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Recent Posts

Here are the 10 latest posts from EconLog.

EconLog November 19, 2017

How much do government workers cost?, by Scott Sumner

Tyler Cowen directed me to an interesting question raised in his comment section (by "BC"):

Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn't that mean that, while their actual salary may be lower than their official nominal salary, they actually don't pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.)

For example, suppose a private firm and the federal government both value a worker's output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees!

Doesn't this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive -- the usual cited distortion -- they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers.
This is one of those cases where things look very different if you recall the macroeconomic linkages. Let's start by assuming that the government hires the worker away from a comparable private sector job. In that case, the tax paid by the newly hired government worker would be offset by the tax no longer paid on the job he left in the private sector. To make things simple, assume a flat rate tax system. Then total tax revenue is the tax rate times national income. Thus in order for the act of hiring a government worker to result in more total tax revenue, the act of hiring the worker would have to boost national income.

Now we can see that the actual question being asked here is whether or not the act of hiring a government worker causes national income to be higher. Here are some models where that is generally not the case:

  1. Monetarism
  2. Austrianism
  3. Real business cycle theory
  4. New Keynesian models with a natural rate of output

And here's one model where it may be the case:

  1. Primitive Keynesian models of the sort that were discredited during the 1970s

The wrong way to think about these sorts of issues is to look at accounting relationships at the individual level. "Follow the money". The correct way to approach the problem is to think in terms of aggregates such as "national income". Does government hiring cause national income to rise? If so, then you get more revenue.

PS. In some New Keynesian (and RBC?) models you might get a rise in measured national income, as the government worker would make the country poorer, causing labor supply to increase as a way of preventing an excessively sharp fall in consumption. I'm abstracting from that (second order) issue, which gets into questions about the proper way to measure GDP.


EconLog November 18, 2017

The third option, by Scott Sumner

Last week I attended the Cato Monetary conference in Washington. Jim Dorn always does a good job of finding interesting speakers.

I couldn't help contrasting the event with the Peterson Institute conference that I attended last month. At the Peterson Institute, most speakers correctly noted that insufficient AD was a key problem over the past decade, but also argued (wrongly, in my view) that monetary stimulus was relatively ineffective at the zero bound. At Cato it was almost the exact opposite. I don't recall anyone doubting the effectiveness of monetary policy (I attended 3 of the 4 panels), but there was almost no concern about insufficient nominal spending. Indeed a number of speakers seemed worried that policy was too expansionary.

This makes me feel really good about the prospects for market monetarism. Both logic and facts are overwhelming on our side. It seems absurd to claim a fiat money central bank could not debase its currency. Are the Zimbabweans really that much more talented than we are? And when countries like Japan have changed policy the yen has fallen sharply, even at the zero bound. That doesn't happen in the Keynesian model. As for the level of AD, during most of the past decade both inflation and employment have been well below the Fed's targets. It's the (conservative) opponents of monetary stimulus who have a difficult argument to make, not us.

This recent article gives a good sense of the weakness of the arguments of our opponents:

TOKYO (Reuters) - Premier Shinzo Abe's victory in last month's election may make it difficult for the Bank of Japan to dial back its radical stimulus next year despite the rising cost of prolonged monetary easing, former BOJ board member Sayuri Shirai said on Friday. . . .

Shirai said the BOJ should start withdrawing stimulus by hiking its yield target and slowing asset purchases next year, given the rising cost and diminishing returns of its policy.

"When the economy is in good shape like now, the BOJ needs to normalise monetary policy so it has the tools available to fight the next recession," Shirai told Reuters.

"But the election result has made that difficult," she said.

Raising the BOJ's 10-year government bond yield target could trigger an unwelcome yen rise by narrowing the interest rate differentials between Japan and the United States, Shirai said.
This quote exhibits a basic lack of understanding of monetary economics. The speaker implies that tightening monetary policy gives the BOJ more "tools" to fight the next recession, whereas the exact opposite is true. When the BOJ tightens monetary policy the natural rate of interest falls. The speaker presumably believes that what matters is the gap between the actual rate of interest and zero, whereas what really matters is the gap between the natural rate of interest and zero. When the BOJ raises the actual interest rate with a tight money policy, the natural interest rate falls.

If Shirai were correct, then the Fed could have raised interest rates to 20% in 2008, giving them lots of "tools" to later cut rates and spur the economy when the recession got severe. But that's about as effective as trying to pick yourself up by your bootstraps. This is why I insist that people appointed to the Fed should be experts on monetary economics. I don't care about credential---it makes no difference if they have a PhD---but they need to understand the basic principles of monetary economics.

Does Japan need higher interest rates to pop asset prices bubbles? Consider the Japanese stock market, which is about 40% below the peak value in 1991, while the US market has risen almost 10-fold. Or take housing, where prices in Japan are down about 40% since 1990 (lavender line), while they have risen 140% in the US (blue) and 360% in Australia (light blue).

Screen Shot 2017-11-18 at 6.26.15 PM.png
Australia's had the highest interest rates over that period (among developed countries), and Japan has had the lowest. So no, rapid asset price increases are not caused by low interest rates, indeed asset prices tend to rise more rapidly in countries with very high nominal interest rates. Japan doesn't have to worry about asset price bubbles.

Japan would benefit from higher nominal interest rates, but only if brought about by a more expansionary monetary policy.

PS. I should emphasize that there was plenty that I agreed with at the Cato conference. A number of speakers were critical of the war on cash (as am I), and Charles Calomiris was skeptical of the view that China was a currency manipulator.

PPS. David Beckworth presented me with a coffee mug.

Screen Shot 2017-11-18 at 6.39.34 PM.png
Market monetarism is right on target to becoming the dominant view in macroeconomics; just give us another 10 or 20 years.


EconLog November 18, 2017

Allan Meltzer, libertarian institutionalist, by Alberto Mingardi

Chris De Muth has written a wonderful tribute to Allan Meltzer. It is a piece that accounts for a strong bond of personal friendship that goes beyond intellectual esteem. DeMuth brought Meltzer to the American Enterprise Institute as a Visiting Scholar when the latter left President Reagan's Council of Economic Advisors: "It took us perhaps four minutes to settle on business arrangements, sealed with a handshake and never any sort of written contract". Well, those were the days - and those were the gentlemen who could be happy with such trustworthy informality!

DeMuth defines Meltzer as "that rare and wonderful intellectual avis, the libertarian institutionalist". The word "institutionalist" here is happily ambiguous. On the one hand, DeMuth remarks, Meltzer understood that "liberty is an artifact of human institutions, from banks to nations to the rule of law". That is not particularly rare, among libertarians. What is rarer is that from the understanding that "our institutions may rise and fall through evolutionary trial and error, but they are also subject to human reason, criticism, and purposive reform" Meltzer derived a passion for directly engaging in this very activity of criticism and purposive reform. 514gsOEKlzL._AC_UL160_.jpg

Meltzer joined committees, advised politicians and institutions, all of this while writing his masterful History of the Federal Reserve. DeMuth alludes to the fact that this willingness to engage with reality did show a profound optimism but not an eagerness to settle on intellectual compromises. (Political compromises are a different matter).

So concludes his tribute to Meltzer:

Allan Meltzer led a life of complete integrity. He devoted himself to the most difficult and consequential of policy conundrums; subjected them to the highest levels of intellectual scrutiny over sustained periods of time; solved more than a few of them; promoted his solutions with indefatigable zest; and selflessly encouraged the like efforts of many others. It is only fitting that he left us with a few unsolved conundrums to wrestle on our own--along with a shining example of how to go about it. (0 COMMENTS)

EconLog November 17, 2017

Taking Comparative Advantage Seriously, by Contributing Guest

by Pierre Lemieux

_ Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don't they now represent a comparative advantage? _

Arecent Wall Street Journal story reports that the longer growing season of Mexican farmers is seen as a cause of dumping and that a renegotiated North American Free Trade Agreement may have to compensate for this comparative advantage of Mexico:

American farmers, however, complain that their Mexican rivals enjoy unfair advantages, including low-cost farm labor, state subsidies and a year-round growing season that lets them dump cheap berries on the U.S. market when the two countries' growing seasons overlap in the late spring.

EconLog November 17, 2017

Caplan on Communism, by David Henderson


Before the Russian Revolution of 1917, "socialism" and "communism" were synonyms. Both referred to economic systems in which the government owns the means of production. The two terms diverged in meaning largely as a result of the political theory and practice of Vladimir Lenin (1870-1924).

Like most contemporary socialists, Lenin believed that socialism could not be attained without violent revolution. But no one pursued the logic of revolution as rigorously as he. After deciding that violent revolution would not happen spontaneously, Lenin concluded that it must be engineered by a quasi-military party of professional revolutionaries, which he began and led. After realizing that the revolution would have many opponents, Lenin determined that the best way to quell resistance was with what he frankly called "terror"--mass executions, slave labor, and starvation. After seeing that the majority of his countrymen opposed communism even after his military triumph, Lenin concluded that one-party dictatorship must continue until it enjoyed unshakeable popular support. In the chaos of the last years of World War I, Lenin's tactics proved an effective way to seize and hold power in the former Russian Empire. Socialists who embraced Lenin's methods became known as "communists" and eventually came to power in China, Eastern Europe, North Korea, Indo-China, and elsewhere.

EconLog November 16, 2017

A Vast But Dwindling Reservoir of Nativism, by Bryan Caplan

Tyler Cowen and I have an ongoing dispute about "immigration backlash."  Reading these June Gallup poll results, I'm tempted to hail a "backlash to the backlash."

Though preventing illegal immigration was one of the president's key campaign promises, the general desire to decrease immigration is near its historic low in Gallup's trend over more than half a century.If you look at the numbers, however, they've been quite steady for the last five years.  We're not living in a period of rising hostility to immigration.  We're not living in a period of rising support for immigration.  We're living in a period of stable but relatively high support for immigration.  The numbers speak:

gallupimmig.jpgIf public support for immigration is so high, why has political opposition become so vocal?  Because public support for immigration, though relatively high, remains absolutely low.  And that's all it takes for anti-immigration demagoguery to work.  The real puzzle isn't, "Why did Trump take a strong anti-immigration stand in 2016?" but "Why doesn't every presidential candidate take a strong anti-immigration stand in every election?"  And the obvious solution to this puzzle is elite-on-elite pressure: elites are more cosmopolitan than the masses - and shame fellow elites who dissent.  Trump won by being the sort of elite who treats elite shame as a badge of honor.

EconLog November 16, 2017

How should we evaluate Herbert Hoover?, by Scott Sumner

The Economist recently reviewed a biography of Herbert Hoover:

Why was it that Hoover, hitherto so talented at overcoming crises, was unable to overcome the Great Depression? Perhaps he had come to believe his own propaganda about ordinary people collectively solving problems without government aid. Or maybe the scale of the problem was too great even for someone of Hoover's abilities. Mr Whyte does an excellent job of describing the qualities that brought Hoover his early successes--but provides too little guidance as to why, in the end, he failed his severest test.Hoover is widely regarded as one of the most talented people ever to serve as President of the United States. He was very successful in business, and also in managing complex and difficult relief efforts in Europe (during and after WWI). He was clearly a highly skilled individual.

EconLog November 15, 2017

All Roads Lead to Open Borders: Slides, by Bryan Caplan

Here are the slides from today's talk on my graphic novel.  Enjoy!

P.S. Comments welcome.


EconLog November 15, 2017

About That Loss of Health Insurance, by David Henderson

Someone tells you that you have to buy something, and levies a penalty if you don't. So you buy it. Then someone else countermands the first person's order. You no longer have to buy it. So, assuming it's not because the price of what you had to buy rose, you don't buy it. Are you worse off?

Various media outlets have reported on the loss of health insurance that the Congressional Budget Office thinks will come about if Congress gets rid of the mandate that requires individuals to buy health insurance. Estimating the effects of changes in laws is always tricky, of course. What's not tricky is to explain to readers something that many of the reports don't do a good job of.

Are you ready?

Many of the people who will "lose" health insurance if the mandate is repealed are people who want to lose health insurance. That is, according to the CBO, what is causing them to get health insurance now is the mandate. So, by their standards, even if we, observing them paternalistically, might think different, they would be better off.

How many of the millions who lose health insurance are people who want to lose it? We can't tell exactly but we can probably come close.

EconLog November 14, 2017

Why Question the Protestant Reformation?, by Bryan Caplan


A reader asked me, "Would you mind clarifying exactly what your takeaway message was in your Reformation post?"  I'm happy to oblige.

Popular views about the Protestant Reformation are absurdly sugarcoated.  It's tempting for libertarians to jump on this sugarcoating bandwagon and praise the Reformation as a triumph of religious freedom.  But given the staggering body count - not to mention the violent fundamentalism of the leading Protestant reformers - it's actually a telling counter-example to libertarian optimism.  Despite all its oppression, "corrupt" pre-Luther Catholic Europe was far freer than the multilateral bloodbath that succeeded it. 

So how's a thoughtful libertarian to respond?  Leading possibilities:

  1. Libertarian absolutism.  The Protestant Reformation was a disaster, but there's still an absolute duty to leave religious dissenters alone until they actually start violating the rights of innocent people.

  2. It could have been worse.  Many millions were killed, but even more would have been killed under continuing Catholic hegemony.

  3. In the long-run, it was worth it.  Despite a century of horrors, Luther and Calvin unwittingly built the foundations of modern freedom.

  4. An exception to religious toleration was warranted.  The consequences of the Reformation were so godawful that the Catholic Church (or anyone else) would have been justified in preemptively coercively suppressing it before it endangered the peace of Europe.

  5. Libertarian presumptivism.  While the Reformation turned out to be a disaster, people at the time could not have foreseen the horrors with sufficient certainty to overturn the libertarian presumption in favor of religious freedom.

Ultimately, I believe #5, but #4 is my second choice. 

P.S. Ilya Somin seems to hold a mix of #2 and #3.


Here are the 10 latest posts from EconTalk.

EconTalk November 15, 2017

To Tip or Not to Tip

kids tip.jpg Is tipping a relic of the past that has outlived its usefulness? Should restaurant servers work for tips or a living wage? This week, EconTalk host Russ Roberts welcomed back political scientist Anthony Gill to discuss his recent piece on teaching about tipping.

Now we'd like to hear more from you. Use the prompts here to share your reaction to this week's episode, or to spark your own conversation offline. Feel free to post your own questions here, too. We'd love to converse with you.

  1. Did your parents teach you to tip for service? If so, what was their rationale, and was there a guideline for how much to tip?

EconTalk November 13, 2017

Anthony Gill on Tipping

tipping.jpg Why does tipping persist? Despite the efforts of some restaurants to stop tipping, it remains a healthy institution and has recently spread to Uber. Political scientist Anthony Gill of the University of Washington talks with EconTalk host Russ Roberts about why tipping persists and what it achieves despite there being no formal way of enforcing this norm.


Time: 1:05:43

EconTalk November 10, 2017

The Infidel or the Professor?

letters.jpg Longtime EconTalk listeners have had much occasion to consider the influence of Adam Smith. In this week's episode, discussion of Smith takes an interesting turn as host Russ Roberts welcomes political scientist Dennis Rasmussen to the show. Rasmussen's new book, The Infidel and the Professor, explores the deep and enduring friendship between Smith and philosopher David Hume, twelve years Smith's senior. How did their friendship and works influence each other? What circumstances of time and place have made their influence so profound? And how were the two men able to sustain such a meaningful friendship when they spent practically no time together?

As usual, we'd love to hear your own musings and Smith, Hume, philosophy, and friendship. Share your response to any of the prompts here below...Or use them as prompts in your classroom, at the dinner table, or even at Happy Hour. We'd love to hear about your conversation.

  1. We're used to thinking of Adam Smith as a champion of commerce and exchange. Yet Rasmussen argues that Hume may in fact be the greater champion. Have a look at Hume's essay, "Of Refinement in the Arts" On what moral grounds does Hume make the case for commerce? To what extent do you find his case convincing, either on its own or in comparison to Smith?

EconTalk November 6, 2017

Dennis Rasmussen on Hume and Smith and The Infidel and the Professor

Infidel%20and%20Professor.jpg How did the friendship between David Hume and Adam Smith influence their ideas? Why do their ideas still matter today? Political Scientist Dennis Rasmussen of Tufts University and author of The Infidel and the Professor talks with EconTalk host Russ Roberts about his book--the intellectual and personal connections between two of the greatest thinkers of all time, David Hume and Adam Smith.


Time: 1:11:37

EconTalk November 3, 2017

The Dance

English dance.jpg Mike Munger, "the Tom Brady of EconTalk, returned to EconTalk this week to talk with host Russ Roberts about what he deems the most important concept in political economy, permissionless innovation. Should innovators ask permission first or forgiveness later, and under what circumstances? And why aren't economists generally any good at predicting innovation?

  1. While Munger claims permissionless innovation as the most important concept in political economy, he dubs opportunity cost the most important in economics. What do you think is the most important concept in economics, and why?

EconTalk October 30, 2017

Michael Munger on Permissionless Innovation

innovation.jpgMichael Munger of Duke University talks with EconTalk host Russ Roberts about permissionless innovation. Munger argues that the ability to innovate without permission is the most important concept of political economy. Munger defends this claim and explores the metaphor of emergent order as a dance, a metaphor coming from the German poet Schiller.


Time: 1:07:51

EconTalk October 23, 2017

Jennifer Burns on Ayn Rand and the Goddess of the Market

Goddess%20Market.jpgJennifer Burns of Stanford University and the Hoover Institution talks with EconTalk host Russ Roberts about her biography of Ayn Rand, Goddess of the Market. They discuss Rand's philosophy, her influence, her relationship with the conservative movement, and the intersection of her personal life with her philosophical principles.


Time: 1:04:38

EconTalk October 16, 2017

Megan McArdle on Internet Shaming and Online Mobs

shaming.jpg Author and journalist Megan McArdle of Bloomberg View talks with EconTalk host Russ Roberts about how the internet has allowed a new kind of shaming via social media and how episodes of bad behavior live on because Google's memory is very, very good. McArdle discusses the implications this new reality has on how we behave at work and how people protect and maintain their reputations in a world where nothing is forgotten and seemingly little is forgiven.


Time: 1:14:32

EconTalk October 11, 2017

Thinking the Unthinkable

future start.jpg Given the scale of the digital revolution thus far, we can be reasonably sure that technological advances will continue to enhance our lives into the future. But how widely will such advances be shared, and why is it up to us? This week, EconTalk host Russ Roberts welcomed author and Silicon Valley guru Tim O'Reilly to talk about his new book, WTF: What's the Future and Why It's Up to Us.

O'Reilly argues that we shouldn't look at technology as being labor-saving. Instead, we should focus on how it lets us do more. Today's companies are "infused with the digital," creating new platforms and redesigning themselves all the time. (Amazon is O'Reilly's prime example.) Now we hope you'll share your reactions to this week's episode with us. We love to hear from you.

  1. Is new technology more likely to replace workers, or make existing workers better? To what extent will workers' lives be equally augmented by such advances?

EconTalk October 9, 2017

Tim O'Reilly on What's the Future

WTF.jpg Author Tim O'Reilly, founder of O'Reilly Media and long-time observer and commenter on the internet and technology, talks with EconTalk host Russ Roberts about his new book, WTF? What's the Future and Why It's Up to Us. O'Reilly surveys the evolution of the internet, the key companies that have prospered from it, and how the products of those companies have changed our lives. He then turns to the future and explains why he is an optimist and what can be done to make that optimism accurate.


Time: 1:02:47