Author Michael Blastland talks about his book The Hidden Half with EconTalk host Russ Roberts. Blastland argues that the deeper you delve into science, medicine, astrophysics–pick a topic–the more you realize there is a lot we don’t understand. Things we can’t explain. Blastwood believes we would all do well to admit that and stop pretending […] The post Michael Blastland on the Hidden Half appeared first on Econlib.

For instance, government support for higher education is often viewed as enabling the children of the poor to go to college, and thus is viewed to have a positive redistributive impact. But, on closer examination, children of the middle- and upper-middle-classes are more likely to avail themselves of a higher education and whatever government support for it they can obtain. Thus the net benefits accrue disproportionately to the children of middle- and upper-middle-class individuals, and in this perspective, state support appears to be regressive. Moreover, it is not clear that parents’ income provides the appropriate focus of attention; the beneficiaries of education are not the parents but the children; it is the children who will receive higher wages as a result of the increased level of education. This is from “The Analysis of Expenditure Policy,” Chapter 9 of Joseph E. Stiglitz, Economics of the Public Sector, 2nd edition, 1988. This is yet another example of Stiglitz’s clear thinking about government policy. Notice in the 2nd and 3rd sentences how he makes the standard argument that many economists have made. The first place I saw this point made was in a 1960s article by, I think, Burton Weisbrod and W. L. Hansen of the University of Wisconsin. Interestingly, William F. Buckley, Jr. made this argument before a New York college audience while running for mayor of New York in 1965. Buckley writes about it in The Unmaking of a Mayor. But then Stiglitz goes even deeper, the way Armen Alchian did in his article “The Social and Economic Impact of Zero Tuition,” New Individualist Review, Winter 1968. Stiglitz points out that since the recipients of college age are typically adults, the income of their family isn’t that relevant. College aid will go to people whom the aid makes wealthy. Stiglitz almost gets to where Alchian got. Alchian focuses on wealth and points out that just as owner of land sitting on a pool of oil is wealthy even before he has drilled it, someone capable of getting through college is sitting on an untapped pool of wealth in his brain. This is my third post on Stiglitz’s textbook. The first two are here and here. I’ll have a few more Stiglitz posts and at some point I’ll explain why I was rereading a 30-years-old book.   (0 COMMENTS)

Even before the arrival of COVID-19, the restaurant industry was being transformed by a variety of forces, in particular the competition for home delivery among UberEats, GrubHub, DoorDash and others. In addition, pop-ups, test kitchens, and food trucks offered unique dining opportunities at a very small scale and for short periods of time. These acts of entrepreneurship were possible because the food service industry is still largely characterized by “permissionless innovation.” The regulatory costs of entry are low, and physical and human capital are fairly mobile, all of which allows people to try out ideas and see what sticks. As COVID-19 has created new challenges for restaurants, even the innovators have to keep innovating to meet the new demands of consumers, not to mention complying with local public health regulations. Often the most valuable sorts of entrepreneurial innovations are not ones that make big headlines but ones that instead make improvements in existing products and services to better meet the needs of consumers. Two examples of this sort of entrepreneurial innovation are taking place here in Fishers, Indiana. Although both of these innovations pre-date COVID-19, one is well-poised to take advantage of the changes the pandemic has brought, and the other has demonstrated the kind of flexibility that is often necessary for effective entrepreneurial responses to exogenous shocks like a pandemic. The first example is a company called ClusterTruck. Based in Indianapolis, they recently opened a second kitchen here in Fishers. They are a nice example of innovating on an innovation. One of the problems with food delivery services like GrubHub is that the drivers are not employees of the restaurants, and the restaurants are dependent on the schedules of the drivers when they promise a delivery time. We’ve all had the experience of our order coming much later, or even earlier, than expected, or having food that was no longer hot. The creators of ClusterTruck were, as Israel Kirzner puts it, “alert” to the opportunity to improve that model. One of the ways they did that was by creating a restaurant that is delivery and pick-up only. ClusterTruck has integrated the food preparation and the delivery process in two ways. First, the drivers all work for them. But they also won’t start preparing your food until they have one of the drivers committed for that delivery. This prevents food from sitting and waiting for a driver to pick up. And without seating, their whole kitchen is geared to competing and preparing delivery orders. It’s not a sideline. It’s what they do. Their app also has several nice innovations. One of those is the ability to order ahead for delivery at a specified time. With in-house drivers, Clustertruck can meet a pretty tight window that way. The other nice innovation is the ability to share a link to your order that allows other people to piggy-back on the same order but pay with their own account. So offices ordering lunch don’t have to worry about Venmo or other ways of settling up. Everyone can order and pay for their own meal but have it delivered together. And to be able to satisfy groups and families this way, their menu spans a variety of cuisines, from a few Asian and Mexican dishes to pub food and pizza. This full integration from preparation to delivery, along with ordering ahead and the ability to easily order in groups, puts them a step ahead of the other platform-based delivery services. Nonetheless, like every other restaurant, they’ll have to provide good eats if they are going to expand the way they have planned. As the current big wave of COVID-19 will enhance the demand for home delivery of prepared food, their entrepreneurial innovations seem well-positioned to succeed. The second example of innovation is illustrative of the flexibility that good entrepreneurship demands. COVID-19 has been devastating for local restaurants, as they operate on such thin margins that the loss of business over the last several months has been too much for them to continue. But how to keep a great menu alive in a different form that can work in the world of COVID? One answer comes from the world of test kitchens. This model, which predates the pandemic, is one in which space is created for a small number of counter-service restaurants to share, while rotating the particular cuisines that occupy the various slots. A particular idea might only be there for a few months while the owners try to discover if their model is workable, hence the “test kitchen” concept. This model allows them to share some overhead costs and work out recipes without having to worry about table service or other elements of a full-service restaurant. We have a test kitchen like this located inside a local brewery, which itself is a nice innovation given the mutual benefits involved. One of the kitchens at our Fishers Test Kitchen is an Asian street food place called Lil Dumplings. It was opened by the chef from Rook, a very well-regarded Indianapolis restaurant, and served mostly dumplings. The full service Rook was a casualty of COVID, however, going out of business earlier this fall. But that loss also presented an entrepreneurial opportunity. The former chef recently switched the menu at his Test Kitchen location over to ramen and steamed buns, and is serving several items very similar to customer favorites from Rook. The test kitchen model gives entrepreneurs who are alert to changes elsewhere in the market the flexibility they need to quickly switch over a menu and meet that new demand. It also provides a cheap way of discovering whether Rook’s dishes are still valued by its former customers. (I can report that they most definitely are!) And doing it with counter service, carry-out, and delivery options makes the whole thing work in a pandemic. Too often we think about entrepreneurial innovations as being big, grand things like the invention of the automobile or airplane. In fact, most of what good entrepreneurs do is to take existing products and services and find ways to improve them around the edges. Inventing the cell phone is great, but adding a camera on to it gives it an amazing new range of possibilities. Reorganizing the way in which a product or service is provided, as ClusterTruck has done, is one way to innovate, and taking advantage of a flexible production structure to recover some value from a failed business is another. Good entrepreneurs are people who are alert to these kinds of opportunities and take advantage of them to make consumers better off. Creating environments that allow for permissionless innovation of this sort is the best way for policymakers to attract that entrepreneurial energy and thereby improve their communities.     For more on competition and entrepreneurship, see Steve Horwitz’s Liberty Classic on Israel Kirzner’s classic work Competition and Entrepreneurship, new this month at Econlib.   *Steven Horwitz is the Distinguished Professor of Free Enterprise and Director of the Institute for the Study of Political Economy in the Department of Economics in the Miller College of Business at Ball State University in Muncie, IN. He is also an Affiliated Senior Scholar at the Mercatus Center in Arlington, VA, a Senior Fellow at the Fraser Institute of Canada, and the economics editor at the Cato Institute’s libertarianism.org. He is the author of four books, including most recently Austrian Economics: An Introduction. He is also the 2020 recipient of the Julian L. Simon Memorial Award from the Competitive Enterprise Institute. For more articles by Steven Horwitz, see the Archive. (0 COMMENTS)

In recent months, a number of important firms have announced they are relocating from California to Texas. An article by Peter Yared discussing this trend had a graphic that caught my eye: The movement of these industries is toward three states that have one thing in common—no state income tax. And these are the only three states with no income tax in the southeastern quadrant of the US—say Texas to Florida and south of the Ohio River. Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect.  But Kansas lacks the sort of big cities that would typical draw these firms and its tax cuts were relatively modest.  If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all.  The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%).  That won’t get the job done. Miami clearly benefits from a mild climate, but Tennessee and Texas have climates that are only average for a southern state. I’m certainly not a rabid supply sider who thinks that tax rates are all important.  But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places. Interestingly, Washington State has no income tax, which is unique for a northern state with a big city.  Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.)  Beyond these anecdotes, Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city.  Indeed it’s growing even faster than Oregon, which has a slightly nicer climate. There’s no doubt that climate has been reshaping America in the decades since air conditioning was invented, with people moving to warmer locations.  But for the first time ever (AFAIK), California saw its population fall last year, and yet it has a delightful climate (even with the recent forest fires.)  High tax Hawaii also lost population. So while people are gradually moving to warmer locations, state tax policies explain why certain states attract a disproportionate share of the migrants.  Indeed, last year more that half of the US population growth occurred in just two states—Texas and Florida.  I believe that’s the first time that has ever happened.  Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth.  Recent limits on the deductibility of state and local taxes has exacerbated this trend. PS.  Technically, Tennessee has no wage tax.  However, they do tax interest and dividends at 1%.  But even that small tax is being phased out at the end of this year. PPS.  Yes, housing policies are another big factor in migration—especially for the middle class. Happy Holidays everyone!     (2 COMMENTS)

Christmas is not only a time for rejoicing and celebration, but also a time of gratitude for what we have. In times such as these, in which all of us have been affected by the circumstances related to COVID-19, this is all the more important. It’s for this reason I would like to point out that it’s not only Christmas today, but every day. What do I mean by this? To answer this question, I’ll provide a lesson from my mother. My mother was born in a town called Carini, in the Province of Palermo, Sicily. She was born and grew up in a home with no car, no television, and no air conditioning. After she migrated to the United States in 1971, see never thought of returning to her hometown, and always reminded us how wonderful life in America is. It was 30 years today that she imparted on me a lesson, one that I will never forget and that I only fully appreciate now. It was an important lesson of economic development and the blessings of a free society that she taught me, even though my mom never made it to high school. She would reflect on her own childhood, telling us that the smell of oranges would remind her of Christmas. What’s baffling about this story is that, even before my mom was born and to the present day, Sicily remains the largest producer of oranges in Italy, and a major producer of oranges and other citrus fruits worldwide. You’d think, in spite of the poverty within which she was raised, she would enjoy oranges on a more regular basis. Yet, today, most us enjoy (or can enjoy at little cost) and take for granted what had been a luxury that was consumed during Christmas, even amongst those residing in a part of the world where they were grown in relative abundance. My intention here is neither to secularize nor undermine how special and joyous the Christmas season is. Rather, it is to express gratitude and place in perspective what the beneficial consequences of economic development are, and not to take for granted how new in the history of humankind our way of life is, even during times as hard as this. The point here is that one of the fruits of economic development, and the institutional preconditions that facilitate it, namely private property and freedom of contract under the rule of law, not only provide the framework to practice religious freedom, but also allows the masses of the population to get just not a smell, but a taste of Christmas every day.   Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University         (0 COMMENTS)

Considering sunk costs in one’s decisions is a cognitive limitation that behavioral economists may underestimate. If you, dear voter, have already lost $100,000 in a project that you are sure will continue to bring you net losses, you will just lose more money by putting more into it. Your previous cost is sunk and won’t be reimbursed to you just because you lose more money. As the dictum goes, don’t throw good money after bad money! The sunk-cost fallacy is at work in political partisanship too. Suppose you have “invested,” if only emotionally, in politician X. You have followed him for years, applauding his good deeds and forgiving his bad ones: “he just said that to be elected,” “he did not have a choice,” “consider how politician W would be worse,” etc.). Perhaps you even consciously swallowed the lies he wanted you to believe as a badge of loyalty? You were sometimes disappointed, perhaps betrayed, but you had faith that it would get better. It doesn’t get better but you continue to follow. You are a victim of the sunk-cost fallacy if you consider your past emotional investment as a reason for continuing to invest faith, hope, and emotions into X. You may feel that there is an intellectual or moral reputation reason for doing so. Admitting that you were wrong or have been duped may indeed involve a reputational cost. But waiting longer may impose a still larger reputational cost on you. At any rate, your current decision should not take into account your emotional (or intellectual or moral) sunk costs. The only reason, it seems, for which a (dismal) economist friend could give you for continuing to follow your politician hero revolves around specific human capital. You may have wasted much of your reputational capital (admittedly a sunk cost) and, in its place, accumulated very specific human capital—the ability to lie or blur the truth, for example—that has little value in honest life pursuits. I am not this dismal economist, but Merry Christmas anyway! (0 COMMENTS)

Taxation is unlike most transfers of money from one individual to another: while most other transfers are entered into voluntarily, taxation is compulsory. In Chapter 5 we saw some of the reasons why the contributions to support public services need to be compulsory: because of the free rider problem, unless support for public goods is made compulsory no one will have an incentive to contribute. We showed, in particular, that all individuals might be made better off by voluntarily agreeing to be compelled to contribute to the support of public goods. Yet the ability to compel individuals to contribute to the support of public goods may also provide the government with the ability to compel individuals to contribute to support some special-interest group: the government has the power to force one group to give up its resources to another group. This forced transfer has been likened to theft, with one major difference: while both are involuntary transfers, transfers through the government wear the mantle of legality and respectability conferred upon them by the political process. In some countries and at some times, the distinction becomes, at best, blurred. The political process becomes detached from the citizenry and is used to transfer resources to the groups in power. This is from Joseph E. Stiglitz, Economics of the Public Sector, Second Edition, 1988. I used the textbook in a policy analysis course at the Naval Postgraduate School in the mid to late 1990s. I find the order of his reasoning in the above fascinating. The first sentence makes clear, in no uncertain terms, that taxation is compulsory. The second sentence is the typical case for taxation to finance public goods, something that he might have learned (if he hadn’t already known and he probably did know) at the knee of his mentor, the late Paul Samuelson. It also contains the standard exaggeration: no one would have the incentive to contribute? I don’t know of any such examples. Even for the economist’s typical example of national defense, if some foreign invader is coming at me, I’m going to defend myself. Is the amount of defense enough? Probably not. But my incentive is not zero. The third sentence reminds me of James Buchanan when he channeled Knut Wicksell. Buchanan took seriously Wicksell’s idea that the only way to be sure everyone benefited from government spending is to require unanimous consent for every tax/spending program. Of course, in practice this is unworkable, but it’s a good reminder. The fourth sentence lays out the huge downside of relying on taxes: taxes can be used to redistribute wealth. Indeed, that is the main thing they do in most countries. Here Stiglitz is channelling Public Choice theory. In the fifth through seventh sentences, Stiglitz is way more radical in an anti-government direction than I ever would have expected. There’s so much I like about this textbook. I don’t think he would write it even close to the same way today.       (0 COMMENTS)

I often see pundits talk about how inflation is dead, how “global forces” are holding down inflation. This is nonsense.  Most people live in countries where inflation is 3% or higher, often much higher. Here are just a few examples (estimates of 2021 inflation from The Economist). They contain most of the world’s population: China: 3.1% India: 4.0% Ukraine: 6.6% Turkey: 10.8% Bangladesh: 5.6% Indonesia: 3.2% Kazakhstan: 6.7% Pakistan: 6.0% Philippines: 3.2% Sri Lanka 5.1% Uzbekistan: 12.2% Mexico: 3.9% Argentina 45.3% Cuba: 6.0% Uruguay: 7.5% Venezuela 640% (world’s highest) Angola: 19.1% Egypt: 5.1% Iran: 21.3% Kenya: 6.0% Lebanon: 98.8% Libya: 7.7% Nigeria: 16.8% South Africa: 4.1% Syria: 54.5% Zimbabwe: 223% Most of these are not particularly small countries.  For instance, the combined population of Pakistan and Indonesia is nearly 500 million, roughly equal to North America. You might wonder if the high inflation is somehow caused by the fact that these are developing countries. But why would an advanced country like the US forget how to do something that a less advanced country such as India can accomplish with ease? Turkey has double-digit inflation, while neighboring Bulgaria has less than 3% inflation. And yet both countries have fairly similar levels of per capita GDP (in PPP terms.) And I’ve excluded from this list many extremely poor countries with almost no inflation. The actual distinction is monetary policy. Bulgaria’s currency is fixed to the euro, and the ECB targets inflation at below 2%. Not surprisingly, eurozone inflation is below 2%. People often mention China as a factor holding down inflation, which is nonsense. Growth in Chinese exports reduces the relative prices of imported manufactured goods, but has no bearing on changes in the absolute price level. Argentina’s 45% inflation doesn’t mean that Argentine exports are very expensive, just that the Argentine currency is rapidly depreciating. Each country determines its own inflation rate (assuming a floating exchange rate). So why do so many fully developed economies have low inflation? Because they are all trying to have low inflation. Central bankers in developed countries largely have the same mindset, and adopt pretty similar monetary policies, although the English speaking central banks are often a bit more “dovish” than Europe and Japan. I often read pundits suggesting that the Fed was “struggling” to push inflation up to 2%. This makes me want to pull my hair out. The Fed raised its interest rate on bank reserves nine times between 2015 and 2018, and every single rate increase was specifically aimed at holding down inflation. How can anyone looking at that picture conclude that the Fed was “struggling” to push inflation up to 2%? It boggles the mind. The interesting question, and the question that pundits should be asking, is why did the Fed believe that raising interest rates nine times would help them to hit their 2% inflation target?  Why did they misjudge the situation?  The most likely answer is that they were relying on faulty “Phillips Curve” models. But this has absolutely nothing to do with some sort of mythical “global forces” holding down inflation. What “global forces” can do is hold down real interest rates. If the central bank were targeting inflation at 2%, these global forces would then also hold down nominal interest rates, perhaps to zero. Now you have an actual model of how global forces might affect monetary policy. But this model has absolutely no bearing on the Fed’s failure to hit its 2% inflation target during the 2010s. It failed because it kept raising interest rates over and over again, when it should not have been doing so. If Turkey and India can create inflation, I assure you that developed country central banks can also do so. They simply refuse to take the necessary steps. The list of countries above contains two types of inflation.  The very high inflation rates are usually in countries that are broke, and that are printing money to pay their bills. (This can be explained by the fiscal theory of the price level.)  Most of the countries with 3% to 12% inflation are not broke; they have simply chosen to adopt a more expansionary monetary policy than the US. The US itself had inflation in the range from 1966-1990.  This post does not take a stand on whether China’s 3.1% inflation or India’s 4% inflation is optimal, but I suspect that inflation is pretty far down the list of pressing economic challenges facing their 2.8 billion people. (0 COMMENTS)

Thinking like an economist about travel. Here’s what happened yesterday. A good friend called me and asked me for advice. I often hesitate to give advice but I don’t hesitate to ask lots of questions. At the end, usually the person can figure it out for himself or come close with a little intellectual nudging. He’s a fellow academic and I don’t want to reveal his identity so I’ll call him Fred. Fred took Amtrak last week from California to his boyhood home in the East for Christmas. He found that he got a lot of work done on a paper he’s working on: at least 3 hours a day of intense uninterrupted work over a 2.5 day trip. He’s trying to decide whether to come back to California by train or fly. We talked through COVID-19 risks first and he’s convinced that they’re comparable. (When he took the train, it was 40% full and he had his own compartment. That tilts in favor of the train, but the train takes about 9 times as long as the airplane, which tilts in favor of the airplane.) I had no expertise on those risks and so I didn’t offer any. The point is that he was convinced that the risks are roughly equal and I had no basis for contradicting that. The next question I asked Fred is whether if he got back to California early (by taking the plane) he could work at least 3 hours a day at home. He said he probably couldn’t work nearly as effectively because the absence of distractions on the train was something he couldn’t easily replicate where he lives. In short, he would be more productive if he took the train. I then asked whether getting the work done on the train on the way back to California creates some momentum in his work that helps him when he gets home. He said it does. There was one main issue left: relative fares. The one way airfare is about $500 and the Amtrak fare is a whopping $1,300. “$1,300 is a lot of money,” he said. I replied that the relevant number was not $1,300 but $800 because that’s the increment in outlay from taking the train. He got the point immediately and then said, “See? That’s why I like talking to you. You give me clarity.” “Moreover,” I said, “maybe you could deduct the train fare. Are you visiting fellow academics back there? If not, make sure you do. Take one or a few for coffee to talk about your work, and socially distance. If you can justify deducting the fare, the real difference in monetary cost to you is (1- t)* $800, where t is your marginal tax rate. I happen to know that your marginal tax rate on your Schedule C income is about 40%. So the real difference in cost is $480. I know your net worth quite well and you can easily afford this. But even if you can’t deduct, $800 is not a large number for you relative to your net worth. Is your added productivity worth at least $800?” He decided to take the train. (0 COMMENTS)

Some economists see price discrimination everywhere.  Others see it nowhere.  Key point of contention: How do you know that alleged “price discrimination” does not in fact reflect cost differences?  First-class airplane seats really are bigger, after all. Logically speaking, though, mindfulness of cost differences can make you see more price discrimination rather than less.  Why?  Because businesses often charge the same price for manifestly different products – and it’s hard imagine that the input costs of all so equi-priced products are identical.  Some restaurants charges equal prices for chicken, beef, and pork dishes – or equal prices for fries, cole slaw, and apple slices – even though the prices of the ingredients and prep time vary notably.  Looks like price discrimination to me, though admittedly they could vary the portion size to lock total costs in sync. In any case, here in Austin I came across an especially undeniable instance of price discrimination.  The parking garage across from campus posts the following prices: The hitch: This garage also offers an early bird special.  They charge only $8 ($7 online) if you are “in before 10:00 AM, and out after 2:00 PM & before 6:00 PM.”  Hence, if you arrive at 7 AM but leave at 1:59 PM, you pay not $8, but $23!  Your “reward” for freeing up garage space a minute early is -$15. Note the perverse incentives.  A person who values his time at $14 might intentionally waste an hour to save money on parking – and clog up the garage at the same time.  Not the invisible hand I had in mind. At the same time, however, remember that firms have to cover their fixed costs somehow – and price discrimination is one of the many businesses practices that make this possible.  In economic jargon, though price discrimination often undermines first-best efficiency, it is a vital tool for the promotion of second-best efficiency. P.S. Happy holidays! (0 COMMENTS)