What was the difference between rent controls on apartments and price controls on gasoline? In the rent control case, current tenants are insiders. They don’t have to line up for an apartment. So, as noted above, most of them will favor rent control. In the gasoline price control case, though, everyone (unless they had a special deal with the service station owner or manager, as sometimes happened) had to line up. The fact that you managed to get gasoline last week gave you no special place in line this week. So, there aren’t many “insiders” to lobby for the gasoline price controls. That raises an interesting possibility for ending rent control. What if the rent control regulations gave no existing tenants the preferential treatment that the current regulations give? Once a tenant’s one-year lease was up, his claim on the apartment he currently occupies would be no stronger than the claim of a want-to-be tenant. That one change in the regulation would dramatically change the political dynamics of rent control. There wouldn’t be insiders. Of course, current tenants would lobby like crazy against that regulatory change. This is from David R. Henderson, “Rent Control Creates Privileged Tenants,” Defining Ideas,” May 15, 2025. I taught the point of this article in my class for many years. I had never seen it stated clearly in textbooks. So I decided to write it up. I recommend the article for economics professors and teachers for when they teach about price controls. (1 COMMENTS)

When we talk about opposition to prices, we’re usually talking about price controls. This isn’t unreasonable. There are still calls for them in response to short-term higher prices after a disaster, or longer-term cost-of-living increases, as for rent or food. It’s important to explain the negative unintended consequences of such interventions. But sometimes, people who argue that there are negative unintended consequences don’t seem to understand why. In particular, when those who are against price controls also support policies that intervene in price signals less directly. In other words, opposition to price controls doesn’t necessarily translate to an argument for letting markets work. What’s needed is an argument against interfering with market signals sent by prices.  For example, in response to the housing crisis, Canadian governments have arrived at a near-consensus about the need to cap immigration. Neither the Liberal nor the Conservative Party campaigned on price controls. But both promised demand controls. The housing crisis is itself a result of market distortions. Overlapping laws and regulations prevent (and slow to a crawl) the building of enough homes where people want to live. There’s a consensus that we need to allow new housing. But we face the usual problems: too many people with homes in the places where demand is highest don’t want to allow their neighbourhoods to become denser or change in character.  In response to the resulting high prices for housing, governments promise to distort the market further by both boosting and suppressing demand.[1] Canadian governments have boosted demand for new homes by providing an array of policies (both incentives and tax credits) that subsidize demand. They’re also suppressing demand with more restrictive caps on immigration. One party suggested tying immigration caps to housing growth, job growth, and healthcare accessibility. (Put a pin in this.)  More homes drive down prices through competition between home sellers and landlords. More people needing homes drive up prices through competition between home buyers and renters. On some level, it makes sense that if government policy is causing the price to go up, simply implementing another policy that will relieve the upward pressure on prices should help.  And maybe it would if we lived in an economy where people were buying and selling one good. But we don’t! The people who need homes are the same people who work in the rest of the economy—including home construction. This is the whole reason we need prices: they are the only tool we have that can make market knowledge useful.  Recall the policy that suggests tying immigration to housing growth, job growth, and healthcare accessibility. All of these factors also need immigrants! Immigrants to build homes, immigrants to fill and create new jobs, immigrant doctors to address a nation-wide shortage. Every worker, and all of their resources, have demands and offer resources that no one can even know, let alone deftly manipulate, without market prices. There’s no proposal to end immigration completely, so the government might choose to interfere further to address the problems immigration controls create. They might prioritize immigrants with the relevant expertise in skilled trades. But that means choosing one sector to support over others, with a cascading effect across the economy. Ending paths to immigration might ease the pressure on housing costs, but affect the food supply. Piling intervention upon intervention, in both housing and immigration, gives us a government that looks like it’s playing whack-a-mole.  This is the knowledge problem at work. Once the government creates a problem with a market intervention, subsequent interventions meant to mitigate the first problem risk creating new ones, in new sectors of the economy. With each intervention, resource use is likely to get less efficient, and we should expect to see higher prices or, if things get bad enough, shortages.  A better understanding of prices, of how consumer demand can reach back through supply chains to give raw materials their value, and how prices balance consumers’ competing demands with the availability of resources to encourage service providers and producers to put those resources where they’re most valued, is needed. There’s more than one front in the war on prices. Simply convincing everyone that price controls are bad won’t cut it.  —— [1] Cue joke about the government interfering on both sides of an issue.  (0 COMMENTS)

Theory is vital to understanding the world.  It both helps us make sense of the world around us and make predictions.  Theory is like a pair of glasses: a good pair helps you see better.  A bad pair makes things worse.  And no pair is just useless.  One of the major problems these days is that the trade policy of the Trump Administration is guided by horrifically bad theory (when guided by theory at all).  Even worse, they do not even seem to grasp easy-to-verify facts and figures (e.g., Trump’s claim that the US trade deficit with China is $1 trillion.  It’s less than $300 billion.  Personally, I’d have relatively more faith in central planners if they could get even the basics right).  This post aims to be a corrective lens on some of the nonsense.  Of course, to the True Believers, none of this will matter; this post isn’t for them.  This post is for those who want to understand trade theory. International trade does not differ from domestic trade.  Whether one is trading with Bret in Boston, Brad in Baton Rouge, or Bobby in Berlin, the same principles hold.  Specifically, people think on the margin when making buying and selling decisions.  They will buy a good when the marginal cost of making the good exceeds the marginal benefit of making the good.  In other words, they will buy when it is cheaper to buy and make when it is cheaper to make.Likewise, they will sell when the marginal cost of making the good is less than the marginal benefit of making the good.  Or, they will sell when they can get more for selling the good than it costs to make it. Ricardo’s simple model, in which comparative advantage determines the patterns of trade, has been shown time and time again to hold, both at the individual level and at the international level.  Technical elaborations have come about (e.g., the Hecksher-Ohlin ‘Standard Trade Model,’ Stolper-Samuelson and Factor Price Equalization, the Specific Factors Model, the Product Life Cycle Theory, etc), but we will stick with the simple model, as these elaborations do not change the underlying logic. Since people are thinking and acting on the margin, we should expect international trade patterns to reflect these margins.  In other words, a nation should generally import what it is relatively bad at making (i.e., low productivity goods/services) and export what it is relatively good at making (i.e., high productivity goods/services).  Furthermore, since wages are tied to productivity, we should expect the wages in import-competing industries to be relatively low and the wages in export-competing industries to be relatively high.  Indeed, that is what we see.  Writing for the Peterson Institute for International Economics, J. Bradford Jensen and Lori G. Keltzer show that the overwhelming majority of jobs “at risk” to trade are in sectors with low productivity and low wages.  Conversely, the sectors with the highest productivity and wages are exporters (see figures 4 and 7).  These data are a little old (the report is from 2008), but I have been working on updating the figures.  The pattern isn’t changing; just the numbers. Since trade patterns follow a certain logic and are not random, we should not expect job losses from trade to be random, either.  Protectionists like to argue implicitly that trade job losses are either random (and thus they cite average wages) or that trade job losses are non-random, but for some reason, firms look to offshore their most productive, least costly business (thus focusing solely on high productivity industries and wages).  But job losses would be in low-wage areas, and job gains would be in high-wage areas. Consequently, any jobs “saved” by tariffs will also be those low-productivity jobs at the expense of high-productivity jobs.  Take textiles, for example.  Textile manufacturing in the US faces staunch competition from abroad.  According to the BLS, textile manufacturing workers earn an average of $17.78/hr.  That’s just 54.4% of the national average ($32.66).  Conversely, oil & petroleum extraction workers—one of our major exports—earn an average of $28.39/hr.  (Note: these data exclude managers and other supervisory workers.  These are just non-supervisory.)  Tariffs may “save” some low-productivity jobs, but at the cost of higher-productivity jobs.  (To head off any objections, it is true that the two industries chosen are the polar opposites of the scale, but the point remains.)   Now, of course, as trade expands, some textile workers may get laid off.  What are their alternatives?  Are they doomed to live on the public dime the rest of their lives?  After all, their skills are no longer needed in the US economy (what economists call “structural unemployment”).  The answer is: probably not.  Even relatively low-productivity service jobs pay approximately the same as these low-end manufacturing jobs.  Food prep workers earn an average of $17.32/hr.  Retail sales workers: $17.05/hr.  Are these declines in wages for the textile manufacturing worker?  Sure.  But they are pretty comparable wages.  If the worker wasn’t on welfare with textiles, he likely wouldn’t be working as a retail or food prep worker either.  And all this assumes the worker takes no steps to re-train.  If they do acquire skills for which there is more demand, they can increase their wages. Life happens on the margins.  Thus, adjustments to trade will happen on the margins as well.  Good theory helps us see the potential impacts of tariffs along various margins (and to dismiss what impacts are unlikely to occur).  Let me end with a personal story from grad school:  I was taking Robin Hanson’s Law & Econ grad class (ECON 841).  For part of the grade, we had to present an original paper.  I had come up with what I thought was a very clever model.  The math worked out, and it was quite pretty.  I presented the paper, and Dr. Hanson said just one thing: “This is interesting, but where’s the economics?’ With that one simple question, he blew up my model.  I couldn’t answer.  The mathematics were precise.  The model was logically perfect.  But it explained nothing.  There was no theory.  It amounted to little more than “what if?” I learned two important lessons that day: 1) if I never wanted to be embarrassed like that again, I’d have to make sure theory is included, and 2) give someone enough assumptions, and they can prove anything they want.  Good theory prevents bad vision.  Bad theory, no matter how mathematically precise, no matter how many fancy Greek letters you throw in, will mislead. (0 COMMENTS)

  Vice-presidential candidate Tim Walz, of whom I am not a fan, had one very good line that he used a lot when running on the Democratic ticket last summer: “Mind your own damn business.” He didn’t really believe it. Someone who sets up a snitch line during the Covid lockdown doesn’t really believe that government should mind its own business. But, despite Walz’s hypocrisy, it’s still a good thought. Some of us, though, had the faint hope that Donald Trump would be a little more open to the idea of government minding its own damn business. On some issues, such as mandates for gas stoves and shower heads, he has come through. But on some other very big issues, he has gone the other way. I warned friends who were thinking that with RFK, Jr. as the head of HHS was a good pick, that we would have “the nanny state on steroids.” I’m turning out to be right. The latest instance is Marty Makary, whom other friends had said would be a good pick as head of the Food and Drug Administration, and who answers to RFK, Jr. I wish. Here’s what my friend Dr. Jeff Singer writes about Makary’s latest: On May 13, the Food and Drug Administration announced plans to pull fluoride supplements, such as tablets and drops, off the market. FDA Commissioner Marty Makary stated that if people want their children to avoid dental caries, they should have them eat less sugar and practice good dental hygiene. While Dr. Makary emphasizes diet and hygiene, both important, his approach ignores the evidence that fluoride, used appropriately, plays a crucial preventive role. In short, you plebes, do it my way. There’s such an obvious solution to the issue of fluoride in water and Jeff lays it out nicely: It’s one thing when government-monopoly water companies stop fluoridating the water, allowing people uncomfortable with consuming fluoridated water to opt out. It’s an entirely different matter to deny access to fluoride for those who wish to consume it. If people wish to enjoy its benefits, there are many ways to obtain fluoride: from bottled fluoridated water to fluoride tablets and drops, varnish, and toothpaste. The FDA’s proposal to remove drops and tablets from the market undermines patients’ autonomy by denying them the right to consume a product with benefits that, for them, outweigh its risks. Jeff goes on, quite rightly, to push his new book, writing: In my book, Your Body, Your Health Care, I list various ways the government ignores our self-ownership and infringes on our right to make our own health care decisions. If the FDA’s proposed ban on fluoride tablets and drops is adopted, this must be added to the list. (0 COMMENTS)

  In the May 8 edition (electronic) of the Wall Street Journal, editorial writer Kimberley A. Strassel published an editorial titled “America Inc.’s Balance Sheet.” In it, she considered the proposals of Interior Secretary Doug Burgum (one of my two favorite Trump cabinet members, although I would have liked even better if Trump had chosen him as Veep) to tote up the asset side of the federal government’s balance sheet. She writes: That’s why the interior secretary is proudly making a wonky addition to the “drill, baby, drill” mantra: “Map, baby, map.” He’s working to get USGS refocused on pinpointing and estimating resources rather than its recent climate obsession. Good for him. My big surprise, though, was that Strassel didn’t consider one asset, an asset that has already been taken from the ground and is easily marketable. I refer, of course, to gold. According to an unofficial August 11, 2023 report, the U.S. government currently holds 261.5 million troy ounces of gold. The government officially values it at $42.22 per troy ounce. That, of course, is absurd. But while some government official is foolish enough to state the value at $42 an ounce, no one in the government is foolish enough to sell it at $42 an ounce. That brings me to the serious point. If the feds sold all their gold, that would bring the price down somewhat. Let’s say the sale brings it down to $3,000 an ounce. The government would then bring in 261.5 million * $3,000, which is $784.5 billion. That’s almost half of one year’s deficit. I would rather have the federal government reduce bond issuance by almost $800 billion than speculate on gold while having us taxpayers pay the interest on that $800 billion. When I eyeballed the data, I thought that the gold would be worth more like $1 trillion. But reducing the deficit by $800 billion would be a good start. (0 COMMENTS)

Back in January, Tyler Cowen did a post entitled: Congratulations to Christopher Rufo and Richard Hanania This was in reference to their role in fighting DEI policies: As most of you already know, the Trump administration through Executive Orders has taken major steps against affirmative action and also DEI.  We will see how the details play out, but each of these developments seems highly significant and not just “expressive.” Those two individuals played a decisive role in what happened, in both cases taking considerable flak along the way.   I had exactly the same view as Tyler.  But in at least one respect, the “details” did not play out in the way that many of us would have preferred.  Here’s Richard Hanania: I’m in The Economist today on the problems with Trump’s war on Harvard. The entire point of the anti-wokeness movement, at least from my perspective, was to fight for merit, freedom, and the rule of law. If you honestly hold these principles, then you have to acknowledge that Trump is trying to replace DEI with something that is even more opposed to them. . . . I don’t see any real defenses out there of what Trump is doing. Here’s Rufo arguing against center-right critics of the administration, yet the policy he defends has no resemblance to the one actually being pursued. Not once does he mention the Trump requirement for ideological diversity, nor the demand that Harvard create an ideological litmus test for foreign students. If Chris thought that these policies had a sound logical and legal basis, I think he would make the case for them. He might believe wokeness is so bad that any policy that strikes against it needs to be supported, but I think that kind of attitude is how you end up defending the indefensible. On issues like free speech there are two types of people.  Those whose views depend on whether or not they agree with the ideology of the speaker, and those who have a principled support for freedom.  In the former case, a so-called proponent of free speech may immediately flip to opposition as soon as they gain power.  Some on the right have opposed diversity programs that placed racial and gender considerations above merit, but now wish to place ideological diversity considerations above merit.  People who complained about cancel culture now wish to deport students that protested against Israel’s action in Gaza. In a related note, a recent Matt Lutz post on civil rights caught my attention: So ok, let’s talk about the Civil Rights Act. I know, I know! I feel you reaching for your pearls again, ready to clutch. So let me begin by saying that I am not against the Civil Rights Act. I think it has been, on the whole, good. But as with much else in politics, there are good arguments to be made on either side. And I think that there are good arguments to be made against the Civil Rights Act. It is, on net, good. But that doesn’t mean there’s no bad to it. And the bad is, basically, the argument that libertarians have long had against the Civil Rights Act. . . .  The world is complicated, and we should never commit ourselves fully to any particular perspective. The Trump administration’s treatment of Harvard is bad. But Jim Crow was worse. If the worst that can be said about the Civil Rights Act is that it gave Donald [expletive] Trump the power to run roughshod over liberal institutions, and the best that can be said is that it ended Jim Crow, then the Civil Rights Act comes out way ahead. Jim Crow was that bad. But the libertarians had a point. I think it’s easier to see that now. My views on civil rights are pretty similar to those expressed in Lutz’s post.  But I’d like to frame the debate in a slightly different fashion. The 1964 Civil Rights Act covers many different areas.  The vast majority are fairly uncontroversial.  I don’t see people arguing that blacks should not be allowed to vote, sit at the lunch counter, or sit in the front of a bus.  I don’t see people arguing that public benefit programs should favor whites.  I don’t see people arguing that labor unions should be allowed to refuse admission to blacks, or that employment agencies should be allowed to screen out black job applicants.   Or that certain public schools should be for whites only.   It seems to me that almost all of the controversy over civil rights is actually related to a set of DEI-related issues in employment and college admission, which constitute only a small portion of the bill.  The most controversial civil rights issues relate to concepts such as “disparate impact”, “affirmative action” and “diversity”. But many of these controversial DEI policies seem to violate the plain meaning of the Civil Right Act.  Indeed at least one part of the law (in Title VII) explicitly suggests that companies should not be required to aim for racial or gender diversity. (j) Nothing contained in this title shall be interpreted to require any employer, employment agency, labor organization, or joint labor-management committee subject to this title to grant preferential treatment to any individual or to any group because of the race, color, religion, sex, or national origin of such individual or group on account of an imbalance which may exist with respect to the total number or percentage of persons of any race, color, religion, sex, or national origin employed by any employer, referred or classified for employment by any employment agency or labor organization, admitted to membership or classified by any labor organization, or admitted to, or employed in, any apprenticeship or other training program, in comparison with the total number or percentage of persons of such race, color, religion, sex, or national origin in any community, State, section, or other area, or in the available work force in any community, State, section, or other area. There are a couple ways that a person might think about this situation: The 1964 Civil Rights Act was a good law, but was not implemented as written. The 1964 Civil Rights Act was a bad law, because it gave powers to government that would inevitably be abused. A few people of the right might even argue the 1964 Civil Rights Act was a bad law because racial discrimination is good.  But the more mainstream conservative objection has been that the Civil Rights Act was (wrongly) interpreted as encouraging companies and universities to discriminate against whites and Asians.  Once civil rights advocates gained political power, we learned that their actual objective was not a colorblind society. Here are a few analogies.  Prior to Roe v. Wade being overturned, the pro-life movement wished to allow individual states to determined abortion policy.  Today, they favor a nationwide ban on abortion.   During the Joe McCarthy era, the left favored allowing more freedom of speech in places like UC Berkeley.  Once the left gained control of UC-Berkeley, they shifted to opposing freedom of speech. Unfortunately, very few people have consistent principles.  Most people favor freedom only when other people make the sort of choices of which they approve.  As soon as they gain power, they seek to impose their values on the rest of the population.  The developing world is full of “liberation movements”.  As soon as they gain power, they usually switch from being a liberation movement to being an oppression movement.  The almost saint-like reputation of Nelson Mandela comes from the fact that he was an exception, he did not attempt to crush his enemies after taking power.   The Trump administration faces a momentous decision.  Should it try to prevent universities from discriminating to achieve diversity, or should it replace one type of discrimination with another? PS.  Here’s another example.  Environmentalists have made it very difficult to build new projects, by erecting a complex a bureaucratic process in order for a project to be approved.  In the past, conservatives objected to the fact that those hurdles were aimed at preventing the construction of coal-fired power plants.  Today, conservatives are using these restrictions to stop clean energy: The halt on federal permits for wind energy was first laid out in a Jan. 20 executive order, one of a barrage that President Trump signed immediately upon taking office. It directed agencies to stop all permits for wind farms pending federal review. . . . The wind industry provides about 10 percent of the nation’s electricity, and has many new projects under development, particularly in the Great Plains and the Atlantic Ocean. Last month, the Trump administration halted a major wind farm under construction off the coast of Long Island, the Empire Wind project. It was designed to provide enough electricity to power a half-million homes. It had already received the permits it needed, but Interior Secretary Doug Burgum suggested the Biden administration’s analysis during the approval process was rushed and insufficient. (0 COMMENTS)

For more than two decades, Disco Corp., a Japanese company with $25 billion in annual sales, has been trying to operate as if its 7,000 employees were independent contractors in the open market. The 87-year-old company now manufactures three-fourths of all the machines to cut, grind, and dice semiconductors. An interesting story in the Financial Times (Harry Dempsey and David Keohane, “Can You Run a Company as a Perfect Free Market? Inside Disco Corp,” Financial Times, May 1, 2025) reports: Since 2011, [Disco] has conducted a radical experiment to operate a blue-chip company on purely free-market principles. Nobody has a boss. Superiors cannot tell juniors what to do. Each day, employees choose whatever tasks they want. They can quit or join a different team at their own volition. Within this state of perfect freedom, most of their decisions will be guided by Will, as Disco’s internal currency is known. Employees earn Will by doing tasks. They barter and compete at auction with their colleagues for the right to do those tasks. They are fined Will for actions that might cost the company, or compromise their productivity. Their Will balance determines the size of their bonus paid every three months. … His door, [the CEO] says, is open to even the most junior Disco employees, as long as they are willing to pay 165,000 Will for 30 minutes of face time with the top boss. The Will money supply is generated by sales and filters down the company through exchanges and auctions where individuals who need tasks done (demand) and those who volunteer to do them (supply) determine their prices. Anybody can offer to pay for a task he needs done. If a sales team wants a new machine to be manufactured or tweaked, it only needs to offer the manufacturing team enough Will to make the project profitable for the latter. An IT system (operating software) manages the auctions and transfers. Not everything within Disco is pure market, though. Only 40% of employees’ bonuses depend on their Will balance. The human resources department has a monopoly on recruitment. The CEO, like a central bank, can create Will at will (if you allow me the easy pun) for special projects. “He casts himself as a benevolent autocrat,” says the Financial Times. There is no currency market for the Will, which is not really money. The company looks more like a “village community” than a free and often impersonal market. In many ways, then, the supposed market participants are only employees. More surprisingly, Disco’s website gives the impression of a very ordinary corporation, with a social mission, CSR, stakeholders, and all that… The distinction between the firm and the market is easy to understand for someone who has read Ronald Coase’s seminal article “The Nature of the Firm” (Economica, 1937). It is difficult to get very excited about the idea of “running” a firm like a market. Why does the hierarchical firm exist within the free market? Coase asked. He argued that the raison d’être of the firm is to avoid the transaction costs of using the market, that is, the costs of finding subcontractors (instead of hiring employees), discovering relevant prices, negotiating and signing multiple contracts for every project, and trying to forecast all related market conditions. When circumstances are such that these transaction costs are or become higher than the cost of organizing and managing a firm, the entrepreneur or his investors will choose the latter. Charles Koch and his late brother David have, for several decades, run a similarly inspired but less all-encompassing system called “Market-Based Management” (MBM). Their company, Koch Industries, is the largest non-listed corporation in America. It has grown rapidly. More mundanely, many corporations use market-like incentives, including some internal competition, in their management or structure. Disco Corp. has gone much further in the experiment. Whether a firm is a hierarchical-authoritarian organization or a free-market microcosm is a matter of degree. On the one hand, every firm in a free society contains market features, if only the freedom of employees to leave and the absence of physical coercion. On the other hand, a one-person business often establishes long-term relations with some contractors or suppliers. Diversity, entrepreneurship, and innovation—all features of free markets—generate information about the best corporate formulas in different circumstances. But Coase’s insight still seems inescapable, and Disco Corp. must be an experiment at the limit of the possible. The dream of literally transforming a firm into a market looks as unrealistic (albeit not dangerous) as the collectivist utopia of replacing the market with an organization. One irreplaceable advantage of a free-market economy is free enterprise and experimentation at the micro level. The free market is the abstract locus within which voluntary organizations operate. ****************************** Disco Corp. and Ronald Coase, an exaggerated view, by Chat GPT (and Pierre Lemieux) (4 COMMENTS)

In a previous post, I described some cases of the use of discretion in law enforcement from Barry Lam’s book Fewer Rules, Better People. But while citing individual cases can be useful for illustrating an idea, coming to a decision on whether or when discretion should take precedence over legalism can’t be made by citing individual anecdotes. What is needed is a second-order consideration of what kinds of circumstances make it more likely for discretion to bring about better results than legalism in general, rather than pointing to individual instances of rules or discretion bringing about good or bad outcomes. A proponent of legalism might try to suggest that we use rules informed by the most up-to-date research, counting on behavior guided by those rules to outperform discretion. Lam describes the results of one such attempt at research and how it was integrated into policy. While according to the Supreme Court, law enforcement has no obligation to provide protection or services to any citizen, there is an exception in most jurisdictions – domestic violence: As a result of well-intentioned activism, a majority of states and jurisdictions have made the use of force legally mandatory in cases of domestic violence. Police have no discretion, for they can be arrested, jailed, or fined for failing to arrest a suspect. How did this come to be? It started with the work of Lawrence Sherman, a criminologist in Minneapolis, who was asked to help work out the best approach for domestic violence calls during the early 1980s. These calls tended to have one of three outcomes – either the police made an arrest, or they attempted to bring the situation to a resolution with the parties, or they would separate the people involved by having one or both parties stay with family or friends for 24 hours until tempers had cooled. The question was which of these actions produced the best results. Rather stunningly, Sherman managed to convince the police department that the only way to answer this would be to carry out each of these approaches at random: The Minneapolis police would have to do the equivalent of rolling a three-sided die each time they received a domestic violence call. The officers would have to perform their assigned intervention on the call regardless of what they learned or encountered on that call. What if it was a minor call because someone punched a wall and scared the kids? If the die read “arrest,” you had to arrest. What if the suspect gave a serious beating to an elderly parent? If the die read “don’t arrest, only separate them,” you would have to do that. What were the results of this experiment? After months of conducting the experiment, Sherman found that, of the people who were randomly assigned “arrest,” 10 percent of them were rearrested for domestic violence within six months. Of those who received mediation, it was about 18 percent. And for people who were separated for twenty-four hours, it was over 20 percent. So, the data seemed to show that arresting suspects led to greatest reduction in future incidents of domestic violence. This had a swift impact: Within a few years, twenty-eight states passed laws that made it mandatory for police officers to arrest someone in a domestic violence dispute, imposing a $1,000 fine or one-year prison term if they didn’t do so. These “shall arrest” laws even expanded to include the category of violating a restraining order (or protection order) related to domestic violence. It became widespread US policy that selective discretion applies to all crimes except domestic violence. This had a popular political coalition to support it as well – Republicans in the Regan Era were very big on being tough on crime in general, while Democrats and feminists were keen to push for stronger police action for domestic violence in particular. However, the long-term results have not been what the initial advocates might have hoped for: Unfortunately, forty years of empirical data shows that there is no difference between domestic violence rates in states with mandatory verses discretionary-arrest policies. This is even though twice as many people are arrested for domestic violence in mandatory-arrest states than in discretionary-arrest states…This is partly because states with mandatory-arrest policies result in more dual arrests: officers use far less discretion trying to determine who is at fault or the primary aggressor, so they arrest everyone in the dispute. The result is that mandatory-arrest states have two to three times more people with an arrest record, filling jails and being taken out of work and family care while the domestic violence rates remain the same. Even more surprisingly, states with mandatory-arrest policies for domestic violence tend to have worse long-term outcomes for victims of domestic violence: Meanwhile, mandatory-arrest policies lead to significantly higher murder rates of spouses. There are 35 percent fewer murders of spouses in states with discretionary-versus-mandatory arrest policies. Even outside death by homicide, women whose partners were arrested have a much higher premature death rate than women whose partners were not. Here it’s worth pointing out that Sherman, the aforementioned criminologist, had a much more restricted interpretation of his findings in the Minneapolis experiment than policymakers: “So arrests worked best from the Minneapolis experiment, in that city, in that context,” concluded Sherman, and he reported these finding to the Minneapolis department. But the context of time and place makes a huge difference as to the outcomes: Sometimes arrest increased domestic violence recidivism, sometimes it had no effect. The issue turned out to be complicated. Whether arrested deterred future violence depended on a host of other factors local to a community, whether the community was affluent or improvised, whether the household was impoverished or solidly middle class, and others. Sherman never intended the Minneapolis study to lead to a blanket policy, and his subsequent studies revealed just how ineffective and self-defeating that policy was. Decades of additional research has provided data on all kinds of ways particular variables are correlated with long-term outcomes of arrest or other approaches. But this more robust and detailed collection of data, Lam argues, still can’t do the work that the policy-over-discretion crowd would want from it. We might say “in a cases with X, Y, and Z variables, arrest leads to better outcomes 75% of the time.” But this does not imply that for any given XYZ case, there’s a 75% chance for arrest to bring about the best results. There might be XYZ cases where arrest is almost certainly going to make things worse. These kinds of data can inform decision-making, but they can’t themselves be what actually makes a decision in a given case – that will have to be made on the ground by a particular person. And making the best possible decision in that case will depend on the proverbial man on the spot using the full amount of information at hand relevant to that specific case – information that cannot be known or possessed by any given rule-maker: There really are better or worse ways to do the job. And doing the job better requires knowing some background facts as well as the facts of each situation. And this is the key mechanism Lam identifies for expanding the scope of discretion over rules for the “on-the-street” level bureaucrats and enforcers. The people directly on the scene are the ones most likely to have the best and most relevant information for each case, and will be able to use that local knowledge to greater effect than simply following a blanket policy made by a high-level policymaker operating according to statistical aggregates and detached social theory: Real life provides a lot more information than can ever be reckoned with in the statistical norms. Maybe there are children or elderly parents in the home. Maybe there is hunger involved or a firearm. How can this information be ignored while decided whether this is one of the 75 percent or one of the 25 percent of exceptions to the rule? In circumstances like these, do we want officers to walk into a situation with discretion or a mandate? Deciding that an officer must treat every unique circumstance, not according to the particular facts of time and place relevant to that circumstance, but according to a statistical flowchart written up in an office by a policymaker who can’t possibly have all the relevant information each situation requires, has led to great harm: The utopian social engineer dreams that a single easy-to-follow rule, laid out in advance and executed without exception, will solve a particular social problem. The merely optimistic engineer dreams that at the very least, the rule will outperform discretion, the acts of thousands of individuals making thousands of decisions based on the thousands of micro-situations they encounter. The “shall arrest” rule was a forty-year experiment about whether the complex social problem of domestic violence admits of a blanket solution. In hindsight, to think there could have been such a one-size-fits-all solution seems naive. But Lam’s concern with legalism goes beyond the inability of high-level rules to capture the information relevant to on-the-ground level circumstances. He also believes that legalism comes with a significant moral cost, making us into worse people. I’ll review that aspect of his argument in the next post. (0 COMMENTS)

I realize that people get tired of me continually harping on the “never reason from a . . . ” maxim, but it’s a continual problem. A recent NBER study of housing by Schuyler Louie, John A. Mondragon, and Johannes Wieland had the following abstract: The standard view of housing markets holds that the flexibility of local housing supply–shaped by factors like geography and regulation–strongly affects the response of house prices, house quantities and population to rising housing demand. However, from 2000 to 2020, we find that higher income growth predicts the same growth in house prices, housing quantity, and population regardless of a city’s estimated housing supply elasticity. We find the same pattern when we expand the sample to 1980 to 2020, use different elasticity measures, and when we instrument for local housing demand. Using a general demand-and-supply framework, we show that our findings imply that constrained housing supply is relatively unimportant in explaining differences in rising house prices among U.S. cities. These results challenge the prevailing view of local housing and labor markets and suggest that easing housing supply constraints may not yield the anticipated improvements in housing affordability. When I first read that abstract, I was skeptical.  How is it possible that building constraints are not the primary cause of high prices in places like California and the Northeast?  It turns out that my skepticism was justified.  A new paper by Michael Weibe has the following abstract: Louie et al. (2025) (henceforth LMW) claim to provide evidence that housing supply constraints are quantitatively unimportant in understanding changes in housing prices and quantities in the United States. In this short comment, I show that LMW’s empirical model is unidentified. LMW models housing demand as a function of population and average income. However, supply constraints are a key determinant of population growth: newcomers are less able to move into a city that restricts the construction of new housing. Hence, LMW does not have exogenous variation in demand. Accordingly, the empirical results are uninformative about the role the housing supply constraints. If you are having trouble understanding the problem in the first paper, consider the following analogy.  Suppose someone said, “High gas taxes are not the real reason why Europeans consume less gasoline (per capita) than America, the actual reason is that they have smaller cars and use public transport.”  The problem with that claim is pretty obvious, right?  The tendency of Europeans to use smaller cars and public transport partly reflects the fact that gas taxes are extremely high in Europe.  Economists call this the “identification problem.”  It is important to identify whether market changes are caused by demand shifts or supply shifts.  Neither price nor quantity can answer this question. Not very many people have moved to California in recent years, but that’s not because there’s little demand to live here.  Rather it’s because supply constraints have pushed housing prices in California to levels far higher than in most other states. (0 COMMENTS)

Recently, Donald Trump stated that Americans are too wealthy and that his tariffs will fix that: Somebody said, ‘Oh the shelves are going to be open.’ Well, maybe the children will have two dolls instead of 30 dolls.  And maybe the two dolls will cost a couple bucks more than they would normally. Indeed, such a mindset has become dominant among Republicans, echoing Bernie Sanders’s earlier lament that Americans have too much deodorant and too many shoes.  There is a sort of economic logic to this scarcityist mindset.  It harkens back to the arguments made for socialism by Oskar Lange: competition exists in order to determine how to produce a good/service at the most economic cost.  Once that method is determined, then the good/service can be produced at that cost and sold at that price, resulting in perfect competition.  Under perfect competition, there is only one version of the product; all goods made in that market are identical—no distinguishing characteristics whatsoever. Consequently, socialism (and Trumpism) can do away with wasteful competition by simply imposing the perfectly competitive method of production.   Perfect competition is sometimes treated as the “ideal” market structure because costs are minimized and price equals marginal cost at the lowest point on the average total cost curve.  (I should note that the Sanders/Trump argument isn’t strictly for perfect competition, as in the perfect competition model, more of a good is being produced.  They often argue, as in the Trump quote above, that both too much of a good is produced and that there is too much variety.) Despite the fact that perfect competition is an ‘ideal type,’ I argue that it is an undesirable outcome.  Why should one size fit all?  People have all sorts of tastes and preferences.  Some people like pepperoni on their pizza, some people like anchovies.  Some people like opera and some people like heavy metal music.  Sometimes you want a TV show that makes you feel good and sometimes you want one that will upset you.  Variety, as they say, is the spice of life.  But variety is, in economic terminology, imperfect competition.  Product differentiation leads to “monopolistic competition,” where firms still earn no economic profit, but average total costs are not economized.  Imperfect competition is, according to some, a “market failure” or an “inefficient market.”  But, in reality, it is a more efficient market: people’s varied tastes are being met.   I love imperfect competition.  It allows you to be you.  That is an anathema to the central planners of the world (your Trumps, your Sanders, and your Navarros).  Market liberalism means embracing the imperfect and celebrating the market, rather than making arbitrary decisions about what people should want. (0 COMMENTS)