When I posted on Social Security as a Ponzi scheme on March 11, I didn’t expect the degree of interest I got. It also led to a discussion of what to do now that we’re in a mess. So I’ve decided to post the rest of my chapter of The Joy of Freedom: An Economist’s Odyssey. I’ll do it in installments. The last installment discusses what to do about it. Here’s the next installment.   Flawed from the Start How did we get into this mess? It started in 1935, when President Franklin D. Roosevelt, together with Congress, explicitly designed Social Security as an intergenerational “chain letter.” That, more than any other single feature, virtually guaranteed a big mess for future generations. Interestingly, when the proposal was debated, its chain-letter aspect was little discussed. Politicians in neither the Democratic nor the Republican party seemed upset about that crucial aspect of the plan. At the time, some of its proponents thought of the Social Security tax as a way of extending the income tax to lower-earning people. W. R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security extends Federal income taxes “in a democratic fashion” to the lower-income brackets.[1] Roosevelt and Congress also rejected the Clark amendment, named after Missouri Senator Bennett Champ Clark, which would have exempted employers and employees who had government-approved pension plans. Although the Senate backed this amendment by a vote of 51 to 35, it was later removed. Had that exemption been in the law, many fewer people would have been in the Social Security program and, in fact, with the growth of private pensions, the fraction of the workforce in Social Security would probably have shrunk over the years. Roosevelt strongly believed in a payroll tax as the way to finance the program. Calling the taxes “contributions,” which the federal government did from the start, would make people think of Social Security as an annuity that they had paid for and that they therefore had a right to. That’s also why Roosevelt wanted to use a special payroll tax rather than general revenues. If people paid a payroll tax earmarked for Social Security, reasoned FDR, they would think themselves entitled to benefits from the program. FDR stated, [T]hose taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….With those taxes in there, no damn politician can ever scrap my Social Security program.[2] Roosevelt was saying, in effect, that once the entitlement mentality had taken hold, it would be very difficult ever to cut or eliminate Social Security. He was right. What he didn’t say—but what the chain-letter financing implied—was that the other reason Social Security would be entrenched was that older people would press politicians for continued benefits, which would necessitate continued taxes on working people, who, when they retired, would push for further taxes on the next generation, and on and on forever. In short, FDR implemented a system of passed-on intergenerational abuse that is still with us today. Presidents Johnson and Nixon made the problem worse. Between 1967 and 1972, Congress and the President raised Social Security benefits by 72 percent (37 percent after adjusting for inflation). When Wilbur Cohen, Johnson’s Secretary of Health, Education, and Welfare, proposed a 10 percent hike in Social Security benefits, Johnson replied, “Come on, Wilbur, you can do better than that!”[3] President Nixon added to the problem by getting into a bidding war with Wilbur Mills, a powerful congressman who was jockeying for the 1972 Democratic presidential nomination. The net result was a 20 percent increase in benefits. MIT economist Paul Samuelson added some of the intellectual backing for these policies. “The beauty about social insurance is that it is actuarially [italics Samuelson’s] unsound.” Samuelson’s point was that if real incomes were growing quickly, each generation could get more out of Social Security than it paid in. While its critics attacked Social Security as a Ponzi scheme, Samuelson beat them to the punch in 1967 by blessing it as one. “A growing nation,” wrote Samuelson, “is the greatest Ponzi game ever contrived.”[4] We are now paying through the nose for that “beautiful” Ponzi game. If we include the portion paid by the employer, over 62 percent of families now pay more in payroll taxes (most of which is for Social Security) than they pay in federal income taxes.[5] The initial payroll tax rate when the program first began was 2 percent on the first $3,000 of income, split equally between employer and employee. In the year 2001, the tax rate for Social Security was 10.6 percent on income up to $80,400 and zero after. This increase in income taxes is not simply an adjustment for inflation. Three thousand dollars in 1938, adjusted for inflation, is less than $38,000 today, or only about half the base income that is taxed today. The maximum tax, employer and employee combined, is $8,077 today versus $60 when the program first started. Had the tax been increased just for inflation, but no more, it would be only about $750 today. See Table 14.1. Table 14.1 Maximum Tax for Social Security (excluding Disability Insurance) Calendar Year Maximum Tax Maximum Tax in 2000$ 1939 $60 $735 1950 $90 $636 1955 $168 $1,066 1960 $264 $1,518 1965 $324 $1,750 1970 $569 $2,496 1975 $1,234 $3,902 1980 $2,341 $4,835 1985 $4,118 $6,512 1990 $5,746 $7,483 1995 $6,438 $7,187 1997 $6,932 $7,348 2001 $8522 $8,274 (estimated) Source: Tax rates and tax base from Social Security Board of Trustees Report, various issues; inflation adjustment from Economic Report of the President, various issues. Ponzi versus Stocks Many critics of Social Security have claimed that the current elderly are getting a windfall from the system, but that the younger you are, the worse a deal you will get. They’re half right. The younger you are, the worse your deal. But many of the current elderly are also hurt. The reason is that the return from Social Security compares very unfavorably to the returns available in the stock market. In a 1987 article in the National Tax Journal, Stanford economists Michael Boskin (later to be chairman of the first President Bush’s Council of Economic Advisers), Douglas Puffert, and John Shoven, and Boston University economist Laurence Kotlikoff presented data on the rate of return earned from Social Security taxes[6]. The real rates of return varied from minus 0.79 percent to 6.34 percent and depended crucially on the person’s age (older is better), income level (low income is better than high income), and marital status (being married with one spouse not working is better than either being single or being married with both spouses working). Interestingly, even the person who did the best—someone born in 1915, the sole wage earner for a married couple, earning only $10,000 a year in 1985 dollars—received a return of 6.34 percent. Every other category of income earner they considered, including those slightly younger or with a slightly higher income, earned a lower return from Social Security taxes. In a more recent study,[7] Harvard economist Martin Feldstein and Dartmouth economist Andrew Samwick found that the average rate of return on taxes paid will be as shown in Table 14.2. TABLE: Average Real Rate of Return on Social Security Taxes Paid Year of Birth Pre-1915 1915 1930 1945 1960 1975 1990 Real Rate of Return 7.0% 4.21% 2.52% 1.67% 1.39% 1.39% 1.43 Source: Feldstein and Samwick, “The Transition Path in Privatizing Social Security,” National Bureau of Economic Research, Working Paper # 5761, September 1996. Compare these rates of return with what you could have earned with an indexed portfolio of stocks. According to Ibbotson Associates, a Chicago-based firm that computes stock market returns, the average rate of return on stocks between 1926 (before the 1929 crash) and 1997 was 11.0 percent, or 7.7 percent when adjusted for inflation. For shorter periods, of course, the rate of return has been higher and lower than this, but for no 30-year period has the real rate of return ever been below 4 percent. So a rate-of-return comparison shows private investment in stocks to be superior to the government system for people who invest for 30 years or more. Of course, you can find 5-year periods and even 10-year periods during which you would have done considerably worse. According to Ibbotson Associates, the worst 10-year period was October 1, 1964 to September 30, 1974, when the annual inflation-adjusted rate of return in stocks was -4.3 percent.[8] The moral of the story is that you shouldn’t put all your savings in stocks if you plan to draw on the funds in 10 years or so. Another equally valid way to compare makes the contrast starker: look at the effect that Social Security taxes and benefits have on your wealth. Economists do the computation in three steps. First, they compute the present value of Social Security taxes paid by you and your employer—the value at retirement age of all the previous taxes paid, assuming that they earn compound interest. Second, they estimate the present value of Social Security benefits—the value at retirement age of a stream of future income—using the same rate of return they use for the taxes. Finally, they subtract the present value of taxes from the present value of benefits. The crucial variable for such a calculation is the interest rate. A pessimistic real rate to use is 4 percent. Why? Because, as noted above, you could have earned over 4 percent with a portfolio of stocks for the worst 30-year period for stocks. Shawn Duffy, a student at the Naval Postgraduate School, using an inflation-adjusted rate of return of 4 percent, found that someone born in 1929 who paid the maximum Social Security tax his or her whole working life and who retired in 1994, would have been $120,000 better off with a private savings plan instead of Social Security. Someone who worked at the average wage his or her whole life would have been $54,000 better off without Social Security. And even a 1994 retiree who earned the minimum wage for the whole of his or her working life, supposedly the quintessential social-security-windfall king, would have been about $9,000 better off with a private savings plan.[9] With a more realistic 6 percent real rate of return, the Social Security caused the maximum-earning 1994 retiree to lose $262,000 in wealth, caused the average earner to lose $160,000, and caused the minimum-wage earner to lose $66,000. It’s true that the earliest recipients of Social Security did very well. That’s because they had paid into the system for only a few years, but received substantial benefits for many years. Miss Ida Mae Fuller, for example, the first recipient of Social Security, received, by the time of her death at age 100, $20,000 in benefits in return for $22 in taxes paid. But now that all future and most current beneficiaries have paid taxes over a working lifetime (when this happens, economists who study Social Security call the system “mature”), there is no windfall for current and future retirees. [1] “26,000 in Brooklyn Defy Security Law,” New York Times, November 29, 1936, p. 37. [2] From Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Houghton Mifflin, 1959), pp. 309–310, referenced in Martha Derthick, Policymaking for Social Security, Washington, D.C.: Brookings Institution, 1979, p. 230. [3] This story is told in Peter G. Peterson, Will America Grow Up Before It Grows Old?, New York: Random House, 1996, pp. 93–99. [4] Samuelson quotes are from Newsweek, February 13, 1967, and are quoted in Derthick, p. 254. [5] Andrew Mitrusi and James Poterba, “The Distribution of Payroll and Income Tax Burdens, 1979-1999, National Bureau of Economic Research, Working Paper No. 7707, May 2000, p. 24.   [6] Boskin, Michael, Laurence Kotlikoff, Douglas Puffert, and John Shoven, “Social Security: A Financial Appraisal Across and Within Generations,” National Tax Journal 40, 1987, pp. 19–34. [7] Martin Feldstein and Andrew Samwick, “The Transition Path in Privatizing Social Security,” National Bureau of Economic Research, Working Paper # 5761, September 1996, p. 20. [8] I thank Heather Fabian, public affairs manager at Ibbotson Associates, for providing the computations. [9] Shawn P. Duffy, Social Security: A Present Value Analysis of Old Age Survivors Insurance (OASI) Taxes and Benefits, Naval Postgraduate School, Masters Thesis, December 1995.   (0 COMMENTS)

A new trend is emerging in left-wing circles in the Americas- denouncing rivals as ‘cruel.’ In the US, the New York Magazine (NYMag) recently ran a cover titled ‘The Cruel Kids’ Table,’ which featured a picture of partying conservatives who apparently would have been, according to the implied message, bullies in high school. Never mind that the photo was altered to remove nonwhites and thus make it seem racist, the implication was clear: Not aligning with the left equaled being ‘cruel.’ Interestingly, the same phenomenon has also been taking place for a few years in Argentina. Various writers, political commentators, and politicians have called President Javier Milei ‘cruel’ and even a ‘villain.’ Again, the implication is that Milei embodies cruelty and is thus a danger to the Argentine society, because he has come to destroy it. Denouncing ‘cruelty’ has become the new way in which left-wing élites showcase their moral superiority. But why? What exactly is cruel about a party? Why would a politician with whom one disagrees be a villain? Astonishingly, left-wing Argentine magazine Anfibia recently announced that its funding was close to running out due to the end of USAID cooperation. ‘We are a shelter against cruelty,’ they said. So, how could Trump dare cut their funding? The problem with moral superiority on the part of the left is that the track record of cruelty denouncers is usually terrible. This is a direct consequence of the policies that the left supports, which include higher public spending, higher taxes, and higher regulation: All of these reduce growth, drive out investors, and cause inflation. In some cases, these are problems whose root causes the left does not understand, but in others, they seem to be the product of human design. (Many left-wingers call for degrowth, after all.) A worse economy results in a worse quality of life for most people. How is that not cruel? Besides funding cuts, the left usually focuses on layoffs in the public sector when describing their opponents’ alleged cruelty. However, it is generally left-wing policies that artificially inflate government and grant privileges to those who are part of it, the cost of which falls on taxpayers. That is, from a classical liberal perspective, unjust and cruel. Just because a minority living off of others is less visible than a layoff does not mean that the former is any less real.  To be sure, the right sometimes also embraces policies that make everyone poor, and the latest push for protectionism in the US is a prime example of that. But recent efforts to deregulate, on the contrary, do have a clear classical liberal root, which is why the Trump administration has followed Milei’s in creating a department (DOGE) whose sole purpose is to deregulate the economy and unleash the potential of the private sector. Classical liberals, then, must deny that there is any cruelty in trying to stop the government from interfering with basic economic liberties. On the contrary, they must question the left’s alleged moral superiority. All in all, classical liberals would do well to counter the new trend among the left by insisting that it is the policies of those who denounce ‘cruelty’ that cause injustice and economic chaos through privileges, taxes, regulations, and unstoppable spending. Trying to fix them cannot possibly be cruel.   Marcos Falcone is the Project Manager of Fundación Libertad and a regular contributor to Forbes Argentina. His writing has also appeared in The Washington Post, National Review, and Reason, among others. He is based in Buenos Aires, Argentina. (0 COMMENTS)

I’m continually amazed by the media coverage of China’s deflation problem, which is treated as a big mystery.  Actually, almost all modern examples of deflation have the same explanation—relatively tight money. (To be sure, deflation can be caused by a positive supply shock, but that rarely occurs under modern fiat money regimes.)  Central banks can only hit one target at a time.  Most developed countries target inflation at around 2%, which forces them to allow highly volatile exchange rates.  Those that stablize their exchange rate are unable to target inflation.  When their currencies become overvalued, they are forced to engage in “internal devaluation”, i.e., deflation of domestic wages and prices. Over the past few decades, China’s currency has been either rigidly fixed to the US dollar (1995-2005 and 2008-2010), or kept within a narrow band around the US dollar.  At no time has the Chinese government allowed the yuan to move dramatically up or down, as we see with other currencies like the yen, the euro, the pound, and Swiss franc.  Because of China’s exchange rate policy, Chinese monetary policy is essentially made in the USA.  A strong dollar in the foreign exchange markets leads to deflation in China.  Period, end of story.  But the press consistently ignores this issue.  Here’s Bloomberg: Why is China experiencing deflation? Prices rocketed in the US and other big economies when they reopened after the Covid-19 pandemic, as pent-up demand coincided with shortages in the supply of many goods. Predictions that the same would happen in China proved to be wrong. Consumer spending power is weak and a real estate slump has dented confidence, causing people to hold back from buying big-ticket items. A tightening of regulations in high-paying industries like technology and finance has led to layoffs and salary cuts, further dampening the appetite for spending. A policy push to develop manufacturing and high-tech goods spurred increased production, but demand for these goods has been weak, forcing businesses to mark down their prices. That’s it.  That’s the entire explanation.  Much of the rest of the article is devoted to possible solutions, with no mention of exchange rate adjustment or internal devaluation. The article even includes a graph, which provides very strong clues as to what is causing these repeated episodes of Chinese deflation: The grey bands represent periods of deflation using the GDP deflator.  Notice an extended period in the late 1990s, a brief period around 2009, a brief period around 2015, and an extended period since 2023. Now let’s examine the real exchange rate for the US dollar against a basket of other currencies: Notice a very strong appreciation of the dollar in the late 1990s, a brief surge in 2009, another surge in 2015 and an exceedingly strong dollar over the past few years. Of course it’s not a perfect fit, as the yuan was not rigidly fixed to the US dollar.  The yuan did depreciate somewhat in the late 2010s, which helped to make the 2015 deflationary period fairly brief.  And the equilibrium real exchange rate can move around for reasons unrelated to monetary policy.  But as a general rule, a strong US dollar means tight money for any country with its currency pegged to the dollar, or even kept relatively stable against the dollar. So why didn’t most other countries have deflation in the late 1990s?  Most other countries allowed their currencies to depreciate against the dollar.  Those that didn’t (China, Argentina, Hong Kong) generally experienced deflation.  Deflation also hit countries that allow only slight currency depreciation, due to pressure from the US government.  The Japanese yen/US dollar exchange rate showed very little change between 1997 and 2002, while most of the rest of the world was sharply depreciating their currencies.  The result was Japanese deflation. It’s not complicated.  In the 21st century, deflation is generally caused by a policy of exchange rate stabilization combined with a strong US dollar. (0 COMMENTS)

It’s often said that economics is counterintuitive. On the other hand, it’s also said that economics is about human behavior. This should imply that at least the basic ideas of economics should be pretty easy to understand and explain. (Assuming, of course, that you are in fact a human.) One important point in economics is about the margin – thinking at the margin, decisions being made at the margin, and so on. On the one hand, it sometimes seems tricky to get people to understand what it means to make a decision at the margin, or to understand the difference between marginal cost and average cost. Some people attempt to illustrate the difference using math. You might, for example, give someone an equation for calculating total cost, and then tell them that marginal cost is the first derivative of total cost. Then, with a little basic calculus, they can work out the marginal cost of some process. This is neat, precise, and makes for tidy exam questions that are easy to grade. It’s also entirely possible to ace an exam full of these math problems and leave class at the end of the semester without ever really internalizing the idea of making a decision at the margin. On the other hand, if people really do make decisions at the margin, shouldn’t it be easy to explain the concept to people by pointing out these decisions being made, in cases that are easy to understand and recognize? Yes, actually. Consider the following meme. If you recognize what the meme is saying and understand why it’s funny, then you intuitively understand the difference between average and marginal cost, and you understand what making a decision at the margin means: Assuming you’re old enough to shave, you’ll immediately recognize this. Nonetheless, I’m going to break a cardinal rule of comedy and explain the joke. Shaving cartridges are expensive. To make the math easy, let’s assume this pack costs $20. The average cost per cartridge is $5. As you use a razor, it gets duller, making it less comfortable and effective for shaving. So as the first cartridge wears down after five shaves, you switch to the second. Because you paid the full price for the pack up front, the marginal cost of tossing out the first cartridge for the second is essentially zero, while the marginal benefit is pretty high. The same holds true for tossing out the second for the third, and the third for the fourth. But once you start using the fourth, things change. Now the marginal cost of tossing out the fourth and switching to a new cartridge means paying the full price of a new pack. As a result, people stretch the fourth cartridge in the pack far longer than the first three. All four razors have the same average cost – but they don’t all have the same marginal cost when it comes to use and disposal. And because people make their decisions on the margin, you end up seeing the kind of behavior highlighted in the meme. Unfortunately, there are people who can pass through economics programs with excellent grades on the basis of their high level of mathematical acumen, yet never absorb the economic way of thinking in a way that is presented by this simple meme. Math is a fine thing and certainly has legitimate uses in economics, but solving math problems isn’t the same thing as doing economic analysis. There’s an old saying that if you can’t explain something in a way that an eight year old can understand it, then you don’t truly understand it yourself. Maybe there’s an analogy here. If you can put together a simple meme that highlights how indifference curves work, that demonstrates your understanding of the topic far more than calculating partial derivatives, using utility functions, or referencing budget lines. Anyone who’s decent at math can do the latter, particularly in the context of a classroom exam. But only someone who has really absorbed the idea can do the former. (1 COMMENTS)

  What are the economic benefits and costs of import tariffs? The economic impact can be examined in one of two ways: on an individual product basis (partial equilibrium, looking at supply and demand for a particular good), or on an economy-wide basis (general equilibrium, looking at many markets simultaneously). Let’s consider each approach in turn. Suppose the U.S. government imposes a tariff on imported sugar. This tax discourages the importation of sugar and the domestic price rises. The higher price reduces the quantity of sugar that consumers demand but increases the quantity of sugar that domestic producers are willing to supply. As a result, imports fall, being squeezed by lower domestic demand and higher domestic supply. Because it increases domestic production of sugar and decreases domestic consumption, the tariff is equivalent to a production subsidy and a consumption tax. In changing production and consumption, the tariff redistributes income. Domestic consumers lose from the higher price, which goes partly to domestic producers (in the form of higher prices) and partly to the government (in the form of tax revenue). However, consumers lose more than producers and the government gains, meaning that there are “deadweight losses” (economic inefficiencies) associated with the tariff. The production deadweight loss is the extra costs that are incurred in increasing domestic production (beyond what would have been produced at the world price) and the consumption deadweight loss is the lost benefits to consumers who used to purchase the good (at the world price) but no longer do so. These deadweight losses can be considered lost gains from trade as a result of reducing trade. This is from Douglas A. Irwin, “Tariffs,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. With the huge role that tariffs have taken in economic policy in the last 2 months, Liberty Fund and I thought (and think) it made sense to have an article devoted to tariffs. I already have “Free Trade” by Alan S. Blinder, “Protectionism” by Jagdish Bhagwati, and “International Trade Agreements” by Doug Irwin. The article on tariffs is the latest addition to the online Encyclopedia. Additional excerpt: Tariffs are sometimes proposed as a way of reducing a trade deficit. But trade deficits are determined by macroeconomic factors, such as the degree to which capital can move between countries, and the balance between a country’s national savings and investment. Tariffs tend not to affect these underlying determinants of trade deficits and are largely ineffective at reducing them. For developing countries, tariffs not only reduce consumer choices but also can harm a country’s growth prospects. Countries that are behind the technology frontier need imports of foreign capital goods to help their producers become more efficient. Tariffs that restrict such imports are an obstacle to such countries catching up to the productive efficiency and higher income levels enjoyed by other countries (Irwin 2025). For example, under its communist leader Mao Zedong, China was largely closed to international trade and remained one of the poorest countries in the world. In the late 1970s, China’s new leader, Deng Xiaoping, opened the economy to trade and foreign investment. For several decades thereafter, China’s economy grew at close to double digit rates, raising incomes dramatically and sharply reducing poverty. A similar process has been observed in countries such as India and Vietnam after they opened to trade. However, trade is an opportunity, not a guarantee of economic success, and other countries in Latin America and Africa have not seen such dramatic growth rates after they reduced their trade barriers. Read the whole thing. It’s long but it doesn’t feel long. It’s like slicing a hot knife through butter. (0 COMMENTS)

Populism is one of the most important political phenomena of our time. Yet, it is still poorly understood. At its core, populism is built on the notion that the masses are engaged in a struggle against corrupt elites who have rigged the political and economic system to their advantage. Whether left-wing or right-wing, this is the essence of the populist narrative: an appeal to “the people” against “the elite” and the claim to restore power to ordinary citizens by breaking the grip of entrenched interests. But can populism effectively challenge crony capitalism—a system where the political and economic elite are entangled? Can it truly dismantle the grip of entrenched interests? In a recent working paper, we argue that populist movements are likely to fail to deliver on their promises. The reason is that populism does not resolve the dual epistemic and incentive challenges necessary for success.    The epistemic problem  Populist movements claim to embody the “true will of the people” and pledge to implement policies that prioritize the welfare of the masses over that of the elite. However, a deeper examination of societal decision-making exposes significant epistemic challenges for these leaders. These challenges stem from the inherent difficulty political decision-makers face in accurately identifying and advancing the collective will of the people.  William Riker, James Buchanan, and Timur Kuran provide key insights into why populism cannot truly assess and represent the “will of the people.”  Riker demonstrated through social choice theory that collective decision-making is inherently flawed, as different voting rules yield different outcomes and fail to translate individual preferences into a coherent aggregate representing the masses. Therefore, the idea of a unified “will of the people” is a myth.  Buchanan argued that social welfare functions—used to aggregate individual preferences into a collective decision—are fundamentally flawed. He maintained that individual preferences can only be revealed in the moment of choice and are highly dependent on the context faced by the chooser. The challenge is even greater since, as Buchanan noted, people change through time as opposed to being some fixed and pre-packaged utility function. Lastly, Kuran’s concept of “preference falsification” adds another epistemic challenge for the populist leader in assessing the true will of the masses. Kuran argues that individuals often misrepresent or suppress their true preferences due to social pressures, fear of ostracism, or the desire to conform to prevailing norms. Consequently, the expressed public opinion may not match what people truly think or want.  Thus, the core epistemic problem of populism lies in its inability to discern and act upon a singular will of the people. Instead, populist leaders impose their own interpretation of what “the people” want, thereby reinforcing their power. The conclusion, as noted by Pierre Lemieux, is that populism is ontologically impossible because there is no way for the political leaders to assess the “will of the people.”   The incentive problem Despite the epistemic challenge faced by populist decision-makers, someone must decide which policy will be implemented. An appreciation of the organizational logic of politics further undermines the promises of populism.  One key issue is encapsulated in what Robert Michels’s concept of the “iron law of oligarchy.” Michels argued that any organization—even one with democratic origins—inevitably concentrates power in the hands of a few. This concentration is not necessarily due to corruption, but rather the natural emergence of leadership and a division of labor. As leaders coordinate activities and manage the organization, even a populist movement can quickly devolve into a new elite structure, setting the stage for rent seeking and resource extraction akin to traditional regimes. This problem is compounded by multiple principal-agent issues inherent in democratic systems. Voters (the principals) rely on elected officials (the agents) to implement policies on their behalf. However, voters are often poorly informed—a phenomenon known as rational ignorance—and they struggle to communicate the intensity of their preferences or monitor the complex bargaining behind policymaking. This information gap allows political agents to prioritize narrow interests over the common good, all under the guise of executing “the will of the people.” Two factors exacerbate these incentive problems in populist settings. First, populism often leaves the scope of government intervention remarkably open-ended. Leaders can justify virtually any action as aligning with the amorphous “will of the people,” a flexibility that rent-seeking groups readily exploit to advance their own interests. Second, populist movements typically emerge from—and are sustained by—a perceived crisis. This sense of urgency fuels the rise of populist leaders and creates an environment in which expansive, crisis-driven measures become the norm. Even after the initial crisis subsides, these measures tend to persist, as entrenched interests and empowered elites continue the cycle of resource redistribution, leaving voters with little meaningful control   The future of democracy If populism—a political movement based on the idea of representing the true will of the people and giving them a voice—is doomed to fail, is there any hope for liberal democracy? The answer to that question varies depending on how we conceptualize democracy, the idea of a self-governing people, and their relationship. Populist movements  act as if there is a singular “will of the people” that can be realized through centralized political institutions. In this framing, the problem is not with the nature of political institutions themselves, but with who controls them. However, for all of its rhetoric of empowering “the people” often collapse into existing patterns, where the elite continue to govern over the masses. But what if we change the way we think about democracy? We often tend to envisage democracy as a top-down system, but a better alternative would be to imagine it as a network of bottom-up processes rooted in the interactions among self-governing individuals. Vincent Ostrom developed this alternative perspective in The Meaning of Democracy and the Vulnerability of Democracies. Following Alexis de Tocqueville, Ostrom argued that when citizens view government as a caretaker, individuals are more likely to “democratic despotism”—a system characterized by where elites control the rest of the population.  In contrast, Ostrom envisions democracy as emerging from associations among citizens, where person-to-person, citizen-to-citizen relationships form the basis of a truly democratic society. As he states “Democratic ways of life turn on self-organizing and self-governing capabilities rather than presuming that something called ‘the Government’ governs” (pp. 3-4). From this perspective, meaningful change is not achieved through marginal reforms to existing political institutions or the rise of new ideological movements within the current system. These strategies fail to address the fundamental issue: elite rule through top-down command-and-control institutions. For Ostrom, overcoming democratic despotism requires a transformation in the beliefs citizens hold about the nature of the political process and their influence in self-governance.  If we truly care about individual preferences and authentic democratic participation, salvation does not lie in centralized political power—even when exercised in the name of “the people.” Instead, it is found “on principles of self-responsibility in self-governing communities of relationships” (p. 4).    Christopher Coyne is a Professor of Economics at George Mason University, the Associate Director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center, and the Director of the Initiative for the Study of a Stable Peace through the Hayek Program. André Quintas is a PhD student in Economics at George Mason University and a Hayek Fellow through the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. 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Despite containing useful information, a Financial Times story makes some puzzling statements (“Trump Nominee Unites Right and Left with Tough Antitrust View,” Financial Times, March 7, 2025): Among the loyalists selected by Donald Trump to staff his second administration, Gail Slater stands out for a different reason: she unites right and left with a sceptical view of big business. While the US president’s other nominees tend to be traditional conservative free market advocates, Slater, his pick to lead the Justice Department’s antitrust division, is expected to maintain the Biden administration’s vigorous approach to enforcement–much to Wall Street’s chagrin. … Slater embodies the unlikely alignment of progressives who support tough antitrust enforcement and a new generation of populist conservatives. Who are “the US president’s other nominees [who] tend to be traditional conservative free market advocates?” The “free market advocates” are difficult to find in Trump’s entourage, or they are dumb silent. No free-market advocate can reject free trade among individuals in the way that Trump and his entourage do. As I argued before, the “unlikely alignment of progressives … and a new generation of populist conservatives” is easy to understand. It has only become tighter and more visible. Historically, populist rulers, of the right and of the left, have defended the primacy of collective and political choices against individual and private choices, as the experience of Latin America shows. Antitrust laws, which grant extraordinary power to the state, are just one illustration. We would expect that such power would naturally be used by the state rulers of the day to take sides in favor of their preferred clientèles and against individuals and groups that do not fit well in their ideal economic organization. It was only a matter of time before this power could, in advanced “democratic” countries, be openly used against “enemies of the state.” It may now be happening in the United States. The Financial Times reports that a top deal banker said corporate leaders fear that under Trump, antitrust may be used to punish enemies and reward friends in ways that are unpredictable. That the Department of Justice has opened an investigation into the price of eggs seems to confirm this fear: a scapegoat must be found to explain why the president has not succeeded in lowering food prices “starting on day one” as he had promised (“Justice Department Opens Probe of Sharp Surge in Egg Prices,” Wall Street Journal, March 7, 2025). It would not be the first time political power has intervened in the administration of justice, but the fact that the DoJ is now quasi-officially at the service of the president’s “vision” makes witch-hunts more probable and more dangerous (“Trump Tightens Grip on FBI and Justice Department,” Wall Street Journal, March 7, 2025). Ten years ago, most Americans probably thought that the danger of state lawlessness had receded since J. Edgar Hoover and Richard Nixon. The Wall Street Journal writes: While every FBI director since J. Edgar Hoover has taken pains to keep the White House at arms length, the new Trump administration has taken the opposite tack, working to bring the traditionally independent ethos of the FBI and Justice Department firmly within the president’s grasp. … Louis Freeh, who was director under former President Bill Clinton, irked the president by surrendering his White House access badge during his first week on the job, after learning that Clinton was under investigation for a controversial land deal, which became known as the Whitewater scandal. James Comey refused to play basketball with former President Barack Obama because he didn’t want to appear too chummy with the man who appointed him. One of the few areas of public policy where individual liberty seemed to have strengthened over the past several decades was indeed in the quasi-disappearance of the incestuous relationship between politicians and the administration of justice. Of course, the state continued to grow but most individuals seemed better protected against glaring arbitrary power. Whatever good intuitions and commendable intentions Mr. Trump has—and he has expressed some—they look like random blips likely to fail among his enervated interventionism, his imperial entertainment, and the infatuation with collective choices that he shares with the other major political party. He just wants to impose different tastes and values on the 50.2% of voters who did not vote for him and, tragically, on many in his 49.8%. A grave danger is that this be mistaken for the defense of individual liberty. ****************************** Jean-Baptiste Colbert writing a report for the King, as imagined by DALL-E (with some external influence) (0 COMMENTS)

In this post, I’d like to revisit a debate from early 2024, when Trump suggested that he would not favor defending Nato members that spent less than 2% of GDP on defense.  Here’s what Tyler Cowen said at the time: As you probably know, Trump threatened to let NATO countries that failed to meet the two percent of gdp defense budget obligation fend for themselves against Putin (video here, with Canadian commentary).  Trump even said he would encourage the attacker. Long-time MR readers will know I am not fond of Trump, either as a president or otherwise.  (And I am very fond of NATO.)  But on this issue I think he is basically correct.  Yes, I know all about backlash effects.  But so many NATO members do not keep up serious defense capabilities.  And for decades none of our jawboning has worked. Personally, I would not have proceeded or spoken as Trump did, and I do not address the collective action problems in my own sphere of work and life in a comparable manner (“if you’re not ready with enough publications for tenure, we’ll let Bukele take you!” or “Spinoza, if you don’t stop scratching the couch, I won’t protect you against the coyotes!”).  So if you wish to take that as a condemnation of Trump, so be it.  Nonetheless, I cannot help but feel there is some room for an “unreasonable” approach on this issue, whether or not I am the one to carry that ball. That’s a plausible argument, but I had a different view: I believe that both Trump and Tyler misunderstand the role of Nato. The most important aspect of Nato is not the amount it spends on the military, rather its role is to provide a mutual defense pact so large that no nation would dare to attack even its tiniest members. In that regard, it’s a smashing success.Consider the recent war in the Ukraine, where Russia has been stalemated for 2 years. To say that Ukraine is weaker than Nato would be an understatement. Nato has 31 members, many of which are individually richer and more powerful than Ukraine. As long as Nato sticks together, Russia would not dare to attack even a small member like Estonia. It makes essentially no difference whether Germany spends 1.4% or 2.0% of GDP on its military. Nato is ten times over impregnable, if it sticks together.But will Nato stick together? Late in his first term, Trump told aides that he hoped to pull the US out of Nato in his second term. That’s why Putin desperately wants Trump to win the election.  Over the past two months, events have tended to confirm that my worry was justified.  Consider the following: 1. The 2nd Trump administration has been exceedingly hostile to Nato, with key members suggesting that the US leave the alliance.  This despite the fact that most of the important members of Nato have recently boosted spending to a level above the 2% threshold demanded by Nato critics (see below.) 2.  Yes, there’s a reasonable argument that even 2% of GDP is too low, as the US spends over 3% of GDP on defense.  But Trump now demands at least 5% of GDP, a figure that he surely understands is not going to be met by countries already struggling to finance their big welfare states, and is an obvious pretext for the US to walk away from the alliance.  That’s the sort of demand you make if you want the alliance to fail.  Trump lacks the legal authority to explicitly exit Nato, but he’s doing everything he can to create the impression of a de facto exit. 3.  In the Ukraine War, Trump has switched US support from Ukraine and Nato to Russia.  Before the election, my critics pointed to the fact that the first Trump administration was fairly tough on Russia, suggesting I was delusional to view Trump as pro-Putin.  They failed to understand that in his first administration Trump farmed out foreign policy to some mainstream Republicans.  But during the campaign Trump promised a radically different approach in his second term, a promise he has fulfilled.  The US is now voting with Russia and against Europe on the question of whether Russia is to blame for the war.  (Even China abstained!)  The US government calls Zelensky a “dictator” but refuses to call Putin a dictator.   Far from being delusional, I actually underestimated Trump’s support for Russia.  I expected him to cut off financial support for Ukraine, but didn’t expect him to needlessly hurt Ukraine in ways that did not save the US government any money, such as cutting off intelligence sharing and voting against resolutions that condemned Russia for the war.  Like Tyler, I am “very fond of Nato”; indeed, I regard it as one of the best innovations of the post-WWII era, an organization that moved Europe past the destructive nationalism of the first half of the 20th century.  I can imagine how a supporter of this sort of multinational organization could favor putting pressure on its members in order to make the alliance stronger.  That was Tyler’s view.  But Trump is not a supporter of multilateral organizations; he is an avowed nationalist.   He opposes Nato, just as he opposes the EU, Nafta, and even his own renegotiated version of Nafta (USMCA). When you argue that a controversial figure may have a valid point in one particular area, you need to be careful that the valid point they have in mind is the same as the valid point that you have in mind.  In the case of Tyler Cowen, Donald Trump and Nato, I don’t believe that was the case.   Some readers agree with me on economics but disagree with me on foreign policy.  So let me address that group with an analogy.  Suppose you are the sort of person that basically likes free markets, but didn’t at all care for the Trudeau government, and also believes the US has a few valid complaints about Canadian trade policy.  What would be the optimal US strategy? Perhaps the US government might quietly reach out and ask to renegotiate a few specific points, trading some favors to Canada in exchange for favors from Canada.  I’m not sure this was necessary, but I can see how someone might hold that view.  Perhaps the US would choose to wait until after the Canadian election, as the Conservative Party had a 25% lead in the polls, which was growing over time.  Now consider the effects of the recent US-Canada trade war: 1. The Canadian election is now a dead heat, almost entirely due to the fact that the Canadian public is outraged by US bullying.  The party you favor might well lose an election that weeks before was a lock. 2.  An anti-American mood in Canada makes it very difficult for any Canadian government to offer trade concessions; far more difficult than it would have been had the administration had a sincere desire to work quietly and cooperatively toward a win-win solution. So what’s my point?  It not enough to say you don’t like the current structure of Nato, or you don’t like the current structure of global trade.  Not every critic of those structures will be offering constructive solutions.  Some critics are nihilists, who simply want to blow it all up and start over. Many people don’t like international organizations.  But I suspect they will be missed when they are gone.  If smaller countries cannot rely on military alliances, they’ll need to develop their own nuclear deterrent.  Do you wish to see a world with dozens of nuclear powers?   What could go wrong? Here’s the BBC’s estimate of Nato military spending: (0 COMMENTS)

One of my all-time favorite movies is the 1982 cyberpunk-noir classic Blade Runner.  Not only did the film single-handedly create the cyberpunk genre, but it inspired significant change in the sci-fi genre as a whole, led to classics such as Akira, and inspired great directors such as Guillermo del Toro, Christopher Nolan, and Denis Villeneuve.  Its themes of humanity, hyper-technology, hyper-capitalism, femininity, and ecology remain hotly debated to this day.  Not bad for a film considered a flop on its initial release. Set in the distant future of 2019 Los Angeles, the politically and economically dominant Tyrell Corporation has created synthetic humans known as replicants to do dangerous jobs in outer space.  For obvious reasons, some of these replicants aren’t thrilled with this arrangement and go rogue.  Blade runners are those dispatched to hunt down these rogue replicants.  The movie follows one such blade runner, Rick Deckard (played by Harrison Ford), as he hunts down four especially dangerous replicants.   I’ve seen the movie about a billion times.  One of the nice things about watching movies you can practically quote by heart is that you can observe the background.  Brainpower can be diverted from the plot into observing the setting and how it reflects the mindset of the author/filmmaker/society.  In my most recent rewatch, something about the setting jumped out at me.  The team that built the setting imagined 2019 Los Angeles as heavily Japanese.  Japanese food dominates the culture.  The Japanese language is written on signs.  Japanese corporations dominate the skyline.  Even the Tyrell Corporation was originally imagined as a Japanese conglomerate in early drafts of the film. Why Japan?  Simple: Japan was a rising economic influence and a supposed threat to American economic power in the 1980s.  For example, the economist Lester Thurow wrote several books in the 80s and 90s on how the Japanese style of state-guided economic management was destined to overtake America and make them the economic powerhouse of the world.  American corporations were afraid of Japanese competition.  Peter Drucker praised the Japanese style of management and pressed for it to be established in America.  Japan was an existential threat to American economic power, so much so that there were strong lobbies for Congress to impose tariffs and quotas on Japanese imports, lest the dystopia of Blade Runner come about. Of course, these fears were overblown.  Even as Thurow was writing his books, the Japanese economy was stagnating.  The 1990s and 2000s were characterized by economic stagnation in Japan, while American economic growth exploded.  Over the 30-year period from 1994 to 2004, Japanese real GDP rose just 24.9% (source) while American real GDP rose 115.1% over the same time period (source).  Over the same time period, Japanese industrial production (excluding construction) averaged just 0.1% growth (source) while US industrial production averaged 1.2% (source).  The widely feared economic dominance of Japan never came about.   Since about 2010, the same fears have arisen with China.  The above story doesn’t change, however.  Just replace “China” with “Japan” and “Peter Navarro” with “Lester Thurow.”  It’s the same claims of coming economic dominance by state-run conglomerates and the superiority of industrial policy.  America must be afraid, must capitulate to these supposedly superior foreign powers, must adopt their systems, lest we be overrun.  And just like with Japan, these fears are obsolete even as they are made.  The Chinese economy is stagnating.  They’re wasting resources left and right, something that is unsustainable.  Short of substantial market reforms, China will end up on the ash heap of economic history, just like Japan.  All those fears will soon be lost like tears in the rain. Fiction provides us useful insights into the past.  And one of the big lessons is this: the more things change, the more they stay the same.  The hand just rearranges the players in the game.     P.S. It is also interesting to me how sticky culture can be.  Even though the fears of Japanese dominance have faded, cyberpunk media still portrays Japan as a dominant influence in their worlds.  For example, in the video game Cyberpunk 2077, set in the distant future of 2077, Japanese culture is dominant in the fictional California city of Night City.  Ridley Scott’s arbitrary choice in the 1980s still appears in 2025. P.P.S. I gave Midjourney a picture of me and told it to put me in a cyberpunk setting.  Here is my favorite result:   (0 COMMENTS)

R. R. Reno’s book The Return of the Strong Gods is very broad in scope. He covers many disparate phenomenon, including some commentary on economics. Unfortunately, Reno’s arguments in this regard are disappointing. While describing possible causes of economic inequality, Reno says “This is the sort of assertion I prefer to leave to the economic theorists to debate.” This was a wise instinct on Reno’s part, and one he would have benefited from if it had been more consistently applied. Some of his claims are just strange – he says that economists argue that the “‘animal spirits’ of the economy need to be freed from oppressive regulations.” This is bizarre because, far from being a call for deregulation, “animal spirits” are invoked as a major reason why the economy needs regulation – starting with John Maynard Keynes, who said, in The General Theory, Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Similarly, any economist reading Reno’s book is going to wince when Reno confidently makes proclamations about, for example, how Apple can and should produce its products in America, asserting “The problem is not the ‘vast scale’ [of international supply chains]. Apple and other large companies could easily afford capital investments in large plants in the United States.” (When I read that line, I actually winced so strongly with secondhand embarrassment that my wife asked me if everything was okay when she saw the look on my face.) Reno also criticizes open-society thinking by saying, among other things, it ought to be in favor of “advantageous trade, not open trade.” But, of course, economists who argue in favor of open trade do so precisely because they believe that open trade is advantageous trade. Reno doesn’t try to describe the economic arguments in favor of open trade, let along engage with or rebut them. He simply declares open trade and advantageous trade are opposed to each other, but this is pure question-begging. He’s assuming the very point under dispute. One of the biggest misses in his book is his description of F. A. Hayek. He argues that the paradigm that took hold in the postwar period (what today would probably be called a “vibe shift”) held that strong social norms are unjustly constraining and should be weakened and opened up. But strangely – staggeringly, even – he ascribes this view to Hayek as well, despite the fact that Hayek was one of the 20th century’s most eloquent defenders about the importance of maintaining and upholding strong social norms! The examples of Reno making this odd claim are numerous – for example, he argues that for Hayek “there is always greater freedom for the individual when the social consensus about right and wrong is weakened.” And for Hayek, says Reno, “Since the basic principle of individualism is individual liberty, we must resist anything that compels our choices, even holding at arm’s length the compelling character of solid and significant moral truths.” As a summary of Hayek’s views, this is about as accurate as claiming FDR spent his free time during his presidency engaging in marathon running as a hobby. A much better summary of Hayek’s thoughts on this matter can be found in Erwin Dekker’s book The Viennese Students of Civilization: If we think back to our first section in which we argued that Menger and Schaffer changed the start and end point of economics, we recognize that in Hayek the individual is not the starting point anymore. What is perhaps even more surprising, he or she is also not the end point. Hayek argues that the submission to constrains is the only way that the individual can contribute to something that is ‘greater than himself’ (Hayek, 1948: 8); that, which is bigger than himself is the civilization of which is a part. Hayes argues that civilization makes individual autonomy possible, and that individual actions contribute to civilization. In no straightforward way can this be called methodological individualism anymore… Freedom for the Viennese students of civilization, and especially for Hayek, is not the absence of constraints. Freedom for them is enabled by traditions, morality, and institutions to which the individual must submit so that he can be free. Reno comes across as someone who reads his own theory into Hayek. And at some points, Reno seems aware that his description of Hayek’s ideas doesn’t fit Hayek’s writing – he occasionally tosses in disclaimers noting that Hayek “does not say it explicitly” or that Hayek’s outlining of these ideas “is not as precise as Popper.” Other times he speculates about what Hayek really meant, saying “By ‘good’ or ‘bad,’ the economist Hayek undoubtedly means increasing or reducing my utility rather than congruent with morality or not.” Reno needlessly narrows, and is seemingly unaware of, the full breadth of Hayek’s thought. There is a reason Hayek said “Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.” What seems to be the lynchpin in Reno’s understanding of Hayek comes from this passage from The Road to Serfdom (emphasis added by me): What the German and Italian who have learned the lesson wants above all is protection against the monster state – not grandiose schemes for organization on a colossal scale, but opportunity peacefully and in freedom to build up once more their own little worlds. I say this seems to be the key to Reno’s understanding of Hayek because after quoting this passage, Reno references the phrase “little worlds” at least eighteen additional times, invariably in a critical way. Reno represents this passage from Hayek as having the following meaning: In our public affairs, we must renounce our desire for great things and transcendent vistas, seeking instead only “little worlds”: decent health, a modicum of wealth, and ordinary pleasures. The free society requires going small. This, too, seems like Reno simply reading his own theory into Hayek. First of all, Hayek never advocated that people renounce their desire for great things or transcendence – Hayek very much argued in favor of people seeking to contribute to that which was “greater than himself.” Hayek’s claim that people wanted the “freedom to build up once more their own little worlds” in no way entails or implies Reno’s claim that we should limit ourselves to “seeking instead only ‘little worlds’”, nor does it entail that one must renounce seeking the transcendent. Wanting to be able to live your day-to-day life free of direction from “the monster state” and its “grandiose schemes for organization on a colossal scale” is light-years away from saying that “little worlds” are the only things one should care about, nor does it imply one must renounce any desire for transcendence. Reno frequently makes similar, and similarly off-base, criticisms of Milton Friedman, but I don’t want to belabor the point. Reno making these kinds of mistakes immediately sets off my “Gell-Mann Amnesia” alert – a phenomenon identified by the author Michael Crichton. As Crichton said, Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them. In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know. In the same way, when I see Reno making such elementary mistakes in, say, his representation of Hayek’s thought, it immediately lowers my credence in his analysis on other specific points. I’m not well-versed in the thought of Albert Camus. Reno describes, and critiques, Camus’s thoughts. But should I take Reno’s representation of Camus at face value? Do I have some strong reason to assume he’s getting Camus right, when he gets Hayek so badly wrong? I’m highly skeptical. Maybe he’s spot-on in his description and criticisms of Camus, but based on what he’s said about topics I know well, I’m at the very least going to suspend judgment on that. In The Fellowship of the Ring, Bilbo Baggins, his life long extended by his exposure to the One Ring, tells Gandalf that he feels “thin, sort of stretched, like butter scraped over too much bread.” Like most authors of grand theories of society, Reno has stretched himself too far. He’s trying to bring in his evaluation of widely disparate ideas and fields of study into one grand approach, and in doing so, he has overextended himself. I enjoyed reading this book. And I do think there is some truth in it, and some value in his ideas. And I generally strive to be the kind of person who rules thinkers in, not out. So while Reno’s arguments fall well short of being a knock-down case, I’m still glad to have engaged them, and I’ll continue to ponder them over time, including considering whether there are ways to strengthen his case. And if a book can make me do that, then I’d say reading it was well worth my time. (0 COMMENTS)