Tim Kane’s interview of me, which I mentioned here, is out. It’s titled “David Henderson: The Immigrant Who Worked for Reagan.” It’s about an hour long. We covered in this order: the draft, Nixon, Martin Anderson, immigration, George Borjas, Bryan Caplan’s Concise Encyclopedia article on Communism, life in Canada for young David (this is the part where, Brian Lamb-style, Tim caught me off guard), my father teaching me trig while smoking his cigar and me gasping the fumes and grasping the concepts, what Canadians know about the United States, why Canadian talent in Hollywood is disproportionately in comedy, seeing movies in North Dakota, Canadian health care, my tastes in music, my evolving views on Los Angeles, why I’m 98% American, how my views evolved on Ayn Rand’s Atlas Shrugged, The Autobiography of Malcolm X, federalism, problems with E-Verify, immigration reform, immigrants voting, charging admission for immigrants, refugees from Vietnam in the mid-1970s, Ronald Reagan, Joan Baez, Sr. and 1980 Mariel boat lift, Presidential Executive Orders, Milton Friedman predicts I’ll get corrupted working at Cato in 1979 and then takes it back years later, Friedman, immigration, and the welfare state. I might have missed a few. (0 COMMENTS)

I posted last week on my Defining Ideas article on why California Democrats should oppose President Biden’s proposed increase in the tax rate on capital gains for high-income people. That article led to this 10-minute interview with John Batchelor earlier this week. The interview starts at about the 0:40 point and goes to about 11:35. I find John Batchelor’s style wonderfully old-school. (0 COMMENTS)

I’m no expert on extortion, so I’d be interested in what other people think of the following proposed law: Any person found guilty of paying ransom in order to protect corporate assets shall serve a sentence of not less than 20 years in a federal prison. The proximate goal would be to stop US corporations from paying ransom. The ultimate goal would be to reduce attempts to extort ransom. Would such a law make sense? (1 COMMENTS)

  Furman argued that the $300 a week in extra jobless benefits that was also provided by the plan was holding back a jobs recovery in some places. Furman said of the overall package, “It’s definitely too big for the moment. I don’t know any economist that was recommending something the size of what was done.” Furman aligned with some Republican-run states, including Montana and North Dakota, that have suspended the $300 a week supplemental unemployment insurance, or UI, payments in the aim of spurring hiring. “If I were in a state with a 3.5% unemployment rate, I’d be thinking seriously about whether paying people more to not work than to work was a good thing to continue doing,” Furman said. While it depends on the location, state of the pandemic, and economic condition, “certainly by June, July, August of this year I don’t think we need the same UI system that we had in January.” This is from Nancy Cook, “Obama, Biden Economists in Conflict on Inflation Jump, Spending,” Bloomberg, May 12, 2021. This is what many economists, including Scott Sumner and me, have been saying for months. I think Jason is wrong, though, about these benefits being a good idea in January. (0 COMMENTS)

    It was not the alarmists in the mid-20th century who led the way out of the darkness but rather the “recoverists”—those who took stock of the good things we can build on even as the alarmists at America’s Manichean poles continue to dominate so much of social and conventional media. This is from Ryan Streeter, “The Great American Freak-Out and How to Address It,” in Law and Liberty, April 30, 2021. Somehow I had missed it even though I check that site every day. Law and Liberty is our sister publication. HT2 Arnold Kling for highlighting it today. Ryan Streeter, by the way, is the director of domestic policy at the American Enterprise Institute. There’s so much positive in that article. A few highlights follow. On the American Dream Americans also want to believe in the future, that getting ahead and opportunity are still fundamental to being American. More people consistently value the economy over the hot-button that elites tell us are more important, such as climate change or inequality, and most Americans are satisfied with the opportunity to get ahead. Belief not only in the American Dream but that people are actually living it is rather widespreadin the country, even if people don’t fare as well by objective mobility measures. Claiming the American Dream is dead has served useful purposes on both the left and the right in recent years, but most Americans don’t actually believe it, including the working class. In September of 2020, 42 percent of the country believed they were on their way to achieving the American Dream. Perhaps surprising to the pundit class, that jumps to 45 percent of the overall working class, and even higher to 55 percent of the Hispanic working class. Economists and pundits have been decrying stagnation in the middle and the bottom of socioeconomic America for years, yet people living in the middle and the bottom have surprisingly high levels of confidence in the American Dream. I’m actually not quite as surprised as Ryan. I’ve been saying and writing for almost 20 years about the fact that a majority of people at all income levels have had their real income increase substantially. A lot of economists don’t know that; many people in those income groups do. On Breaking Down the Government School Monopoly And when it comes to the always-politicized educational establishment, the appetite for good schools and the innovations that support them are more baked into the American psyche than they were a generation ago. In 1990, there were exactly zero charter schools in America. Today, there more than 7,500 public charter schools, serving over 3 million students, primarily low-income students of color. Eighteen states havevoucher programs, and given the pandemic’s forced national experiment with homeschooling, new forms of schooling such as hybrid models, are abounding. As partisan as K-12 fights can be, the embrace of charter schools and other educational innovations at the grassroots is not. Streeter’s Conclusion It is important for recoverists within American political life to find each other and coalesce around common projects so that alarmism has less of an effect on policymakers. For recoverists hoping to make the future better by building on the past, it is worth pulling a page from the century-old playbook to find new ways to defend the first principles, practices, and institutions on which all of these good things depend. Neither the Mont Pelerin Society nor the Great Books nor C.S. Lewis was inventing entirely new ideas. All of them were recovering anew those things without which a healthy and flourishing society is not possible. Does Streeter overstate his case? Probably. And some of the commenters on Arnold Kling’s post on Streeter’s article have said why.  But I’ve stayed away from quoting the items on which I think he overstates. Those who know me know that I’m a glass-half-full person. So of course this kind of article would appeal to me. But just as even paranoids have enemies, even optimists often have reason for hope. (0 COMMENTS)

Deirdre McCloskey and I have and op-ed on Project Syndicate on industrial planning and COVID vaccines. The article argues against the currently rather popular position now that the rapid development of COVID-19 vaccines was a triumph of the Entrepreneurial State. Here’s a bit: This time, the federal government helped by acting as a big bank to finance COVID-19 vaccines, but didn’t choose winners in the fashion of industrial planning. Instead, Operation Warp Speed promised to buy good vaccines, and paid up front for guaranteed supplies. South Korea does the same, subsidizing trial-and-error research and development, but relying on profit-making firms to do it. Federal procurement during World War II was similar, with the government dumping money into small innovative firms such as the American Austin Car Company or big ones such as General Motors. Contrary to the myth of the US wartime production miracle, as the economic historian Alexander Field has shown, haste was inefficient from the point of view of an imagined perfection. But haste was necessary to win the war. The result was worth it. Operation Warp Speed was, too. During WWII, the US government didn’t usually pre-pick industrial winners. When it did, it attracted the attention of then-Senator Harry S. Truman’s hearings on corrupt procurement. Mainly, the government had private companies compete, yielding winners such as the Willys-Ford collaboration on the Jeep. General (and later President) Dwight D. Eisenhower called the weird-looking roofless four-wheel-drive car “one of three decisive weapons” of the war. You can read the piece here. (0 COMMENTS)

What is the relationship between the right to private property and a free and liberal society? Private property is the institutional precondition for individual liberty, yet the concept itself and its inherent link to liberalism is often misunderstood. Let me begin by defining what is meant by private property before discussing its relationship to liberalism. Property rights do not define a right to an object, per se. Such a statement is incomplete, and raises more questions than answers. Rather, they define expectations regarding the ability to exercise choices over an object. For example, the exchange of money for an automobile implies that an individual has taken possession over an automobile, but possession of the automobile can imply renting it for a period of days, leasing it for a period of years, or owning it outright, perhaps for decades. Whether one is renting, leasing, or granted full title over a good or service, there exists a particular specification of what choices can be exercised over a good or service in relationship to another individual, and how liability is defined. Herein lies the central point I wish to make here, one that I’m paraphrasing from Ludwig von Mises’s Human Action (1949 [2007], p. 311): the right to private property implies a social liability, not a private privilege. Private property rights are fundamentally a set of social relationships defining ability to use, exclude, and exchange resources in interaction with other individuals (see Furubotn and Pejovich 1972). Their existence does not imply an absence of social conflict over the assignment of resources. Rather, the omnipresence of scarcity implies social conflict over the allocation of resources. But, private property rights provide the institutional framework that allows individuals to learn how to compete for goods and resources in a peaceful and productive manner. This peaceful and productive form of competition manifests itself in the form of specialization and exchange, the defining attribute of private property. As Armen Alchian makes this point: If ownership rights are transferable, then specialization of ownership will yield gains. People will concentrate their ownership in those areas in which they believe they have a comparative advantage, if they want to increase their wealth. Just as specialization in typing, music, or various types of labor is more productive so is specialization in ownership. Some people specialize in electronics industry knowledge, some in airlines, some in dairies, some in retailing, etc. Private property owners can specialize in knowledge about electronics, devoting much of their effort and study to learning which electronic devices show promise, which are now most efficient in various uses, which should be produced in larger numbers, where investment should take place, what kinds of research and development to finance, etc. (1965, p. 825). How does this imply that private property rights are not synonymous with privilege? After all, one might object and state that private property is a zero-sum game, assigning an exclusive authority to exercise choices over a good, at the expense of others. This last point conflates the physical assignment of the good with the assignment of consequences of one’s choices exercised over that good, the latter of which is the fundamental purpose of private property, namely, to tie consequences to one’s action. Let’s take the example of a barber, named Gaetano, who exchanges his services with a prospective customer, named Hyman. Gaetano may have private property rights over various tools, such a scissors and a razor, with which he serves Hyman by giving him a haircut and a shave. This implies that Gaetano possesses exclusive authority to exercise choices over his tools, but this is not imply he has the privilege to threaten Hyman violently with such tools. Private property would imply, to say the least, that Gaetano loses Hyman as a customer, and most likely, suffers legal liability and criminal prosecution. Another objection may be raised that private property grants an individual the privilege to exclude one’s goods and services at the expense of another based on one’s creed, gender, race, or sexual orientation. Returning to the previous example, Gaetano may deny his services to Hyman on the grounds of religious discrimination, since Gaetano is Roman Catholic and Hyman is Jewish. However, private property does not imply that Gaetano will not suffer the consequences of his action. At the very least, he will pay the cost of lost business from Hyman as well as other individuals of his faith once Gaetano’s religious discrimination is personally communicated. Furthermore, such imprudence on Gaetano’s part will be impersonally communicated in the form of a profit opportunity to a competing barber, Salvatore, further harming Gaetano’s business. Thus, private property provides the institutional context to communicate and learn moral behavior, and in turn communicate and correct for immoral behavior (see Storr and Choi 2019). Moreover, private property implies that individuals will tend to interact on the basis of their merit and skill, acquired through their own effort, specializing not only in a particular trade, but more importantly specializing in acquiring knowledge of a business environment, neither of which are innate. Therefore, the privilege to assign wealth and resources based on racial, religious, or ethnic discrimination is antithetical to the concept of private property and eroded by the competitive process through which the market allocates resources. “The analysis also suggests,” as Alchian and Kessel state (1962, p. 175), “an inconsistency in the views of those who argue that profit incentives bring out the worst in people and at the same time believe that discrimination in terms of race, creed, or color is socially undesirable.” Thus, the civilizing effect of the profit incentive is preconditioned by the right to private property, which assigns a social liability to producers to provide goods and services that any individual may value, based on their willingness to pay. It neither assigns the privilege to discriminate against one group of customers over another based on non-monetary margins, nor for that matter the privilege to bar competing producers based on race, creed, or gender (and who would otherwise profit from serving alienated customers). How is this all related to liberalism? “The essence of the liberal position,” as F.A. Hayek states, “is the denial of all privilege, if privilege is understood in its proper and original meaning of the state granting and protecting rights to some which are not available on equal terms to others” (1956 [1994], p. xxxvi). The “true contrast to a reign of status is the reign of general and equal laws, of the rules which are the same for all, or, we might say, of the rule of leges in the original meaning of the Latin word for laws – leges that is, as opposed to the privi-leges” (emphasis original, Hayek 1960, p. 154). Thus, whereas competition based on productive specialization and exchange, preconditioned by private property, tends to liberate the individual from arbitrary assignments of resources and income based on creed, gender, race, or other legal status, competition based on privilege tends to confine an individual’s potential for self-actualization to such arbitrary assignments.   References Alchian, Armen A. 1965. “Some Economics of Property Rights.” Il Politico 30 (4): 816–829. Alchian, Armen A., and Reuben A. Kessel. 1962. “Competition, Monopoly, and the Pursuit of Money.” In Aspects of Labor Economics (pp. 157–183). Princeton: Princeton University Press. Furubotn, Eirik G., and Svetozar Pejovich. 1972. “Property Rights and Economic Theory: A Survey of Recent Literature.” Journal of Economic Literature 10(4): 1137–1162. Hayek, F.A. 1956 [1994]. “Preface to the 1956 Paperback Edition.” In The Road to Serfdom, Fiftieth Anniversary Edition (pp. xxvii–xliv). Chicago, IL: University of Chicago Press. Hayek, F.A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press. Mises, Ludwig von. 1949 [2007]. Human Action: A Treatise on Economics, 4th Edition. Indianapolis: Liberty Fund. Storr, Virgil Henry, and Ginny Seung Choi. 2019. Do Markets Corrupt Our Morals? New York: Palgrave Macmillan. Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs  at the Mercatus Center at George Mason University   (0 COMMENTS)

Last year, the Fed forecast that inflation would run well below 2% for the foreseeable future. Today, inflation has risen above 2%, and is likely to stay about 2% for a while. By itself, that’s not necessarily a problem. The Fed engages in “average inflation targeting”, which means offsetting periods of below 2% inflation with periods of above 2% inflation, and vice versa. Nonetheless, there is some reason to be concerned about a possible stop-go cycle, such as we saw during the Eisenhower administration (which experienced three recessions.) The danger is that the Fed will not adjust its policy instruments to reflect changing economic conditions. The Fed should always set its policy instrument (such as the fed funds rate target) at a position where it expects to achieve its policy goals (such as 2% average inflation.) That means that whenever the economy turns out to be stronger or weaker than expected, the Fed needs to adjust its policy instrument to keep expected future growth on course. But will it do so? History suggests some reason for concern. George Selgin has argued that the Fed raised interest rates in 2015 not because doing so was necessary to achieve its policy goal, rather because it somehow felt that very low interest rates were undesirable for vague and hard to define reasons. Such low rates seemed “unnatural”. Policy can go off course when central bankers confuse the policy instrument with the policy goal. Today, we may be facing the opposite scenario. While its too soon to be certain, I have some concern that the Fed is now treating low interest rates as a goal in itself, not as a means for achieving 2% inflation, on average, during the 2020s. I hope that I am wrong, but there seems to be some danger that the Fed will be reluctant to raise its interest rate target even if macroeconomic conditions call for higher short-term interest rates. I do have some sympathy for their predicament. They rightly emphasis both sides of their dual mandate (stable prices and high employment.) Unfortunately, inept fiscal authorities have created a significant adverse supply shock, and thus it is more difficult than usual to determine whether the economy is in danger of overheating. There is some risk of stagflation, although I currently expect the problem to be transitory. If the 5-year TIPS spread were to reach 3%, it would be a pretty clear sign that the Fed had fallen behind the curve and that we were likely to overheat. Another warning sign would be a sharp spike in long-term T-bond yields. Fortunately, we are not there yet. Bond yields remain pretty low, and hence I’m not currently predicting anything more than a brief spike in inflation. Even so, I’d say that for the first time in 14 years the balance of risks has shifted from the threat of undershooting to a threat of overshooting in terms of nominal spending growth. My recommendation to the Fed is two-fold: 1. Reiterate your commitment to 2% AIT for the 2020s, regardless of whether that commitment requires easier or tighter money. 2. Reiterate that your interest rate target will be 100% data dependent, and that you have no qualms about large and unexpected changes in the fed funds target, if necessary to keep average inflation at 2%. In a better world the Fed would entirely abandon interest rate targeting and let markets set the short-term interest rate. PS. You might wonder why I would be concerned by overshooting of the AIT target path. Overshooting increasing the risk that we’ll experience a recession during the 2020s, and I don’t like recessions. (0 COMMENTS)

On Monday, I debated Professor Alan Manning of the London School of Economics on whether the federal minimum wage should be increased from $7.25 an hour to $15 an hour. Guess which side I took. The audience was MBA students at Northwestern University’s Kellogg School of Management. The moderator was a Kellogg associate professor named Amanda Starc, whose area is health economics. She did a great job and, as I pointed out at the end, was more prepared as a moderator than I had seen in a long time. She even had her own slides as a basis for questioning both Alan and me. The discussion was quite civil. I asked them to record the debate and they did so; I think it will be available soon for people to watch. Alan Manning’s major claim was that even a substantial increase in the minimum wage will cause little or no job loss. In his argument, he gave the following hypothetical example. A low-skilled worker is producing something that nets the employer $12 an hour. Of course the employer isn’t going to pay $12 an hour because at that wage the employer would be indifferent between hiring or not hiring the worker. So far, so good. But then Professor Manning suggested that the employer would pay $8 an hour. So if the government then raises the minimum wage to $10 an hour, the employer will continue hiring the worker. See the missing step? I did. So later, when I had a chance, I pointed it out. If the worker’s productivity is really worth $12 an hour, one would expect another employer to come along and offer $9. Then someone would offer $10. Then $11. I don’t know how close the wage would get to $12. But it’s highly implausible to think that it would stick at $8. If no one offered more than even $10, which already is $2 higher than in Alan’s hypothetical, then a potential employer is leaving $4,000 on the table annually. Professor Starc suggested that I was proposing that the labor market is perfectly competitive. I responded that I wasn’t; I was making the much less ambitious claim that the labor market for relatively unskilled workers is competitive. (1 COMMENTS)

Consider a story in Monday’s Wall Street Journal regarding the current market for used cars, “Looking to Buy a Used Car? Expect High Prices, Few Options (May 10, 2021).” Financial press reporters are usually more reliable than their colleagues in the general media because they have a knowledge of supply-demand analysis acquired from economic classes or at least on-the-job training. But it is not always true and finding errors in the financial press is a good exercise and an easy hunt. Similarly, to use a formula from the late Financial Times columnist Samuel Brittan, “businessmen are paid to operate the system rather than understand or expound it” (Capitalism and the Permissive Society, Macmillan, 1973). The WSJ report contains some useful information provided it is interpreted in light of economic theory. With the end of the pandemic, demand for automobiles increased while their supply lagged partly because of a microprocessor “shortage.” I believe that there has been more a price increase than an actual shortage, but it is true that about half of the microprocessors going into cars are non-generic and that recent supply disruptions may have generated a real but temporary shortage. For our purpose here, it suffices to understand that new car prices have increased and that this caused a large increase (perhaps as much as 17% since January) in the prices of used cars as the two goods are substitutes. The Wall Street Journal quotes a businessman in the car industry: “What is normally a depreciable asset has been appreciating,” said Phil Maguire, who owns Maguire Family Dealerships, a group of 13 stores in New York state. “It’s certainly surreal, and I guess we can all agree that it’s an anomaly.” There is nothing surreal in this, even if the current circumstances are not often repeated on such a large scale. (Go back to Samuel Brittan’s quote!) A used physical asset mainly depreciates because the demand for it (the whole demand curve) decreases. If demand for an asset increases, it will appreciate ceteris paribus. This applies not only to Renoir paintings but also to vintage cars, whose supply is fixed. It can happen to used cars in general. The author of the WSJ story, although not always immune to economic confusion, was professional enough to quote another opinion confirming that depreciation is a matter of supply of demand, not a physical law of the universe: Scott Smith, president of Smith Automotive Group, a dealership chain in the Atlanta area, said he recently paid close to the original sticker price for two-year-old Nissan Sentras at auction. Supply and demand determine the value of an asset and thus its depreciation or appreciation. More generally, prices are determined by supply and demand. When outside interference coercively imposes maximums or minimums, the result will be shortages and surpluses (if the price controls are set at levels that happen to be binding). That shortages are not occurring in the used-car market is a reflection that the “price-gouging” laws triggered by the declarations of emergencies following the Covid-19 epidemic are expiring in several states (many of them this month) or are not effectively enforced. (The diversity and thus enforcement difficulty of these laws in federal America have limited economic dislocations and prevented a worse recession.) Many people seem to think that the used-car prices provided by the Kelley Blue Book and similar websites determine the prices of these cars. It is of course an error. The system works exactly and necessarily the other way around: the Kelley Blue Book finds the prices actually paid on the market, on the basis of which it tries to estimate the price or value of a specific car given its mileage and condition. Another economic fact that is important to understand–especially in view of the current acceleration of inflation just reported in this morning’s Wall Street Journal–is that the price of used cars has little to do with inflation (“Consumer Prices Jump as Economic Recovery Picked Up,” May 12, 2021). One must distinguish changes in relative prices, which happen with or without inflation, and change in the general level of prices, which defines inflation (or deflation). In April, for example, prices of used cars jumped by 10% and the price level (the average of all prices) increased by nearly 1%, which means that the relative prices of used cars increased by about 9%–that is, relative to the other prices in the economy. In other words, changes in individual prices don’t cause inflation; but inflation adds to the change in a relative price. Thus, we can say that the steep rise of used-price cars has basically nothing to do with inflation. This morning’s WSJ report is confusing on this. (0 COMMENTS)