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Posts Tagged ‘Economics’

Time for another edition of economics humor (previous versions here, here, here, and here).

We’re going to start with the topic of free trade, which people sometimes oppose when casting ballots but inevitably support when spending dollars.

Next, we have a bookstore that understands how to categorize Keynesian economics.

Our third item is an amusing stereotype of economists.

Perhaps you now understand why I have several columns based on why people should not trust economists.

Now let’s turn to the issue of inflation.

I’ve written about the topic of rising prices, but I didn’t realize the situation had reached the crisis level captured by this tweet.

So how do we stop the problem of inflation to protect helpless victims like Leonardo DiCaprio?

My last – and favorite – item for today shows that it is sometimes unpopular to offer good answers.

As the guy falls to his death, at least he will be comforted by knowing he is right.

Maybe his last thought will even be about a permanent solution.

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I wrote just yesterday about Europe lagging behind the United States, and that’s in addition to many similar columns over the past year.

But let’s not forget that Europe is also the cradle of classical liberalism, and that the continent became rich because of market-oriented policies.

As I often say when giving speeches in developing nations, it is a good idea to copy Europe’s rich nations. But I then include a very important caveat. Copy the policies that those counties had when they became rich.

Back in the 1800s, that meant very small government, very low taxes, and very low levels of red tape (i.e., the types of policies that helped trigger the industrial revolution).

Heck, the fiscal burden of government in Western Europe was relatively modest as recently as 1960.

It wasn’t until the mid-1960s that the welfare state exploded in size (aided and abetted by the imposition of value-added taxes).

Now taxes drain huge amounts of money from people’s pockets and government budgets now divert immense amounts of money from the economy’s productive sector.

P.S. The news isn’t all bad. As fiscal burdens increased in Europe. some other policies moved in the right direction.

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According to polling data, President Biden is not getting good grades for economic policy.

Part of that is because of inflation, though I’ve repeatedly pointed out that the blame belongs with the Federal Reserve rather than Biden. And the big mistake from the Fed took place before Biden even took office.

Unfortunately, the President is not trying to make things better. His appointments to the Fed suggest he doesn’t understand the need for good monetary policy.

And all of his major legislative initiatives (the so-called stimulus, the misnamed Inflation Reduction Act, the pork-filled infrastructure legislation, and the cronyist handouts to the semiconductor industry) have increased the size and scope of government.

For what it’s worth, I think Biden’s big challenge – both politically and economically – is that Americans are losing ground. Simply stated, prices are increasing faster than incomes.

But that isn’t stopping the Administration from trying to turn a sow’s ear into a silk purse.

Alan Rappeport of the New York Times reported a few days ago that the Biden’s Treasury Secretary, Janet Yellen, is claiming that Bdenomics is a big success.

…the Biden administration is pivoting to recast its stewardship of the U.S. economy as a singular achievement. …The case was reinforced on Thursday by Treasury Secretary Janet L. Yellen… Ms. Yellen said the legislation that Mr. Biden signed this year to promote infrastructure investment, expand the domestic semiconductor industry and support the transition to electric vehicles represented what she called “modern supply-side economics.” …After months of being on the defensive in the face of criticism from Republicans who say Democrats fueled inflation by overstimulating the economy, the Biden administration is fully embracing the fruits of initiatives such as the $1.9 trillion American Rescue Plan of 2021.

The editors at the Wall Street Journal are not impressed.

Janet Yellen…tenure as Treasury Secretary hasn’t enhanced her reputation. …the White House is rolling her out in election season to portray the U.S. economy as a Valhalla of growth, fairness and optimism. …If you’re in a green business the White House likes, you’re in clover. If not, you’ll endure the costs of more regulation and taxes. In the Biden era, big government and big business are in political business together. …Ms. Yellen’s whoppers, …including a claim that “the causes of inflation are largely global.” …U.S. inflation has been substantially home-grown. …The Federal Reserve kept the money spigots open for too long, in part to finance the borrowing needed for all of the spending. …Ms. Yellen is also at pains to stress how much fairer the economy is since Mr. Biden took office… She fails to mention that the U.S. economy contracted by about 1% of GDP in the first six months of this year, even as real wages were falling. Real average hourly earnings declined 3% over the 12 months through July, and average weekly earnings by 3.6%. They’ve fallen 4.2% since Mr. Biden took office.

Meanwhile, the latest inflation data has not strengthened Biden’s case.

Jim Tankersley of the New York Times wrote about the issue yesterday.

Hotter-than-expected inflation in August was unwelcome news for President Biden, who has sought to defuse Republican attacks over rising prices in the run-up to November’s midterm elections. …Mr. Biden has claimed progress in the fight against inflation, including with the signing last month of an energy, health care and tax bill that Democrats called the Inflation Reduction Act. …But polls continue to show inflation is hurting Mr. Biden and his party… Mr. Biden threw a belated celebration at the White House on Tuesday to mark his signing of the Inflation Reduction Act. …But the country’s economic reality remains more muddled, as the inflation report underscored. Food prices are continuing to spike, straining lower-income families in particular. …Most importantly — and perhaps most damaging for Mr. Biden and Democrats — Americans’ wages have struggled to keep pace with fast-rising prices, an uncomfortable truth for a president who promised to make real wage gains a centerpiece of his economic program.

Let’s close with this chart, which shows what has happened to inflation-adjusted weekly earnings since Biden took office.

Yes, there was one recent month with good data, but that doesn’t seem like a big cause for celebration.

P.S. Paul Krugman’s defense of Bidenomics is just as weak as Janet Yellen’s (and his criticisms of good presidents are equally weak).

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When I wrote about the 2021 edition of Economic Freedom of the World, I noted that both Chile and Canada were drifting in the wrong direction.

In the just-released 2022 version, there’s not any good news about those two countries, but I was more struck by the very bad news about the United Kingdom, which fell out of the top 20 thanks to a big drop in its score.- from 8.16 to 7.71 (more evidence that Boris Johnson was bad news).

Here are the jurisdictions with the most economic liberty.

The bad news is that every nation in the top 20 had less economic liberty in 2020 than in 2019.

American readers will be interested to see that the United States dropped from #6 to #7.

And Switzerland leapfrogged New Zealand to claim the #3 slot.

Denmark, Japan, and Estonia jumped several spots in the rankings. Not because their scores increased, but rather because other nations moved in the wrong direction at an even-faster pace (note that Denmark now ranks above the USA).

By the way, few people will be surprised to see that Venezuela remains in last place, though fairness requires that I acknowledge that it was one of the few countries to get a better score.

Here are some of the other key findings.

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. …The EFW index rates 165 jurisdictions. The data are available annually from 2000 to 2020… The most recent comprehensive data available are from 2020. Hong Kong remains in the top position, though its rating fell an additional 0.28 points. Singapore, once again, comes in second. The next highest-scoring nations are Switzerland, New Zealand, Denmark, Australia, United States, Estonia, Mauritius, and Ireland. …lowest-rated countries are…Iran, Libya, Argentina, Syria, Zimbabwe, Sudan, and lastly, Venezuela. …Nations in the top quartile of economic freedom had an average per-capita GDP of $48,251 in 2020, compared to $6,542 for nations in the bottom quartile.

The final sentence in the above excerpt is key. More economic liberty is strongly associated with more national prosperity.

I was curious about whether Hong Kong would retain the #1 slot. And it did, even though its score dropped to 8.59. For what it’s worth, the authors are not optimistic about the future.

Hong Kong has been…at the top of the EFW index for all years for which we have data, and this remains the case in 2020. In previous annual reports, we sounded the alarm bell about signs of declining economic—and other—freedoms in Hong Kong. In particular, we highlighted the new security law imposed in 2020 by the Chinese government with potential sentences of life imprisonment and the accompanying arrests in its aftermath. In this year’s report, Hong Kong’s overall EFW rating fell by a stunning 0.28 points to 8.59 for 2020 from 8.87 in 2019. …Hong Kong’s decline was much larger than the world’s average decline.

Speaking of declines, here’s a very sad chart. It shows that global economic liberty suffered a big drop from 2019 to 2020.

The pandemic is the main reason for the decline.

The policy responses to the coronavirus pandemic, including massive increases in government spending, monetary expansion, travel restrictions, regulatory mandates on businesses related to masks, hours, and capacity, and outright lockdowns undoubtedly contributed to an erosion of economic freedom for most people. Not surprisingly, virtually all jurisdictions, 146 out of the 165 to be exact, recorded lower scores in 2020 than in 2019, and the global average of the summary EFW index fell by 0.18 points. … these various policies…very well may have saved millions of lives, or they may have been completely ineffectual. That is a question for epidemiologists and health economists to work out. Our concern is economic freedom, and, on that margin, there is no question that government policies responding to the coronavirus pandemic have reduced economic freedom.

We’ll probably have to wait two years to see whether governments undo pandemic-related policy mistakes.

Next year’s version will reflect 2021 data, and many nations such as the United States were still imposing bad fiscal and monetary policy at that time.

It’s possible that we will see some improvement next year, but I’ll be even more curious to see EFW‘s 2024 edition, which will be based on 2022 data.

My fear is that politicians and bureaucrats will have self-interested reasons to retain the additional power they grabbed during the pandemic. But I’ll keep my fingers crossed.

Let’s close with a depressing look at the nations that lost the most economic freedom in the current edition.

For personal reasons, I’m sad to see the big declines in Taiwan, Georgia, Singapore, and Panama.

And it’s amazing (in a bad way) that Argentina and Greece managed to fall so much, given that they started with bad scores.

Sadly, every developed nation moved in the wrong direction. The industrialized countries that moved in the wrong direction by the smallest amounts are Switzerland (-.12), Australia (-.13), Sweden (-.14), and Denmark (-.14).

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Over the past few months, I’ve written a 7-part series on Bidenomics, reviewing the president’s record on issues such as subsidies, inflation, protectionism, household income, fiscal policy, red tape, and employment.

Regarding the last item, a big problem is that the share of the population with jobs (measured by either the labor-force participation rate or the employment-population ratio) has not recovered.

It hasn’t recovered to where it was before the pandemic and it hasn’t recovered to where it was before Obama took office.

That’s bad news. Our economy’s output (and our national income) depends on the quantity and quality of both labor and capital.

This does not reflect well on Biden.

But not everyone agrees. Paul Krugman has leapt to the President’s defense. He even claims that American workers are enjoying a “Biden boom.”

President Biden has presided over a huge employment boom… Bidenomics has been good for American workers, whether they know it or not. …Haven’t they seen the purchasing power of their wages fall, thanks to inflation? The answer is yes, but. …that decline was entirely caused by rising prices for food and energy, which have a lot to do with global forces and little, if anything, to do with U.S. policy… If you want to assess the impacts of Bidenomics on wages, you should probably compare wages with prices excluding food and energy. And on that basis, real wages have basically been flat since Biden took office. …So, yes, the Biden boom has been good for workers.

The most shocking part of the column is that Krugman never addresses the problem of missing workers.

I’m not joking. You can read his entire article and you won’t find anything about the labor-force participation rate or the employment-population ratio.

He does mention the number of people working and wants us to believe those numbers are a cause for celebration, but even he felt the need to acknowledge that, “the job gains under Biden probably reflected a natural recovery from lockdowns.”

And I think it’s worth noting that we have 4 million fewer jobs than Biden claimed we would have if his so-called stimulus scheme was approved.

In other words, the president’s policies almost certainly have hindered the natural recovery that should have occurred.

Now let’s tackle the issue of inflation-adjusted wages for the people who do have jobs.

Krugman claims that workers have enjoyed a “boom” because “real wages have basically been flat.”

But even that claim is only possible if you ignore what’s happened to prices for food and energy.

Call me crazy, but this is the economic equivalent of “Other than that, Mrs. Lincoln, how was the play?”

The bottom line if that inflation-adjusted wages have been falling during Biden’s tenure.

I’ll conclude by noting that Krugman could have written a column blaming the Fed for the weak employment data. That would have been legitimate.

And he could have written a column arguing that Trump had the same big-spending policies when he was in office. That also would have been legitimate.

Instead, he wrote a column that may be even more of a joke than his “exploding cigar” about Estonia.

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Last week, I shared some great information from Superabundance, a new book that shows how economic liberty has made us much better off, as measured by how much more we can buy per hour worked.

Today, let’s look at a related benefit of capitalism, which is that we don’t have to work nearly as many hours to achieve high living standards.

Here’s a tweet from Chris Freiman, a professor of philosophy at William & Mary University. As you can see, people in market-oriented nations work far fewer hours than they did 150 years ago. In some cases, hours worked per year have dropped by more than 50 percent.

When economists study these issues, they generally say the willingness of people to supply labor (whether to work and how much to work) depends on compensation. In other words, people give up leisure because they want money so they can consume.

But that choice can be complicated. It is governed by an “income effect” and a “substitution effect.”

For those who want to learn the economics, here’s a good description from the University of Washington.

  • Substitution effect of an increase in the real wage, w. As w increases, income increases by working more and a worker substitutes work for leisure so labor supply, NS, increases.
  • Income effect of an increase in the real wage, w. As w increases, working the same number of hours still gives an increase in income so that a worker may decrease the number of hours worked and maintain the previous level of income so labor supply, NS, decreases.

Simply stated, people like both income and leisure. So we all make choices about how much to work depending on our preferences and tradeoffs.

However, that decision can be influenced by economic policy. If there are generous government handouts, for instance, people may decide to work fewer hours. Or not at all.

And a decision to work only a small amount may be a result of high implicit marginal tax rates that are embedded in redistribution programs.

Taxes also play a big role. High marginal tax rates can discourage labor supply, which helps to explain why people work more hours in the United States than in Europe.

And that’s true even though Americans are much richer, thus showing how the substitution effect can outweigh the income effect. At least in the short run.

In the long run, the above chart shows how the income effect is dominant.

But let’s forget about economic jargon. What the chart really shows is how free markets enable societies to generate so much income that we can enjoy better lives in exchange for far less effort.

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Let’s revisit the issues of Bidenomics.

Previous editions of this series have focused on Biden’s dismal record with regards to subsidies, inflation, protectionism, household income, fiscal policy, and red tape.

The assessment has not been positive, which shouldn’t be very surprising since Biden is basically a slow-motion version of Bernie Sanders.

Today, we’re going to look at Biden’s record on jobs…and that’s not going to improve the assessment.

The problem is employment rather than unemployment.

In a column for the Wall Street Journal, Nicholas Eberstadt writes about the millions of Americans who have disappeared from the labor force.

Never has work been so readily available in modern America; never have so many been uninterested in taking it. …For every unemployed person in the U.S. today, there are nearly two open jobs, and the labor shortage affects every region of the country. …Why the bizarre imbalance between the demand for work and the supply of it? One critical piece of the puzzle was the policy response to the pandemic. …Washington pulled out all the monetary and fiscal stops….created disincentives for work as never before. …In 2020 and 2021, a windfall of more than $2.5 trillion in extra savings was bestowed by Washington on private households through borrowed public funds. …With pre-Covid rates of workforce participation, almost three million more men and women would be in our labor force today.

To be fair, bad pandemic policies began with Trump.

But Biden promised changes yet has delivered more of the same.

Why does this matter?

It’s not just a numbers issue. When people drop out of the labor force, that translates into a weakening of America’s societal capital.

Mr. Eberstadt explains.

The signs that growing numbers of citizens are ambivalent about working shouldn’t be ignored. Success through work, no matter one’s station, is a key to self-esteem, independence and belonging. A can-do, pro-work ethos has served our nation well. America’s future will depend in no small part on how—and whether—her people choose to work.

Thanks to a stronger work ethic and spirit of self reliance, the United States historically has had an advantage over other nations.

But it’s increasingly difficult to feel optimistic about the long-run outlook for America’s societal capital.

Ironically, Joe Biden seemed to understand this in the not-too-distant past.

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I wrote last year that today’s Americans are much richer than their parents and grandparents (and the gap becomes even more enormous when comparing with earlier generations).

But the data I cited almost surely understate the improvement in living standards.

That’s the core takeaway of a new book, Superabundance, authored by Marian Tupy of the Cato Institute and Professor Gabe Pooley from Brigham Young University in Hawaii.

The book is filled with an immense amount of data and analysis, all of which shows that life is getting better. For purposes of today’s column, we’re going to highlight some fascinating numbers about the “time price” of various goods.

The authors explain that the “time price (TP) denotes the amount of time that a person needs to work in order to earn enough money to be able to buy something.”

In simple terms, this calculation shows how many hours we had to work to buy something in the past compared to how many hours we have to work to buy the same thing today.

For some items, such as food, there’s enough long-run data to see how the “time price” has changed over the past 100 years. The bottom line is that there’s been an amazing increase in our purchasing power.

What about non-food items?

Well, many of the things we buy today did not exist 100 years ago, so let’s look at four decades of data to see what’s happened to purchasing power in the United States.

As you can see, we can obtain almost everything by working far fewer hours.

For people who like hard data, the book is like an encyclopedia.

You can also get numbers for a “personal resource abundance multiplier” to see how much and how fast living standards have increased.

For example, a 97.2% decline in the price of eggs relative to the wages of a blue-collar worker between 1919 and 2019 means that:

  • a) The same length of work that got the blue-collar worker one egg in 1919 got him 36 eggs in 2019
  • b) That worker’s “egg abundance” rose by 3,500%
  • c) That worker’s egg abundance increased by 3.65% per year
  • d) The egg abundance doubled every 19.34 years.

For those who want to augment numbers with analysis, Chapter 8 describes what happened.

Even after Homo sapiens embraced agriculture some 12,000 years ago, progress was painfully slow. People lacked basic medicines and died relatively young. They had no painkillers, and people with ailments spent much of their lives in agonizing pain. Entire families lived in bug-infested dwellings that offered neither comfort nor privacy. They worked in the fields from sun- rise to sunset, yet hunger and famines were commonplace. …In a remarkable and sudden transition, though, standards of living sky- rocketed over the last two centuries, first in Western Europe and North Amer- ica, and then in other parts of the world. The consequences of that increase in economic growth were monumental. For the first time in human history, our species overcame Malthusian limits on production and consumption. The Age of Innovation ushered in unprecedented and even unimaginable improvements in wealth, life expectancy, nutrition, health, clothing, working conditions, and education. Extreme poverty, infant and maternal mortalities, and child labor declined.

Chapter 9 describes why it happened.

Individuals, who lack equal legal rights, and face onerous regulatory burdens, confiscatory taxation, or insecure property rights, will be disincentivized from turning their ideas into inventions and innovations. Conversely, people who function under conditions of legal equality, sensible regulation, moderate taxation, and secure property rights will apply their talents to their benefit and, ultimately, to that of society. …Free markets serve one other beneficial role in human society: they build trust and cooperation. Competition, as everyone knows, is an essential part of a capitalist economy. It drives businesses to innovate and to provide consumers with less costly and better products. If businesses fail to innovate, they go under. …Capitalism is also one of the most cooperative of human endeavors, though. Goods and services are traded among strangers and across vast distances, guided to a great degree by the price mechanism and by the reputation of the trading parties. …In the short run, competition produces winners and losers (although over the long run it is very difficult to find anyone in a market society who does not daily enjoy substantial gains or “wins” from market competition).

I’ll also add this flowchart from Chapter 9 to show the importance of free markets and entrepreneurship.

I’ll add one final point, which is that we don’t need perfect policy to get more prosperity.

The economy simply needs “breathing room,” which will exist so long as politicians don’t get too crazy about over-taxing, over-spending, and over-regulating.

After all, even small differences in annual economic growth compound into big changes in living standards.

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When I wrote the first edition of “Don’t Trust Economists” back in 2010, the column focused on a chart showing that economists failed to predict every major economic downturn for the previous two decades.

Well, we now have some new data making the same point.

To be fair, I wouldn’t blame anybody for bad 2020 predictions. After all, the pandemic was a (hopefully!) one-time event.

But giving economists a mulligan for 2020 doesn’t change the fact that the profession has a notoriously bad track record.

Today, let’s discuss how my fellow economists are lousy forecasters.

Brian Riedl, in a new column for National Review, is not impressed by the profession’s track record.

The next time economists declare that they can project the economy’s performance far into the future, remember that the Federal Reserve recently failed to project even a current-year inflation rate within three percentage points. ..the Federal Open Market Committee (FOMC) forecasted in December 2020 that inflation (as measured by the PCE, the Fed’s preferred measure) would be 1.8 percent in 2021. …PCE inflation ended up at 5.8 percent for the year. …Then, the FOMC repeated the same error. Even as inflation tore through the 2021 economy, the committee merely nudged up its 2022 inflation projection from 1.9 to 2.6 percent. PCE inflation in 2022 may end up even higher than 2021. And it’s not just the Federal Reserve. The Congressional Budget Office’s 2021 inflation estimate was even lower than that of the Federal Reserve. …macroeconomics…is subject to significant groupthink and overconfidence in its precision, despite a poor record of understanding and projecting the economy’s performance. …economists develop models whose mathematical complexity offers an air of scientific certainty… The result is economists…who are blindsided by market crashes, housing crashes, pandemics, inflation, and rising interest rates. …celebrity economists such as Paul Krugman offer wildly inaccurate forecasts and predictions with the certainty and condescension of a scientist.

If economists really knew how to forecast the economy, they could become very wealthy.

Yet, as Peter Coy explained earlier this year in his column for the New York Times, that is not the case.

…the median annual wages of economists in May 2021 were $105,630. That’s lower than the median pay of astronomers, nuclear engineers, medical dosimetrists and theatrical and performance makeup artists. …Learning a little economics is useful for a lot of lucrative careers, from management to banking. Warren Buffett, Steven Cohen, Kenneth Griffin, Henry Kravis and Elon Musk are among the billionaires who have bachelor or master degrees in economics. The mistake is loving it so much that you get your doctorate …economists are smart. But some — not the good ones — can be blindered. They know their subspecialties well but are weak on others, such as economic history. These economists have technical expertise but not wisdom. …John Maynard Keynes failed repeatedly as an investor when he tried to use the credit cycle to predict what businesses would do.

This leads us to a column in the Wall Street Journal by Professor Alexander William Salter of Texas Tech University.

He explains that the real problem is that some economists have forgotten (or never learned) the basics of “price theory,” which is the foundation of microeconomics.

Despite the complexities of markets, economists can get at the heart of how they work by focusing on prices. This insight is so important, it gives economists’ core tool kit a name: price theory. …Yet…economists are abandoning price theory in droves. …The heights of the economics profession are increasingly inhabited by people who disdain price theory. Reliance on the economic way of thinking in solving problems is viewed as obsolete and unscientific. …The opposite is closer to the truth. Old-school economics recognized that trade-offs and constraints are everywhere. There are no free lunches. …To fix economics, economists must again insist on the primacy of price theory. The economic way of thinking is not optional. Nor is it an impediment to social science. In fact, price theory is the only thing that makes social science possible. 

At the risk of over-simplifying, a potential lesson to be learned is that we should trust (or at least listen to) microeconomists while being skeptical of macroeconomists.

P.S. While the moral of the story is that some economists make lots of mistakes because they overlook price theory, sometimes economists are explicit fraudsters.

P.P.S. Here’s an entertaining cartoon strip about economists.

P.P.P.S. I’ll close with a plug for the Austrian School of economics.

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Yesterday’s column was rather depressing, focusing on the expansion of a corrupt internal revenue service.

To make matters worse, that IRS expansion is part of a larger package of new taxes and more spending.

So let’s offset that bad news with some economics humor.

Since the Biden-Manchin-Schumer legislation includes a big back-door tax increase on companies (the provision targeting “book income“), that’s a perfect segue to our first item about taxation and incentives.

The Biden-Manchin-Schumer legislation isn’t just about misguided tax increases.

It also contains lots of new spending.

Which is why this list from the Babylon Bee is very appropriate.

Next, most of the world’s major nations are dealing with rising prices.

Why?

Because central banks around the world dramatically expanded their balance sheets (i.e., created too much money).

So this definition is both timely and accurate.

Speaking of central banks, here’s a little girl pretending to be Chairman of the Federal Reserve.

Except we now have the highest inflation in 40 years, so the fire is doing even more damage.

Per tradition, I saved the best for last. I’ve written many times that being pro-capitalism is not the same as being pro-business.

Well, here’s a helpful algorithm to show the difference between genuine free enterprise and despicable cronyism.

P.S. You can enjoy previous collections of economics humor by clicking here, here, and here.

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The central message of “Mitchell’s law” is certainly not something I concocted.

Economists and other policy experts have known for a couple of hundred years that politicians have a tendency to makes mistakes and then use the resulting damage as a justification for even more intervention.

I simply gave this phenomenon a name so I didn’t have to offer repeat explanations.

Over and over and over and over again.

Today we’re going to look at another example of politicians demanding more intervention to address a problem caused by previous interventions.

In an article for National Review, Michael Cannon has a very depressing explanation of how government has messed up the market for insulin.

…a proposal by congressional Democrats to mandate that private insurance companies cap out-of-pocket spending on insulin…neglects to address the way the government drives up the cost of insulin. Further intervention would make matters worse. …government makes it both unnecessarily difficult and expensive for diabetics to access this lifesaving drug. …Thanks to government, new insulin is expensive to bring to market. …The high cost of government regulation discourages the development of new insulin products, reduces the number of insulin manufacturers, and increases the prices of any products that do make it through that process… Government increases the cost of insulin by requiring diabetics to get prescriptions before purchasing many insulin products. …Canada generally allows diabetics to purchase any insulin product without a prescription. If the FDA or Congress were to remove those requirements, both the price of insulin and the ancillary costs of obtaining it would fall. …Thanks to government, most people end up with excessive insurance coverage and little awareness of how much things cost. …excessive health insurance encourages providers to increase prices because heavily insured patients care less about price increases.

I’ll augment these observations by explaining that “excessive insurance coverage” refers to how the tax code’s exclusion for fringe benefits leads both employees and employers to use health insurance as a way of not only covering large, unexpected costs, but also as a way of pre-paying for health care.

Unfortunately this pre-payment system has turned much of the health care system into an all-you-can-eat buffet, but with (the perception of) someone else paying the bill.

At the risk of understatement, this system of government-created third-party payer has produced an extraordinarily expensive and inefficient health system.

But I’m digressing. Let’s get back to the column.

So what’s the bottom line? As Cannon explains, the right answer is less government rather than more government.

Had government never intervened in the health sector, private insurance companies might already be offering more comprehensive cost-sharing for insulin than congressional Democrats propose, without driving insulin prices higher. Or perhaps insulin prices would be so low that no one would feel the need to purchase insurance that covers it. All we know for sure is that, like past government interventions, attempts by government to cap cost-sharing for insulin will have unintended consequences that make matters worse for diabetics and all consumers.

P.S. In his column, Cannon observed that, “When Congress capped cost-sharing for contraceptives at $0, prices for hormones and oral contraceptives skyrocketed.”

This is illustrated very clearly by this chart.

As you might expect, deregulation would be the way to lower the cost of birth control (just like deregulation would be the way to lower the cost of insulin).

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A big argument for free enterprise over statism is that the former delivers growth while the latter leads to stagnation.

And that’s very apparent when you review decades of data.

The case for capitalism is especially powerful if you care about what’s best for the disadvantaged. As the chart from Economic Freedom of the World illustrates, poor people enjoy much higher levels of income in nations that have higher levels of economic liberty.

So why, then, do our friends on the left support bigger government?

There are several possible answers, but today let’s focus on their understandable desire to do things that seem compassionate. Particularly things that seem to offer immediate help.

I think that’s a big reason why some well-meaning leftists support a big welfare state even though there is plenty of evidence that poor people get trapped in dependency. They are so focused on doing something that ostensibly alleviates today’s problems that they do not appreciate the risk of harmful long-run consequences.

This problem is so pervasive that we need to create a new Theorem of Government.

If you want an example of this Theorem, we can look at a story in today’s New York Times.

Reporters Jeanna Smialek and  document how low-income people are being hurt by inflation and will probably be hurt by what will be needed to curtail inflation.

…data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation. That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signsthat poorer families are cutting back. …The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown. In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. …America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases.

The story is filled with anecdotes about poor people suffering from inflation.

And, as the above excerpts captures, it has plenty of fretting about how the less fortunate will suffer as the Federal Reserve tries to fix the mess.

But what you won’t find in the story is any acknowledgement that poor people would not be dealing with this hardship if the Federal Reserve had not made the mistake of creating too much liquidity in the first place.

Yet this is the big lesson all of us should learn.

The Federal Reserve wanted to offer short-run help to the economy, motivated in part by a desire to help poor people by propping up the economy during the pandemic.

Yet any short-run help has been swamped by subsequent negative consequences.

And this is not unique. The big lesson from the so-called War on Poverty is that poverty rates suddenly stopped declining. In other words, government tried to help, but wound up doing harm.

P.S. Here are the other 13 Theorems of Government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.
  • The “Eighth Theorem” explains the motives of those who focus on inequality.
  • The “Ninth Theorem” explains how politics often trumps principles.
  • The “Tenth Theorem” explains how politicians manufacture/exploit crises.
  • The “Eleventh Theorem” explains why big business is often anti-free market.
  • The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
  • The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.

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Back in 2009, I narrated a video about the downsides of class-warfare tax policy.

But if you don’t want to spend eight minutes watching the video (or 14 minutes watching this video), here’s a visual that summarizes why high tax rates discourage people from engaging in productive behavior.

The most important thing to understand is that a high marginal tax rate (i.e., the tax rate on earning more money) has a big effect on incentives to work, save, invest, and be entrepreneurial.

But how big is that effect?

Let’s review some new research from Professor Charles Jones.

The classic tradeoff in the optimal income tax literature is between redistribution and the incentive effects that determine the “size of the pie.” …However, what is in some ways the most natural effect on the size of the pie has not been adequately explored. …To the extent that top income taxation distorts…innovation, it can impact not only the income of the innovator but also the incomes of everyone else in the economy. …High incomes are a prize that partly motivates entrepreneurs to turn basic insights into a product or process that ultimately benefits consumers. High marginal tax rates deter this effort and therefore reduce innovation and overall GDP. …For example, consider raising the top marginal tax rate from 50% to 75%. …the change raises about 2.5% of GDP in revenue before the behavioral response. In the baseline calibration…, this increase in the top tax rate reduces innovation and lowers GDP per person in the long run by around 7 percent. …even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 7% decline in their incomes is not offset by the 5% increase from redistribution. In other words, raising the top marginal rate from 50% to 75% reduces social welfare…the rate that incorporates innovation and maximizes the welfare of workers is much lower: the benchmark value is just 9%.

Here’s a table from the study showing how the optimum tax rate is very low if the goal is to help workers and society rather than politicians.

If you want more evidence, there’s a never-ending supply.

But if we want to be concise, start with this list.

Heck, higher tax rates can even hurt your favorite sports team.

P.S. Joe Biden wants people to think that it’s patriotic to pay more tax, though he exempts himself with clever tax planning.

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The capital gains tax is double taxation, and that’s a bad idea (assuming the goal is faster growth and higher wages).

Let’s consider how it discourages investment. People earn money, pay tax on that money, and then need to decide what to do with the remaining (after-tax) income.

If they save and invest, they can be hit with all sorts of additional taxes. Such as the capital gains tax.

If you want to be wonky, a capital gain occurs when an asset (like shares of stock) climbs in value between when it is purchased and when it is sold.

But stocks rise in value when the market expects a company will generate more income in the future.

Yet that income gets hit by both the corporate income tax and the personal income tax (the infamous double tax on dividends).

So a capital gains tax is a version of triple taxation.

Now that I’ve whined about capital gains taxation, let’s see what happens when a country moves in the right direction.

Professor Terry Moon, from the University of British Columbia, authored a study on the impact of a partial cut in South Korea’s capital gains tax. His abstract succinctly summarizes the results.

This paper assesses the effects of capital gains taxes on investment in the Republic of Korea (hereafter, Korea), where capital gains tax rates vary at the firm level by firm size. Following a reform in 2014, firms with a tax cut increased investment by 34 log points and issued more equity by 9 cents per dollar of lagged revenue, relative to unaffected firms. Additionally, the effects were larger for firms that appeared more cash constrained or went public after the reform. Taken together, these findings are consistent with the “traditional view” predicting that lower payout taxes spur equity-financed investment by increasing marginal returns on investment.

There are several interesting charts and graphs in the study.

But this one is particularly enlightening since we can see big positive results for the firms that were eligible for lower tax rates compared to the ones that still faced higher tax rates.

Richard Rahn wrote about capital gains taxation late last year.

Here are some excerpts from his column in the Washington Times.

Would you vote for a tax that frequently taxes people at an effective rate of 100% or more, misallocates investment, reduces economic growth and job creation, often becomes almost impossible to calculate, and in many cases reduces, rather than increases, revenue for the government? …So-called “capital gains” are price changes most often caused by inflation, which, of course, is caused by incompetent or corrupt governments. …Some countries explicitly allow for the indexing of a capital gain for inflation. Other countries have no capital gains tax at all because they recognize what a destructive tax it is. …The current maximum federal capital gains tax is 23.8%. …“Build Back Better” (BBB) bill would push the top rate to 31.8%…and…citizens of states with high state income tax rates like California, New York, and New Jersey would find themselves paying destructive rates from 43 to 45%.

Needless to say, it is a bad idea to impose a 43 percent-45 percent tax on any type of productive behavior.

But it is downright crazy to impose that type of tax on economic activity (investment) that also gets hit by other forms of tax.

Let’s close with this map from the Tax Foundation. As you can see, some European nations have punitive rates, but countries such as Belgium, Slovakia, Luxembourg, the Czech Republic, and Switzerland wisely have chosen not to impose a capital gains tax..

P.S. For more information, I invite people to watch the video I narrated on the topic. And this editorial from the Wall Street Journal also is a good summary of the issue.

P.P.S. Biden wants America to have the world’s worst capital gains tax. To learn why that’s a bad idea, click here and here.

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At the start of this interview, I cite Economic Freedom of the World and the Index of Economic Freedom to make the point that more economic liberty is correlated with more human prosperity.

For purposes of today’s column, I want to focus on the last half of the interview. I point out that a handful of nations began to escape poverty, largely back in the 1800s, when the fiscal burden of government was very small.

But that’s just a partial explanation. As Professors Donald Boudreaux and Deirdre McCloskey explained in short videos, the adoption of capitalism in a few nations enabled a stunning increase in living standards starting a couple of hundred years ago.

If you want a one-sentence summary, all you need to know is that capitalism enabled the industrial revolution and the industrial revolution triggered a huge increase in living standards.

If you prefer to see this in a visual form, here’s a compelling chart put together by Luke Muehlhauser of the Open Philanthropy Project.

And here’s some of what he wrote on his personal page.

The gains in human well-being observed since the industrial revolution are vastly larger than pre-industrial fluctuations in human well-being. No other transitions in recorded history, either positive or negative, are remotely similar in magnitude. …world GDP per capita (in 1990 international dollars) was relatively flat until the final decades of the industrial revolution, when the trajectory for this measure changed dramatically. …In general, the gains and losses in (these measures of) human well-being during the pre-industrial era are miniscule compared to the gains made during the post-industrial era, and there is a sharp upward trajectory change for all these measures shortly after 1800. …many major historical events seem to have not produced anything close to such a transformative change.

Let’s see what others have to say on this topic.

My former colleague Marian Tupy, in an article for the Foundation for Economic Education, pointed out that living through the industrial revolution was no picnic by today’s standards, but the wealth generated by free markets is what enabled environmental improvements.

It is well known that industrialization helped to pollute the environment, but that does not mean that air and water were clean before factories and mills came along! Compared to today, our ancestors had to endure horrific environmental conditions. …John Harrington invented the toilet in 1596, but bathrooms remained rare luxuries two hundred years later. Chamber pots continued to be emptied into streets, turning them into sewers. To make matters worse, even large towns continued to engage in husbandry well into the 18th century. As Fernand Braudel noted in The Structures of Everyday Life, “Pigs were reared in freedom in the streets. And the streets were so dirty and muddy that they had to be crossed on stilts.” …The situation was no better on the European mainland. …industrialization did great damage to the environment during the second half of the 19th century. But it also created wealth that allowed advanced societies to build better sanitation facilities and spurred the creation of an enlightened populace with a historically unprecedented concern over the environment and a willingness to pay for its stewardship.

Very similar to the issue of child labor.

Market-driven prosperity is what enabled children to go to school rather than being put to work.

In a column for the American Institute for Economic Research, Professor Vincent Geloso of King’s University College looked at new research about the rise of living standards as the United Kingdom went through the industrial revolution.

I began asking my own students about their assessments of the Industrial Revolution. The set of answers I obtained was roughly the same: living standards did not increase for the poor; only the rich got richer; the cities were dirty and the poor suffered from ill-health; the artisans were crowded out; the infernal machines of the Revolution dumbed down workers, etc. In other words, the imagery that seems to have seeped into popular imagination is one that resembles the Marxian version of history… As such, any new research on the topic of living standards during the Industrial Revolution is worth communicating… Two recent articles, published in the European Review of Economic History, that consider living standards in Britain (the cradle of industrialization) during the Industrial Revolution offer such a chance… The first of the two articles, authored by Luis Zegarra, made a series of modifications to the way that wages are deflated. …He made two important findings. The first is that living standards were lower than depicted in previous works of economic history. He found that living standards in London (i.e. a proxy for England) were overestimated by 40%. The second is that the increase in living standards was sustained from 1600 onwards. The second article, authored by Daniel Gallardo-Albarrán and Herman de Jong, decided to go a step further and attempted to measure welfare as broadly defined as possible. …their results…show…the increase started later but there was a pronounced sustained increase. 

P.S. Here’s a video about how industrialization dramatically improved lives in a country that used to be part of Britain.

P.P.S. And here’s another video on the link between free markets and growth.

P.P.P.S. If you want more historical information about the industrial revolution, click here and here.

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Here is the argument why corporate tax rates should be as low as possible.

In an ideal world, there would be no corporate income tax (or any income tax).

But I’ll gladly accept any movement in the right direction, which is why the reduction in the corporate tax rate was the crown jewel of Trump’s 2017 tax plan.

The bad news is that Biden wants to undo much of that progress.

Today, let’s look at some new academic evidence on the issue. A new study from the National Bureau of Economic Research, authored by Professors James Cloyne, Joseba Martinez, Haroon Mumtaz, and Paolo Surico, finds that lower corporate rates are especially beneficial for long-run prosperity.

We use…post-WWII U.S. data on output, taxes, productivity and R&D spending to estimate the dynamic effects of income tax changes…and focus on personal and corporate income tax changes separately. …In Figure 1, we present our first set of main results. The figure contains two columns. On the left, we show the IRFs to a reduction in the average corporate tax rate. On the right, we show the results for a reduction in the average personal tax rate. …The first row in Figure 1 reveals that, following a shock to corporate and personal income taxes, the average tax rates decline temporarily. …The second row in Figure 1 shows the impulse response functions for the percentage response of real GDP. … Looking at the first column it is clear that, despite the transitory nature of the corporate tax reduction, there are very persistent effects on real GDP, whose short-run increase of 0.5% persists throughout the ten year period shown in the figure. In other words, the corporate income tax cut has disappeared after 5 years, but the effect on the level of economic activity is still sizable and significant after 8 years. …A similar picture emerges for productivity, as shown in the third row of Figure 1. Both tax rate cuts boost productivity on impact, with the size of the initial response to a personal income tax cut being much larger than for a cut to corporate taxes. On the other hand, the effects of corporate tax cuts grow over time and remain significant even after 10 years.

Here’s the aforementioned Figure 1 from their research.

I’ll conclude by noting that permanent tax cuts are much better than temporary tax cuts.

But if taxes are being cut, regardless of duration, the goal should be to get the most bang for the buck. And there’s plenty of evidence (from the United States, AustraliaCanadaGermany, and the United Kingdom) that lowering corporate tax rates is a smart place to start.

P.S. It’s unfortunate that Biden wants a higher corporate tax burden in the United States. It’s even more disturbing that he wants a global tax cartel so the entire world has to follow in his footsteps. But he apparently does not understand the topic.

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I’ve written a few columns that explain tax principles, but this video from the Tax Foundation may be the best place to start if you have friends or colleagues who need to learn the basics.

As part of the article that accompanies the video, the Tax Foundation explains that not all taxes are created equal. In other words, some taxes impose more damage than other taxes.

And this chart from the article is a nice summary of the three types of tax, along with the potential damage caused by varying ways of collecting tax.

As a general rule, this chart is totally accurate.

Corporate income taxes, gross receipts taxes (mentioned here), and wealth taxes do a lot of economic damage on a per-dollar-collected basis.

But I want to add a caveat to the first column.

As currently designed, there’s no question that the personal income tax and the corporate income tax are very bad taxes.

But it is possible to dramatically reduce the damage imposed by those levies. For instance, the personal income tax could be largely defanged if the current system was repealed and replaced by a simple and fair flat tax.

Likewise, it’s possible to reform the corporate income tax (full expensing, territoriality, no double tax on dividends, etc) so that it does comparatively little damage.

By the way, I’m sure the experts at the Tax Foundation would agree with these observations, so I’m augmenting rather than criticizing.

And since I’m doing some augmenting, another observation is that the first two taxes on the bottom row generally are very similar, at least with regard to their economic impact (and also similar to a properly designed individual income tax).

Here’s some of what I wrote in a column back in 2012.

…anything that expands the “tax wedge” between pre-tax income and post-tax consumption is going to impose similar levels of economic harm. Here’s a simple example. If I earn $100, does it matter to me if the government takes $25 as I earn that income (either with a payroll tax or income tax) or as I spend that income (either with a sales tax or value-added tax)? Is there any reason that my incentives to earn and produce will be altered by shifting from one approach to the other?

I explain that the answer is no. My incentive to earn income is affected by my ability to use income to enjoy consumption. But if taxes take a big bite, I’ll have less reason to be productive, regardless of how politicians collect the tax.

For what it is worth, I’ve used Belgium as an example to explain why shifting from payroll taxes to sales taxes, or vice-versa, is not a recipe for greater prosperity.

P.S. Those who want more advanced primers on taxes and growth should click here and here.

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There has been plenty of bad economic news for Joe Biden, most notably rising levels of inflation.

He also is being criticized for his tax-and-spend fiscal agenda. And mocked for his assertions about red ink.

But I think his main problem is this chart, courtesy of the Atlantic‘s Derek Thompson, which shows that prices are rising faster than earnings for the average American

The bottom line is that people don’t like inflation, but they probably would not be nearly as upset if their income was rising at least as quickly as prices.

But that’s not happening. And this means the average family is enduring a pay cut, when measured in actual purchasing power.

I shared a version of these numbers back in March as part of a six-part series on Biden’s economic mistakes (the other five columns can be found here, here, here, here, and here).

That data also shows that inflation is rising faster than earnings. And that’s true even if fringe benefits are included.

What’s ironic about this data is that Joe Biden doesn’t deserve blame for the outbreak of inflation. Today’s rising prices are a consequence of mistakes by the Federal Reserve that took place before Biden was in the White House.

Though Biden’s subsequent appointments to the Fed suggest he either does not understand the problem of inflation or doesn’t care. So it’s not as if he deserves much sympathy.

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I’ve been wondering about Biden’s stupidest-ever tweet. Was it the one about corporate taxes, the one about class warfare, or the one about the deficit?

The answer may be “none of the above.”

That’s because this tweet about gas prices now may be in first place. I’ve highlighted the most absurd parts.

What’s sad is that Biden may not even know his tweet was laughably wrong.

If we had some decent reporters at the White House, they would ask if he really thinks gas station have the power to set prices. And if Biden said yes, I can only imagine how amusing it would be to ask a follow-up question about why they didn’t use that magical power to raise prices before Biden got elected.

The Wall Street Journal editorialized about Biden’s clueless tweet.

President Biden’s…tweet over the weekend ordering gas stations to lower prices betrayed a willful ignorance about the private economy. …It’s embarrassing for the leader of the free world to sound like he’s channeling Hugo Chávez. A Chinese state media flack praised Mr. Biden’s tweet: “Now US President finally realized that capitalism is all about exploitation. He didn’t believe this before.” Or maybe he did, and nobody wanted to believe it. …The President’s economic ignorance isn’t a one-off. In recent months he has accused oil and gas companies of price gouging and demanded that they increase production even while his Administration threatens to put them out of business.

Kevin Williamson of National Review was similarly dumbfounded by Biden’s statement.

President Biden has been dunning U.S. gas stations to lower their prices in order to help him solve his main immediate political problem. His misunderstanding of how the gasoline business works…paints a portrait of a man out of touch. …contrary to what the Biden brain trust seems to think, wholesale gasoline prices do not move in lockstep with crude oil prices. And retail gasoline prices do not move in lockstep with wholesale gasoline prices. …As anybody who has ever sold anything for a living can tell you, you don’t get to set your own margin. The market does that for you. …The urge to blame retailers for the results of inflationary fiscal policies — and destructive energy policies — in Washington is ugly, demagogic, and, given Biden’s creepy history, maybe even a little bit racist.

I don’t know if Biden is clueless or a demagogue.

But the net result is the same. We are governed by idiots.

P.S. My attack on Biden is not partisan. On the issue of trade, some of Trump’s tweets displayed jaw-dropping stupidity and ignorance.

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I’ve long argued that it’s generally better to focus on employment rather than unemployment when assessing the health of the job market, and I had a chance to pontificate on that topic for Labor Relations Radio.

Sadly, labor force participation numbers weren’t good under Obama and they improved only marginally under Trump.

And, as you might expect, the numbers are not good under Biden.

Courtesy of the Bureau of Labor Statistics, here is the data on the labor force participation rate.

As you can see, the numbers were declining for much of this century, but then began to improve before falling off a cliff because of the pandemic.

For purposes of today’s column, it’s rather troubling that the labor market has not bounced back to where it was before coronavirus wreaked so much havoc.

The Employment-Population Ratio, also from the Bureau of Labor Statistics, tells a similar story.

There was a big drop at the end of the Bush years and start of the Obama years, followed by a gradual recovery that was short-circuited by the pandemic.

Sadly, we have not come close to recouping those losses.

By the way, there are some folks on the left who recognize this problem.

Andrew Yang recently tweeted about the drop in labor force participation.

And he had a follow-up tweet pointing out that every one-percentage-point drop in labor force participation translates into 2.5 million fewer people being employed.

Is he right?

Well, let’s look at another chart from the Bureau of Labor Statistics.

As you can see, total employment today (158.4 million people) is not even back to where it was before the pandemic (158.9 million people).

And we would need a couple of million more jobs simply to get back on the pre-pandemic trendline.

To be fair, I don’t think Biden is fully responsible for the sub-par numbers. We probably would not be back to the pre-pandemic trendline even if we had good policy from Washington.

That being said, Biden is making a bad situation worse. His so-called stimulus was a net-job destroyer.

I’m sure additional red tape also is hindering job growth. Moreover, the threat of higher taxes surely isn’t helping.

The bottom line is that we need more people working, but that probably won’t happen unless we get government out of the way.

P.S. If you want technical definitions, here’s how the BLS defines the above terms.

  • The labor force participation rate. This measure is the number of people in the labor force as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is either working or actively seeking work.
  • The employment-population ratio. This measure is the number of employed as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is currently working.

P.S. If you want a humorous take on labor economics, I recommend this Wizard-of-Id parody, as well as this Chuck Asay cartoon and this Robert Gorrell cartoon.

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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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