My Open Borders neglects two major worries about immigration. The first is contagious disease; I did not see that one coming, though I try to remedy my oversight here. The second omission is less excusable.  Somehow I neglected to address immigration’s environmental effects.  Here’s what I should have said – and what I will say if there’s ever a second edition. 1. The obvious environmental objection to immigration is that it raises population and therefore leads to more pollution and other negative environmental effects. 2. The naive reply is that immigration merely redistributes environmental harm from one country to another rather than actually increasing environmental harm overall. 3. The wise reply to this naive reply is that precisely because immigration drastically increases wealth creation, it also ipso facto increases the negative environmental byproducts of wealth creation.  Immigration’s “trillion-dollar bills on the sidewalk” sits inside a gargantuan wallet of harm to Mother Earth. 4. Note: If you buy this argument, you should be similarly afraid of economic development in the Third World.  So rather than opposing immigration, you should oppose economic progress in general. 5. In any case, there is a big complication: the Environmental Kuznets Curve.  Quick summary of the empirics: Moving from low to middle income increases environmental harm, but moving from middle to high income reduces environmental harm.  So environmentally speaking, the best thing for the environment is to move from low to high income as quickly as possible.  And liberalizing immigration does precisely that!  Indeed, immigration lets people leapfrog straight from low to high income without even passing through middle income along the way. 6. Caveat: Standard measures probably overstate environmental quality in low-income countries by ignoring noxious low-tech pollutants like animal and human waste.  So leapfrogging straight to high income is even better than it looks. 7. The Environmental Kuznets Curve works through multiple channels: consumer demand (richer people want greener stuff), norms (richer people care more about the planet), and regulation (richer countries can better afford the economic burden) being the most obvious.  But we can safely liberalize immigration without pinning down the precise mechanism. P.S. Any related topics you think I should address?         (0 COMMENTS)

A year ago, Tyler Cowen claimed that President Trump won round one of the trade war with China: I’m not entirely convinced we won even the first round of the trade war, although the claim might be true.  The stated goal of President Trump and his advisers was to reduce the US trade deficit with China.  A secondary goal may have been to slow the growth of China’s economy.  A third goal might have been to weaken the position of Xi Jinping, who has been moving China in a more repressive and nationalistic direction. Today, we know that the US failed spectacularly on all three counts.  Indeed the last year has been an unmitigated disaster for Trump administration protectionists.  Today’s Bloomberg has an article arguing (correctly) that China ended up winning the trade war: The trade deficit has risen to record levels in 2020:     The goal of slowing the rise of the Chinese economy has also failed.  The Chinese economy (in dollar terms) is now expected to overtake the US in 2028, five years earlier than estimated just a year ago.  (In PPP terms they overtook us years ago.) And the prestige of Xi Jinping has risen dramatically relative to the prestige of President Trump, even before the recent fiasco on Capitol Hill.  In China there’s a widespread view that our botched handling of Covid-19 shows the superiority of an authoritarian system, at least on questions of public health.  (That’s not my view, as Taiwan did better than China.)  The prestige of America has never been lower. Here’s what Tyler said a year ago: A third set of possible benefits relates to the internal power dynamics in the Chinese Communist Party. For all the talk of his growing power, Chinese President Xi Jinping has not been having a good year. The situation in Hong Kong remains volatile, the election in Taiwan did not go the way the Chinese leadership had hoped, and now the trade war with America has ended, or perhaps more accurately paused, in ways that could limit China’s future expansion and international leverage. This trade deal takes Xi down a notch, not only because it imposes a lot of requirements on China, such as buying American goods, but because it shows China is susceptible to foreign threats. . . . It is too soon to judge the current trade deal a success from an American point of view. Nevertheless, its potential benefits remain underappreciated, and there is a good chance they will pay off. It’s no longer too soon to judge.  Perhaps without Covid-19 the outcome would have been more favorable to the US, but as of today the trade war looks like an own goal for the US.  The correct policy would have been to join the TPP back in 2017.  And increase high skilled immigration from China (including Hong Kong.) Let’s hope the Biden Administration learns the right lessons. (2 COMMENTS)

Here’s the plan for my new Book Club.  After each segment, place your thoughts and questions in the comments and I’ll post an omnibus response later in the week. On January 18, I’ll cover Chapter 1: “Ignorance Is Strength” up to the sentence “The possibility of enforcing not only complete obedience to the will of the State, but complete uniformity of opinion on all subjects, now existed for the first time.” On January 25, I’ll cover the rest of Chapter 1. On February 1, I’ll cover Chapter 3: “War Is Peace” up to the sentence “Portions of it are constantly changing hands, and it is the chance of seizing this or that fragment by a sudden stroke of treachery that dictates the endless changes of alignment.” On February 8, I’ll cover the rest of Chapter 3. Happy dystopian reading! (0 COMMENTS)

After last week’s post on apologies, a few readers sent me links on the psychology of effective apologies.  Maximally effective apologies include the following elements: Expression of regret Explanation of what went wrong Acknowledgment of responsibility Declaration of repentance Offer of repair Request for forgiveness A similar piece elaborates: Taking responsibility means acknowledging mistakes you made that hurt the other person, and it’s one of the most important and neglected ingredients of most apologies, especially those in the media. Saying something vague like, “I’m sorry if you were offended by something I said,” implies that the hurt feelings were a random reaction on the part of the other person. Saying, “When I said [the hurtful thing], I wasn’t thinking. I realize I hurt your feelings, and I’m sorry,” acknowledges that you know what it was you said that hurt the other person, and you take responsibility for it. Overall, this seems like plausible advice.  Ideal apologies will indeed have all six elements.  The harsh reality, though, is that ideal apologies often require the superpower of telepathy.  Why?  Because the person who wants to apologize doesn’t understand why the other person is upset, and the person who wants an apology refuses to explain themselves.  So unless the would-be apologizer can read minds, “sorry for whatever I did” is the best he can do. The bigger question, though is: How will people actually use this research?  Will they learn to make better apologies?  Or simply to expect better apologies? I suspect that the latter effect will far exceed the former.  If this suspicion is correct, the ironic result of this research is to exacerbate conflict rather than defuse it. Why do I have this pessimistic view?  For starters: As far as I can recall, I have never received an ideal apology – or anything close to it.  In fact, I doubt I’ve received a dozen halfway decent apologies in my entire life.  If I held this dearth against people, I wouldn’t have a friend left in the world.  Instead of expecting apologies from others, I generally make excuses on their behalf. My motives are partly strategic and partly sincere. Strategically speaking, I know that demanding good apologies probably won’t work.  People are stubborn and self-righteous.  Unless I bite my tongue and appease them, I will be very lonely.  You could object, “With friends like that, who needs enemies?”  But if a friend unapologetically tramples my feelings five days a year, but makes me happy the other 360 days, I count myself lucky. Sincerely speaking, I know that lively social interaction is an inherently risky activity.  Boring, superficial conversations are safe: “Nice weather we’re having?” “Yes, quite.”  As soon as you stray from that time-worn path, you might accidentally say the wrong thing.  So if someone hurts your feelings as a result, the wise reaction is normally, “It’s all part of the game, no big deal.” Wouldn’t I like to receive an apology every now and then?  Sure.  Wouldn’t I prefer apologies that contain an expression of regret, explanation of what went wrong, acknowledgment of responsibility, declaration of repentance, offer of repair, and request for forgiveness?  Sure again.  But in my book, even a “Sorry I hurt your feelings” with a sincere tone is amazingly above the bar.  If offered, I’ll cheerfully take it.  So should you. (0 COMMENTS)

My biggest frustration over the past decade is how often I see economists misdiagnose the stance of monetary policy, either reasoning from price changes or reasoning from quantity changes. The “reason from a price change” problem has been discussed extensively in this blog, so today I’ll focus on reasoning from a quantity change. Many economists assume that a country that has done extensive QE has, ipso facto, adopted an expansionary monetary policy. That is certainly true in some cases, but in other cases the QE is a defensive move, an endogenous response to previous tight money policies that drove nominal interest rates to zero and money demand to very high levels. Thus I was very pleased when David Beckworth directed me to an article that gets the causation right. The article is by Daniel Kaufmann, with the following subtitle: This is Part 5 of a series of articles on Swiss monetary policy I wrote jointly with Simon Schmid for Republik. They kindly agreed that I can publish an english version on my blog. Much like Japan, Switzerland has seen extremely low inflation “despite” the fact that their central bank’s balance sheet has ballooned to more than 100% of GDP.  I put scare quotes around ‘despite’, because it would be more accurate to say that the balance sheet has ballooned “because” of very low inflation.  Here’s Kaufmann: The crucial point is, however, that the appreciation is not merely caused by exogenous foreign factors but can be partly traced back to the SNB’s monetary strategy and mandate. The low inflation target reduces the scope for interest rate cuts and therefore amplifies appreciation pressures in crises. Small interest rate cuts and large balance sheet expansions In other words, there is a connection between the Swiss definition of price stability and the large foreign exchange interventions by the SNB. I generally explain this in a simpler way.  Low inflation leads to low nominal interest rates via the Fisher effect.  And low interest rates boost the real demand for base money.  Kaufmann’s explanation is more detailed and will probably be more persuasive to mainstream economists, as he focuses on how Switzerland’s low inflation target leaves it with less room to cut rates in a recession, and hence it must substitute massive QE to prevent the sort of currency appreciation that would otherwise drive Switzerland into deflation. He then discusses some alternatives to having a bloated balance sheet: The first kind, uses changes in the composition or size of the balance sheet to affect financial markets. The main idea is that financial markets are inefficient (or subject to substantial transaction costs) and the central bank can correct distortions through direct interventions in particular markets (for example in the mortgage market or in the foreign exchange market). The second kind, affects expectations of market participants about future monetary policy. A central bank can, for example, promise to defend a foreign exchange peg in order to increase future inflation. Another option is price level targeting. In the past, I’ve argued that the Swiss made a mistake in January 2015 when they abandoned their exchange rate peg to the euro.  They seem to have been partly motivated by a desire to avoid having to buy up lots of foreign assets to defend the peg, but in the long run the appreciation of the Swiss franc merely pushed inflation in Switzerland even lower, making the SF an even more attractive asset for foreign speculators. I wish my fellow economists would internalize this message.  It is dangerous to draw policy conclusions from big central bank balance sheets, for exactly the same reason that it is dangerous to draw policy conclusions from very low nominal interest rates.  Both variables are a mix of exogenous policy tools and endogenous responses to previous policy decisions.  To see them only as policy tools is to miss the more important part of the picture. PS.  Switzerland may seem like a small and unimportant country, but the message here also has important implications for Japan and the Eurozone. PPS.  David Beckworth recently interviewed me on what I am now calling the “Princeton School” of macroeconomics.  I plan to write a paper on this topic.   (0 COMMENTS)

Is it true, as House Speaker Nancy Pelosi claimed, that Congress is a temple of democracy (“U.S. Capital Police Officer Brian D. Sicknick, who died after assault on Capitol, Protected With a Kind Touch,” Washington Post, January 8, 2021)? She said: The violent and deadly act of insurrection targeting the Capitol, our temple of American Democracy, and its workers was a profound tragedy and stain on our nation’s history. This invites a reflection on how Congress, democracy, and the state work. Any moral value attached to these institutions must be consistent with, although not limited to, their likely functioning and consequences. Anthony de Jasay is one of the many economists who, over the last eight decades of so, have tried to understand the state (the whole apparatus of government). For him, the state is, in positive reality, a redistributive machine that favors some individuals and harm others. One’s ultimate judgement on the state depends also on moral values related to what the state should do. If it is considered good to harm some individuals in order to benefit others (and if de Jasay’s positive analysis is correct), then the state is good. If coercively harming some for the benefit others is morally rejected, then the state is morally bad. Could we, de Jasay asked, imagine a sort of state that would not be a redistributive Leviathan, that would not be in the business of redistributing pleasure and pain, happiness and submission, but would instead only aim at preventing invasion by, or evolution of, such a state? A sort of state that would not aim at governing? This minimal state, he calls the “capitalist state.” It has never existed anywhere near its pure form but some systems of political authority have been farther from it than others. Many anarchist theorists such as de Jasay think that the capitalist or minimal state cannot survive because it would, by its very logic, soon grab the redistributive function in order to reward its supporters at the cost of other (less loyal) subjects. The state who democratically steals from Paul to give to Peter because the Peters are more numerous than the Pauls is one instantiation of that. In this perspective, the temple of democracy appears more like a den of thieves and a gang of bullies. It is often difficult to distinguish the state from an organized and heavily armed mob. Although I have come to believe that Lysander Spooner’s attack on the state on that basis is weak, it is still worth reading his 1870 pamphlet The Constitution of No Authority, which describes the democratic state of being “a secret band of robbers and murderers.” The economic and philosophical issues involved are more complicated than they may appear at first sight. For example, suppose that the state is far from the capitalist state but does prevent the installation of another state that would be even worse—or that it prevents the descent into violent anarchy, as Thomas Hobbes feared. Many politicians commenting on last week’s troubles seem to believe, strangely, that, hic et nunc, anarchy is a more pressing problem than tyranny. (In the Washington Post, David Ignatius even uses an oxymoron: “the Trump anarchists”!) The mob was in effect calling for more state power even if some of its participants may have been duped into believing the contrary. Little exercise: Why is it easier to be duped on the political market than on ordinary economic markets? And all this is not speaking of what sort of democracy Pelosi is referring to. If it is majoritarian democracy, which majority do specific electoral methods and institutions favor? What happens when the majority wants both A and non-A, as the paradox of voting and Arrow’s impossibility theorem show is unavoidable? If it is not majoritarian democracy, which minority rules? Does the specific sort of democracy used pursue an illusory “will of the people”? On these questions, economics and, in its wake, political science have had much to teach over the past few decades. (Many of my Econlog and Econlib pieces have been concerned with these issues.) At any rate, it is not sufficient to simply assume that glorified individuals (“lawmakers”) voting laws thousands of pages long (without knowing what’s in them except for their pious labels and professed intentions) constitute a temple of democracy. (0 COMMENTS)

George Orwell’s 1984 contains excerpts from a fictional book, The Theory and Practice of Oligarchical Collectivism.  Orwell provides a short passage from Chapter 1, entitled “Ignorance is Strength” and a much longer passage from Chapter 3, entitled “War Is Peace.”  Although 1984 is a work of dystopian fiction, TPOC has long struck me as a profound work of social science.   The book is a wonderful meditation on not only totalitarianism (especially Stalinism), but politics itself. The upshot: I’ve decided to run a new book club – not on 1984 as a whole, but merely Orwell’s book-within-a-book. You can read TPOC online here, or just take out your handy copy of 1984 and read the relevant parts of Part 2, Chapter 9.  The whole read should take just 40 minutes or so. The first installment will run on January 18.  Who’s in?       (1 COMMENTS)

I’ve written before about how “The Box,” that is, containerization, slashed the cost of international trade, thus leading to more of it. My guess is that that reduction in cost was the equivalent of dropping tariffs by at least 5 percentage points. I quoted the famous statement by Paul Krugman that put it nicely: The ability to ship things long distances fairly cheaply has been there since the steamship and the railroad. What was the big bottleneck was getting things on and off the ships. A large part of the cost of international trade was taking the cargo off the ship, sorting it out, and dealing with the pilferage that always took place along the way. So, the first big thing that changed was the introduction of the container. When we think about technology that changed the world, we think about glamorous things like the internet. But if you try to figure out what happened to world trade, there is really a strong case that it was the container, which could be hauled off a ship and put into a truck or a train and moved on. The quote is from here. Like Krugman, I’m a big fan of Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, Princeton University Press, 2006. I happened to page through Levinson’s book the other day looking for something on the famous Harry Bridges, leader of the International Longshoremen’s and Warehouseman’s Union (ILWU). He was very important in the West Coast economy in the 1950s and 1960s, and especially the San Francisco Bay Area economy. Not that I was looking for this, but, as one wag put it when Bridges’s power was near its height, “In San Francisco, there are three bridges: the Golden Gate Bridge, the Oakland Bay Bridge, and Harry Bridges.” In the process I found an interesting tidbit on Eric Hoffer, the author of The True Believer. (That’s a picture of him above.) In 1960, employers on the West Coast were trying to clear the decks (pun intended) for mechanization and so they had a bright idea: compensate port workers with the amount of compensation scaled according to how long they had worked. Levinson writes that in return for “near-total flexibility, the employers agreed to pay $5 million per year.” That was a lot of money in 1960 dollars. Longshoremen with 25 or more years of service would get $7,920, which was about 70 weeks’ base pay, upon retirement at age 65. They would also get the $100 per month ILWU pension. Workers aged 62 to 65 “would be paid $220 a month until age 65 if they retired early.” Others were guaranteed wages on 35 hours of work weekly even if their services weren’t needed. Levinson adds, “Anyone hired as a longshoreman after the agreement was signed would never be eligible for the guarantee because, as a union spokesman explained, ‘they will not have given un anything.'” I think that most economists who looked at this agreement would approve of it as a way of compensating losers in a relatively efficient way. Eric Hoffer didn’t like it. Levinson writes: More than one-third of the ILWU’s members voted no. Some opponents, such as San Francisco’s famed longshoreman-philosopher Eric Hoffer, were outraged on ideological grounds. “This generation has no right to give away, or sell for money, conditions that were handed on to us by a previous generation,” Hoffer stormed. In short, Hoffer saw the right to a job as an inalienable right. (0 COMMENTS)

***** TAKE THE 2020 ECONTALK SURVEY: https://tinyurl.com/y6tzqvg6. VOTE FOR YOUR FAVORITE EPISODES OF THE YEAR! ***** Economist and author Don Boudreaux of George Mason University discusses the life and work of the economist James Buchanan with EconTalk host Russ Roberts. Buchanan received the Nobel Prize in 1986 for his work creating and developing public choice–the […] The post Don Boudreaux on Buchanan appeared first on Econlib.

This is another in my continuing series of excerpts from Joseph E. Stiglitz’s excellent 1988 textbook, Economics of the Public Sector. I’ve previously posted about this textbook here and here. Thus an income tax that taxes interest can be viewed as a differential commodity tax in which future consumption is taxed more heavily than current consumption. The question of whether it is desirable to tax interest income is then equivalent to the question of whether it is desirable to tax future consumption at higher rates than current consumption. Just as, with a well-designed income tax, there may be little to be gained by adding differential commodity taxation, so too there is little to be gained from taxing consumption at different dates at different rates. This means, in effect, that interest income should be exempt from taxation. An income tax that exempts interest income is, of course, equivalent to a wage tax, and we showed in Chapter 17 that a wage tax was equivalent to a consumption tax (in the absence of bequests. This suggests that it may be optimal to have a consumption tax. That’s very tight reasoning on Stiglitz’s part. Even though I hate taxes, I love analyzing the economics of taxation. Co-blogger Scott Sumner is, I believe, an advocate of consumption taxes. If you’ve read me closely over the years, you’ll know that I’m not. I’ve been very critical of a VAT, for example, which comes close to a consumption tax. So why am I not a fan? Because the analysis of a VAT that finds a VAT to be superior, on efficiency grounds, to other taxes, holds constant something that empirical evidence says should not be held constant: the amount of revenue raised. Because VATs tend to be less visible, they lead to less political resistance and result in a much larger amount of government tax revenue and government spending. Because so much of government spending is inefficient–how much do you value, relative to cost, the occupation of Iraq and Afghanistan or defending wealthy Germany or the middle-speed train in California’s central valley or agricultural subsidies?–the inefficiencies from higher government spending probably outweigh the inefficiency of a less-efficient form of collecting government revenue.   (0 COMMENTS)