When Joe Biden was president, Republicans rightly complained that he often abused his power when doing things like cancelling student debts. They also rightly complained when the federal government usurped the power of state and local governments.  The GOP is traditionally seen as favoring “federalism”.Was the GOP complaint about the president exceeding his constitutional authority, or was the actual complaint that the president exceeded his constitutional authority while pursuing Democratic Party objectives?  Perhaps this can answer the question: President Trump and his new transportation secretary, Sean P. Duffy, made it sound as if their power to pull the plug on New York City’s six-week-old congestion pricing program was absolute. Mr. Duffy, who has been on the job for less than a month, wrote to New York’s governor on Wednesday that “I have concluded” that the tolling program, implemented after a grueling, years long process, was not “eligible” under the federal statute used to enact it. Mr. Trump’s explanation was even less complex: He hit the caps-lock button and invoked his authority as “king.” “CONGESTION PRICING IS DEAD, Manhattan,” the president wrote on social media, “and all of New York is SAVED. LONG LIVE THE KING!” Long-time readers know that I’m not President’s Trump’s biggest fan.  But in this case, I give him credit for honesty.  In the past, commenters have raked me over the coals for claiming that Trump had authoritarian tendencies.  I’m glad that I no longer have to make those arguments; I can merely quote from the president’s own statements. New York’s congestion pricing plan had reduced traffic congestion, despite being poorly designed relative to congestion pricing in some other big cities.  If the courts uphold Trump’s decision (which is not at all certain) then we can expect NYC traffic to get worse. I’ve noticed a recent trend in American politics/policymaking.  Politics increasingly seems to be a sort of performance art.  Thus trolling is no longer merely a technique used in some situations, it has become a part of the policymaking process.  While Donald Trump is the master of the art of trolling, the trend has filtered down to the local level. A few miles from where I live is the famous surfing town of Huntington Beach.  (BTW, California suburbs are big–HB has 200,000 residents.)  Huntington Beach recently decided to put a plaque outside the city library.  In addition, they decided to spend some money defending the plaque: Councilmember Gracey Van Der Mark, who submitted the updated design, also said the council had raised an extra $1,000 to pay for a spotlight installation to protect the plaque from vandalism. You might wonder why a city would assume that they needed to spend taxpayer funds defending a plaque outside a library.  See if you can guess why the city council was nervous: Public policy as trolling. PS.  A brief follow-up to my previous post.  Niall Ferguson recently had this to say (replying to JD Vance): I have said more than once in the past three years that the war would not have happened if President Trump had been reelected in 2020. I supported his campaign for reelection last year, consistently predicted his and your victory, and welcomed the “vibe shift” that victory represented. I have also supported the President’s previous calls to negotiate peace between Russia and Ukraine. So I am not sure I really qualify as a globalist. In fact, I agree with all five of the points you make. Indeed, I praised your Munich speech. . . . But I simply cannot understand the logic of beginning a negotiation this difficult by conceding so many crucial points to Russia. Those of us who have understood Trump from the beginning are not at all surprised by what we see.  Trump has repeated praised Putin, even when he was campaigning back in 2016.  It’s a pity that so many intellectuals failed to take his comments seriously, and now find themselves bewildered by what is happening.    (0 COMMENTS)

  When I was a full-time economics professor at the Naval Postgraduate School, I always taught my master’s students about comparative advantage. I showed them that if two people were on a desert island and discovered each other, they could each have more by specializing in producing the good in which they had a comparative advantage and trading for the other good. I would then go from a simple numerical illustration to three other important points. First, I expanded from an island to a country, showing why it makes sense for people in California to trade with people in New York. Second, I expanded from a country to the world, showing that national borders don’t change the reasoning: people in the United States gain from trading with people in China, in Canada, or in any other country. Third, I showed how they implicitly recognized comparative advantage in their jobs. Many of my students had overseen dozens to hundreds of people. They realized, if only from experience, that even if they could do the jobs of their underlings better and more quickly, it was a fool’s errand to do their underlings’ jobs because that left less time for them to do their jobs. I would then get into the fact that when trade is opened to the world, some businesses lose their business, and some workers in those businesses lose their jobs, to lower-cost foreign producers. Some workers will be worse off, I noted, for at least a few years, finding jobs that might pay 20 percent less than what they previously had earned. The threatened loss from foreign competition would lead some businesses and workers to lobby for tariffs or import quotas to make foreign goods less attractive to domestic buyers. Students were excited about their new knowledge, but some were pessimistic about the prospects for free trade. They realized that most people don’t understand the argument they had just mastered and, therefore, the students figured that we were stuck with high tariffs. Then I gave them a pleasant surprise. I showed that tariffs had fallen every decade since World War II and were now a small percent of what they were before World War II. This is from David R. Henderson, “The Benefits of Free Trade Are at Risk,” Defining Ideas, February 20, 2025. I then get into the details about how tariff rates have fallen worldwide to a fraction of what they were before World War II, and show how that is now at risk. Read the whole thing, which is longer than my usual Hoover article. (0 COMMENTS)

Those of us who teach and study international trade sometimes get the question: “how is international trade different from domestic trade?” From a purely analytical perspective, national borders do not change the fundamentals of trade.  Whether one is trading with Bart in Baton Rouge, Brad in Boston, or Brent in Berlin, the fundamentals stay the same: what one gives up are the costs, what one gets are the benefits, and, so long as both parties agree to the trade, the trade is prima facie mutually beneficial.  The accounting conventions of international trade often obscure these fundamentals (for example, the gains and costs to foreigners are often not counted, and phrases like “trade deficit” erroneously conjure up ideas of budget deficits and debt), but nevertheless, they remain.   But, while international borders are often invisible and arbitrary, that does not mean they are irrelevant.  Because a sovereign* has a legitimate right to limit what crosses the borders of its domain and the duty to defend the domain from legitimate and real threats, the sovereign may have to interfere in the otherwise free flow of goods, services, and people across borders.  Furthermore, since governments are made up of people, there is no particular reason to think they will not act in their own self-interest and be prone to petty behavior and conflict.  At the personal level, such pettiness will not affect trade patterns much.  But, given the awesome power even the most rudimentary government wields on international trade, such pettiness and self-interest can substantially affect patterns of trade, and thus our analysis.   Many trade models that underlie modern economic trade theory do not account for politics.  In some cases, they do not need to: analysis on the effects of tariffs, for example, do not often need to explicitly take into account the political economy issues discussed above.  Reducing transportation and communication costs will increase the volume of trade, at least in the short run, regardless of political issues.     But the unusual authority sovereigns have over international, and their all-too-human motivations, can have distortionary effects.  Firms have to read political tea leaves and prepare for trade disruptions due to war or just petty politics.  And we, as analysts, need to have a theory of government in our models to know when certain outcomes can be expected and when some cannot.   To be fair, most trade economists understand this point and explicitly address political economy.  In Paul Krugman, Maurice Obstfeld, and Marc Melitz’s standard textbook International Economics, they have a chapter dedicated to political economy and trade.  One of the textbooks I use in my International Trade class, International Economics by Robert Carbaugh, similarly devotes a large amount of text to discussing the political economy of tariffs, non-tariff trade barriers, trade regulations, and industrial policy.  After reading the discussions in these two textbooks (and, indeed, most writings on international trade), one very much sees how considering political economy often inverts the goal of government interventions in international trade: antidumping legislation is used to protect monopolies rather than prevent them, “optimal” tariffs trigger trade wars and significantly reduce national welfare, repatriotization of supply chains makes them more fragile rather than less, and so on.     To be clear, politics does matter in domestic economics as well.  All social exchange takes place under the shadow of the law.  But those shadows are much deeper and more tangible in international trade.   *Note: I am using “sovereign” here in a very broad sense to mean the entire institution of a government.  It could be King-in-Parliament like in Great Britain, the Federal Government apparatus of Congress and the President like in the United States, or a dictator.  The “sovereign” is an institution, not an individual per se. (0 COMMENTS)

Economists like to look at actual behavior as a way of inferring what people believe.  This is called “revealed preference.”  I’ve always found it to be a very useful tool. Recent statements by top Trump administration officials have puzzled observers on both sides of the political spectrum. Here’s the National Review, a conservative publication that generally supports Trump, but differs with his views on a number of important issues: But so far in his second term, regarding the Russian invasion of Ukraine, Trump has offered to Vladimir Putin that Ukraine will not retake all its annexed and occupied sovereign territory, that Ukraine will not join NATO, that there will be no U.S. troops on Ukrainian soil after the war, and that the U.S. will lift sanctions on Russia. And Trump might even throw in a withdrawal of the extra 20,000 U.S. troops that Joe Biden sent to NATO’s eastern flank after the invasion of Ukraine. And in exchange, Putin offered . . . well, nothing, really. Critics have complained that this is not the sort of behavior you’d expect from a politician that prides himself in being a skilled dealmaker.   A few days ago, I suggested that the critics had it wrong.  They were operating under the mistaken assumption that Ukraine was America’s ally and Russia was our enemy.  In fact, Trump has long been an admirer of Vladimir Putin and has frequently been dismissive of the Ukrainian government.  Rather than viewing these sorts of pre-negotiation concessions as “mistakes”, I viewed them as tactics to weaken Ukraine’s negotiating position.  Put simply, Trump sees America as Russia’s friend, allied against Ukraine and the EU. Today, Trump all but confirmed my claim: Regarding the war, President Donald Trump says to the Ukrainians, “You should have never started it!” Somewhere in Moscow, Vladimir Putin must be grinning from ear to ear. As a result, the National Review now shares my view: Trump is flailing and thrashing around, trying anything to justify his current de facto pro-Russian stance. It took two days for my claim to move from Noam Chomsky-style heterodoxy to being the conventional wisdom, even among conservatives.   In the short run, issues such as the budget and government efficiency will occupy most of the online discussion.  I understand that.  But in the long run, to paraphrase Trotsky: “You might not be interested in ideology, but ideology is interested in you.”   In 2016, the National Review did a special “Against Trump” issue.  Later on, they decided they could move on from the concerns they expressed at that time.  But the NR reporters are beginning to realize that reality doesn’t always conform to what they might wish it to be.   PS.  Speaking of heterodox views, a new Substack blog uses the concept of revealed preference to infer the actual foreign policy goals of the Trump administration.    PPS.  Hard to believe that this was just three years ago: (1 COMMENTS)

  Many people who discuss who actually pays for tariffs claim that they are paid solely by consumers. Even many economists, including co-blogger Pierre Lemieux, say that. But it’s important to look at what people are implicitly assuming when they make that claim. Here’s what I wrote in “Tariffs Will Hurt Canadians and Americans Alike,” Defining Ideas, December 19, 2024: Many people who have, like me, been critical of tariffs, have claimed that US consumers bear the whole cost of the tariff. Writing in August 2019, for example, Rachel Layne of CBS News stated, “The fact is, companies here pay tariffs to US Customs and Border Protection when Chinese goods reach America’s shores.” It’s true that Americans write the checks. But one of the first things about taxes that we economists teach undergrads is that knowing who writes the check tells you exactly nothing about who bears the burden of a tax. What determines the split of the burden between producer (exporter) and consumer (importer) is their relative elasticities of supply and demand. There are two extreme circumstances in which the importers bear the whole burden of the taxes. The first is if importers have a completely inelastic demand for the good on which the tariff is placed. In such a case, the price gross of tariff rises by the whole amount of the tariff. That necessarily means that the amount bought changes not at all. (You would show that on a graph with a vertical demand curve.) I don’t know anyone who believes that that happens. There is always some elasticity of demand even if it’s only on the order of -0.1 or -0.2. The second case in which the importer bears the whole burden is if the supply is infinitely elastic. In that case also, the price gross of tariff rises by the whole amount of the tariff. (You would show that on a graph with a horizontal supply curve. That case is shown in the accompanying graph.) This is more plausible than the first case. It would happen, or come close to happening, if the exporters of the good had very good alternatives for selling their product. Here’s the interesting tension. If you’ve paid much attention to what’s happening in Canada, as I have, you know that many Canadians are upset about Donald Trump’s threatened tariffs. But if importers bear the whole burden, Canadians shouldn’t be upset at all. If the demand curve for their exports is completely inelastic, then, even with a tariff rate of 25%, they will make the same amount of money selling the same exact number of exported goods as if the tariff rate were the same as it is today, which is typically well below 25%. If, on the other hand, the supply curve is perfectly elastic, exporters in Canada will not export as much as they did to the United States, but they will sell the same number of goods for the same price net of tariff that they would have earned before the tariff. They might sell them to people in other countries or to people in Canada, but their sales and net revenues will be unaffected. My reasoning above means that either Canadians are getting upset over nothing, which is possible, or that the burden of a 25% tariff would be split between Canadians and Americans. My inclination is to believe the latter. I’m quite willing to believe, as I wrote in my earlier mentioned article, that it’s not an even split, specifically that Americans would bear most of the burden. But, as I noted in that article, even if Americans bear 80% of the burden, the large difference in population between Canada and the United States means that the burden per person and per household would be much higher in Canada than in the United States. Here’s what I wrote about relative burdens in that article: The $95 billion loss to US consumers would be spread over approximately 340 million people, for a per capita loss of $279. That’s not a large number, but the cost to the average household (which has 2.5 people) would be $699. The $23.75 billion loss to Canada would be spread over approximately 41 million Canadians, for a per capita loss of $579 and a per household loss (the average household size in Canada is also 2.5) of $1,448. (0 COMMENTS)

“I give you the toast of the Royal Economic Society, of economics and economists, who are the trustees not of civilization, but of the possibility of civilization.” John Maynard Keynes, quoted in Dwight E. Robinson, “Economics and ‘The Possibility of Civilization’” Four Judgments, Quarterly Journal of Economics 67(1), Feb 1953, pp. 50-75, p. 50   Look around you. No doubt you see people doing things that don’t make much sense when you think about it. Middle-aged people (like me) talk about wanting to be healthy but then (like me) still too often eat like they’re still in High School. People talk about wanting a job and don’t seek one. People litter. People throw things away that could be recycled. There’s homelessness. Jobs are especially scarce for black teenagers. The world, it seems, doesn’t make sense because it’s filled with fools and knaves. If only we could find the right strong man or woman who can make a plan and make it work… A lot of that, I suspect, is the product of a price structure that rewards what looks like foolishness and knavery. When we get the prices right, however, what looks “foolish” isn’t necessarily foolish, and what looks knavish might be relatively easy to explain. Consider littering. It drives me crazy: in the 1980s, I imbibed messages telling us not to litter or waste energy or water. The fastest way to annoy me is to leave a room without turning the light off or to leave a faucet running for no discernable purpose. I hate seeing people throw food away, especially when I paid for it.  Why are people such inconsiderate jerks? More specifically, why don’t they all do what I want them to do when I want them to do it? Don’t they realize that those like me know how they should now live better than they do?  The fault lies not in our stars and only sort of in ourselves. The fault lies mainly in our incentives. I won’t get into what prices do, how they work, etc. I’ve covered that in-depth before. Here are just a few examples. Rather, I want to highlight an unintended social spillover from forsaking the price mechanism: the erosion of the social fabric and the dissolution of the bonds that make civilization possible. Look at your Facebook and Twitter feeds for a second. Glance at Nextdoor.com. You’ll see many posts decrying other people’s selfishness or foolishness. We have long lines outside gas stations because people are greedy and only interested in themselves. People “don’t want to work anymore” because they’re lazy. People support this or that foolish thing du jour because they are fools.  Frequently, however, we would do well to ask about people’s incentives. What incentive do people have not to support the stupid thing? Campaign advertisements are clear examples of what Joseph Schumpeter meant by people moving to a lower level of mental performance when political questions are on the table. I’ve followed Bryan Caplan in building a bit of a bubble that insulates me from political campaigns, but it’s important to consider people’s incentives when asking why they vote the way they do. Since a single vote is supremely unlikely to be decisive, we have very weak incentives to develop epistemically justified true beliefs about what is conducive to the common good. Instead, we rely on gut reactions and simple heuristics. “Gee, Candidate Betty Blue wants to help the children! I also want to help the children! I’m voting for Betty Blue!” “Candidate Rhonda Red likes guns? I also like guns! I’m voting for Rhonda Red!” Schumpeter notes that people regularly indulge in modes of thinking and heed “arguments” they would rightly dismiss as silly in just about any other context. Our family spends a lot of time in Birmingham’s Avondale Park. Like any city park, there’s a bit of a litter problem. It needn’t be because people carelessly toss beer cans in the grass when finished. On busy days or weekends (especially during youth baseball season), garbage cans overflow, and anything light enough to be blown away ends up in the grass, the woods, or the pond. First, people face little social sanction for littering in the park. The cops are never around, and few people want to be the self-appointed litter police. The same thing happens when people feed ducks and geese in the park. There are giant signs bearing pictures of ducks that say “THANK YOU FOR NOT FEEDING US BREAD,” and explaining that it makes the animals sick and contributes to the green scum that makes the park pond smell bad and look worse. Naturally, it’s common to see people feeding the local wildlife bread, crackers, or other not-bird-friendly foods. Compare this to Disney World or just about any other theme park. It’s likely to be cleaner, and as the park owners have a clear incentive to keep the animals healthy, they likely have dedicated personnel to remind people (always with a smile!) that we’re not to feed the animals. I know I don’t want to be the litter or bread police. Maybe I should just carry around some birdseed or something. The social fabric frays when we don’t have clear, well-defined incentives and institutions. We turn against one another, seeing our fellows as fools and knaves when all they do is respond predictably to the incentives in place. John Maynard Keynes famously toasted “the economists” as “the trustees not of civilization, but of the possibility of civilization.” Understanding the roles of incentives, institutions, and information is one way we do that. (0 COMMENTS)

There is a fundamental misconception of international trade. Under different disguises and confusions, it is that the collective state trades, instead of individuals and private organizations trading. Recent illustrations are worth reporting. On his so-called “reciprocal tariffs,” President Trump declared (“Trump’s Next Round of Tariffs—25% on Steel and Aluminum—Won’t Be So Easily Averted,” Wall Street Journal, February 9, 2025): Very simple, they charge us, we charge them. Translating the grandiose “we” into actual reality, what he is saying is, “very simple, a foreign state charges tariffs on American exports, the American state taxes the foreign state’s exports to America.” College economics students know that a tariff is a tax charged to importers when a good enters the country and that this tax is generally transferred to domestic consumers by way of an equivalent price increase. So what Trump is really saying is, “very simple, a foreign state charges a tax on its residents, my own state will charge an equivalent tax to our own residents.” Your tribe or collective harms its own, the tribe or collective I run will cause an equivalent harm to its members; it’s that simple. Not only does elementary economic theory demonstrate this conclusion, but it is continually confirmed by experience to the point where the mere announcement or expectation of domestic tariffs starts pushing up the price of the imported goods and of the substitute domestic goods. In the Wall Street Journal, Greg Ip writes (“Inflation Helped Trump Get Elected. Now It’s His Problem,” February 13, 2025): This week, [Trump] announced 25% tariffs on all imported steel and aluminum and said reciprocal tariffs on a wider range of products and countries are in the works. Importers and suppliers are already reacting. Steel companies have already raised prices. Since Trump’s tariff announcement, futures contracts tied to an index of Midwest steel prices have risen about 6%. Instead of “steel companies have already raised prices,” it would be more exact to say that domestic steel buyers are already bidding up the price of steel in the expectation of tighter quantities in the domestic market. Another recent case is perhaps even more revealing of the collectivist nature of protectionism. (Let’s not be scared of the word “collectivist.” Communist countries, including the old Soviet Union, claim the collectivist label precisely to emphasize the primacy of collective choices over individual and private choices; but it is still collectivism when the degree or scope of the collective’s supremacy is smaller. It’s a matter of degree.) On February 1, the White House published a fact sheet titled “President Donald J. Trump Imposes Tariffs on Imports from Canada, Mexico, and China,” in which we read: Access to the American market is a privilege. What does that mean? The foreign business of an American citizen, or one in which he holds shares, may not export its ware to Americans living in America without the American government’s permission? An American living in America may not, without his government’s permission, import what he wants at terms freely agreed to with a foreign producer or even an American producing abroad? A foreign producer may not offer Americans what they want to buy? In other words, certain trading activities are, for foreigners and Americans, a privilege granted by the collective (or its representative), which may also take a cut (a tariff) on the trade. This is a quite extraordinary and shameless statement. Trade is exchange. What about the American market for friendship or dating? Is access to this (even virtual) market a privilege for foreigners? As we can see, the basic error is to conceive international trade as trade conducted by “countries.” The normative dimension of this error is that the liberty to trade should be located not in individuals and their private organizations, but in a collective right controlled by the state. This is not compatible with a free society, which is a society of free individuals. Visualize two private parties voluntarily and indeed reciprocally trading with each other—say, a poor American in Appalachia and a much poorer worker in Thailand or Vietnam— exchanging American dollars against a textile product through an intermediary such as Walmart. We can say: the man (both men) is liberty! The woman (both women) is liberty! Compare this situation with the power of politicians to decide whether or not, or under which conditions, the exchange will be allowed to proceed. It is not pejoratively but admiratively (we can imagine his mouth open with awe) that Howard Lutnick, now Commerce Secretary, was speaking about Donald Trump (“‘He Is Power’: Billionaires Line Up for Donald Trump’s Inauguration,” Financial Times, January 20, 2025): “The man is power,” said Lutnick of Trump in a speech on Monday at the Capital One arena, where the president’s supporters gathered to watch him being sworn in. “He is power.” ****************************** Brave New World: Two collectives are exchanging (0 COMMENTS)

  Let’s quit producing both the penny and the nickel. On Super Bowl Sunday, President Trump announced that the federal government would stop producing pennies. Good for him. This is long overdue. This week, I contacted a former Marine student, Stephanie King, who, in 2006, had approached me with a thesis topic. Often when students had ideas for thesis topics that other faculty found strange or unusual, the faculty would recommend that the student come to me, probably because they regarded me as strange and unusual. I prefer to call it open-minded. Stephanie told me that she wanted to write a thesis arguing for getting rid of the penny. I don’t tend to say yes to thesis topics for which the person already knows the answer he or she wants. I need to see a solid case in such situations. So I asked questions. The big one was, “What does it cost to produce a penny?” Once Stephanie answered that the cost had already exceeded one cent, I agreed to supervise her thesis. It was a pleasant experience. I always liked supervising theses for which the authors were motivated and knew where they wanted to go. The thesis is titled, “Common Cents? The Role of Pennies in the U.S. Economy,” December 2006. It can be found here. Here’s the abstract of her thesis: This thesis analyzes the impact that the elimination of pennies would have on the U.S. and global economies. This analysis is then compared to the Department of Defense’s policy of not utilizing pennies in any of its overseas bases, and examines the pros and cons of this course of action on the exchanges and its customers. The objective of this thesis is to identify the financial burden, if any, of maintaining pennies in the U.S. currency to both the government and its citizens. The body of this thesis explores whether or not the U.S. government should continue the production and use of pennies or if the DOD’s model could work in the greater economy. This thesis finds that the soundest approach the government could take to deal with this issue is the current legislation proposed by Arizona Representative Kolbe, who proposes that the government stop producing pennies, and that businesses utilize the rounding approach to deal with all transactions ending in cents. And here’s one of the key paragraphs: Every year, the U.S. Mint produces millions of new pennies to place into circulation. The penny is the most produced coin, yet it is the least circulated currency in the U.S. economy. If this is the case, it is easy to wonder why the government continues to produce new pennies. Historically, the production of pennies and their subsequent sale to banks has resulted in big money for the government, in the form of seigniorage. In recent years, this profit has decreased significantly from what it was in the past, primarily due to the rise in the cost of copper and zinc which is used to produce the penny. In May 2006, the U.S. Mint announced that by the end of the fiscal year, the penny would cost more to produce than what its face value was worth. Hence, this seigniorage would no longer exist. Not only would the government not be earning any profits from the production of pennies, but it would also be losing money by producing them. As a result, the government would be subsidizing the production of pennies, even though they are the least circulated currency in the economy. The cost of producing a penny has increased substantially, as Timothy Taylor, the Conversable Economist, recently noted. Indeed, as Tim showed, it’s also now time to quit producing the nickel.   (0 COMMENTS)

Under the US Constitution, Congress is supposed to set tariff rates.  But our government stopped paying attention to the Constitution long ago, so we also need to think about the implications of the president’s views on tariffs.  Here’s Fortune magazine: Still, Trump blames the VAT for the U.S. trade deficit with the European Union, which hit $236 billion in 2024, according to the Census Bureau, second only to China.“A VAT tax is a tariff,” Trump told reporters Thursday.That’s not true. A tariff is a tax on imports, while the VAT is simply a tax on all domestic consumption, regardless of where the good or service is produced. In the end, the only major difference between a value-added tax and a sales tax is the way in which it’s collected. So what might have led the president to make a statement that conflicts with reality?  It might be related to an equation that seems to cause all sorts of confusion: GDP = C + I + G + (X – M) Because imports (M) show up in this equation with a minus sign, many people wrongly assume that imports tend to reduce GDP.  Not so, imports have no direct effect on GDP, as they also show up as a positive in either consumption or investment (if the imported product is a capital good.)  A VAT is a tax on all consumption, regardless of where the product is produced.  There are two ways to collect a consumption tax.  In America, we collect the tax at the point of purchase.  In Europe, the tax is applied to both domestic production of consumer goods, and also to consumer goods imported from elsewhere.  Because the VAT does not discriminate between domestic and foreign production, it is not a tariff. The sky is not green, it’s blue. And a value added tax is not a tariff.  President Trump once suggested that ‘tariff’ is the most beautiful word in the dictionary, hence you might expect him to know what a tariff actually is.   You can argue that the president should have a lot of power in order to “get things done.”  You can argue that a president cannot be expected to understand basic economic principles.  But you cannot argue both points at once.   In my view, tariff is one of our ugliest words, associated with ignorance, xenophobia, statism and nationalism. (1 COMMENTS)

A review of John A. Shivik, Mousy Cats and Sheepish Coyotes: The Science of Animal Personalities, (Beacon Press, 2017)   Economists can learn a lot from non-economists. Biologist and animal rescuer John Shivik’s charming 2017 book Mousy Cats and Sheepish Coyotes is an excellent example. He, likely unintentionally, offers two deep insights for economists. First, Shivik shows that individual dignity is important, and not just for humans. Second, he offers vivid examples of equilibrium as a process, rather than an end state. Shivik’s opening sentence sets the tone: “My cat, for all practical purposes, is an asshole.” Though a self-described dog person, Shivik reluctantly opens his heart to this unwelcome cat as his unique personality emerges. They communicate, develop routines, and bond with each other in ways no other two individuals could. As with our pets, so with other species. Shivik’s later stories of tagging coyotes and working with other animals are more vivid and less heartwarming, but are just as instructive in how different individual animals can be. They are unique, dignified individuals, same as humans. Economists can learn from this. The homo economicus species that inhabits economists’ perfect competition models is an automaton. It has no individuality and no free will. Its sole purpose is to maximize utility. It has all the individual personality of an equation. This lifeless view of humans is similar to the mechanistic view that Shivik warns against when it comes to other animal species. Humans have built civilizations and sent ourselves to space. Thanks to the written word, we can send messages thousands of years into the future. No automaton could have done this. People had to come up with new ideas. They had to build upon others’ work. They had to persuade other people that their new innovations were worthwhile. It took people demanding to be treated with dignity and agency, and treating others that way in return. In short, it takes personality. While humanity’s accomplishments go beyond other species, our differences with them are more of degree than of kind. Our individuality is far older than we are. This long heritage, which is millions of years older than our species, makes the case for individual dignity even stronger than most classical liberal economists already believe. A fascinating question that Shivik discusses frequently, but does not develop fully, is why one personality type never dominates an entire species. In any given species, some individuals are more timid, and some are more aggressive. If one personality type consistently outcompeted the other, then the less fit personality type would go extinct. This almost never happens. Why is that? If every individual is aggressive, their species will die out because they spend too much energy fighting each other over status, mates, and food, leaving too little left over for finding those things in the first place. This type of environment creates an opening for more timid members on the sidelines to pass on their genes.  The same thing applies at the other end of the spectrum. An all-timid species might starve or go extinct because its members would not take enough chances. This would provide a natural opening for more aggressive personalities to take food and mates for themselves.  Instead of one personality type dominating, both always coexist. Shivik never uses economic terminology, but this is a fantastic example of a natural equilibrating process. Somewhere, Walras is smiling. At the same time this push-and-pull process is going on, natural periods of abundance and scarcity also constantly shift the advantage between aggressive and timid personality types.  Aggressive personalities might survive better during hard times, because they are better at fighting over scarce resources. Timid individuals might do better during abundant periods, because by avoiding conflict they tend to live longer. Shivik hasn’t just unintentionally described a static equilibrium model, he shows a dynamic equilibrium process that adapts to changing circumstances. Diverse individualism is an effective survival strategy, which is why nearly every species has it.  This is a fascinating insight, and an astute biologist or economist could spend a career exploring it. Instead of equilibrium generating uniformity, it generates all the unique individual traits we see in all animal species, not just humans. Personality types work a little bit like a cartel model in economics, which is a special case of equilibrium at work. Members of a cartel agree to restrict supplies and artificially raise prices. This opens opportunities for non-members to enter the market and take away the cartel’s customers by offering lower prices.  The higher the cartel price, the more that non-members can profit. It also becomes more likely that cartel members will cheat on their agreement by boosting supply or lowering prices.  This is why cartels like OPEC cannot sustain themselves without government help. Absent that interference, prices will return to equilibrium market levels.  Now substitute the word “aggressive” for “cartel member” and “timid” for “non-member,” or vice versa. The dynamic is pretty similar for different animal personalities within a species. If one personality type dominates, that creates openings for the other type, and then that dominance goes away. Any dominance that does emerge is temporary. This review has only explored simplified two-personality-type models. Shivik uses the Briggs-Meyers personality test throughout the book, which has four dimensions. He introduces the reader to individual animals that vary along all four dimensions, and to varying degrees. Just as every human is unique, so are all other animal species.  While an enterprising economist could build all sorts of sophisticated models around the insights Shivik touches on, the most important lesson from his book is his reminder of the importance of individual dignity, for both humans and animals.  Our human individuality did not come from a vacuum. It emerged from a long evolutionary process. Diversity isn’t just an ingredient of humanity, it is an ingredient of life itself.   Ryan Young is senior economist at the Competitive Enterprise Institute. (0 COMMENTS)