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Archive for the ‘Economics’ Category

As John Stossel discusses in this new video, few economic policies are as insanely foolish as rent control.

As you saw in the video, supporters of rent control tend to be the cranks and crazies, such as Bernie Sanders and Alexandria Ocasio-Cortez.

The vast majority of economists, by contrast, recognize that such policies undermine incentives to provide and maintain rental housing.

Who is going to invest in a new apartment complex, after all, if politicians impose laws that ensure it will be a money-losing project?

The video highlights what has recently happened in Minnesota.

I wrote about that mistake last year. Christian Britschgi of Reason also looked at what happened. Here are some excerpts from his column.

Another housing development in St. Paul, Minnesota, is on hold… The reason? St. Paul’s newly-passed rent control ordinance, which Alatus’ principals say is making their once-eager investors skittish about doing business in the city. …the policy has developed a rock bottom reputation among economists over the past few decades. They almost uniformly argued that capping rents deterred developers from building new homes, and discouraged landlords from taking care of the ones that already exist. The inevitable result is less, and less well-maintained, housing. …Rent control is always going to disincentivize housing construction.

I recommend reading the entire article, since it also discusses the pernicious impact of zoning laws.

Since we’re on the topic of rent control, here’s the abstract of a study published by the American Economic Review in 2019. Because the policy discourages construction of new units, Rebecca Diamond, Time McQuade, and Franklin Qian found rent control actually increases rents in the long run.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20 percent and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15 percent by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law.

Rent control is bad for both landlords and renters.

But renters generally don’t understand the topic, which is why many of them support demagogic politicians pushing the policy.

The bottom line is that rent control is a form of price control. And we have centuries and centuries of evidence that such policies produce shortages and other forms of economic damage.

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As far as I’m concerned, the huge reductions in global poverty in recent decades are the only evidence we need about the benefits of economic growth.

This chart I shared in 2014 shows that output doubles much faster when annual economic growth goes from low levels (1 percent or 2 percent) to high levels (4 percent or above).

I call this the miracle of compounding.

Needless to say, I also argue that nations experience high levels of growth with the right policies and the right perspective.

But not everyone thinks policy makers should focus on getting more economic growth. Some of them (the “Okunites“) are willing to sacrifice some prosperity to achieve more equality, while others dislike growth because of the environment.

In a column for the Foundation for Economic Education, Saul Zimet points out that the people who downplay growth are no friends of the poor.

Economic degrowth is terrible for almost everyone, but it endangers the poor most of all. Therefore, it is remarkable that the problems with degrowth are appreciated least by those who claim to be most focused on the interests of the lower classes. …Socialist political commentator Ian Kochinski, who goes by the pseudonym Vaush, has said that, “One of the unfortunate truths of being a socialist is you have to accept that your nation will not get to enjoy the skyrocket GDP growth that capitalist nations get to enjoy. There is going to be a sacrifice of some economic efficiency, to the benefit of hopefully making life better for everybody.” Some growth critics go even further than to question the importance of growth as a policy target. …Naomi Klein calls economic growth “reckless and dirty” and advocates a policy of “radical and immediate degrowth”.

Zimet explains how this agenda is bad news for those on the lower rungs of the economic ladder.

… those brought out of extreme poverty, which have mostly been in places like China and India, were largely not helped by massive social programs but by a growing global market for their labor. …George Mason University economist Tyler Cowen explains…that, “In the medium to long term, even small changes in growth rates have significant consequences for living standards. An economy that grows at one percent doubles its average income approximately every 70 years, whereas an economy that grows at three percent doubles its average income about every 23 years—which, over time, makes a big difference in people’s lives.”

Professor Glenn Hubbard, an economist at Columbia University, makes the case for growth in an article for National Review.

A slightly higher rate of economic growth, sustained over time, can make the difference between a big increase in living standards and relative stagnation. …Nobel Prize–winning economist Robert Lucas famously observed that once economists think of long-term growth, it is hard to think of anything else. A pro-growth policy agenda is a good idea because growth is a good idea. …Higher output can come from growth in inputs such as labor and capital, but what determines their growth? Today’s economists highlight population growth and society’s willingness to work, save, and invest. Still more important is growth in productivity, or the efficiency with which inputs are used to produce goods and services. …McCloskey, an economic historian, has similarly identified the continuous, large-scale, voluntary, and unfocused search for betterment as the source of new ideas that can produce economic growth. She sees this “innovism” as primarily a cultural force, preferring the term to the more familiar “capitalism,” and connects innovism to economic liberalism.

Prof. Hubbard notes that economic growth requires creative destruction, but also acknowledges that this process causes pain.

And that politicians often respond to pain with bad ideas.

Forces that propel growth invariably leave a wake of economic disruption for people in many places… A serious discussion of pro-growth policy must account for that disruption. …growth is messy. It can push some individuals, firms, and even industries off well-worn and comfortable paths. …A gentle industrial policy devised by social scientists who are worried about jobs is not the answer. It results in state tinkering for special interests…it risks a vicious cycle: A little bit of tinkering becomes a lot of tinkering.

Instead of industrial policy, Hubbard suggests a couple of policies, most notably a better system of community colleges.

That would be a good outcome, of course.

From a big-picture perspective, though, I think net job creation is the best way to mitigate the political downsides of creative destruction.

It is not good news if 15 million jobs are destroyed in a particular year (especially for the people and communities that are directly harmed).

But if more than 15 million jobs are created the same year, that surely makes it easier for people to find new opportunities.

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As part of a conference organized by the Face of Liberty International in Nigeria, I reviewed realworld evidence to explain the recipe needed for poor nations to become rich nations. With an emphasis on fiscal policy, of course.

I think much of what I said is common sense backed by hard data.

Indeed, the evidence is so clear that I put together a never-answered-question challenge back in 2020 (which built upon an earlier version from 2014).

Why is it “never-answered”?

Because my left-leaning friends have never been able to provide an example, either now or at some point in the past, of a poor nation becoming a rich nation by imposing higher taxes and a bigger burden of government spending.

Yet supposed experts in economic development for decades have pushed foreign aid in failed efforts turn poor countries into rich countries.

More recently (and even more preposterously), international bureaucracies like the OECD, UN, and IMF have been arguing that higher taxes and bigger government are needed to promote economic development.

For all intents and purposes, my argument is based on the fact that western nations became rich in the 1800s and early 1900s when they had very low taxes and very small governments.

And if you don’t have 20 minutes to watch the above video, the most important charts come from a column I wrote back in 2018.

The first chart shows that there was a stunning reduction in poverty in western nations over a 100-year time period.

And the second chart shows that this near-miraculous improvement occurred before those nations had welfare states or any other forms of redistribution spending.

P.S. Rule of law (rather than arbitrary rule by kings, chiefs, emperors, and dictators) is a necessary prerequisite for growth. And weak rule of law is an even bigger challenge in the developing world than bad advice from international bureaucracies.

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Good tax policy should strive to solve the three major problems that plague today’s income tax.

  1. Punitive tax rates on productive behavior.
  2. Double taxation of saving and investment
  3. Corrupt, complex, and inefficient loopholes.

Today, let’s focus on the second item. If the goal is to minimize the economic damage of taxation, both labor and capital should be taxed at the lowest-possible rate.

But, as illustrated by the chart, the internal revenue code imposes widespread “double taxation” on income that is saved and invested.

Actually, it’s more than double taxation. Between the capital gains tax, corporate income tax, double tax on dividends, and death tax, there are multiple layers of tax on income from saving and investment.

So even if statutory tax rates are low, effective tax rates can be very high when you consider how the IRS gets several bites at the apple.

This is why good tax reform plans eliminate the tax bias against capital.

But we don’t want the perfect to be the enemy of the good. Simply lowering tax rates on capital also would be a step in the right direction.

And such an approach would produce meaningful economic benefits, as explained in a new Federal Reserve study by Saroj Bhattarai, Jae Won Lee, Woong Yong Park, and Choongryul Yang.

…capital tax cuts, as expected, have expansionary long-run aggregate effects on the economy. For instance, with a permanent reduction of the capital tax rate from 35% to 21%, output in the new steady state, compared to the initial steady state, is greater by 4.24%… A reduction in the capital tax rate leads to a decrease in the rental rate of capital, raising demand for capital by firms. This stimulates investment and capital accumulation. A larger amount of capital stock, in turn, makes workers more productive, raising wages and hours. Finally, given the increase in the factors of production, output expands.

This is all good news.

But our left-leaning friends might not be happy because some people get richer faster than other people get richer.

This aggregate expansion however, is coupled with worsening…inequality in our model. For instance, skilled wages increase by 4.66% while unskilled wages increases by only 0.56%, driven by capital-skill complementarity.

For what it is worth, I agree with Margaret Thatcher about adopting policies that help all groups enjoy higher living standards.

Here’s a chart for wonky readers. It shows how quickly the economy grows depending on how lower capital taxes are offset.

 

And here’s some of the explanatory text.

The main takeaway if that you get the most growth when you also lower the burden of redistribution spending.

The three financing schemes under consideration…produce different effects on aggregate output because each scheme influences workers’ labor supply decisions differently. …lump-sum transfer cuts…boosts unskilled hours and in turn, contributes to greater aggregate output… In comparison, a rise in the labor or consumption tax rate decreases the effective wage rate (as is well-understood) and additionally, weakens the wealth effect for the unskilled household. These two mechanisms work together to generate a smaller aggregate expansion under the distortionary tax adjustments. …we show that the capital tax cut has different welfare implications for each type of household depending on time horizon and policy adjustments. …The tax reform benefits the skilled households the most when transfers adjust, whereas the unskilled households prefer distortionary financing to avoid a significant reduction in transfer incomes.

The secondary takeaway from this research is that it would be bad for the economy (and bad for both rich people and poor people) if Joe Biden’s class-warfare tax policy was enacted.

But if you read this, this, this, and this, you already knew that.

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I support free trade for selfish reasons. I want my life to be better and I want my country to be richer.

But I also support free trade for selfless reasons. I want other people in other countries to be richer as well.

And rejecting protectionism usually is a way to achieve both my selfish and selfless goals.

But not always. Let’s look at some new evidence about the selfless benefits of open trade and globalization.

In an article for VoxEU, Maksym Chepeliev, Maryla Maliszewska, Israel Osorio Rodarte, Maria Filipa Seara e Pereira, and Dominique van der Mensbrugghe summarize their new research on global value chains.

The authors look at the economic consequences if some or all companies are told they have to rely solely on domestic suppliers (“reshoring”) compared to a world where they engage in cross-border trade.

As you can can see from this chart, you get bad results from some protectionism (reshoring leading economies) or more protectionism (reshoring all economies). Liberalization, by contrast, leads to good results.

Here’s some of what they wrote about their results.

A possible reshoring of production by the leading economies and China would have a negative impact in most regions, with real income decreasing by 1.5% worldwide. A localised world takes the biggest toll on developing countries with the Middle East and North Africa, Rest of East Asia and Pacific, and Europe and Central Asian regions being hit the most severely (Figure 1). However, countries subsidising domestic production would also be worse off as reshoring decreases trade and income, limits the variety of products available to producers and consumers, and increases prices.

If you look closely at Figure 1, you will notice that the United States and other rich nations suffer relatively small income losses from protectionism.

So this is a case where the selfish argument for free trade does not play a big role.

But the selfless argument is very strong. The authors point out that poor nations are the ones that reap big rewards with expanded trade.

Or suffer big losses in a world with more protectionism.

Under the ‘Reshoring all’ scenario, 51.8 million additional people would fall into extreme poverty by 2030, the equivalent to a 0.6% increase in the global extreme poverty headcount ratio. …The ‘GVC-friendly’ scenario, on the other hand, could lift 21.5 million people from extreme poverty by 2030. …In addition, we find that 56.2 million would graduate to global middle-class status, measured as individuals with a per capita consumption of more than PPP $10.00 a day.

Figure 4 shows that protectionism produces more extreme poverty while expanded trade saves people from that awful fate.

Let’s close with two simple observations.

Also, any discussion about trade is incomplete without an acknowledgement that not everyone benefits in the short run from changing patterns of trade.

But that’s true whether the trade is between countries or within countries.

We should acknowledge that new competitors, new technologies, and new products are part of “creative destruction,” which can cause pain for some people in the short run.

The key thing to understand, however, is that this is the process that makes societies far more prosperous in the long run. Moreover, when politicians interfere, they will cause more pain for more people in both the short run and the long run.

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Back in 2018, I shared some academic research on the relationship between state tax rates and the performance of professional football teams.

The main takeaway is that teams based in high-tax states did not win as many games, on average, as teams based in low-tax states.

So if you want your favorite team to win, support better tax policy.

Though there are no guarantees. A team from high-tax California just won the Super Bowl, so it goes without saying that taxes are not the only factor that determines team success.

But it presumably means that teams in states like California and New York have to overcome a built-in disadvantage.

Let’s take a look at some new research on this issue. Professor Erik Hembre of the University of Illinois at Chicago authored a study that’s been published by International Tax and Public Finance.

Here’s the question he wanted to answer.

Do higher state income taxes harm firms? …This paper examines the state income tax burden in a unique market, professional sports, where teams—the capital in question—are highly immobile and players—the labor—are highly mobile to test whether higher state income tax hinders team performance. Anecdotal evidence suggests higher state income taxes disadvantage professional sports teams. Across the four major US sports leagues, of the forty-nine franchises with long championship droughts, only four are from states that do not have an income tax, while twenty are from the highest taxed states.

Here’s his methodology, which takes advantage of the fact that free agency gave players new-found ability to play where they could keep more of their earnings.

To test the link between state income taxes and team performance, this paper analyzes team performance in the four major US professional sports leagues: the National Basketball Association (NBA), the National Football League (NFL), the National Hockey League (NHL), and Major League Baseball (MLB). To address concerns that the association between team performance and income tax rates may be coincidental, I examine how the tax rate effect changed with the adoption of free agency. Achieving free agency has been a milestone for players’ associations, paramount both for increasing player mobility across teams and for forcing teams to compete for player services without restrictions.

Since athletes respond to incentives (just like entrepreneurs, inventors, and scientists), we should not be surprised that Prof. Hembre found that teams in lower-tax states now enjoy more success.

I compare the link between tax rates and team winning percentage before and after the introduction of free agency in each league using within-team variation in top state marginal income tax rates. Prior to free agency, there was a small positive association between income tax rates and winning. After the introduction of free agency, changes in state income tax rates significantly influence team performance. Each percentage point increase in the top marginal income tax rate is associated with a 0.70 percentage point decrease in win percentage. The tax rate effect on team performance is robust to a variety of specifications, such as controlling for sales and property taxes or alternative tax rate measures. Changing the outcome measure to be championships or finals appearances also yields similar results. The estimated effect size is non-trivial. The main analysis effect size of − 0.70 means that a one standard deviation increase in tax rate will result in 2.05 fewer wins over an 82 game season. …Figure 3 presents the annual point estimates (훽2) and 95% confidence intervals of the income tax rate effects between 1980 and 2017. …in all 9 years prior to any league having free agency, there was a positive income tax effect estimate. This relationship changed shortly after the introduction of free agency and since 1990 the annual income tax effect has remained negative.

Here’s the aforementioned Figure 3 for my wonky readers.

As a fan of better tax policy, I like Prof. Hembre’s findings.

As a fan of the New York Yankees, I don’t like his findings

P.S. Here’s one final tidbit that will appeal to fans of the Raiders.

Considering an extreme case, the recent relocation of the Oakland Raiders from a high income tax state (California) to a no income tax state (Nevada) projects a winning percentage increase of 8.6 percentage points or about 1 game per NFL season

P.P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But he has since migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.P.S. Needless to say, these principles also apply in other nations.

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When the Commerce Department announced in February that the United States had a record trade deficit for 2021, I shared this video to help make the point that those trade numbers were that year’s “least important economic news.”

The main thing to understand is that a trade deficit is simply the flip side of an investment surplus.

When Americans use dollars to buy goods from other nations, those dollars are only valuable to foreigners because they can use them to buy things from America.

In many cases, they buy American goods and services. But they also use many of those dollars to invest in the U.S. economy.

That’s generally a positive thing. It’s a vote of confidence about America’s economic future.

Jeff Jacoby of the Boston Globe shares my viewpoint. He recently opined on this issue, echoing the important insight about the link between trade flows and investment flows.

The US trade deficit hit an all-time high in March, widening to nearly $110 billion as the nation imported considerably more goods than it exported. That can’t be good, right? Actually, it’s fine. …It’s not an indication of actual economic weakness. …Quite the contrary: All things being equal, imports are usually evidence of economic vitality and success. …The dollars Americans spend on imports aren’t “lost.” They are exchanged for desirable and affordable goods, services, parts, and commodities that strengthen Americans’ economy while elevating their US lifestyle. Better still, those dollars then come back to the United States, where they are used to invest in American assets or buy American exports, creating even more value and putting even more Americans to work. …a trade “deficit” isn’t a debt we owe. It is an accounting entry that tells us how much more we were enriched by foreigners than they were by us. ..the US economy has some real problems. Happily, the trade deficit isn’t one of them. Imports are good. And more imports? They’re good too.

This does not mean, however, that everyone is a winner.

As I explain in this video, jobs are destroyed when there is trade between nations. But I also point out that jobs are destroyed by trade inside a nation’s borders.

That’s bad news for workers in sectors that are dying (such as typewriter makers after personal computers hit the market).

What’s important is whether the new jobs that are created exceed the number of jobs that are lost.

This is what is called “creative destruction.” It’s painful, but it is why we are much richer today than we were in the past.

The good news is that this usually happens…at least if politicians resist the temptation to over-tax, over-spend, and over-regulate.

The bottom line is that free trade is much better for long-run prosperity than protectionism.

Unless, of course, you think it’s a good idea to copy the policies of Herbert Hoover.

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I’m more than happy to condemn Joe Biden for his bad policy proposals, such as higher tax rates, fake stimulus, red tape, and a bigger welfare state.

But as I discuss in this segment from a recent interview, he bears very little blame for today’s high inflation rate.

If you want to know who is responsible for 8.5 percent inflation, the highest in four decades, this chart tells you everything you need to know.

Simply stated, the Federal Reserve has created a lot more money by expanding its balance sheet (which happens, for example, when the central bank purchases government bonds using “open market operations”).

Notice, by the way, that the Fed dramatically expanded its balance sheet beginning in March 2020. That was almost one year before Biden was inaugurated.

At the risk of stating the obvious, Biden does not have the power of time travel. He can’t be at fault for a monetary policy mistake that happened when Trump was president.

That being said, I don’t want anyone to think that Biden believes in good monetary policy.

  • Biden has never made any sort of statement favoring monetary restraint by the Fed.
  • Neither the president not his senior advisors have urged the Fed to reverse its mistake.
  • Biden renominated Jerome Powell to be Chairman of the Fed’s Board of Governors.
  • None of Biden’s other nominees to the Federal Reserve have a track record of opposing easy money.

The bottom line is that the Fed almost surely would have made the same mistake in 2020 if Biden was in the White House.

But he wasn’t, so he gets a partial free pass.

P.S. Speaking of time travel, Paul Krugman blamed Estonia’s 2008 recession on spending cuts that took place in 2009.

P.P.S. Here’s my two cents on how people can protect themselves in an inflationary economy.

P.P.P.S. Only one president in my lifetime deserves praise for his approach to monetary policy.

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Thomas Piketty is a big proponent of class-warfare tax policy because he views inequality as a horrible outcome.

But a soak-the-rich policy agenda, echoed by many other academics such as Emmanuel Saez and Gabriel Zucman, is fundamentally misguided. If people really care about helping the poor, they should focus instead on reforms that actually have a proven track record of reducing poverty.

The fact that they fixate on inequality makes me wonder about their motives.

And it also leads me to find their work largely irrelevant. I don’t care if they produce detailed long-run data on changes in inequality.

I prefer detailed long-run data on changes in poverty.

That being said, it appears that some of Piketty’s data is sloppy.

I shared some evidence about his bad numbers back in 2014. And, in a column for the Wall Street Journal, Phil Magness of the American Institute for Economic Research and Professor Vincent Geloso of George Mason University expose another glaring flaw

…the Piketty-Saez theory is less a matter of history than an accounting error caused by their misunderstanding of World War II-era tax statistics. …It’s true that income inequality declined in the early part of the 20th century, but the cause had more to do with the economic devastation of the Great Depression than the New Deal tax regime. …they failed to account properly for historical changes in how the Internal Revenue Service reported income-tax statistics. As a result, their numbers systematically overstate the levels of top income concentrations by as much as a third …Between 1943 and 1944 the tax collection agency shifted from tracking “net income” to “adjusted gross income,” or AGI…a truer depiction of annual earnings… Yet Messrs. Piketty and Saez didn’t bring pre-1944 IRS records into line with AGI accounting standards. Instead, they applied a fixed and arbitrary adjustment to all years before the AGI accounting change that conveniently scaled upward to the highest income brackets. …They used the wrong accounting definition for personal income and neglected to adjust their data for wartime distortions on tax reporting. When we corrected these problems, something stunning happened. The overall level of top income concentration flattened, and the timing of its leveling shifted away from the World War II-era tax rates that Messrs. Piketty and Saez place at the center of their story.

Here’s a chart that accompanied the column, showing how accurate data changes the story.

Since today’s column debunks sloppy class warfare, let’s travel back to 2014, when Deirdre McCloskey reviewed Pikittey’s tome for the Erasmus Journal of Philosophy and Economics.

She also thought his fixation on envy was misguided.

…in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. …What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer too. His worry, in other words, is purely about difference, about the Gini coefficient, about a vague feeling of envy raised to a theoretical and ethical proposition. …Piketty and much of the left…miss the ethical point…of lifting up the poor…by the dramatic increase in the size of the pie, which has historically brought the poor to 90 or 95 percent of “enough”, as against the 10 or 5 percent attainable by redistribution without enlarging the pie. …the main event of the past two centuries was…the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more.

But she also explained that he doesn’t understand how the economy works.

The fundamental technical problem in the book…is that Piketty the economist does not understand supply responses. In keeping with his position as a man of the left, he has a vague and confused idea about how markets work, and especially about how supply responds to higher prices. …Piketty, it would seem, has not read with understanding the theory of supply and demand that he disparages, such as in Smith (one sneering remark on p. 9), Say (ditto, mentioned in a footnote with Smith as optimistic), Bastiat (no mention), Walras (no mention), Menger (no mention), Marshall (no mention), Mises (no mention), Hayek (one footnote citation on another matter), Friedman (pp. 548-549, but only on monetarism, not the price system). He is in short not qualified to sneer at self-regulated markets…, because he has no idea how they work.

And she concludes with a reminder that some of our left-wing friends seem most interested in punishing rich people rather than helping poor people.

The left clerisy such as…Paul Krugman or Thomas Piketty, who are quite sure that they themselves are taking the ethical high road against the wicked selfishness…might on such evidence be considered dubiously ethical. They are obsessed with first-act changes that cannot much help the poor, and often can be shown to damage them, and are obsessed with angry envy at the consumption of the uncharitable rich, of which they personally are often examples, and the ending of which would do very little to improve the position of the poor. They are very willing to stifle through taxing the rich the market-tested betterments which in the long run have gigantically helped the rest of us.

Amen. If you want to know what Deirdre means by “betterment,” click here and watch her video.

P.S. Click herehere, here, and here for my four-part series on poverty and inequality. Though what Deirdre wrote in 2016 may be even better.

P.P.S. I also can’t resist calling attention to the poll of economists at the end of this column.

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In Part I of this series, Professor Don Boudreaux explained the folly of price controls, and Professor Antony Davies was featured in Part II.

Now let’s see some commentary from the late, great, Milton Friedman.

As Professor Friedman explained, the economics of price controls are very clear.

When politicians and bureaucrats suppress prices, you get shortages (as all students should learn in their introductory economics classes).

Sometimes that happens with price controls on specific sectors, such as rental housing in poorly governed cities.

Sometimes it happens because of economy-wide price controls, as we saw during Richard Nixon’s disastrous presidency.

In all cases, price controls are imposed by politicians who are stupid or evil. That’s blunt language, but it’s the only explanation.

Sadly, there will never be a shortage of those kinds of politicians, as can be seen from this column in the Wall Street Journal by Andy Kessler.

Here are some excerpts.

On the 2020 campaign trail, Joe Biden declared, “ Milton Friedman isn’t running the show anymore.” Wrong! …Lo and behold, inflation is running at 7.9%, supply chains are tight, and many store shelves are empty. Friedman’s adage “Inflation is always and everywhere a monetary phenomenon” has stood the test of time. But what scares me most is the likely policy responses by the Biden administration that would pour salt into this self-inflicted wound. It feels as if price controls are coming. …Prices set by producers are signals, and consumers whisper feedback billions of times a day by buying or not buying products. Mess with prices and the economy has no guide. The Soviets instituted price controls on everything from subsidized “red bread” to meat, often resulting in empty shelves. President Franklin D. Roosevelt’s National Recovery Agency fixed prices, prolonging the Depression, all in the name of “fair competition.” …Price controls don’t work. Never have, never will. But we keep instituting them. Try finding a cheap apartment in rent-controlled New York City. …Sen. Elizabeth Warren, a leader among our economic illiterate, noted in February that high prices are caused in part by “giant corporations…”

He closes with a very succinct and sensible observation.

Want to whip inflation now? Forget all the Band-Aids and government controls. Instead, as Friedman suggests, stop printing money.

In other words, Mr. Kessler is suggesting that politicians do the opposite of Mitchell’s Law.

Instead of using one bad policy (inflation) as an excuse to impose a second bad policy (price controls), he wants them to undo the original mistake.

Will Joe Biden and Elizabeth Warren take his advice?

That’s doubtful, but I’m hoping there are more rational people in the rooms where these decisions get made.

Maybe some of them will have read this column from Professor Boudreaux.

Prices are among the visible results of the invisible hand’s successful operation, as well as the single most important source of this success. Each price objectively summarizes an inconceivably large number of details that must be taken account of if the economy is to perform even moderately well. Consider the price of a loaf of a particular kind and brand of bread. …The price at the supermarket of a loaf of bread, a straightforward $4.99, is the distillation of the economic results of the interaction of an unfathomably large number of details from around the globe about opportunities, trade-offs, and preferences. The invisible hand of the market causes these details to be visibly summarized not only in the price of bread, but in the prices of all other consumer goods and services, as well as in the prices of each of the inputs used in production. …These market prices also give investors and entrepreneurs guidance on how to deploy scarce resources in ways that produce that particular mix of goods and services that will today be of greatest benefit for consumers.

I have two comments.

First, Don obviously buys fancier bread than my $1.29-a-loaf store brand (used to be 99 cents, so thanks for nothing to the Federal Reserve).

Second, and far more important, he’s pointing out that market-based prices play an absolutely critical role in coordinating the desires of consumers and producers.

When politicians interfere with prices, it’s akin to throwing sand in the gears of a machine.

For more information on the role of prices, I strongly recommend these videos from Professors Russ Roberts, Howard Baetjer, and Alex Tabarrok.

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Since I wrote yesterday about Ukraine’s terrible economic policy, fairness requires that I make the same points about Russia’s similarly dirigiste system.

We’ll start with Russia’s scores from the latest edition of Economic Freedom of the World.

Not exactly a good set of numbers, particularly with regards to “size of government.” And it’s safe to assume that Russia’s overall score will decline when a new version is released later this year.

But I want to make the point that Russia faced serious economic problems well before Putin decided to invade Ukraine.

Indeed, he may have attacked in part to distract from Russia’s ongoing economic problems.

To some degree, this is a story of weak demographics, as I observed last month.

But Putin is making a bad situation worse.

Consider what George Will wrote for the Washington Post back in 2020.

n Putin’s ramshackle Russia…as recently as 2018, almost a third of medical facilities lacked running water, 40 percent lacked central heating and more than half lacked hot water. …in Catherine Belton’s exhaustive new book…, “Putin’s People: How the KGB Took Back Russia and Then Took On the West…” says that “by 2012 more than 50 percent of Russia’s [gross domestic product] was under the direct control of the state and businessmen closely linked the Putin.” …state-directed capital allocation actually is crony socialism.

It’s sometimes not easy to measure crony socialism (which technically should be called fascism), but even the International Monetary Fund recognizes its downsides.

Here’s some research from the IMF, authored by Gabriel Di Bella, Oksana Dynnikova, and Slavi Slavov.

The size of the Russian State…economic footprint remains significant. Concretely, the state’s size increased from about 32 percent of GDP in 2012 to 33 percent in 2016, not far from the EBRD’s estimate of 35 percent for 2005-10. …a deep state footprint is reflected in a relatively high state share in formal sector activity (close to 40 percent) and formal sector employment (about 50 percent). The deep footprint is also reflected in market competition and efficiency. Although sectors in which the state is present are more concentrated, concentration is large even in sectors where the state’s share is low. …Finally, state-owned enterprises’ performance appears weaker than that of privately-owned firms, which may be subtracting from growth.

Last December, Jarret Decker analyzed Russia’s state-controlled economy in an article for Reason.

There’s a thorough discussion of how the oligarchs gained control of key sectors of the economy, as well as this discussion of other policy mistakes.

The 1990s in Russia and throughout most of the former Soviet Union were a time of dizzying change… As price controls were lifted and the money supply increased, inflation exploded. In 1992, Russian inflation was about 2,000 percent, with another 1,000 percent inflation the following year. Life savings disappeared almost overnight. …plummeting social indicators were all tied to the disastrous performance of the Russian economy, a chaotic mix of large enterprises still under state control, a central government heavily in debt…the “crown jewels” of the former Soviet economy—in sectors such as oil and gas, mining, and steel production—remained under state control. …in GDP per capita, Russia has fallen far behind its fellow former Soviet republics in the Baltic region, with output per person about half of Estonia’s and about 40 percent less than Lithuania’s and Latvia’s. Not coincidentally, the Baltic countries all rank in the top 30 in the world in the Heritage Foundation’s 2021 Index of Economic Freedom.

I’ll wrap up with a story that is particularly disappointing to me.

One of the few good policies Putin implemented was a flat tax.

But rather than build on that successful reform, he decided to reverse it and adopt a system with discriminatory rates. Here are some excerpts from a 2020 report in the Moscow Times.

Russian President Vladimir Putin on Monday signed a law on increasing income tax for high earners in the first move away from a flat tax system in place since 2001. Starting next year, the tax rate will rise from 13% to 15% on incomes over 5 million rubles (about $65,800/55,370 euros at the current exchange rate). …The reform is expected to give state coffers an additional 60 billion rubles, the president said… The current flat tax system was introduced in 2001 and was among the key reforms of Putin’s first presidential term.

The bottom line is that the yoke of communism has been removed but statism remains.

Which explains why Russia is not converging with the United States, as theory would predict. Here is a chart based on the Maddison database.

This is quite depressing, especially if the economy’s poor performance gave Putin an extra incentive to “wag the dog” with military aggression.

But let’s end on an optimistic note. It’s possible that Putin has miscalculated and his attack on Ukraine eventually will result in his ouster.

The best-case scenario is that he gets replaced with a free-market reformer. The Russian version of Mart Laar, perhaps. Then Russia could become a success story, which is exactly what we’ve seen in the Baltic nations.

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Regarding Russia’s reprehensible attack on Ukraine, I’ve written three columns.

Today, let’s address the topic of foreign aid for Ukraine, specifically whether American taxpayers should help restore that country’s economy once the conflict ends.

I’ll start by recycling an observation I made back in 2014, which is that Ukraine has been an economic laggard because of statist economic policies.

More specifically, I compared Poland (which has engaged in substantial liberalization) and Ukraine (which has not) and showed a growing gap between the two nations (another case study for the anti-convergence club).

Now let’s look at some updated data from the latest edition of Economic Freedom of the World.

As you can see, Ukraine is a cesspool of statism, ranking a miserable #129 out of 165 jurisdictions.

That’s lower than Russia, which is #100.

And the same is true if you look at the latest edition of the Index of Economic Freedom, which ranks Ukraine #130 and Russia #113.

At the risk of stating the obvious, giving economic aid to Ukraine would be flushing money down the toilet.

Unless, of course, western nations such as the United States somehow made aid contingent on sweeping economic liberalization.

We know what works. Don BoudreauxDeirdre McCloskey, and Dan Hannan have all explained how Western Europe and North America became rich in the 1800s and early 1900s with the tried-and-true approach of free markets and limited government.

Even a curmudgeonly libertarian like me would relax my long-standing hostility to aid under those conditions.

The odds of that happening, however, are slim to none. And I would put my money on none, as explained by the “Foreign Aid Paradox.”

P.S. Some people incorrectly claim Western Europe recovered after World War II because of government aid (the “Marshall Plan”). The real credit belongs with people like Ludwig Erhard.

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I’ve written about President Warren Harding’s under-appreciated economic policies.

He restored economic prosperity in the 1920s by slashing tax rates and reducing the burden of government spending.

I’ve also written many times about how President Franklin Roosevelt’s economic policies in the 1930s were misguided.

And that’s being charitable. For all intents and purposes, he doubled down on the bad policies of Herbert Hoover. As a result, what should have been a typical recession wound up becoming the Great Depression.

But I’ve never directly compared Harding and FDR.

Ryan Walters, who teaches history to students at Collins College, has undertaken that task. In a piece for the Foundation for Economic Education, he explains how Harding and Roosevelt took opposite paths when facing similar situations.

Both men came into office with an economy in tatters and both men instituted ambitious agendas to correct the respective downturns. Yet their policies were the polar opposite of one another and, as a result, had the opposite effect. In short, Harding used laissez faire-style capitalism and the economy boomed; FDR intervened and things went from bad to worse. …Unlike FDR, who was no better than a “C” student in economics at Harvard, Harding understood that the old method of laissez faire was the best prescription for a sick economy.

Here’s some of what he wrote about Harding’s successful policies.

America in 1920, the year Harding was elected, fell into a serious economic slide called by some “the forgotten depression.” …The depression lasted about 18 months, from January 1920 to July 1921. During that time, the conditions for average Americans steadily deteriorated. Industrial production fell by a third, stocks dropped nearly 50 percent, corporate profits were down more than 90 percent. Unemployment rose from 4 percent to 12, putting nearly 5 million Americans out of work. …Harding campaigned on exactly what he wanted to do for the economy – retrenchment. He would slash taxes, cut government spending, and roll back the progressive tide. …Under Harding and his successor, Calvin Coolidge, and with the leadership of Andrew Mellon at Treasury, taxes were slashed from more than 70 percent to 25 percent. Government spending was cut in half. Regulations were reduced. The result was an economic boom. Growth averaged 7 percent per year, unemployment fell to less than 2 percent, and revenue to the government increased, generating a budget surplus every year, enough to reduce the national debt by a third. Wages rose for every class of American worker.

And here’s what happened under FDR.

Basically the opposite path, with horrible consequences.

FDR certainly inherited a bad economy, like Harding, yet he made it worse, not better, prolonging it for nearly a decade. With the stock market crash in October 1929, the American economy slid into a steep recession, which Herbert Hoover…proceeded to make worse by intervening with activist government policies – increased spending, reversing the Harding-Coolidge tax cuts, and imposing the Smoot-Hawley tariff. …once in office FDR set in motion a massive government economic intervention called the New Deal. …under FDR taxes were tripled and new taxes, like Social Security, were added, taking more money out of the pockets of ordinary Americans and businesses alike. Between 1933 and 1936, FDR’s first term, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent. In all, spending shot up from $4.5 billion in 1933 to $9.4 billion in 1940. …The results were disastrous. …Unemployment under Roosevelt averaged a little more than 17 percent and never fell below 14 percent at any time. And, to make matters worse, there was a second crash in 1937. From August 1937 to March 1938, the stock market fell 50 percent.

At the risk of understatement, amen, amen, and amen.

Sadly, very few people understand this economic history.

This is mostly because they get spoon fed inaccurate information in their history classes and now think that laissez-faire capitalism somehow failed in the 1930s.

And they know nothing about what happened under Harding.

P.S. What happened in the 1920s and 1930s also is very instructive when thinking about the growth-vs-equality debate.

P.P.S. Shifting back to people not learning history (or learning bad history), it would be helpful if there was more understanding of how supporters of Keynesian economics were completely wrong about what happened after World War II.

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Having addressed Biden’s track record on subsidies, inflation, protectionism, household income, and fiscal policy, let’s finish our series by reviewing the president’s record on regulatory issues.

The first place to start is the Federal Register, which is Uncle Sam’s official site for new rules.

Though it gives us conflicting information. The number of pages (a crude measure of regulatory zeal, as I noted a few years ago) actually decreased during Biden’s first year. But only compared to Trump’s last year.

To understand what’s really going on, let’s look at the Forbes article from which the above table was taken.

Clyde Wayne Crews of the Competitive Enterprise Institute sifts through the data and concludes that Biden is a fan of expanded red tape.

The Federal Register is the daily depository of rules and regulations produced by hundreds of federal departments and agencies. …Under Biden, the regulatory establishment has its Hall Pass back, and it shows. The Federal Register page count ended the year with 74,532 pages. …The 2020 count under Trump was far higher, at 86,356. There had been “only” 61,308 pages back in Trump’s first year of 2017, which had been the lowest count in a quarter-century… Trump’s first year represented a 35 percent drop… But Trump’s final year made him number two… How come? Well, …removing rules that ought not have been written in the first place still requires writing new rules to do it. …So, paradoxically, any concerted Trump moves on “one-in, two-out” in service of deregulating and removing that which came decades before required fattening the Register to some extent. …Despite Biden’s lower Federal Register page count, we’re nonetheless back in the mode of not just unapologetically but combatively fattening the Federal Register. …several hundred of Trumps rules had been deemed “deregulatory” for purposes of his one-in, two-out program… Biden’s revivalist counts are embedded with no such purpose… Trump definitely left a mark. Biden is working on erasing it.

Incidentally, I don’t think regulatory experts from the left would disagree with the above assessment.

For instance, Brookings has a regulatory tracker that monitors what’s been happening since Biden took office and you will not find any evidence that the current administration is interested in limiting or reducing red tape.

Let’s wrap up by looking at a specific example of Biden’s regulatory excess. It’s about domestic energy production, which is a very timely issue given what is happening in Ukraine.

Ben Cahill of the Center for Strategic and International Studies summarized some of what Biden did to hinder America’s ability to produce energy.

President Joe Biden has followed through on a campaign pledge by introducing a moratorium on new oil and gas leasing on federal lands and waters. With nearly 25 percent of U.S. oil and gas production coming from federal lands, the policy shift may have significant implications for future investment and production. …This pause will not affect existing operations or permits for existing leases, and private lands will not be affected. …A more permanent leasing ban would have a significant impact, although visible offshore production declines may not materialize for up to 10 years, given the typical timeframe for planning, exploration, appraisal, and development. Onshore production declines could conceivably show up faster.

As you can see, the main damage is to future energy production rather than current energy production.

Needless to say, the same is true about the Biden Administration’s limitations on energy exploration and development in Alaska.

And don’t forget about pipelines (and geopolitics!), as mentioned in this column by Kevin Williamson for National Review.

The Biden administration already is reaching out to Caracas, where officials describe the initial conversation as “cordial” and “respectful.” I’ll bet it is. And Maduro’s isn’t the only tyrannical tuchus that requires kissing: President Joe Biden is said to be planning a personal trip to Riyadh to beg Crown Prince Mohammed bin Salman to ramp up Saudi production. …Right about now, President Biden must be wishing he had an extra pipeline to Canada. The thought has occurred to Alberta premier Jason Kenney, who observes about Keystone XL: “If President Biden had not vetoed that project, it would be done later this year — 840,000 barrels of democratic energy that could have displaced the 600,000 plus barrels of Russian conflict oil that’s filled with the blood of Ukrainians.” …We could spare ourselves some of these calculations by maximizing our own output — not only of crude oil and natural gas but also of refined-petroleum products. That would also mean building the necessary pipeline infrastructure and reforming our antiquated maritime regulations to enable the transportation of those fuels.

The bottom line is that the Biden Administration wants more regulation and red tape.

That has adverse consequences for economic dynamism and growth.

Especially when bureaucrats at the regulatory agencies ignore cost-benefit analysis (or put their thumbs on the scale to get a result that matches their ideological preferences).

And, in the case of energy, regulatory policy can have significant geopolitical implications as well.

P.S. You can click here to learn something about Obama’s record on the issue, and click here to learn a bit about Trump’s track record as well.

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As part of my ongoing efforts to show that free enterprise produces better results than statism, I often use data on per-capita economic output – especially when comparing nations over long periods of time.

And I’ll sometimes build upon those numbers by comparing consumption levels in different nations.

But what if we’re looking at one country rather than several nations?

In the case of the United States, it is useful to peruse data on GDP and consumption, but I’m also a big fan of using the Census Bureau’s data on inflation-adjusted median household income (though even this data isn’t perfect because household sizes are declining over time).

These numbers allow us to gauge, over multi-year periods, whether government policies are making life better for average families. Or whether they are producing stagnation.

But what if we don’t have several years of data?

That’s a very relevant question since we’re in the midst of my series on Bidenomics.

The president has only been in office for a little over one year, so we don’t even have medium-run data, much less long-run data. Moreover, I’m always cautious about using data for just one month, one quarter, or one year. After all, you don’t know if something is a real trend, or just a statistical blip.

That being said, if we want to give a preliminary grade to Biden’s economic performance, the best data would be inflation-adjusted earnings.

On this basis, Joe Biden is doing a bad job. Here’s Chart 1 from the Bureau of Labor Statistics’ report on what happened to hourly earnings in 2021, adjusted for inflation.

At the risk of stating the obvious, it’s not good news if most of the bars are in negative territory. I’ve also highlighted (in red) the key takeaways for the year.

Sophisticated observers will point out that hourly earnings are only one piece of the compensation puzzle.

So I then went to the Bureau of Labor Statistics’ report that also includes fringe benefits.

And if you look at Chart 4, which measures compensation after adjusting for inflation, you’ll notice very depressing data for 2021.

Now that we’ve looked at some grim data, let’s contemplate whether Joe Biden deserves blame.

The answer is probably yes, but I’ll share five caveats.

  • First, it’s just one year of data, so always be wary of statistical blips (maybe inflation is just transitory).
  • Second, only a few Biden policies have actually been enacted (though I’m not a fan of his biggest achievement).
  • Third, those policies may not have been in place long enough to have a meaningful effect on the economy.
  • Fourth, keep in mind that the pandemic scrambled economic data (though perhaps in a way that should have meant a boom in 2021).
  • Fifth, bad news in 2021 could merely be a continuation of a preexisting trend, in which case Trump maybe deserves blame.

Regarding the final point, notice in Chart 4 that the data was heading south at the end of 2020, when Trump was still in the White House.

Was that merely a statistical blip? If not, were the numbers bad because of something Trump did, or were they related to the pandemic? Or perhaps the bad numbers at the end of 2020 were related to investors and entrepreneurs fearing a future Biden agenda?

The bottom line is that we should ignore partisan labels and instead focus on policy. If government is becoming a bigger burden, then we can expect slower growth.

As such, it is very reasonable to think that 2021’s bad data is – at least in part – a consequence of Biden’s dirigiste policy agenda.

P.S. If he is able to resuscitate his so-called Build Back Better plan, expect more bad data in 2022.

P.P.S. For previous columns in this series, click here, here, and here.

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In Part I of this series, I pointed out that Biden’s plethora of proposed handouts and subsidies would lead to higher prices and more inefficiency. And in Part II, I explained that his discussion of inflation was embarrassingly inaccurate.

In today’s column, we’re going to analyze his strident support for protectionist “Buy America” provisions, which drive up costs for taxpayers by making it harder for foreign firms to compete for government contracts and thus give American firms the ability to charge higher prices.

How much of a burden are these policies? How much more are taxpayers having to pay because governments can’t opt for the lowest qualified bidder?

According to research shared by the Peterson Institute for International Economics (PIIE), American taxpayers lose $94 billion per year.

The good news (if we have a very generous definition of “good”) is that procurement protectionism “only” pushes up costs in the United States by 5.6 percent.

Our dirigiste friends in the European Union suffer much more. Their procurement protectionism results in average markups of 17.6 percent, costing European taxpayers a staggering $471 billion.

But taxpayers are not the only losers.

In a 2017 study for PIIE, Gary Hufbauer and Euijin Jung explain that nations also lose exports because of procurement protectionism.

Buy American provisions are often enacted because politicians associate the patriotic slogan with the creation of domestic jobs. In fact, these laws are counterproductive: They are costly for taxpayers, they curtail exports, and they lose more jobs than they create. “Buy American” was bad policy in 1930 and does even more harm today. …Buy American dulls competition for everything that federal, state, and local governments purchase. Consequently, taxpayers pay inflated prices for new infrastructure, the latest information technology, and routine maintenance of subways, bridges, and airports. …Quantification is difficult, but the major federal Buy American laws probably equate to tariff equivalent barriers of at least 25 percent on federal purchases. State laws vary in scope and protective degree, but on average they probably entail at least 10 percent tariff equivalent barriers. …When Buy American policies are championed at home they are emulated abroad—in the form of Buy European, Buy Mexican, Buy Japanese, and other local content laws and policies. Consequently, US goods and services face severe barriers in foreign procurement markets. …US exports could expand by $189 billion annually if OECD countries all repealed their existing local content laws.

The Heritage Foundation’s Tori Smith authored a report when Trump was pushing his version of procurement protectionism. Here’s some of what she wrote.

Domestic content requirements, like those found in the Buy American Act, the Berry Amendment, and various other laws, result in additional regulatory burdens for producers, and increase costs for American taxpayers. All for little or no gain: The policies are unlikely to stimulate job growth in target industries. …Existing laws and provisions regarding domestic content requirements…are extremely onerous and complicated burdens. They have three main effects: (1) creating additional regulatory hurdles for producers; (2) costing American taxpayers more than they would otherwise pay for government projects; and (3) they are unlikely to yield job growth in target industries like the steel sector.

Here are the most important passages from her report.

…to eliminate all existing domestic content requirements….would create hundreds of thousands of American jobs across the country and contribute billions of dollars to U.S. gross domestic product.

And this chart shows how various states would benefit if there was open competition for government procurement.

I’ll close with three additional points.

First, it’s disappointing that Biden is continuing Trump’s protectionist policies. It’s even more disappointing that he wants to expand upon them. This is one area where people thought Biden might move policy in the right direction.

For some historical perspective on the failure of the Trump-Biden approach, the National Taxpayers Union helpfully shared the views of Harry Truman and Dwight Eisenhower.

Second, some national security experts make a very reasonable argument that the Pentagon should not make itself dependent on purchases from nations such as China.

But this is at most an argument for “Buy from Allied Nations,” not an argument for “Buy America.”

Third, Biden is perversely consistent. Everything he is doing will increase costs for taxpayers and consumers in order to bestow undeserved benefits on special-interest groups.

P.S. The argument for competition in the market for government procurement is the same as the general argument for free trade. And since we’re on the topic of trade, remember that dollars sent overseas as part of a procurement contract will come back to the United States, either to purchase American exports or as part of investment in the U.S. economy.

P.P.S. None of this changes the fact that the public sector should be much smaller. In a libertarian society, there would be far lower levels of government procurement.

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Joe Biden’s economic policy has been a disaster.

  • He’s bad on the issues where Trump was bad (spending and trade).
  • He’s bad on the issues where Trump was good (most notably, taxes).
  • And he’s bad on the issues where Trump had a mixed record (regulation).

Based on his track record as a long-time Senator, none of this is a surprise. According to vote ratings from the Club for Growth and National Taxpayers Union, Biden was to the left of even Crazy Bernie.

Unfortunately, a bad president (anyone remember Nixon?) can do a lot more damage than a bad senator.

Today is Part I of a series of columns analyzing Biden’s failure.

We’ll start with his so-called Build Back Better plan. Joe Biden didn’t explicitly mention “BBB” is his State of the Union address, but he did promote almost all of the specific policies that are in that plan.

And he even made the preposterous argument that some of those policies would help bring inflation under control.

I’ve repeatedly explained why the president’s plan for a bigger welfare state is bad news, but this tweet from Americans for Prosperity’s Akash Chougule does a great job of debunking Biden’s argument in a very succinct fashion.

You may recognize the chart. As I pointed out last year, it shows that prices rise rapidly in areas where government subsidies distort the market.

In areas where the free market operates, by contrast, prices actually tend to decline.

I’ll close with the observation that Biden’s Build Back Better is a clunky amalgamation of new and expanded entitlements. His per-child handout is the most expensive, and it’s especially pernicious because it would undo the success of Bill Clinton (and Newt Gingrich’s) welfare reform.

But if there was a prize for the most economic damage per dollar spent, Biden’s scheme for government-dictated childcare would be the worst of the worst since he subsidizes demand while also restricting supply. If it gets approved, the chart may need a new vertical axis because Biden will screw up the market for childcare even more than the government has screwed up the markets for health care and higher education.

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I’ve previously explained that “creative destruction” is the best and worst part of capitalism. This new video has more details.

I have three goals with this video.

First, I explain that trade destroys jobs. But protectionists won’t be happy with my message because I point out that all trade destroys jobs – whether we are looking at trade inside a country or trade that crosses national borders.

To be more specific, jobs are destroyed because of changes in trade that are caused by innovation. And I cite several examples.

  • The invention and adoption of the light bulb destroying jobs in the candle-making industry.
  • The invention and adoption of the automobile destroying jobs in the horse-and-buggy industry.
  • The invention and adoption of the personal computer destroying jobs in the typewriter industry.

Second, I explain that this creative destruction boosts our living standards. Americans are far more prosperous today than we were 50 years ago or 100 years ago.

And I specifically point out in the video that this is true even for the descendants of candle makers, blacksmiths, and typewriter makers.

Third, I share data from the Bureau of Labor Statistics about massive annual job losses in the private sector that occurred in 2017 and 2018, but I also pointed out that an ever larger amount of new jobs were created in those two years.

For today, I’m going to update those numbers by also showing what happened in 2019. As you can see from the chart, the United States lost more than 85 million jobs during those three years (the orange bars), but those losses were fortunately offset by a gain of nearly 91 million private-sector jobs (the blue bars).

There’s also data for 2020 and part of 2021, and those numbers tell an unhappy story because we still haven’t recovered from pandemic-related job losses (notwithstanding President Biden’s false claims in his State of the Union speech last night).

The moral of the story is that major job losses are an unavoidable feature of a modern economy. And that’s true regardless of the level of cross-border trade.

Which is why policymakers should focus on making sure we have sensible policies (low tax rates, efficient markets, spending restraint, open trade, etc) that allow high levels of new job creation in the United States.

P.S. Creative destruction also means that some companies disappear and are replaced by new ones.

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I’ve written columns about wonky economic concepts such as “deadweight loss” and “public goods.” Today’s topic is “rent seeking,” which is part of “public choice” and is described by Professor Alex Tabarrok of George Mason University.

To elaborate, here’s a video from Professor Michael Munger from Duke University.

The basic message of both videos is that “rent seeking” occurs when interest groups manipulate the political system to obtain undeserved riches.

And there are all sorts of examples of policies that exist solely because interest groups get politicians to tilt the playing field – including trade barriers, farm subsidies, occupational licensing, and bureaucrat salaries.

As pointed out in the videos, these rent-seeking policies reduce prosperity.

But what’s the origin of the term? In the modern era, it’s often associated with Gordon Tullock, one of the founders of public choice school of economic analysis.

But the term actually was coined a couple of hundred years ago by David Ricardo, as explained by Professor David Henderson of the Naval Postgraduate School.

Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. …People are said to seek rents when they try to obtain benefits for themselves through the political arena. …But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo introduced the term “rent” in economics. It means the payment to a factor of production in excess of what is required to keep that factor in its present use. …What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”

To elaborate, there’s nothing wrong with rent seeking as defined by Ricardo.

But rent seeking is now associated with “privilege seeking,” which obviously is very unsavory.

Ben Casselman of FiveThirtyEight also wrote on rent seeking.

Imagine you run a barbershop and you learn that someone is planning to open a rival business down the street. What do you do? One option, of course, would be to compete the old-fashioned way by offering lower prices or better service. But the old-fashioned way is hard! Wouldn’t it be nice if you could keep your competitor from setting up shop in the first place? There’s evidence that a growing number of businesses in the U.S. are trying to do exactly that. And while that may be good for them, it’s bad for entrepreneurs, workers and the economy as a whole. …Economists call this kind of behavior “rent-seeking,” which is another way of saying “gaming the system to make more money than you’ve earned.” …There is evidence that rent-seeking, in various forms, is becoming more common in the U.S. economy. In a recent paper, economist Dean Baker argued that rent-seeking has driven much of the recent increase in income inequality. And while Baker is a liberal, conservatives are also concerned about rent-seeking, such as land-use restrictions that make it hard to build housing in high-priced coastal cities.

The bottom line is that politicians spend much of their time buying their way to reelection by providing undeserved goodies to various interest groups. You can call it rent seeking. You can call it corruption. Or you can call it politics.

But one obvious takeaway is that shrinking the size and scope of government is the only effective way of reducing rent seeking.

P.S. If you’re in the mood for more economic wonkiness, here are several videos that explain “Austrian economics” and two videos that explain the price system.

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When I first wrote about the Index of Economic Freedom back in 2010, the United States was comfortably among the world’s 10-freest nations with a score of 78 out of 100.

By last year, America had dropped to #20, with a very mediocre score of 74.8.

Sadly, the United States is continuing to decline. The Heritage Foundation recently released the 2022 version of the Index and the United States is now down to #25, with an even-more-mediocre score of 72.1.

As you can see, the biggest reason for the decline is bad fiscal policy (we can assume that Biden’s so-called stimulus deserves much of the blame).

So what nations got the best scores?

Our next visual shows that Singapore has the world’s freest economy, narrowly edging out Switzerland.

Notice, though, that Singapore’s score dropped and Switzerland’s improved. So it will be interesting to see if the “sensible nation” takes the top spot next year.

Also notice that only 7 nations qualified as “Free,” meaning scores of 80 or above.

The United States is in the “Mostly Free” category, which is for nations with scores between 70 and 80.

By the way, notice that the United States trails all the Nordic nations. Indeed, Finland, Denmark, Sweden, Iceland, and Norway get scores in the upper-70s.

How is this possible when those countries have high-tax welfare states? Because they follow a very laissez-faire approach for all of their other policies (trade, regulation, monetary policy, etc).

I’ll close with a depressing look at how the United States has declined over the past two decades. I already mentioned that the U.S. gets a score of 72.1 in the 2022 version. That’s far below 81.2, which is where America was back in 2006.

P.S. The Fraser Institute’s Economic Freedom of the World shows a similar decline for the United States.

P.P.S. Taiwan is an under-appreciated success story.

P.P.P.S. New Zealand is still in the “Free” group, but it’s decline is worrisome.

P.P.P.P.S. Kudos to Estonia for climbing into the top group.

P.P.P.P.P.S. The bottom three nations are Cuba, Venezuela, and North Korea.

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The Laffer Curve is a method for illustrating the relationship between tax rates, taxable income, and tax revenue.

But it’s important to realize that there are actually lots of varieties.

The Laffer Curve for capital gains taxes, for instance, will look different than the Laffer Curve for payroll taxes. Or corporate taxes. Or marijuana taxes.

In every case, the shape of the curve will depend on what’s being taxed and the ability of affected taxpayers to alter their behavior.

And the shape of the Laffer Curve also will depend on whether one is measuring the short-run revenue impact of tax changes or the long-run impact of tax changes.

Given all these varieties, no wonder so many people, both right and left, sometimes misstate its meaning.

Let’s try to expand our understanding of the Lafffer Curve by looking at some new research.

Professor Aaron Hedlund of the University of Missouri authored a study on the Laffer Curve for the Show Me Institute.

Here’s what he wants to understand.

Empirically, recent research provides a variety of estimates for the revenue-maximizing and welfare-maximizing tax rates, but one lesson that emerges is that analyses that only take into account the response of hours worked to tax increases are bound to greatly overestimate the amount of new revenue that can be raised while underestimating the economic damage from lost GDP growth and wages. This paper examines the relationship between tax rates and revenue by taking a broader view that encompasses the responses of skill acquisition, entrepreneurship, innovation, and the labor market behavior of dual-earner families. The bottom line that emerges is that these additional margins of adjustment imply significantly lower revenue-maximizing and welfare-enhancing tax rates.

He then explains that some economists fail to look at all possible behavioral responses.

Traditionally, much of the economic analysis aimed at finding this peak rate has focused on how the income tax rate affects an individual’s willingness to work, both with regard to hours worked and the decision to enter the labor force at all. Moreover, until the recent arrival of better data, much of the academic research considered only the response of heads of households. …This assumption of tax rate insensitivity led economists Peter Diamond and Emmanuel Saez to conclude that the optimal—revenue maximizing—top income tax rate is 73%. Moreover, in an analysis that also considers the social insurance benefits of progressive taxation—specifically, the ability of redistribution to soften the blow of unexpected economic hardship—economists Fabian Kindermann and Dirk Krueger provide justification for a top rate that approaches 90%. However, both studies omit the many other margins of behavioral adjustment that accompany any significant change to tax rates.

When all behavioral responses are measured, it turns out that the revenue-maximizing rate is much lower.

In one study that accounts for the sensitivity of entrepreneurs to tax rates, increasing the progressivity of the income tax code leads to a revenue-maximizing top rate of only 33%. Furthermore, in this case revenues only increase by 5%—amounting to less than one percentage point of GDP. Another study finds even starker results when looking at the subset of superstar entrepreneurs. In an analysis that incorporates the positive spillovers of ideas and innovation on economic growth, economist Charles Jones finds that the revenue-maximizing tax rate may even be as low as 29%. Furthermore, he shows that raising the top income tax rate to 75% could reduce GDP by over 8%, which would greatly blunt the impact on revenues by shrinking the tax base.

Figure 5 from the study shows how the revenue-maximizing rate varies depending on which factors are included in the study.

My two cents on this issue is to remind readers that we don’t want to maximize revenue for politicians.

As such, I don’t care if the revenue-maximizing rate in 29 percent or 73 percent.

I want to be at the growth-maximizing rate, which is where the government only collects the amount of money that is necessary to finance genuine public goods.

Needless to say, that means tax rates (and spending burdens) far lower than today.

P.S. Tax accountants have a very good understanding of the Laffer Curve.

P.P.S. Heck, even the thugs from ISIS understand the Laffer Curve.

P.P.P.S. Sadly, it doesn’t matter if some leftists understand the Laffer Curve.

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Three years ago, I unveiled this video to help explain that trade deficits are nothing to worry about.

The most important thing to understand from the video is that the flip side of a trade deficit is a capital surplus.

To be more specific, foreigners earn dollars by selling products to Americans. They then use those dollars to buy goods and services from American producers, or they use those dollars to invest money in the American economy.

And when foreigners choose to invest their dollars, that necessarily is accompanied by a trade deficit.

At the risk of understatement, it’s not bad that foreigners want to invest in the United States.

Why am I discussing this topic today?

Because we have final data on trade flows for 2021. Here are some excerpts from a report by Ana Swanson for the New York Times.

The U.S. trade deficit in goods soared to record levels in 2021, topping $1 trillion… The overall trade deficit in both goods and services also hit an annual record, rising 27 percent as the country’s imports far outpaced its exports, according to data released by the Commerce Department… Imports surged by $576.5 billion, or 20.5 percent, rising sharply from a slump at the onset of the pandemic, as both the quantity and the price of the foreign products that Americans purchased increased. Businesses spent heavily on equipment and machinery… Exports grew 18.5 percent, or by $394.1 billion.

The correct reaction to this story is a big yawn.

Simply stated, I don’t care if Americans bought more from foreigners than foreigners bought from Americans. Just like I don’t care that I have a trade deficit with my local grocery stores (I’m always buying food from them and they never buy anything from me!).

Here’s another sentence from the story that deserves some attention.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the ballooning trade deficit last year mostly reflected the country’s continued strong economic growth.

To elaborate, if the United States economy is growing, that means Americans can afford to buy more stuff, regardless of where those goods and services originate.

And if other places in the world are growing slower (such as Europe), that means people from those areas can’t afford to buy as much stuff that originates in the United States.

P.S. A few years ago, I criticized Trump’s trade deal with China.

At the risk of patting myself on the back, I was right. Here are a few more sentences from the NYT story.

The data also revealed the shortcomings of a trade deal that Mr. Trump signed with China in 2020. …China committed to buying an additional $200 billion worth of American goods and services above a 2017 baseline by the end of 2021. But those purchases did not materialize. …China actually bought none of the additional $200 billion of exports that the trade deal had promised. …the trade deal Mr. Trump signed in 2020 “did not address the core problems” with China’s state-led economy.

P.P.S. While it is generally a good thing when foreigners invest in the U.S. economy, that’s only true if they investing in the private sector (stocks, bonds, real estate, etc). By contrast, if foreigners are using dollars to buy government bonds, that obviously doesn’t help growth.

But the problem isn’t that foreigners are buying government debt. That’s merely a symptom of the actual problem, which is excessive spending by politicians in Washington.

The moral of the story is that free trade is desirable…and small government is desirable.

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Every few years (2012, 2015, 2019), I warn that easy-money policies by the Federal Reserve are misguided.

But not just because such policies eventually can lead to price inflation, which now has become a problem in the United States.

Bad monetary policy also can lead to asset inflation. In other words, bubbles. And it’s no fun when bubbles burst.

The obvious lesson to be learned is that central banks such as the Fed shouldn’t try to steer the economy with Keynesian-style monetary policy.

I’m motivated to write about this issue because the Washington Post recently invited some people to offer their ideas on how to fight inflation.

Some of the ideas were worthwhile.

Some of the ideas were bad, or even awful.

If asked to contribute, what would I have suggested?

Being a curmudgeonly libertarian, I would have channeled the spirit of Milton Friedman and pointed out that bad monetary policy by central banks is the cause of inflation. Simply stated, it is appropriate to blame central banks if there are sustained and permanent increases in the overall price level.

And the only way to fix inflation is for central banks to unwind the policy mistakes that caused the problem in the first place.

Some of the respondents did mention the need for Federal Reserve to rectify its mistakes, so I’m not the only one to think monetary policy is important.

But I’m very fixated on assigning blame where it belongs, so I would not have mentioned any other factor.

For instance, in an article just published by the Austrian Economics Center in Vienna, Robert O’Quinn and I explain that bad fiscal policy does not cause inflation.

Are we seeing higher levels of price inflation because of fiscal profligacy?  Some Republican U.S. Senators and Representatives have blamed this acceleration of price inflation on Biden’s blowout of federal spending. There are many good reasons to criticize Biden’s spending spree. It is not good for the economy to increase the burden of government spending and push for higher tax rates… But that does not necessarily mean deficit spending is inflationary. …Price inflation occurs when the supply of money exceeds the demand for money… Notably, none of the mechanisms that central banks use for monetary policy (buying and selling government securities, setting interest rates paid on reserves, loans to financial institutions, etc) have anything to do with federal spending or budget deficits.  The Fed and other central banks can maintain price stability regardless of whether governments are enacting reckless fiscal policies.

In the article, we cited Japan as an example of a country with huge levels of debt, yet prices are stable.

By contrast, prices are rising in the United States because of Keynesian monetary policies by the Federal Reserve (often with the support of politicians).

What’s causing inflation, if not budget deficits and government debt? …central banks have been pursuing an inflationary policy. But they’ve been pursuing that approach not to finance budget deficits, but instead are motivated by a Keynesian/interventionist viewpoint that it is the role of central banks to “stimulate” the economy and/or prop up the financial market with easy-money policies.

I’ll close by observing that there can be a link between bad fiscal policy and inflation.

In basket-case nations such as Venezuela, Zimbabwe, and Argentina, politicians periodically use central banks to finance some of their excessive spending.

Some governments, particularly in less-developed countries, cannot easily borrow money and they rely on their central banks to finance their budget deficits. And that is clearly inflationary.

Because of changing demographics and poorly designed entitlement programs, it’s possible that the United States and other western nations eventually may get to this point.

Heck, I speculated just a couple of days ago that the European Central Bank may be doing this with Italy.

But the United States hasn’t yet reached that “tipping point.” There are still plenty of investors willing to buy the federal government’s debt (especially since the dollar is the world’s reserve currency).

The bottom line is that we should pursue good fiscal policy because it makes sense. And we should pursue good monetary policy because it makes sense. But the two are not directly connected.

P.S. On the topic of inflation, Ronald Reagan deserves immense praise for standing firm for good policy in the 1980s.

P.P.S. On the topic of the Federal Reserve, the central bank also should be criticized for interfering with the allocation of credit. And financial repression as well.

P.P.P.S. On the topic of basket-case economies, let’s hope that the American policy makers don’t embrace “modern monetary theory.”

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I only share long videos when they satisfy key criteria, such as being very informative and very educational.

This video from Arthur Brooks is both.

What I like most is that he does a very good job of showing that concern for the disadvantaged is the most important reason to support free markets and limited government.

And he does this by exploring some very interesting and challenging topics, such as Denmark’s unusual mix of free markets and a welfare state (I’ve referred to that country’s public policy as a combination of Dr. Jekyll and Mr. Hyde).

But I want to focus on his discussion of India’s partial economic liberalization. We’ll start by perusing the most-recent edition of Economic Freedom of the World to confirm that there was a significant increase in economic liberty during the 1990s.

But it’s also important to stress that India’s partial economic liberalization was…well, partial.

India is currently ranked #108 for economic freedom, which is mediocre at best, and it does especially poorly in areas such as regulation and trade.

The good news is that the country’s policies are not as bad as Venezuela’s. The bad news, though, is that it’s also nowhere close to being as good as Singapore.

If you want to understand economic policy in India, you should read this study by Swaminathan S. Anklesaria Aiyar.

He starts by explaining the awful policies that existed prior to 1991.

India was in such poor shape before 1991 that it takes an effort to recall how bad things were. …India’s slow-growing, inward-looking socialism made it unimportant in global terms, save as an aid recipient. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. …In 1991, it took two years for anyone to get a telephone landline connection. N. R. Narayana Murthy, head of top software company Infosys, recalls that in the 1980s, it took him three years to get permission to import a computer and over one year to get a telephone connection. …In 1991 Indian politicians and industrialists feared that economic liberalization would mean the collapse of Indian industry… Before 1991 very high tax rates (up to a 58 percent corporate tax) plus a high wealth tax meant that businesses kept income off the books.

There was a decent amount of economic liberalization in the 1990s.

After 1991 direct tax rates gradually came down substantially (to 30 percent plus surcharges for individuals and corporations). The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent. …economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs. …In the two decades since 1991, India’s literacy rate has shot up by a record 21.8 percentage points, to 74 percent…much faster in the era of reform than in the earlier era of socialism. …Life expectancy in India is up from an average of 58.6 years in 1986-91 to 68.5 years. Infant mortality is down from 87 deaths per 1,000 births to 40.

This partial liberalization has produced good results, as illustrated by Table 2.

India’s growth rate has improved, which is why various social indicators (poverty, literacy, mortality) have improved.

But India should not be considered a role model.

There is still far too much government.

How can we sum up 25 years of economic reform? Three major trends are visible. First, the vast majority of successes have been private‐​sector successes, whereas the vast majority of failures have been government failures, mainly in service delivery. Second, wherever markets have become competitive and globalized, the outcomes have been excellent. …In the 1990s, the government gradually opened up the economy, abolishing industrial and import licensing, freeing foreign exchange regulations, gradually reducing import tariffs and direct tax rates, reforming capital and financial markets, and generally cutting red tape. Those changes enabled India to boom and become a potential economic superpower. But some areas were never liberalized, such as land and natural resources, and those areas have been marked by massive scams.

I’ll close by sharing this chart, which is based on the Maddison database.

As you can see, per-capita economic output climbed faster after a few pro-market reforms were implemented.

After giving some speeches in India back in 2018, here’s how I summarized my conflicted assessment.

Indians are enormously successful when they emigrate to the United States. And they also do very well when they migrate to Singapore, South Africa, and other places around the world. Yet Indians in India remain comparatively poor. …There’s a saying in the country that “India grows at night, while government sleeps.” …In other words, policy is generally not friendly, but the private sector manages to find “breathing room” to operate in spite of government. So poverty is falling, slowly but surely.

It would be great if poverty could fall much faster, but the current government doesn’t seem to have any interest in the policies that would make that happen.

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To explain why politicians should not interfere with prices, I’ve shared videos from Marginal Revolution, Don Boudreaux, Learn Liberty, and Russ Roberts.

To add to that collection, here’s part of a lecture by Professor Antony Davies.

The bottom line is that price controls have a history of failure, anywhere and everywhere they’ve been tried.

But some folks on the left want to resuscitate this awful idea, as reported in an article in the New York Times by Ben Casselman and

America’s recent inflation spike has prompted renewed interest in an idea that many economists and policy experts thought they had long ago left behind for good: price controls. …the phrase “price controls” has, at least for many people, called to mind images of product shortages and bureaucratic overreach. …As consumer prices soared this fall, however, a handful of mostly left-leaning economists reignited the long-dormant debate, arguing in opinion columns, policy briefs and social-media posts that the idea deserves a second look. …Few economists today defend the Nixon price controls. But some argue that it is unfair to consider their failure a definitive rebuttal of all price caps. …Democrats and the administration have stopped short of suggesting actual price limits.

In a column for the U.K.-based Guardian, Professor Isabella Weber of the University of Massachusetts Amherst argues for price controls to counter corporate greed.

Inflation is near a 40-year high.In 2021, US non-financial profit margins have reached levels not seen since the aftermath of the second world war. This is no coincidence. large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. we need…a serious conversation about strategic price controls… Price controls would buy time to deal with bottlenecks that will continue as long as the pandemic prevails. Strategic price controls could also contribute to the monetary stability needed to mobilize public investments towards economic resilience, climate change mitigation and carbon-neutrality. The cost of waiting for inflation to go away is high. 

For what it’s worth, I agree that businesses want as much profit as possible (just as workers want wages to be as high as possible).

But the notion that corporate greed is causing inflation is laughable. After all, weren’t businesses also greedy in the 1990s, 2000s, and 2010s? Yet we didn’t see a big uptick in consumer prices.

So we shouldn’t be surprised that the vast majority of economists, both right and left, reject Prof. Weber’s hypothesis.

Needless to say, the Federal Reserve deserves blame for inflation, not greedy companies (or greedy workers).

It’s possible, of course, that today’s rising prices are partly or even mostly transitory. But, given the easy-money policy we’ve had (including under Trump), it’s perhaps more likely that prices are going up as an inevitable consequence of mistakes by the central bank.

Let’s close with Alberto Mingardi’s 2020 column in the Wall Street Journal about how a product-specific price control failed.

Italy is trying to control the price of face masks, …a fixed price of 50 European cents… The Italian newspaper Il Foglio reports that the government is buying face masks wholesale at a price between 38 and 70 European cents each—essentially admitting it can’t abide by its own price controls. …The Civil Protection Department, Italy’s national body that deals with emergencies, …discouraged entrepreneurs from importing masks, right as more masks were needed. …Those who were buying up masks to hoard risked government confiscation. These moves clamped down on price gouging but created a shortage. …pharmacists can’t get masks cheap enough to sell at a retail price of 50 European cents. …The price fixers have promised a subsidy to pharmacists to mitigate losses. But the price was fixed by executive order, whereas the subsidy was merely promised. Quite a few pharmacists elected to stop selling masks.

P.S. Politicians in Washington want to impose price controls on the pharmaceutical industry. That concerns me since I’m getting older and might be in a position where I would benefit from new therapeutics. But companies will have much less incentive for research and innovation if government makes it very difficult to make money.

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There are many well-meaning people who support statist policies such as punitive taxation because they believe in the zero-sum fallacy, which is explained in this short video by Madsen Pirie of London’s Adam Smith Institute.

The zero-sum fallacy is especially noxious because it naturally leads to all sorts of misguided policies. Not just class-warfare taxation, but also protectionism and the welfare state.

But I can understand why people are drawn to such ideas. If they sincerely believe that people like Jeff Bezos and Elon Musk only become richer because the rest of us become poorer, it’s hard to blame them.

This is why I repeatedly share evidence showing that the zero-sum fallacy is, well, a fallacy.

Indeed, one very powerful lesson from the above examples is that poor people have been huge winners from economic growth.

As shown by U.S. Census Bureau data, there’s a strong correlation between rising income and falling income among all groups.

Given the importance of this issue, let’s take a closer look at the zero-sum fallacy.

In an article for the Foundation for Economic Education, John Williams used the example of a poker game to explain this cornerstone of bad economics.

Economic activity is depicted in terms of a poker game. One player’s chips are observed to have increased. Immediately one concludes that some other player has lost chips. Poker is, as they say, a zero-sum game: Gains enjoyed by one party must be balanced by losses suffered by another. So it is, people embracing the fallacies of “static wealth” and “the zero-sum game” insist, with economic exchanges. “Winners” must be balanced by corresponding “losers.” …According to the mercantilists, wealth was a constant, a given—like the chips in a poker game. If one community—and typically the mercantilists thought in terms of communities—improved its overall economic situation, another community must have lost out. …What Adam Smith perceived, essentially, was first that “wealth” was not something static and given like gold, or, indeed, poker chips, but rather consisted of goods and services that could be created, and second that both parties to an economic exchange could improve their respective situations. …There are two winners, not one. This is a positive-sum, rather than a gem-sum game.

This type of thinking may even be hard-wired in our brains, as explained by Professor Paul Rubin of Emory University in a column for the Wall Street Journal.

…the worldview of Marxists and woke leftists alike is fundamentally primitive. …It is the economic view of the world that evolved in our brains before the development of the modern economy. …Zero-sum thinking was well-adapted to this world. Since there was no economic growth, incomes and wealth didn’t grow. If one person had access to more food or other goods, or greater access to females, it was likely because of expropriation from others. Since there was little capital, a “labor theory of value”—the idea that all value is created by labor alone—would have been appropriate… Adam Smith and other economists challenged this worldview in the 18th century. They taught that specialization of labor was valuable, that capital was productive, and that labor and capital could work together to increase income. …the creation of wealth would benefit everyone in a society, not only the wealthy. …Members of the woke left want to return to policies based on this primitive economic thinking. One of their major errors is thinking that the world is zero-sum. …Dislike of the rich makes sense in a world where one can become rich only by exploiting others, but not in a society full of creativity and useful inventions.

Prof. Rubin also wrote about this topic back in 2010.

P.S. The good news is that very few left-leaning economists believe in the zero-sum fallacy. They recognize that growth benefits all income groups. Where they go wrong is thinking that bigger government is needed for growth and/or thinking that less growth is okay if rich people suffer more than poor people (they tend to be so fixated on inequality that they overlook very good news).

P.P.S. Just as poor people aren’t poor because of rich people (at least the ones that get rich by markets rather than cronyism), poor nations aren’t poor because of rich nations.

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I have shared five videos (Part I, Part II, Part III, Part IV, and Part V) that make the case for capitalism.

Here’s a sixth example.

The video notes that poverty was the natural condition for humanity (notwithstanding the economic illiteracy of Congresswoman Pressley).

But then, starting a couple of hundred years ago, capitalism gained a foothold and – for the first time in world history – there were nations with mass prosperity.

We learn about how various places became rich, including the United States, Hong Kong, and New Zealand.

The narrator also pointed out that Ireland experienced a period of dramatic market-driven growth.

Which gives me a good excuse to make the following comparison, which shows the dramatic divergence between Ireland and Greece beginning in the mid-1980s.

Why the stunning divergence (one of many examples I’ve collected)?

Ireland controlled spending and cut tax rates and now routinely ranks among the nations with the most economic liberty.

Greece, by contrast, has imposed more and more government over time.

Let’s close with this tweet, which nicely summarizes Walter Williams’ famous observation.

P.S. This comparison of Sweden and Greece also makes the key point about the superiority of markets over statism.

P.P.S. Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

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As I warned a few days ago, Biden’s so-called Build Back Better plan is not dead.

There’s still a significant risk that this economy-sapping plan will get enacted, resulting in big tax increases and a larger burden of government spending.

Proponents of a bigger welfare state say the President’s plan should be approved so that the United States can be more like Europe.

This argument is baffling because it doesn’t make sense to copy countries where living standards are significantly lower.

In some cases dramatically lower.

Let’s explore this issue in greater detail.

In a column for Bloomberg, Allison Schrager analyzes America’s supply-chain problems and the impact on consumption patterns.

But what caught my eye were the numbers comparing the United States and Europe.

Americans can’t spend like they used to. Store shelves are emptying, and it can take months to find a car, refrigerator or sofa. If this continues, we may need to learn to do without — and, horrors, live more like the Europeans. That actually might not be a bad thing, because the U.S. economy could be healthier if it were less reliant on consumption. …We consume much more than we used to and more than other countries.  Consumption per capita grew about 65% from 1990 to 2015, compared with about 35% growth in Europe. …What would that mean for the U.S. economy? European levels of consumption coexist with lower levels of growth.

Here’s the chart that accompanied her article.

As you can see, consumption in the United States is far higher than it is in major European nations – about $15,000-per-year higher than the United Kingdom and about double the levels in Germany, Belgium, and France.

So when someone says we should expand the welfare state and be more like Europe, what they’re really saying is that we should copy nations that are far behind the United States.

Some of you may have noticed that Ms. Schrager is citing per-capita consumption data from the World Bank and you may be wondering whether other numbers tell a different story.

After all, if higher levels of consumption in America are simply the result of borrowing from overseas, that would be a negative rather than a positive.

So I went to the same website and downloaded the data for per-capita gross domestic product instead. I then created this chart (going all the way back to 1971). As you can see, it shows that Americans not only consume more, but we also produce more.

For those interested, I also included Japan and China, as well as the average for the entire world.

The bottom line is that it’s good to be part of western civilization. But it’s especially good to be in the United States.

Since we’re on the topic of comparative economics, David Harsanyi of National Review recently wrote about the gap between the United States and Europe.

More than anything, it is the ingrained American entrepreneurial spirit and work ethic that separates us from Europe and the rest of the world. …Europe, despite its wealth, its relatively stable institutions, its giant marketplace, and its intellectual firepower, is home to only one of the top 30 global Internet companies in the world (Spotify), while the United States is home to 18 of the top 30. …One of the most underrated traits we hold, for instance, is our relative comfort with risk — a behavior embedded in the American character. …Americans, self-selected risk-takers, created an individual and communal independence that engendered creativity. …Because of a preoccupation with “inequality” — one shared by the modern American Left — European rules and taxation for stock-option remuneration make it difficult for start-up employees to enjoy the benefits of innovation — and make it harder for new companies to attract talent. …But the deeper problem is that European culture values stability over success, security over invention…in Europe, hard work is less likely to guarantee results because policies that allow people to keep the fruits of their labor and compete matter far less.

In other words, there’s less economic dynamism because the reward for being productive is lower in Europe (which is simply another way of saying taxes are higher in Europe).

P.S. The main forcus of Ms. Schrager’s Bloomberg article was whether the U.S. economy is too dependent on consumption.

It feels like our voracious consumption is what fuels the economy. But that needn’t be the case. Long-term, sustainable growth doesn’t come from going deep into debt to buy stuff we don’t really need. It comes from technology and innovation, where we come up with new products and better ways of doing things. An economy based on consumption is not sustainable.

I sort of agree with her point.

Simply stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of consumption.

But this doesn’t mean consumption is bad, or that it would be good for America to be more like Europe.

Instead, the real lesson is that you want the types of policies (free markets and limited government) that will produce innovation and investment.

That results in higher levels of income, which then allows higher levels of consumption.

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Regarding fiscal policy, almost everyone’s attention is focused on Biden’s growth-sapping plan to increase the burden of taxes and spending.

People are right to be concerned. If the President’s plan is approved, the already-grim fiscal outlook for United States will get even worse.

This battle will be decided in next 12 months, hopefully with a defeat for Biden’s dependency agenda.

Regardless of how that fight is resolved, though, we’re eventually going to get to a point where sensible people are back in charge. And when that happens, we’ll have to figure out how to restore the nation’s finances.

That requires figuring out the appropriate goal. Here are two options:

  • Keeping taxes low.
  • Controlling debt.

These are both worthy objectives.

But, as a logic teacher might say, they are necessary but not sufficient conditions.

Here’s a chart showing how a policy of low taxes (the orange line) presumably enables faster growth, but also creates the risk of an eventual economic crisis if nothing is done to control spending and debt climbs too high (think Greece).

By contrast, the chart also shows that it’s theoretically possible to avoid an economic crisis with higher taxes (the blue line), but it means less growth on a year-to-year basis.

The moral of the story is that the economy winds up in the same place with either tax-financed spending or debt-financed spending.

Which is why we should consider a third goal.

  • Limiting spending.

The economic benefits of this approach are illustrated in this second chart. We enjoy faster year-to-year growth. And, because spending restraint is the best way of controlling debt, the risk of a Greek-style economic crisis is averted.

Now for some caveats.

I made a handful of assumptions in the above charts.

  • The economy grows 2.0 percent annually for the next 31 years with tax-financed spending
  • The economy grows 2.5 percent annually with debt-financed spending, but suffers a 10 percent decline in Year 31.
  • The economy grows 3.0 percent annually for the next 31 years with smaller government (thus enabling low taxes and less debt).

Anyone can create their own spreadsheet and make different assumptions.

That being said, there’s a lot of evidence that higher tax burdens hinder growth, that ever-rising debt burdens can lead to crisis, and that less government spending produces stronger growth.

So feel free to make your own assumptions about the strength of these effects, but let’s never lose sight of the fact that spending restraint should be the main goal for post-Biden fiscal policy.

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Earlier this year, extrapolating from a study by the nonpartisan Congressional Budget Office, Robert O’Quinn (former Chief Economist at the Department of Labor) and I authored a study on the economic impact of Biden’s fiscal plan.

The results are not pretty.

Lost jobs, lost wages, lower living standards, and lost competitiveness.

But those estimates were based on the parameters of Biden’s economic plan in the summer.

His agenda has since been modified, which raises the question of how the current proposal would affect economic performance.

In a piece for Canada’s Fraser Institute (publishers of Economic Freedom of the World and Economic Freedom of North America), Robert and I updated our numbers and explained the implications of Biden’s tax-and-spend agenda.

According to independent experts at the Committee for a Responsible Federal Budget, the actual cost of the president’s policies is closer to $4.9 trillion. Some of this new spending will be financed with red ink, but President Biden also has embraced higher tax rates on work, saving, investment and entrepreneurship. Indeed, if his plan were enacted, the United States would have both the highest corporate tax rate and the highest capital gains tax rate in the developed world. …But how much would the economy be hurt? There are groups such as the Tax Foundation that do excellent work measuring the adverse effects of higher tax rates. But it’s also important to measure the harmful impact of a bigger welfare state. …Based on that CBO study, and using the CBO fiscal and economic baselines, we calculated the following unpalatable outcomes if Build Back Better bill (pushed by the president and Democrats in Congress) becomes law and growth is reduced by 2/10ths of 1 per cent per year.

And here are the results.

The good news is that the latest version of Biden’s plan doesn’t do quite as much damage as what was being discussed earlier this year.

The bad news is that our economy will be much weaker (and our results are in line with other estimates, including those done before the election and since the election).

Not that we should be surprised. If the United States becomes more like Europe, we’ll be more likely so suffer from European-style anemia.

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