The year was 1965. I was a college sophomore. My family was middle class—not wealthy, watching the budget—and yet, health care was not a problem. In fact, I never heard my parents discuss it. We had our family physician, and if we needed a specialist, we saw one. Holden Hospital was clean, efficient, and—if needed—willing to treat those who could not pay. In fact, the United States was touted as having the best medical care system in the world—for rich and poor alike. It was a tapestry of private practices, community hospitals, medical schools with teaching/research hospitals, and foundations and other charitable organizations for disease-specific research and local or national funding for a host of experiments such as HMOs (Health Maintenance Organizations).1 A significant fraction of hospital care was by nonprofit institutions affiliated with religious denominations. These hospitals often had an explicit mission to serve the indigent. While precise statistics on the volume of charitable care are scarce, it is well-documented that many hospitals maintained charity wards, and physicians frequently offered pro bono services to those in need.​ By 1910, the American Medical Association (AMA) already was large and began to improve medical education and licensure standards of physicians. My family had Blue Cross/Blue Shield. The American Hospital Association (which had taken on accreditation of hospitals) started Blue Cross in 1937 to unite the country’s networks of hospital insurance plans; physicians then started Blue Shield to prevent Blue Cross from entering the primary care field. Both were nonprofit. In a sense, they led the commercial insurance companies that soon flocked into the field. In the AMA Journal of Ethics, George Moseley writes that “… the market for [commercial] health insurance of all kinds increased dramatically during the 1940s, from a total enrollment of 20.7 million in 1940 to 142.3 million [out a total U.S. population of 151 million] in 1950.” During World War II, federal legislation cleared the way for employers to offer healthcare benefits—and employees to receive it—tax exempt. The chief federal initiatives apart from the Veterans Administration, started in 1930, were the Hill-Burton Act of 1946 and the Kerr-Mills program. Hill-Burton funded hospital construction across the country, ensuring especially that rural areas had access to modern facilities. I worked at the New York City Commonwealth Fund, which pioneered the concept of community-matching grants for hospital construction—until the federal government took over the idea with Hill-Burton. Between 1947 and 1971, more than $3.7 billion was allocated for building more than 9,000 medical facilities across the country. This was a first, early initiative of government to improve the system while soft-pedaling government control over medical decisions. In 1960, the Federal Employees Health Benefit Plan was begun to provide health insurance to federal workers. The Kerr-Mills Act was passed, which used federal funds to support state programs providing medical care to the poor and elderly (a precursor to Medicaid). Doctors treated the indigent for free or a reduced fee not because they were more charitable than today, but because of the fundamental pledge of their profession, because the need was there, and because until the 1960s charitable care was expected. In 1965, President Lyndon B. Johnson signed Medicare and Medicaid into law, transforming American healthcare. Today, those programs have become so much part of our national consciousness that imagining a world without them borders on the unthinkable. And yet, just seven decades ago, the United States had a medical and hospital care system that functioned well for most Americans largely without government. Was it a perfect system? No. But the question we should be asking is if the radical transformation that came with Medicare and Medicaid was ever an improvement or sustainable economically or systemically.​ “Today, any suggestion of return to a private medical and hospital care system is met with outright horror. The idea that healthcare existed—and functioned—before Medicare and Medicaid is treated as irrelevant, paleo conservative, and callous.” Today, any suggestion of return to a private medical and hospital care system is met with outright horror. The idea that healthcare existed—and functioned—before Medicare and Medicaid is treated as irrelevant, paleo conservative, and callous. Of course, those who paid into Medicare deserve, need, and are owed their benefits. If you are forced all your working life to contribute to Medicare, you make no other provisions for retirement and older age and can be relied upon to cry, “It is impossible to end Medicare! Are you crazy?” No argument there. But what if Medicare’s introduction was the moment that the best medical care system in the world began its slow but accelerating unraveling? Before the enactment of the legislation, vocal opposition was widespread and arguments powerful: • Once care became “free” at the “point of service,” demand would be unlimited. • The government would react by rationing care to control soaring costs. • The system would become financially unsustainable. • Doctors would be forced to accept lower reimbursements, and many would leave the system. It was all foreseen. The premises of government subsidized healthcare defied American political and economic principles. It was a first step toward socialized medicine and portended bureaucratic control of a science-based profession that daily made highly informed judgments that called for a balancing of evidence. Above all, the logic of he-who-pays-is-responsible for deciding who gets paid, for what, and how much. Now, the responsible party would be government. In 1961, then-private citizen Ronald Reagan warned that Medicare would lead to increasing government control over healthcare, ultimately limiting patient freedom: One of the traditional methods of imposing statism or socialism on a people has been by way of medicine…. If you don’t stop Medicare, one of these days you and I are going to spend our sunset years telling our children and our children’s children what it was like in America when men were free.2 Dr. Edward Annis, then-president of the AMA, argued in a speech before Congress in 1965: This program will not be voluntary. Your doctor will be told what he can do and how he can do it. The government will set the fees, and in return, they will determine the services provided. This is the first step toward the socialization of American medicine.3 When Congress was debating Medicare legislation, the government estimated that by 1990 the program would cost $12 billion annually. The actual cost was $110 billion—nearly ten times the projection. Today, combined Medicare and Medicaid spending exceeds $1.5 trillion per year, accounting for more than 25% of the federal budget. These programs are among the primary drivers of the national debt, yet politicians, fearing this “third rail” of politics, refuse to touch them, fearing voter backlash. ​ When Medicare was enacted, physicians were assured that they would simply be reimbursed for services (cost-plus like Blue Cross/Blue Shield), with no interference. Many doctors and hospitals initially welcomed Medicare and Medicaid because they promised to pay patient bills without interference. That promise was short-lived. Seven years later, in 1972, the government established Professional Standards Review Organizations (PSROs), tasking them with determining which medical treatments were “necessary” and “appropriate.” It angered physicians, many of whom had backed Medicare in good faith. PSROs were superseded in 1982 by Peer Review Organizations (PROs), later rebranded as Quality Improvement Organizations (QIOs). As the name increasingly skirted any suggestion of oversight over medical practice, the function remained the same: government-mandated oversight of medical decisions to control costs. This shift represented an unprecedented level of bureaucratic intrusion into U.S. medical practice. Gradually, full-scale rationing was introduced. Government set reimbursement rates far below private insurance payments, leading to the inevitable: doctors abandoning Medicare patients. A 2023 survey by the Medicare Payment Advisory Commission (MedPAC) found that 34% of primary care doctors and 28% of all specialists now refuse new Medicare patients due to low reimbursement rates.4 The AMA reports that since 2001, Medicare payments to doctors have increased just 9%—while the cost of running a medical practice has increased 47%. By comparison, hospital payments have risen 60% in the same period. Many of the best doctors in major cities have stopped accepting Medicare entirely. Doctors I saw for years in Manhattan told me bluntly: “Medicare doesn’t even cover my overhead.” The AMA warns that, “Without reform, fewer and fewer doctors will be willing to see Medicare patients, leading to severe access issues for seniors.” Many will spring to the defense of Medicare by claiming the government didn’t take over health care, it just pays for it. Pause here to do what is seldom done today: talk in terms of fundamental principles. In our resolutely pragmatist age of politics (and much else) to insist on consistency of principle is to be accused of “extremism”: “Well, we don’t have to go that far!” In fact, however, we must fear consistency only when we have unworkable principles—for example, altruistic self-sacrifice as a moral absolute. No, Medicare has not nationalized healthcare on the public ownership model of socialism; that is not the American approach to socialism. Yet America has placed the industry under the most fundamental government control: price setting, extensive regulation, and rationing. That is the opposite of free-market dynamics. In a market, employees share the goal of maximizing a company’s value and profit and have considerable autonomy to make decisions, experiment, innovate. Government bureaucrats must operate within the rule of law and under regulations derived from law. Areas where the bureaucratic approach works are the military, the police, and the courts, where the essence of the job is to follow orders, respect the law, and abide by strictly defined procedures. It should surprise no one that when government controls the price, it controls the supply. It is a matter of principle. Medicare cannot be “fixed.” Government cannot pay for unlimited care and also control costs. America’s aging population only makes that obvious sooner. We are left with doctors fleeing the system because they are underpaid, services rationed by bureaucratic cost controls, and budget deficits and a national debt almost ungraspable by most Americans. Medicare’s defenders now admit the system is unsustainable—but even the AMA proposes only tweaks. It is time to say that the system itself is the problem. And yet, before 1965, we had a system that worked and was on a steep upward curve of improvement. There were ways to improve access for poor and/or elderly individuals without handing control of healthcare to the government. Opponents of Medicare weren’t callous; they recognized tradeoffs and advocated incremental solutions, like expanded charitable hospital funding and private insurance pools for the elderly. Medicare and Medicaid supposedly obviated the need for charity. The huge philanthropic giving of Americans to healthcare became ancillary with the advent of government funding—until reimbursements were slashed and hospitals again are crying for help. In 2023, total U.S. charitable giving reached approximately $557 billion ($374 billion from individuals, $76 billion from foundations, $43 billion in bequests, and $21 billion from corporations). But as governments have assumed responsibility for such major charitable areas as healthcare, these dollars have been redirected to less urgent (and at times rather esoteric) causes in the arts, social and political movements, foreign aid, a welter of environmental causes, and fully one-fourth to religion. The money is there to pay for those who need charitable assistance for healthcare. We’d best start now on fundamental reform. To achieve it while honoring present commitments under Medicare and even providing better interim funding to keep the promises of the system, will take 50 years—although things will get better much sooner. The key is to maintain all services for the cohort now in Medicare, refund Medicare contributions to those not yet in the system (perhaps directing the refunds to the private insurance plan of their choice), and from those just beginning to work collect no contributions. The problem with the refund idea, of course, is that the money no longer exists. All of it is spent on current Medicare costs. Medicare is not a healthcare insurance plan; it is a welfare program supported by a deceptive tax. That tax is on our children and grandchildren who pay it to support us and in turn count on their children and grandchildren to pay the tax to support them. Since that base is shrinking, and the recipient cohort is burgeoning, and since politicians will not tax as needed, we have a $36.6 trillion dollar national debt. It will never be paid. It is being and will be inflated away. For more on these topics, see Michael Cannon on Medicare. Great Antidote Podcast, October 2022. Christy Ford Chapin on the Evolution of the American Health Care System. EconTalk. Health Insurance, by John C. Goodman. Concise Encyclopedia of Economics. I doubt that reform at the level I describe will occur before the inevitable collapse. But how many Americans will pay with their lives before that happens? And by then, will we even remember that America functioned for more than 200 years with private healthcare? That doctors and patients once were free? Footnotes [1] George B. Moseley III. “The U.S. Health Care Non-System: 1908-2008.” AMA Journal of Ethics. May 2008. [2] Ronald Reagan, Radio Address on Socialized Medicine, circa 1961. [3] Edward Annis and Jane M. Orient, “Medicare and the Destruction of Freedom in Medicine: Recollections of Dr. Edward Annis,” Journal of American Physicians and Surgeons. Winter 2008. [4] Medicare Payment Policy. Report to Congress. *Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review. For more articles by Walter Donway, see the Archive. (0 COMMENTS)

… the path forward will involve a reconciliation of a commitment to the free market, and its atomization and isolation of individual wants and needs, with the insatiable human desire for some form of collective experience and endeavor… the atomization of daily life in America and the broader West left a lane open for technology firms, including ours, to recruit and retain a generation of talent that wanted to do something other than tinker with financial markets or consult. —Alexander C. Karp and Nicholas W. Zamiska, The Technological Republic: Hard Power, Soft Belief, and the Future of the West1, p. 217 Alexander C. Karp and Nicholas W. Zamiska are, respectively, CEO and head of corporate affairs at Palantir Technologies, a Silicon Valley firm that provides software to businesses and governments. It uses machine intelligence to solve problems, often having to do with security. In their book, The Technological Republic, the authors recount how in 2012 the American military used Palantir software in Afghanistan to better anticipate the location of Improvised Explosive Devices (IEDs). In Afghanistan, software made by Palantir had found a committed band of supporters, particularly in the U.S. Special Forces, with teams where intelligence, and the ability to quickly navigate across databases and stitch together context in advance of missions, were critical. p. 152 Part of the book is a meditation on start-up culture. But most of the book reads like something a Professor of Classics might have written circa 1985, in the middle of the Decade of Greed, lamenting the students’ crass materialism and lack of interest in Western Civilization or the higher goals in life. In style, The Technological Republic also owes something to 20th century academic intellectual writing. In just one six-page section, the authors refer to and/or quote Thomas Hart Benton, Jackson Pollock, Jack Kerouac, Rene Girard, Ralph Waldo Emerson, Isaiah Berlin, Herbert Hoover, and John Dewey. The description of start-up culture emphasizes an organizational structure with minimal hierarchy. I myself have written, “The more titles an organization has, the more it will select for people who really care about titles.”2 The authors write, … we have, at Palantir, attempted to foster a culture in which status is seen as an instrumental, not intrinsic good… Every human institution, including the technology giants of Silicon Valley, has a means of organizing personnel, and such organizations will often require the elevation of certain individuals over others. The difference is the rigidity of those structures, that is, the speed with which they can be dismantled or rearranged, and the proportion of the creative energy of a workforce that goes into maintaining such structures and to self-promotion within them. p. 125 They point out that the engineering mindset is pragmatic: the software has to work. Employees must feel accountable. Instead of a culture of blame-shifting, bad results are studied in terms of systemic causes and solutions. Higher Motives “The authors complain that too many Silicon Valley companies are looking to make big profits from solving little problems.” The authors complain that too many Silicon Valley companies are looking to make big profits from solving little problems. They would prefer to see more focus on what they see as the important issues, such as national security and health. While the authors take many opportunities to scorn finance, consulting, and especially the development of applications for shopping and entertainment, they are not social justice activists. They take pride in the application of Palantir software to help police. The view that advanced technology and software have no place in local law enforcement is an archetypical “luxury belief,” to use the term of the author Rob Henderson. The risk is that we abandon a moral or ethical system oriented around results—the outcomes that matter most to people (less hunger, crime, and disease) in favor of a far more performative discourse…. p. 177-178 While I came away from The Technological Republic with some insights, I was also left with some important questions that I would like to have seen addressed. One question is how Palantir was able to adapt to sell to governments and large corporations. Large organizations undertake thorough evaluations of major purchases, putting would-be sellers through a long and frustrating process. You can spend months meeting with mid-level staff who are not even authorized to make a purchase decision. You have to navigate the complex internal politics and competing interests within the organization. I would have liked to see some examples illustrating how Palantir was able to do that. For more on these topics, see Marc Andressen on Why AI Will Save the World. EconTalk. Eliezer Yudkowsky on the Dangers of AI. EconTalk. Joe Lonsdale on the Rebirth of Liberty and Cultivating a Successful Future. Future of Liberty Podcast, 8-15-2024. Another question concerns the government’s culture. How concerned are the authors that the government may not be able to adapt to the pace of change, especially in the nascent field of artificial intelligence? What recommendations would they have to offer to public officials? The final question that I have concerns the nature of the “republic” that the authors have in mind. Is a partnership between the engineering elites and the political leadership really the solution? What role would it leave for the rest of us? Footnotes [1] Alexander C. Karp and Nicholas W. Zamiska, The Technological Republic: Hard Power, Soft Belief, and the Future of the West. Crown Currency, 2025. [2] “Social Media and other Status Games,” by Arnold Kling. In My Tribe, May 8, 2024. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Ezra Klein and Derek Thompson have a new book entitled Abundance.  This is a part of the description at Amazon: Abundance explains that our problems today are not the results of yesteryear’s villains. Rather, one generation’s solutions have become the next gener­ation’s problems. Rules and regulations designed to solve the problems of the 1970s often prevent urban-density and green-energy projects that would help solve the problems of the 2020s. Laws meant to ensure that government considers the consequences of its actions have made it too difficult for government to act consequentially. In the last few decades, our capacity to see problems has sharpened while our ability to solve them has diminished. The authors are supporters of the “Yimby” movement, which aims to boost housing by reducing barriers to construction.  Thompson was recently interviewed on CNBC (see this link for the interview): Thompson is rightly exasperated by people that confuse lower housing prices created by increased supply with lower housing prices created by economic depression.  The former situation is good for potential homebuyers, the latter is bad.  Both more supply and less demand result in lower housing prices, but only the former results in more quantity of housing. I frequently complain about people who “reason from a price change”.  You might assume that this sort of mistake is only made by students in freshman economics classes.  In fact, many of the most powerful people on Wall Street make the same mistake.  Thompson also pushes back on the claim that falling stock prices are not something to worry about.  I often hear people claim that falling stock prices reflect the fact that tariffs hurt the economy in the short run but help the economy in the long run.  There are several problems with this claim: 1. That’s not how asset markets work.  If investors thought the tariffs would help the economy in the long run, you would probably not see a big decline in stock prices, and you would not see a weaker dollar.  The “wisdom of crowds” is suggesting that tariffs will likely hurt long run economic growth.  We don’t have a futures market for industrial production, but if we did it would very likely have shown a significant drop in recent days. 2. Proponents of mercantilism did not predict these market reactions.  So it’s not just a question of “Wall Street is not Main Street”.  That excuse might work if we had been told that stock, commodity and foreign exchange markets would react this way to tariffs, but in fact the market reactions were not at all what the mercantilists expected.  (0 COMMENTS)

At the heart of the success of the Beatles was the creative chemistry and volatile friendship between John Lennon and Paul McCartney. Listen as author Ian Leslie discusses his book, John & Paul: A Love Story in Songs with EconTalk’s Russ Roberts. It’s a deep dive into music and friendship as well as a revisionist history […] The post The Music and Magic of John and Paul (with Ian Leslie) appeared first on Econlib.

  The Bias in Health Science by Richard Gunderman, Law & Liberty, April 1, 2025. Excerpt: But still, I never suspected outright fraud. It is true that the Lancet, another of the most respected medical journals, had published, with harmful effects in practice, a now infamous paper supposedly linking the measles, mumps, and rubella (German measles) vaccine with the development of childhood autism, but such gross cases of editorial negligence and scientific dishonesty were rare—or so I thought. Relatively recently, however, it has been discovered that a very high percentage of scientific studies are unreproducible, and a smaller but still significant number are outright fraudulent. There are now scientists dedicated to searching out deficient or dishonest scientific papers, and there is an excellent website, Retraction Watch, similarly dedicated. Its investigations often lead to retraction, the signaling that a paper is so seriously flawed that its results or conclusions can no longer be relied upon and should, for preference, not be quoted.   The 3 Myths Supporting NIH Funding by Zachary Caverly, Reason, April 1, 2025. Excerpt: U.S. biomedical science in the era before the NIH was spreading federal money was not hurting for private support, and while some insist that increased government spending only strengthened a good foundation, the public sector’s role is often overstated regarding some canonical research achievements. The Human Genome Project is a good example. The NIH correctly asserts this groundbreaking international collaboration “changed the face of the scientific workforce,” but it was only made possible by the automatic gene sequencer developed by Leroy Hood, who noted the invention received “some of the worst scores the NIH had ever given.” It was only through the generosity of Sol Price—the founder of warehouse superstores—that the technology came to fruition and the human genome was finally sequenced. Similar stories of private generosity in place of government grants can be found forstem cell research. As for the importance of publicly supported academics, consider the story of mRNA vaccine development. The NIH timeline implies that smart government investment into years of HIV research was the key to this lifesaving technology, but the chief innovator of the eventual product, Katalin Karikó, was roadblocked for years in academia and even demoted for her lack of grant acquisition. She would later leave the university setting and work for BioNTech in the private sector to create the Pfizer vaccine. Her story is conspicuously absent from the NIH timeline of events.   Federal Court ‘Vacates in Its Entirety’ the FDA’s Costly and Onerous Lab Test Rule by Ronald Bailey, Reason, April 1, 2025. Excerpt: A federal district court has struck a blow for medical innovation and patient empowerment by overruling the Food and Drug Administration’s (FDA) misbegotten effort to regulate laboratory-developed (LDTs) and in vitro testing. LDTs are diagnostic in vitro tests for clinical use that are designed, manufactured, and performed by individual laboratories. They can diagnose illnesses and guide treatments by detecting relevant biomarkers in saliva, blood, or tissues; the tests can identify small molecules, proteins, RNA, DNA, cells, and pathogens. For example, some assess the risks of developing Alzheimer’s disease, detect the presence of cancers, or guide the treatment of breast cancer. Last May, the agency adopted extensive new rules aimed at regulating those tests for the first time. This is the same agency whose bureaucratic acumen in 2020 massively screwed up COVID-19 diagnostic testing as the pandemic rolled in. As I reported at the time, out of the billions of tests given annually, the FDA sought to justify imposing its burdensome oversight by citing problematic medical device reports and unconfirmed “allegations” for a grand total of nine and four different tests respectively between 2009 and 2023. The remaining examples cited by the FDA are tests that had actually been submitted to the agency for analysis and were subsequently rejected or revised as recommended.   THE 2025 EDCHOICE FRIEDMAN INDEX Excerpt: The 2025 EdChoice Friedman Index is a comprehensive and easy-to-understand measure of the availability of private K–12 educational choice across the United States. Inspired by Milton and Rose Friedman’s vision of universal choice, the index assesses how well each state enables families to direct education funding toward the options they deem best, whether public or private. Since 2020, there has been a rapid increase in educational choice programs across the U.S. Fourteen states have been labeled as offering “universal choice,” but many of these states lack accessibility due to caps on funding. The EdChoice Friedman Index measures how much educational choice families really have. Note: The absence of anything on Trump’s tariffs does not imply agreement. Rather, various other economists are handling this very well and it’s not hard for readers of this blog to find such coverage, both on EconLog and elsewhere. I will have more coverage in the next week, though. (0 COMMENTS)

Reader, it is difficult to overstate just how incredibly bad the “Liberation Day” tariff scheme is.  Top to bottom, it is incoherent.  When the plan was announced on April 2 with Donald Trump holding up a board of seemingly-random numbers, economists had to scramble to figure out what, exactly, these figures came from.  They seemed utterly divorced from reality and had nothing to do with reciprocity.  Folks figured the numbers were the bilateral trade deficit divided by imports to that country.  This prompted the USTR to deny that claim and release their actual calculations.  Somehow, it was worse than what people thought. One would think that a model on “reciprocal” tariffs would include tariffs from the other country.  Indeed, there are already well-established methods in US law and economic theory in determining what reciprocal tariffs should be in the face of unfair trading practices.  Section 301 of the Trade Act of 1974 lays out various remedies, as does the Reciprocal Tariff Act.  Countervailing duty calculations already exist; this new model serves no purpose when it comes to reciprocity or even correcting “unfair” trade practices since it doesn’t take into account any tariffs or nontariff barriers. Rather, the model treats bilateral trade deficits as per se evidence of unfair practices.  One could make an argument that overall trade deficits are bad (but even that is a stretch as such an argument is conditional, not per se, and made even weaker when a nation is the international reserve currency).  But bilateral?  Absolutely not.  There is no reason to think that trade between any two partners would be equally balanced; we do not live in a barter economy.  The entire point of money is to facilitate these bilateral trade imbalances.  I have a trade surplus with my employer.  That is not per se evidence that I am ripping them off.  Likewise, I have trade deficits with the grocer, the butcher, the brewer, and so on.  That is not per se evidence that Rouses Supermarket, Bourgeois Meat Market, nor Abitia Brewing is ripping me off.  If it weren’t for money, we would have to have bilateral trade balance: I would need to find exactly what Rouses wants for my daily meals (I am willing to bet they do not want economics research).  So, the premise of the entire model fundamentally misunderstands the very foundations of monetary economic exchange. But, for the sake of argument, let us assume that the model’s premise is valid.  Let us take a look at the model itself.  The USTR reports the model as the balance of trade with a given country divided by price elasticity of imports (ε) times tariff passthrough (φ) times imports.  This model means nothing; it hides this meaninglessness behind Greek letters, but there is no interpretable meaning to this model.  It’s not obvious it will even do what the authors want it to do.  Reader, you will not find this model in any economics textbook or paper and, at least as of this writing, no one has released an in-depth report on the logic of the model.  So, even if the premise was valid, there is no prima facie reason to think the model itself has anything to do with the premise. But, for the sake of argument, let’s assume that the model is valid.  The model parameters chosen are illogical.  For ε and φ, the USTR chose the same values for each country.  But there is no reason to assume ε and φ would be identical for each country, or even for each good within each country.  Both ε and φ depend on exchange-specific factors.  For example, goods with many substitutes, ε will be higher (or lower if the good has few substitutes).  Consequently, this implies that the calculated tariff rate is likely incorrect; it may be too high and it may be too low.   But, for the sake of argument, let us assume that every country in the world has the exact same ε and φ.  The numbers chosen for these parameters are incorrect.  The authors state:  Recent evidence suggests the elasticity is near 2 in the long run (Boehm et al., 2023), but estimates of the elasticity vary. To be conservative, studies that find higher elasticities near 3-4 (e.g., Broda and Weinstein 2006; Simonovska and Waugh 2014; Soderbery 2018) were drawn on.  Those are some estimates, sure.  But, despite the statement that ε of 4 is “conservative,” it’s actually not.  Many studies find that ε is upwards of 5-7, especially after a trade shock (see, eg, here).  Furthermore, they just set φ at 0.25.*  No citation given.  The only justification given is: The recent experience with U.S. tariffs on China has demonstrated that tariff passthrough to retail prices was low (Cavallo et al, 2021). [link added] But retail prices are not the relevant measure here.  We need total passthrough.  Here is what Alberto Cavallo et al actually say (emphasis added): At the border, import tariff pass-through is much higher than exchange rate pass-through. Chinese exporters did not lower their dollar prices by much, despite the recent appreciation of the dollar. By contrast, US exporters significantly lowered prices affected by foreign retaliatory tariffs. In US stores, the price impact is more limited, suggesting that retail margins have fallen. Our results imply that, so far, the tariffs’ incidence has fallen in large part on US firms. The authors of the report get Cavallo et al exactly backward.  Rather than showing low passthrough, they actually show nearly complete passthrough and that the tariff passthrough was borne by Americans.  This is a horrific case of cherry-picking by the USTR.  Oh, and by the way, research shows φ is closer to 0.8, not 0.25.  Consequently, both ε and φ are underestimated, indicating the tariff calculation is systematically too high. But, for the sake of argument, let us assume that their choices for ε and φ are accurate.  We get to the real kicker.  The authors write: “Assuming that offsetting exchange rate and general equilibrium effects are small enough to be ignored…” This assumption is huge.  Their whole model falls apart if the assumption does not hold.  Here’s the problem: The entire point of the tariffs is to have exchange rate and general equilibrium effects!  They state so multiple times in their report and the Trump Administration’s economic advisors have said so as well.  Thus, the core necessary assumptions of the model never held, meaning the whole thing is bunk ab initio.  Indeed, not 24 hours after the tariff scheme was released, the stock market had its worst two days on record and the dollar depreciated. I don’t think I’ve ever seen a model get proven wrong so fast.  24 hours has got to be some kind of record.  Even the COVID lockdown models, as bad as they were, took a few months to blow up. I repeat again: it is hard to overstate just how bad this model is.  Start to finish, it is incoherent and rife with bad assumptions, bad parameters, and no logic.  This is not the result of reasoned thinking.  It is a shameful display of scientism. *By the way, this is why folks initially thought that the model was just the trade balance divided by imports.  If ε = 4 and φ = 0.25 and the denominator is ε * φ * imports, then ε * φ = 1 and the whole denominator reduces to just imports.  The fact the USTR didn’t see that is problematic. (0 COMMENTS)

Economists sometimes say something banal that doesn’t seem to require much economic education or business experience but only a bit of reflection about individual incentives. Let me do it. What will happen if foreign companies or foreign plants of American companies cannot sell their goods in America without being constantly hit by whimsical American tariffs and threats thereof, up one month, down the next month, and up again? They will move their production facilities to America? But then, they will also know that they risk being hit with whimsical American tariffs on their inputs. And they know that foreign states will often retaliate. Moreover, in these circumstances, the legendary American market will have become much less attractive since most people will be poorer, except for government cronies. The best idea for entrepreneurs may be to stay put or to move to a country still open to trade—or, ideally, to a country unilaterally open to trade if such countries exist. A silver lining would be that Americans and other people similarly victimized in their own countries (“taken advantage of” by their own governments) would stop blindly trusting the state and discover or rediscover the classical liberal and libertarian project of strictly limiting the power and scope of their own leviathan. Alas, it could also go the other way: the mob could clamor for a new, more powerful strongman to fix the wall, make the trains run on time, and get it done. In fact, and taking into account the different forms that authority and Leviathan have taken, it has been that way in most of the world during most of the history of mankind. There is certainly something worse than everyone in the world wishing to come to one’s country: it is if nobody wants to. ****************************** A mercantilist state, by ChatGPT with the new image generator (0 COMMENTS)

  In 1958, Leonard Read, in an attempt to write a version of Hayek’s “The Use of Knowledge in Society” for a wider audience, wrote “I, Pencil.” (It doesn’t cover all of Hayek’s points but it’s pretty good given its short length.) Many economists use Read’s short article in their classes to great effect. It became much wider known when Milton Friedman used it in his PBS TV series, “Free to Choose.” One interesting thing I just thought of is that in laying out the various elements of a pencil that come from other countries, Read does not talk about tariff rates. It wasn’t because there was free trade. In fact, tariff rates around the world were pretty high when Read wrote. Indeed, as I wrote 2 months ago, Trump is single-handedly undoing much of the progress that the world has made on trade since the 1940s. So tariff rates were quite high when Leonard Read was writing. Still, I think it’s interesting to take the 4 countries from which some of the inputs come and note the tariff rates that will now be assigned under Trump’s new high (though not reciprocal) tariff regime. So here are the 4 passages, with the tariff rate after each. Remember that the ✏️ is talking. Hokey? Sure, but it works. A lot of my 30-something military officer students loved it. “My ‘lead’ itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka].”  Tariff rate: 44%. “To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.” Tariff rate: 25%. “An ingredient called ‘factice’ is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride.” Tariff rate: 32%. “The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.” Tariff rate: unspecified. Interestingly, in the Newsweek article that lists Trump’s tariffs, country by country, Italy is not mentioned. (0 COMMENTS)

The recent announced tariffs were computed using a formula that is almost universally viewed by economists as making no sense: Now we discover that even if you think this formula does make sense, the specific calculations were based on the wrong elasticity estimate.  The following is from an AEI report by Kevin Corinth and Stan Veuger: The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs. The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula. However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that “tariffs [are] passed through almost fully to US import prices,” while finding “more mixed evidence regarding retail price increases.” It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs. Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level, and as a result, cut the tariffs announced by President Trump on Wednesday by the same fraction, subject to the 10 percent tariff floor. As shown in Table 1, the tariff rate would not exceed 14 percent for any country. For all but a few countries, the tariff would be exactly 10 percent, the floor imposed by the Trump Administration. The Cavallo study was gated, but a tweet by Cavallo seems to confirm their interpretation: Unless I’m mistaken, the stock market briefly rose at the beginning of the tariff announcement, as it looked at first like there’d be a uniform 10% tariff on all countries (which would have been a relief to the markets).  Stocks then crashed when it became clear that our major trading partners would face far higher rates.  Thus it looks like $5.4 trillion in wealth was destroyed by a math error by a low-level government official.  (To be clear, there are many other problems with the formula, but this mistake is especially significant.) Of course it is likely that the administration had already decided on high tariffs, and this equation was reverse engineered to provide cover.  Nonetheless, this equation was used to compute the specific rates for each country, and thus probably explains why the EU was hit with a 20% tariff, China with a 34% tariff, and Vietnam with a 46% tariff.  Mistakes do have consequences! All this reminds me a bit of the Chinese Cultural Revolution of 1966-76, when grown-up experts were banished to the countryside and important parts of the economy were turned over to students.   You might argue that anyone can make a math error, and that’s true.  But in an administration that includes skilled economists, it is more likely that someone will catch the error, especially when the final results look “fishy”.  To be fair, even the previous administration fell short in this area.  Larry Summers warned the Biden people that excessive fiscal and monetary expansion could lead to high inflation.  The current administration seems even more anti-elite than the Biden administration, and is especially hostile to the views of economists.  Most talented people have either left the government or are laying low to avoid involvement in the current mess. The administration now has three options: They can admit that the wrong figure was used, and correct the tariffs. They can admit that the wrong figure was used, and also admit that the formula was not the actual justification for the tariffs.  In other words, they can admit that they lied. They can deny that the wrong figure was used in the formula. In the old days, choice #3 would have been unthinkable.  But we are in a new world.  Just a few weeks ago, the administration responded to the Signal chat scandal by claiming that the highly specific battle plans leaked to a reporter at The Atlantic did not constitute “classified information.” Yes, and the sky is green. My wife lived through the Cultural Revolution.  She hoped that she was leaving all that behind when she moved to America. PS.  When I think of the Chinese Cultural Revolution, I often recall this scene from the 1994 Chinese film To Live: Months later, during Fengxia’s childbirth, her parents and husband accompany her to the county hospital. All doctors have been sent to do hard labor for being over educated, and the students are left as the only ones in charge. Wan Erxi manages to find a doctor to oversee the birth, removing him from confinement, but he is very weak from starvation. Fugui purchases seven steamed buns (mantou) for him and the family decides to name the son Mantou, after the buns. However, Fengxia begins to hemorrhage, and the nurses panic, admitting that they do not know what to do. The family and nurses seek the advice of the doctor, but find that he has overeaten and is semiconscious. The family is helpless, and Fengxia dies from postpartum hemorrhage (severe blood loss). (1 COMMENTS)

  Poor Netanyahu but not poor Israelis. Israel’s government has said it will cancel all remaining tariffs on American imports, in an apparent bid to ensure that it is exempt from a new wave of levies that President Trump is set to announce on Wednesday. Israel and the United States, two close allies, have had a free-trade agreement since 1985 that excludes most American products from Israeli tariffs. On Tuesday, Prime Minister Benjamin Netanyahu of Israel presented the decision to remove all remaining tariffs as a move toward greater trade liberalization. This is from Matthew Mpoke Bigg, “On Eve of Trump’s Tariffs Announcement, Israel Says It Will Lift All Duties on U.S. Imports,” New York Times, April 2, 2025. Poor Benjamin Netnayahu. He clearly must have thought that when Donald Trump said he wanted reciprocal tariffs, Donald Trump must have wanted reciprocal tariffs. What Netenyahu didn’t understand is that Trump doesn’t want reciprocal tariffs. Instead, he wants to impose high tariffs on products from most countries no matter the tariff policy of the particular country. There is one bright spot. Having zero tariffs on all imports from the United States is a good move that will benefit most Israelis and cause their real GDP to be slightly higher. It would be even better for most Israelis if Netanyahu were to cut tariffs on all imports to zero. (0 COMMENTS)