Our Kids Have No Economic Immune Systems by Michael Munger, AIER, June 5, 2024. Excerpt: This seems paradoxical. The commercial system has delivered, consistently and broadly shared across the population. Yet having to participate in a system where one plans, saves, invests, and designs an individual “pursuit of happiness” is overwhelming the very people who should be grabbing all the new opportunities that the system has revealed to them. I think the explanation for the paradox is simple: Everything difficult has been banished. Just as our physiological immune system needs threats to mature and avoid attacking itself, our sense of commercial efficacy has to be confronted with challenges, and surmount those challenges, to mature into effective citizenship. Kids are told they can do anything, that they are personally mighty and important. But they never have the experience of everyday effort and failure; In fact, they are urged to avoid anything that might “trigger” them, or enable them to play or act on their own, as has been documented by authors ranging from Jonathan Haidt, mentioned above, to Lenore Skenazy.  So young people are overwhelmed with anxiety: If they do anything less than cure cancer or become a US Senator, they have failed. But they don’t know how to build a birdhouse from scrap wood. They have no idea how to repair a toilet, or how to change the inner tube on their $6,000 mountain bike. They are helpless, but charged with an inflated sense of destiny and self-importance. DRH comment when I read this: One of my proudest accomplishments at the Naval Postgraduate School occurred one afternoon about 15 years ago when I saw a distinguished professor (and by distinguished, I mean that he had gray hair and looked old, which is about how I look now) in the parking lot with a flat tire. I asked him if he wanted me to help. He did. I hadn’t changed a tire in over 30 years, but I remembered all the steps right, and we were both on our way in under 15 minutes. DRH comment now: I hesitate to challenge Michael’s observations because, after all, he is around young students more than I am. So my 5 counterexamples will probably appear weak, laced as they are with self-selection. A local organization I’m involved with, called the California Arts and Science Institute (CASI) had an event for young people–everyone from grade schoolers to college students–last Wednesday. My friend Francois Melese talked to three of them; I talked to two of them–my two were in college, one at Monterey Peninsula College and the other at UC Berkeley. I came away very impressed, as did Francois. I know the danger of anecdotes. What I would say is that the danger of going with Mike Munger’s view is that you might tell yourself that there’s no point in showing up for such events. How Democrats Left the IPCC Behind by Roger Pielke, Jr., The Honest Broker, May 20, 2024. Democrats — not all, but many — have left the IPCC behind in favor of an extreme view of climate and extreme events. Republicans — not all, but many — find themselves much more in line with the findings of the IPCC on climate and extreme events. Similarly, I’d guess that explains why in recent years I’ve been invited to testify by Republicans.4 Of course, consistency with the IPCC (or not) says little about policy preferences. Democrats remain the party championing action on climate policy and Republicans remain much less supportive. Of course, the key question here is, What action? I have long argued that there are unexplored opportunities for greater bipartisan support for pragmatic energy and adaptation policies that would accelerate decarbonization and reduce vulnerabilities — but that’s a topic for another day. Comment: The Stanford Classical Liberals had Roger speak on Zoom last month. Very impressive. The Danger Is Not China But the Fake China Threat by John V. Walsh, antiwar.com, May 27, 2024. At times a book is convincing not only because its arguments are sound but also because of the author’s identity.  It would be no surprise to encounter a book penned by a socialist or Sinophile that takes on the false portrait of China that graces the US media.  But Joseph Solis-Mullen, the author of The Fake China Threat And Its Very Real Danger, is neither socialist nor Sinophile. Solis-Mullen is a libertarian in the mold of Randolph Bourne and Justin Raimondo. Hence, he is classified as a conservative in our impoverished political taxonomy.  But his book is not written to appeal to people of any single political outlook.  It is written with only one thing in mind, the interest of the American people and, dare I say, of humanity in general, China included.  Hence it is of great utility for people across the political spectrum who sense that our people are being hoodwinked by fake China threats.  It may answer your questions on China or those of your friends in ways understandable to the average American. Comment: I don’t completely discount the threat from China but I think it has been overblown. Certainly, if they’re trying to threaten us with trade, they have a weird way of doing it, namely having their taxpayers give money to us in the form of subsidized exports. As Milton Friedman once said, “Why should we reject foreign aid?” Especially when the foreign aid is given to consumers rather than to our wasteful governments. George Orwell’s Error by Christopher J. Snowdon, Quillette, June 6, 2024. Excerpt: The central assumption at the heart of Orwell’s political writing from the mid-1930s was that capitalism was doomed and would most likely be replaced by totalitarian socialism of the sort satirised in Nineteen-Eighty Four. Despite his contempt for capitalism, Orwell saw the world caught between a rock and hard place. “Capitalism leads to dole queues, the scramble for markets, and war,” he wrote in 1944. “Collectivism leads to concentration camps, leader worship, and war.” The only alternative, to his mind, was a planned economy that retained democracy and allowed freedom of the individual, but he became increasingly pessimistic about the prospects for his libertarian brand of what he called democratic socialism as the 1940s wore on. Indeed, he saw “no practicable way of bringing it about.” This explains why he was so despondent about the world’s prospects in the last years of his life and why he decided to write Nineteen Eighty-Four. But he was wrong. Capitalism did survive, subsequent communist revolutions went the same way as the USSR’s, and Orwell’s version of democratic socialism was not required to prevent totalitarianism sweeping the globe. It turned out that it was not a straight choice between democratic socialism and communist (or fascist) totalitarianism. There was a third way. The quote from 1944, by the way, is from his review of two books, one of which was Friedrich Hayek’s The Road to Serfdom.   Scott Ritter : On My Way to Russia I Met Big Brother. Judge Napolitano, Judging Freedom, YouTube, June 5, 2024. Ritter tells of 3 U.S. government agents hauling him off an airplane about to leave for Russia and stealing, without explanation, his passport. They wouldn’t tell him who sent them and, when asked, told him that the way to retrieve his stolen property was to contact the State Department. (0 COMMENTS)

For well over a century, economists have studied ways to make the law more efficient.  While the Journal of Law & Economics (the premier field journal) was not founded until 1958, early 20th century economists like Alfred Marshall, A.C. Pigou, John Maynard Keynes, and many others were busy studying how economics can inform legislation to improve outcomes. However, moving from “blackboard” economics to the real world is a difficult endeavor.  We have repeatedly seen economic policies fail to achieve their stated goals, from the grand central planning of the USSR to more mundane “market fine tuning,” like carbon taxes.  There is a wide literature on these failings, which readers of this blog are certainly aware of: the knowledge problem highlighted by Hayek, public choice issues like rent-seeking and other collective decision-making problems, and so forth.  But there is also a problem of translating theory into something actionable.  Economic theory uses a lot of terms slightly differently from how they are generally used.  Translating these terms into legislation is tricky.  The example of dumping will demonstrate this point. A bit of business before I begin: I am assuming here that the goal of the legislation is to improve economic outcomes as defined in the neoclassical sense: to maximize total welfare.  My general point about the difficulty of aligning legislation with goals will not change if this assumption does not hold, though the examples will.   Dumping is a process where a firm sells below cost to try and grab market share by driving out competitors.  There is an argument that such behavior is anti-competitive and will result in worse economic outcomes.  Economists generally reject this argument (indeed, one of the first papers in the Journal of Law & Economics is a classic piece dispelling this myth), although it can still be considered anticompetitive and not welfare maximizing.  To that end, legislation exists both at the U.S. federal government level and at the international (World Trade Organization) level that prohibits dumping by domestic and international firms. But there is a significant difference between economic dumping (that is, dumping as defined in economics) and legal dumping (that is, dumping as defined in legislation).  In economics, dumping is when a good is sold below Average Total Cost.  For the economist, “cost” includes both explicit (monetary) and implicit (opportunity) costs.  Explicit costs are easy to identify, but implicit costs are much harder.  Despite a clear definition, economic dumping is hard to identify.  So, when legislation is written to try and improve economic outcomes, the legislators must use something more measurable.  Thus, the legal definition of dumping. Legal dumping is something entirely different.  Legal dumping is simply a good being sold below “fair value.”  But what is fair value?  The Department of Commerce and U.S. International Trade Commission (the two bodies charged with investigating unfair international trade practices) have three ways to determine fair value: 1) what the price of the good is in the home country, 2) what the price of the good is in some 3rd country, 3) what the “constructed” price of the good is (the manufacturing cost of the good, plus some Department of Commerce-determined markup). Note that the legal definition of dumping is vastly different from the economic definition.  Indeed, the two describe very different practices!  From an economic perspective, departure from any of the three descriptions of “fair value” does not imply unfair or uncompetitive behavior.  Indeed, departure could be competition and welfare enhancing!  We should expect prices to differ in different markets (supply and demand holds locally).  Furthermore, where economics treats the price of a good as emergent depending on marginal benefit and marginal costs, the legal definition of dumping considers price as known in advance and the function simply of explicitly costs. Because of the vagueness of the legal dumping statue, it is highly prone to corruption.  Firms tend to use dumping as a hammer to wield against competition, especially domestic competition. The tool meant to prevent unfair practices ends up encouraging unfair practices.  In short, by attempting to translate economic theory into legislation to actively guide outcomes, the legislation generates the very outcomes it was trying to prevent!  (For a full discussion of the literature on the anti-competitive nature of anti-dumping legislation, see Free Trade Under Fire, Chapter 5.) One could respond “But Jon, you sly and handsome devil, that just shows that the legislation can be enhanced further.  There is no difficulty here.”  But I disagree.  A good scientist is comfortable with the fact that there are many things that influence our behavior that are unmeasurable.  In economics, costs are one such thing: costs are ephemeral, psychological, and subjective.  Costs, and their interpretation, will vary from person to person, and situation to situation.  It is impossible for an outside observer ex ante to know what another person’s costs are.  Indeed, the decision-maker may not even be aware of the costs they are facing.  Legislation must rely on proxies, such as accounting costs, which do not translate the information in the same way.  Consequently, translating economic theory into actionable legislation faces a significant uphill battle. Dumping is one particularly obvious example of the difficulty of translating theory into legislation.  But even if things go perfectly, there are always unintended consequences.  Sticking with trade, Trump and Biden’s explicit goals for their tariffs were to raise the domestic prices of goods to discourage imports.  That worked as intended.  But the unintended consequence of reducing exports also occurred.  Let me end with what I call Jordan’s Law of Unintended Consequences (named for fantasy author Robert Jordan): “Law of Unintended Consequences, stronger than any written law.  Whether or not what you do has the effect you want, it will have three at least you never expected, and one of those usually unpleasant” (from The Path of Daggers by Robert Jordan, page 334).   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

The ideological certitude with which FTC Commissioner Lina Khan explains her latest investigation of Microsoft is revealing of the zeitgeist of our time. Interviewed by the Wall Street Journal, she explains that Microsoft may have violated antitrust law–or rather policy and politics, because it is not properly law–by consensually hiring the co-founder of startup Inflection AI and almost all its staff, and compensating the ongoing concern with a licensing fee. Watch the video accompanying the story “FTC Opens Antitrust Probe of Microsoft AI Deal,” June 6, 2024. It is with the most reasonable political correctness that Ms. Khan declares: In Washington, there is increasingly a recognition that we can’t as a government just be totally hands-off and stand out of the way. I wonder at what fleeting moment the young law professor nominated by Joe Biden thinks the federal government was “totally hands-off” and “out of the way.” It would be interesting to know what evidence she has to support her contention. She also says: You’re right that in some ways this is going to look different. … And we as policymakers and we as a society can help make decisions and choices that are going to steer the technologies on a path that actually serves us rather than a model where a handful of companies are just extracting more and more from society, from creators, and people feel they don’t have recourse. Who are “we as policymakers” and “we as a society”? Are the two political “we” the same? Don’t “we as policymakers” represent at best 50% +1 of the “we as a society”? And that is the best case. I suspect that our Washington political bureaucrat hasn’t reflected much on these issues and entertains an intuitive and naïve conception of democracy. Twentieth-century welfare economics and social-choice theory, often developed by economists who, like Ms. Khan, had a sweet tooth for economic and social planning, showed that “we as a society” raises problems of preference aggregation that can only be solved by authoritarianism—“dictatorship,” in the terms Kenneth Arrow’s famous theorem. Only a society of identical individuals can be imagined as saying “we” (with our collective mouth). James Buchanan and public-choice economics added a realistic view of “we as policymakers” and a more sensible view of democracy. In reality, Ms. Khan’s “we as policymakers” hides an authoritarian desire to control society: At the FTC … we are scrutinizing the entire stack, from the chip, to the computing cloud, to the models, to the apps. … The raw material for a lot of these tools is in the hands of a very small number of companies. … There could be self-dealing, there could be discrimination, there could be exclusion, so that the big guys are just getting bigger at the expense of everybody else. Ms. Khan seems to unknowingly admit that her crusade is part of a general ideology of social engineering from above. Could it be that Microsoft and Inflection structured their deal so that it did not fall foul of what the surveillance state does not like? That is certainly a possibility. It is a scary possibility, but not in the way Khan seems to imagine. The rule of law does not consist in a majoritarian government using a wide and expanding complex of laws and regulations to prevent anything “we as policymakers” do not like and mandate anything that “we as policymakers” want. Such a conception of government represents a “government of men” (OK, make it “of persons”), not a “government of laws.” With the proliferation of laws and regulations, there must now exist at least one legal instrument for every potential power grab. Refusing to see this suggests a disregard of both the economic-scientific study of society and the modern conception of liberty, in favor of an unexamined and dangerous predilection for collective choices over individual choices. As an instinctive adherent to majoritarian democracy—we as policymakers representing we as the current majority in society—Ms. Khan should be as happy if Donald Trump is elected policymaker-in-chief as if the crown is given to Joe Biden. The people will have spoken in one case as in the other. Setting the problem in these terms suggests that the danger of collective choices is the same on the right and on the left as we know them: under a strong leader, “we” impose “our” preferences on the rest of the “we.” It is urgent to think out of the political box. ****************************** Big Mother grabbing control of bad businesses (By DALL-E under the inspiration of P. Lemieux) (0 COMMENTS)

Today’s jobs report contained two pieces of information that suggest policy may be a bit too expansionary.  First, payroll employment rose by a stronger than expected 272,000.  (The household survey was weak, but that data is viewed as less reliable.)  Second, nominal wages grew at 0.4% (an annual rate of nearly 5%.)  If you think in terms of the Fed’s dual mandate, both data points slightly tilt things toward the view that policy is too expansionary.  That doesn’t mean that we can be certain that policy is too expansionary, just that this claim is now a bit more likely to be true. The 10-year T-bond market reacted with a sell-off, which means that longer-term interest rates increased: Markets currently anticipate a Fed rate cut later this year.  This might occur because inflation declines, or because the real economy is in danger of sliding into recession.  Today’s news made both of those outcomes seem a bit less likely.  Wage inflation has averaged 4.1% over the past 12 months, a rate that is not consistent with the Fed’s “price stability” goals, even if you define price stability as 2% inflation.  Over time, wage inflation tends to run about 1% to 1.5% above price inflation.  Unfortunately, progress on reducing wage inflation seems to have stalled over the past 10 months.  The next two or three readings will be very important. I do not have strong views on where the Fed should set its interest rate target at the moment.  I do have strong views on past monetary policy, which has been far too expansionary over the past three years.  The longer these policy overshoots last, the stronger the case for switching to a level targeting policy regime, where the Fed would commit to make up for previous policy errors.  I had thought they intended to do that back in 2020, but it turns out that “average inflation targeting” was not an accurate description of their new policy regime.   This post is entitled “double trouble”, even though the payroll employment figure can be regarded as good news.  The figures are trouble for a Fed that seems to be hoping that they will soon be able to lower their target interest rate.  In my view, it’s a mistake for the central bank to root for lower interest rates, just as it was a mistake for the Fed to prefer higher interest rates back in 2015.  They should not favor either lower or higher interest rates; they should favor macroeconomic (nominal) stability.  Let the market decide what sort of interest rates are consistent with macro stability. PS.  This comment in the FT caught my eye: Jason Furman, a former administration official now at Harvard University, said the uptick in joblessness could be the most important part of Friday’s data release. “If we wake up next month and the unemployment rate is 4.1 per cent, I think that will get [the Fed’s] attention,” Furman said. “If you have an unemployment that is above 4, that would put a rate cut in play earlier.” In the 1970s, the Fed assumed that a rising unemployment rate was a sign that money was too tight.  That was not the case.  The Fed should never target the unemployment rate, as no one knows exactly what the natural rate of unemployment is at any given moment in time.  The Fed should target a nominal variable, preferable nominal GDP.  It’s often true that rising unemployment is a signal that easier money is needed, but not if NGDP is growing at 5%. (0 COMMENTS)

One of the first things you learn about in an economics course is the concept of trade-offs: You can’t have everything you want. This is relevant in the debate about electric vehicles. U.S. auto workers want to keep their jobs. Most U.S. drivers still prefer cars with internal combustion engines. Environmentalists want Americans to buy EVs. And free traders want, well, free trade. Something’s got to give. Or does it? There’s a path that would enable each party to achieve many of its objectives. First, end mandates and subsidies for EVs. Second, eliminate President Biden’s 100% tariff on EVs from China and allow duty-free imports. Free trade would give lower- and middle-income Americans the chance to buy relatively cheap imported EVs. More people driving EVs would make environmentalists happy. And ending mandates and subsidies would allow U.S. automakers to do what they do best: make cars with internal combustion engines. That in turn would keep U.S. auto workers employed and able to continue using their specific skills. This is from David R. Henderson, “How Electric Vehicles Can Make Everyone Happy,” Wall Street Journal, June 6, 2024. I’ll post the whole thing when 30 days are up. (0 COMMENTS)

Recently, a meme from one of Twitter’s many socialist denizens got a lot of attention. The message it seemed to deliver was that workers are undervalued, because they are paid for far less than they produce: The implication is clear, and is reflective of a popular talking point in socialist circles. The worker in this meme produces 3,000 of those plastic rings with each hour labor but is only paid enough per hour to buy 3 of them. That would imply he’s only being paid for one thousandth of the value of what he produces! Surely this is exploitation, right?  Well, no. There are two big points this meme misses that change the picture quite a bit. The first one is that the worker here can’t actually produce 3,000 of those plastic rings per hour. If he could do that, he’d just set up shop in his garage and make them himself, selling them directly and massively improving his income. He can only make 3,000 per hour because he works with machines built by others and paid for by others. His labor, by itself, isn’t sufficient to produce 3,000 per hour. It requires combining his labor with the massive capital investment the company put forth to make his labor more productive, taking place in the context of a business that also provides him with the work environment, raw materials, and tools, that handles the orders and sales, along with innumerable other aspects that are necessary to enable him to do what he does. In order for that worker to claim he specifically produces 3,000 per hour by his own labor, he has to massively discount and dismiss the labor and investment made by so many other people. His labor is important, sure, but it’s one small step in an incomprehensibly complex process involving the cooperation of countless workers that also go into producing those plastic rings.  As is often the case, the flaw in this kind of thinking was pointed out by Adam Smith, in his well-known (but apparently not well-known enough) description of what ultimately goes into the production of a simple wool coat: The woolen-coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smeltinghouse, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them…if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided. In the modern world, the web of activities and labor leading up to the production of those plastic rings is, if anything, incomprehensibly more vast than what Adam Smith describes in the production of a wool coat in the eighteenth century. All of that work, effort, investment, and cooperation is erased from existence by the kind of “reasoning” employed in this meme. While socialists may claim to be the allies of labor, in putting forth claims of this sort, they are ironically devaluing and dismissing the importance of the cooperative efforts of a vast amount of laborers. (0 COMMENTS)

Most economists expected a recession in 2023. This prediction didn’t even come close—indeed 2023 was a boom year. I’ve already discussed one implication of that fact; economists are lousy at predicting the business cycle, and should not even try.There’s another lesson to be derived from the 2023 non-recession; don’t put too much weight on statistical patterns that might look reliable at first glance. Readers of this blog know that I often push back on claims that the “yield curve” is an infallible indicator of turning points in the business cycle. David Beckworth recently directed me to a tweet showing that the yield curve has now been inverted for 589 days. Forecasters often claim that a recession is inevitable within 12 months of a yield curve inversion. This is not the case: I do believe that an inverted yield curve provides some useful information. It can be seen as an indicator that investors probably expect a slowdown in NGDP growth going forward.  But it’s not perfect. I did a recent post on “bad reasoning” regarding the lab leak hypothesis for Covid.  Recession forecasting is another example of bad reasoning.  Yield curve inversions tend to occur rather late in a business cycle.  And America tends to have recessions roughly every 5 years, on average.  Combining those two facts, it’s not surprising that recessions often occur within 12 months of a yield curve inversion.  But not always. Human beings are very good at noticing statistical patterns.  We are always on the lookout for patterns that help us to better navigate through the world around us.  And patterns are in fact often quite useful.  Yield curve inversion is often an accurate precursor of recessions.  But I also find that people become too overconfident with these patterns, assuming that just because a pattern has worked in the past, it will continue holding true.   The Fed is always trying to prevent recessions.  If a truly infallible indicator of recessions were to be established, the Fed would react to that by adjusting monetary policy in such a way as to make the recession less likely.  For this reason, it is unlikely that we will ever have a reliable technique for forecasting recessions. PS.  The yield curve did predict the Covid recession of 2020, but I suspect that this was just “dumb luck”. (0 COMMENTS)

My friend (although we’ve never met) and fellow economist Jon Murphy stated recently, in a comment on co-blogger Pierre Lemieux’s recent post: When there are two options moving you away from your desired path, choosing the one that moves you away slightly slower is not really any better. I challenged Jon, writing: Yes it is. Think on the margin. Jon is great at thinking on the margin. I thought he would agree. But he didn’t. Instead he wrote: I am, David.  My point is that both options as presented lead me further away from my goal.  That implies it is time to search out a new margin or do nothing. Commenter Vivian Darkbloom came in on my side of the issue, writing: Being on the 30 yard line is not the same as being on the 10 yard line! To which Jon responded: Agreed.  But when my goal is to be in the endzone, one play that drops me back to the 40 and another that drops me back to the 50 are both counterproductive. Yes, both are counterproductive, but in economics we often compare two bad alternatives and choose the less bad. Thinking on the margin works here too. 40 is closer than 50. Now, if Jon had argued that the two alternatives are no different, then he would have a point. But he made quite clear that that’s not what he’s arguing. Note: Pierre raises another issue in the comments, in response, and it’s a good point for Pierre to make. But it isn’t relevant to my response to Jon. (1 COMMENTS)

The philosopher Daniel Dennett passed away recently. While his work was focused on things like consciousness and the philosophy of mind, his ideas can find applications in other areas of life, including economics. There’s one idea in particular he described in his book Intuition Pumps and Other Tools for Thinking I want to highlight here – what Dennett calls a “deepity.” Dennett describes a “deepity” as a seemingly meaningful comment that is actually marred by ambiguity. There are two different ways to interpret the statement. On one interpretation, it makes a meaningful and substantive claim, but that claim is outright false. On another interpretation, the claim is true, but only trivially true.  This has some similarities with the “motte-and-bailey” fallacy Scott Alexander has described before: So the motte-and-bailey doctrine is when you make a bold, controversial statement. Then when somebody challenges you, you retreat to an obvious, uncontroversial statement, and say that was what you meant all along, so you’re clearly right and they’re silly for challenging you. Then when the argument is over you go back to making the bold, controversial statement. Both ideas are similar in that they refer to claims that oscillate between interpretations, but there are a few differences. In the motte-and-bailey, it’s not necessarily the case that the bold statement is false – it’s just that the bold claim actually being advanced isn’t being defended. Motte-and-bailey is a sneaky argumentative tactic to bypass defending a claim. A deepity, as Dennett described it, is more akin to a trick you can play on yourself. Deepities can trip up our thinking when we unknowingly transfer the truth value of the trivial interpretation over to the substantive interpretation.  That said, here are two examples of deepities in economics one often finds. The first is the idea that imports reduce GDP, and the second is the idea that price increases are a result of greed.  For the first example, I’m actually being generous in allowing there’s a sense in which this claim can even be trivially true. It’s only in what Pierre Lemieux has called “a narrow bean-counting sense” – if we look at the accounting identity for GDP, we see that GDP = G + C + I + X – M. That is, GDP is equal to government spending, plus consumption spending, plus investment spending, plus exports, minus imports. While exports are an addition to GDP, imports are subtracted from GDP, therefore doesn’t that just obviously mean imports reduce GDP? Well, no. While I’ve complained on more than one occasion that many economic misunderstandings come about because economists are just bad at naming concepts (public goods!), in this case I have to acquit the profession of that charge. What GDP conveys is right there in the name – gross domestic product. That is, it’s a measure of things that were – wait for it – produced domestically. Imports, by definition, are things that are not produced domestically. While it’s trivially true that imports are subtracted from the GDP accounting identity, that’s because what GDP measures, by definition, excludes imports. The subtraction occurs to prevent double counting. Recently, I spent $5 on some avocadoes that were imported from Mexico. That $5 would appear in the C portion of the above identity – it was $5 of consumption. But since the avocadoes were not produced domestically, that $5 is subtracted from the GDP calculation as M. That doesn’t mean GDP was “reduced” by $5 in any meaningful sense. It means this $5 in consumption wasn’t part of GDP as defined. The substantive claim being made by the “imports reduce GDP” crowd is the idea that Americans would have a higher standard of living if we exported more and imported less. But this is outright false. Exports (again, by definition) are things American workers spend time, money, and resources producing and foreigners get the benefit of consuming. Consumption is a benefit, and production is the cost of acquiring that benefit. (Indeed, as Adam Smith wisely said, “consumption is the sole end and purpose of all production.”) Exports are what the citizens of a nation go through the cost of producing but don’t get the benefit of consuming. Because exports are produced domestically (by definition) they are part of GDP, but that’s very different from saying more exports and fewer imports would improve living standards or make citizens wealthier in any meaningful way. Another way to show this is to rearrange the GDP accounting identity. Say you want to live in a society where the citizens benefit from high levels of consumption and investment. You get C + I = GDP – G – X + M. That is, lots of exports and few imports means low levels of consumption and investment, and lots of imports and few exports means high levels of consumption and investment. The second deepity, that greed explains price increases, can be interpreted in a way that is trivially true. Producers want to make as much money as they can and will therefore prefer to sell at higher prices in order to make more money. But this claim is often trotted out to explain things like price spikes, and in this more substantive context, the claim is clearly false. A desire to make more money rather than less is a constant. Price changes are a variable. Explaining a change in outcome by appealing to factors that have remained the same is an explanatory dead end. As an example, not long ago eggs sharply increased in price in the United States. Does “greed” explain this price increase? Trivially yes, but substantively no. If egg producers used to sell eggs for $3 per dozen and then raise the price to $6 per dozen, how does “greed” explain the change? If greed is the reason to sell at $6 per dozen, then why were they ever selling at $3 per dozen to begin with? Were egg producers altruistically motivated in the previous era, then suddenly all simultaneously got greedier, before all suddenly becoming less greedy again? The economist Justin Wolfers once tweeted out a rather striking graph of egg prices: The same reasoning that says the massive spike in prices toward the end of the graph is explained by “greed” would, if applied consistently, also imply that the precipitous decline taking place shortly thereafter is explained by a massive decrease in greed. Or, instead of trying to explain changes by appealing to the unchanged, we could try to explain changes by appealing to other factors that also changed. Such as, say, changes in the supply-and-demand situation brought about by the spreading of an avian disease that substantially reduced the egg supply in the short term.  Those are two common examples of economic deepities. If there are some you can think of, dear reader, do by all means share them in the comments! (0 COMMENTS)

A recent NYT article provides an almost textbook example of how bad reasoning can fuel conspiracy theories. The author claims to provide five pieces of evidence suggesting that Covid escaped from a lab in Wuhan, China. In fact, none of the pieces of evidence are at all persuasive, and some are factually inaccurate. Here I’ll focus on the first piece of evidence cited, the inferences that we should draw from the fact that Covid happened in Wuhan. The article shows a graph of the “hundreds of large cities” within about 1500 miles of the bat caves where Covid is thought to have originated: Then we are led to believe that it would be an amazing coincidence if Covid were to naturally emerge in the one city in this region that just happened to have a major virology lab.  But is this claim true? In 1994, I got married in Beijing.  Our honeymoon was spent in Wuhan and Chongqing.  Is it an “amazing coincidence” that my honeymoon was spent in the city where Covid originated?  As we will see, the answer is no. A more pertinent example occurred in 2014, when virologist Eddie Holmes visited the animal market in Wuhan where Covid first spilled over to humans.  He snapped a picture of a cage with a raccoon dog, and speculated that this is the sort of place where a future pandemic might emerge: What’s even weirder — it turns out that one of the co-authors of the study, Eddie Holmes, had been taken to the Huanan market several years before the pandemic and shown raccoon dogs in one of the stalls. He was told, “This is the kind of place that has the ingredients for cross-species transmission of dangerous pathogens.” So he clicks photos of the raccoon dogs. In one photo, the raccoon dogs are in a cage stacked on top of a cage with some birds in it. And at the end of our sleuth work, we checked the GPS coordinates on his camera, and we find that he took the photo at the same stall, where five samples tested positive for SARS-CoV-2. I don’t know about you, but that seems like an even more major coincidence than the virus emerging in Wuhan. The NYT article is wrong; Wuhan is not just one of hundreds of large cities, it’s a Chinese megacity.  Southern China has four megacities (Wuhan, Chongqing, Chengdu, and Guangzhou/Shenzhen), or five if you view Guangzhou and Shenzhen as separate metro areas.  They are all hundreds of miles from the so-called “bat caves”.  Pandemics are far more likely to emerge in these places than in the hundreds of other Chinese cities.  These cities have many affluent shoppers, and huge animal markets that attract exotic species from all over China.  Also dense populations and lots of visitors from elsewhere.  Places that are magnets for people and trade. But let’s say I am wrong, and that there is nothing special about these four Chinese megacities.  In that case, the lab leak proponents face another problem.  Unlike with Covid (aka SARS-2), there is absolutely no dispute about how SARS-1 crossed over into humans back in 2002.  It first showed up near a wild animal market in the Guangzhou metropolis.  So people who reject my claim that southern Chinese megacities are special have merely traded one amazing coincidence for another.  Now they have to explain why Covid emerged in the giant city of Guangzhou, and not one of hundreds of other southern Chinese cities.   Here are the facts: SARS-1 is known to have crossed over in an animal market that was roughly 900 miles from the bat caves.  There were intermediate animal hosts. SARS-2 first showed up in people that worked and shopped in an animal market about 1000 miles from the bat caves.  The famous virology lab was in a completely different part of the giant metro area. Please apply Occam’s razor. Most Americans have very limited knowledge of Chinese geography, and are therefore easily persuaded by the sort of argument provided in the NYT.  So consider an American analogy.  Imagine a pandemic emerges among people who work and shop near an animal market in Flushing, a Chinese area of NYC.  Pandemics are known to have previously begun in such markets.  Then someone on the internet points out that the pandemic began in “New York City”, which also happens to contain a hugely important virology lab at Columbia University.  Maybe there was a lab leak, and the infected scientist just happened to go way across town to do some shopping at an animal market in Flushing, thereby infecting other people.  Does that seem like a very plausible “conspiracy theory”? Throughout history, many global pandemics have begun in southern China.  Even by Chinese standards, the southern Chinese are famous for eating a wide variety of exotic animals.  Southern China has a dense population, often living in close proximity to animal life. Yes, the NYT article also contains other “evidence”, all of which is equally weak.  Those other points have been refuted here and here and here. (0 COMMENTS)