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Recent Posts

Here are the 10 latest posts from EconLog.

EconLog January 21, 2018

Hope for Italy?, by David Henderson

A coalition of center-right parties (market-oriented, low-tax conservative parties in American parlance) agreed to an electoral pact on Thursday, January 18, 2018. Silvio Berlusconi of Forza Italia, Matteo's Salvini of Lega Nord, and Georgia Meloni of Nationalist Brothers of Italy listed ten measures in their joint platform. Topping the list was a single-rate flat tax: Salvini proposes 15%, Berlusconi about 20%, with Meloni concurring in the general concept.

Should the coalition form the next Italian government, the flat tax will be the first measure it submits to Parliament. A text of the law already exists, with only the exact rate to be set. It would be relatively easy to select, say, a rate of 18-19%, with an agreement to reduce the rate one percentage point each year to 15% if revenue materializes as projected.
This is from Alvin Babushka, "Prosperità per L'Italia," Thoughtful Ideas, January 20, 2018.

Alvin is one of my Hoover colleagues.

I wonder what co-blogger Alberto Mingardi thinks are this coalition's chances.


EconLog January 20, 2018

Just who are those "consumers"?, by Scott Sumner

While working on a principles of economics textbook, I began wondering how students evaluate terms like "consumer welfare". Who are these consumers?

There's a term for people who are not consumers, they are called "corpses". All living people are consumers. So any policy that benefits consumers as a group also must, ipso facto, benefit society as a whole. Right?

Not quite, as that's not what economists mean by 'consumers'. We are not talking about a distinct set of people (all people are consumers); we are talking about one aspect of our lives. Thus a policy like price controls affects both consumers and producers, and hence everybody, both in our role as consumers and in our role as producers.

[You may object that we are not all producers. But those who are not, such as children and people on welfare, base their consumption on the monetary contributions of people who are producers. So in a deeper sense we all have a stake in both the consumption and production side of the economy.]

I'm probably too close to all of this to know whether these points are obvious, so I'd be interested in your take.

Let's consider a specific example. Suppose we adopt across-the-board price controls, as in 1971. You can show the impact on "consumers" and "producers" with a supply and demand diagram:

Screen Shot 2018-01-19 at 4.04.52 PM.png
In this graph, it looks like "consumers" might gain from price controls. But this doesn't mean that there is some segment of society that actually gains from price controls, rather that people might gain in their role as consumers, lose in the role as producers, and lose overall due to the decline in "total surplus" (due to the deadweight loss.)

[As an aside, even consumers qua consumers might not be better off due to queuing costs.]

I wonder if students reading these textbooks think "Gee, I'm a consumer, so I better pay close attention to the effects of government policies on consumers." If so, they are missing the bigger picture. Students should be focused on the effects of government policies on total surplus, as consumer and producer surplus are just a subset of each and every person's interest is in both sides of a market.

I'd even apply this to individual product markets. It's true that consumers and producers of automobiles might be very different people, but many of the policies that affect individual markets are widely applied. If you are considering the wisdom of trade barriers, it probably makes more sense to think of barriers affecting a wide range of products, as they are unlikely to only be imposed on a single good. Thus if you think to yourself, "I'm a car producer, thus I like tariffs", beware that the tariffs don't end up being imposed on steel and aluminum, for which you are a consumer. Indeed there's a good chance that this is exactly what will happen in the near future, hurting the auto industry, and indeed hurting most of American manufacturing.


EconLog January 19, 2018

Are the Tax Cuts and Increased Wages and Bonuses Connected?, by David Henderson

They might be.

Veronique de Rugy of the Mercatus Center has an excellent piece at Reason on the connection, if any, between the recent cut in the corporate income tax rates and the spate of bonuses, pay increases, and increases in employer contributions to employee 401(k)s. Her article is titled "Is Tax Reform Already Working?"

First, she lays out some basic facts:

The legislation, which permanently slashed corporate tax rates from 35 percent down to 21 percent, was only signed into law last month. But more than 100 companies have already indicated that they will make big moves to benefit workers and the economy--including raising wages, handing out bonuses, granting 401(k) increases, and committing to increased capital investment--while citing the law's reduction in the corporate income tax rate as at least part of the reason.
Here's a list of over 200 companies that have made these pro-employee moves; the list is compiled by Americans for Tax Reform, an organization that strongly favors the tax cut.

EconLog January 19, 2018

A Golden Journey, by Bryan Caplan

Here's the speech I delivered at my in-laws 50th anniversary party a couple of weeks ago.  It's anecdotal, but I think social science fans will enjoy it.


On New Year's Day, 1968, a young couple married in Bucharest, Romania.  Their names were Corneliu Dumitru Mateescu and Maria Teodora Ghitza.  I wasn't there, but I hear it was a three-day Old World extravaganza of feasting and dancing. Despite disapproval from the Romanian Communist Party, Cornel and Maria celebrated an old-fashioned church wedding.  At the time, I suspect that loyal Communists were saying, "Well, it's only a wedding.  It's not like they're going to reject everything we stand for."

But let's back up. Corneliu, the groom, was born in the mid-1930s.  He was the cherished only child of two loving parents who worked hard to give him an idyllic childhood.  But then the war came.  Daily life was a struggle.  By the war's end, young Corneliu was a refugee - fleeing the city to escape the bombing.  When peace finally came, it was the peace of the Red Army.  The Communists soon closed Corneliu's school, where he had been educated by German monks - "the Brüder."  When he reached adulthood, Corneliu was drafted and sent away from home.  But he persevered, eventually earning a top job with the electric authority - about as high as anyone in Romania could rise without joining the Communist Party.

EconLog January 18, 2018

A tax by any other name . . . , by Scott Sumner

When the Supreme Court narrowly upheld the health insurance mandate part of Obamacare, John Roberts suggested that the penalty for not buying health insurance could be viewed as a tax.

I'm not qualified to offer an opinion as to whether that decision was correct from a legal perspective, but economists don't see much difference between regulations and taxes. A fine for speeding, or for double parking your car, looks pretty similar to a $4/pack tax on cigarettes, which might be viewed as a "fine" for smoking.

Suppose the Supreme Court had said that a health insurance mandate was unconstitutional. The government could achieve the same effect with a combination of taxes and subsidies. If the penalty for not buying health insurance had been $2500 per household, then the government could impose a lump sum tax of $2500 on all households in America. Then they could offer a $2500 subsidy to all households that purchased health insurance. For those with health insurance, the tax and subsidy would exactly offset--the government could inform those households to not even bother paying the tax and collecting the subsidy. Those without health insurance would be paying a $2500 tax to the government--exactly equivalent to the health insurance penalty under the mandate.

Today, many states are contemplating using a similar subterfuge to undo one of the most important parts of the recent tax bill, the $10,000 limit on the deductibility of state and local taxes. One idea is to have higher income people donate $X to various state health and education programs, and then receive an equivalent tax credit. The donation would effectively serve as a tax payment, and yet it could be deducted from federal income taxes (unlike with SALT payments). And these "donations" wouldn't really be charity in any meaningful sense. People donating the money are no worse off than if they did not donate the money. The alternative was paying the same amount in taxes.

Because legal definitions often don't coincide with economic definitions, there is plenty of room for gaming the system. If states find a way around the $10,000 cap in SALT deductions, it would be a major setback for tax reform, and also further balloon an already excessive budget deficit. This is an issue to watch.

Screen Shot 2018-01-18 at 12.41.15 PM.png

EconLog January 18, 2018

The Big Victims of Drug Prohibition, by David Henderson

Never forget consumer surplus.

Steven Landsburg is critical of co-blogger Scott Sumner's proposal to give preference in licensing legal marijuana sellers to those who were previously convicted of marijuana offenses. Scott calls this "affirmative action for drug pushers." Actually, though, his quote about the policy he favors does not mention drug dealers. (The word "pushers" is a misnomer; almost no one who sells drugs "pushes" them.)

Here's the relevant passage that Scott quoted:

In Los Angeles, residents with past marijuana convictions will not only be allowed to buy licences to sell the drug, but will be given priority. Under the city's "social-equity programme", low-income Angelenos who have previous marijuana convictions or who have lived in areas with disproportionately high rates of arrest for marijuana offences will be given preference when licences to open marijuana retail businesses are granted. Oakland, San Francisco and Sacramento have introduced similar initiatives.
We can be sure that many of these convictions, possibly most, were for dealing or producing illegal marijuana. But I would bet that some of them were for simply using marijuana. And even some of the convictions for dealing might have been against users who were heavy users. The police and prosecutors tend to regard being caught with large amounts of marijuana as prima facie evidence that one is a dealer; sometimes, though, some of these people might simply have been stocking up.

EconLog January 17, 2018

Carillion and the reputation of privatisations, by Alberto Mingardi

"Privatisations" were done to make again room for the private sector, and for government officials to stop managing a particular business. In reality, of course, the boundaries may be blurred...

UK construction.jpeg Instances of classical liberal-leaning (critics would say: neo-liberal) government were very few in the 20th century. Margaret Thatcher's one was perhaps the most spectacular, as England really walked a long way in the direction of the command-and-control economy. Thatcher's privatisations were the first and as a political leader she cast a long shadow: so that even today, twenty-eight years after she left office, she is regularly evoked in broader debates over the balance between the public and the private sector.

Carillion, a British big construction company that grew enormously in a bunch of different businesses active in public procurement, is now filing for liquidation. In England's cultural climate, which is by no means friendly to conservatives at this moment, this bankruptcy is revitalising those on the left who want to do away with the Iron Lady's legacy. It is probably, by all means, "the end of the love affair between governments and private contractors".

EconLog January 16, 2018

For a Free Market in Plasma, by David Henderson

Ottawa, Ontario and Washington, D.C. - A group of professional ethicists and economists published an open letter urging provincial governments to reconsider proposals to ban compensation for blood plasma donations. The letter is signed by 26 ethicists and economists, including two Nobel Prize winners (Alvin Roth and Vernon Smith), a recipient of the Order of Canada (Jan Narveson), amongst others.This is the opening paragraph of today's press release advocating legalizing a market for blood plasma. Georgetown University's Peter Jaworski, one of the signers, asked me to sign because I am both an economist and a Canadian. I did. The actual statement is very well argued.

EconLog January 16, 2018

Whereof One Cannot Speak, Thereof One Must Be Silent, by Scott Sumner

We talk too much. I probably talk way too much. Humans like to explain everything, even things that cannot be explained.

Over at TheMoneyIllusion I did a post trying to rebut the bubble view of NASDAQ, circa 1999-2000. Lots of people bought tech stocks, mostly during periods of time when NASDAQ was around 3500 to 4000. (It briefly spiked to just over 5000.) Now it's over 7200. Yes, that's not a good rate of return for a period of 18 years, but it's not obviously horrible (especially if you include reinvested dividends, and especially for those who didn't buy at the absolute peak, which lasted very briefly.) In the comment section, Matthew Waters asked:

Saying NASDAQ had an OK value in 2000 brings up the same question as the 1987 crash: how could both the 2000 and 2002 NASDAQ prices be efficient? For that matter, how could both 2002 and 2003 NASDAQ prices be efficient? End of 2002: NASDAQ was at $1,300. End of 2003: NASDAQ was at $2,000.

Maybe bona fide news on future cash flows accounted for a 75% drop followed by a 50% increase within three years. I doubt it. For its part, Bitcoin has such swings in WEEKS rather than years.

Is there anything that could falsify the EMH? It should be dramatically reformulated from "prices reflect all available information." It would be far stronger and more predictive to say "it's very difficult to beat the market on a 6 month or 1 year timeline."
This is a very good question, and one that reaches into the field of epistemology. What can we know about the world? Which I would rephrase as "What information is useful"?

EconLog January 16, 2018

For Individual Liberty, Size Does Not Matter - or So It Seems, by Contributing Guest

by Pierre Lemieux

"... let's have a look at the empirical evidence. Do available data show a correlation between individual liberty and the size of a country? A positive or a negative one?"

Catalonia.jpg In a recent Econlog post, Alberto Mingardi provided an interesting reflection on the Catalonia secession attempt. Since then, a secessionist government has been reelected in the region, and the future is uncertain.

More generally, Alberto suggested that, if states are unavoidable, having more of them is better than fewer. One reason is that individuals will have more choices as to which state to live under according to their preferences. A related reason is that competing states will have an incentive to satisfy the preferences of their clienteles. More numerous and homogeneous states will thus offer public services more in line with what citizens want. Alberto Alesina and Enrico Spolaore make related arguments in their book The Size of Nations.

However, there are also good arguments for larger, more cosmopolitan societies. What Friedrich Hayek, in his trilogy Law, Legislation and Liberty, calls the Great Society, i.e. the abstract classical-liberal order, is more likely to flourish in a large, cosmopolitan society than under small-group tyranny. In a large and diversified society, Leviathan may be less effective at oppression. At any rate, smaller, homogeneous nation-states will typically not allow individuals to move freely between themselves.

Here are the 10 latest posts from EconTalk.

EconTalk January 15, 2018

Bill James on Baseball, Facts, and the Rules of the Game

baseball%20numbers.jpg Baseball stats guru and author Bill James talks with EconTalk host Russ Roberts about the challenges of understanding complexity in baseball and elsewhere. James reflects on the lessons he has learned as a long-time student of data and the role it plays in understanding the underlying reality that exists between different variables in sports and outside of sports. The conversation closes with a discussion of our understanding of social processes and the connection to public policy and the ideologies we hold.


Time: 1:02:20

EconTalk January 8, 2018

Dick Carpenter on Bottleneckers

Bottleneckers.jpgDick Carpenter of the Institute for Justice and author of Bottleneckers talks with EconTalk host Russ Roberts about his book--a look at how occupational licensing and other regulations protect existing job holders from competition.


Time: 1:14:58

EconTalk January 5, 2018

One of the Days, Alice...

space elevator.jpg Asteroid mining, space elevators, and augmented reality. These are just a few of the "Soonish" technologies that are discussed in this week's episode, in which host Russ Roberts welcomes Kelly and Zach Weinersmith.

  1. What did you find to be the most salient economic concept throughout this week's conversation? How did it manifest itself, and how was it significant to the conversation?

  2. Which of the technologies discussed did you find to be the most far-fetched, and why? How about the least? Which one (or ones) would you be most concerned about, and why?

EconTalk January 1, 2018

Kelly Weinersmith and Zach Weinersmith on Soonish

Soonish.jpg Ecologist Kelly Weinersmith and cartoonist Zach Weinersmith--creator of Saturday Morning Breakfast Cereal--talk with EconTalk host Russ Roberts about their new book, Soonish--a look at cutting-edge and not-quite cutting edge technologies. The Weinersmiths speculate about everything from asteroid mining to robotic house construction to the nasal cycle and how the human body and medicine might be transformed in the future. They discuss the likelihood of some really crazy stuff coming along and changing our lives as well as the possible downsides of innovation.


Time: 1:10:28

EconTalk December 27, 2017

The Mighty Amazon (and Facebook...and Google?)

Google school.jpg In our last episode of 2017, EconTalk host Russ Roberts welcomed Matt Stoller of the Open Market Institute to discuss his take on modern monopolies. In this lively conversation, Roberts and Stoller discussed the role and influence of technology companies in our lives- especially "the Big 3," Facebook, Google, and Amazon.

  1. How great a problem is extremism on social media? Is the problem self-generated, as Roberts suggests, or inherent in social media's algorithmic nature?

EconTalk December 25, 2017

Matt Stoller on Modern Monopolies

internetmonopoly.jpgMatt Stoller of the Open Market Institute talks with EconTalk host Russ Roberts about the growing influence of Google, Facebook, and Amazon on commercial and political life. Stoller argues that these large firms have too much power over our options as consumers and creators as well as having a large impact on our access to information.


Time: 1:10:11

EconTalk December 22, 2017

Ideologically Convenient...Economically Corrosive

dental hygienist.jpg 21st century America has been hit by a "double whammy malaise," according to the Niskanen Center's Brink Lindsey, one of two guests joining host Russ Roberts on this week's EconTalk. Lindsey joins his co-author, Steven Teles, to talk about their new book, The Captured Economy.

Lindsey and Teles argue, in an appeal to both the political Left and Right, that inequality has been worsened in America by special interests who steer policy to benefit themselves, and that the concentration of political power hampers both innovation and economic growth to a large degree. Now let's hear what you have to say about this week's conversation. As always, we'd be honored to continue the conversation with you.

  1. As mentioned above, Teles and Lindsay maintain that their argument should hold appeal for both the Left and the Right. What is it they think will appeal to each, and what what do they say are the blind spots of the political Left and Right? To what extent do you think their argument will appeal to each, and why?

EconTalk December 18, 2017

Brink Lindsey and Steven Teles on the Captured Economy

Captured%20Economy.jpgBrink Lindsey of the Niskanen Center and Steven Teles of the Niskanen Center and Johns Hopkins University talk with EconTalk host Russ Roberts about their book, The Captured Economy. Lindsey and Teles argue that inequality has been worsened by special interests who steer policy to benefit themselves. They also argue that the influence of the politically powerful has lowered the overall growth of the American economy.


Time: 1:09:34

EconTalk December 14, 2017

You Gotta Love Irene Triplett

entitlement.jpg If you're unhappy about the growth of government entitlement programs, perhaps it's time you stop harping on the New Deal. According to this week's EconTalk guest, John Cogan, you'll need to look back a lot further...a lot further.

What can the history of the federal governments role in transfer payments teach us about tax reform today? How much of a safety net should the government provide for its citizens? These are complicated questions. So take a trip back in time with us this week, and examine your own thoughts about transfer payment programs then and now.

Please share your thoughts with us...Respond to our prompts in the Comments below, or consider using these questions with your class or your friends. Let's continue the conversation.

  1. How did the veterans' benefit program instituted after the American Revolution come to set the pattern for all US entitlement programs to follow? How does Cogan distinguish this entitlement trend from the one begun in the wake of the Great Depression?

EconTalk December 10, 2017

John Cogan on Entitlements and the High Cost of Good Intentions

High%20Cost.jpgJohn Cogan of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about Cogan's book, The High Cost of Good Intentions, a history of U.S. entitlement policy. Cogan traces the evolution of government pensions beginning with Revolutionary War vets to the birth and evolution of the Social Security program. Surprises along the way include President Franklin Roosevelt as fiscal conservative and the hard-to-believe but true fact that there is still one person receiving monthly checks from the Civil War veterans pension program. The conversation concludes with Cogan's concerns over the growing costs of financing social security payments to baby boomers.


Time: 1:06:08