The picture above is of the computer case that I use to carry my Mac. Why do I show it? To make a point about how making good economic decisions doesn’t always mean being cheap. Looking back over the examples I gave to students, in about 40 years of teaching, of good economic decisions in my own life, I realize that a huge percent of them are of me saving money, being cheap, etc. But sometimes making good economic decisions involves spending a lot of money. I don’t remember what I spent on the above case. I think it was more than $40 and less than $70. The case was and is wonderful. It’s highly padded and tucked in tight, so that if you drop it about 3 or 4 feet, the computer is well protected. I did drop it a few times, with no bad consequences. About 5 years ago, though, the zipper on it broke. I looked around on line and couldn’t find anything like that case. So I thought it might make sense to replace the zipper, which was plastic and clearly of lower quality than the case. So I took the case to the shoe repair place near my office and asked them what it would cost to replace the zipper. The person told me that it would be expensive–about $40. What kind of zipper would I get? A metal zipper of much higher quality. Done. Five years later, the case is still good. The most likely thing to go bad is–the zipper. If that happens again, I’ll have the same place, Federico’s Shoes in Monterey, apply their talents to replacing the zipper. (0 COMMENTS)

Walmart is providing another illustration that here is no “shortage” of labor if we take the word in its economic meaning of empty “shelves” at free-market prices (or wages, which is the price of labor). If we take the word in its confusing sense of “high prices,” then there is a shortage of everything: diamonds, Porsches, olive oil, Bourgogne, etc. (We must distinguish “shortage” and “smurfage.”) Because resources are relatively scarce in relation to human desirers, no economic good has a zero price—except perhaps when property rights are not well defined. Much of what producers (including intermediaries, as economic usage goes) call shortages of inputs such as labor is not actually of the nature of shortages, except perhaps in the short run, and usually the very short run. What they mean is simply high prices they don’t want to pay because final consumers would not pay the corresponding price increases. When consumers are willing to pay higher prices because market demand has increased or supply has decreased or both, it is this willingness to pay more that leads producers to bid up input prices. The demand for an input, economists say, is a “derived demand”—derived from consumer demand for the final product. When consumers prefer to pay more rather than going without a good and its price is not capped by government edict, there is no supply-chain “snarl”or other vain emotion, only a higher consumer price and, if the industry is large in input markets, higher input prices. This is quite obvious in the current case of personal computers, whose prices have jumped enough to persuade producers to bid up the price of microchips to make sure they get them. It is an important result of economics that only free market can make these complex calculations; government planners (bureaucrats or politicians) cannot. Consider Walmart (“Walmart Dangles $110,000 Starting Pay to Lure Truck Drivers,” Wall Street Journal, April 7, 2022). Because consumer demand for its wares is increasing, Walmart needs more truck shipping capacity than provided by its current 12,000 drivers. The company needs to retain its drivers and to hire new ones. In the meantime, the supply of truck drivers seems may be decreasing as some are attracted to other occupations. Thus, the company is now offering an annual salary up to $110,000, plus sign-on bonuses in certain cases, to divert drivers from other industries where consumer demand is not as pressing; the offer is also available, together with a 12-week training program, to some of its own employees from elsewhere in the company. I suppose a socialist would say that this is how a capitalist company exploits workers and cheat consumers! Note also that each time another employer is hiring a truck driver, he is successfully bidding for labor against Walmart. On the supply-chain front, we have seen a similar phenomenon before last Christmas when companies such as Walmart, Home Depot, and Target chartered their own cargo ships to bring to the shores of America what their customers wanted (see my Econlog post “The Supply-Chain Myth, November 18, 2021). (1 COMMENTS)

The Fed repeatedly makes policy mistakes by ignoring erratic swings in nominal GDP. Today, two important media outlets published persuasive arguments in favor of NGDP targeting.  Here’s Clive Crook in the Washington Post: The Fed delayed raising interest rates until now because it wasn’t sure why inflation had spiked and whether the pandemic-driven contraction of the labor force would reverse. An excess of demand over supply is driving prices up — but how much of this excess is due to high demand and how much to temporary interruptions in supply?  A central bank that watched NGDP can be agnostic about this. It would compare actual NGDP to its target, and aim to keep it growing on track. Changing supply conditions would then determine what happens to inflation and output. . . .  The chart compares actual NGDP with a benchmark Beckworth calls “neutral NGDP” — a steadily rising level of demand consistent with medium-term growth and low average inflation, which is neither expansionary nor contractionary. Following the pandemic-induced shock in 2020, demand had recovered to this benchmark level by the second quarter of 2021. Had the Fed been watching, it would have seen a strong signal to start tightening no later than last summer — and would have been equipped with a simple explanation for lift-off. And here is a similar suggestion, from Bryan Cutsinger and Alexander Salter in the National Review: Monetary policy affects total spending, and hence aggregate demand. To fight recessions, it’s appropriate for the Fed to push back when demand collapses, stabilizing both labor markets and the dollar’s value. You can’t have one without the other. How much employment is full employment depends on supply, over which the Fed has no power. All the central bank can do is pick the level of demand, and hence the purchasing power of money. This doesn’t mean the Fed is unimportant. On the contrary: Stable demand is a boon for the economy. Instead, it means the employment component of the mandate is superfluous at best and dangerous at worst. By keeping nominal income on a steady path, the Fed creates a solid foundation for labor markets to flourish. No micromanaging needed. (0 COMMENTS)

A friend posted this cartoon on Facebook this morning and it led to an interesting discussion. Economist Roger Koppl wrote: My second grade teacher told us the best things in life are free. After thinking about her statement I said, “The best things in life are free, but you have to have enough money to enjoy those free things.” She stared at me for a moment and replied in astonishment, “You’re right.” I responded to Roger: “OMG. You probably should have known in second grade that you’d be an economist.” And then that triggered a memory of a conversation I had with a school teacher when I was in grade 2. (In Canada, that’s how we referred to second grade.) In this case the teacher was my father, who was principal of the school in our small town and so he was in charge of 1-12. (Thank goodness we didn’t have kindergarten; it gave me an extra year of play.) When I was in grade 1, parents had to buy the textbooks for their kids. There was an active resale market and a lot of parents bought used texts. When I was about to start grade 2, my father was all excited one evening because a government body, either the local school board or, more likely, the Manitoba provincial Department of Education, had decided that no longer would parents have to buy books; they would be provided. Here’s the conversation that took place: Dad: We can now get books for free. David: But who’s paying for them? Dad: They’re free. David: Ya, but who’s paying for them? They can’t be free to everyone. Someone has to be paying. He relented and confessed that taxpayers would pay for them. That’s when I should have known that I would be an economist.   Here’s a conjecture: When this movement spread, both in Canada and the United States, the prices of textbooks, inflation-adjusted rose. The reason is that no longer would the parents feel the effect of textbook prices directly and so the textbook publishers would take advantage of the parents’ and the bureaucracy’s insensitivity to price. (0 COMMENTS)

As I’ve gotten older, I’ve noticed that people who work in the financial industry often give very poor advice to their clients.  Unfortunately, various government regulations make our financial system extremely complex—too complex for many people to navigate on their own.  I have a PhD in economics, and even I struggle with basic questions involving the dense thicket of retirement account options. This Bloomberg article caught my eye: Milwaukee Bucks superstar Giannis Antetokounmpo had more banks than letters in his name before Avenue Capital Group founder Marc Lasry stepped in. The National Basketball Association’s two-time most-valuable player had accounts open at 50 different banks, with each of them holding up to the Federal Deposit Insurance Corp. coverage limit. That shocked Lasry, who co-owns the Milwaukee team. “I spend a lot of time with them explaining where they should invest,” he said of his players on Thursday at the Bloomberg Wealth Summit in New York. “I’m like, Giannis, you can’t be having accounts at 50 different banks. Let me tell you something, if JPMorgan goes under, your little dinky banks are going to go under too. Let me explain what you should buy, you should buy U.S. Treasuries, you should buy this.” I suppose the average reader might assume that a billionaire Wall Street investor like Marc Lasry knows more about investing than does a basketball player that grew up selling trinkets on the streets of Athens. In fact, if this article is correct then Lasry is giving inaccurate advice. By investing no more than $250,000 in each of 50 banks, Antetokounmpo is fully protected against a future financial crisis that took down JPMorgan and much of the remaining banking system. Lasry seems to think that Antetokounmpo’s strategy would not work if these smaller banks were to go under. But that’s not true. Might FDIC also fail? Yes, but in that case even Treasury bonds would likely default. While nothing is 100% safe, US politicians would be far more worried about several hundred million Americans losing money because FDIC failed than they would be about a much smaller number of irate T-bill holders. Antetokounmpo lived through the Greek financial crisis, and thus it makes sense that he would prefer insured bank deposits over other investments. So why didn’t the Bloomberg reporter point out Lasry’s mistake, which is pretty obvious? I suspect it has to do with a form of prejudice that I call “credentialism”. At first glance, it seems as though someone like Marc Lasry ought know more than the typical NBA player about investing.  As a result, our first impulse in these cases is to trust the view of the more credentialed individual. The media has a reputation of being highly critical. In many cases, however, I find media reports to be excessively deferential to the pronouncements of credentialed individuals working in places such as the CDC, FDA and Federal Reserve.   (0 COMMENTS)

One issue that I didn’t have room to cover in “A Wide-Ranging Book for Non-Economists and Economists,” Regulation, Spring 2022, my review of Steven E. Rhoads’s excellent book The Economist’s View of the World, is the issue of unemployed men. Rhoads points out that various government welfare programs discourage work by men. He also adds another factor: But, for most jobless men, it is help from parents, grandparents, partners, and friends that provides the most significant income enabling them to be listless about seeking employment. (p. 122) Rhoads doesn’t give evidence to back this assertion but, given how careful he is with data in the rest of the book, I assume that he has evidence to back this claim. The big surprise for me in that sentence is “most.” I had no idea that the personal voluntary gifts from friends and loved ones were so substantial. That puts a new light on the issue. It makes sense to oppose transfer programs that take money from some and give to others in ways that discourage employment. It also makes sense for people who want the men in their lives to have jobs not to keep giving them money. But one is an issue of government policy; the second is an issue of personal policy. To the extent the unemployment of jobless men comes about as a result of voluntary contributions, I worry less. Not that I don’t worry, but I worry less. The reason is two-fold: (1) people aren’t being coerced to help them, or, more exactly, that’s not the main source of funds, and (2) loved ones who want men in their lives to have jobs can decide on their own to help them less or to make their help conditional on the man getting a job.       (0 COMMENTS)

Former co-blogger Bryan Caplan (how I miss his presence on EconLog) pointed out in April 2020 that the true cost of living in 2020 rose substantially more than the recorded Consumer Price Index stated. The reason is simple: variety fell and it took more time to get a given number of items at stores. I’ve been experiencing that recently. My wife needs a particular kind of milk to make her morning latte. I used to be able to get her latte at Starbucks but her situation has changed and they don’t use the kind of milk she needs. The surefire milk is shown in the picture. It’s sold at Safeway and Andronico’s but nowhere else that we can find. And whether it’s there when I go to the store is always a percentage shot. At least 20 percent of the time, I come home without the milk. I went to Safeway yesterday morning to get some items and they were out of that particular milk. So I went to Andronico’s and found it. The trip to the store and the time in the store took at least an extra 15 minutes, probably more like 20. At any reasonable estimate of my time value, therefore, this milk was extremely expensive. There’s also an historical point to be made here. Nixon imposed a 90-day price freeze on August 15, 1971. He later relaxed the freeze but kept economy-wide price controls. In 1973 he got rid of many of the price controls. (He didn’t get rid of the price controls on oil and gasoline, an omission that caused huge problems and, arguably led to a new government department, the Department of Energy.) When economists look at various time-series data, few of them note that 1973 was a strange year because of the price controls. With many price controls being eliminated, prices shot up, but the real cost of getting many goods that had been in short supply actually declined or rose modestly. Failure to take account of that can lead you to some seriously wrong conclusions. Note: For more on how the CPI normally overstates inflation, see Michael J. Boskin, “Consumer Price Indexes,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. (0 COMMENTS)

One of the best readings from Carl Menger’s Principles of Economics, a reading that we covered in the colloquium on Menger on which I was discussion leader in Las Vegas last weekend, is about how prices are formed. The following quote gives the flavor: If, for example, an economizing individual, A, has a horse that has a value to him no higher than 10 bushels of grain if he were to acquire them, while to B, who has had a rich harvest of grain, 80 bushels have a value equal to a horse if he were to acquire one, it is clear that the foundations for an economic exchange of A’s horse for B’s grain are present, provided that A and B both recognize this relationship and have the power actu- ally to perform the exchange of these goods. But it is equally cer- tain that the price of the horse can be formed between the wide limits of 10 and 80 bushels of grain and can approach either of the two extremes without causing the economic character of the exchange to disappear. It is, of course, extremely improbable that the price of the horse will settle at 11 or 12 bushels or at 78 or 79 bushels of grain. But it is certain that no economic causes whatsoever are present that exclude completely the possibility of the formation of even these prices. At the same time, it is also clear that the transaction can take place naturally only between A and B only as long as B finds no competitor in his endeavor to acquire A’s horse by trade. But suppose that B1 does have a competitor, B2, who either does not have as great an abundance of grain as B1 or requires a horse less urgently. Still, B2 values a horse as highly as 30 bushels of grain, and could thus provide better for the satisfaction of his needs if he were to give 29 bushels of grain for A’s horse. It is clear that the foundations for an economic exchange of a horse for some quantity of grain exist between B2 and A as well as between B1 and A. But since only one of the two competitors for A’s horse can actu- ally acquire it, two questions arise: (a) With which of the two com- petitors will the monopolist A conclude the exchange transaction? and (b) What will be the limits within which price formation will take place? Step by step, Menger then introduces transactors on both sides and shows how that bounds the price. He does it all without using a demand curve or a supply curve. It’s a beautifully constructed 20 or so pages and I recommend it. One of the participants, Catherine Pakulak, an economics professor at Catholic University of America in Washington, D.C., said that she liked it so much that she will use it as a reading in her economic principles class. I said that I would have done the same had I known about that section years ago. (I think I came across it in my history of thought reading in the mid-1970s, but forgot it, actually.) I pointed out, and Catherine agreed, that one of the advantages of teaching price formation this way is that students taking an economics class for the first time don’t have the intellectual baggage that comes later in economics classes and that this exposition will sound completely realistic and intuitive to students. By the way, I laid out the Chatham House ground rule, which I also referred to, appropriately enough, as “What happens in Vegas stays in Vegas.” Accordingly, I asked and received Catherine’s permission to reference her thoughts. You can find a free pdf of Menger’s Principles here. (0 COMMENTS)

Political scientists are skeptical about the feasibility of a carbon tax. Why would Congress raise taxes on a broad section of the American public?I may not live along enough to find out if a carbon tax eventually becomes a reality, but I suspect that it is more likely to occur than many people assume. Before discussing carbon taxes, let’s consider another product with an interesting history.When I was young, a very large proportion of American adults smoked cigarettes. People smoked almost everywhere, and even nonsmokers like me didn’t much mind. We were used to it. You had to be there to understand that it seemed much less bad than you’d think. Cigarettes were taxed, but nowhere near as heavily as today.Then cigarette smoking gradually went out of style. The proportion of adults who smoked fell steadily, and is now a fairly small fraction of the population. Smoking became associated with lower class workers. More and more people saw smoking as a dirty habit with nasty negative externalities. (The negative externalities are overrated, but I’m looking at perceptions.) Smokers were seen as anti-social. Society responded with very punitive and hugely regressive taxes on cigarettes. (There were also large implicit taxes associated with the legal settlement agreed to by the major cigarette companies.)  These punitive taxes would not have been politically acceptable in 1960s, when a large proportion of Americans of all classes smoked cigarettes.When I first moved to southern Orange County I was shocked at the number of Teslas I saw on the road, especially in affluent areas. Five years later there are predictions that electric cars are the wave of the future, and even the traditional car companies are planning to dramatically ramp up production of electric vehicles. Many experts predict that in a few decades most new cars will be electric. Indeed many areas are planning to ban the sale of gasoline cars in another decade or two. The price of car batteries has been falling rapidly.Let’s say these plans for an electric car future come to fruition, and that in 2040 or 2050 only relatively poor people who cannot afford new cars are still driving old clunkers using gasoline. How will society regard those people still driving cars with gasoline engines?You might not think there’s anything disgusting about a car driving by you belching exhaust out its tailpipe. Fair enough, but in 1965 I didn’t think there was anything disgusting about someone sitting next to me at a bar smoking a cigarette, it seemed normal. What we find disgusting is almost purely subjective.[I’m repulsed when I read of all the horse manure on the streets of NYC in the 1800s. But when I grew up there was lots of dog poop that people didn’t bother picking up, at least in Wisconsin. My daughter’s generation would find the 1960s to be disgusting. Another example is spitting on sidewalks, which used to be common. One or two more generations and Americans will be disgusted that people of the 2020s wore their shoes indoors.]In my view, by 2040 or 2050 the politics of a carbon tax will begin to look a lot like the politics of a heavy tax on cigarettes looked in the late 20th century–increasingly feasible. PS. I realize that a carbon tax hits more than just gasoline, but the political opposition to a carbon tax comes mostly from the fact that Americans are heavy users of this highly visible product, and also that there are huge regional differences in gasoline consumption. By 2040, I suspect that not much electricity will be generated in the US using coal. (1 COMMENTS)

The Hungarian prime minister Viktor Orban’s party won another parliamentary majority in last weekend’s election. An authoritarian populist, Orban boasts that he favors “illiberal democracy.” But what is a liberal democracy? We may distinguish three meanings of “liberal democracy.” The first one and perhaps the most popular, is empty. It assumes that “democracy” and “liberal” (the latter in the American sense of progressive-dirigiste) are synonymous with “good.” In this perspective, it is conceived as a system that produces the results that its defender—usually an American “liberal”—favors. But except if all voters are identical, this chameleon system is contradictory: liberal democracy does not make sense and cannot work if it is taken by every citizen to guarantee decisions that will implement his own preferences and values. That sort of “liberal democracy,” it should be noted, is espoused by small gangs of wokes, social justice warriors, and gender-obssessed activists. That these ideologues are generally rich and pampered only adds to the comedy. They make liberal democracy look like a decadent system, which populists like Orban and Putin feel justified to attack on that very basis. But it is also true that the Western establishment often takes “liberal democracy” in a similar mushy sense. A more serious conception of liberal democracy is a democracy that is constrained in its scope so that a majority (or minority) of voters cannot undermine the rights or liberties that are dear to others. “Liberal” qualifies “democracy”; it is not a pleonastic embellishment. A liberal democracy is a limited democracy or, synonymously, a constitutional democracy; it is the ideal of most classical liberals. One version (defended by William Riker among others) takes the form of a humble political system where elections simply allow voters to reject their political leaders and replace them with new ones. It does not claim to define truth or justice. A third sort of liberal democracy, which may also be viewed as a special case of the second, is a political regime ultimately based on unanimity, that is, where every individual has a veto on government decisions—a very strong constraint. Although the formula may seem difficult to conceive, it has been brilliantly defended by James Buchanan, the 1986 laureate of the Nobel Prize in economics. The basic idea is that all individuals can agree on general or constitutional rules of state action, as opposed to ad hoc interventions; and that simple or qualified majorities may, at the post-constitutional stage, make decisions in compliance with the higher constitutional rules. The system is not contradictory because what every individual gets is the respect of the rules that he has virtually bargained for with other citizens and accepted as generally in his own interest. The power of political majorities remains strictly limited. (See Buchanan’s book with Gordon Tullock, The Calculus of Consent [1962] [Liberty Fund, 1998]; and one of Buchanan’s last books, Why I, Too, Am Not a Conservative [Edward Elgar, 2006].) “Illiberal democracy”, the opposite of “liberal democracy,” thus means any majoritarian democracy that is not limited and can abrogate somebody’s rights without his consent. A strongman democracy or populist democracy is the most representative specimen of the genre. A populist democracy is nearly inevitably a strongman democracy: since “the people” doesn’t exist except as a set of individuals with different preferences and values, it has to be embodied in a strong ruler who can easily enforce his will (see my “The Impossibility of Populism,” The Independent Review 26:1 [Summer 2021]). A populist ruler is necessarily an authoritarian. Orban is such a ruler. The Financial Times notes (see respectively “Viktor Orban Wins New Term as Hungary’s Prime Minister but OSCE Critisises Campaign,” Financial Times, April 3, 2022; and “Crushing victory gives Viktor Orban scope to tighten grip on Hungary,” April 5): Orban … has extended control over most walks of life on the way to forming a self-styled “illiberal democracy” in which checks and balances have been weakened and the premier’s associates have become the business elite. Orban has established tight administrative and ideological control over much of the media, higher education and cultural institutions. Putin was among the first to congratulate Orban on his electoral victory. Columnist Gideon Rachman further explains (“Orban’s Victory Sends a Warning to the West,” Financial Times, April 4, 2022): In the past, Orban has praised Putin for “making Russia great again”. He held a jovial meeting with the Russian president in Moscow, shortly before the invasion of Ukraine. Donald Trump is another Orban fan. Earlier this year, the former US president endorsed the Hungarian leader’s re-election bid, calling him a “strong leader” who has done a “powerful and wonderful job”. … But Orban has rigged the political system in his favour for more than a decade. The courts have been packed, the civil service purged and the electoral system gerrymandered. Above all, there has been an assault on media freedom. Peter Marki-Zay, the Hungarian opposition leader, was given all of five minutes airtime on state television—during the entire election campaign. (0 COMMENTS)