Timothy Taylor, at Conversable Economist, had a post on August 13 titled “What Economic Ideas are True and Nontrivial?” He starts with a famous story that Paul Samuelson told and I’ll quote it here: [O]ur subject puts its best foot forward when it speaks out on international trade. This was brought home to me years ago when I was in the Society of Fellows at Harvard along with the mathematician Stanislaw Ulam. Ulam, who was to become an originator of the Monte Carlo method and co-discoverer of the hydrogen bomb, was already at a tender age a world famous topologist. And he was a delightful conversationalist, wandering lazily over all domains of knowledge. He used to tease me by saying, ‘Name me one proposition in all of the social sciences which is both true and non-trivial.’ This was a test that I always failed. But now, some thirty years later, on the staircase so to speak, an appropriate answer occurs to me: The Ricardian theory of comparative advantage; the demonstration that trade is mutually profitable even when one country is absolutely more – or less – productive in terms of every commodity. That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them. Tim keys in on the last sentence in the above Samuelson quote. He writes: If the “non-trivial” criterion can be met by any economic theory where thousands of intelligent and important people are unable to grasp or believe it, then it seems to me that many economic theories are true and (apparently) non-trivial, including the (apparently) widespread belief that governments can set prices or impose tariffs without experiencing tradeoffs, along with many more. The news headlines provide examples of (apparently) intelligent and important people who seem unable to grasp or believe economic insights pretty much every day. I think Tim means that the true statement is that a government that sets prices and imposes tariffs will experience tradeoffs. That reminded me of a question that Armen Alchian and William Allen asked in their economics textbook University Economics. I came across it when I was TA-ing for an introductory microeconomics course during my first year at UCLA. Here’s question #21 from Chapter 13 of the third edition of University Economics (p. 21): Evidence of the very extent of specialization of knowledge is provided by Albert Einstein’s assertion just prior to his death (Socialist International Information): “The economic anarchy of capitalist society as it exists today is in my view the main cause of our evils. Production is carried on for profit, not for use.” Give evidence of your superiority over Einstein by exposing his error in economic analysis. I won’t bother answering their question because I think that, especially to readers of EconLog, the answer is obvious. I’ll give another one. We often see apparently intelligent people, observing that the share of income of the bottom 20% has fallen, argue that the poor are getting poorer. There are two problems with this. The more obvious is that the share of a growing income can be falling but the average incomes of people in that lowest quintile can be rising. The second, and less obvious, is that the people in the lowest quintile in one year are not all the same people in the next year. And over a decade, there is huge mobility among income quintiles. (There’s a third problem also: income, though positively correlated with wealth, it not perfectly correlated. Someone can be in the bottom quintile of income and still be fairly wealthy.) Note: The related pic is of Universal Economics, an update of the old Alchian and Allen text. (0 COMMENTS)

In the 1960s and 1970s, a fashionable idea, at least among the Western intelligentsia, was the convergence between socialism (read: communism) and capitalism. Even less obvious than today was the true distinction between, on one side, a regime of individual and private choice and, on the other side, a system of collective and political choice. Most people believed instead that the main line of fracture was between capitalism (i.e., the Right and the United States) and communism (i.e., the Left and the Soviet Union). Few saw that the convergence going on was about the supremacy of collective choices (whether of the Left or the Right) swallowing up the (classical liberal) philosophy of individual choices. At that time (in illo tempore), a whole literature developed on the convergence of capitalism and communism. In Gregory Grossman’s Economic Systems (Prentice Hall, 1967), I just reread what I then underlined (pp. 112-113): In the past, these kinds of planning and steering were instituted too rigidly in the East and perhaps too loosely in the West; some future convergence on this plane is not at all unlikely. (The already-mentioned considerable similarity between French and Yugoslav planning may be a case in point; they are, so to say, on the frontiers of capitalism and socialism, respectively.) … While the Soviet-style East moves towards less rigid economic control by central authorities, and while the West is searching for more effective forms of social control, both sides are beginning to look forward seriously to the problems of higher productivity. (In the roaring sixties, many believed that people could be totally free if the state were absolutely powerful, an idea recently rediscovered by a couple of economists who went on to win a Nobel prize.) Forward to the present, the convergence has been progressing much faster, albeit not less stealthily. America has joined the race with a vengeance. A column of Greg Ip in the Wall Street Journal makes the point in different terms (“The U.S. Marches Toward State Capitalism With American Characteristics,” August 11, 2025); the whole piece is worth reading, but a couple of quotes will give its flavor: A generation ago conventional wisdom held that as China liberalized, its economy would come to resemble America’s. Instead, capitalism in America is starting to look like China. … This isn’t socialism, in which the state owns the means of production. It is more like state capitalism, a hybrid between socialism and capitalism in which the state guides the decisions of nominally private enterprises. Of course, even from a narrow economic viewpoint, the pursued primacy of collective choices remains as much an illusion as it was more than half a century ago. Greg Ip notes: Chinese state capitalism isn’t the success story it seems. Barry Naughton of the University of California, San Diego has documented how China’s rapid growth since 1979 has come from market sources, not the state. (0 COMMENTS)

As I mentioned in my last post, Musa al-Gharbi argues that the post-2011 Awokening – that is, the rise of social justice activism and the escalating adoption of social justice ideology among the symbolic capitalist class – was not an unprecedented event. He argues that Awokenings have occurred before and have taken largely similar form. This shouldn’t be overstated – each Awokening was not identical to another, but as Mark Twain might say, they all rhymed. The first wave Awokening, al-Gharbi says, “peaked toward the 1920s and crested through the early 1930s.” This first Awokening saw symbolic capitalists “campaigning for civil rights” while others “aligned themselves with feminists” and “the first gay rights advocacy organizations were also formed at this time.” In addition, there was an increase in support for socialism and protests against military action. There was a second wave Awokening movement from the mid 1960s to the early 1970, with a third wave from the late 1980s to the early 1990s, with the fourth Great Awokening rising in 2011. The content of each of these Awokenings was very similar – a spike in concern among the symbolic capitalist class regarding racism, economic inequality, poverty, the rights of sexual minorities, and against the establishment. But what motivated the symbolic capitalists – the elites of the established order – to rise up at these times in protest against the established order? Musa al-Gharbi’s answer is that Awokenings come about as a result of what he calls “elite overproduction.”  As he describes it, Elite overproduction occurs when a society produces too many people who feel entitled to high status and high incomes relative to the capacity of that society to actually absorb elite aspirants into the power structure. Under these circumstances, growing numbers of frustrated erstwhile elites grow bitter toward the prevailing order and try to form alliances with genuinely marginalized populations in order to depose existing elites and install themselves in their stead. This is also why, as I alluded to in my previous post, it takes a specific kind of “hard times” to produce an Awokening. When times are hard for the people at the bottom but good for symbolic capitalists, the latter have no real reason to rock the boat. When times are hard for the professional class but relatively good for ordinary people, the general public will tend to “care even less about elite problems that they otherwise would.” And because during these time the majority of the population feels things are going well, “concern about social justice issues tends to recede into the background” and this has the effect of “constraining the ability of frustrated elites and elite aspirants to leverage social justice discourse in service of their own ends.” But there is a particular combination of events where things change: However, there are occasional moments when the trajectories between elites and nonelites are partially collapsed—when things have been bad and getting worse for ordinary folks for a while and are suddenly fraught for symbolic capitalists too. These are moments when Awokenings tend to occur. When things have been bad for ordinary folks, social justice concerns begin to rise among the population in general: Narratives indicting the prevailing order and the people at its helm are already taking off. Perennial campaigns, such as women’s rights movements or racial justice movements, which generally fall into abeyance patterns during times of prosperity, begin gaining new traction among a broader swath of society. When the professional class also feels the stress, these rising movements become opportunities for them to challenge the system they believe has failed to provide them with the status and security they feel they deserve. The scorned elites or elite-aspirants also experience “frustration toward those who are enjoying success and apparent security.” Those elites, they say, are corrupt and need to be replaced by better people – people like us. This frustrated branch of the professional class begins to form an alliance with existing social justice movements. But in short order, their membership in the alliance quickly becomes their attempt to control it: However, these newly mobilized symbolic capitalists are rarely content to be mere foot soldiers or subordinates in social movements. They’re elite aspirants, after all. And in virtue of their ostensibly superior knowledge and skills, they often see themselves as uniquely well suited to determine the ideal aims and tactics of movements. This, in turn, leads the social justice movements in directions that have little to do with the actual well-being of those such movements are supposed to help: And as symbolic capitalists become conspicuous faces and voices of social movements, they generally define and pursue the cause in ways that flatter their own sensibilities and serve their personal interests. This is commonly to the detriment of the genuinely marginalized and disadvantaged in society because the preferences and priorities of symbolic capitalists tend to be demonstrably out of sync with those of the people they are ostensibly speaking for and advocating on behalf of. One example al-Gharbi gives is how, in the most recent Awokening, social justice activists would pour tremendous time, energy, and resources into removing the names of disfavored historical figures from schools and renaming those schools after the “right” people, as preferred by symbolic capitalists. Yet, as al-Gharbi points out, “if nonwhites who live in the affected communities had been consulted about their top concerns, it would have been clear that the name of the local school would not rank anywhere near the top of their priorities.” Their primary concerns were much more pedestrian issues like whether or not they’d be able to afford groceries to feed their children. However, “rather than addressing those concerns, or even bothering to find out what those concerns are, mainstream symbolic capitalists focus on securing symbolic victories” rather than focusing on issues that actually mattered to the “normies.” This dynamic also shows something that is not commonly understood about Awokenings. It’s often spoken as if Awokenings come about as grassroots movements – those at the bottom, frustrated about their difficulties, spontaneously organizing and rising against the system. But al-Gharbi argues that the Awokenings and the social movements that rise during them are fundamentally movements of elites (or elite-aspirants) who wish to become even more elite, not of the masses. For example, one of the first movements to rise in prominence during the most recent Awokening was Occupy Wall Street. One might look back at this movement and imagine it was a movement of the poor rising in frustration against their poverty. However, Contrary to depictions of Occupy as a broad-based movement, symbolic capitalists were its primary base. For instance, despite the diversity of the city, participants of Occupy demonstrations in New York were overwhelmingly non-Hispanic white. They were nearly uniformly liberal in their political orientations. They were also relatively affluent: roughly three-quarters (72 percent) of participants came from households above the 2011 New York City median. The Occupy movement was a movement of highly educated professionals frustrated that they hadn’t been able to secure the high prestige, high paying jobs they expected and felt they were entitled to. Similar demographics were found in the post 2016 #Resistance movement, an umbrella term describing “the March for Science, the Women’s March, and the March for Racial Justice” among others. Looking at the makeup of these movements and their attendees, we find they were “overwhelmingly concentrated in knowledge economy hubs, just like Occupy protests were. The average adult age of the demonstrators was thirty-eight to forty-nine years old. Far from being a project of passionate young people, the #Resistance movement comprised primarily of midcareer professionals associated with the symbolic economy. The Occupy crowd, but half a decade later.” Just like Occupy transitioned to the #Resistance, frustrated elites began a long march through social justice causes: As the initial (Occupy) movement fizzled out, roughly the same constituencies began mobilizing alternative modes of social justice discourse, largely toward the same ends. Many who spent 2011 shouting “We are the 99 percent” spent 2013 proudly declaring that “Black Lives Matter,” identified as part of the #Resistance under Trump, began telling #MeToo stories in 2017, and became “trust the science” stans from 2018 through the COVID-19 pandemic. It’s all been part of the same wave of activism among mainstream symbolic capitalists. Occupy in particular served one other key purpose for these frustrated elites with its branding. Casting the struggle in terms of the 99 percent vs the 1 percent allowed these elites to act as though what would be beneficial for them was really about what would be good for the poor or needy, as though merely being in the ninety-seventh percentile of wealth made you basically the same as someone living at the edge of poverty. As al-Gharbi puts it, “Rather than advocating for concrete policies that could tangibly assist the marginalized or disadvantaged in society, or developing some actionable platform that could help promote broad-based prosperity, the movement was primarily focused on villainizing those above symbolic capitalists on the socioeconomic ladder.” Symbolic capitalists, while well off, are not the superelite of society. Symbolic capitalists usually hold the wealthiest members of society in low regard, and have “consistently condemned superelites as selfish, short-sighted, and insufficiently deferential to people like ourselves.” Citing the work of Max Weber, al-Gharbi describes this disdain: As sociologist Max Weber emphasized, elites who hold social status in society on the basis of attributes like their knowledge, skills, or institutional rank tend to be resentful and disdainful toward those who enjoy a high social position primarily on the basis of their business success and accumulated wealth. It has always been our strong conviction that society would be vastly improved if people listened to and admired millionaires and billionaires less and valued the perspectives of intellectuals more. These sentiments are heightened, Weber argued, when symbolic capitalists find their own status or socioeconomic position threatened or particularly precarious. During these periods, we become much more likely to rail aggressively against capitalism and the superrich—often cloaking our struggles for wealth, status, and power as social justice advocacy—although our passion for revolution tends to rapidly fade once our own objectives are met… Highly educated and wealthy activists used the framing of Occupy to portray themselves as on par with the “little guys,” just as much under the thumb of the superrich as the poor. However, one must not overestimate the power of these superelites compared to symbolic capitalists. As al-Gharbi goes on to describe, for all the railing against the 1% that the professional class uses, the symbolic professions are hardly helpless against the power of the extremely rich: We shape the system in accordance with our own tastes and desires, independent of, and sometimes in conflict with, the preferences and priorities of superelites…What’s more, even when superelites try to outright dominate us, they often lose. He gives the example of a struggle for power between the symbolic capitalists who operated the Ford Foundation, and the will of the actual Ford family. During the second Great Awokening, the symbolic capitalists began to use the Ford Foundation as a vessel for their own social justice activism, turning it away from its original “mission of supporting hospitals, museums, and basic science” as initially intended. Henry Ford II tried to assert his control over the situation, only to be pushed out of the organization bearing his family name by the symbolic capitalists nominally under his control. As al-Gharbi sums it up, “The Fords went to war with symbolic capitalists in their own family foundation. The symbolic capitalists won.” So why do Awokenings end? Recall how al-Gharbi said “our passion for revolution tends to rapidly fade once our own objectives are met.” Awokenings are caused when enough frustrated elites fail to achieve the status and security they expect. This also means as the situation for these frustrated elites improves, and they find themselves gaining the highly prestigious and financially secure positions they expected, their motivation for activism fades away. And so, too, does the Awokening. For example, the first Awokening al-Gharbi identifies occurred in the late 1920s to the early 1930s. As described in the previous post, the years leading up to this first Awokening saw the rise of technocratic power in both state and corporate entities and the establishment of symbolic capitalists in these powerful and high status positions. These new elites took steps to ensure their positions were safe: As the symbolic professions were being consolidated, and their positions elevated, educational and certification requirements were increasingly used as barriers to lock out minorities, immigrants, and the poor. But there came a disruption: Then, the Great Depression hit. Suddenly, many who had taken for granted a position among the elite, who had felt more or less entitled to a secure, respected, and well-paying professional job, found themselves facing deeply uncertain futures—especially because layered on top of the economic insecurity were profound geopolitical concerns… Consequently, rather than enjoying the secure and comfortable lives they had imagined for themselves, aspiring elites were facing the prospects of downward social mobility (as a result of the Depression) and possible deployment into a war. The anxiety, frustration, and looming socioeconomic humiliation of elite aspirants quickly curdled into rage against existing elites and the society that failed them. As one college magazine editorial bluntly put it, “Educated for jobs that do not materialize, students will grow resentful towards the existing order and will use the learning they have acquired to overthrow it.” The result was the first Great Awokening. But FDR’s programs in particular were very beneficial to these insecure elites – it provided them with new positions of power among the multitude of agencies and bureaucracies FDR created, securing their situation. And despite the continued hardship the Depression continued to inflict on the normies, this improvement in the situation of the elites was, it turns out, enough to cause the first Awokening to fizzle out: Contrary to their radical rhetoric, they wanted relatively high-status jobs and socioeconomically comfortable lives far more than they wanted to actually overthrow the existing order. And the Roosevelt administration provided what they wanted. By the time FDR stood for reelection for the first time, the New Deal was well underway. Major expansions of the government bureaucracy provided elite workers with stable, respected, and well-paying positions… Civil rights and feminism did not consume their efforts or attention much. Socialism and communism no longer held much purchase with them. The “radicals” of the 1930s became the establishment that protestors would later rebel against in the 1960s and 1970s. The same occurred with each subsequent Awokening. As circumstances got better for the professional elites, their commitment to social justice activism and woke ideology took a backseat or disappeared altogether, and the Awokenings withered away – regardless of whether or not things actually got any better for the communities these social justice activists were ostensibly trying to support. Still, this leads to another important question – what, if anything, are the long-term consequences of Awokenings? Do they actually create long lasting impacts, and if so, are the results beneficial or deleterious? That will be reviewed in the next post. (0 COMMENTS)

President Trump signed the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) into law on July 18th, promising to “cement American dominance of global finance and crypto technology.” In his post-signing speech, the president explained, “the GENIUS Act provides banks, businesses and financial institutions, a framework for issuing crypto assets backed one for one, with real us, dollars, treasury bills and other cash equivalents, is really strengthening the dollar and giving the dollar great prominence [sic].” Trump declared that the Act “creates a clear and simple regulatory framework to establish and unleash the immense promise of dollar backed stablecoins.” USD stablecoins have been in existence since the 2014 launches of Tether and BitUSD, but they’ve gained prominence in the last few years with an increasing number of issuers and widening acceptance. With the supportive regulatory environment of the GENIUS Act, they should surge in popularity and gain wide usage and acceptance.  I’ll briefly address the uses and ostensible benefits of stablecoins, but I want to focus on what I think is the most exciting feature, which is their potential to herald a renewal of free banking.   Why Stablecoins? Most Americans find it extremely convenient to transfer money or make payments by tapping a debit or credit card. Indeed, in the US about 85% of payments (by number), and 96% of payments (by value) are made via these kinds of bank-to-bank transfers. Investopedia has a nice explainer on ACH—the Automated Clearing House—for  those interested in the nuts and bolts of interbank payment processing. But are there any drawbacks to using this ubiquitous bank-issued money? Plenty. Let’s start with fees: Banks charge fees ranging from a few dozen cents for debit transactions to over 3% for credit card sales. Next is timing: although most payments settle on the same day, larger payments often take days to clear, and wire transfers must be executed during business hours. Regulations requiring banks to scrutinize transactions (especially large sums) for criminal activity also drive these fees and delays. Finally, to use a debit/credit card, check, or wire transfer, both payer and payee must be “banked.” This is not too big of a problem in the US, where only about 4% of the population, or 5.6 million households, don’t have bank accounts. Globally, however, 24% of the population is unbanked, and this proportion is higher of course in undeveloped countries with weak legal institutions. More people have smartphones than have bank accounts in these places, which means stablecoins can step up and solve the cost, timing, and network problems all at once. Stablecoin transfers on their respective blockchains can be consummated instantly and with zero or negligible fees. Stablecoins can be transferred anonymously to anyone with a crypto account “wallet,” which does not require a bank account and is easily accessible in a competitive crypto-custody marketplace. Stablecoins, therefore, are particularly useful for foreigners who wish to transact in dollars, but lack access to US bank accounts. Stablecoins will facilitate both dollar remittances abroad, and foreign flows of capital into the US economy.   Stablecoins and Free Banking Stablecoin issuers are essentially banks. While they don’t (for now) lend out the money they take in, they perform the money-provision and payments system roles of banks. As several commentators have noted—mostly with disapproval—this is reminiscent of the “free banking” era, in which banks were able to issue private currencies denominated in their countries’ monetary units. In historical free banking systems, most of the functional money supply was provided by private banks, in the form of banknotes (currency) and bank deposits (checking accounts). Stablecoins are “backed” by either regular bank deposits or US Treasury securities—indeed the GENIUS Act requires 100% backing of stablecoin issues with one of these forms of liquidity. Free bank notes in the 1700s-1800s were “backed” by each bank’s specie reserves of gold and silver coins, and banks could and did issue more total liabilities (notes and deposits) than their specie reserves. This “fractional reserve” practice has led to much consternation among certain analysts, but leading scholars have found that free banking systems in Scotland, Canada, the United States and elsewhere were stable and successful. This is particularly remarkable in the US case, as state-level regulations, aimed more at governments’ fiscal goals than at monetary stability, allowed some fraud and unsound banking practices to prevail for a time in some areas. Free market skeptics wrongly uphold these “wildcat” banking episodes as emblematic of the entire system. But as Minneapolis Federal Reserve researchers Arthur Rolnick and Warren Weber noted in an overview of America’s free banking era, Free bank notes were relatively safe, although the degree of safety varied over states and over time within a state. New York bank notes were the safest; the expected value of a randomly selected New York bank note never fell below 99 cents on the dollar, and for many years this expected value was one dollar. (Leading monetary scholar Lawrence White provides an excellent overview of free banking theory and practice in this podcast.) So what prevents banks from simply lending excessive amounts of banknotes into existence, causing inflation and/or destabilizing the economy? Simply the core “regulation” of free banking: enforced redemption of banknotes (and other bank liabilities), on demand, for the underlying monetary asset. Any bank that over-issues inside money will see the notes “flow back” for redemption, draining its reserves and forcing it to curtail credit—the corrective mechanism that scholars label the “law of reflux.” Competition and the market mechanism winnow the field and ensure performance and customer satisfaction. Banks that don’t keep adequate reserves nor prudently manage their loan portfolios will risk losing customers and their funds (deposits) to more soundly-managed institutions. More than merely efficiently satisfying customers in a competitive financial services market, free banking helps achieve “monetary equilibrium” and can avoid the problems associated with both over-issue of money (inflation, boom and bust) and stringency of money (deflation, depression). This is because free banks respond to market signals to increase or curtail the issuance of bank money, providing an “elastic” money supply which can expand or contract to meet the exact needs of businesses and the public. In other words, supply of money can adjust to meet changes in demand for money, eliminating the prospect of monetary shocks and consequent macro turmoil. Moreover, with strict redemption of bank-issued forms of money, free banking obviates need for government intervention such as deposit insurance and central banking, with their attendant moral hazards. In pure free banking, market discipline rules and imposes the responsibility of due diligence and risk management on both suppliers and demanders of money and credit. Opposition to Stablecoins Not everyone shares President Trump and the crypto bros’ optimism about stablecoins. Objectors raise two main arguments: Instability: won’t “fly-by-night” stablecoin operators be at risk of not being able to redeem stablecoins—i.e. they won’t have the underlying dollars, and if faced with a “run” on their coins they will have to shut down, leading to widespread panic and destabilizing the financial system? This view is promoted by mainstream economists such as Barry Eichengreen and Gary Gorton, who both smear stablecoins as a reiteration of the worst “wildcat” free banking episodes.  Nefarious activity: due to the anonymity of crypto, stablecoins enable criminal activity, money laundering, etc.  On the stability point: the free banking naysayers really need to check the literature on free banking before casually repeating bromides about wildcat banking. As noted above, free banking systems in Canada and Scotland were remarkably stable, and American free banking, despite serious flaws in regulatory structures, was more stable than mainstream scholars care to admit. The worst “wildcat” frauds were confined to a few states for a few years and only happened due to absurd regulatory loopholes that were quickly closed. On the criminality point: yes, criminals will use stablecoins, just like criminals use cash. Law enforcement is always playing a cat and mouse game with the crooks, and stablecoins will surely add some new challenges. I’m not convinced, though, by the argument, “we can’t allow this cost-saving, brilliant new technology, because bad guys will use it to facilitate crime.” The same could be said for any innovation, from cars to phones to the internet in general.  Of course, stablecoins today are layered on top of an entrenched monetary system, with the fiat US dollar, the Federal Reserve and its helicopter drops of new base money, federal deposit insurance, and a pile of banking regulations from 4 federal and 50 state regulatory agencies. Stablecoins cannot replace all of this with a pristine free banking system. Stablecoins can, however, bring a new facet of freedom and efficiency for one of most important aspects of the financial system: the provision of money that facilitates everyday business.  In sum, stablecoins have immense potential to serve as digital banknotes for the 21st century. Stablecoins can provide full elasticity of money supply, while end-running some meddlesome, costly bank-based regulations regarding other payment media such as deposits. Stablecoins can reduce the costs and increase the benefits of the money we use daily. Stablecoins have potential for greater positive impact than the advent of credit and debit cards.    Tyler Watts is a professor of economics and management at Ferris State University. (0 COMMENTS)

The Economist has an interesting article speculating that the red state advantage in housing affordability may be about to shrink: But what if red states’ cheap-housing advantage were to start shrinking? That may already be happening in places: a study by Edward Glaeser of Harvard University and Joseph Gyourko of the University of Pennsylvania published in May found that new homebuilding in big sunbelt metro areas such as Atlanta, Dallas, Miami and Phoenix has dramatically slowed, leading to higher prices. And on June 30th Mr Newsom signed a reform to make it harder for NIMBYs to block new housing in California, which could eventually make living there more affordable. We need to be cautious in making prediction on this issue.  In previous posts, I’ve argued that reducing the number of regulations that prevent home building may not actually make new construction much more feasible, especially if many regulatory barriers remain in place.  Thus, I’m not at all convinced that California has effectively addressed its housing problems.  Nonetheless, it’s worth thinking about the implications of this possible shift: If the red-state house-price advantage were to shrink a lot, the consequences would be widely felt. The most dynamic cities in blue states have very high wages, and California has weather “like the Garden of Eden”, says Mr Armlovich. If such places actually made it easy to build, the exodus from blue states to red could reverse, he reckons. . . . Such a shift would also undercut a potent Republican talking point, argues Mr Glock: that people vote with their feet and flock to red states because they are better governed and more liveable. Some red-state politicians are waking up to the threat. Texas recently passed several YIMBY reforms: making it easier to build homes in commercial areas, lifting restrictions on lot sizes and weakening what Texans call the “tyrants’ veto” that lets neighbours block new construction.  In previous posts I’ve discussed tax competition between states.  This competition intensified after the SALT deduction was limited to $10,000.  Congress recently increased the SALT limit back up to $40,000, however, which will significantly reduce tax competition between states. In the future, housing policy may become the number one factor in competition for new residents, especially as immigration restrictions and sharply lower birthrates slow or even end the growth of America’s population.  Despite high taxes and burdensome regulations, California has extremely high housing prices.  This suggests that there is still a strong demand to live here, which could lead to a large population inflow if regulations on building were further liberalized.   It is interesting to see that Texas is not waiting around to see if California’s YIMBY policies will succeed and instead is proactively trying to reduce its own incipient NIMBY problem. (0 COMMENTS)

AI art and music are quite amazing.  In seconds, you can create fun images.  To wit, below is a photorealistic image I created with ChatGPT of Adam Smith and David Hume having lunch and Hume sticking Smith with the bill: Or a cartoon image of my summer bowling league team, the Cosmic Colonels: Both of these had zero monetary cost.  I told GTP what I wanted, it generated them, and now I can share them. Among artists (by which I mean both those who generate art for art’s sake and those who generate art professionally, like graphic designers), AI is hotly controversial.  Professional artists understandably fear that AI will take their jobs.  Let’s use the “economic way of thinking” to analyze those fears and see what is most likely. Let’s start with the most basic, uncontroversial element of economic thinking: that demand curves slope downward.  That means that as price rises, quantity demanded falls (and vice versa). AI is relatively cheap for the user (as low as $0) compared to professional artists, so the law of demand suggests that people will demand more art.  This means people now demand original art for lower-marginal-benefit uses.  A reason demand curves slope downward is the law of diminishing marginal utility: As one consumes more of a good, one gets less satisfaction from each unit consumed.  Consequently, when acting as consumers, people seek to satisfy the highest marginal uses first and then move on to lower marginal uses.  This is why when the price of something is high, it tends to be used for high marginal value tasks as opposed to low marginal value tasks. So, as the price of art falls due to AI, more art is being consumed for low-marginal-benefit uses.  Uses like: creating a cartoon image of a bowling team or imagining David Hume as a cheapskate and bad friend.  These uses are not eliminating jobs because these images did not exist at a higher price; I am not paying an artist a commission to draw an image for a joke in a blog post. But what of the higher-margin uses of art?  At the lower price, could AI displace art that was previously supplying those uses, thus generating more consumer surplus (at the expense of producer surplus)?  That certainly will happen, to some degree.  Indeed, if the market were perfectly competitive (that is, if AI art were a perfect substitute for professional art), we should expect complete substitution of AI art for human-produced art. But for high-marginal-use art, the goals are different.  One isn’t making a cartoon image as an in-joke among friends, but producing commercial products, a customized portrait, or something else the person values highly.  AI may be able to replicate some of those tasks, but not all.  AI, for all its wonders, is not intelligent.  It is a computer program.  When dealing with AI, there is no “meeting of the minds” as with an artist.  AI isn’t particularly good at interpreting human communication.  It can be surprisingly difficult to get AI art to do what you want sometimes, and how it interprets prompts can be a mystery (even to the AI!).  With a human artist, communication can be much easier. Consequently, I expect the market to bifurcate.  One branch will be the low-marginal-use art.  That will flourish, but not cost any jobs.  The other branch will be high-marginal-use art, where humans will likely still dominate.  Where that bifurcation occurs will be where jobs are lost.  The intramarginal[1] artist would likely lose their job to AI.  Who they are and how many artists that represents, I cannot say.  But I do not expect AI to be the existential crisis some consider it for art creation and the art industry.   —— [1] Reminder: I am using “marginal” here in the economic sense.  These are artists who are operating right at the margin, right at the point of bifurcation.  “Marginal” does not imply that they are low-talent.  Rather, for whatever reason, the work they are producing is very close in value from the buyer’s perspective to what can be produced by AI. (0 COMMENTS)

Former submarine commander David Marquet joins EconTalk’s Russ Roberts to explore how distancing–thinking like someone else, somewhere else, or sometime else–can unlock better choices in business and life. They talk about leadership without giving orders, how to empower teams, and what it means to see yourself as a coach rather than a boss. Along the way, they discuss […] The post Learning to Think Like Someone Else (with David Marquet) appeared first on Econlib.

  Child Protective Services Investigated Her 4 Times Because She Let Her Kids Play Outside by Lenore Skenazy, Reason, August 9, 2025. Excerpt: During this visit, the social services worker acknowledged that our home was clean, that the children were happy, well-fed, polite, and well-spoken, but said the children had to be supervised 100 percent of the time when outdoors. When I asked what constitutes supervision, she said that I had to be visible to my neighbors when the kids were outside, regardless of whether or not I could see the children. I asked where that was found in the Virginia law. She replied that it isn’t in the Virginia law, but that Social Services has its own set of rules.   A Guaranteed Annual Income Flop by Editorial Board, Wall Street Journal, August 8, 2025. Excerpts: Progressives and a growing faction of Republicans support cash handouts as an important answer to America’s social ills. So readers might want to know about a study published as a working paper by the National Bureau of Economic Research that finds $1,000 monthly payments have few long-term benefits. Researchers with the nonprofit OpenResearch and several universities ran a randomized controlled trial to test the impact of a cash transfer on lower-income, working-age Americans. One group received $1,000 every month for three years—$36,000 total—no strings attached. The other were paid $50 a month to participate as a control group. And: Recipients also worked less, equivalent to roughly eight fewer days in the previous year. Yet OpenResearch touts that “average household income was roughly $6,100 higher for recipients than control participants, including the transfer amount” and payments “increased agency to work fewer hours or reduce the number of jobs held.” In other words, the payments led people to work less. DRH comment: 8 days a year is substantial. It’s about 3% of a 2000-hour work year. But it’s not as substantial as I would have expected.   The Fictions Holding Down the Economy by Dominic Pino, Civitas Institute, August 7, 2025. Excerpts: Phil Gramm and Donald Boudreaux have written a book called The Triumph of Economic Freedom in which they debunk seven economic myths that undergird much of American government policy today. The book is a valuable resource to anyone who needs a refresher on the defenses of free markets based on historical research. Both men are teachers at heart — Gramm taught economics before serving in Congress, and Boudreaux is a professor — and they communicate with clarity and precision. The problem is that people believe that the New Deal ended the Great Depression, free markets caused the Great Recession, the Industrial Revolution led to increased poverty, and free trade hollowed out America. They really, sincerely, believe these things to be true. And that really does matter. And: Between 1980 and 2000, the share of the world’s population living in extreme poverty declined from 34 percent to 25 percent. The death rate from malnutritiondeclined by 43 percent. Rice yields increased by 41 percent, and wheat yields increased by 47 percent. Global average life expectancy increased by six years. And all of that happened while the world’s population increased from about 4.5 billion to over 6 billion. DRH Note: Although I haven’t yet read their book, I suspect that they cover some of the same ground that I covered in this talk that I gave to students at Stanford University. BTW, I got Malthus a little wrong in my exposition I gave, as David Friedman pointed out to me. Although Malthus was dismal, he wasn’t that dismal. He thought people would adjust their behavior before they got to anything like mass starvation.   Why Tariffs On More Countries Can Be Better by Alex Tabarrok, Marginal Revolution, August 9, 2025. Excerpt: Suppose the U.S. can import Hyundai Sonatas from Korea and Toyota Camrys from Japan, and consumers view the two cars as perfect substitutes. We compare three scenarios: A)Free trade B)10% tariff on both countries (uniform tariff) C) 10% tariff on Korea only (selective tariff) The surprising result: B can be better than C, even though C is, in one sense, closer to free trade (the “best” policy) than B as it tariffs fewer countries. To focus on the key points I will assume 50 car buyers and no change in the number of buyers when tariffs change (so I will ignore the standard deadweight loss from reduced quantities).   DRH note: Although Alex doesn’t mention it in the title, notice that a crucial assumption in his proof is that the tariffs are uniform across imports from both Korea and Japan.   Note: The featured image was generated by ChatGPT. (0 COMMENTS)

I found many interesting points in a recent Financial Times story about cocoa beans, the main ingredient of chocolate: see Susannah Savage, Chocolate Cartels: The Rise of Cocoa Smuggling, August 2, 2025. The first set of facts relates to the great “deals” that the states of Ghana and Ivory Coast made with their cocoa farmers. Two-thirds of the world supply of cocoa beans comes from these two countries. The official deal was to protect the farmers against price fluctuations on the world market. The real deal probably aimed to allow each state to establish a monopsony of the domestic cocoa production: it could then pay the farmers less than the world price, resell the beans on the world market, and use the difference to subsidize the urban elite. With a world price of cocoa that reached $10,000 per ton (now down to about $7,000) over the last year and a half, the price paid to farmers only crept up, with a lag, from $1,000 to between $3,000 and $5,000. An economist won’t be surprised. In rich countries, where farmers make up a very small proportion of the population, they represent concentrated interests that use the state to exploit the rest of the population. In underdeveloped countries like Ghana and Ivory Coast, where farmers represent the bulk of the active population, they are typically exploited by the concentrated interests of urban and government elites. In general, public choice economics has taught us not to idealize the state: it is manned by people no less self-interested than you and I. Catering to organized and vocal interests serves the interests of politicians and their bureaucracy. A second revealing phenomenon is the rise of smuggling. Given the level of cocoa prices on world markets, farmers sell part of their crops (perhaps a quarter of it in Ghana) to smugglers, who, at some risk, transport it to neighboring countries, out of the reach of the national monopsony, and resell the beans for as much as $9,000 a ton (during the recent peak). From there, the beans are shipped to European processing hubs in Belgium or the Netherlands. Even with the state’s repressive apparatus, it is often impossible to prevent human individuals from trading when doing so is in their best interest. The reflection of a pilot trying to catch moving smugglers gives the flavor of the phenomenon: “It’s more dangerous to investigate cocoa than arms trafficking,” boasted the pilot, an adviser to the government, who requested anonymity and described it being “like cocaine in Colombia or in the Amazon”. Adam Smith saw the smuggler as a person who, though no doubt highly blameable for violating the laws of his country, is frequently incapable of violating those of natural justice, and would have been, in every respect, an excellent citizen, had not the laws of his country made that a crime which nature never meant to be so. … Not many people are scrupulous about smuggling, when, without perjury, they can find any easy and safe opportunity of doing so. To pretend to have any scruple about buying smuggled goods, though a manifest encouragement to the violation of the revenue laws, and to the perjury which almost always attends it, would in most countries be regarded as one of those pedantic pieces of hypocrisy which, instead of gaining credit with any body, serve only to expose the person who affects to practise them, to the suspicion of being a greater knave than most of his neighbours. By this indulgence of the public, the smuggler is often encouraged to continue a trade which he is thus taught to consider as in some measure innocent. A third phenomenon is official corruption. Less honorable are the government officials who, as the FT reports, take bribes from the smugglers, although we should note that this corruption does allow humble people to trade despite the state’s official restrictions. “Ivorian authorities did not respond to a request for comments,” the journalist notes. A fourth observation results from a new surveillance activity by governments. The “traceability” of products decreed by the European Union’s controversial Deforestation Regulation may kill the trade in smuggled beans, which will likely lack proper documentation. To the extent that the smugglers find a way around this new restriction, it will reduce the price they can offer to farmers. (0 COMMENTS)

With all the discussion of free trade, tariffs, and non-tariff barriers, I decided to pick up and quickly skim a short, delightful book by trade economist Jagdish Bhagwati. It’s his 1988 book, titled simply Protectionism. I wrote a short review of the book in the June 5, 1989 issue of Fortune. One of the issues, then and now, is American companies’ objection to what they see as “dumping.” Here’s a key paragraph of my review: American companies often claim that foreign competitors are unfairly subsidized by their governments, and they petition the U.S. government to impose countervailing duties and antidumping measures on foreign suppliers. Bhagwati sees such measures as mainly harassment to discourage competition from foreigners. For example, he says, U.S. rice producers got a countervailing duty imposed on rice from Thailand by establishing that the Thai government was subsidizing rice exports by less than 1%–and ignoring the fact that Thailand also slapped a 5% tax on rice exports. We usually think a foreign firm is dumping when it sells at a lower price in our market than in its own. But the U.S. government took an antidumping measure against Poland’s exports of golf carts even though no golf carts were sold in Poland. I didn’t have space to cover his humorous discussion of an argument by Stephen Cohen and John Zysman, in their 1987 book, which made a splash at the time, Manufacturing Matters. I have space here. Cohen and Zysman wrote, and Bhagwati quotes: There are…other kinds of linkages in the economy, such as those which tie the crop duster to the cotton fields, the ketchup maker to the tomato patch, the wine press to the vineyards (to return to our focus on agriculture). Here the linkages are tight and quite concrete…the linkage is a bind, not a junction or substitution point. Offshore the tomato farm and you close or offshore the ketchup plant. No two ways about it. Responds Bhagwati: Now, as I read the profound assertion about the tomato farm and the ketchup plant, I was eating my favorite Crabtree & Evelyn vintage marmalade. It surely had not occurred to me that England grew its own oranges. (Bhagwati, by the way, wrote the article “Protectionism” for David R. Henderson, ed. The Concise Encyclopedia of Economics.) (0 COMMENTS)