Howard Hughes was one of the richest people in the world during his lifetime. He was also a bit of an eccentric fellow (putting it mildly). But I recently learned an interesting tidbit about his life that puts into perspective just how much wealthier we are today in ways that simply can’t be captured by mere reference to GDP accounting.  Hughes was an insomniac and a movie buff. Unfortunately for him, late night programming was very limited. He wanted to have more options available for what to watch during his sleepless nights. And, with his not inconsiderable resources, he managed to find a solution. He ended up buying a TV station, KLAS, in 1967 for the price of $3.6 million dollars, which would come out to just under $34 million dollars today adjusting for inflation. Now in control of his own private TV station, he could ensure movies would be broadcast at all hours. And apparently, it wasn’t uncommon for him to decide he didn’t like what was being shown and simply call the station to tell them to play something else instead. As a result, anyone else who was watching the station would suddenly find themselves confused as the movie they were in the middle of watching was suddenly switched to something else. Hughes was a wealthy man. But at the same time, he had to spend what in todays money would be tens of millions of dollars in order to get a service that was vastly inferior to what anyone with a Netflix subscription has available to them today. Hughes could have burned through his entire fortune without ever coming close to gaining the dizzying variety of entertainment that you or I can have today for a trivial amount of money. If you look at Hughes’ net worth during his life (even without adjusting for inflation!), by all standard measures he was a vastly wealthier person than I am. But I would never be even slightly tempted to exchange my current standard of living for the standard of living Hughes had during his life. And 1967 isn’t exactly ancient history. One doesn’t have to look that far back to see how the luxuries of wealthiest people alive a generation or two ago couldn’t even begin to approximate what today is so abundant as to be considered trivial.  If I suggested to someone right now that their grandchildren will have things that are beyond the reach of Elon Musk or Jeff Bezos with all their riches today, they may think that’s a fantastical claim. But it’s a claim that we can accurately make now about ourselves and Howard Hughes, or John Rockefeller, or any other wealthy person from even a generation ago. So the next time you settle down on your couch and log into your Netflix account, take a moment to be grateful that you don’t have to live like Howard Hughes. When you turn your air conditioning on to take the edge off a hot summer day, be grateful that you don’t have to live like John Rockefeller. When you put some antibiotic ointment over a little cut, thank your lucky stars that your medical care is so much better than what was available to the son of President Calvin Coolidge, who died when a blister on his toe got infected. And be grateful in the knowledge that your grandchildren will be thankful that they don’t have to live like Elon Musk or Jeff Bezos live today.  (0 COMMENTS)

Almost every time I see an expert interviewed on the macroeconomy, they suggest that a substantial portion of the inflation over the past 5 years has been supply side. That’s wrong; none of it has been supply side. I’d go even further; essentially none of the inflation over the past 50 years has been supply side.To be clear, I am speaking of the total cumulative increase in prices over 5 years, or over 50 years. It is true that some of the inflation in 1979 was supply side, as well as some of the inflation during 2008, or 2022. There have been individual years where negative supply shocks pushed up prices, but just as many years where positive supply shocks pushed down prices. Many experts implicitly seem to think there’s some sort of “ratchet effect”, where negative supply shocks push up prices, and then inflation settles back to its average rate. That’s false. When negative supply shocks are not causing inflation to rise above average, positive supply shocks cause it to fall below average. West Texas crude currently trades at just over $70/barrel.  The graph below shows real oil prices over the past 80 years (deflated by the CPI): Adjusted for inflation, oil prices are about the same as they were in the late 2010s, and about the same as they were in the mid-1970s.  That means that the nominal price of oil has risen at roughly the same rate as the overall CPI over the past 5 years, and indeed over the past 50 years.  Oil doesn’t explain long run inflation at all. [To be fair, there was a permanent one-time rise in real oil prices during 1973, when the OPEC moved the industry from being a competitive market to a cartel.  Since then, it’s been mostly fluctuations round a real price of about $70/barrel.] When oil prices rise faster than the CPI, it puts upward pressure on the CPI.  Technically, the Fed could prevent this, but due to its dual mandate it generally allows higher oil prices to pass through to higher consumer prices.  When oil prices rise slower than the CPI, it puts downward pressure on the CPI.  Because oil prices have risen at roughly the same rate as the CPI over the past 5 years, and even over the past 50 years, oil shocks have had essentially no long run impact on the cost of living.  None.  The same is true of food price shocks, supply chain shocks, and other types of supply shocks.  They are a non-factor for long run inflation. So why do so many experts insist that supply shocks played a big role in the unusual inflation over the past 5 years?  They seem to have made the following error.  They correctly observed that negative supply shocks pushed consumer prices higher during 2022, but forget to note that positive supply shocks had an equally powerful downward effect on inflation during other recent years.  In other words, the supply shock part of the problem really was transitory.  So why wasn’t the overall inflation rate transitory, as many had predicted?  The answer is simple.  All of the cumulative inflation since 2019 is demand side, and demand side inflation is permanent.  PCE inflation over the past 5 years has exceeded the Fed’s 2% target by a total of nearly 8%.  NGDP growth has exceeded 4%/year by a total of roughly 10%.  That’s the entire problem—supply shocks have nothing to do with it.  If anything, we’ve had enough positive supply shocks (mostly immigration) to hold inflation 2% below the level you would expect from the extreme demand stimulus that was provided.  The Fed actually got lucky. (0 COMMENTS)

Editor’s Note: You may have heard that price theory needs a revival. We agree. The economic way of thinking has of late been subsumed by mathematical analysis absent intuition. Fortunately, Professor Bryan Cutsinger is here to help. We are happy to present this first in what will [for now] be a monthly series in which Cutsinger presents price theory questions for your consideration. Professor Cutsinger will be present for two weeks for feedback in the Comments section, helping you to “solve” each problem. We can’t wait to see your responses!   Question 1: In his book, Basic Economics, Thomas Sowell (2015) writes, “the price which one producer is willing to pay for any given ingredient becomes the price that other producers are forced to pay for that same ingredient” (p. 20). With that quote in mind, consider the following scenario:  The demand to drink milk rises while the demand for milk in the form of cheese, ice cream, and yogurt remains the same. Assume that the supply of milk is perfectly inelastic. Explain why the elasticities of demand for milk in these other uses determine how much milk will be reallocated from these uses for direct consumption. (0 COMMENTS)

  I finally got around to watching a Cato Institute forum from May in which Cato health economist Michael Cannon discusses with health economist Luca Maini of Harvard Medical School and  health economist Pragya Kakani of Cornell Medical School the effects of Medicare price negotiation on drugs. The forum is “At What Price: Determining Pharmaceutical Prices in Medicare,” May 22, 2024. (You can listen at 1.25 speed.) The bottom line is that the negotiation will only slightly reduce the present value of the revenue stream that goes to pharmaceutical companies and, therefore, will only slightly reduce the discovery and introduction of new drugs. The person who lays this out most clearly is Professor Kakani. Her presentation is third, and goes from 41:30 to 55:40. Notice the requirements for a drug to be subject to Medicare negotiation. Kakani shows an interesting slide on that at the 46:49 point. The drug must be a brand-name drug, it must give rise to more than $200 million in annual Medicare expenditures, it must be on the market for at least 9 years (for small molecules) or 13 years (for biologics), and must face no competition from generics or biosimilars. She also lays out 3 other categories that are exempt from price negotiation. Kakani shows that in steady state, only $43 billion of Pharma’s $1.1 trillion (in 2022) would be on drugs subject to Medicare negotiation. (She assumes that the price negotiation has been in place for years and thus gets to a steady state.) That’s only a 4% hit. If the Inflation Reduction Act (which introduced price negotiation) cut the relevant drug prices by 50%, global revenues would fall by 2% (50% times 4%.) She then takes an extreme case: a drug with high Medicare exposure (2/3 of revenue from the US vs. the actual average of 30 to 40%) and a 67% reduction in prices due to negotiation (rather than the Congressional Budget Office’s estimate of 50%.) She then estimates that in present value terms, there would be an 11% drop in revenue. One reason is that the price negotiation comes after the drug has been around for a long time; the further out in time, the lower the loss to Pharma in present value terms. (She doesn’t state what interest rate she uses.) All the heavy lifting happens by the 54:40 point. At 1:07:00, Michael Cannon points out that Sam Peltzman found in the early 1970s that the 1962 law that required proof of efficacy reduced the stream of new drugs by 60%. That suggests an idea: repeal the 1962 law and have the FDA certify safety, not efficacy, as it did pre-1962 and then we would have way more innovation on net, even with the Medicare price negotiation.   (0 COMMENTS)

The Cato Institute recently released a new poll and report detailing public opinion on trade.  The headline number is very encouraging: 63% of Americans want to increase trade with other nations.  There are some details to discuss, but in general Americans do not have the protectionist streak their politicians do.  Again, this is encouraging because it does not suggest a broad based turn away from the trade liberalism that has generally characterized the post-World War 2 era, at least in the mind of the public. What is interesting about these numbers is that they come even as Americans are skeptical about the effects of trade on jobs and wages.  According to the poll, about 39% of respondents worry trade reduces the number of jobs, 37% are concerned trade reduces the quality of jobs available, and 39% think trade reduces wages.  Indeed, 80% fear trade has harmed some American industries.  Despite these concerns, Americans reject protectionism: 2/3rds-4/5ths of Americans reject tariffs when even small increases in price occur (the question is asked multiple times in multiple ways, thus the range).  About half of Americans (48%) reject tariffs that are lobbied for business or industry groups. There are many other fascinating tidbits in the report.  But these instances of skepticism represent a major source of advancement for the classical liberal movement.  Education appears to be the way to reduce skepticism over trade and build broader support.  Of course, education can be formal (indeed, one of the graphs in the report finds support for trade is highly correlated with one’s formal educational achievement), but with the proliferation of blogs, YouTube, and other low-monetary-cost media, education can include informal as well. And this is why I write.  Writing blog posts, op-eds, doing podcasts, and so on are a vital 21st Century method of conveying information and helping people overcome their skepticism.  With trade in particular, correcting misconceptions is very difficult.  Concepts like comparative advantage are very difficult to understand and explain.  But Americans seem to have a good intuition for trade.  I think it is a worthy endeavor as an academic to help Americans understand those gut feelings. PS: one could respond “If trade is so popular, why is protectionism a platform of both major parties?”  The report answers that as well.  Only 1% of respondents say that trade & globalization is a “Top 3” political issue for them.  Protectionist adoption by both the Democrats and Republicans is your classic Public Choice result: while it is politically unpopular, the group who considers it important are a minority.  Politicians can adopt the position, win votes from special interest groups who strongly support such handouts, and not significantly risk losing votes.  Other issues like inflation, jobs, immigration, etc., all play a bigger role for voters.  Helping them understand the connection between trade and these issues will also help push back against the protectionist movement.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

I recently watched Alien: Romulus in theaters. I won’t spoil the movie here, but I will say that I enjoyed it much more than the more recent entries in the franchise like Prometheus and Alien: Covenant. The original Alien and its sequel Aliens were among my favorite movies growing up – and Romulus is very successful at capturing the spirit and feel of those films. But the movie also made me wonder about something – why is Hollywood so bad at writing stories about corporations that are believably evil? The story of Alien: Romulus centers around the efforts of the Weyland-Yutani corporation to capture and somehow “harness” the xenomorphs for criminally under-specified reasons. (No, this is not a spoiler – this is the plot of basically every movie in the Alien franchise.) The first Alien vs Predator movie is set in the modern day, whereas the original movies are set hundreds of years in the future. This means that Weyland-Yutani has spent literally centuries attempting this task with a 100% failure rate. The xenomorph is an incredibly dangerous creature that unstoppably murders everyone in the vicinity and reproduces by harvesting humans as hosts, killing them in the process. Every time the company has attempted this project, the end result is “basically everyone dies and pretty much everything gets destroyed.” The company has endured massive costs in lost personnel and lost equipment while getting nothing valuable in exchange, but they never stop attempting the same thing over and over again. Nor is this movie series unique. RoboCop was also among my childhood favorite movies, and this movie series also centers their plots around the actions of evil, greedy corporations. Indeed, the first RoboCop movie in particular has often been hailed as a brilliant form of social commentary on corporate greed. But just like the fictional Weyland-Yutani from the Alien franchise, the evil corporation of the RoboCop movies, Omni Consumer Products, is depicted as doing nothing but making a string of catastrophically stupid, highly expensive decisions that make no business sense at all, and are virtually guaranteed to cost massive amounts of money and resources while providing the company with nothing valuable. In the second RoboCop movie, OCP decides to make another RoboCop, but instead of using a recently deceased, highly dedicated law enforcement professional as in the first movie, they decide it’s a good idea for their new RoboCop to be built around a highly dangerous drug lord, cult leader, and career criminal. In addition to making this person into a near-indestructible walking tank, they also decide it’s a good idea to have him operating on a supply of mind-altering drugs at the same time. Shockingly, this plan somehow backfires! But this seems less like something someone would be driven to do because it seems like a feasible money-making strategy, and more like something they’d do out of a sheer commitment to make the most cartoonishly evil decisions possible, profits be damned. One more example – the Tyrell Corporation from Blade Runner. Again, I love this movie, but the “evil greedy corporation” angle of this movie just makes no sense at all. The Tyrell Corporation sells “replicants,” which are essentially vat-grown humans to be used for short term labor. Short term, because replicants are programmed with a four-year lifespan. And replicants also feel pain, emotion, and have independent wills, leading them to frequently go on the run. This happens so often that there is an entire segment of the police force, the titular Blade Runners, dedicated solely to tracking down runaway replicants. This is a terrible business model. If I offered you a chance to invest in a business of mine selling tractors, but I also told you every tractor I produced was guaranteed to break down in a few years, could actually feel pain and emotions (including resentment of the people operating them), were capable of running a way and frequently did so, and could blend in to society so well that it would take an entire department of highly trained specialists to find and identify them, I bet you’d turn down this investment opportunity. The greedier you are, the less likely you’d be to want to be part of such a fantastically terrible business strategy. In all of these films, it seems like the only thing that prevents these companies from self-destructing due to their incompetent business choices is that The Screenwriter Wants to Make a Point, and these companies somehow remain profitable despite their ineptitude because The Screenwriter’s Point Requires It. I’m not opposed to using fiction to make points of real-world relevance, but if your point requires jettisoning even a smidgen of verisimilitude to be made, perhaps that’s a sign that your point isn’t as strong as you think it is. Of course, not all of my childhood was spent watching hyper-violent movies primarily aimed at adults. I did also watch things that were actually aimed at kids, such as the show Captain Planet. I absolutely loved that show when I was in grade school. But looking back, again, the villains of that show just made no sense. Captain Planet depicts pollution not as an inevitable side-effect of the productive activity that both enables modern human civilization and greatly expands the length and quality of the human lifespan. Instead, in Captain Planet, pollution occurs because morally evil people with names like “Looten Plunder” or “Hoggishly Greedy” (or toxic radioactive sludge monsters like “Duke Nukem”) decide to take oil tankers and deliberately crash them into the beach for…the sheer joy of watching baby seals suffer, I guess? It’s not as though writing characters with believable motivations is an impossible feat. For example, I once wrote about how the show House, M.D. featured a realistic depiction of Bryan Caplan’s model of rational irrationality. And part of what made it compelling was the believable motivations of the characters involved: As with all good fiction, this is a totally believable bit of writing. Nobody who watches this episode will think “The way Foreman is acting is so unrealistic.” We all can see how that kind of behavior makes sense, and how we’d almost certainly do the same thing if we were in a similar position. This is why I find it so curious that the films that are often held up as providing scathing critiques of corporate greed fail so badly at writing stories where greed is actually a believable basis for the actions the corporation takes. Instead, these corporations seem motivated by the directive “be as evil as possible, no matter how wasteful, expensive, and unprofitable it becomes.” (0 COMMENTS)

The following two tweets caught my eye: On one level, these are both sort of “gotcha” tweets, implicitly arguing that JD Vance has accidentally made the case for more immigration.   But I’m more interested in something else—what motivated Vance to make this claim?   Political statements can be evaluated in many different ways.  One might view them as expressing the opinion of the politician.  But it’s also worth thinking about why the statement was made.  Politicians have many different views—but what determines which views get expressed in a political campaign?   It seems plausible that successful politicians tend to express views that they believe will be persuasive to voters.  Note that I am not commenting on the sincerity of the politician.  Regardless of whether they believe “X is true”, or do not believe X is true, they would not be inclined to campaign on “X is true” unless they thought the message was effective. In this particular case, I’m not particularly interested in what Vance believes.  But I am very interested in what Vance believes that the public believes.  The fact that Vance is advancing this argument in a campaign suggests that he believes the public does not see America as being among the world’s richest countries.   It would be interesting for a pollster to ask the public whether the US or China is the richer country.  I suspect that a significant share of respondents would say “China” (albeit not a majority.)  Of course, the US is many times richer. Here’s another good question.  “Does the US adhere to international trade laws while other countries cheat?”  Again, I’d expect many wrong answers.  (Yes, we often cheat.) It seems to me that when the public is optimistic about the state of the country, the ideology of nationalism has less appeal.  If you go back to a period when the US was clearly number one, say 1965, the mood of the public was pretty supportive of global institutions.  When the public believes that other countries are getting ahead of the US, especially if they believe other countries are cheating to get ahead, then the public is likely to become much more nationalistic. A few months ago, I did a post pointing to the odd fact that the US was the country that had accepted the most immigrants and was also the richest country.  Taken literally, Vance’s statement could be viewed as essentially identical to my post.   Despite using the term “if”, however, it is the clear implication of his statement that the US is not the richest country.  But at least Vance and I agree on one thing—one fact implies the other.  We agree that the correlation between America’s high rate of immigration and America’s position on the world’s richest country list is probably causal.  Now we just need to figure out if America is indeed a very rich country, or not.  (0 COMMENTS)

  Another nugget from Jonathan Lipow’s book Public Policy for Progressives. I’ve posted three times now on Lipow’s book (here, here, and here). One thing I like a lot about Jonathan is that although he’s a progressive, he’s also an economist. And he doesn’t leave his economics at the policy door. Here’s an interesting insight about Medicare for All as a solution to health care spending. He writes: One hint that Medicare is part of the problem and not the solution is that no American below the age of 65 is on Medicare, and the US spends only moderately more per person on healthcare for these people than other OECD countries. Meanwhile, all Americans above the age of 65 are on Medicare, [DRH note: not quite true. My wife and I are on Medicare Part A but not on the rest of Medicare. As a federal retiree, I retained my employer-provided health insurance] and America’s healthcare spending per person for this group far exceeds that [of] other OECD countries. Formally, that doesn’t prove anything, but where there is smoke there just might be a fire–and Medicare is shrouded by a huge plume of dense smoke. Later he points out: The first change that the “Medicare for All” proposal would make to traditional Medicare is to eliminate all co-pays, deductibles, and premiums. That would convert Medicare into a program very similar to the extravagant “all expenses paid” FFS [fee for service] insurance policy studied in the RAND experiment. Recall that the experiment found that “free FFS” insurance ran up bills by 30%, while achieving only negligible benefits in terms of health. Would something similar happen if we adopted “Medicare for All?”     (0 COMMENTS)

Johns Hopkins surgeon Dr. Marty Makary talks about his book Blind Spots with EconTalk’s Russ Roberts. Makary argues that the medical establishment too often makes unsupported recommendations for treatment while condemning treatments and approaches that can make us healthier. This is a sobering and informative exploration of a number of key findings in medicine that […] The post What Modern Medicine Gets Wrong (with Marty Makary) appeared first on Econlib.

  Pro-War Lobby Attacks Russian Influencers by Ted Galen Carpenter, antiwar.com, September 10, 2024. Excerpt: But even in the unlikely event that the charges are accurate, other more fundamental issues should concern all Americans. The statutes that he is accused of violating are sufficiently vague as to pose a threat to freedom of speech and to badly needed debates on numerous international issues, especially the tense relations between Russia and the United States. Could, for example, publishing an article in the National Interest or participating in a discussion sponsored by the Center inadvertently violate pertinent statutes? What about a paid interview? How could an author or participant be confident one way or the other? The mere existence of the Foreign Agents Registration Act and various sanctions laws directed against specific countries pose an intolerable threat to the 1st Amendment.   Surface Transportation News: Questions about the Key Bridge replacement by Robert Poole, Reason, September 10, 2024. Excerpt: In a recent release, the International Bridge, Tunnel and Turnpike Association (IBTTA), said: “The formal designation of the I-695 corridor as an Interstate highway…federalized the bridge replacement project, extending all the limitations on revenue uses contained in Section 129 of Title 23 of the U.S. Code.” This statement implies that there would be a federal problem with using toll financing to replace the Key Bridge. That’s false. Congress explicitly revised that section of the statute in 1991 to make clear that toll financing can be used to replace bridges on the Interstate system, regardless of whether they were tolled or not. That is how Louisiana is underway replacing the aging Calcasieu River Bridge with a toll-financed new bridge. (italics in original)   The Islamic Moses: The Key to the Judeo-Islamic Tradition by Mustafa Akyol, Cato at Liberty, September 10, 2024. Excerpt: It is, in a sense, a sequel to my earlier book, The Islamic Jesus (2017), which examined the Qur’anic depiction of Jesus Christ, revealing the intricate connections between Christianity and Islam. This time, I examine the Quranic depiction of Moses, who, curiously, is the most dominant human figure in the Islamic scripture, eclipsing even the latter’s own prophet, Muhammad. The Quranic Moses is just the key to a much larger story, though. The Jewish prophet was so central to Islam’s founding text because he was the role model for Islam’s own prophet. Muhammad embraced the core ideals of Judaism — a staunch monotheism with a comprehensive religious law — only to proclaim them to his people, the Arabs. The theological continuation between two faiths was so strong that modern Jewish historian Shelomo Dov Goitein (d. 1985) defined Islam as “from the very flesh and bone of Judaism.” This new religion, Goitein added, was “a recast, an enlargement” of its Jewish precursor. For many people in the West today, all this may be surprising to hear, because they are used to hearing about the “Judeo-Christian tradition,” while Islam is often considered, at best, a distant cousin. But the Judeo-Christian tradition is a modern concept popularized only in the twentieth century, when Western civilization finally began to question its dark history of antisemitism, while parts of the Muslim world sadly began to absorb it.   The Supreme Court Reined in Federal Regulators. What Happens Now? by Peter Suderman, Reason, October 2024. In 1984, the Supreme Court issued a unanimous ruling in favor of an Environmental Protection Agency (EPA) rule stemming from the Clean Air Act. The EPA rule allowed states to treat all pollution from a unified industrial group as a singular pollution source for regulatory purposes. A cohort of environmental groups challenged the rule, arguing that it allowed pollution-emitting devices to operate that would not have passed regulatory muster considered on their own. It was a technical exercise in statutory interpretation—but the case’s long-term impact had little to do with pollution or the intricacies of the Clean Air Act. Embedded in that decision, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., was a small revolution in administrative law. DRH comment: When I taught a public policy class, one of the examples I gave of how we could get a lower cost of reducing pollution was the Chevron case. I liked what the EPA did, but I now understand that it went beyond its mandate. The EPA allowed an industrial polluter to hit the targeted reduction by reducing pollution more from the source for which the cost was lowest. That meant that it hit the target at least cost. You can see why, I, an economist, liked it. I wasn’t familiar with the law. We Still Live in the Physical World by Virginia Postrel, Reason, September 10, 2024. Excerpt: Unfortunately, the book fails to meet an author’s obligations to the audience. It is riddled with contradictions, cherry-picked examples, and question begging. It is bereft of historical context. And contrary to the promise of the subtitle, it never reveals how Rosen imagines “being human.” That ideal seems to involve writing handwritten letters to distant loved ones—but not texts! never texts!—and embracing the boredom of long lines at Disney World. Rosen gives some of her most promising evidence short shrift. She accords pandemic Zoom classes about a page. She doesn’t explore why online schooling is ineffective, nor does she consider when instructional videos—such as the how-tos found on YouTube—do work. Letting the abysmal effects of Zoom schooling stand in for all online instruction, she simply ignores the value of digital convenience for teaching such real-world skills as making a sewing pattern, fixing a garbage disposal, improving your passing game, or tying a tie. Perhaps she simply doesn’t know that how-to videos are common on YouTube. (Khan Academy also gets no mention either.) From Rosen’s viewpoint, if something is online it has nothing to do with the real world except to undermine it. Virginia is at her best in laying out the huge benefits to virtually everyone of much technological change. BTW, when I saw the title of her review, I thought of Madonna and I wanted to add, “And I am a physical boy.” (0 COMMENTS)