While giving some of my thoughts on R. R. Reno’s book Return of the Strong Gods, I gave Reno credit for doing very well at something called the Display Test. I quoted from Justin Tosi and Brandon Warmke’s book Grandstanding: The Use and Abuse of Moral Talk, where it was described this way: Virtually every policy proposal would have downsides – perhaps even significant ones – if implemented. If a politician is honest about those downsides and supports the policy anyway, this is good evidence that she supports the policy because she thinks it will secure overall good outcomes. On the other hand, if a politician obscures or refuses to acknowledge the negatives of her proposal, Pincione and Teson suggest she is either ignorant or dishonest. She’s ignorant if she’s not aware of the downsides. She’s dishonest if she’s aware of the downsides but conceals them for rhetorical advantage. As Pincione and Teson put it, she’s a “posturer.” Of course, it’s all well and good to value the Display Test and talk about how useful it is, but simply leaving it at that might indicate one is doing little more than, well, grandstanding. I think it’s a good idea for people to regularly apply this test to themselves. And in the spirit of that, I thought I’d carry out this exercise as well. I’ve done something like this before, where I described what I see as real downsides that come along with my support of the free press. This time, I’m going to describe what I see as real potential downsides that come along with something I think is generally great – the tendency of the market mechanism to improve efficiency. Calling back to another post of mine, I once wrote about how HarperCollins spent a great deal of time and effort making changes to font format and print layouts for their books to minimize the number of pages needed per book and ink needed per page. The end result was a page that was virtually indistinguishable to the eye from previous formats, but when put to use printing Bibles, “these adjustments resulted in 350 fewer pages being needed per Bible, which in 2017 alone resulted in over 100 million fewer pages needed – four times the height of the Empire State Building, according to the story.” Overall, I said, this was a really impressive display of how much the market incentivizes producing as much as possible while using the least resources necessary: The market provides strong incentives to find and implement every feasible option to reduce and minimize the resources needed in production. If there is some means available to reduce resource usage by even a tiny amount, someone out there is looking for it, and will find and implement it. By contrast, can you imagine any government agency putting teams to work engaging in similarly intensive efforts to ensure they are using only the minimum amount of resources necessary? But this process, too, can have serious downsides, in a way that reminds me of a quip from the comedian Lewis Black when he was ranting about how Minnesota elected a professional wrestler as governor: “Jesse Ventura proves what’s great about democracy – anybody can get elected to any office. And he also shows what stinks about democracy – anybody can get elected to any office.” I’m on the record as having been convinced to give up animal products as a result of Michael Huemer and Bryan Caplan’s debate about the ethics of animal treatment. I was persuaded by Huemer that the amount of cruelty that exists in the meat, eggs, and dairy industry is a moral travesty far outweighing the importance of personal gustatory pleasure. A lot of that cruelty is done in the name of maximizing output while minimizing costs. And it turns out, even the most extreme measures don’t actually reduce costs by all that much. As just one example, a common practice in egg production is called chick culling. Basically, newborn male chicks aren’t much use for an egg farm, but about half of all chickens born on an egg farm will be male. As a result, male chicks are killed en masse shortly after birth, most commonly by being fed straight into grinding machines (less commonly, they’re gassed or suffocated to death in plastic). It’s estimated that something like seven billion baby chickens are killed this way each year. Technology exists that allows egg farmers to identify which eggs will produce male or female chicks, and ensure only the female chicks hatch. It’s expensive, but chick culling has its own expenses, like doubling the energy and space needed to incubate eggs while only using half the resulting chicks, plus paying the costs of the culling operation  itself. (It’s estimated to cost about a dollar per baby chicken culled, so industry wide $7 billion dollars are spent just carrying out this act.) Still, chick culling is cheaper – but by how much? A few countries have banned the practice of chick culling, such as Germany and Austria, and producers began using screening technology instead. The result was an increase in prices of about two cents per egg. In this way, the process of market efficiency mirrors the above quip from Lewis Black. If producers can find ways to make just a few tiny tweaks and get just a few more words printed per page in order to use the least necessary resources, the market will drive them to find and use those techniques. But in the same way, if farmers feeding live baby chickens directly into meat grinders by the billions shortly after birth lets them shave another two cents off the price of an egg, then they’ll do that as well. This is true not just of chick culling but of pretty much all of the cruelest practices of the meat and dairy industry – if a method that massively increases the pain and suffering of billions of animals each year also results in just a tiny decrease in prices, then producers will do that as well. However, rather than turn the comment section into a flame war about the ethics of animal cruelty, I’d like to suggest a different route. Dear EconLog readers, what would be an example of your own for the Display Test? What’s a policy you favor, and what are some of the negative results you believe will come about from that policy as a result? (0 COMMENTS)

  I often see people in debates online accuse other people of playing “Whataboutism.” Here’s a standard definition: Whataboutism is a pejorative for the strategy of responding to an accusation with a counteraccusation instead of a defense against the original accusation. That raises two issues. First, is whataboutism ever a reasonable way to argue? Second, what’s a good way to respond when someone uses the “whataboutism” strategy to deflect? My answer to the first question is yes. It is sometimes a reasonable way to argue. I’ll answer the second question by referring to a discussion I was in on Facebook today. I had said good things on FB about Senator Chris Van Hollen, the Democratic Senator from Maryland. I thought he did a good job down in El Salvador, in a 3-minute video (here’s the 24-minute version), of making the case for the return of one of his constituents, Abrego Garcia, whom the Trump administration admits was mistakenly taken to a prison in El Salvador. Van Hollen made only one error: he stated that Abrego Garcia is innocent even though he doesn’t know that. The key is not that he’s innocent. The key is that he was never given a hearing. The only way to find out is to give him a hearing back in the United States at which he can have a lawyer present. Probably because of FB’s algorithm, up popped a threaded discussion initiated by a lawyer friend named Matt Gilliland. Matt said that Trump is defying the Supreme Court of the United States, which told him, in a 9-0 decision, to facilitate Abrego Garcia’s return. A friend of Matt’s named Will stated: Wow, a president defying the SC – why I haven’t seen that since … JOE BIDEN on student loans bragging about it. Matt replied: So I think that Biden’s student loan shenanigans were often outside of his limits, but Biden didn’t actually defy the Supreme Court. When he got shut down because the method he used was ruled invalid, he tried a different legal method. That’s not defying the Supreme Court — it’s following their decisions. Can you point to an example where he actually defied their decision? The conversation went back and forth. Will was engaging in whataboutism. Was that an invalid way to argue? I don’t think so. Matt’s response was that Biden hadn’t defied the Supreme Court. (By the way, in an appearance in, I think Los Angeles, Biden came awfully close to bragging that he had.) The problem is that in raising the issue of Biden, Will manages to avoid discussing whether what Trump did was illegitimate. So I asked the obvious question. I wrote to Will: And when Biden did that, you were against it, right? Will didn’t answer. I think my question of Will was a good way to go. Once he admitted that he was against Biden defying the Supreme Court (he thought Biden was; I, like Matt, thought he didn’t, but I also thought Biden came perilously close) then we could get to the issue of whether Trump’s actions constituted defiance of the Supreme Court. We never got there because, at least so far, Will hasn’t replied. But the way I responded  is a legitimate way to respond to whataboutism, whether or not whataboutism is justified, but especially if whataboutism is justified. One final question about Trump and Biden. The Supreme Court has seconded a lower court decision requiring Trump to facilitate Abrego Garcia’s return to the United States. Why, after the Supreme Court found Biden’s forgiving of student loans unconstitutional, did it not require him to undo that forgiveness? Biden wouldn’t have even had to get people to send checks that had been sent to them. All he would have had to is tell them that their loans were not forgiven. (0 COMMENTS)

For any science to be broadly understood, it needs to be communicated in a helpful manner.  Indeed, much of my research focuses on how experts communicate their opinions and on the institutions under which that communication is improved.  In this post, I turn my eye toward another form of expert opinion, the law. With law, or any science, we must distinguish between a term of art and a colloquial term.  A term of art is a term that has a specialized meaning within a particular field or profession.  A colloquial term is a term whose use is not formal; it is used in ordinary conversation.  The two uses can be similar but they often differ significantly. For example, in economics, “cost” is a term of art.  When the economist invokes “cost,” we mean “the best alternative you otherwise would have chosen.  Cost is what you forgo” (Universal Economics, pg 33).  Contrast this with the colloquial use of cost, which typically refers to the money price paid or any negative consequence of an action.  For the economist, cost is something that happens at the moment of choice; it is forward-looking and ephemeral.  In the colloquial use, cost is backward-looking. Mixing up the colloquial and the term of art leads to much confusion.  Among the most common mistakes my students make is to confuse the two meanings of “cost,” and, consequently, to systemically misestimate the marginal costs and benefits of an action, leading to poor choices.  For example, students will often write in their reflections that price-gouging legislation is desirable because it keeps costs low.  In this case, we see a failure: the goal of economic education (enhance decision-making ability) is not achieved and a perversion of that goal does occur.  (Of course, we should expect these errors to occur among students, which is why I provide many opportunities for these mistakes to occur in the classroom so I can help them see the errors). In law, we see a similar problem.  Confusion between terms of art and colloquial terms can pervert the law.  The goal of law is the development and enforcement of general rules of conduct; proper ways of behavior that enhance everyone’s well-being and maximize individual freedom given the constraints of other individuals’ freedoms. (It’s unfortunate that the recent drift among both the American Left and Right is toward identifying law with a hierarchy of power and command – with confusing law with legislation and bureaucratic commands.  This authoritarian bent is most worrisome).  But colloquial understandings of legal terms have perverted law, turning that purpose on its head and leading to insecurity among everyone. One recent example involves the word “invasion.”  In law, “invasion” has a very specific meaning: “the incursion of an army for conquest or plunder” (Black’s Law Dictionary, 2nd ed).*  But “invasion” also has a colloquial use: “an incursion by a large number of people or things into a place or sphere of activity” (e.g. New Orleans had an invasion of football fans during the Super Bowl).  The US Constitution gives the national government the authority and power to repel any invasion (Art 1, Sec 8, Art 4, Sec 4).  Or, if a state is currently invaded, States may also deploy their forces against an invasion (Art 1, Sec 10).  Legal precedence and theory has long held in the US (and before) that “invasion” in this sense refers to armed invasion.  Force can only be deployed against force. More recently, however, some politicians have begun using “invasion” in the colloquial sense.  They point to illegal immigration as an “invasion” and thus use that justification to deploy troops and use extra-judicial means to go after immigrants.  This is, quite obviously, a perversion of the law: rather than enhance everyone’s safety and freedom, these actions destroy security and freedom by violating peoples’ rights to association, freedom of movement, and right not to be harassed by government officials.  The legal system goes from being the guardian of security and rights to being their destroyer.  Fortunately, at least in the US, the courts have rejected this colloquial use of “invasion”.  But again, this colloquial drift (as well as the justification “they’re just enforcing the law!”) paves a path to authoritarianism. Now, a term of art can be confusing.  There is virtue in making the law clear and easy to understand.  But one can go too far.  The great Harvard legal scholar Lon L. Fuller gives one such example from Poland: “During a visit to Poland in May of 1961 I had a conversation with a former Minister of Justice that is relevant here.  She told how in the early days of the communist regime an earnest and sustained effort was made to draft the laws so clearly that they would be intelligible to the worker and peasant.  It was soon discovered, however, that this kind of clarity could be attained only at the cost of those systematic elements in a legal system that shape its rules into a coherent whole and render the capable of consistent applications by the courts.  It was discovered, in other words, that making the laws readily understandable to the citizen carried a hidden cost in that it rendered their application by the courts more capricious and less predictable” (The Morality of Law, Revised Ed.  Yale University Press, 1969.  Pg 45).   I’ve written about the dangers of arbitrary government in the past.  As we are seeing now, the substitution of systematic law for colloquial law, such as broadening the word “invasion” to include people, and “violence” to include speech, opens the door wide for such arbitrary government.  The law must not become perverted. *There is a second definition, “An encroachment upon the rights of another,” but that definition is not relevant to the point I am making, which shall become obvious to the reader in a moment. (0 COMMENTS)

The Economist has a very interesting set of articles on recent trends in western culture.  The first one is entitled Aging disgracefully, and documents a major increase in promiscuous sex and drug use among the baby boom generation.  (Yes, that’s my generation.)  The second article notes a dramatic decease in this sort of behavior among the younger generation: The trend towards youthful sobriety holds true for much of the rich world. In 2024 illicit drug use among adolescents dropped to historical lows in America, according to a nationwide survey published on December 17th by the University of Michigan. Drinking fell, too. The researchers found that even cannabis use is now declining fast among the young, despite weed having been made legal in almost half of states over the past decade. European surveys show continuing drops in drug and alcohol use too. Why is youthful excess dying out? There is no single explanation. Children are more closely watched than in the past, and a higher share of young adults are from more abstemious immigrant cultures. Age id checks at bars are more common; Netflix and Fortnite are cheaper than cider; and dating apps are better than finding love on the sticky floors of a place called “Snobs”. The trend is clear and seems likely to last. It’s their parents who are the problem now. If you live long enough you see all sorts of surprising trends, and this is certainly one that I never would have imagined.  I had always thought of wild behavior as being a province of the young, whereas elderly people tended to be more conservative in their lifestyles. I’m not in favor of drug prohibition, but if we must have restrictions on drug use then perhaps we should replace the minimum age for pot smoking with a maximum age. Of course I’m joking, but these articles do raise a serious point.  Over recent decades, many thousands of people have been imprisoned for selling marijuana.  The drug warriors told us that we needed to do this, despite the huge cost in both dollars spent and lives ruined, because legal marijuana would be abused by young people that lack the maturity to make wise decisions.  It now seems that the entire drug war was based on a fallacy.  Legalizing marijuana has been associated with a big decease in pot use among the young.  So much human misery, all caused by a misconception. Here is Titian’s Allegory of Prudence: (0 COMMENTS)

Regular reader Alan Goldhammer wrote: I fully understand how tariffs work and know that the calculation for the reciprocal tariffs was something pulled out of a hat (or some malfunctioning AI tool). However, I don’t know if imports are fully modeled for how much they add to the US economy. Any small business that brings in Chinese products to sell, adds value by creating jobs and the money that they generate from sales goes to the Federal, State, and Local governments in the form of taxes. Why should not this added value be subtracted from the trade deficit? Isn’t this also added to the US GDP?  Maybe these are just naïve questions but, as you know I am not an economist. I told Alan by email that it’s not a naïve question and I do have answers. I won’t focus on the role, or not, of AI in calculating “reciprocal tariffs.” As is clear from his question, that’s not what Alan is asking about. Here’s his key sentence: Any small business that brings in Chinese products to sell, adds value by creating jobs and the money that they generate from sales goes to the Federal, State, and Local governments in the form of taxes. That’s all almost true. Some of the money from the sales of those products goes to governments. Most of it goes to the sellers, and they’re not chopped liver. We measure their gain by the difference between their revenues and their costs, assuming that all costs, and not just the costs of the Chinese inputs, are taken into account. Also, yes, those sales do create jobs, but the way we economists measure the gain to workers from those jobs is not those jobs per se. It’s not even the wages, salaries, and benefits that those workers get because counting wages, salaries, and benefits overstates their gain. They have an opportunity cost, namely, the next best job they would be in if they weren’t in their current jobs. So their gain is their wages, salaries, and benefits minus the wages, salaries, and benefits they would get in their next-best job. So far, I’ve left out a very important group: ultimate consumers of those goods. We economists call their gain “consumer surplus.” Consumer surplus is the maximum amount consumers are willing to pay minus the amount they do pay. Now to Alan’s 2 questions: Why should not this added value be subtracted from the trade deficit?  Isn’t this also added to the US GDP? The value is not subtracted from the trade deficit because the trade deficit was never intended to measure value: it measures money flows. The U.S. trade deficit with China is the difference between what we Americans spend on Chinese goods and services and what people in China spend on our goods and services. It says nothing about the amount of value we get from those goods and services from China, other than that the value must exceed what we spend or we wouldn’t buy those goods and services. In short, we gain from trade. In a way, Alan’s “naïve” question points to one of the key problems with even talking about a trade deficit. How bad can a trade deficit be when the values of those imports, to consumers, to producers, and to governments, exceed the amount we spend? I think, in other words, that Alan rightly sees these values and wonders, “What’s the big deal?” He’s right to wonder. Now to his second question: “Isn’t this [value] also added to the U.S. GDP?” The increment in wages, benefits, and salaries due to the imports IS part of GDP. GDP would be slightly lower if people were in less-productive jobs. The taxes that American governments at all levels get are not added to GDP because they’re first taken from American producers and consumers. Finally, the consumer surplus is not added to GDP. Remember that GDP measures product at market prices and so doesn’t include consumer surplus.   (1 COMMENTS)

Liberty Fund lost a great friend recently with the passing of Paul Lewis.  Paul was a professor of political economy at Kings College, London and had been on the faculty of Cambridge prior to that.  Paul was a great interpreter of economic thought and specific thinkers – so much so that Bruce Caldwell asked him to edit a volume of Hayek’s Collective Works.  He was in the middle of working on another volume when he tragically passed away at the far too young age of 53. Paul’s work was broadly at the intersection of philosophy and economics, but it was his macrolevel writings comparing the various schools that comprise much of classical liberal thought in the 20th century that established him as a first rate scholar among pro-liberty economists and philosophers.  He was “fluent” in Austrian economics, public choice, and the Bloomington School, and he published numerous papers with leading scholars in each field. He was also the king of great titles for his papers when he could.  A recent paper with John Meadowcroft in Constitutional Political Economy called Buchanan and Vincent Ostrom “Constitutional Artisans”.  There was The Hand Behind the Invisible Hand, which explored the concept of the invisible hand across classical liberal thought, and the ironically titled Far from a Nihilist Crowd: The Theoretical Contribution of Radical Subjectivist Austrian Economics. Perhaps my personal favorite is Orders, Orders Everywhere…..On Hayek’s the Market and other Orders, which is a super title and a very interesting paper.  He could see linkages across the territory that many of the most influential classical liberal economists occupy and we are all the better for his research. I actually vividly remember the first time I met Paul. We were at Ockenden Manor in 2007. There was a lot that struck me about Paul including his scholarly and thoughtful approach to his work, his genuine and easy smile, along with his self-deprecating sense of humor. I also encountered him running through a field while I was quite slothfully walking through the countryside. You could tell he loved his life and what he did. Paul and I ended up working together regularly on a lot of Liberty Fund projects.  Paul and Liberty Fund weren’t necessarily always politically aligned, but he was aligned with our mission and especially our texts, which he took as seriously and honestly as anyone I have ever encountered in my work. He directed his first Liberty Fund conference with me in 2011 on Isaiah Berlin. I found the conference so interesting I ended up writing a paper on Berlin’s economics, which Paul then graciously invited me to present at King’s to a faculty and student group. In typical Paul fashion he chopped me to pieces kindly during the discussion part of the event and then bought me a really good dinner afterwards. We ended up working together on a lot of conferences that always made me think and challenged my priors. Our last was on the Hayek Collected Works volume he had edited, and it was a super event attended by Bruce Caldwell and an outstanding group. Paul contributed a lot to our conference program and we cannot ever fully repay him for his work on helping us promote conversation about the free and responsible society.  He will be very much missed. (0 COMMENTS)

It’s time for another round in the ongoing saga of “Kevin complains that economists are terrible at naming ideas.” Here, I propose that economists should consider rebranding “the trade deficit.” The reason people so badly misunderstand the term is right there in the name – deficit. Deficits sound bad. In most usages, deficits imply something along the lines of living beyond one’s means and accumulating debt. That would certainly be true if my household budget was in a deficit. If my monthly household budget was in a deficit, that would imply the difference is being made up by racking up credit card debt, or borrowing money from friends and family, or something along those lines. Households can run a budget deficit for a short while – maybe they were hit by unusually high expenses and had to put some things on a credit card to get through the month. If they cut back spending over the next few months until the credit card debt is cleared, then there’s no great cause for alarm. But if that situation were to repeat itself every month, for years on end, there’s no happy ending to that story. But a country running a trade deficit is not analogous to a household living beyond its means and racking up credit card debt. For example, Nintendo just announced a new video game console, the Nintendo Switch 2, currently priced at $449. (I say currently because it remains to be seen if drive that price up when it actually comes to market.) Suppose I decided I wanted to buy one. I go to Nintendo’s website and enter my debit card information, and send them $449 from my checking account and become the proud owner of a shiny new video game platform. In doing so, the trade deficit has increased by $449. But…there’s no debt involved in this process. Nobody is living beyond their means. There’s no cause for alarm here. If President Trump is to be believed, this transaction is evidence that Japan is “ripping us off” or “taking advantage of us” by selling me something I want at a price I’m willing to pay. But that’s clearly wrong – a mutually beneficial exchange has occurred, nothing more or less. So here’s my proposed rebrand for “the trade deficit.” It relates back to a previous post I wrote, on how to think about imports and exports. I pointed out that when a country runs a trade deficit, it becomes “a country where citizens get more goods and services from foreigners than those citizens send away for foreigners to consume.” So maybe instead of calling this situation a “trade deficit,” we should call it a consumption surplus. In 2024, the United States ran a trade deficit of about $918 billion. The United States sent about $3.2 trillion dollars worth of goods and services away to be consumed by foreigners, but was able to consume about $4.1 trillion dollars worth of goods and services from foreigners. We got the benefit of consuming $918 billion dollars more in goods and services than we had to give up in exchange! As President Trump likes to say, that’s a lot of winning. So much winning! (Note: the term “consumption surplus” is itself misleading, because as I mentioned in a recent previous post, over 60% of imports into the United States are inputs for production, rather than imports that are directly consumed. Still, it seems less misleading to me than the current terminology.) Of course, there’s another side of this coin. As Scott Sumner recently pointed out, “when all types of trade are taken into account (goods, services and financial assets) trade always balances.” That is, a trade deficit (or more precisely, a current account deficit) is always and everywhere balanced out by a capital account surplus, which tracks savings and investment rather than goods and services. So saying the United States had a current account deficit of $918 billion last year means the United States also ran a capital account surplus of $918 billion last year. This is because the money foreigners don’t spend on US-produced goods and services is instead used to support savings and investment – buying dollar-denominated assets, foreign direct investment in US companies, bond purchases, that sort of thing. (In fact, let’s assume an extreme case where instead of using those $918 billion dollars for investment in the United States, foreigners decide to convert it all into cash and then burn it. So in this case, that’s $918 billion that will never be used to buy American goods, services, or for investment. Even then, there’s no cause for alarm. All this bonfire would do is decrease the amount of US dollars in circulation, making all the dollars held by American citizens more valuable. So even in that extreme situation, the value represented by that $918 billion comes back by increasing the purchasing power of the remaining dollars.) So with this rebranding, US citizens not only get the benefits from a consumption surplus, but also experience an equally large investment surplus as well. I think this is a framing that would actually get through to President Trump – but sadly, he hasn’t returned any of my phone calls. Hopefully he reads this blog though! (0 COMMENTS)

Question: Some economists have argued that the Fed should raise its inflation target from 2 percent to 3 or even 4 percent. Why might the effect of a higher inflation target on the quantity of real money balances demanded be larger in the long run than in the short run?   Solution: Economists often treat price theory and monetary theory as conceptually distinct. Milton Friedman, for example, called this the major division in economics. Monetary theory, he argued, concerns the overall price level and fluctuations in output and employment; price theory, by contrast, explains how relative prices allocate scarce resources. In my view, the boundary between the two is not as sharp as Friedman suggested; price theory and monetary theory often intersect in fascinating ways. For example, a higher inflation target can distort comparative advantage by altering relative prices. It may also discourage capital accumulation if capital income taxes are not indexed to inflation. Both effects reduce output and, in turn, lower the demand for real money balances. These examples are worth noting, but they are not quite the effects I had in mind when I posed the question. Rather, I was thinking about how a higher inflation target would influence households’ decisions to adopt particular financial technologies. To that end, let us set aside the income effects of higher inflation and focus instead on this choice. Households have access to a wide range of financial technologies for saving—such as checking and savings accounts, certificates of deposit, money market accounts, and money market mutual funds, to name just a few. Some of these products, like money market mutual funds, are nearly as liquid as a checking account but offer significantly higher returns. However, taking advantage of those higher returns typically requires households to incur a fixed cost—whether in time, effort, or attention—to open and manage the account. The returns offered by these accounts typically rise with inflation. When inflation expectations increase, lenders demand higher nominal interest rates to preserve the real value of their savings. Without such an adjustment, they would be repaid in dollars worth less than those they lent, reducing their real return. When inflation is relatively low, these accounts offer little advantage over traditional chec king or savings accounts. As a result, many households may find that the fixed costs of opening and managing them are not worth incurring. While inflation may temporarily deviate from expectations, households are unlikely to adopt new financial technologies unless there is a sustained shift in its long-run trend. In short, households’ inflation expectations shape their decisions about whether to adopt particular financial technologies. As a result, their response to a temporary deviation in inflation will differ from their response to a permanent increase in the trend inflation rate. When the trend rate rises—as it would if the Fed adopts a higher inflation target—it may become worthwhile for households to incur the fixed cost of opening and managing a money market mutual fund account. Once they do, we can no longer assume that the household’s demand for real money balances remains constant. We can illustrate this idea with a simple diagram showing the relationship between the demand for real money balances and the nominal interest rate, i. In the figure below, the curve labeled D1 represents aggregate money demand under the current inflation target. When inflation deviates temporarily from this target, households move along D11 to point B, reducing their real balances to QSR in response to the higher nominal interest rate. If, however, the Fed permanently raises its inflation target, and households respond by adopting new financial technologies, the demand curve shifts leftward to D2. This new curve reflects a lower quantity of real money balances demanded at every nominal interest rate. As before, temporary fluctuations in inflation lead to movement along D2. But if the trend inflation rate shifts again, the entire demand curve shifts once more.  The long-run aggregate money demand curve, labeled DLR, connects D1 and D2. It reflects households’ full adjustment to a permanently higher inflation rate, including the adoption of financial technologies that help them economize on money holdings. The relatively flatter slope of DLR captures the idea that money demand is more sensitive to the nominal interest rate in the long run than in the short run. Households are unlikely to identify and adopt new financial technologies immediately. If the Fed raises its inflation target, households will begin to reduce their real money balances, but the full adjustment to the higher trend rate will take time. For this reason, the effect of a higher inflation target on the quantity of real balances demanded is larger in the long run than in the short run. (0 COMMENTS)

What motivates President Donald Trump’s chaotic, stop-and-go, incoherent tariff moves? On April 9, a few days after his “reciprocal tariffs” had come into force and after worrying cracks appeared in financial markets including the market for Treasurys, he announced a 90-day pause for most “reciprocal tariffs” over 10%. He explained that people were “getting … a little bit afraid.” “I thought that people were jumping a little bit out of line. They were getting yippy.” In the end, he said, the pause “was written from the heart.” (“Why Did Donald Trump Buckle?” Financial Times, April 9, 2025.) Interestingly, Venezuela’s dictator Nicolás Maduro, who has run his country into the ground, said something similar: “I act out of love” (“Nicolás Maduro, Venezuela’s Contested President,” Financial Times, August 2, 2024). If Trump’s apparent incoherence is not driven by love, is there some grand plan hidden behind it? Financial Times columnist Janan Ganesh argued that there is none: it is irrationality pure and simple. For example, he says, Trump pursues both the Maga goal of containing China and the “Liberation Day” goal of hitting imports from friendly countries (“The Hopeless Search for Trump’s Cunning Plan,” April 9, 2025). Ganesh concludes: In the end, there are just too many contradictions in the Trump worldview to warrant any talk of a grand plan. … If strategy means anything, it is having a sense of the connectedness of things. There is none of that here. The problem with this sort of hypothesis, although tempting in this case, is that it can explain everything and its contrary. It is safer—and more natural for an economist—to start with a rational choice framework, even if some qualifications are necessary. Like any individual in the ordinary course of life, Mr. Trump’s first goal is to further his own interest. This motivation is especially strong in politics. Mr. Trump’s preferences and interests incorporate an unusual need for recognition and a devouring lust for power. However, he appears to choose means that are ultimately inconsistent with his goals, that is, his instrumental rationality (as opposed to the logical coherence of transitive preferences) is defective. This is likely due to his deep ignorance of how society and the world work, something difficult to understand without economics. (If he becomes president for life, I will have to review my hypothesis of instrumental-rationality failures, and Gonesh will need to admit that the president did have a cunning grand plan.) Individuals do make mistakes in their private affairs, but they have strong incentives to correct them. If one reaches the summit of the state, the cost of his mistakes is mainly borne by others, and his incentives to correct them are lower ceteris paribus. The more power he has, the more costly mistakes he can afford—or at least he thinks so. The grand plans of states are typically nothing but what is in the rulers’ self-interest. A ruler’s self-interest requires that he rewards his more useful supporters, which are typically special interests and electoral contributors. A ruler’s need to satisfy the interests of useful supporters will often give his policies the appearance of incoherence. Moreover, a populist ruler tends to make his decisions “intuitively,” as Trump said he would do before he made exemptions for some electronics (“Trump Excludes Smartphones From Reciprocal Tariffs After Market Rout,” Financial Times, April 12, 2025). After all, the populist leader knows the truth in his guts, which are the guts of “the people” that he embodies. So much for the glorified state’s planning rationality. Yesterday, less than two days after pausing most of his tariffs for 90 days, Mr. Trump announced that the pause may not last that long anyway (“US Tech Tariff Exemption Will Be Temporary, says Trump,” Financial Times, April 13, 2025). “This is starting to look more like stand-up comedy that ‘tariff policy,’” says Jose Pablo, a businessman and investor who frequently comments on this blog. The idea that the current president’s trade spasms aim at making “deals” in favor of “his” people illustrates his ignorance of both economics and the minimal ethics required to maintain a free society. Imposing tariffs on another country amounts, in reality, to imposing a tax on one’s fellow citizens. When Trump repeats “What they charge us, we charge them,” he is really saying “What they charge their citizens or subjects, I charge mine.” He seems to intuitively recognize this when he makes exceptions. The moral error resides in the kidnapper’s deal: he kidnaps you and then offers you a deal, a ransom against your freedom. This “art of the deal” has been practiced by unchained Leviathans against their citizens, foreigners, or both. Why don’t voters see all that or take so much time to discover it? One major explanation proposed by public choice theory lies in voters’ “rational ignorance.” Since the individual voter has no influence on an election result, he has no incentive to spend time and other resources gathering and analyzing political information (see also my Regulation piece “Mencken’s Theory of Democracy”). The libertarian and classical liberal ideal mainly aims at constraining rulers and preventing them from doing harm. What has saved us for a few hundred years in many Western countries were the many strong institutions (“institutions” in the sense of both sets of rules or “norms,” and powerful countervailing groups) that ensured the decentralization of power. A widespread belief in individual liberty reigned. These factors protected us, even if imperfectly, against the will and whims of the people and its demagogues. ******************************   (1 COMMENTS)

How can we explain the world’s underlying order? How does consciousness emerge? And why do people from such different cultures have such similar near-death experiences? Listen as Ross Douthat, New York Times columnist and author of the new book Believe: Why Everyone Should Be Religious, argues that these and other unanswerable questions underscore his argument for the rationality […] The post Rational and Religious (with Ross Douthat) appeared first on Econlib.