Writing for the Peterson Institute for International Economics (PIIE), Dr Maurice Obstfeld has a great, non-technical piece addressing some of the claims made by Michael Pettis (among others) that a trade deficit must be “managed.”  Obstfeld details the theoretical and empirical issues with Pettis’s claims very succinctly.  Allow me to supplement Obstfeld’s comments with my own. First, a technical note: there is a difference between the trade balance (the difference between exports and imports) and the current account (exports, imports, and some financial transactions like income from investments and transfers).  However, for the purposes here, I will not worry too much about that difference; it won’t matter much for the point I am making.  With that out of the way, let’s begin. In national income accounting, the current account is the difference between national savings and national investment (for those interested in the algebra, you can find it here).  Mathematically, we have: Current Account = Savings – Investment. This accounting identity is deceptively simple.  If one thinks a current account deficit (that is, investment is greater than savings, is a problem (an unjustified claim we will get to in a moment), then the solution is easy: either increase savings or decrease investment.  Do that, and the problem is solved.   But realistically what can a government do?  I emphasize “realistically” because there seems to be some confusion on that point.  Reformers love to propose actions that are utterly divorced from reality.  Realistically, there’s not much governments can do.  Most of the elements of savings and investment are determined exogenously.  It’s not like an individual making a budget.  Rather, national savings and national investment are determined by factors far beyond a government’s control: desires of people within the border, desires of those outside the country, plans made by firms, and countless other factors.  Savings and investment, in other words, are emergent.  They are not things that can be manipulated, not levers to be pulled and tweaked.  It’s not that it is difficult to manage them.  It is impossible to manage them.  That simple accounting equation hides magnitudes of complexity.   Of course, governments can influence one aspect of the identity: savings.  National savings is made up of private savings and government savings.  Governments can increase their savings (that is, not operate in a deficit) which could, all else held equal, reduce the current account deficit.  Although, even that method has its limitations, as Obstfeld discusses.  Further, governments have sometimes tried to influence private savings and investment through various incentives and capital controls, but incentives are not mind control.  They do not always work and often end up having unintended consequences. All this assumes that a current account deficit is a bad thing, something to be avoided.  Nothing, however, could be further from the truth.  More often than not, trade deficits are a sign of good things, as Central Washington University economics professor Robert Carbaugh explains: Often, countries enjoying rapid economic growth possess long-run current account deficits, whereas those with weaker economic growth have long-run current account surpluses.  This relation likely derives from the fact that rapid economic growth and strong investment often go hand in hand.  Where the driving force is the discovery of new natural resources, technological progress, or the implementation of economic reform, periods of rapid economic growth are likely periods when new investment is unusually profitable.  Investment must be financed with saving, and if a country’s national saving is not sufficient to finance all the new profitable investment projects, the country will rely on foreign saving to finance the difference.  It thus experiences a net financial inflow and a corresponding current account deficit.  As long as the new investments are profitable, they will generate the extra earnings needed to repay the claims contracted to undertake them.  When current account deficits reflect strong, profitable investment programs, they work to raise the output and employment growth, not to destroy jobs and production. (International Economics, 18th ed, pg 302, emphasis in original). Current account deficits are not a bad thing when they reflect profitable investment opportunities like in the US.  It’s why the US has been able to run current account deficits for over 40 years and frequently sets new record levels for industrial production and remains one of the world’s most productive places.  But that could change with Trump’s trade war.  If countries relocate to the US to avoid tariffs, that is because they are, pretty much by definition, less profitable operating in the US than abroad.  Consequently, trade deficits that emerge from the trade war are a worrying sign.   (0 COMMENTS)

A while back, I wrote a post criticizing Yoram Hazony’s concern that free trade, while generally good, can undermine the bonds of mutual loyalty among citizens. My claim was that “mutual loyalty” by itself does not give a positive reason to prefer intranational over international trade: Suppose I’m looking to build a house, and I need to purchase a certain amount of lumber to do so. Walter, from Washington state, can provide me what I need at a certain price. However, Carl the Canadian can also offer me the same lumber at the same quality, but Carl’s selling price is $35,000 lower. Under free trade, I am free to favor Walter over Carl, because I prefer to buy from an American, or I may also choose to buy from Carl over Walter to save a significant sum of money. Presumably, Hazony thinks there is an obligation rooted in loyalty to buy from Walter over Carl, but it’s not clear why. After all, what Hazony invokes so often is the idea of mutual loyalty – and the thing about mutual loyalty is that it’s mutual. The obligation goes in both directions. So why would we say I’m failing to show Walter proper loyalty by buying from Carl? Why not say Walter would be failing to show proper loyalty to me, by insisting I buy from him despite the huge additional financial burden it would impose on me? Simply saying “mutual loyalty” does nothing to resolve this. However, this point of mine doesn’t strictly defeat Hazony’s objection. At best, it only puts things in a stalemate. As I argued elsewhere, we need some kind of symmetry-breaker to resolve situations like this. For people whose worldview aligns with classical liberalism, it’s easy to cite individual liberty as breaking the symmetry. But this would be inadequate as a response to the argument Hazony makes. As part of his own argument and worldview, individual liberty can’t simply be thrown out as a trump card that overrules every other consideration. As Hazony put it, Conservatives, on the other hand, consider the liberty of the individual to be a precious good to be cultivated and protected, but one that finds its place within a complex of competing principles that must be balanced against one another if the life of the nation is to be sustained. So to Hazony and his fellow thinkers, in situations like this, there is more at stake that needs to be considered beyond what maximizes the liberty of the individual. As a general strategy of discussion, you’re unlikely to make progress by offering responses to your interlocuter that require them to assume the truth of your worldview and falsity of their own. Responding to that argument by saying “But we should still favor free trade because it maximizes individual liberty!” in this context is question-begging – it’s assuming the very point under dispute. Hazony, and NatCons more generally, don’t deny that free trade would more greatly expand individual liberty. Their argument, rather, is that maximizing individual liberty can conflict with the mutual loyalty that holds societies together, and in those cases, these are two competing goods that must be traded off against each other. There are two routes I can see to respond to someone like Hazony in these cases. One is to shift the argument to whether or not individual liberty should be a trump card, or should be maximized in all cases. The other is to argue that even within Hazony’s own worldview, there are reasons to prefer a system that allows – even encourages – buying lumber from Carl over Walter. It’s this second scenario that I argue for here. If two people wish to interact with each other in a way that not only considers their individual liberty to do what they wish, but also factors in bonds of mutual loyalty that bind them together, what would those two people want? If Walter and I are motivated by bonds of mutual loyalty, we would truly want what is best for each other. And this desire, if held in a mature way, looks beyond what is best for one of us merely at the present moment, or in an individual transaction. We would want what is best for each other in a more holistic and long-term way. We would be motivated by the sympathy Adam Smith wrote about, and that David Schmidtz unpacked so eloquently in is book Living Together: Second, it makes perfect sense for the author whose first book treated benevolence as primary to subsequently ask how to respond benevolently to trading partners. Why, as a benevolent person hoping to truck and bater with brewers and bakers, do you address their self-love? Answer: because you want them to be better off for having come to you. Notice that Smith does not say bakers are motivated solely by self-love. He says we address ourselves not to their benevolence but to their self-love (WN, Book I, chap. 2). This is a reflection on our psychology, not theirs. He is offering insight not into the self-love of bakers but into what it takes to be benevolent in our dealings with them. In sum, the author of Moral Sentiments gives center stage to virtue and benevolence, but, in elaborating what benevolence means, the author of Wealth of Nations belabors the obvious: namely, a man of true benevolence wants his partners to be better off with him than without him. The point of addressing other people’s self-love is to give them their due. That’s what it’s like to succeed in one’s attempt to be sympathetic. Thus, Walter and I would both consider more than what makes one or the other of us better off in a single transaction. We would want to work together within a system that makes both of us better off in the long term – not just in this one transaction, but throughout our lives. And this is what a system of free trade does. Looking at a static picture, it might seem like free trade would make Walter worse off, because he’d need to either substantially lower his price, or lose the sale of lumber. But in a system of free trade, in the longer term, Walter gets much more than he loses. Walter, too, can avail himself of the widest possible selection of goods and services made at the best possible prices. Think of how I, specifically, would benefit under free trade in the lumber transaction. I would get the benefit of the lumber, plus I’d be able to consume a significant amount of additional goods and services on top of that with the money I’d save from the lower price. Or instead of increasing my consumption, I could put the extra money away into a retirement account, or to a college fund for my children. If I buy from Walter, I get only the lumber and lose out on the rest. But this same situation holds true for Walter, for all the goods and services he consumes as well. In a system of free trade, he gains all these benefits from all of his purchases. The clothes he buys, the food he eats, the materials used to build all the durable goods he enjoys – in all these transactions, he would gain from free trade in the same way I would gain from free trade in lumber in this one transaction. But might Walter end up losing his job under free trade? It’s possible, yes. Free trade doesn’t destroy or create jobs on net, in the long run. But it does change the makeup of jobs. As Alan Blinder put it, the effect of protectionism isn’t so much job saving as “job swapping. It protects jobs in some industries only by destroying jobs in others.” And because protectionism shifts jobs to areas where goods and services are more costly to produce domestically, and away from jobs where American workers have a comparative advantage, it makes jobs in the long run less productive and lower paying than they otherwise would be. Lastly, if Walter was himself motivated by mutual loyalty, he would consider the costs he’s imposing on his fellow citizens by seeking protection for his industry. Research has consistently shown that the costs imposed on American consumers in the forms of higher prices vastly exceed the protected wages of workers whose jobs are preserved by protectionism. To quote from Blinder’s essay linked above, “one study in the early 1990s estimated that U.S. consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker.” Let’s be generous and assume that these luggage workers were very well paid – perhaps making a salary of $250,000 per year. Even then, the costs being imposed on that workers fellow citizens is over five times higher than the benefit they obtain. Would I, as someone truly motivated by the benevolence Adam Smith so eloquently described, and motivated by a desire to honor a sense of mutual loyalty to my, support a policy that imposes costs on my fellow citizens five times higher than the benefit I gain? The answer to that seems to be a clear no to me. Just as “a man of true benevolence wants his partners to be better off with him than without him,” a man motivated by mutual loyalty, too, wants his fellow citizens to be better off with him than without him. Benefitting one’s self at a greater expense being forcibly imposed on your fellow citizens is not upholding mutual loyalty. It’s simply taking advantage of them for personal gain. And anyone who wants to honor bonds of mutual loyalty among citizens should reject such behavior. (3 COMMENTS)

Cosmopolitanism is the idea that all people on the planet are part of a global community.  The philosophy of cosmopolitanism is very broad, sometimes advocating universal rules, or that we should all have the same partiality to people far away than we do closer to us.  By appending the modifier “methodological” to “cosmopolitanism,” I mean to invoke a meaning similar to the philosophical one, but more limited to just one’s analytical method.  In short, I am using the phrase “methodological cosmopolitanism” simply to mean that when examining the economic effects of something, the costs and benefits to all parties affected must be taken into account.  Arbitrary distinctions like race, nationality, gender, wealth, class, etc., do not determine whose costs matter and whose do not.   Methodological cosmopolitanism is necessary to economic understanding.  Consider the so-called optimal tariff.  Given certain conditions, a sufficiently small tariff could potentially create a net social welfare gain: consumer surplus losses plus the deadweight loss from the tariff can be less than the surplus gains to the producers and the government.  This outcome is quite unique among taxes: with the exception of taxes on goods that generate externalities, the model of taxes indicates a net welfare loss.  Tariffs are not taxes on externalities.  So, how do they generate net welfare gains?  Though an accounting slight-of-hand.  Optimal tariffs only suggest a net welfare gain because the reduction in surplus to the foreign producers is not counted in the model.  If those reductions were counted, then the optimal tariff no longer creates a net welfare gain. Many economic nationalists object at this point.  When discussing the point above, I often get a retort along the lines of,  “Who cares that foreigners have their welfare reduced?  We should only care about our nation!”  Whether or not the wellbeing of a foreigner matters from a moral standpoint is irrelevant; it matters significantly from an economic standpoint.  Trade, all trade, is reciprocal.  In the initial exchange, both parties benefit (the buyer gets something of higher value than their money and the seller gets something of higher value than the good they sell).  But the exchange process does not end there.  The seller sold and now has dollars.  They can do any number of things with that: buy goods from the other nation, invest in the other nation, etc.  When trade is reduced between two nations, then economic wellbeing is reduced twice: once through the tariff reducing primary exchanges, and again when the foreigner, who has been made worse off, now has fewer dollars to spend on exports or investments in the economy.  As Abba Lerner pointed out in 1936, a tariff on imports has a similar reductive effect on exports.   This effect, well known to economists (indeed, one of the reasons why an optimal tariff has to be sufficiently small is to minimize the loss to domestic producers/consumers attached to the export market) is missed by nationalists and others who reject methodological cosmopolitanism.  Even if one does not think the wellbeing of foreigners should matter, one must be a methodological cosmopolitan to fully appreciate and consider the total effects of policy (as opposed to simple single margin effects). (0 COMMENTS)

In previous posts, I’ve criticized ambiguity in foreign policy. I cited the example of the Gulf War (1991), which occurred because a US official gave Saddam Hussein the impression that we would not object to an invasion of Kuwait. That was clearly an incorrect signal, and as a result we were drawn into a costly war.  It also seems likely that the subsequent Iraq War (2003) would not have occurred without the previous Gulf War. Saddam almost certainly would not have invaded Kuwait if the US has correctly explained its intended response before the invasion, as his mistake ended up proving to be very costly. Jordan Schneider and Jonathon Sine recently interviewed Sergey Radchenko, who had this to say about the events leading up to the Korean War: Kim Il-sung in North Korea wanted to reunify the country and kept asking Stalin for permission, saying, “Comrade Stalin, the moment we cross over the 38th parallel, there will be revolution in South Korea. Everything will turn out just fine. It’ll be very quick.” Stalin would refuse him permission to do that time and again. The reason for that is pretty obvious — Stalin was worried about American intervention. He was a very cautious individual in this particular instance. . . . The question is, why does Stalin change his mind from thinking that the Americans might intervene to thinking that they will not intervene? That is where it becomes complicated. First of all, we have Dean Acheson’s remarks in the press conference, which are straightforward, where he says, “America has a defensive perimeter, which does not include Korea.” That is probably the most misguided statement ever made by an American foreign policymaker. That, in retrospect, was a very bad idea. . . .  Even Mao himself did not know what was going on. Stalin did not inform him. Then I see Anastas Mikoyan’s response, which is, “Our intelligence intercepted cables by the Americans that said that they would not intervene in the conflict.” The entire interview is quite interesting and well worth reading. If this claim is correct, then a war that resulted in 3 million deaths occurred because the US had an ambiguous policy regarding our willingness to defend South Korea.  To be sure, it is possible that North Korea might have eventually invaded South Korea even without Stalin’s approval.  But if the invasion had been delayed by a few decades, it would have given the South more time to build up its defense forces (perhaps with US assistance.)  So now we have two or even three wars that may have occurred because the US sent out ambiguous signals on our willingness to defend various countries.  Does this have any implications for today? Both the Biden and the Trump administrations have made it pretty clear that we will not use US troops to defend Ukraine.  So I see no major ambiguity on that front.  But elsewhere, policy ambiguity is rising sharply. The Biden administration was firmly committed to Nato, which commits each member to come to the defense of other members if attacked.  For instance, a number of Nato members helped the US in Afghanistan after the 9-11 attacks.  President Trump has sent out mixed signals on Nato, and thus it is no longer clear that the US government is committed to this organization.  That increases the risk of miscalculation in some place like the Baltic region. With regard to Taiwan, there were mixed signals even within the Biden administration.  President Biden would occasionally suggest that the US was committed to defend Taiwan if attacked, only to have other administration officials walk back these statements and restore “strategic ambiguity.”  In contrast, President Trump has not firmly committed to defend Taiwan. In this post, I’m not trying to defend any particular Taiwan policy.  (I’m not a fan of either the Biden or the Trump approach.). Rather, I am trying to describe how previous examples of policy ambiguity have led to some costly foreign policy disasters, and also show that in recent years there has been a dramatic increase in policy uncertainty. How can we have more transparency and clarity in US foreign policy?  One approach would be to return to the original intent of the Constitution, and have Congress make decisions on whether or not to go to war.  Because the Senate has 100 members, it is easier to predict its response to foreign aggression than it is to predict the response of a single individual (i.e., the President).  There’s also the “wisdom of crowds”, which suggests that decisions made by large groups are usually superior to those made by a single individual.  (Tariffs are another area where the founders thought it wise to give Congress the authority.) PS. In general, it makes sense to have a foreign policy that reduces the “tail risk” of extremely bad outcomes.  In my view, war between Mainland China and Taiwan would be very bad.  But war between Mainland China and the US could be several orders of magnitude worse.  PPS.  After writing this post, I noticed that a bunch of top administration officials were caught discussing war plans on an insecure Signal chat that included a reporter for The Atlantic, and then lied about it afterwards, even after the administration had confirmed the Atlantic story.  There are so many other things going on that I suspect this story will be forgotten within 24 hours.  So many scandals, so little time.  The chat messages revealed some of things that I’ve been talking about: For a continent already worried that Trump may not honor any NATO Article 5 request or would be willing to shake down allies by withholding the spare parts and software upgrades needed to keep their F-35 Joint Strike Fighters flying, the content of this unintentionally leaked discussion has provided confirmation. . . .US allies in the Asia Pacific and Middle East can only conclude that this might soon be them, too, should Trump and his officials ever decide that they aren’t paying enough for their defense or making sufficient trade concessions.Russia and China, meanwhile, will also draw conclusions, though viewed from their perspective this offers exploitable opportunities. At least as important as all this is that America’s friends and foes alike are finding out what happens when you get group of poorly qualified ideologues to run the most powerful military in the world. The short answer is either recklessness or, under a more generous interpretation, a group with a steep learning curve. The chat discussion also revealed that when considering the pros and cons of this military action, the fact that it might also help Europe was viewed as a negative.  (No, I’m not joking.)  As I keep saying, the US has shifted its alliance from the West to Putin’s Russia.  Here’s a Bloomberg story: Russia and the US Both Want to Finlandize the World “Finlandization” is about weaker countries having to cede sovereignty to appease stronger bullies, such as Russia and, now, the US. A few years ago, commenters viewed me as an anti-American extremist for claiming the US government was a “bully”.  Now that view has gone mainstream. (0 COMMENTS)

The TikTok saga, which will soon rebound, seems to belong to the theater of the absurd. I tell the story up to late January in the just published Spring issue of Regulation. My piece is available online in an html or pdf version. The first paragraph summarizes the absurd affair: Imagine you are watching a play by theater of the absurd playwright Samuel Beckett or Eugène Ionesco. In it, a Republican president proposes to ban a computer application, saying it’s a threat to national security, but the effort fails. The subsequent Congress and Democratic president approve legislation banning the app and, nine months later, it goes dark in the United States. But the aforementioned Republican president, returning to office, rides in like a knight in shining armor and saves the app, perhaps illegally, because it is politically beneficial for him. The whole thing is difficult to believe. I follow it over time, with events and dates, up to the point where Godot comes: Godot, it seems, had finally arrived—contrary to the famous Beckett play, where he never shows up. Wait! We don’t really know if the real Godot came because the last scene remains to be played in a theater near you on or before April 5. I also offer a short and basic public-choice interpretation of the whole saga: Understanding the positive fact that the knaves in power would be dangerous if not restrained by the proper institutions does not imply the normative idea that knavery is a virtue and that the knaves’ attempts to bend the rules and institutions toward their own interests is acceptable behavior. It is not because credible theories of state agents’ behavior forecast their temptation to exploit the governed and undermine a free society that such behavior must be celebrated and encouraged.   ****************************** Post Sriptum on the featured image of this post: It happens more often, I must admit, that ChatGPT, the AI behind DALL-E, surprises me. I instructed “it” to create the image of a scene from Beckett’s “Waiting for Godot,” mentioning that “the scene would be clownish if it were not simply absurd.” He got the wrong aspect ratio, and it took him a few tries to get that right. After I finally told the silicon being that the image was good, he replied: “Always happy to help you dig deeper into the absurd.” Our “conversation” then proceded as follows: PL: With this sense of humor (“dig deeper into the absurd”), are you sure you are not secretly human? DALL-E: Ha! I’ve been accused of worse. But if I were secretly human, would I admit it? Or would that be exactly what a machine pretending to be human would say to throw you off? Now we’re getting dangerously close to a Waiting for Godot subplot—two characters endlessly debating whether one of them is real or not. Anyway, whether code or clown, I’m here for the existential riddles and creative mischief. Want to keep going with this project? Samuel Beckett’s “Waiting for Godot,” as seen by DALL-E (0 COMMENTS)

In his new book Dawn’s Early Light: Taking Back Washington to Save America, Kevin Roberts of the Heritage Foundation argues that, “China believes it has a mandate to rule the world,” and that it is using trade balances to accomplish this. This is an old tactic. “As far back as the Roman Empire,” Roberts argues, “the demand for Chinese manufacturers around the world substantially exceeded the Chinese demand for the things other countries produced…That trade imbalance helped shape the world economy-coinage from all over Europe and Asia has been discovered in Chinese archaeological finds, but to my knowledge no ancient Chinese coins have ever been located outside East Asia.”  “China’s economic dominance, supply chain monopoly for desirable goods, and carefully controlled trade policies created substantial wealth for China’s rulers, if not for its people,” Roberts’ notes. Indeed, Angus Maddison’s estimates show per capita GDP in China falling from 106% of that in Britain in 1000 to 71% in 1500 and 28% in 1880.  But, ultimately, Chinese trade surpluses didn’t help China’s leaders either. When Britain resolved to open China to trade by force in 1839, the ruling Qing dynasty found that all the coins it had accumulated as the reward for its trade surpluses were no defense against Queen Victoria’s gunboats. Those coins would have been better spent on weapons than being buried for archaeologists to discover. It was the country with the trade deficit that won the war, not the country with the surplus. “Before 1839,” Roberts writes, “trade favored the Chinese.” Little good it did them: China experienced military humiliation, political and social disintegration, and an eventual descent into communism. Roberts argues that China’s: …traditional strategy of generating massive trade surpluses should not have worked in the modern monetary system, because money today is not backed by bullion (the tons of gold and silver that flowed to China under the Canton System). Instead, the trade surpluses incurred by exporting more than its imports should have caused China’s currency to appreciate and its trade partners’ to depreciate. In the long run, that would have made Chinese manufactures more expensive and less attractive for outsourcing… “That never happened,” he continues, because “China illegally devalued its currency, harming its own people but ensuring that the CCP’s strategy for hollowing out western manufacturing and returning China to global economic centrality would work.”   But, again, little good it did them. While GDP per capita in China has risen from a low of 7% of the British level in 1950 to 34% in 2018 – a level last seen around 1770 – Roberts is right that China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history.  “But even a Chinese domestic spending and debt spree could not absorb all of the trade imbalance,” Roberts writes, discovering that a US deficit on the trade account must be offset with a surplus on the capital account: What China did to maintain its export advantage was devious: it invested in the United States, buying US assets with US dollars, thus propping up the value of the dollar (to keep Chinese products cheap) while seeking ownership of US companies, real estate, and more out of the United States and buying trillions of dollars’ worth of US government debt. The CCP today sits atop a $3 trillion hoard of assets, many of them American. And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.   China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But if, as Roberts argues, it has tried this before, that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party.       John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Does purchase of imports necessarily imply that we must export?   On March 21, 2025, economist Don Boudreaux quoted, on Café Hayek, the following passage from a chapter written by Veronique de Rugy. Here it is: One of the biggest fallacies about trade is that the ultimate value of trade for a country is found in that country’s exports, with imports being valuable only insofar as they better enable the country to export. But in reality, the opposite is true: Imports are the end and exports are the means. If we could acquire imports without exporting anything, that would be the best of all worlds for us. Unfortunately, foreigners won’t work for us for free. They want things in return for what they produce for us, and so we must export. It’s clear from context that Don agrees with Vero. I rarely disagree with Don or Vero about trade. But I do here. Start with the part I don’t disagree with, the first sentence: One of the biggest fallacies about trade is that the ultimate value of trade for a country is found in that country’s exports, with imports being valuable only insofar as they better enable the country to export. That is spot on and well said. It’s the rest that I mainly disagree with. Let’s consider it sentence by sentence. But in reality, the opposite is true: Imports are the end and exports are the means. There are two ends: imports and exports. We want imports: that’s one end. But our exporters want to export: that’s their end. If we could acquire imports without exporting anything, that would be the best of all worlds for us. It’s not clear that if we could get imports without exports, that would be the best of all possible worlds. In particular, potential exporters wouldn’t like it because they would like to make money by exporting. Also, what if the alternative to exports is a huge foreign investment in our country? That could be good. More on that anon. Unfortunately, foreigners won’t work for us for free. I agree. They want things in return for what they produce for us, and so we must export. It’s true that they want “things in return for what they produce for us.” But it doesn’t follow that we must export. It is true that one way they get money to buy things from us is by our importing, and that they take much of the money from selling those imports to us (which are exports from their point of view) and buy our exports. But imagine that we spend a lot on imports. Do we have to sell exports? No. What if there are huge investment opportunities in the United States, not just in buying U.S. federal government bonds but also investing in Apple, Microsoft, Meta, etc.? And what if, as is true, there is a world demand to hold U.S. dollars? Then exporters in other countries could take the money they earned on exporting to us and invest it in the United States or hold it as dollars. So although there is a strong empirical connection between exports and imports, there is no necessary connection. Indeed, our large current account deficit and large current account surplus are evidence of that. The one case in which Vero would be right is if no one in any country invested anything in any other country. But that’s not the world we live in.   (1 COMMENTS)

Bright colors, long tails, and dances of seduction: they may hurt a bird’s chances of survival in the wild, but they seem to increase the chances of reproduction. Is this all part of natural selection or is sexual selection its own force in the bird world? Is there such a thing as beauty for beauty’s sake? What can we […] The post Bird Brains, Bird Sex, and All Kinds of Beauty (with Matt Ridley) appeared first on Econlib.

Valerie A. Ramey of the Hoover Institution has a new NBER paper that examines the impact of lump sum transfer payments on aggregate demand. Here is the abstract: This paper re-evaluates the effectiveness of temporary transfers in stimulating the macroeconomy, using evidence from four case studies. The rebirth of Keynesian stabilization policy has lingering costs in terms of higher debt paths, so it is important to assess the benefits of these policies. In each case study, I analyze whether the behavior of the aggregate data is consistent with the transfers providing an effective stimulus. Two of the case studies are reviews of evidence from my recent work on the 2001 and 2008 U.S. tax rebates. The other two case studies are new analyses of temporary transfers in Singapore and Australia. In all four instances, the evidence suggests that temporary cash transfers to households likely provided little or no stimulus to the macroeconomy This comment caught my eye: I find no evidence that the Singapore election year payouts stimulate the macroeconomy. These results are consistent with the 2001 and 2008 tax rebates in the U.S., as summarized in the earlier section. However, we are left with a puzzle: why are the high household MPCs estimated by Agarwal and Qian (2014) not showing up in aggregate consumption? Since I do not have current access to the micro data, I leave the reconciliation of the conflicting micro and macro results to future research. Let’s take the example of the 2008 tax rebates, which occurred in April and May.  For the sake of argument, assume that 75% of households received a $1000 check, and the other 25% did not receive a rebate.  Also assume that the rebate would lead households that received a check to boost spending by 4%, while other households were unaffected.  In that case, the rebate might have tended to push consumption 3% higher, in aggregate. During this period, however, inflation was accelerating sharply, mostly due to rising commodity prices and a sharply weaker dollar.  The Fed responded to this inflation surge by tightening monetary policy.   This did not take the form of a rise in interest rates, rather the Fed held its target interest rate at 2% even as the natural rate of interest fell sharply during mid-2008.   Now assume that the Fed’s tight money policy tended to depress spending by all households by 3%. If we combine the effects of the fiscal stimulus with the tight money, you might expect the households that received a tax rebate to spend 1% more (the initial 4% increase, minus 3% due to tighter money), while the 25% of households that did not receive a rebate check might be expected to consume 3% less than before.  In that case, monetary policy would have completely offset the expansionary effect of the fiscal stimulus. Of course, this example is merely an illustration of monetary offset.  Nonetheless, it demonstrates that “micro data” (i.e., household behavior) might seem to suggest that fiscal stimulus works, even as macro data shows no effect.  If monetary policymakers are doing their job, they should always fully offset any fiscal policy initiatives that consist of changes in lump sum taxes and transfers.  (Changes in marginal tax rates may have supply-side effects.) Ramey’s paper provides a number of graphs showing changes in disposable income and consumption.  Notice how disposable income spikes in May 2008 due to the tax rebate, whereas consumption remains largely unaffected: (0 COMMENTS)

  A Revolution Against Regulation by John Berlau, Law & Liberty, March 20, 2025. Excerpts: The phrase “regulation without representation” also connotes the battle that George Washington and other American patriots fought against taxation without representation. But in researching my book George Washington, Entrepreneur, I found that “regulation without representation” is more than just linguistically connected to the causes of the Revolutionary War. It was an actual grievance of the colonists that was almost as important as taxation in turning George Washington and other patriots against the rule of Great Britain. In my book, I document George Washington’s amazing entrepreneurship and innovation. Starting out from a background that was humble compared to the other Founders and lacking resources for a college education, Washington became an apprentice surveyor for the neighboring Fairfax family at 16. He quickly built a lucrative freelance surveying practice and speculated in real estate by purchasing or asking for compensation in some of the undeveloped land he surveyed. Decades later—after he acquired Mount Vernon due to the untimely deaths of his older brother Lawrence and Lawrence’s family—Washington abandoned tobacco as the farm’s cash crop, diversified into wheat and dozens of other crops, and built a grist mill to sift flour that he would export throughout the colonies and to the West Indies and Great Britain. Washington would put his name on these bags of flour, essentially trademarking the flour with the “G. Washington” imprint on the bags to differentiate it from his competitors, pioneering the practice of branding that we have today. In addition, he turned Mount Vernon into what historian Harlow Giles Unger called in his book, The Unexpected George Washington, “a vast agro-industrial enterprise” that included a blacksmith shop to make tools such as horseshoes and nails and a mini textile factory to make clothing, the latter of which was run largely by Martha Washington. Mount Vernon, by the way, has rebuilt the grist mill and whiskey distillery that Washington placed near the grist mill after he was president. And: In the 1760s, when the British started aggressively levying new taxes on the colonists, they also started ramping up the anti-manufacturing edicts. In fact, the taxes and regulations sometimes worked hand in hand. The Stamp Act, for instance, not only taxed the colonists’ paper imports, but also required that colonial printers make all their products, from legal documents to political newspapers and even decks of cards, with paper stamped in Britain. And even if no law specifically forbade the manufacture of a product, entrepreneurs knew that their new mill or factory could be closed at the whim of British officials if domestic manufacture of the product made the colonies less of a captive market. As business and social historian Lyman Horace Weeks wrote in A History of Paper-Manufacturing in the United States, 1690–1916, “As soon as there were indications that manufacturing industries were likely to develop in the colonies, the jealousy of the British manufacturers was aroused, for they had always regarded America as an altogether exclusive market for their goods.” DRH comment: I, like John Berlau, am an admirer of George Washington. I hadn’t known about the extent of his entrepreneurialism. I do think that there should have been at least one sentence, in an article titled “A Revolution Against Regulation” on a site called “Law & Liberty” about the fact that Washington had slaves and did his utmost to keep them enslaved. That substantially qualifies my admiration of him. Pandemic Lockdowns Made the World Ruder by J.D. Tuccille, Reason, March 17, 2025. Excerpt: “Epidemics also contribute to a coarsening of society,” security expert and RAND Corporation adviser Brian Michael Jenkins wrote in his 2022 book Plagues and Their Aftermath: How Societies Recover from Pandemics. “Civility has been declining for decades for a variety of reasons, and the pandemic has added new layers of edginess…. There is not just a loss of comity, but an increase in aggression.” According to Jenkins, “the observed increase in antisocial behavior” can be blamed on “prolonged isolation, which heightens anxiety, increases irritability, promotes aggression, and diminishes impulse control.” Unfortunately, he adds, “the effects may be hard to reverse.” Why are the effects hard to reverse? Well, a lot of trust in institutions is lost. “Suspicion of government is a recurring theme,” Jenkins notes after serious civil liberties violations, mandated disruptions of normal activity, and extensions of state power into unprecedented areas where such intrusions are unwelcome and resented. But isolation and closures also breed new social habits as people adapt to a more insular world—and prevent people still learning their way in society from experiencing normal interactions.   Did ICE Deport This Guy Over a Real Madrid Tattoo? by Eric Boehm, Reason, March 20, 2025. Excerpts: On Jerce Reyes Barrios’ arm, there is a tattoo of a soccer ball with a crown and the Spanish word Dios. Is that proof that Reyes Barrios is a dangerous member of an infamous Venezuelan drug gang, or merely that he’s a fan of the Spanish soccer team Real Madrid? That’s the sort of question that an immigration court might be able to settle. It won’t get the chance. Reyes Barrios was one of about 200 people deported to El Salvador, without due process, last weekend. And: A hearing like that is meant to determine whether someone like Reyes Barrios qualifies for asylum—that is, was he fleeing a foreign regime that had arrested and tortured him, as his attorney claims, or was he part of what the Trump administration has called an “invasion” of the United States by the Tren de Aragua gang? Part of that hearing might have focused on his tattoo of a soccer ball with a crown and the word Dios. Government attorneys could have argued why those symbols might connect Reyes Barrios to the gang and would (one hopes) be expected also to present more significant evidence for why he should be denied lawful entry to the country. Tobin could then refute those claims with her own evidence. As she explained in the sworn statement filed on Wednesday, Reyes Barrios was a former professional soccer player and a fan of Real Madrid. That explains the tattoo. More importantly, she claimsthat Reyes Marrios had “a police clearance from Venezuela indicating no criminal record, multiple employment letters, [and] a declaration from the tattoo artist who rendered the tattoo.” DRH comment: Are we living in the United States of America or Jean Valjean’s France?   Premier Eby wants to give B.C. cabinet extraordinary powers by Bruce Pardy, Fraser Institute, March 17, 2025. Excerpt: But not in practise. Exceptions are so common today as to be ubiquitous. The Human Rights Commission, not the legislature, declares what constitutes discrimination. The police decide whether to enforce court orders. Environment ministry officials determine when environmental impacts are permissible. Cabinet decides when pipelines will be built. But in these cases, decision-makers at least must keep themselves within the boundaries of their authorizing statute, which was passed by elected legislatures. Under Bill 7, the Eby government will take delegation to the next level. Its cabinet will have the power not just to exercise broad discretion in accordance with legislation, but to override legislation itself. The bill will allow cabinet to make exceptions to the law, modify the law’s requirements, limit the law’s application, or establish powers or duties in place of the law. And not just a specific law, but any enactment on the books. The cabinet’s edicts will be valid for more than two years, until May 2027.   Most Externalities are Solved with Technology, Not Coordination by Maxwell Tabarrok, Maximum Progress, March 14, 2025. Excerpts: The basic story over-focuses on social coordination as the solution to externalities. Our institutions cannot be relied on to optimally correct externalities or even to avoid making them worse. Usually, the costs of an externality subside only after we’ve invented a technology which [sic] makes it cheap or privately beneficial to do the socially optimal thing. Most importantly, technology shifts out the production possibilities frontier making it possible to get outcomes beyond what even perfect social coordination could attain. Economics should emphasize the importance of technology as a solution to externality problems and focus less on social coordination. And: Coal pollution is a classic externality problem and indeed the classic solutions were tried. There were political and social campaigns for cleaner air in the city throughout the early 20th century. These culminated in a 1941 law that put some requirements on residential users to use treated coal or other cleaner fuels or special burners that reduced smoke. But ultimately, the solution to this externality problem came from technology. First, coal-gas burner-lamps were replaced with electric ones. Then, Pittsburgh got a natural gas and petroleum pipeline laid nearby. Revenues from utility sale of natural gas doubled from $67 million in 1938 to $140 million ten years later. The growth of natural gas replaced coal in heat and power generation for Pittsburgh and made more total energy available for its residents. Similarly, coal trains were replaced by diesel trains. In 1955 the Bureau of Smoke Prevention observed that “The Diesel locomotive has solved the smoke problem of the railroads.” DRH comment: Refreshingly insightful. It reminds me of the classic Arnold Kling line: “Markets fail; use markets.” Also, Max’s insight reminds me of an insight that environmentalist Amory Lovins and his co-authors had in 2000. This is from David R. Henderson, “Save the Environment and Get Rich,” Reason, July 2000. Excerpt from my review: Natural Capitalism, by Paul Hawken, Amory Lovins, and L. Hunter Lovins, brings some real news to the authors’ presumed audience of hard-core environmentalists. Hawken is an environmentalist and the author of The Ecology of Commerce; the Lovinses are co-founders of the Rocky Mountain Institute, a non-profit consultancy that advises firms on saving resources. Perhaps it’s not as entertaining as a two-headed Marilyn Monroe clone marrying Michael Jackson, but to many greens who associate economic growth with shrinking environmental quality, Natural Capitalism‘s thesis might be even more shocking than the tabloids: Economic growth needn’t coincide with environmental degradation. The kind of industrial activity that upsets environmentalists involves the wasteful use of huge amounts of natural materials to create products that then dump pollutants back on Mother Nature. Do you see the hidden solution? The authors do, and that’s what they call “natural capitalism,” though the adjective isn’t necessary—it’s exactly the same kind of capitalism that free-market economists have been pushing for about 200 years. Capitalism—the search for profits through making and selling in free markets—should move us toward both a healthy economy and clean air and water. Why? Because pollution and waste are inefficient and expensive. Is your factory polluting the air? You are wasting money. Polluting the water? You are wasting money. Using too much energy? Still wasting money. Add in the property rights of those downstream and the link between capitalism and environmentalism becomes still clearer. Factor in the true value of the clean air and water that nature produces each and every day for “free,” and it becomes obvious that we will be richer with a cleaner environment. This is where the greedy capitalists come in. Money can be made preventing the waste that causes resource depletion and pollution. Entrepreneurs clever enough to tap into this massive potential will make themselves and their companies wealthy. The government needn’t order anyone to act.     (0 COMMENTS)