Book Review of The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy. Ryan A. Bourne, Ed.1 Price controls have grown increasingly common across large sectors of the economy such as finance and healthcare, especially in the wake of laws like Dodd-Frank and Obamacare. President Biden’s recent cap on credit card late fees, as well as his broader campaign against what he calls “junk fees,” are the latest examples of an anti-market-price attitude sweeping Washington, and price controls are now playing a leading role in the Presidential election. As a result, the new edited volume The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy from the Cato Institute comes out just in time to address problems stemming from price controls and inflation. Quoting economist Alex Tabarrok, editor Ryan Bourne wisely notes that, “Prices are a signal wrapped up in an incentive.” By this he means market prices convey information about scarcity as well as the nature of consumer wants. Prices also incentivize companies to produce what people value, and individuals to conserve where resources are in short supply. Biden’s junk fee policies fail to recognize this important coordinating mechanism of prices. Tying the Invisible Hand Whereas it used to be conventional wisdom that binding price ceilings cause shortages and price floors cause gluts, price controls are now suddenly back in vogue. The book’s release coincides with an alarming shift in the regulatory environment. In 2023, for example, Biden’s Office of Management and Budget (OMB) repealed a section of its guidance to federal regulators that discouraged agencies from enacting price controls and similar “economic regulation,” like quotas. OMB’s move will make it easier to impose such policies in the future. While the ill effects of price controls are sometimes readily apparent, as with the gas lines associated with the 1970s and the rationing of everyday consumer goods during World War II, harms can be harder to detect in other contexts, which explains some of their renewed popularity. Michael Cannon points out in his chapter on healthcare markets that government-fixed healthcare prices are often capped too high relative to the market-clearing level, resulting in excessive spending, the cost of which is largely obscured because it is paid for by government. Meanwhile, controls on financial product prices make it harder for marginal communities, like the poor, to access credit. Reduced access to loans for purchasing homes or vehicles, and higher interest rates on credit cards and mortgages, are not nearly so visible as long lines at the pump. Other effects of price controls can be hard to anticipate. Bourne’s chapter on World War II price controls documents how, beyond creating shortages, price caps degraded quality in unexpected ways as companies responded to lower revenues. Likewise, Jeffrey Clemens’s chapter on the minimum wage shows how workplaces often cut fringe benefits before adding workers to the unemployment lines, suggesting the real world is messier and more complicated than Econ 101 theory sometimes implies. Monetary Myths and Misconceptions In addition to covering the problems with price controls, The War on Prices serves as an excellent primer on inflation and its underlying causes. Bryan Cutsinger rightly criticizes the “wage-price spiral” economic fallacy, which posits that workers pushing for higher wages drive businesses to raise prices, which leads workers to demand still-higher wages in a self-perpetuating inflationary cycle. Brian Albrecht points out how “greedflation” similarly confuses cause and effect. Inflation is fundamentally a monetary phenomenon caused by excess money growth. Inflation drives up nominal corporate profits, not the other way around. Author Stan Veuger provides a helpful overview of Modern Monetary Theory (MMT), which is a relatively new economic theory “born” in the blogosphere. MMT’s emphasis on the importance of money parallels the monetarist views of some of the book’s contributors. MMT argues, correctly I would say, that monetary policy can in theory be loosened through Congress spending new money into the economy, and tightened by raising taxes. But in practice, policy will never work this way. The problem with MMT is not so much that the theory is wrong, but that it ignores the political realities that make the use of fiscal policy to control inflation unrealistic. Politicians are usually reluctant to raise taxes for fear of losing the next election. Even if taxes could be raised by exactly the right amount at exactly the right time (a big assumption when Congress can’t pass a budget on time), politicians would need to resist spending the raised revenue to keep inflation in check, and they are unlikely to exhibit any such spending restraint. As far as areas for improvement, some of the book’s contributors pin blame on journalists for the public’s economic ignorance regarding inflation. Pierre Lemieux, for instance, lambastes journalists who discuss inflation as “driven” by the rising prices of different product categories in the Consumer Price Index (CPI). Price indices have well-known limitations, and Lemieux is correct to point out the shortcomings. But a few of Lemieux’s complaints come across as capricious. Journalists are technically correct when they note that the prices of particular goods, like eggs or milk, do “contribute” to an index rising in value. Even if these journalists sometimes use sloppy language that could be misunderstood as implying a cost of living index and inflation are the same thing, it is unclear how influential these news stories are. In spite of the imperfections with indices like the CPI, they remain useful for tracking overall price trends and detailing the way in which inflation affects different parts of the economy at different times. The Limits of Laissez-faire While The War on Prices does a thorough job explaining the virtues of market prices, it did miss the opportunity to discuss some of their downsides. The incentives market prices provide, for example, are often perverse, as when externalities and other market failures are present. In such cases, prices may encourage redirection of production away from efficient uses. A good example is the high salaries of sports stars, which Deirdre McCloskey defends, but there remain reasons to be skeptical of this free market outcome. Even if those salaries are ultimately the result of intense consumer demand for sports entertainment from athletes exhibiting rare physical ability, society would be better served if consumers had other priorities beyond sitting on the couch watching sports and young people invested their time building more productive forms of human capital. McCloskey is correct to note that market prices don’t tell us anything about what one inherently “deserves.” But a lot of market prices reflect a desire on the part of the public to engage in conspicuous consumption. It would be more economically efficient if we lived in a world where scientists and engineers were as highly valued as actors and athletes are in our own culture. Price controls also have certain benefits. Consider that if controls enacted during World War II created additional capacity for military production, why would not similar restrictions in normal times create capacity for other valuable items that usually go underproduced? Sacrifice—in the form of consumers accepting lower quality and quantities of consumer goods, as occurs under some price control policies—has upsides. This is especially true when the sacrifice flows from consumers’ free choices to save and invest more and consume less. The Objective Nature of Subjective Value “Value derives from individual preferences, and is therefore “subjective” in the sense that the value of a painting might vary from person to person…. But the real resources government interventions use up in the form of land, labor, and capital are objective phenomena.” The book’s section on value was also a bit light on details when it came to distinguishing between the determinants of value and economic cost. Value derives from individual preferences, and is therefore “subjective” in the sense that the value of a painting might vary from person to person and depend on mental considerations. But the real resources government interventions use up in the form of land, labor, and capital are objective phenomena. In this sense, economists’ use of the word “subjective” when describing resources’ value can be misleading. Private (individual) and social (total) economic cost are objective concepts falling in the realm of positive economics. Cost can be calculated scientifically, though this does not mean it is always easy to do so. An objective understanding of cost does not negate marginalist or preference-based explanations of price determination. This fact is perfectly consistent with criticisms of the “labor theory of value,” which 19th century economists William Stanley Jevons, Léon Walras and Carl Menger utterly demolished. Yet many economists to this day mistakenly conflate objective cost with subjective accounts of price formation. The chapters on value in The War on Prices thus missed an opportunity to set the record straight in this regard. Whatever the shortcomings, which were minor, The War on Prices remains essential reading for anyone seeking to understand the economics of price controls and inflation. McCloskey’s core recommendation is spot on. Market failures occur because of missing markets. “The socially sensible move then is to create markets where there are none, not abolish them by collectivization or price controls.” The challenge lies in promoting the creation of new markets, while still subjecting them to the ethical constraints and related prerogatives that are inescapable for human flourishing. Ultimately markets must be subordinated to certain inalienable checks, such as rights or the protection of “sacred goods” like happiness or aesthetic beauty. McCloskey acknowledges the need to “choose properly what is for sale and what is not,” respecting the role of sacred values. For more on these topics, see Ryan Bourne on The War on Prices. The Great Antidote Podcast, August 2024. Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics. “Can Price Controls Fight Inflation?” by Rosolino Candela. Library of Economics and Liberty, September 5, 2022. “Cutting Corners and Nickel-and-Diming Customers,” by James Broughel. Library of Economics and Liberty, March 15, 2024. Overall, The War on Prices arms readers with the intellectual ammunition needed to combat misguided inflationary policies and price controls. It falls short of being able to declare total victory for the free market, however, leaving room for further discussion about the limits of guiding markets by the preferences of indulgent consumers, and the ethical considerations that necessarily factor into governing even the most well-functioning and efficient of market forces. Footnotes [1] Ryan A. Bourne (ed.), The War on Prices: How Popular Misconceptions About Inflation, Prices, and Value Create Bad Policy. The Cato Institute, 2024. * James Broughel is a senior affiliated scholar with the Mercatus Center at George Mason University and a senior editor with the Center for Growth and Opportunity at Utah State University. For more articles by James Broughel, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Unlike chimpanzees, which acquire the vast majority of their daily calorie intake from easy-to-find foods such as fruit and leaves, early humans occupied a more complex foraging niche, relying on foods they had to either extract (e.g., buried tubers, or nuts inside shells) or hunt. These more complex foraging techniques take time and skill to learn—and cannot easily be acquired through observation alone. The combination of foraging skills being difficult to learn and necessary for survival in humans may be the point of difference between us and the other great apes, explaining why we are prolific teachers while our ape cousins are not. –Nichola Raihani, The Social Instinct: How Cooperation Shaped the World.1 (p. 92) Humans could not just pick the low-hanging fruit. In order to survive in our more difficult ecological niche, we had to evolve skills that other apes did not possess. In The Social Instinct: How Cooperation Shaped the World, Nichola Raihani dwells on the skill of cooperation. There is a simple conclusion that we can draw from this whirlwind tour of early human evolution: we needed to cooperate to survive. This helps to explain why there is almost no evidence in the fossil record of other apes living alongside humans in the East African Rift Valley. Instead, our great-ape cousins inhabit less seasonal and more plentiful environments where extreme cooperation is not a prerequisite for survival. p. 77 Raihani sees the cooperation of insects as fundamentally different from the cooperation of humans. She makes the case, … for conceiving of highly social insect colonies (for example, ants and termites) as being individuals in their own right—or “superorganisms.” Social insect colonies often exhibit striking similarities with multicellular bodies, like yours and mine. In particular, the design features and behaviors of the constituent insect “parts” can only be understood with reference to the higher level of organization: the colony. p. 25 She would have us think of an ant colony as a single unit, with various types of ants within that unit acting as constituent parts. The parts are designed (by evolution) to work together. They do not consciously choose to work together or negotiate how they work together. Could we also view a human group as a superorganism, like an ant colony? Some evolutionary biologists believe that the answer to these questions is yes. Like the insects we just met, humans also have widespread division of labor and are tremendously cooperative, including in scenarios where help is not directed to kin and we can expect no return favors from the beneficiary. These evolutionary biologists claim that our species’s uniquely cooperative nature only makes sense if we consider ourselves as being cogs in a larger machine. So the argument goes, cooperation can only be understood because of the benefits this yields at the group level, with the implication being that selection also operates at this higher level of biological organization. p. 27 But Raihani does not share this view. For a collection of parts to be welded into a new kind of being, their interests need to be almost completely and permanently aligned. p. 27 Humans only cooperate sometimes. Often, we are in conflict within a group, and groups themselves sometimes cooperate with one another and sometimes compete with one another. Ants are not applying game theory. Humans are. “Humans cooperate strategically. We cooperate when we find it in our individual interest to do so, and sometimes we go against the interests of the overall group or society to which we belong.” The members of an ant colony cooperate automatically. They always act in the interest of the survival of the overall colony. Humans cooperate strategically. We cooperate when we find it in our individual interest to do so, and sometimes we go against the interests of the overall group or society to which we belong. Raihani says that our family structure also differs from that of other apes. For example, humans evolved a cooperative approach to child care. Many primates live in social groups, and humans are no exception. Nevertheless, we are unique among the great apes in that we also live in stable family groups, where mothers receive assistance from others in the production of young. The evolution of our family—fathers, siblings, and grandparents—was the first critical step on our path toward becoming a hypercooperative species. p. 47 Raihani says that we stay in families long enough for older siblings to help raise younger ones. … mothers can expect to receive help from their older children in the business of rearing younger ones. And we are the only ape that does this. For those of us living in modern, industrialized societies, it might come as a surprise to discover that we are cooperative breeders, as we typically have relatively small families, and often stop breeding before the older children can become helpers to younger ones. p. 73 Mothers have always received help in caring for children, although the form that help takes may vary. … for most of our time on Earth, mothers have been embedded in vast social networks and children have been raised by multiple caregivers, including fathers, older siblings, aunts and uncles, and grandparents. Many contemporary human societies still live like this, though these large extended families have (to some extent) been replaced by more formal institutions, like schools and day care, in many industrialized societies. Formal institutions that provide childcare are a logical extension of our cooperative breeding natures. p. 78 Raihani emphasizes that human brains play a unique role in our species’ cooperation. … some of the most important sociocognitive traits that set humans apart from other species—a concern for the welfare of others, the ability to take another person’s perspective and to understand and share their mental states—are traits that are conspicuously lacking among the other cooperatively breeding species on the planet. … Humans are one of the most cooperative species on the planet, a trait we share with other cooperatively breeding species. But our version of sociality is built on different cognitive foundations. p. 126 A key difference relative to other species is that we are aware of the trade-offs involved in choosing to cooperate. Broadly speaking, the kinds of cooperation problems we encounter from day to day can be summarized under one common header: social dilemmas. They are social because our decisions affect other people (even if this is not always obvious). And they are dilemmas because individual and collective interests diverge. p. 129 At the group level, we address these dilemmas by doling out rewards and punishments. We give one another incentives to cooperate. An important reward for pro-social action is a good reputation. People seek good reputations, because a good reputation increases the willingness of others to work with us and to assist us. This represents another distinctly human use of our cognitive skills. … there is scant evidence that any of the other great apes know or care about what others think of them. … For humans, reputation management involves taking the perspective of another person, and also inferring how their beliefs and impressions of us might be altered under various scenarios. p. 159 Raihani sees this as critical to the development of specialization and trade. Without systems to track and monitor the reputations of others, it is unlikely that the intricate systems of mutual trade that characterize all human societies would ever have emerged. p. 160 But our heuristics for tracking reputations can lead us astray. We say we think it is good to raise money for charity or protect the environment, but we rail against companies that try to achieve these aims if they also derive a profit in doing so. Our difficulty in reconciling the fact that something can be both for profit and for good at the same time frequently prompts us to choose outcomes or people or companies that deliver no benefit whatsoever to good causes, rather than those that take a slice of the benefits they generate. p. 181 I think that people systematically assign overly high status to non-profits and overly low status to profit-seeking businesses. This was news to me: The classical view of ancestral (preagricultural) human societies is that they were small-scale, bounded communities, comprising just a few dozen members, with the idea being that “each of our ancestors was, in effect, on a camping trip that lasted a lifetime.” But it turns out that this view is rather outdated. Humans were (much like we still are) likely to have been embedded in vast social networks, with many of their closest friends and family members living far away. Whereas the average male chimpanzee might expect to interact with just twenty other males in his entire lifetime, recent estimates put the average hunter-gatherer’s social universe at about 1,000 individuals. p. 193 Still, I do not believe that ancestral societies had the ability to organize social institutions to govern a group larger than the Dunbar number of about 150 people. Instead, I suspect that what emerged was something like Rule of the Clan.2 Raihani points out that our skills at cooperation also enhanced our ability to cause harm. By working together, the earliest humans were increasingly able to overcome the challenges that nature threw at them: the problems of food scarcity, water shortages, and dangerous predators could all be mitigated via cooperation. But, as a consequence, other humans became our primary threat. We were no longer battling against nature, but against one another. p. 207 cooperation is favored if and when it offers a better way to compete. A corollary of this is that cooperation frequently has victims (in fact, cooperation without victims is the most difficult kind to achieve). p. 236 She says that humans became justifiably frightened of one another. … paranoia might be a feature, rather than a bug, in our psychology. We are emphatically not proposing that the extreme paranoia that accompanies mental disorders like schizophrenia has been favored by evolution…. At lower intensities, however, paranoia is likely to play an important role in helping us to detect and manage social threat. p. 209-210 For more on these topics, see Deborah Gordon on Ants, Humans, the Division of Labor and Emergent Order. EconTalk. “Cooperation Requires Large Brains,” by Arnold Kling. Library of Economics and Liberty, April 3, 2023. Mike Munger on the Division of Labor. EconTalk. One comes away from The Social Instinct with an appreciation for the complexity of human cooperation. As an individual within a group, I may choose to cooperate or defect in various situations. The group must give me the incentive to choose to cooperate. Above the group level, a larger society has to harness group cooperation. A highly cohesive group may behave in ways that corrupt and damage the larger society. Institutions must operate to channel group cooperation constructively. Human cooperation is both impressive and precarious. Footnotes [1] Nichola Raihani, The Social Instinct: How Cooperation Shaped the World. St. Martin’s Press, 2021. [2] See “State Clan and Liberty,” by Arnold Kling. Library of Economics and Liberty, May 6, 2013. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Many boys and men in America are doing worse than girls and women in education while struggling with a culture that struggles to define what masculinity is in the 21st century. Is this a problem? Richard Reeves thinks so which is why he started the American Institute for Boys and Men. Listen as Reeves discusses […] The post The Problems of Boys and Men in Today’s America (with Richard Reeves) appeared first on Econlib.

  Caltrain’s Great New Electric Trains Replace Heavy Polluters by Brad Templeton, Forbes, August 21, 2024. Excerpt: The numbers mean Caltrain was burning about 25 million gallons of diesel annually. But today, Caltrain has around 590,000 boardings/year and an average of 24,600 on weekdays. That means 3.5 gallons of diesel per boarding, on average, which is equivalent to 4 gallons of gasoline. Each round trip thus burned the equivalent 8 gallons of gasoline per person. A 30 miles each way round trip in a car with the average load of 1.5 people, which is less that one gallon per person in a Prius, and 2 gallons per person in a large SUV. Even if each passenger were given a personal Hummer H2 to drive, they would only burn 4.6 gallons for that round trip. If diesel Caltrain were a car, it would be class as one of the heaviest polluters per passenger.   Will Brazil’s Government Shut Down X for 20 Million Brazilians? by David Inserra, Cato at Liberty, August 29, 2024. Excerpt: Brazilian courts have now formally threatened to shut down X (formerly Twitter) in Brazil because X will not silence or provide information on individuals critical of the current government, including individuals living in the United States. And: Also, now there are rumblings that Brazil may be targeting Starlink and SpaceX, which are only partially owned by Elon Musk. If true, this would mean that other unrelated US companies and investors are being hit by Brazil’s judicial authoritarians.   Simon Newcomb on Public Opinions and Economic Insights by Timothy Taylor, Conversable Economist, August 29, 2024. Excerpt: Simon Newcomb (1835-1909) is largely unknown today, but he was a highly prominent economist back in the day: as one example, he was active in the disputes that led to the founding of the American Economic Association back in 1885. In July 1893, he published an essay on “The Problem of Economic Education” for the prominent (both then and now!) Quarterly Journal of Economics. The essay argues that there are basic insights of economics–well-known as of 1893–that are largely unknown or ignored by the general public. What I found thought-provoking was that a number of these insights appear equally unknown to much of the public, as well as to many policymakers, here in the third decade of the 21st century. And from Newcomb: Before such a thing as economic science was known arose the theory of the “balance of trade.” The fundamental doctrine of this theory was that trade was advantageous or disadvantageous to a nation according as the value of its exports exceeded or fell short of the value of its imports. Accordingly, in the nomenclature of the time, an unfavorable balance of trade or state of credit meant one in which the imports were supposed to exceed the exports, and a favorable balance the contrary. An immediate corollary from this view was that trade between two nations could not be advantageous to both, because the values which each exported to the other could not both be greater than those received from the other. … For a century and a half the doctrine entertained and taught by economists is that there can be no trade between two nations which is not advantageous to both; that men do not buy or sell unless what they receive is to them more valuable than what they give in exchange; and that what is true of the individual man is, in this respect, true of the nation. And yet the combined arguments of economists for a hundred years have not sufficed to change the nomenclature or modify the ideas of commercial nations upon the subject. … The terms ” favorable ” and ” unfavorable,” as applied to the supposed balance of trade, still mean what they did before Adam Smith was born. We might well tremble for the political fate of any statesman who should publicly maintain that our exports would, in the long run, substantially balance our imports, no matter what policy we adopted; and that, if this equality could be disturbed, the advantage would be on the side of the nation which imported the greater values.   (0 COMMENTS)

The Wall Street Journal reports that the International Brotherhood of Teamsters has thus far refrained from giving its official support to one or the other of the two main parties and presidential candidates in the forthcoming election (“Some Teamsters Rebel After Boss Praises Trump,” August 24). A Teamsters’ spokeswoman declared: Our endorsement must be earned. The meaning of this sentence is clear: the organization will officially support the candidate or party that promises to give it the most in terms of coercive legal privileges or hard cash for its members. The Brotherhood sells its support in exchange for privileges, and the government sells the privileges in exchange for support. It is political exchange between greedy bullies. What theory of the state can justify that? The cynical view is to think, “Our turn to get privileges will come!” The angelic view of the state consists instead of thinking, “Oh my God, that’s bad, they should (like I do) selflessly pursue the common good.” A basket of other justifications contains many strands claiming that the rules under which we live or have decided to live allow for some limited political exchange; some (James Buchanan, for example) are more defendable than others (say, Jean-Jacques Rousseau). A different, anti-state, approach has been proposed by economist and political philosopher Anthony de Jasay. The Teamsters’ bargaining is seen as a manifestation of the “adversary state” or discriminatory state, which takes sides in favor of some citizens and against others. Among those who live under the discriminatory state, the winners are those who most efficiently bargain to sell their support to the state. In a sense, the Teamsters’ officialdom believes in a dictatorship of the proletariat with a human face, that is, in which the proletariat votes. But this is only a first approximation. In fact, many of its members (cops and airline pilots, for example) are no proletarians at all; the others are not paupers. As its logo shows, the union was more proletarian (assuming for a moment that this term has any meaning on a free market) when its original members in 1903 were drivers of horse-drawn wagons. Their hierography presents them as early defenders of “social justice.” According to historian David Witwer, the Teamsters’ union did admit and recruit Blacks as full members but was not uncontaminated by the racism of the trade unions and of the white workers who often resented the competition of the Blacks (see his “Race Relations in the Early Teamsters Union,” Labor History 43-4 [2002]). Perhaps I should emphasize that in a standard (classical) liberal or libertarian perspective, there is no reason to oppose collective bargaining, provided that every member of the “collective” (the members of the union) is a voluntary member and that the other side, against whom it is negotiating, is not forced by law to “negotiate.” As a matter of terminology, and in parallel to the substantive “collectivism,” I suggest that “collective” should refer to groups that impose their will on recalcitrant members; in that sense, free trade unions might be involved in group bargaining, not collective bargaining. Trade unions would be as useful as any voluntary association, perhaps even more useful in certain circumstances, provided it remains voluntary and does not wield coercive privileges. In general, the way to know that an institution is useful in the economic sense of “efficient” is that it survives with no legal privilege. (0 COMMENTS)

This is the last in my posts on The Nazi Officer’s Wife: How One Jewish Woman Survived the Holocaust. (The first three are here, here, and here.) Sometimes what Edith Hahn Beer calls “personal morality” comes through: Frieda, the girl who had lost ten teeth, began to wail: “Why is the asparagus so much more important than human beings. [DRH note: Frieda and the author were among the slave laborers on a German asparagus farm.] Why are we living at all when the whole purpose of our life is such misery?” The overseer, miraculously moved by her outburst, let us go back to the hut. You see, even the inhuman ones were not always inhuman. This was a lesson I would learn again and again—how completely unpredictable individuals could be when it came to personal morality. German officer Werner falls in love with her and stays in love even when he finds out she’s Jewish. But she’s not a good cook and she lies to him about that. Of course, this was a bald-faced lie. To understand Werner Vetter, remember that it was perfectly possible for me to tell him that I was Jewish in Germany at the height of Nazi power, but it was essential for me to lie about being a good cook. On lying to get scarce rations: “Listen, Grete,” he [Werner] said. “When you go to the pharmacy for the special milk for the baby, don’t be surprised if they treat you as a tragic heroine. Because to tell you the truth, I lied to them. I told them you had already buried three children and therefore they simply had to give you the milk so this fourth child of yours would not also enter eternity.” Even now, I have to smile when I think of this. I tell you, of all the things about Werner Vetter that appealed to me, this most of all warmed my heart: He had no respect for the truth in Nazi Germany. (0 COMMENTS)

I suspect that the average American assumes that low wage countries have a competitive advantage in international trade. Economists often rebut that argument using Ricardian trade theory. But the public cares little for “theory”, and remains unconvinced. So what about the real world?There are many ways of looking at this question, but I suspect that many people are especially worried about the trade deficit. So let’s consider the question of whether low wages tend to lead to current account surpluses. Here’s some recent data from The Economist: Let’s begin by focusing on the top half of the list, from the US down to Switzerland.  What do you notice?  With the exception of China and (perhaps) Russia, all are developed economies, with wage rates far above the global average.  And yet, despite most of those countries having wage rates far above the global average, most run current account surpluses (in grey).  Indeed some of the biggest surpluses are in places with the highest wages, such as the Nordic countries and Switzerland. Now focus on the bottom half of the list, from Turkey down to South Africa.  Most of those are developing countries with low wages, and most are running current account deficits (in peach color). But even that understates the pattern.  The bottom half of the list includes six developed economies (the 4 “tiger economies”, Israel and Australia.)  And 5 of those 6 are now running current account surpluses.  Remove those six developed countries, and the bottom half of the list becomes very strongly associated with current account deficits. But it’s even worse than that.  Most of the “exceptions” that are not fully developed but still run CA surpluses are higher middle-income places, such as Russia, Malaysia, and Argentina.  If we use World Bank estimates of GDP per capita (PPP) in 2023, then Thailand ($23,423) is the poorest country with a CA surplus.  China is estimated at $24,558.  Both are slightly above the world average ($23,010.)  Admittedly, the Economist’s list excludes many of the world’s roughly 200 countries, mostly smaller nations.  I suspect that there are a few low-income countries running CA surpluses.  Nonetheless, it’s a pretty large sample and includes almost all of the world’s important economies, both developed and developing.  Perhaps you are one of those people that don’t trust economic theory, and prides yourself by looking at how things work in the real world.  If so, you should be relieved to learn that low wages do not seem to give countries an unfair advantage in international trade. So why do so many people believe the opposite? I suspect they put far too much weight on a single observation, the trade deficit that the US has with China.  The plural of anecdote is data. PS.  I was being generous to the opposing view in characterizing Russia and Malaysia as middle income.  The World Bank has Russia slightly ahead of Greece, and Malaysia only slightly behind. PPS.  I’ll consider fiscal policy on another day, but if you compare the US to other countries on the list, you will see why I worry much more about our budget deficit than our CA deficit.  And take a look at the CA balances in the 5 countries that are running budget surpluses.  As I keep saying, the Nordics and the East Asians are the world’s great savers. (0 COMMENTS)

Economists frequently react to events differently than most people. Often, critics of economists will say something like “sure, it’s easy for you to say that because of the position you are in, but if you were in the shoes of someone who has to experience it I bet you’d change your tune!” For example, economists don’t view so-called “price gouging” as a terrible affront – but maybe that’s just because those economists have never been on the receiving end of price gouging, and if they ever were, they’d reconsider. But such critics shouldn’t be so sure. The economist John Cochrane recently explained why his experience being on the receiving end of “price-gouging” was positive: Uber surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers are needed. But drivers reported that everyone else hated it and felt cheated. Cochrane also describes his mother being outraged when they tried to find a hotel room in what turned out to be the midst of Woodstock II. Eventually, they found one at a Super Motel 8 that was going for significantly more than that chain’s typical rate. He tried to reassure his mother that the room being available for a high price was, in fact, a thing to be grateful for: I tried hard to explain. “If he charged $50, or $100, those rooms would have been gone long ago and we’d be sleeping in the car tonight. Thank him and be grateful! He’s a struggling immigrant, running a business. We don’t need presents from people who run Super-8s in upstate New York.” But, though an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could do would persuade her that the hotel owner wasn’t being terrible in “taking advantage of us.” My own experience of this comes from the other side of things – being in a situation where there was no “price gouging,” and wishing there had been. This was back in 2016. I was leaving my job at the Medical University of South Carolina in Charleston and moving to Minnesota. Most of my belongings had been picked up by movers several days prior, and I was going to drive out that weekend. However, a few days before I was originally set to leave, Hurricane Matthew would be arriving in Charleston. So I decided to wake up extra early the next morning and hit the road a few days earlier than I initially planned. When I woke up the next morning, I realized I had screwed up. My gas tank was very low, bordering on empty, and I had a very long drive ahead of me. So, I needed to get gas. And what I found was that even at 4:30 in the morning, every nearby gas station had a tremendously long line for each pump, as people prepared to leave the area ahead of the hurricane. However, the price of gas had not changed at all – no price gouging to be found here! And that was worrying to me. Everyone needed gas, but not everyone needed it equally. I’m sure that many people in that line, as well as those who had filled up and left in the prior days, had tanks that were near or mostly full but wanted to “top off” before hitting the road. Then there were other people like me, whose gas tanks were running on fumes and who wouldn’t even be able to make it ten minutes down the highway to hit up a gas station in the next town over. In a perfect world, the remaining gas would go to people like me rather than those with mostly full tanks. And that’s exactly the sort of world that price signals will tend to steer us toward. If the price had been allowed to rise, someone who already had three-quarters of a tank of gas might have thought “It’s not worth filling the rest of the way up at this price, I’ll just head out now and get gas when we are a few hours down the road.” Each person who made that kind of decision would leave that much more gas behind for people in a situation like mine, where it really was a “now-or-never” scenario. I’d have cheerfully paid an extra couple of bucks a gallon to be assured of the ability to fill my tank, rather than having a serious risk of getting stranded next to a gas station advertising a “fair” price alongside their empty gas reserves. Luckily it didn’t come to that – I was eventually able to get to the front of the line and fill the tank. I also noticed that the flow of gas coming out of the pump was slower and weaker than I’ve ever experienced before or since. I was lucky – if I had been an hour later leaving that morning it’s very likely there would have been no more gas left at all, and I’d have been stuck with a hurricane bearing down on me. And I wouldn’t have felt at all like I had been protected or looked out for by the laws that kept the price of gas from rising. John Cochrane was grateful for the high prices he got to pay – and I was immensely distressed at the low prices I had to pay. (0 COMMENTS)

Protectionism is currently in vogue, gaining support from both the left and the right. This isn’t the first time. As protectionism’s popularity ebbs and flows, it remains a constant presence. Each resurgence is driven by variations of the same argument, particularly the infant industry argument.  The argument is straightforward: protectionism, through tariffs or subsidies, helps young industries grow by shielding them from foreign competition until they can compete on their own, ultimately leading to more economic growth than would have occurred otherwise. As right-wing public intellectual Oren Cass recently summarized, “the way America went from colonial backwater to this globe-spanning industrial colossus was not free markets and free trade. It was aggressive protection of our domestic market.”  The problem is that, with each resurgence, the same replies can be made: the increase in domestic production of protected industries is not worth the lost welfare of consumers. In fact, there is not a bit of the statement made by Cass that squares with American economic history.  Let’s start with the last part of Cass’s comment that speaks to “aggressive protection of our domestic market”. By definition, protectionism should increase output in the protected industries. However, the scale of the increase, as seen in frequently cited case studies like the steel industry in American economic history, appears pretty small– smaller than what protectionists had promised when they initially called for tariffs. One reason this is the case is because tariffs can also increase the price of some inputs (such as capital inputs), which reduced productivity growth in the future. As such, there might have been a one-time bump in production but the trend was ultimately slowed down by the tariffs.  On the cost side, it’s important to recognize that tariffs, by raising the prices of certain inputs, also increase costs for industries that depend on these inputs. This is especially harmful to industries engaged in fierce international competition for export markets. Economic historian Douglas Irwin was able to show that this effect constituted, for postbellum America, what was effectively an export tax of 10%. All of this is without considering the cost borne to consumers. Returning to the case of steel protection (one of the frequently mentioned cases historically), we find that consumers were left worse off by significant proportions. In other words, the “aggressive protection” was a bad thing.  However, the first part of Cass’s comment is even more profoundly mistaken. America was far from being a “backwater” by the 18th century. Economic historians such as Jeffrey Williamson and Peter Lindert have shown that by 1774, the average American colonist enjoyed a significantly higher income than the average Englishman—a fact consistent with the large numbers of immigrants moving to America. My own research further demonstrates that America was at least 30% richer than the next wealthiest region in the Americas at the time, the French colonists in Quebec. Notably, this period before 1774 coincided with what was essentially the “freest” trade era of American economic history. From 1760 to 1775, following the conquest of Canada, the North Atlantic functioned as a free trade zone encompassing America, Canada, and Britain. Most protectionist legislation (such as the Navigation Acts) were either too small to matter or were widely ignored.  To make the claim he makes, Cass commits a common crime in economic history: focusing on growth during periods like 1790 to 1860 or 1865 to 1913 without considering the broader context. What these eras share is that they immediately followed highly destructive wars. The American Revolutionary War, for instance, erased America’s economic edge over Britain, with incomes dropping by roughly 20% due to destruction. Similarly, the American Civil War had a devastating impact on the economy. While both post-war periods did see impressive growth, this was largely “catch-up” growth—accelerated economic recovery as the nation rebuilt after the turmoil of war. Cass and other protectionists often cherry-pick periods of protectionism, attributing all observed growth to their favored policies. This tactic, much like a magician’s sleight of hand, is designed to dazzle the audience by masking the real factors at play.  The case for tariffs as a driver of economic growth has always been weak, and no amount of rebranding every few decades can change that fundamental flaw.   [Editor’s Note: Readers may also be interested in Geloso’s contributions to the Liberty Matters Forum, “Did the American Colonies Pay Too High Cost?” at the Online Library of Liberty.]   Vincent Geloso is an Assistant Professor of Economics at George Mason University. (0 COMMENTS)

In a recent Bloomberg column, Tyler Cowen discussed the difficulties involved in paring back regulation: The basic paradox is this: Government regulations are embedded in a large, unwieldy and complex set of institutions. Dismantling it, or paring it back significantly, would require a lot of state capacity — that is, state competence. Yet deregulators are suspicious of greater state capacity, as it carries the potential for more state regulatory action. Think of it this way: If someone told a libertarian-leaning government efficiency expert that, in order to pare back the state, it first must be granted more power, he would probably run away screaming. Tyler was focusing on the federal government’s role in regulation, but a recent twitter thread by Brian Hanlon illustrates a similar problem at the state level: Yimby attempts to promote housing construction have proceeded along two different dimensions, deregulation and mandates.  To paraphrase Tyler, if 5 years ago you’d asked me about housing mandates for local governments, I “would have probably run away screaming.”   I’m still not at all sure that this is a good idea.  But I do sort of see the logic of this approach.  State governments are trying to deregulate the housing market, and local governments continually offset their moves with ever more onerous regulatory barriers.  Mandates are obviously not the first best solution—it would be better if local governments put up fewer barriers to building houses.  But mandates are one tool that might actually force action on the issue. For instance, most state governments engage in lots of revenue sharing.  One could imagine making the size of the local grant be proportional to the quantity of new housing being constructed.  Because Nimby policies impose negative externalities on the rest of the state, a financial penalty for burdensome regulations would force local governments to bear at least part of the cost of their barriers to new construction.  This would nudge them toward policies that allowed for more home building. To be clear, I am not at all confident that this would work in the real world.  In states like California and Massachusetts, the state government might attach requirements that construction use union labor, or that a certain percentage of housing be “affordable”.  By the time legislation gets through the sausage making process in the legislature, it rarely resembles the ideal concept drawn up by policy wonks.  Nonetheless, there are things in the world that are worse than housing mandates, and I suspect that certain parts of the US already have them. (0 COMMENTS)