A throwaway comment at the end of my previous post may have been misunderstood. So today I’ll provide a more complete interpretation of the market response to the recent election. There were a number of significant market responses to the election, including:1.  Significantly higher stock prices2. A stronger dollar3. Higher interest rates4. Higher inflation expectations in the TIPS marketI made a sarcastic remark about how the press treated this as a positive reaction to the election. I actually think it is a somewhat positive reaction, but it’s hard to square that view with the media’s pre-election commentary on the state of the economy. Over the past year, there have been many press reports indicating that the public had a very negative view of the state of the economy. If someone responded “But stocks are hitting record highs”, they were shouted down. The general view was that the public doesn’t care about a booming jobs market, or rapid GDP growth, or record stock prices. For the average person, the only thing that matters is the high inflation of 2021-23.  (To be clear, this is not how I view the economy.)And perhaps that’s true! Maybe that is the only thing that the public cares about, at least at the current moment in time. But if that’s the case, then Wall Street’s reaction to the election was clearly negative, as inflation expectations rose on the news.Now let’s think about why markets responded as they did. The sharp rise in stock prices is almost certainly at least partly linked to expectations of lower taxes on corporate income, at least relative to the Democratic alternative. In that case, the response was probably not just due to Trump’s election, but also to the GOP taking the House and Senate. Prior to the election, the House was viewed as being something of a toss-up. It is also possible that stocks rose on expectations of stronger GDP growth. Some of Trump’s policies (income tax cuts and deregulation) would produce stronger growth, while other policies (tariffs, lower immigration, and expulsion of illegals) would produce slower growth. This is a sort of mirror image of the Biden period, where GDP growth was strong due to high rates of immigration, despite a move toward more regulation of business.In my view, the higher inflation expectations reflect the expected impact of tariffs. In principle, the Fed could offset the effect of tariffs, but because of their “dual mandate” they would likely allow at least some of the tariffs to pass through in higher prices.The stronger dollar also reflects expectations of higher tariffs. Tariffs do not reduce the trade deficit (which is caused by a savings/investment imbalance), because the dollar appreciates enough to offset the gain to domestic producers from higher trade barriers.Higher interest rates likely reflect expectations of bigger budget deficits. Both candidates proposed policies that would have worsened the deficit, but Trump’s proposals were even more extreme, largely due to his support for much lower corporate and personal income taxes, at least compared to the Democratic alternative.Stocks have continued to rise even after the election results were known. (BTW, I believe the markets almost immediately understood that the GOP had taken the House, even though the media would not call this until more votes were in.) I suspect the delayed market reaction partly reflects subsequent statements by Trump insiders that some of his more radical proposals such as higher tariffs might be dialed back, or used as a negotiating tool.Market reactions are always provisional. They reflect the change in market valuation based on investors’ best guess as to the value of companies before and after a piece of news comes in. But nothing is ever final. News will continue to come in as the new administration’s plans become clearer, and markets will continue to evaluate that news and reprice assets on the basis of the new information.PS. I was a bit disappointed to see the stock prices of Fannie Mae and Freddie Mac rise very sharply on the election news. I’ve long been in favor of abolishing those examples of crony capitalism, but it seems they are actually likely to be further helped by the government. I worry that our financial system’s moral hazard problem will get even worse. (0 COMMENTS)

The 20th century produced fictional dystopias besides real ones, yet the best known – like George Orwell’s Nineteen Eighty-Four – originated in liberal democracies. All, however, owe much to a novel from one from one of the real dystopias, We, by the Soviet Union’s Yevgeny Zamyatin. Born in 1887, Zamyatin became a  Bolshevik while a student, was arrested during the 1905 revolution, exiled twice from St Petersburg, and tried for “maligning the Russian officer corps” with his satires of army life. His hopes that the 1917 revolution would bring artistic freedom were quickly disappointed: The revolution had not liberated artists, instead they now had to create art to serve the revolution. In 1921, he wrote:  Much has been said by many about the imperfection of the universe…its astonishing lack of monism: water and fire, mountains and abysses, saints and sinners. What absolute simplicity, what happiness, unclouded by any thought, there would have been if [God] had from the very first created a single firewater, if he had from the first spared man the savage state of freedom! …We are unquestionably living in a cosmic era – an era of creation of a new heaven and a new earth. And naturally we will not repeat [His] mistake. There shall be no more polyphony or dissonances. There shall only be majestic, monumental, all-encompassing unanimity. In We, written in 1920-1921, Zamyatin explored these fears. It is set in the One State in the far future, where, its protagonist, D-503, writes: Every morning, with six-wheeled precision, at the same hour and the same moment, we – millions of us – get up as one. At the same hour, in million-headed unison, we start work; and in million-headed unison we end it. And, fused into a single million-handed body, at the same second, designated by the Table, we lift our spoons to our mouths. At the same second, designated by the Table, we lift our spoons to our mouths. At the same second, we come out for our walk, go to the auditorium, go to the hall for Taylor exercises, fall asleep… The “right” to lower ones shades: …is granted only on sexual days. At all other times we live behind our transparent walls that seem woven of gleaming air – we are always visible, always washed in light. We have nothing to conceal from one another. Besides, this makes much easier the difficult and noble task of the Guardians. For who knows what might happen otherwise? Perhaps it was precisely those strange, opaque dwellings of the ancients that gave rise to their paltry cage psychology. “My (sic!) home is my castle.” What an idea! Indeed, D-503 is horrified by “those times when people still lived in a free, i.e., unorganized, savage condition.” In the Soviet Union’s early days, Zamyatin saw Edward Bellamy’s socialist utopia from Looking Backward: 2000–1887 being realized and hated it.  Like Adam – or Winston Smith – D-503 is lured into a doomed rebellion. “Those two, in paradise, were given a choice,” he is told, “happiness without freedom, or freedom without happiness.” Zamyatin assumes that the system works on its own terms, that it can guarantee happiness. History would show that he was mistaken, these systems produced neither happiness nor freedom. When Orwell was told by a supporter of Soviet repression “You can’t make an omelet without breaking eggs,” he replied, “Where’s the omelet?” We was denied publication, first appearing in English in 1924, and a reading to the Writer’s Union in 1923 drew attacks from Zamyatin’s fellow writers. Through the 1920s the state sponsored Russian Association of Proletarian Writers denounced him for “inconsonance with the revolution” and “vilification and slander” of revolutionary beliefs. He was “maligning” again. Fighting his own doomed rebellion, Zamyatin wrote of his fellow writers in 1926: “The Revolution does not need dogs who “sit up” in expectation of a handout or because they fear the whip.” Nevertheless, that is what it got. The flowering of Russian literature which began with Pushkin ended, at least for those writers who stayed in Russia. Wearied, Zamyatin left the Soviet Union in 1931, traveling to Paris where he died in 1937.  In 1962, Isaac Asimov wrote that American science fiction had seen three stages: “adventure dominant,” “technology dominant,” and “sociology dominant” while Soviet science fiction remained in stage two. “The Soviet people are told, and presumably believe, that they are building a new society which is bound, by the sheer attractiveness of its superior workability, to become the dominant society all over the world,” he wrote. “It would amount, then, almost to a lack of patriotism for a Soviet writer to suggest that other societies were possible in the future, or even to look too closely at the present one.” Asimov wasn’t quite correct. We is a stage three novel, one of the greatest of the century.       John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

It is not because preserving the rule of law is a French problem that it has no relevance for the United States. Quite the contrary. The current minister of the Interior, the top cop in France, recently declared (see Nicolas Bastuk and Samuel Dufay, “L’État de droit est-il sacré?” or “Is the Rule of Law Sacred?” in Le Point, October 10, 2024): The rule of law is neither untouchable nor sacred. [Its] source is the sovereign people. L’État de droit, ça n’est pas intangible ni sacré. [Sa] source, c’est le peuple souverain. The classical-liberal definition of the rule of law can be borrowed from Friedrich Hayek. In his Law, Legislation, and Liberty, he identified it with rules regulating the conduct of persons towards others, applicable to an unknown number of future instances and containing prohibitions delimiting the boundary of the protected domain of each person. The rule of law is a “government of laws” instead of a “government by men,” as the standard formula says. The so-called “sovereign people” itself is only a group of men. Hayek believed that, in the long run, as opposed to political mobs, these general rules or laws necessarily come from the opinion of “the people”—which introduces some indeterminacy in the distinction between the rule of law and popular sovereignty. But like all classical liberals, Hayek was still adamant that the people is not sovereign and must not be considered such, that is, it may not hold supreme or unlimited power. The idea that the rule of law is incompatible with the sovereignty of the people was forcefully expressed by Émile Faguet, a French literary critic and historian of political ideas, in his 1903 book Le Libéralisme (Liberalism): [My translation:] If the people is sovereign  by right, which is exactly what the authors of the Declarations [the 1789 Declaration of the Rights of Man and the Citizen, and the one of 1793], the people has the right, being sovereign, to abolish all individual rights. Such is the conflict. Putting in the same declaration the right of the people and the rights of man, sovereignty of the people and liberty for example, at the same level, is like putting water and fire and ask them to please work out their differences. … The authors of the Declarations, even of the less defective first one, were both democrats and liberals; they believed both in individual liberty and the sovereignty of the people. This led them to put in their work a fundamental antinomy. [Original French:] Si le droit du peuple, c’est la souveraineté, ce que précisément ont dit les rédacteurs des Déclarations, le peuple a le droit, en sa souveraineté, de supprimer tous les droits de l’individu. Et voilà le conflit. Mettre dans une même déclaration le droit du peuple et les droits de l’homme, la souveraineté du peuple et la liberté par exemple, à égal titre, c’est y mettre l’eau et le feu et les prier ensuite de vouloir bien s’arranger ensemble. […] Les auteurs des Déclarations, même de la première, quoique moins, étaient à la fois démocrates et libéraux, et ils croyaient à la fois à la liberté individuelle et à la souveraineté du peuple. Ils devaient mettre dans leur œuvre une antinomie fondamentale. Heirs of the Enlightenment like the French constitutional writers, the American founders committed the same error, even if they were more suspicious of popular sovereignty. The problem remains very relevant in today’s America. ****************************** La Liberté guidant le peuple (Liberty Leading the People), by Eugène Delacroix to commemorate the July Revolution of 1830, which toppled King Charles X (0 COMMENTS)

Alex Tabarrok has an excellent post at Marginal Revolution this morning explaining why he had and has confidence in prediction markets. It’s very hard to argue, while predicting, against people who are putting their own money on their own predictions. Like Alex, I tracked those markets closely, which is why I was telling friends that I expected Donald Trump to win the presidential election and the Republicans to take the Senate. I also had my own personal prediction machine that told me Trump would win. Admittedly, it was after the polls had closed in the eastern time zone, but it was only a little while after. If you followed the election, you know that one of the big issues was which way Pennsylvania would go. If Donald Trump were to win Pennsylvania, he would likely win the national election. We all knew that it would be close but we were also told that it could take hours to count the Pennsylvania vote, as it did. But New Jersey abuts Pennsylvania. Why not, I thought, use New Jersey as a leading indicator of the vote in Pennsylvania? I said to my wife, while we were watching the results live, that if Donald Trump gained at least 4 more points in the popular vote in New Jersey than he gained against Biden in 2020, he would win Pennsylvania. Why? Because in 2020 Trump had lost Pennsylvania by only 1.2 percentage points. So with a gain of at least 4-points in New Jersey, relative to his share in 2020, he would likely get at least a 1-point margin in Pennsylvania. We found out early that Trump beat his 2020 New Jersey percentage by about 5 percentage points. He ended up getting a 2-point margin in Pennsylvania. I’m not saying that my method was better than the prediction markets: my method was clearly worse because it gave me results so much later. But it was way better than sitting there in the early evening PST or late evening EDT, wondering, like millions of Americans, who would win.   Note: By the way, I won $40 from a friend on Facebook and $10 from a neighbor, betting that Trump would win. I made these bets 2 to 3 days before the election, and what gave me confidence was the prediction markets. These are the ones I followed. (0 COMMENTS)

Economic planning, where the government uses policies such as taxation, subsidies, spending, or nationalization, in order to direct economic outcomes, is back in vogue.  Its proponents often liken economic planning to planning done by individuals in the economy.  The difference, they claim, is that national economic planning can help accomplish larger economic, national, or social goals that the individual wouldn’t. However, human beings are not infallible.  Even the best laid plans of mice and men run often go awry.  All plans, whether individual or centrally-derived, can fail.  Of course, economic planners recognize this fact.  In the case of failure, they often argue, the economic planner can just discard the current plan and readjust, just like the individual.  On its face, this argument sounds reasonable enough.  But this is a case where the economic way of thinking shines: incentives matter.   Identifying a plan’s failure can sometimes be straightforward (although, as Donald Boudreaux points out, it is not always obvious): if some goal is established and the goal is not reached, we can say the plan failed.  However, why the plan failed is often a hard question to answer: did the plan fail because it is inherently a bad plan?  Or did the plan fail because it was poorly executed?   Individual planners and economic planners face different incentives to understanding why a plan fails.  The individual planner, who faces most (if not all) of the costs and all of the benefits of their actions, faces strong incentives to figure out why a plan failed and whether it should be abandoned or not.  If my get-rich-quick plan is to sell tobacco-flavored toothpaste and nobody buys it, I face the incentive to figure out why.  If I keep investing my resources into tobacco-flavored toothpaste, I will certainly be made worse off: those resources have alternative uses and the benefits of using those resources to make tobacco-flavored toothpaste exceed the costs.  In other words, I have devoted too many resources to developing this product.  Given my goal (getting rich quick) and the fact I face the full cost of using those resources, I have the incentive to dump the plan as a failure and use my resources in a different way. Economic planners do not face the same incentives.  They face neither the full costs or the full benefits of their plans.  Consequently, they face perverse incentives to find out why the plan failed.  If some economic planner decided that the sale of tobacco-flavored toothpaste was a national priority, how might they react to the failure of the plan?  Perhaps, by some stroke of luck, they would realize that people do not want tobacco-flavored toothpaste and abandon the plan altogether.  More likely, however, the planner would likely conclude that too few resources were devoted to producing tobacco-flavored toothpaste rather than too many resources.  The planner may devote more resources toward advertising or other means to accomplish their plan.  This is especially true if their job, say as the Director of the Federal Agency to Promote Tobacco-Flavored Toothpaste, depends on the success of the plan.  In short, while the economic planner could realize their plan has failed and abandon it, the incentives are not aligned to make this outcome likely.   Tobacco-flavored toothpaste is a silly example, but we see this behavior all the time.  One example in particular comes to mind: the COVID-19 price controls.  During COVID-19, the Federal and many state governments imposed price controls on essential goods.  The logic was that it would preserve required equipment for hospitals and prevent price gouging.  However, shortages of these goods predictably appeared and hospitals had a difficult time acquiring the products.  Rather than recognize the plan had failed to increase goods available, the governments doubled down, blamed firms, and began prosecuting “hoarders” and “price gougers,” exacerbating the problem.  The shortages persisted and the very policies that created the failure remained (in fact, the policy actually made the pandemic worse).  The planners failed to see why their plan failed. Bad policies persist in both the private and the public sector.  Planners are unwilling or unable to admit their plans have failed and adjust.  Poor managers cause firms to fail, inability to adjust causes individuals to go bankrupt.  However, when individual plans fail, those resources are freed up to go to other uses.  When economic plans fail, the government planners often pull on more resources, increasing waste.   In conclusion, while it is possible that economic planning could work as a series of experiments, where the “good” are kept and the “bad” are discarded, we have little reason to think such an outcome is likely.  The incentives to understand why a plan has failed are simply not there.   Jon Murphy is an assistant professor of economics at Nicholls State University. (1 COMMENTS)

Lars Svensson has argued that monetary policymakers should “target the forecast”, which means they should set their policy at a position expected to lead to on-target inflation.Early in 2024, a few high inflation readings led to concern that we might not be on track for a soft landing. Inflation eased later in the year, and in September the Fed began cutting interest rates.  In recent weeks, however, 5-year inflation breakevens have been creeping upward, and yesterday they spiked up to 2.46%.  To be clear, this interest rate spread is based on the CPI, which runs a bit hotter than the PCE index targeted by the Fed.  Nonetheless, it suggests that inflation is still expected to run above of the Fed’s 2% target.  And while the Fed has a dual mandate, the labor market is also currently strong, and thus provides no justification for intentionally running inflation above target. Today, the Fed meets to discuss monetary policy. It will be interesting to see how they decide to react to the recent surge in TIPS spreads.  If they adhered to Lars Svensson’s target the forecast maxim, you’d expect them to tighten monetary policy.  It’s also worth considering how a NGDP futures targeting regime would handle this problem. Under current market conditions, I’d expect most investors to take a long position on NGDP futures, forcing the Fed to take a rather extreme short position and exposing the Fed to severe losses if NGDP growth overshoot the target.  But I also believe that the Fed would be unwilling to accept that risk, and would tighten policy enough to restore credibility in the financial markets. PS.  Many pundits believe that the election outcome was heavily influenced by public anger over inflation.  If so, the bond market reaction to the election was certainly something to think about.  If inflation is truly the issue that the public cares about most, then how should the media have described the market reaction to the election?  How did the media describe the market reaction to the election?  (To be clear, inflation is not the economic issue that I care about most.)  In other words, never reason from an inflation rate change. PPS.  Speaking of market forecasts, Alex Tabarrok has a great new post, with implications that go far beyond election prediction markets. (0 COMMENTS)

Joe Nocera and Bethany McLean’s The Big Fail: What the Pandemic Revealed About Who America Protects and Who It Leaves Behind has a lot of criticisms of how medical institutions operated during the pandemic (and also generally). One occasionally hears that the United States shows why a free market in health care can’t work. (I confess, this is a pet peeve of mine, because the health care system we have in the United States isn’t within a light year of a free market. Even if you’re convinced a free market in health care would genuinely be a terrible idea, it’s still wildly dishonest to claim that’s what the United States has.) Respectably, Nocera and McLean never quite describe the health care system in the United States as an example of free-market capitalism. The closest they come is referring it the system that exists as “a perverted version of free-market economics” or “a bastardization of capitalism.” Here’s one such example they give of this in action: The second reason the poor and the uninsured wind up in safety net hospitals is a series of public policy decisions that sound logical in theory but are both callous and misguided in practice. Take, for instance, the decision by many states to reduce the number of hospital beds. They did so believing that fewer beds would help control spiraling Medicare and Medicaid costs. Theoretically, that makes sense. But the game was rigged: the closure of hospitals was determined by their profitability, which had already been determined by government reimbursement policies. So, notes Alan Sager, the Boston University health-care management expert, the primary consequence of eliminating beds by closing entire hospitals was to further separate the wealthy hospitals, which were rarely affected, from the poor hospitals, which bore the brunt of the reductions. It was a classic example of a policy being handed down by elites who would never be affected by it and imposed on people who had no say in the decision. The result of this policy? “In fact, Medicare spending actually increased.” Why did this public policy aimed at reducing spending actually result in a spending increase? Here’s what the authors have to say: The answer was pretty simple: the kind of hospital that could be closed easily – the one with little or no power and prestige – was not the kind of hospital that was likely to save the government money. The same number of people were still going to need to visit a hospital; they would just have to visit one that was still open… …The same pattern played out across the country; hundreds of hospitals in disadvantaged neighborhoods were closed, ostensibly to save money, yet neither hospital costs nor overall health costs went down. All that was really accomplished was a massive reduction in hospital beds in neighborhoods that needed them. While a casual reader might breeze through the book and come away with the idea that it demonstrates markets don’t work in health care, a more careful reading of Nocera and McLean shows the problems they point to occur precisely because the peculiar ways government regulations structure the health care market. An entire book length treatment of that issue can be found in Christy Ford Chapin’s book Ensuring America’s Health: The Public Creation of the Corporate Health Care System. As Chapin puts it, Insurance companies occupy a central position in medical care. Insurers decide which services and procedures qualify for policy coverage, influence physician pay and hospital revenues by setting reimbursement fees, and shape medical practices by requires that health care providers follow treatment blueprints to obtain compensation. Many scholars have taken this authority for granted, assuming that insurance companies are filling an intrinsic role in private medical care. Yet the insurance company model was only one option among an array of organizational possibilities that might have structured the private market. And in comparison with alternative arrangements, the insurance company model has delivered medical services less efficiently and more expensively. So how did insurance companies acquire such a dominant role in health care? Politics – not the logic of the market – positioned insurance companies at the heart of American health care. Chapin shows how the health care system we have in America didn’t develop into its current form because that’s how a market in health care naturally organizes itself. It was structured, step by step, from the top down by an endless series of policies and policy reforms that created a system with the worst possible combination of incentives for all parties involved. Nocera and McLean are aware of this – they approvingly cite the book Overcharged: Why Americans Pay Too Much for Health Care, written by Charles Silver and David Hyman and published by the Cato Institute, arguing that the way the government has regulated and structured health care payments has resulted in an incredibly dysfunctional system. Nocera and McLean write: Indeed, the flaws in the payment system – and the government’s failure to fix them – essentially encouraged hospitals to extort the government. The foundational issue was that hospitals were historically paid by performing procedures and the more procedures they performed, the more money they made. The 1965 law that created Medicare and Medicaid did nothing to change that; on the contrary, instead of capping what it would pay for a procedure, the government agreed to pay hospitals on a cost-plus basis. (As an aside, Nocera and McLean find the “fee-for-service” model, where “the more procedures they performed, the more money they made” to be a serious cause of dysfunction in health care. And they’re on to something – as Johnathan Gruber aptly put it, “This issue is best summarized in the saying that having a doctor tell you how much medical care to get is kind of like having a butcher tell you how much red meat to eat. What we face in the United States is a broken fee-for-service health care system where physicians and providers are paid based on how much care they deliver, not on how healthy they make you.” But this fee-for-service system was, itself, created as a result of government regulation, as Chapin documents in her book.) Simplified, a cost-plus basis worked something like the following. The government would pay hospitals whatever it “cost” to perform some procedure, plus an extra percentage. Let’s just say 10% to make the  numbers easy. So if a hospital performed a procedure for $100, the government would pay the hospital $110, with the hospital gaining $10 for that procedure. But if the hospital instead spent $1,000 to perform the procedure, the government would pay the hospital $1,100 – a $100 gain rather than $10 gain. This method of payment gave hospitals a very strong incentive to inflate costs as much as they possibly could – which is exactly what happened. A similar issue was pointed out in an EconTalk episode where Russ Roberts interviewed Keith Smith of the Surgery Center of Oklahoma. As Michael Huemer summarized the problem: Later in the podcast, he describes some of the scams that go on in the industry. When hospitals claim that they were underpaid (the patient didn’t pay the full cost of treatment), they get money from the government. That sounds reasonable, right? They should be compensated for their good work. This has caused hospitals to jack up prices to absurd levels, so they can regularly claim they were paid only a tiny fraction of the costs, so they can get more money from the government. The hospitals make agreements with insurance companies whereby the insurance company only pays a fraction of the absurdly inflated price. This is all cool with the insurance companies too, because it enables them to claim that they negotiated unbelievable discounts (like an 80% or 90% discount) for their customers. It also makes it cost-prohibitive for a patient to get medical care without insurance, which is also fine with the insurance companies. Now, you may look at the way hospitals or insurance companies behave in response to these regulations and feel like they are deserving of condemnation. And you may also read what Nocera and McLean and feel the same way about the actions of the various medical organizations they describe. But I would suggest this is the wrong reaction. To quote an old adage I often heard in my younger years – don’t hate the player, hate the game. If the government writes a rulebook heavily incentivizing businesses to inflate costs, and then businesses responds to that incentive by inflating costs, the best response isn’t to yell at the business for responding to the incentives they are given. You should instead be upset with the people who wrote the rulebook and created those incentives. (1 COMMENTS)

We observe a strange phenomenon that does not only affect America but currently looks especially virulent in this country. (Before the fall of the Soviet empire, it was more noticeable in Europe.) When an election is coming, each of the two main competing sides shouts that if the other 50% (plus 1% or whatever) wins, catastrophes will happen. The phenomenon has gradually intensified. Each of the two sides seems right: the government has become so powerful that it can seriously harm the interests and lifestyles of either side’s members. Nobody seems secure in his liberty and security. It is not that the politicians of one side promise to do nothing (slogan: “We’ll let you pursue your peaceful activities and happiness”) while those on the other side intend to actively harm the opposing 50% (“We are coming after you”). If that were the case, we would understand that the side to be actively harmed and discriminated against would have good reasons to cry wolf; and we might realize that there is a moral and economic difference between not doing something to help somebody and to actively harm him. But this is not what is happening. Each side intends to actively harm one-half of the population by restricting what they want to do. The incantation that the new president will be the president of all (of all Syldavians) is a sham. He or she cannot be the president of all by taking sides for one half against the other half. “What can I do for you? What can I forbid or mandate that would please you?” The losing side of the election, whichever 50% it is, feels threatened and angry. And here is what’s most surprising: the losers do not conclude that the government should not have the power to harm them (whether they are 49% of the population or whatever); no, they conclude that their candidates must win next time to retaliate and satisfy their claims against the other tribe. From one election to the other, from one change of the guard to the other, government power continues to grow, and the population becomes more discontented. Granted that one-third of voting-age citizens do not vote, which does not prevent their liberty from being alternatively shrunk by one-third and then by the other third. The strange phenomenon is actually explainable, especially after the advances of public-choice analysis over the past seven decades. Once political authorities have gained enough power to significantly harm the losing side in its liberties and opportunities, once the domain of collective choice has sufficiently invaded the domain of individual choice, politics becomes the only game in town. For a couple of centuries, classical liberals and libertarians, whose insights are currently ignored, have argued against this absurd and dangerous race to power, like two angry would-be queens running to seize the throne. This system promotes politicization, conflict, and injustices, and represents a mounting threat to prosperity and liberty. Although liberals and libertarians continue to debate the exact limits of political power, their goal may be summarized by the motto live and let live. This is very different from competitive authoritarianism whether democratic or not. It is worth reflecting on Anthony de Jasay’s simultaneously radical and reasonable definition of (classical) liberalism as “a broad presumption of deciding individually any matter whose structure lends itself, with roughly comparable convenience, to both individual and collective choice.” Since the 18th century, economic analysis has demonstrated how individual choices with the right institutional background generate a free and autoregulated society. ****************************** The Red Queen and the Blue Queen running to seize the throne and harm the other’s followers (0 COMMENTS)

External effects such as air pollution are often cited as an example of a problem that can be usefully addressed by public policy.  In the real world, however, two factors cause externalities to be overemphasized as a justification for regulation: Transactions costs Motivated reasoning A recent article by Geoffrey Kabat in Reason magazine helps to illustrate both of these problems.  Back in 2003, Kabat and James Enstrom published a study showing that second hand smoke had no statistically significant effect on mortality.  According to Kabat, the reaction to their paper is a classic example of motivated reasoning: Since that conclusion flew in the face of the conventional wisdom that had long driven state and local bans on smoking in public places, our study understandably sparked a controversy in the public health community. But the intensity of the attack on us in the pages of a medical journal—by critics who were certain that our study had to be wrong but typically failed to provide specific evidence of fatal errors—vividly illustrates what can happen when policy preferences that have taken on the status of doctrine override rational scientific debate. . . . Exposure to ETS is known to cause eye and throat irritation and to exacerbate preexisting respiratory conditions. In addition, it is simply disagreeable to many people (including me). But assessing the claim that ETS is potentially deadly requires dispassionate examination of the available scientific evidence. Another example of motivated reasoning occurs when people complain that smokers lead to higher taxes due to spending on public health care, ignoring the offsetting fact that they live considerably shorter lives and thus collect smaller public pensions.  There are good reasons to be annoyed by smoking, but increased fiscal costs are not among them. Kabat points out that a new scientific study reached broadly similar conclusions regarding second hand smoke: A recent study by American Cancer Society (ACS) researchers underscores that point by showing that, contrary to what our critics asserted, the cancer risk posed by ETS is likely negligible. The authors present that striking result without remarking on it, which may reflect their reluctance to revisit a debate that anti-smoking activists and public health officials wrongly view as long settled. The other problem with second hand smoke legislation is that ignores the issue of transactions costs.  Ronald Coase showed that public policies to address externalities are only necessary when there are large transactions costs to negotiating a private resolution of the issue. To the extent that second hand smoke is a problem, it is almost entirely in indoor settings.  That means the problem can be most easily addressed by the owner of the property where the smoking occurs.  Governments can regulate second hand smoke in government buildings, and private owners can regulate second hand smoke in privately-owned buildings.  There is no obvious rationale for having the government regulate behavior in a privately-owned setting.  Property owners already have an incentive to regulate second hand smoke whenever the benefit to such a regulation exceeds the cost. This is not to to deny that there exist externalities that reflect market failures.  I favor carbon taxes to address global warming.  But even on that issue, which the private sector cannot easily address, I see many examples of motivated reasoning.  Proponents of “degrowth” seem motivated by a distaste for our modern industrial society, and use global warming as an excuse to push for a return to a simpler past.  Carbon taxes are not an appealing solution for people with that sort of agenda, as they would allow society to address global warming without giving up all of our modern conveniences. For some advocates of degrowth, the efficiency of carbon taxes would be a bug, not a feature. (0 COMMENTS)

  Yesterday, I posted over on my Substack on a long interview that my late Hoover Institution colleague Martin Anderson did about his time with Nixon. In it he revealed how quickly Nixon came to Marty’s position against the military draft in 1967, relatively shortly after meeting Marty. There’s lots more that’s fascinating in that interview. Marty talks at length about Ronald Reagan, who was very different from Nixon. Here’s one on Reagan’s intelligence and knowledge. I once described him as warmly ruthless. He had this appearance of being friendly and jovial and nice, never argued with anyone, never complained. But if you shook your head and thought about it a little bit, he always did it his way. It was like there was a steel bar right down the middle of him and everything you touched was soft and fuzzy except the steel bar in the middle. He always did it his way. No matter how many people talked to him, no matter what happened, he always did it his way. If you were in the way, you were gone, you were fired. He never took any pleasure out of it, just gone. I think if you really want to look at Reagan, one of the things we show with this new book we have, is something that I knew from dealing with him. He was incredibly smart. I know this doesn’t sound reasonable, but he was incredibly smart. I’ve dealt with professors at Columbia and professors at Stanford, but he could look at something and understand it and grasp it and turn it around and work with it and play with it. He was incredibly quick. I’d say he had a brain that was comparable to—and I’d talk to Milton Friedman or Ed Teller and Arthur [Burns], all those guys, he could stay with them. Now, he hid that. He just backed off. He never argued with staff. You could have ten different people tell him the same thing and he’d just listen. He never said to them, Look, you dumb bunny, ten years ago I wrote an article on this, a long article. He’d just say, That’s an interesting idea. So many of the policy issues that were proposed to Reagan over time, by different people, he listened, That’s very interesting. Then when he did it, even though it was something he’d decided many, many years previously he would do, all these people were delighted. He was doing what they had told him. He was happy with that, he didn’t care. He used to say privately, There’s no limit to what a person can get done if you don’t care who gets the credit. And he was just very smart. The second thing is, there was this feeling that he was lazy, that he took naps. Well, I traveled with him for almost four years. He never took a nap. It was total nonsense. In fact, he worked all the time. We have uncovered evidence with this book in terms of the handwritten documents and so on, he was writing all the time. He was studying, he was writing, he was working all the time, in private. As soon as he came out in public, put on the public persona, he was friendly and jovial and talking. For some reason, I’m finding myself thinking about Reagan today. I never voted for him. I couldn’t vote until 1986, shortly after becoming a U.S. citizen. Although I enjoyed working for Martin Feldstein for two years, while he was the chairman of the Council of Economic Advisers and I was a senior economist, I thought Marty [Feldstein, not Anderson] was one of the many intellectuals who sold Reagan short. A story here is relevant. Marty and I were working on a proposal, along with people in the Office of Management and Budget, the U.S. Treasury, the Department of Health and Human Services, and a policy shop in the White House, to make employer contributions to employees’ health insurance above about $1,500 a year taxable income. That doesn’t sound like a lot, but $1,500 in 1983, adjusted for inflation, would be over $4,700 today. The idea, which many health economists and many economists in general shared, was that employers and employees would face the right marginal incentives so that there would little or no bias in favor of health insurance over taxable wages and salaries. ($1,500 a year was below the median employer contribution and, if the $1,500 were not indexed for inflation, over time the bias would become smaller and smaller.) But Marty wanted to go further and insist that for employers to be able to deduct from their taxable income their contributions to employees’ health insurance, they would have to buy insurance that had at least a 10% coinsurance rate and a minimum deductible. (I’ve forgotten the amount of the deductible.) I argued with him. I said that the proposal without those requirements gave employers the right incentives and that he was saying that somehow he knew better than them. He didn’t have a good argument but insisted that I represent his position accurately at interagency meetings. I did. When I was about to say something Marty thought but I didn’t, I would say, “The chairman believes that …” Interestingly and amusingly, health economists around the country heard what Marty was advocating and would write me asking me to talk him out of it. (In the late 1960s to early 1970s, Marty had been arguably the premier health economist in the world, before he went on to other issues such as Social Security and corporate taxation.) So I would go to Marty and say things like, “Joe Newhouse said to say hi and also asked me to tell you that he thinks dictating terms of employer-provided health insurance is a bad idea. Marty would acknowledge the “hi” part. About the third time I did this, in response to the third letter from a health economist, Marty said, “Ok, David, I get it. Cut it out.” So I did. Anyway, back to the story. There was a Cabinet Council meeting at which Marty presented the proposal. In the normal course of things, he would have brought me and I would have been one of those people you see in the pictures sitting with my back against the wall and not at the table. He didn’t invite me, and I found out about the meeting only after it was over. I found out from a colleague in another White House shop, and this colleague had been asked to the meeting by his boss. I think Marty had figured me out. I was the kind of person who, if I saw something I disagreed with, would speak up. The idea that Reagan and a whole lot of Cabinet secretaries were there did not intimidate me at all. So I think Marty feared, somewhat reasonably, that I would speak up. If I had known beforehand about this meeting and known that Marty wasn’t going to take me there, I would have said, “Ok, I get it. You can say the earth is flat, and I won’t say a thing.” Oh, well. I keep getting sidetracked, so here goes the part about Marty and Reagan. Once I heard, after the meeting, from the colleague in another White House shop, I went to Marty to ask how it went. He said, “It went well. Even the President understood.” Even then, having followed Reagan’s thinking for about 6 or 7 years, I thought Marty Feldstein underestimated Ronald Reagan.   (0 COMMENTS)