A story in the Wall Street Journal illustrates some of the dictator’s incentives and trade-offs. It shows that it is not easy to be a dictator, how his country cannot be innovative and rich, and how it is not fun to live there even for somebody happy to serve the regime (Ann M. Simmons, “Spy Mania Sows Fear Among Russia’s Scientists,” October 2). The illustration focuses on Russian dictator Vladimir Putin. A dictator needs a powerful army, a fortiori if he intends to invade foreign countries. A powerful army has always required state-of-the-art technology, which is now based on advanced science. Recall the chilling 2018 video where Putin showcased his new hypersonic missiles with an animation of one whizzing around the earth to bring a nuclear bomb to what looked like Florida. Hypersonic missiles, which travel at more than five times the speed of sound—Putin even said 20 times, which is even more impressive if you don’t know that the cost of lying for a dictator is low. Hypersonic missiles have since been used in Ukraine. They don’t seem to be available to the American armed forces yet. Their development requires advanced physics in the field of high-speed aerodynamics or hypersonics. At the beginning of Putin’s reign, his regime financed research in this field and encouraged its scientists to participate in related scientific conferences in the Western world. The dictatorial regime now claims that its scientific advances may have been partly leaked during these international conferences, although this is probably part of the two signals it wants to transmit: first, to external enemies, actual and potential, that the Russian government has new missiles more effective than any other in the world; second, to its scientist and apparatchiks, that any leak will be severely punished. Individuals being cheap and the rule of law inexistent, an easy way for the dictator to achieve these goals is to charge with treason the very scientists and academics who did the tyrant’s bidding. Since 2018 and especially since the invasion of Ukraine, a number of scientists who were involved in hypersonic research, even only at the theoretical level, have been arrested. Two pictures accompanying the WSJ story show two of the detained old men: physicist Anatoly Maslov, now 78 and recently condemned to 14 years in prison, looks with incomprehension and terror as a Russian praetorian manipulates his handcuffs; physicist Victor Kudryavstev looks despondent behind bars in a “court” hearing in 2019. Other documented cases are cited by the WSJ. Trials for treason are held in secret and their consequences are not pleasant. The Wall Street Journal also reports another reason a dictator can arrest innocent individuals: The suspicion among some observers is that the Russian security agencies are pursuing these arrests in part “to convince themselves, and to convince Putin, that Russia has really advanced scientific achievements and that spies from all over the world are trying to steal them,” [Russian lawyer] Smirnov said. Within the deep state (the real deep state) of a dictatorial regime, information is unreliable and misinformation is an essential part of the game. Note another consequence of these persecutions: Russian scientists are now afraid and have a strong incentive to avoid meaningful research in areas somehow related to military affairs. New scientific and technological developments are less likely to help Putin or his successor strengthen their military force and attack foreign countries, which would be a good thing, of course. Yet, future Russian dictators may, like Stalin or Kim Yong Un, continue to reign over poor and despondent subjects. ****************************** A vision of the Stalin-Putin syndrome: Turning against those who served you (0 COMMENTS)

Bloomberg has a couple of articles today where prominent economists respond to today’s strong jobs report. Here is Chicago Fed president Austin Goolsbee: Federal Reserve Bank of Chicago President Austan Goolsbee lauded the strong September jobs report but warned of putting too much stock in one month’s data, adding that there are risks that inflation might undershoot the central bank’s 2% target.“This jobs number today, and the whole report, is a superb report,” Goolsbee said Friday in an interview with Bloomberg Television’s Michael McKee. And here is Larry Summers: Former Treasury Secretary Larry Summers said the Federal Reserve’s decision to cut interest rates last month was a mistake after new data showed that US job growth last month topped all estimates. “With the benefit of hindsight, the 50 basis point cut in September was a mistake though not one of great consequence,” Summers, a paid contributor to Bloomberg TV, said in a post on X. Nonfarm payrolls increased 254,000 in September, the most in six months. The unemployment rate fell to 4.1% and hourly earnings increased 4% from a year earlier, according to Bureau of Labor Statistics’ figures released Friday. I’m with Summers.  While it’s true that inflation might briefly undershoot the 2% target, that would likely be due (if it occurs) to positive supply shocks.  The Fed should focus on demand-side inflation, and all the evidence I see points to continued strong growth in NGDP and nominal wages.  It is not true that “the whole report, is a superb report.”  Twelve month nominal wage growth accelerated to 4%, which is too high.  We need further monetary restraint to get price inflation sustainably down to 2%. I think Summers is correct that a smaller rate cut would have been better, and also that the mistake was probably not very consequential.  If the Fed is making a serious mistake (and it’s too soon to reach that conclusion), it would likely be due more to excessively expansionary forward guidance than to setting a fed funds target 0.25% too low at a single meeting.  For the moment, I’m willing to give them the benefit of the doubt, as most of the market-oriented forward indicators look pretty good.  It’s clear, however, that the mini-panic about the labor market that occurred a couple months ago was premature.  We were not teetering on the edge of recession. In my view, both Fed hawks and Fed doves make the same mistake, responding asymmetrically to supply shocks depending on whether or not the implications support their policy preference.  Thus doves tend to correctly discount inflation surges driven by reductions in aggregate supply, while ignoring the significance of inflation declines driven by increases in aggregate supply.  Hawks make the opposite mistake.  Recently, the aggregate supply situation has been quite good, resulting in a headline inflation rate that is lower than the core inflation rate (and also lower than predicted from NGDP growth, or nominal wage growth.)  That’s not likely to last. The only “flexible average inflation targeting” regime that works in the long run is stable NGDP growth, at roughly 4%.  We aren’t there yet, but the Fed has made substantial progress since the very high inflation of 2022. (0 COMMENTS)

Doyne Farmer’s recent conversation with EconTalk’s Russ Roberts has given listeners reason to reflect on the state of economics and the way mainstream economists model market behaviors and use their models and tools to predict behaviors and identify trends.  After listening to the EconTalk episode “Chaos and Complexity Economics (with J. Doyne Farmer),” would you agree?  In this podcast, Roberts and Farmer dove into the realm of complexity economics, with Farmer making a strong case for its potential to significantly enhance the way economists model and predict market behaviors and trends. Farmer argues it only makes sense to move away from the all-too-simple rational expectations model. He advocates turning to the messy, interconnected realities of the economic world.  Yes, it does sound like a heavy lift.  But Farmer makes a compelling case for complexity economics and using its agent-based modeling. Roberts and Farmer make complexity economics digestible for outsiders of Farmer’s specialized field, especially for those outside of the economics discipline and for those fancying themselves as armchair economists.  Around 22:26 in the podcast, Farmer explains how complexity economics can incorporate more realistic and nuanced aspects of human behavior into agent-based modeling.  He provides an example to illustrate using the way housing prices are set through aspiration-level adaptation. Complexity economists acknowledge the heterogeneity of individuals, and the multiplicity of their decision-making strategies. Which is starkly different from the rational expectations assumption of homogenous actors seeking utility maximization in neoclassical models with identical constraints of income.  This shift makes the work of complexity economists seem capable of bringing the discipline of economics closer to the nuances of real-life and capable of systematically introducing rules of thumb and social institutions into decision-making, something that has been difficult in most economic models. Around 24:00, some of the differences between the work of complexity economists and econometricians are discussed by Farmer and shared with Roberts. It is here that Farmer describes the advantages of using complexity economics to breakdown the 2008 Financial Crisis, highlighting the possible advantages of using complexity economics to inform policy responses to thwart the aftermath. Roberts pushes back, encouraging Farmer to consider other possibilities. Farmer appears firmly committed to using centralized policy rather than trusting decentralized markets and the people who make them up.  Complemented by using big data and through powerful advanced computing, Farmer moves on to make a compelling case for taking the heterogeneous approach of complexity economics and its real-world dynamics to supercharge economics and, perhaps, help mainstream economics recalibrate the way they model consumption, savings, and investment behaviors. To this point, explain why Farmer argues that this heterogeneous approach is a huge advantage, especially when considering demographics, income differences, random behavior adjustments, and other factors. From Farmer’s perspective, complexity economics could serve as a pathway towards a future in which economic models become clearer, more widely applicable, and adept at examining both the direct and indirect consequences of various policies, equipping economics to better navigate the complexities of societal and global events.  Yes, this creates a compelling vision, especially if it is accompanied by improved predictive power and offers a framework that significantly improves how we understand economic dynamics. As an example, Farmer discusses how he and his team approached introducing an unexpected global crises like recent pandemic into predicting how consumers, businesses, and industries would respond. He cites his team’s experiences with COVID in the United Kingdom.  The integration of complexity economics indeed creates a fertile ground for interdisciplinary collaboration and potentially provides a playground for new institutional economics, fortifying the models with empirical evidence and potentially leading to a paradigm shift in economic thought. The aspiration for a more inclusive and comprehensible economic science is applaudable and aligns with a broader desire across the discipline to make economics more accessible and actionable for wider audiences across disciplines. Indeed, this is all very appealing.  But, there is always a but, especially in our circles committed to the ideal of a society of free and responsible individuals. There is definitely potential for a serious clash when free-market economists take a deep dive into how Farmer advocates using the fruits of complexity economics to inform policymakers. Yes, there always is potential for this clash.  But Farmer appears unfamiliar with F.A. Hayek’s work. From cover to cover, Hayek is not mentioned in his book nor is he discussed in this or other popular podcasts.  Plus, he appears not to fully understand Milton Friedman’s position on the impressive records of self-interested individuals navigating through markets versus the disastrous records of “benevolent” government officials and policymakers. In fact, he appears somewhat hostile to Friedman and his cadre of Chicago School of economists. In fact, Naidu and his co-authors… were explaining how economics has evolved beyond the simple minded misconceptions of neoliberalism. The underpinnings of the Chicago school of economics, led by Milton Friedman, used idealizations – such as perfectly functioning markets and rational expectations – that led to conclusions that supporting the school’s libertarian leanings. But once economics models began to incorporate more realistic assumptions, the results became more nuanced and conditional, and most of the earlier results were shown to be wrong. This was an important step in the right direction. ~ Page 106, Making Sense of Chaos, A Better Economics for a Better World. Yes, Milton Friedman – or F.A. Hayek who is not mentioned by Farmer – are notable for their advocacy of free market principles.  How might they respond to Farmer’s claims? One could only assume that they would react but they would respond differently. Both would likely be intrigued by his scientific approach and its ability to use “decentralized” rules of thumbs as a key part of decision-making behavior.  However, would you agree that Friedman would advocate for incorporating minimal government intervention and the self-regulatory strengths of the free market into the modeling scenarios used by Farmer to offer a balanced perspective?  Or do you think he’d push for something else? Now, turn to Hayek with his emphasis on the dispersed nature of knowledge and the potential hazards of central planning. How would you imagine he would critique Farmer’s approach?  What suggestions would he make to Farmer?  If Farmer’s primary use of this agent-based model seeks to only design policies to address significant social issues, Friedman and Hayek might question its efficacy. However, if it is possible to use his model to explore the net effects of securing property rights, improving legal systems, advancing stable money, improving capital markets, and more can we see Friedman and Hayek leaning into Farmer’s model? Might advocates of minimal intervention might nudge complexity economists like Farmer to explore the natural equilibrium a dynamic economy gravitates toward through free interactions to compare the findings to those generated by the more policy-oriented Keynesians?  This leads me to ask one last question.  Can complexity models provide valuable insights to settle the debate about which serves society better – free markets with limited government or a government that tries to engineer policies? Making progress toward settling this debate would make great strides in helping reconcile different economic paradigms and highlight the need to understand how society is harmed or hurt by both market forces supported by decentralized systems as well as government policies produced in centralized systems.   Let’s hear what you think. Consider the following questions, and share your responses with us today. After listening to the episode, do you agree that Farmer’s conversation with Russ Roberts give us reason to seriously reflect on the current state of economics, particularly how mainstream economists model and predict market behaviors and identify trends?  Explain your answer. At around 22:26 in the podcast, Farmer illustrates how complexity economics integrates more realistic and nuanced aspects of human behavior into agent-based modeling (ABM), as seen in the setting of housing prices through aspiration-level adaptation.  Contrast this ABM approach with the representative-agent decision-making used in instantly clearing market adjustments in response to disturbances or disequilibrium. At around the 24:00 mark, Farmer discusses with Roberts the differences between the work of complexity economists and econometricians; how do the advantages and disadvantages of each approach compare and contrast, particularly in the context of the 2008 Financial Crisis? Why does Farmer argue that the heterogeneous approach of complexity economics, complemented by big data and advanced computing to capture real-world dynamics, represents a significant advantage for mainstream economics in recalibrating how consumption, savings, and investment behaviors are modeled, particularly when taking into account demographics, income differences, random behavior adjustments, and other factors? Considering the claimed benefits of complexity economics in making economic models more clear, widely applicable, and capable of assessing the direct and indirect effects of policies, how did this approach prove useful during COVID in the United Kingdom?  Take a look at the skepticism expressed in the posted comments on this topic. In light of this model’s experience with the U.S., what would your response be to further the discussion?  Complexity economists like Farmer places considerable trust in the government’s ability to strategize and implement policies without falling prey to special interests, shortsightedness, or low-information voting. Can this framework be used to take into account and investigate policies that increase economic freedom?  To what extent can the complexity economics approach to modeling the world be used to help settle the debate on which is better for human flourishing – economic freedom or central-planning through policies?   [Editor’s note: Don’t miss Ferrarini discussing Farmer’s book with David Henderson and Arnold Kling in this episode of our From the Shelf series.] (more…) (0 COMMENTS)

  The good news is that economics gives us some tried and true ways of making consumers better off. They mainly have to do with allowing competition and allowing increased supplies. Trump did some of that while president. Harris as vice president showed no signs of moves in that direction. Yet many of the policies that both propose would do the opposite. . . . One method that appears to drive down consumer costs but actually raises them is price controls. When the government keeps the price below what the free market price would be, it creates a shortage. That causes people to waste valuable time in line trying to get the goods that are in short supply. When the price controls on oil and gasoline in 1979 kept the price of gasoline at 80 cents a gallon, energy economists at the newly created Department of Energy estimated that ending the controls would cause the price to be about $1.00 per gallon. At the time, I estimated, using the average worker’s wage and the average time spent in line, that the time cost of getting gasoline was about 40 cents a gallon. The real cost to consumers, therefore, was about $1.20 per gallon, which was 20 cents above the free market price.   The quotes above are from David R. Henderson, “How to Lower Costs for Consumers,” Defining Ideas, October 4, 2024. Read the whole thing. (0 COMMENTS)

A recent Liberty Fund Virtual Reading Group explored the theme of joy in Leo Tolstoy’s novel Anna Karenina. For Tolstoy, happiness is not an end state that a person can reach. It is an ongoing discovery process filled with trial and error. This is similar to the way many economists view markets. One of F.A. Hayek’s most famous articles, for example, is titled “Competition as a Discovery Procedure.” NYU’s Israel Kirzner dedicated his career to the idea of markets as a process, rather than an outcome. George Mason University economist Rosolino Candela describes Kirzner’s view of markets as “a process of discovery, error correction, and learning.” Tolstoy’s characters in Anna Karenina each go through Kirzner-style processes of pursuing happiness. The title character, the unhappily married Anna, begins an affair with a dashing military officer named Vronsky. Parallel to their story is Levin, a young man Tolstoy modeled after himself, and Ekaterina, more often called Kitty, a debutante who is both kind-hearted and impressionable. The novel follows their lives, along with those of their family members and other people around them. For many of the characters, part of their happiness discovery process is figuring out where to live. They go back and forth between the city and the country, with varying results. The country is a good fit for Levin, who has a pastoral romantic streak; his time in cities reinforces this for him. Anna and Vronsky are more comfortable in Moscow and St. Petersburg conversing in salons, attending the theater, and dancing at balls, and don’t do as well out in the country. Different people have different preferences, both in markets and in happiness. However, Anna and Vronsky’s affair is a scandal in their high society city circles. While the male Vronsky is mostly accepted back by his old friends, Anna is shunned in a double standard typical of the time and is isolated and lonely. Anna and Vronsky move abroad for a time to escape social censure, and then to a country estate. They try new things in these settings, just as an entrepreneur would. While in Italy, Vronsky discovers his artistic talent, though he is disappointed that his skill with the paintbrush is limited to that of a copyist transcribing what he sees. A true artist, such as the one he and Anna meet and who paints her portrait, can instead create original interpretations and can bring hidden qualities into the open. Realizing this, Vronsky puts down his brush. Anna tries her hand at starting a charitable school at their country estate, but pays more attention to those children than to the baby daughter she has with Vronsky. She also misses the son she left behind with her husband. Just as most new businesses fail, many of these experiments in pursuing happiness come up short. Anna’s journey eventually ends in suicide. Vronsky ends up a broken man, last seen on a train on his way to volunteer in the Serbo-Turkish war. Levin, the young Tolstoy stand-in, is the character whose happiness process is the most successful. That is because after many failed attempts, he eventually discovers moderation. He begins the book as an enthusiastic rural romantic, idealizing peasant farmers and their way of life. He then careens in the opposite direction into almost a contempt for peasants, who seem unable to make good decisions on their own. During this period Levin works on a book on political economy, favoring an agrarian economy run by experts. He never finishes it, abandoning it for other, more fulfilling purposes in the same way that an entrepreneur stops making products that lose money, and switches to other products that people value more highly. A lifelong religious skeptic, Levin near the end of the book is overcome by a religious fervor that he finds as unsatisfying as his earlier skepticism. Only at the very end does he find peace by moderating his new zeal into a quiet, contemplative faith. Levin’s wife Kitty, who tends to take on the characteristics of the people around her, pursues happiness by choosing the right company. After spending an unhappy time in Anna’s orbit, and then unhealthily emulating a young woman she meets at a health resort, she finds herself at her best when surrounded by her family and like-minded friends. Each character in Anna Karenina goes through a different discovery process, just as every market actor does. Also like markets, the process does not go perfectly for everyone in Anna Karenina. Happiness and economics are not the same thing. But the processes underlying them have enough in common where, if you understand a little about one, you can use that to better understand the other. Frank Knight, the great University of Chicago economist, wrote in “Ethics and Economic Reform” on page 55 in the collection Freedom and Reform, that “to call a situation hopeless is for practical purposes the same thing as calling it ideal.” The problem with perfection is that it can’t be improved upon. On reflection, this is a depressing thought. Knight was writing about markets, but the same thing is true of happiness. That is why it is important to think of both markets and happiness as processes. Nobody can be perfectly happy, just as markets can never reach perfect competition. But in both, there is always room for improvement, and always room for optimism. Economics, at its core, is not about money, efficiency, or maximizing utility. It is about how people find ways to get along with each other—and how they don’t. No wonder its insights apply so well to the pursuit of happiness, which as Tolstoy describes, works in a similar way.   Ryan Young is a senior economist at the Competitive Enterprise Institute. (0 COMMENTS)

I recently encountered a couple excellent articles discussing productivity problems in English-speaking countries. A paper by Ben Southwood, Samuel Hughes and Sam Bowman begins by showing how the UK lags far behind France in building things like housing, expressways, subways, high speed rail lines, nuclear power plants, and other forms of infrastructure.France and Britain are a particularly interesting pair of countries to examine, because they have so many similarities. Both have a population between 65 and 70 million, and both have roughly the same per capita GDP. (The UK is a bit higher in nominal terms, France is a bit higher in PPP terms.) Both were important colonial powers, both have nuclear weapons, both are countries where a single dominant metro area plays an unusually large role. But there are also some important differences. France is more than twice as large in terms of land area. France is also marginally more socialist. French workers are more productive, but work fewer hours, leaving total per capita output roughly equal.  Here is is SHB: France is notoriously heavily taxed. Factoring in employer-side taxes in addition to those the employee actually sees, a French company would have to spend €137,822 on wages and employer-side taxes for a worker to earn a nominal salary of €100,000, from which they would take home €61,041. For a British worker to take home the same amount after tax (£52,715, equivalent to €61,041), a British employer would only have to spend €97,765.33 (£84,435.6) on wages and employer-side taxes. And yet, despite these high taxes, onerous regulations, and powerful unions, French workers are significantly more productive than British ones – closer to Americans than to us. France’s GDP per capita is only about the same as the UK’s because French workers take more time off on holiday and work shorter hours. What can explain France’s prosperity in spite of its high taxes and high business regulations? France can afford such a large, interventionist state because it does a good job building the things that Britain blocks: housing, infrastructure and energy supply. Basically, both Britain and France do one thing well and one thing poorly.  Britain is relatively (and I emphasize relatively) good at incentivizing people to work.  France is relatively good at building capital.  Within the EU, both countries are only middle of the pack in terms of per capita GDP. So why is Britain so bad at building things?  To begin with, it is recent problem.  Britain used to be outstanding at building housing and infrastructure.  It’s a long report, but there are three themes that show up over and over again: 1.  Nimbyism 2.  Excessive regulation and red tape 3.  Inefficient government production The nimby problem that America experiences in specific places like California and the northeast is a nationwide problem in the UK.  And even when projects are approved, Britain has the same sort of excessive regulation of new infrastructure and energy projects that we face in the US, pushing costs much higher.  And finally, central governments tend to be more wasteful than local governments or private firms: French cities pay 50 percent towards nearly all mass transit projects that affect them, and sometimes 100 percent (with regional and national government contributing the rest). Unsurprisingly, they then fight energetically to suppress cost bloat, and they generally succeed. The Madrid Metro, one of the world’s finest systems, was funded entirely by the Madrid region. A smaller and poorer municipality than London succeeded in financing 203 kilometres of metro extensions with 132 stations between 1995 and 2011, about 13 times the length of the contemporary Jubilee Line Extension in London. Other countries still operate systems of private infrastructure delivery: Tokyo’s legendary transit network is delivered, and regularly expanded, by private companies who fund development by speculating on land around stations. France’s superb system of motorways is built and maintained by private companies, who manage them with vigour and financial discipline. In Britain, the centralisation of infrastructure delivery in the national government has fundamentally weakened this incentive. No public body will ever have quite the existential interest in cost control that a private one does. But national government also has a weaker interest in it than a financially responsible local government does, because the cost is diffused around a vastly larger electorate.  The second article is by Matt Yglesias, and shows how government regulation reduces the effectiveness of the public sector.  I suspect that this finding would surprise many people on both the left and the right, who (depending on your point of view) see government regulation as either the government unfairly handicapping the private sector, or preventing abuses in the private sector.  Yglesias says they are both wrong, that regulations are much more of a problem for the public sector. Some parts of the private sector really have become less regulated (airlines), while others have become more strictly regulated (housing), but what’s regulated most strictly of all is the public sector. And this overregulation of the public sector locks us into a vicious cycle. First, we make it very difficult for public center entities to execute their missions. Second, this leads public sector entities to develop a reputation for incompetence. Third, the low social prestige of public sector work leads to the selective exit of more ambitious people. Fourth, elected officials in a hurry to do something often seek ways to bypass existing public sector institutions further reducing prestige. And what’s actually needed is not more money or more takes about how free markets are out of control or a new anti-growth paradigm. What we need is a vigorous public sector reform campaign to increase the likelihood that, when elected officials want the government to do X, X occurs in a reasonably timely and cost-effective manner.  Yglesias discusses the way that many counterproductive government regulations only apply to the government sector, not to the private sector.  These include well known examples like “Buy America rules” for procurement and Davis-Bacon regulations on labor used by the public sector, but extend to many other lesser known examples of governments shooting themselves in the foot. It is interesting to compare the British study with the Yglesias post.  Both reports seem to be produced by pragmatic policy wonks who would like to see lots more stuff get built.  But I would describe Southwood, Hughes and Bowman as center-right, whereas Yglesias is center-left.  To be clear, both sides believe that there is an important role for both the public and private sector, but SHB clearly emphasize the advantages of privatization, whereas Yglesias emphasizes how reforms to to make it easier to build can help restore faith in the government’s ability to get useful things done.  This may partly reflect differences in the sort of public officials that they are trying to influence. What I liked best about these two articles is the way they went against long held stereotypes.  Ben Southwood has an amusing twitter thread making fun of stereotypes that France is more communitarian than the UK. Yglesias often employs the same type of humor when nudging his readers to think about terms like ‘regulation’ and ‘neoliberalism’ in a less dogmatic fashion, a way that is more consistent with what’s actually going on in the real world. PS.  I suspect that some of the problems discussed in these reports also occur in other Anglosphere countries like Canada and Australia.  I hope that commenters from those places will chime in on the subject.  Why do English-speaking countries find it so hard to build things?   Our legal systems?  (0 COMMENTS)

In a recent essay at American Compass, Michael Lind attempts to refute certain aspects of economists’ case for free trade.  Others have addressed the numerous empirical, factual, and theoretical issues with his essay.  I will focus on just one particular claim.  Lind writes: The attack on tariffs as regressive taxes unites two of the themes of early twenty-first-century neoliberalism. One is the left-neoliberal dogma that each individual tax—not government policy or the economy as a whole—must be progressive in its effects. The other is the right-neoliberal dogma that deregulating trade and immigration to reduce wages for workers and thus reduce prices for consumers is the “efficient” and thus best policy, as long as the “winners” compensate the “losers”—preferably in the form of redistribution through the tax code. For the sake of space, I will ignore his claim on left-dogma and focus on the claim of right-dogma: “deregulating trade and immigration to reduce wages for workers and thus reduce prices for consumers is the “efficient” and thus best policy, as long as the “winners” compensate the “losers”—preferably in the form of redistribution through the tax code.”  Lind provides no citations or links supporting his claim, so it is hard to tell who (or what), exactly, he is responding to here.  Open any trade textbook and you won’t find such dogmas he claims are there.   Rather, I think he is referring to a potential outcome in international trade called the Factor Equalization Theorem, independently derived by Wolfgang Stolper & Paul Samuelson in 1941 and Abba Lerner in 1952.  Sparing you, dear reader, the technical details, I’ll note that the theorem states that, under certain conditions, when two countries trade the trading partner that is relatively labor abundant will see wages rise and returns to capital fall while the country that is relatively capital abundant will see returns to capital rise and wages fall.  According to this theorem, the factor prices (wages and returns to capital) will equalize across trading partners: wages will be equal between the two countries and returns to capital will be equal between the two countries. Assuming I am correct that he is pulling off the Factor Equalization Theorem, Lind seems to be seizing on it, imparting to it certain claims no one actually holds, and claiming these as free-trade dogmas.  The problem is that the theorem hasn’t held up well to empirical scrutiny.  The assumptions in it are too strong.  In particular, the theorem requires that labor across the trading partners is virtually identical (the same with capital).  In reality, labor is not identical across many trading partners.  American workers are extraordinarily productive: we operate in a capital-fueled economy with powerful and stable institutions, high education, and generally high access to productivity-improving infrastructure.  Chinese workers, by contrast, do not: they are much less productive.  According to the World Bank, the average Chinese worker produces approximately $42,000 worth of goods and services a year.  Conversely, the average American worker produces approximately $150,000 worth of goods and services per year, making the average American worker 257% more productive than the average Chinese worker.  A Chinese worker is not a good substitute for an American worker.  We shouldn’t expect to see American wages fall toward Chinese wages with trade.  Indeed, we do not see American wages falling. To make this point less abstract, consider the following: the New England Patriots, my hometown football team, is in desperate need of a good quarterback.  I, a 35-year old man, would love to play for the Patriots.  In fact, they could offer me the league minimum wage ($795k) and I would instantly quit my job and go play for the Patriots.  Millions of other New Englanders (and Americans, for that matter) would also take the Patriots up on that offer.  Why, then, did the Patriots offer 21-year old rookie Drake Maye from UNC almost $60 million ($36 million over 4 years plus $24 million signing bonus)?  The answer is obvious: He and I are not the same by a long shot.  No one would reasonably expect our wages to equalize (mine rise and his to fall).  The theorem doesn’t hold in this case. Factor price equalization will more likely occur between very similar trading partners like the US and Canada: the technology is similar, there are lower costs to relocating, and workers are similar.  But factor price equalization will not occur as a matter of course from trade, as Lind seems to think.  In fact, just the opposite could just as easily occur.  Factor price equalization is a special case, not a general case, of trade.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

  A surprisingly receptive audience reaction to Social Security reform. Yesterday I gave a talk to the Osher Lifelong Learning Institute (OLLI) at California State University, Monterey Bay (CSUMB). I typically give 2 such talks in the spring and 2 in the fall. This year is no exception. One of the people involved with OLLI suggested last spring that in the fall I give 2 talks on economic issues in the presidential campaign. (The second talk will be on October 8.) With some trepidation, I agreed. Why trepidation? Because I know how even very reasonable people (and the OLLI audience is typically very reasonable) can get spun up about particular candidates. So what I did early in my presentation was show a slide that said: Downplay candidates. Play up issues. When I showed that slide, I said, “One good reason for doing so is that I find the issues far more interesting than the candidates.” That got a number of heads nodding and a couple of laughs. I talked at length about federal spending, federal taxes, and the federal budget deficit, showing them some scary figures from the Congressional Budget Office. Then I pointed out that according to the CBO, during the years 2030-34 Social Security spending net of Social Security revenue would add an average of 1.2% of GDP to the annual budget deficit and Medicare spending net of revenue would add 2.4% of GDP net of revenue. So these 2 programs alone would add 3.6% of GDP. That’s over half of the expected deficit as a percent of GDP. If it weren’t for those, we would be in much better shape. Then I took a deep dive into Social Security to make a few points. The first was what one of FDR’s advisors motives was in setting up Social Security: W. R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security extends Federal income taxes “in a democratic fashion” to the lower-income brackets. I filled in the background, pointing out that the income tax back then was a “class tax” and that it was only World War II that turned it into a “mass tax.” Surveying the room of about 30 to 35 people, I said that I suspected that none of their counterparts in their part of the income distribution in the mid-1930s would have paid any income tax. Then I laid out that the fact that Social Security is a Ponzi scheme and was explicitly planned to be a Ponzi scheme. I showed this quote from comedian Dave Barry: I say we scrap the current [Social Security] system and replace it with a system wherein you add your name to the bottom of a list, and then you send some money to the person at the top of the list, and then you . . . Oh, wait, that IS our current system. —Dave Barry, “Election could come down to who kisses most orifice,” Miami Herald, September 24, 2000.   Then I quoted Paul Samuelson blessing it as a Ponzi scheme. I quoted from the chapter on Social Security in my 2001 book, The Joy of Freedom: An Economist’s Odyssey: MIT economist Paul Samuelson added some of the intellectual backing for these policies. “The beauty about social insurance is that it is actuarially [italics Samuelson’s] unsound.” Samuelson’s point was that if real incomes were growing quickly, each generation could get more out of Social Security than it paid in. While its critics attacked Social Security as a Ponzi scheme, Samuelson beat them to the punch in 1967 by blessing it as one. “A growing nation,” wrote Samuelson, “is the greatest Ponzi game ever contrived.”[1] [1] Samuelson quotes are from Newsweek, February 13, 1967, and are quoted in Derthick, p. 254.   Then I quoted Franklin D. Roosevelt laying out how making it a Ponzi scheme would almost certainly guarantee that Social Security would never be abolished: [T]hose taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….With those taxes in there, no damn politician can ever scrap my Social Security program.[1] [1] From Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Houghton Mifflin, 1959), pp. 309–310, referenced in Martha Derthick, Policymaking for Social Security, Washington, D.C.: Brookings Institution, 1979, p. 230. Then I showed a picture of my Hoover colleague Mike Boskin and noted that his commission, set up by the U.S. Senate, did a report in December 1996 that argued that the Consumer Price Index overstated annual inflation by 1.1 percentage points. Then I did some math. “If Congress and the President had started in 1998 to set the Cost of Living Adjustment (COLA) at CPI – 1.1 percentage points, in 2033, Social Security benefits would be 32% lower. (Here’s the math: 0.989^35 = 0.68.) The Social Security crisis would have been gone just like that. I then noted that the Bureau of Labor Statistics had made some adjustments in response to Boskin’s commission. Boskin, in an article in my Concise Encyclopedia of Economics, estimated that as a result the CPI overstated inflation by 0.8 to 0.9 percentage points. So I redid the math: 0.992^35 = 0.75. So Social Security benefits would be 25% lower. Again, the crisis would be gone. I could tell you other highlights of my talk–there were many. But what I particularly liked was that this audience, at least 85% of whom were receiving Social Security, seemed quite open to this. It makes sense. Who goes to a class on education, for which there is no certificate? Answer: people who want to be educated.     (1 COMMENTS)

Perfect markets make a nice fairy tale, but they don’t match reality. And few strawmen have been as repeatedly slain as the idea that the case for markets depends on market perfection, and thus the inevitable failure of real-world markets to match this textbook abstraction undercuts the argument for using markets. Some of the strongest defenders of the market system, like F. A. Hayek and Israel Kirzner, reject ideas like perfect markets, perfect information, perfect competition, and so forth. Their argument for the use of markets rests not on some abstract perfection of markets, but instead on the real-world dynamism inherent to the ongoing and evolving market process. Markets are useful not because in a market-driven world there are no $20 bills on the sidewalk. Markets are useful because they create the right environment for finding those $20 bills.  One real-world friction in real-world markets is price stickiness. In the fairy tale version of perfect markets, prices adjust instantly. In the real world, prices can be sticky – they might not change, or change slowly. One reason for this is transaction costs. Sometimes, changing a price isn’t free. The textbook example of this so-called “menu costs.” Even if the costs of various foods and ingredients change, restaurant prices can be sticky and remain unchanged. In order to change their prices, restaurants would have to print out an entirely new set of menus with the updated price for each dish. This costs money and time. If the price of potatoes slightly increases, it’s often not worth the time and effort for a restaurant to print out a new set of menus with updated pricing for every dish that includes potatoes. But just like asymmetric information, transaction costs have a half-life. In markets, there is an incentive to find ways to reduce transaction costs and thus reduce the stickiness of prices – because finding ways to reduce transaction costs is itself a money-making opportunity. Menu costs are an example of this too. One way I’ve seen restaurants get around menu costs is by simply not having a listed price for particular menu items. If a restaurant in a beach town frequently serves fresh and locally caught fish or lobster, they might face significant fluctuations in costs for those items. To accommodate this, they frequently list such dishes on the menu as “market price” rather than a set dollar amount. More recently, I’ve seen many other restaurants put their menus on digital displays rather than having them printed out, and some have dispensed with physical menus altogether and replaced them with a QR code at each table. You scan the QR code with your smartphone, and it opens up a website with the most recent menu. This drastically reduces the transaction costs associated with menu pricing, and makes prices more flexible. Price stickiness is a real problem – but at the same time, the very existence of that problem provides a market incentive to find solutions. Hence Arnold Kling’s dictum – “Markets fail. Use markets.”  On the other hand, there’s also an issue with policy stickiness. When governments create a policy to try to solve some social problem, those policies themselves become sticky. It’s surprisingly easy for people to overlook this issue. James C. Scott’s fantastic book Seeing Like a State provides an extended look at how policy interventions go awry. Toward the end of the book, he provides a few takeaways that might help improve the situation, such as: Favor reversibility. Prefer interventions that can be easily undone if they turn out to be mistakes. Irreversible interventions have irreversible consequences. Interventions into ecosystems require particular care in this respect, given our great ignorance of how they interact. Aldo Leopold captured the spirit of caution required: “The first rule of intelligent tinkering is to keep all the parts.” It’s not that this is bad advice in the abstract. But the idea that interventions “can be easily undone if they turn out to be mistakes” is less compelling when one takes into account that policies, too, are sticky. In practice, it’s often extremely difficult to undo interventions no matter how mistaken they turn out to have been. Policies become sticky because, as Pierre Lemieux frequently points out, any government policy necessarily benefits some at the expense of others. This quickly turns into a public choice problem. As soon as the government implements some kind of intervention, it creates a new interest group that will be invested in keeping that intervention alive, while the benefits of ending that intervention are so dispersed that there’s nobody in particular who has a strong incentive to try to put an end to it. It’s not for nothing that Milton Friedman quipped “‘Nothing is so permanent as a temporary government program.” This quip does overstate things – not all policies are so sticky as to become immovable objects. But it’s a real problem. One classic example is the mohair subsidy. This program was initially implemented to ensure that the United States military would always have an adequate supply of wool for their uniforms. But eventually, the military stopped using this wool in their uniforms and began using synthetic materials instead. Nonetheless, the federal government continued to spend tens of millions of dollars a year subsidizing mohair production long after the initial rationale for doing so was gone. The program was eventually (mostly) eliminated – over four decades after the switch to synthetic materials. This report from 1993 describing the ongoing efforts to eliminate these subsidies includes a comment from Senator Charles Schumer, who mentions that he’s been spending years trying to undo this policy. If ever there was a policy that should be “easily undone,” you’d think this one should be about as easy as it gets. But policy stickiness can be such a strong force that even something as ostensibly straightforward as “stop spending tens of millions of dollars per year subsidizing something you stopped needing decades ago” requires years of intensive effort to finally achieve. Pace James C. Scott, “interventions that can be easily undone if they turn out to be mistakes” are only found in fairy tales, and not in reality.    While markets provide an incentive to find ways to offset and lessen price stickiness, politics provides incentives for the beneficiaries of policies to make those policies as sticky as they possibly can. In markets, you can make money by finding ways to reduce transaction costs. In politics, you protect your largess by ensuring transaction costs are as high as possible. In the real world, price stickiness is the proverbial speck and policy stickiness is the proverbial log.  (0 COMMENTS)

Back in early 2022, there was a great deal of optimism that sanctions against Russia would cripple its economy. Those predictions have not come true. A recent article in The Economist shows why: Prior to 2022, Kazakhstan sold relatively little electrical machinery to Russia.  After the Ukraine invasion, Kazakh exports soared more than 7-fold.  How was Kazakhstan able to boost output so rapidly?  Notice that at the same time this occurred, Kazakh imports of electrical machinery from the EU also increased sharply.  It’s pretty clear that Russia was using this former Soviet republic as a way of evading sanctions.   For Europe’s policymakers, this is all bad news. “We expected some leakage,” says one official, “but not on the scale we now know about.” In December, the eu’s 12th round of restrictions targeted firms in Armenia and Uzbekistan for the first time. Bureaucrats have since threatened more sanctions on third countries and Europeans exporting to them, but have taken action only against a few firms. For each firm added to the blacklist, another is registered elsewhere. The same problem occurs when countries try to diversify their supply chains.  The US put high tariffs on Chinese imports in order to reduce our dependence on that economy.  As a result, US imports from neighboring countries like Vietnam increased sharply.  Not surprisingly, Vietnamese imports from China increased at the same time.  We are still buying lots of stuff from China, but in a more more roundabout way with higher transportation costs. None of this means that sanctions are necessarily a bad idea.  It’s plausible that sanctions on Russia have at least slightly reduced its ability to wage war.  Rather the point is that we should not expect sanctions to be leakproof. PS.  After writing this post, I noticed another example: Interestingly, the American media blames China but not Germany for aiding Russia’s war machine. (0 COMMENTS)