution of economics is precisely to help determine when the logic of institutions—that is, of individual incentives under certain social arrangements—lead to results inconsistent with officially-proclaimed or idealistic intentions; that is, when slippery slopes are likely. No-fly lists were and remain a slippery accident waiting to happen. We should know. The Patriot Act that has been used to go after suspected drug sellers and to spy on ordinary Americans. The RICO Act has been invoked to prosecute people with no mafia connections whatsoever. Anti-tobacco laws now serve to regulate vaping which does not involve tobacco. And so forth. Except if they are effectively constrained, not an easy feat, politicians and government bureaucrats can be expected to maximally exploit the powers granted to them, because it is generally in their personal interests to do so. Who would have thought that no-fly lists would be used against crypto entrepreneurs?  This just occurred in South Korea as the Financial Times reports (“Workers at Embattled Crypto Operator Terraform Labs Put on No-Fly List,” June 20): South Korean prosecutors have banned Terraform Labs employees from leaving the country as an investigation into the company and its co-founders deepens after the $40bn implosion of its cryptocurrency. The Seoul Southern District Prosecutors Office told the Financial Times on Tuesday that the travel ban had been imposed on “dozens” of former and current Terraform Labs employees, declining to give further details. I don’t know if, in this specific case, any fraud is involved, especially if we define “fraud” otherwise than “anything the government doesn’t like.” But even supposing that there a reasonable suspicion of real fraud, states already have enough (read: too much) power to enforce ordinary laws against fraud, without prosecutors (bureaucrats) resorting to instruments of mass control against a group in which some people are vaguely suspected of something. Against which sets or groups of people will no-fly lists be used next time? (0 COMMENTS)

Rachel Swirsky concludes the author’s note to her new speculative fiction novella, January Fifteenth, with these observations. Money can make life easier, but it can’t solve everything. Adding money to a system with underlying problems won’t fix those problems on its own. After any massive change, some people will be better off, some people will be worse off, and many people will be both better and worse off. However the future unfolds, it won’t go according to my values. There will always be outcomes I don’t expect. Some of them will contradict my beliefs about the world. I’m definitely wrong about something. (9)   It’s a refreshingly modest, mildly skeptical opening, and it’s one that let me know I was in good hands before the book even really began. This modesty and skepticism is particularly important for EconLog readers, as Swirsky’s novella is a look at an imagined future America where the Universal Basic Income (UBI) has been voted into law. I came to the book braced for a didactic work, focused on “teaching” the reader to accept one or another point of view about the UBI, but Swirsky’s novella maintains this sense of modest questioning and exploration throughout. And it is all the better for it. Four interwoven stories told from the points of view of four different female protagonists, Hannah, Janelle, Olivia, and Sarah, comprise the book. Their stories begin early in the morning of January fifteenth, now known as “Windfall Day,” when people receive their UBI payments from the government. Swirsky confesses in her author’s note that she has elected to pretend that this “practical side of running UBI” is fairly frictionless. She’s aware that this is unlikely, though, and various small moments of long lines at banks as people wait for their checks, complicated and delayed EFT transactions, and conversations among those who are worried that this is yet another way for government to get data about people point to her awareness of some of those issues while never overtaking the stories she is more interested in telling. And those stories are interesting and complicated. Hannah, for example, is an abused woman, on the run and hiding from her ex with their two children. For her, the UBI provided enough money to make their escape from domestic violence possible. But it also provides her former spouse an annual income boost that funds a drug and alcohol fueled search for vengeance. January 15th and the UBI are, for Hannah, both the means of her liberation and an annual reminder of how trapped she is.  Janelle is a Black journalist whose story allows Swirsky some latitude to explore the racial complexities involved in an idea about UBI. As Janelle goes about her day, interviewing people about their plans for Windfall Day and their opinions about the UBI, she and her younger sister argue about the justice of UBI. Has it done enough–has it done anything–to address the economic crisis created by generations of restricted opportunities for people of color in America? Is it just a way of shutting down discussion of those inequities? For Janelle, the UBI has allowed her to care for her younger sister since their parents’ death. For her sister, Neveah, a fiery teenage activist, that personal angle is hard to remember amid all the inequality she sees and wants to solve. Olivia is a young college student who returns to her home town for a Windfall Day party, which she and her wealthy friends refer to as “Waste Day.” Their goal, spurred on by the urgings of a podcast duo known as C&C, is to waste their UBI payments in as flagrant and disrespectful a manner as possible. It would have been easy for these sections of the book to become nothing more than rote critiques of the very wealthy, and there is some of that, but Skwirsky is really interested in a deeper conversation here about questions of wealth and responsibility. Her partying college students veer from drunken sexual assaults, to discussions of Ai Wei Wei’s smashing of a Han dynasty urn, to a Peter Singer inspired debate about how much of one’s wealth one should give to the poor, and when one is entitled to criticize others for how much they do or do not give. For me, the least effective sections of the novella were those dedicated to Sarah’s story. A pregnant teenage bride in a polygamist splinter group in Utah, Sarah walks with her sister wives to claim her UBI payments. Along the way, we learn that the group has been beating up and throwing out young men, since there are not enough women to go around, and that they are still claiming the UBI payments for those young men. Less rich and complicated than the other stories, Sarah’s story has a clear right and wrong structure to it. The splinter group is obviously wrong and vicious. Sarah obviously must leave it. The UBI is obviously the thing that will allow her to do so. It’s not a bad tale, but its clear-cut morality felt, to me, a little simplistic after the complexities of the other sections. January Fifteenth is a good read. It’s a particularly good read for those interested in the UBI or for those interested in literature that represents complicated economic issues in subtle ways. I’ll be interested to know what other EconLog readers think of it, what readings they might pair with it, and whether the book, and this review, might have appeared in time to inspire any changes to syllabi for the upcoming academic year.   (0 COMMENTS)

Suppose that you wish to achieve the following 4 objectives: 1. Helping Vladimir Putin win the war in Ukraine. 2. Worsening global warming. 3.  Worsening the budget deficit. 4.  Enriching oil refiners at a time when supply is constrained and they are already earning extraordinary profits. What is the most effective way of doing all four?  On option would be to temporarily end the federal gas tax. I don’t actually believe that these are the reasons why President Biden recently floated this idea.  I think we underrate the extent that public policies reflect ignorance of basic economic theory.  Whether the ignorance lies with the voters, the policymakers, or both is another question.  But people who analyze politics from a “who gains” perspective are often missing the fact that the world is complicated, and not all public policies help the intended beneficiaries. PS.  If you have trouble seeing all of the connections, imagine a simple model where short run supply is highly inelastic due to refinery closures.  Suppose the gas tax holiday shifts the gasoline demand curve (net of tax) to the right by 5%, and the equilibrium quantity increases by 1%.  In that case US consumption rises, worsening global warning.  The net global price of oil rises, helping to finance Putin’s war.  Most of the tax cut goes to suppliers in the short run, helping refiners.  And tax revenues fall, boosting the budget deficit.  Part of this revenue shortfall will be made up later with taxes that are less efficient than gasoline taxes.  (The real world effects would clearly be smaller, but this example illustrates the basic concept.) If you decide to kill 4 birds with one stone, make sure that the 4 birds are not prized specimens in the local zoo. (3 COMMENTS)

In one of the sessions of the one-day colloquium on Harold Demsetz, moderator Harry DeAngelo asked Joe Kalt, Bob Topel, and me to reminisce about Harold as a person and also about his contributions to us and to economics. In response to one of Harry DeAngelo’s questions (at the 3:07:00 point,) Joe Kalt answered that Harold viewed competition as a process rather than as an equilibrium. I totally agree. I do want to add two points, though. First, I got that view more from Ben Klein’s Industrial Organization class than from Harold’s. The second point is one that Ken Elzinga of the University of Virginia made to me in a side conversation after that session: namely, that even though it’s true that Harold pushed that view, the economists who should get credit for it are the Austrian economists. I’m thinking here of contemporaries of Harold such as Israel Kirzner. But you can also find it in earlier works of Austrians. Joseph Schumpeter, who was Austrian, but sometimes is not thought of as a member of the Austrian School, laid out that view beautifully in his Capitalism, Socialism, and Democracy. But you can also find the idea in the late 19th century work of Carl Menger. Incidentally, if I recall correctly, Ben Klein had us purchase Israel Kirzner’s Competition and Entrepreneurship, a book in which Kirzner lays out the view of competition as a process. Ben was very hung-ho on that book. (0 COMMENTS)