The FTC is rumored to be preparing legal action against Greystar, the largest landlord in the US, for “hidden fees”, also called “junk fees” (“FTC Prepares to Sue Largest U.S. Apartment Landlord Over Hidden Fees,” Wall Street Journal, January 13, 2025): The FTC finalized its hidden-fees rule last month and said it would seek civil penalties from firms that violated the rule. It mentioned the hotel and live-event ticketing sectors, requiring “up-front disclosure of total price including fees.” … If the potential FTC lawsuit proceeds, Greystar would become the first apartment landlord to face formal government allegations of hiding fees. One can imagine hidden fees that would be fraudulent: for example, you rent a hotel room and once there, you realize that there is no bed, except for a special fee (and they refuse to reimburse you). In reality, many so-called hidden fees are prices for supplementary services: you go to the theatre and, besides the entry ticket, you have to pay for the popcorn. Most hidden fees lie somewhere in between these two examples and people just get used to them. Everybody knows he has to pay a separate fee to check his baggage on a flight and a late payment fee if he does not pay a minimum amount when his credit card is due. In all cases except obvious fraud, instead of waging coercive power—and, ultimately, putting their boots on the ground: the cops—governments should heed the first principle of liberal logic advanced by Anthony de Jasay: “In case of doubt, abstain.” Ironically, the state (all levels of government) is the mother of all junk fees. Those are more difficult to avoid than private hidden fees. Here are a few examples taken at random: State governments typically control insurance prices, which leads to shortages (no insurance available at the controlled prices), which are in most states alleviated by some form of public insurance of last resort, which private insurance companies are forced to finance in case of cost overrun. The government will push on private insurance premiums a hidden fee that subsidizes the insurance of those who cannot buy private insurance because of government intervention. (See the case of California: “California’s Wildfire Insurance Catastrophe,” Wall Street Journal, January 10, 2025). Deadweight losses from taxes bring a misallocation of resources, meaning that the supply of some goods and services that consumers want will be restricted, forcing prices up as if by junk fees. An inflation tax results from a government bidding up resource prices when it finances part of its debt by increasing the money supply. This includes the increase in interest cost (for mortgages, for instance) due to the fear of future inflation—something that may currently be going on. Hidden fees follow from the price caps that, in most states and at the federal level, kick in after a declaration of emergency. Price caps generate shortages and search costs (a government junk fee) for those who want the goods that disappear from legal markets; the higher prices on black or grey markets are another government junk fee. Junk fees are hidden in any good or service whose price is bid up by government subsidies to certain categories of demanders, notably in health care. Among the non-retired and non-studying able-bodied persons in the lower quintile of the income distribution, only one-third word (compared to two-thirds in the 1960s); the obvious cause is that the average household in that quintile gets about $45,000 a year in different government subsidies, in cash or in kind, an important part of which is in free Medicaid. What’s the point of working and losing these benefits? The government-financed Medicaid demand introduces a hidden fee in everybody’s medical services. The same of course is true for a large part of Medicare. A similar government junk fee is paid by anybody who purchases education from his own pocket. Any business regulation—for example, the coercive privileges granted to trade unions—causes hidden fees because it increases the cost of the goods and services produced. Customs tariffs are typically paid by national consumers in terms of higher prices. Like other forms of protectionism, they generate junk fees. (The fact that the owners and workers of protected companies get a hidden subsidy does not compensate for the junk fee imposed on others.) In any promise honored by politicians, there is a junk fee for those who have to finance the beneficiaries’ advantages, whether this cost is a tax increase or an invisible reduction in his subjective utility. The promise to help one group of voters is generally (Anthony de Jasay would say “always”) paid by other voters. Last time I checked the Harmonized Tariff Schedule of the United States, Revision 8 of the 2019 edition, it contained 3,882 pages, and I am sure it does not translate into fewer junk fees now. A dozen years ago, the Internal Revenue Code contained 2,652 pages, to which the regulations, rulings, and other clarifications, added about 9,000 pages, according to the Tax Foundation. Here again, the number of hidden has likely continued to increase. The specific attack of the FTC on landlords’ “junk fees” may not be going anywhere (for now) because of the imminent change of government. Still, it illustrates another hidden fee in government intervention: the uncertainty created by the arbitrariness and constant changes in threatening laws and regulations. (0 COMMENTS)

Fellow economist Susan Woodward sent me this anecdote about Ronald Coase and gambling that I thought worth sharing. It led me to remember my own interesting story about gambling and one famous economist. Bob Hall [her husband] and I were talking about the 1987 Coase conference at Yale, which I attended but Bob did not. I was a major buddy of John Peterman (then the director of the Federal Trade Commission’s Bureau of Economics) who was a favorite student of Coase, and so I was seated by Coase at the dinner. We talked about what I was working on (at the Council of Economic Advisers) and I answered, “National lotteries.” I opposed them because I thought the government should lean against all gambling. (I was raised Protestant.) “No, no,” said Coase.  His mother had had a very hard life, but she had bought a state lottery ticket every week, and spent the weekend fantasizing about what she would do if she won.  It made her life much better!  The utility gain, he stated, is highest from a low probability but high payoff lottery.  Even if the odds are poor, state lotteries are good because they are honest. That changed my view.   Susan’s story reminded me of my own story. My mentor at Fortune magazine when I started writing frequently for Fortune in 1984 was Dan Seligman, the book review editor. [I’ve written about Dan’s mentoring here and here.] He also had a regular column called “Keeping Up.” Besides being a great writer, Dan had a great sense of humor and a solid understanding of economics. One more thing about Dan is that he loved gambling. So when people criticized gambling and, even worse, pushed to ban it, Dan didn’t like that. MIT Nobel Prize winner Paul Samuelson had written a negative statement about gambling. Samuelson stated, just as many economists and others maintain, that gambling is zero sum; what one side gains is exactly what the other side loses. But, as I said, Dan understood economics. He understood that if you observe people doing anything, they must like it. If they keep doing it, that’s further evidence that they like it. The fancy term economists use is “revealed preference.” Their actions reveal their preferences. In essence, what people leave out when they say that gambling is zero-sum is the pleasure people get from gambling. Not everyone gets that pleasure and those who don’t tend not to gamble. In his column, Seligman could have used the argument I just made. But he found a cleverer way of responding to Paul Samuelson. People who knew much about Samuelson knew that he loved playing tennis. Dan was one of those people. So he turned Samuelson’s anti-gambling argument against him. In tennis, argued Dan, when one side wins, the other side loses. So tennis is zero-sum. Should we then be critical of tennis and maybe even ban it? You might respond that people enjoy tennis. Exactly. (0 COMMENTS)

The title of this post is a nod to Alfred Marshall, who stressed that supply and demand analysis required we think about “both blades of the scissors.” Prices are not set by supply or demand alone – it is the interaction between the two that is crucial. It is for this reason Greg Mankiw once wisely commented that he was neither a supply-side economist nor a demand-side economist. He was a supply-and-demand economist. This came to mind because I recently saw a journalist make a remark on Twitter I’ve seen in numerous forms before. Speaking out against immigration, this journalist declared it was obvious that increases in immigration – legal or otherwise – would decrease the wages of American workers, because “the law of supply and demand applies to labor too: more labor means cheaper labor.” This is doing analysis with one blade of the scissors. And just as one-bladed scissors are terribly ineffective at being scissors, doing supply-and-demand analysis with only supply is equally ineffective. That’s why the term invoked by the aforementioned journalist is “the law of supply and demand.” We need to look at both blades of the scissors here. When the supply of labor increases, what happens to the demand for labor? Does it stay fixed? Well, no. This is because increasing the supply of labor also makes labor more productive. Adam Smith lays it out in the opening lines of The Wealth of Nations: The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour. The more workers there are, the more extensive the division of labor can become. The more extensive the division of labor becomes, the greater the “improvement in the productive powers of labour.” The greater the productive powers of labor become, the greater the demand for labor becomes. Thus, increases in the total size of the labor force don’t just shift the labor supply curve to the right. The labor demand curve also shifts to the right. This is true whether the increase in the labor supply is due to immigration, a proverbial “baby boom,” or the large-scale entry of women into the workforce. One example of this change in specialization can be seen in this paper by Giovanni Peri and Chad Sparber. They make the point that immigrant labor and native labor are not perfect substitutes. Immigrants and natives have different skill sets and strengths relative to each other, particularly in the market for workers with relatively little formal education. Native workers had advantages over immigrant workers in terms of communication and interaction skills, and native and immigrant workers specialized according to their comparative advantage. Thus as more immigrant workers began doing manual labor, more native workers shifted away from manual labor and into higher paying jobs in which they had a comparative advantage such as doing supervisory and coordination work. Thus, the division of labor reorganized along lines of greater specialization, increasing the productivity and efficiency of the labor force. This is just one of several mechanisms by which increases in the labor supply can increase labor productivity and wages. Another way to see this might be to look at it from the other side. Right now, a major concern for many thinkers is a sort of inversion of Paul Ehrlich’s life work – rather than a population bomb, they worry about an impending population implosion. One country with rather dire looking projections is South Korea. According to current projections, their population in 2100 should be similar to their population in 1950. But in 1950, the median age for South Korea was just under 18 years old, while in 2100 the median age is projected to be just under 60 years old, with only about half of the total present-day population. The total working-age population, then, is projected to crash pretty hard. When considering that kind of scenario, almost nobody feels tempted to respond “Wow, that will be so great for future generations! They’ll only have about half as many people engaged in productive work, and with such a low supply of workers, those workers will be so much wealthier because of it! After all, supply and demand applies to labor, so the fewer laborers there are, the wealthier laborers become!” Societies are impoverished, not enriched, by the loss of productive workers. And societies are enriched, not impoverished, by gaining them. (0 COMMENTS)

Tyler Cowen recently made the following comment: I still am glad we bought the Danish West Indies in 1917.  Nor do I hear many Danes, or island natives, complain about this. This issue has been revived due to discussion regarding the purchase of Greenland. So who got the better of that earlier deal? Or was it win-win?  It’s not obvious, but let’s start with a few facts:1. In 1917, we paid $25 million in gold, which today is worth a bit over $3 billion. (Denmark now has $5.6 billion in gold reserves.) That’s a non-trivial sum for a small country, but certainly not a game-changer.2. Reports suggest that the US was motivated by two factors, a desire for a place to host military bases to defend the Panama Canal, and a desire to prevent Germany from getting the islands. In my view, those objectives do not justify spending lots of money to buy some tiny Caribbean islands.  We could have used the Monroe Doctrine to prevent Germany from taking the islands.  Germany was tied down in a losing war in Europe, and in no position to challenge US supremacy in the Western Hemisphere.  And I don’t see the Virgin Islands playing an important role in defending the canal.   Of course, that doesn’t mean it was a good deal for Denmark or a bad deal for the US.  Even $3 billion is a modest sum for the US government, and the islands may have great value for other reasons, such as tourism.  For many years, it hosted a big oil refinery.  Nonetheless, I am confident that it was a very good deal for Denmark, and probably a bad deal for the US (although I’m less confident in that claim.) Denmark already has a big money pit in Greenland, which requires large subsidies.  The last thing they need is another money pit in the Caribbean.  I suspect that most Danes would prefer $3 billion in gold to those faraway islands.   The US case is trickier.  The original justification certainly doesn’t make much sense.  But what about today?  Aren’t these islands a nice tourist destination?  Yes they are.  I’ve never been there, but my wife and I enjoyed snorkeling in the British Virgin Islands.  So I see the appeal.  But the fact that we were able to have a nice holiday in the BVI suggests that ownership isn’t all that important—what matters is the ability to use a resource.  Thus in my view the US might be better off having a military base in an independent Greenland, perhaps even negotiating exclusive rights to military use of the island (to keep out China and Russia), rather than the burden of owning the whole thing.  As far as mineral resources, our firms can negotiate agreements with a Greenland or Danish government representative.  What exactly does ownership buy you, other than a big fiscal burden? One good objection to my argument is that it proves too much.  If all areas with a net fiscal burden were undesirable parts of the US, then we’d have to get rid of many states.  There are economies of scale in having a big national market and this helps the US prosper, even if some specific areas are below average.  I accept that counterargument, but I suspect it applies more the contiguous states in the lower 48, where low transport costs allow for a closely integrated market.  Due to factors such as the Jones Act, the US Virgin Islands are less closely integrated into the US economy, making it less likely that they contribute to our overall prosperity.  We do help the Virgin Islanders, but there are probably more utilitarian ways of helping the people of the Caribbean—such as smaller per person subsidies to a larger area. Another argument is that it’s nice to have some small idyllic Caribbean islands, to give America a greater level of geographic diversity.  But we already have nearby Vieques and Culebra, as well as the much larger Puerto Rico.  Here’s beautiful Culebra:    (0 COMMENTS)

  In the middle of the night your drunk father goes to the sugar bowl where your mother and you have put your savings and pulls out $1,000. He plans to spend $400 on booze and then waste the rest on various items. He spends the $400 on booze. But on the way home from the bar, he forgets what he planned to do with the remaining $600 in his pocket and falls asleep on a park bench. He’s lucky; no one steals his money and so when he gets home, he still has the $600. Should you feel happy or angry? My view is that you should feel angry that he spent the $400 but happy that he didn’t spend the remaining $600. Why am I asking this? Because I thought of this analogy when I read Peter Suderman’s cleverly titled blog post “Biden’s Legacy: He Didn’t Build That,” Reason, January 16, 2025. Suderman lays out a number of huge spending programs that Biden got going along with a Democratic Congress. Although the money was authorized, much of it hasn’t been spent. A key sentence: According to Politico, Congress authorized more than $1 trillion in spending for Biden’s major climate, clean energy, and infrastructure programs, but more than half of it “has yet to be obligated or is not yet available for agencies to spend.” The drunk father didn’t spend it all. Which means, as Suderman writes: Many of the big projects that received either subsidies or tax breaks under Biden are still essentially imaginary, and some may not happen at all, depending on what President-elect Donald Trump and Republicans in Congress choose to pursue. I’m like the kid who put savings in the sugar bowl: I’m happy that it hasn’t all been spent. (0 COMMENTS)

The federal government’s $36 trillion debt isn’t just a fiscal issue—it’s a direct threat to economic freedom and prosperity. Every dollar borrowed is taken from us and future generations, limiting opportunities for growth and innovation. But there are more poor policies at the federal, state, and local levels stifling opportunity, which should be addressed in 2025. My economic foundation, rooted in the works of Milton Friedman, Friedrich Hayek, Thomas Sowell, James Buchanan, Douglass North, and others, demonstrates a clear path forward: reduce spending, limit government overreach, and empower individuals over bureaucracies. Milton Friedman taught that economic freedom is fundamental to prosperity, emphasizing lower taxes, restrained spending, and free-market solutions. Friedrich Hayek warned against centralized planning, which replaces individual decision-making with bureaucratic mandates. Thomas Sowell highlighted how market-based solutions like school choice can address systemic failures. James Buchanan noted how politicians and rent-seekers are rational but misguided and distort market activity. Douglass North explained the importance of institutions for people to prosper.  These lessons remind us that when the government grows, freedom shrinks. We should remember this again; policymakers at every level should abide by these lessons. Cut Spending, Restore Freedom Excessive government spending fuels debt and inflation, harming individuals and businesses. Programs grow unchecked, often delivering diminishing returns. James Buchanan’s public choice theory explains this dynamic: politicians prioritize short-term gains over long-term solutions, leading to bloated budgets and waste. Fiscal discipline is the necessary path forward. Colorado offers a proven model. Its Taxpayer’s Bill of Rights (TABOR) limits government spending growth to population increases plus inflation and requires voter approval for tax hikes. TABOR has kept spending in check even as the state turned blue, refunded surpluses to taxpayers, and strengthened the state’s economy. Applying the TABOR’s principled approach–while strengthening it to cover all spending and using surpluses to reduce tax rates rather than send refunds–at federal, state, and local levels would rein in spending and give power back to taxpayers. Spending restraint must also target “entitlement” programs or sacred budget cows like Social Security, Medicare, Medicaid, defense, education, and transportation. Transitioning to personal accounts, implementing means-testing, raising age limits, and eliminating costly programs can ensure resources for the most vulnerable while reducing taxpayer burdens. Cutting unnecessary programs and laws like the Export-Import Bank, Jones Act, and many occupational licenses would further reduce waste and cronyism. Simplify Taxes, Let People Prosper Friedman’s vision of lower, flatter taxes is critical to restoring economic freedom. A simpler tax code eliminates distortions, encourages investment, and allows individuals to keep more of what they earn. High taxes discourage productivity and innovation, disproportionately hurting small businesses and entrepreneurs. A lower, flatter tax system would ensure fairness and efficiency. By reducing corporate and individual tax rates to zero and eliminating special-interest loopholes, we can promote growth and reduce the economic drag caused by the current tax system. Education Savings Accounts: Funding Students, Not Systems Education is a prime example of government inefficiency. Billions of dollars are spent annually on “public” schools, yet outcomes remain stagnant, leaving students and taxpayers shortchanged. Education Savings Accounts (ESAs) offer a transformative solution. With ESAs, education funding follows students, not systems. Families can use these funds for tuition, tutoring, or other educational needs. States like Arizona and Florida have implemented universal ESA programs, improving outcomes while reducing costs. Expanding ESAs should be done at the state level while getting the federal government out of schooling to empower parents, promote competition, and drive innovation in education. Thomas Sowell’s insights on choice and accountability reinforce this approach. By introducing market forces into education, we can break free from the bureaucratic systems that have failed students for decades. Deregulation: Unleashing Innovation Overregulation stifles economic growth and innovation, particularly in emerging fields like artificial intelligence. Friedrich Hayek’s warnings against centralized control are particularly relevant here. Heavy-handed government rules slow progress and reduce competition, while deregulation allows markets to flourish. Regulatory sandboxes provide a solution. These controlled environments let innovators develop and test technologies without burdensome restrictions. By fostering a culture of innovation, we empower entrepreneurs to solve challenges in healthcare, education, and beyond—where bureaucracies have repeatedly failed. However, these regulatory sandboxes are helpful only if they contribute to unleashing or keeping away harmful regulations. If they pick winners and losers, this is another barrier.  Artificial intelligence and emerging technologies can potentially transform industries and improve lives. To fully realize their potential, the government must take a light-touch approach, prioritizing transparency and accountability without stifling creativity. The Path Forward To tackle overspending by politicians and overfunding by taxpayers to support more prosperity, bold reforms are necessary: Adopt Strict Rules: Implement rules like TABOR to align federal spending with population growth and inflation and return surpluses through lower tax rates. Reform Entitlements: Transition programs like Social Security and Medicare to personal accounts. Simplify Taxes: Create a lower, flatter tax code to promote growth and reduce distortions. Expand School Choice: Use ESAs to empower families and improve education outcomes. Encourage Innovation: Deregulate emerging technologies and foster environments that reward creativity. Freedom to Prosper Excessive debt and government overreach are not inevitable—they result from policy choices. Choosing freedom means reducing spending, cutting taxes, and unleashing innovation. It means trusting individuals, not bureaucracies, to make the best decisions for themselves and their families. As Friedman observed, “The government solution to a problem is usually as bad as the problem.” By adopting policies prioritizing fiscal discipline, deregulation, and individual empowerment, we can reclaim economic freedom and build a society where people thrive. The path forward in 2025 is clear: let’s commit to policies that limit government, reduce spending, and ensure every individual has the opportunity to prosper.   Vance Ginn, Ph.D., is president of Ginn Economic Consulting, host of the Let People Prosper Show, and previously chief economist of the Trump White House’s OMB. Follow him on X.com at @VanceGinn. (0 COMMENTS)

I came across this article that I wrote over 20 years ago for a Canadian audience. It’s a propos now. I’ve made only small edits.   The main problem with the union of Canada and the United States is that it would reduce the number of competing political jurisdictions in the world. This is almost always bad. The more political jurisdictions we have competing for residents, the less oppressive any one of them can be. That’s why no state in United States has dared to set a marginal income tax rate in excess of 15%. If one were to do so, it would lose a large percent of its high earners. It’s also what constrains state governments to restrict the level of welfare payments. [Since I wrote this, California has come close to 15%. The reason the state government can do so, I think, is that it can take a lot of people’s money before they’re willing to leave for more-hostile weather.] If it raised them too high, it would gain residents, but the kind it would gain are those who want welfare, not those who are productive. Given how both state supreme courts and the U.S. Supreme Court have ignored many of the restraints on government in their Constitutions, this political competition is one of the few restraints left. This might come as a surprise to Canadians, who don’t see much political competition among provinces to keep tax rates low. They’re right in observing the empirical fact, but the empirical fact is itself evidence of what I’m saying. What limits competition among Canadian provinces is a huge implicit tax that the federal government puts on those provinces that keep tax rates low and a huge subsidy to those who set them high. The tax is called “equalization payments.” A province like Alberta that keeps tax rates low will see its per capita income rise more quickly than that of other provinces and will thus be a bigger net payer of equalization. A province like Newfoundland, Quebec, New Brunswick, or Manitoba that sets tax rates high and also hurts its economy in other ways will see its equalization payments to itself rise. So the federal policy has limited tax competition. This, incidentally, is why it was so important for former Treasury secretary Paul O’Neill to oppose (which he, fortunately, did) the EU’s (or the OECD’s–I’ve forgotten which) attempts to limit tax competition among nations. So those who want more economic freedom and the accompanying economic growth that goes with it should be pushing, not for mergers of countries, but for break-ups. That’s why, for example, I would like to see the United States break into smaller jurisdictions. We would get more political competition, lower tax rates, and, as a side benefit, a less powerful U.S. military (because there would no longer be a U.S.) There is a downside. Political jurisdictions that are independent tend to restrict trade across borders, something that states and provinces cannot legally do. But in this era of negotiated trade agreements to reduce tariffs, that is a far smaller danger than it was when the U.S. states were merged in 1787.   (0 COMMENTS)

I recently mentioned Diana Mutz’s book Winners and Losers: The Psychology of Foreign Trade and was struck by how people think of international trade as a competitive activity. Of course, I really shouldn’t be surprised by this. Over 30 years ago, Paul Krugman’s excellent essay “Competitiveness: A Dangerous Obsession” was published in Foreign Affairs. In it, Krugman laments that so many people think that “the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi”, and as an example of this misguided thinking quotes President Bill Clinton as saying that a country is “like a big corporation competing in the global marketplace.” Recently, co-blogger David Henderson published an article for Hoover asking if he is subsidizing Safeway: Am I subsidizing Safeway? Why would I ask? Here’s why. My wife and I spend at least $400 a month at Safeway. Safeway doesn’t buy anything from us. So, our monthly trade deficit with Safeway is at least $400. And, in Trump’s view of the world, a trade deficit equals a subsidy. By Trump’s reasoning, yes, I am subsidizing Safeway. Let me borrow this framing and apply it to competition and trade. My wife and I spend many hundreds of dollars per month at Target on groceries and various household items. Now, here’s the question – in doing this, am I engaging in “competition” with Target? By purchasing things from them, have I become their competitor? Obviously not – that would be absurd. I am not Target’s competitor, I am Target’s customer. Target is not competing with me – Target competes with HyVee, Lunds & Byerlys, Trader Joes, Amazon, and a variety of other stores for me. When Americans engage in trade with Canada, those are acts of customers purchasing from producers. It is simply not the case that “America” is “competing” with “Canada” when Americans and Canadians trade with each other, any more than I am competing with Target or Amazon when I trade with them. There is competition for trade, but trade itself is not a competition. It’s mutually beneficial cooperation. Now, of course, there is an element of international trade that does involve competition – the aforementioned competition for trade. If I want to buy lumber for my construction company, I might buy lumber from an American company or I might buy imported Canadian lumber. As a result, the American lumber company must compete with the Canadian company for me. But this is not a bad thing! After all, domestic trade also involves this same kind of competition. The benefits of competition don’t stop being benefits when it occurs across national borders. Particular American companies might be unable to compete and lose money and go out of business. This is true, and it can be devastating for those who lose their businesses and jobs. But this is also the case when American companies compete with each other! American companies have gone out of business as a result of domestic competition – that obviously doesn’t mean such competition is bad overall, or that the American economy would benefit if policymakers decided to prevent that competition from occurring. Apple has to compete with both Microsoft, an American company, and with Samsung, a Korean company. It’s simply not the case that the results of their competition with Samsung is bad for Americans but the results of their competition with Microsoft is good. It’s good in both cases, and for the same reasons. But “America” is not “competing” with “South Korea” when Americans buy Samsung phones or Koreans buy a new iPhone, any more than I am competing with Target when I make my weekly provisions run there. International trade can increase the scope of competition, but trade itself is not a competition, nor are nations competitors when the citizens of those nations trade with each other. (0 COMMENTS)

 Elon Musk and Vivek Ramaswamy, co-chairs of President-Elect Donald Trump’s Department of Government Efficiency (DOGE) initiative, intend to reduce federal spending by $2 trillion (over an undisclosed time period), along with a substantial reduction in the federal workforce. Musk, Ramaswamy, and their army of unpaid volunteer cost-cutters will likely fall miserably short of their admirable goals—for reasons that have been developed among public-choice economists over decades. To those who doubt my pessimism: Good Luck! One of Must and Ramaswamy’s most formidable challenges is to identify $2 trillion in cost savings from total projected outlays for fiscal 2025 of $7.3 trillion—with two-thirds of the total devoted to entitlements and interest payments, likely to be off-limits to DOGE’s cost cutters. But maybe DOGE’s cuts will be spread over serial annual budgets. Cost cutters will face other formidable challenges that could prove insurmountable, not the least of which is the political construction of “waste,” even though “waste” in federal spending is (seemingly) an obvious source of bipartisan support in an polarized polity. Even U.S. Senator John Fetterman has admonished his fellow Democrats to embrace DOGE goals. Who can be, and should be, against expenditure “waste” reduction, he asks (seemingly the fiscal equivalent of apple pie and motherhood?) No doubt, some government “waste” is the result of incompetence and fraud (the proverbial completed bridges to nowhere [overpasses and exchanges] that dot the country) but much of the “waste” is driven by rankest of rank politics, designed to serve special interests that are willing to pay (and have paid) politicians for the democratically approved “waste,” meaning overpayments embedded in federal contracts (dubbed rents by economist Gordon Tullock in the 1960s) intended to offset special interest groups’ campaign contributions to their well-placed political advocates. The notorious hammer that the Pentagon (supposedly) bought decades ago for $700 has long been the poster child for excessive rent seeking by a host of special interests. Critics presume that the Pentagon could and would have bought hammers at Home Depot, but that’s hardly the case for Pentagon-procured hammers ordered with precise specifications, made by companies compliant with a host of government regulations and need to recover their political contributions—with all of the rent seeking often hidden from public scrutiny in massive reconciliation bills that can run thousands of pages to obscure the “political pork” designed to pay back a hosts of special interests (as most recently defeated reconciliation bill that was defeated in December 2024 and trimmed to a hundred pages). Moreover, as economist Dwight Lee observed decades ago, government budged “waste” can—and does—serve much the same purpose in politics that profits serve in business: Government waste (or rents) can move people to produce public goods (defense and CO2 reductions, for example) that might otherwise have gone underproduced. DOGE enthusiasts should remember that many identified dollars of “waste” will be dollars of political “profit” to interests groups. Understandably, Musk and Ramaswamy will face a multitude of special-interest lobbyists, many of whom may have likely already booked additional flights to D.C. with the intent of marshalling their political connections to protect their rents from DOGE, perhaps sending out dire PR warnings that cutting their waste (rents) is an “existential threat” to national security—not to mention their stock prices![i] Many “waste” beneficiaries will now feel entitled to their rents on the grounds they have “pre-paid” for them with past political contributions. They likely will object for much the same reason Tesla owners would protest DOGE efforts to claw-back their already-received and spent Tesla subsidies. Why? Perhaps because a new study emerges that shows conclusively that they were an ineffective climate-change boondoggle! Even if Musk and Ramaswamy are (partially) successful, their success (such as their recent efforts to can the continuing resolution loaded with $200 billion in “pork” spending) could be short-lived, mainly because DOGE backers’ now vocal commitment to government cost cutting will likely be short-lived (with their unpaid volunteers understandably committed to only a few months of service). Sooner or later, the cost-cutters will need to return to managing their businesses and wealth portfolios and earning a living. Special interests’ incentives, on the other hand, for maintaining and increasing their rents will be . . .well, enduring. I hear the objections: “The public will rise up in arms to press for cost savings and tax reductions.” The political problem? Members of the public may want cost savings, but they have precious little incentive, individually, to actively promote them. Special interests (Boeing, GM, and unions), however, have concentrated interests in maintaining their rents for their firms and industries. The politics of DOGE’s efforts will obviously be lopsided—with considerable pessimism warranted. My pessimism has been fortified by a recognition that the Trump/Musk/Ramaswamy coalition, now seemingly bolted together by their shared interest in cost-cutting, could fray early by their different orientation: Trump has to be interested in the politics of cost-cutting, given his broad agenda goals (beyond waste cutting). He needs congressional supporters (and can’t lose more than a handful of votes) on a series of agenda items. Musk and Ramaswamy are likely more intensely focused in achieving DOGE goals, not on Republicans winning the 2026 or 2028 elections. They won’t be judged for long on the fall-off of the entry of illegal immigrants. Expect political tensions to fray their coalition, if not cause it to dissolve in terms of achieving cost-cutting goals (beyond face-saving cuts with PR value). I fear that the best that can be achieved will be a slight reduction in the growth rate of waste.   Richard McKenzie is a professor of economics emeritus in the Merage School of Business at the University of California, Irvine and author of Reality Is Tricky: Contrarian Takes on Contested Economic Issues.   [i]At this writing December 2024, Coke, Pepsi, Mountain Dew and other soda producers have already started a campaign to prevent the Trump administration from taking sugared sodas off the approved list for purchased by food stamp recipients. (0 COMMENTS)

Ryan Bourne recently edited a book that examines various types of price controls, and more broadly looks at the recent increase in hostility toward allowing markets to set prices. Here’s Bourne from pages 88-89 of The War on Prices: [N]o planner can harness the knowledge necessary to effectively allocate goods and services to their highest-valued uses . . . Unlike a central planner, a market economy, through its price mechanism, can harness this knowledge . . . . As George Mason University economist Alex Tabarrok puts it, “Prices are a signal wrapped up in an incentive.” This Matt Yglesias post caught my eye: In previous posts, I’ve argued that the difference between left and right wing liberals is that the latter have a better understanding of the virtues of the price system.  Left wing liberals (called progressives in America) tend to overestimate the extent to which government planners are able to improve on market outcomes.  This is because economics is full of cognitive illusions—things are often not what they seem.  I am surprised by how often I encounter even right wing people who are outraged by market outcomes such as price gouging, or insurance companies dropping coverage (because regulators won’t allow them to earn a profit.)   I often get angry with my home insurance company, so I can certainly sympathize.  But in the back of my mind I always maintain awareness that the root cause of my anger is the refusal of California regulators to allow “capitalism between consenting adults”.  I’d like to buy a smaller home insurance policy, but my insurance agent tells me that regulation prevents those sorts of policies from being offered.  You are not allowed to insure you house at 50% of fair market value, but you are allowed to not buy any insurance at all.  Very strange. In the next few weeks, we can expect lots of articles about how landlords in LA are “price gouging”, due to the recent fire.  I encourage people to read The War on Prices if they wish to learn about the consequences of government price controls. (0 COMMENTS)