Category Archive: Politics & Policy

  1. The many faces of means-testing

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    Isn’t a Universal Basic Income just another name for a negative income tax, such as Tax = -$10,000 + .3*Income?  If so, isn’t a Universal Basic Income means-tested by definition?

    The answer to the first question is Yes.  UBI is just Milton Friedman’s negative income tax in new packaging.

    The answer to the second question, however, is more equivocal.  The UBI is means-tested in the weak sense that your net payment falls with income.  But the UBI dispenses with many other traditional forms of means-testing.  Most notably:

    1. Means-testing by age.  Most welfare states prioritize children and the elderly.  The implicit theory is that, unlike prime-age adults, the very young and the very old are unable to provide for themselves.
    2. Means-testing by dependents and marital status.  Most welfare states prioritize single moms with minor children.  The implicit theory is that single moms have reduced opportunities to work due to their family responsibilities.
    3. Means-testing by health.  Most welfare states prioritize the disabled.  The implicit theory is that they’re not healthy enough to work.
    4. Means-testing by job history.  Most welfare states prioritize people who recently lost their jobs over people who have never worked, or lost their jobs a long time ago.  The implicit theory is that the short-term unemployed are unlucky, while the long-term unemployed are lazy.

    If your UBI proposal includes factors like these in its formula, it’s very hard to see what makes it a UBI.

    If your UBI proposal dispenses with most or all these factors, then it is a distinctive reform indeed.  But “distinctive” is a far cry from “good.”

    Advocates correctly note that dropping multi-faceted means-testing reduces moral hazard: If your monthly payment doesn’t depend on your health, you have no reason to fake bad health.

    But there is also an gargantuan disadvantage: Dropping multi-faceted means-testing greatly increases the number of eligible recipients.  If perfectly able-bodied, childless adults are eligible for free money, plenty will take it – and many won’t work at all.  Taxes on remaining workers have to rise to pay for them.  This probably won’t create a “UBI death spiral,” but a milder sloth spiral definitely kicks in, especially over the longer run as stigma against idleness erodes.  And the burden of supporting able-bodied non-workers is also very likely to cut into funding for the more deserving poor.

    Frankly, given the bleak long-run fiscal forecast for the U.S., I’m baffled that anyone with libertarian sympathies takes the UBI seriously.  The welfare state is already unsustainable, largely because our means-testing by age and health isn’t stringent enough.  The elderly may have trouble working now, but since they had a lifetime to save for their own retirements, few of the indigent elderly are victims of circumstance.  And given the huge long-run rise in the share of U.S. adults on disability despite rising health and less strenuous jobs, its clearly far too easy to plead disability.

    What’s especially strange is that the bleak long-run fiscal forecast makes old-school libertarian austerity more relevant than ever.  Why are so many libertarians running away from our core ideas when conditions are nearly ripe for mainstream America to finally listen to us?

    This piece was originally published at Econlog.

  2. America has a bad case of “Whataboutism”

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    A number of folks I respect have gone full Never Trump, and a few have come out in support of the administration, to varying degrees. But quite a few of “us” have rejected full-on support or opposition, lapsing into what I’ve come to think of as “But What About….?”-ism. This phenomenon was pointed out by Washington Post journalist Radley Balko, who said in January:

    Maybe at this point, stuff like pointing and laughing at liberal/media hypocrisy, crowing about political correctness, invoking “Obama/Hillary did it too” arguments, mocking social justice groups who fear Trump—maybe these should no longer be our main priorities. Maybe this is the time to start directing most or all of our energy at the people who actually hold power now, and who are threatening to do some very unlibertarian things with it.

    I have to say, this brought me up short. I had just been tweeting or writing something about Obama’s executive order stranding Cubans. And now the Left is fully bent out of shape over Trump enacting policies that are not all that different from Obama’s! Y’all didn’t get upset about Obama (or Bush, or Clinton) issuing all those executive orders. You’re a little late to the party; ha! I win!

    But my man Radley Balko ruined all that. Because he’s actually right. The Economist wrote about “whataboutism” in 2008 to describe the long-time Soviet, and later Russian, tactic of answering a criticism of their actions with “Oh, yeah? What about….” and then some observation about the U.S. and its own bad actions in Vietnam, Latin America, or more recently in Iraq. Or, even more recently, in Ferguson, MO.

    Notice what Whataboutism does: It changes the subject and tries to establish a moral equivalence: that the actions being criticized are like previous actions not (sufficiently) criticized by the current critic (or even, in the case of Ferguson, MO, perpetrated by the critic). The point of Whataboutism is to impeach the moral authority of the critic. What Whataboutism never does, and cannot do, is evaluate the moral claim that was the actual center of the original point.

    So when Never Trump folks bring up

    My first thought is, “But what about Obama’s record on suppressing whistle-blowers and attempting to control agency communications?” And in a way that’s fair enough, because Obama was extraordinarily aggressive about using the “Espionage Act” against American media and whistleblowers. After complaining about the incursions on free speech, the press, and other basic freedoms for eight years of Obama (and, by the way, eight years of Bush) we may entitled to a few days of “Whataboutism.”

    But we’re done now. It’s time to take things on their merits, without changing the subject or feeling smug about liberal surprise and anguish at losing the election. If you actually support Mr. Trump, then that’s fair enough — you’re entitled. But if you don’t, then stop pretending that opposition mostly involves mocking the new allies who have finally awakened to the dangers of concentrated state power.

  3. Trade restrictions imperil our standard of living

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    A recent trip to Cincinnati afforded me the opportunity to check out the well-known Jungle Jim’s International Market just north of the city. As a lover of all kinds of food, I was promised that here I could find everything under the sun in one location. And that promise was largely fulfilled, as Jungle Jim’s is indeed an amazing place.

    From its fantastic wine selection to its charcuterie to its tanks of live fish to its exotic and obscure international produce to its international dry goods area with sections containing food from countries across the globe, including some of the smallest in Europe and Central America, Jungle Jim’s is a food lover’s paradise. It is a cornucopia. It is a giant global buffet table. The more time I spent there, however, the more I began to think about the physical space of that market as a metaphor for the globalized economy.

    In Human Action, Ludwig von Mises wrote that “The market is not a place, a thing, a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor.” That process of cooperation, of course, knows no national boundaries. The market, in Mises’s sense, extends across the globe, as exchange by comparative advantage creates a very fine division of labor, which in turn facilitates increased cooperation and prosperity.

    Jungle Jim’s is a physical manifestation of that process. The shelves are lined with goods that come from all over the world, and the shoppers are made up of people from all walks of life and from all kinds of geographical locations. We were two hours from home there, and since telling friends I was there, a number have told me that they’ve made it a point to stop there while driving through the Cincinnati area. I’m quite sure that market was economically and geographically diverse.

    It was also ethnically diverse. The selection of international foods and fresh meat and seafood attracts a wide range of customers who know they could only find what they wanted at Jungle Jim’s. For example, the seafood section was full of older Asian women who were clearly picking out the fresh items they needed for that night, and being very precise with how they wanted those fish filleted.

    Other customers were also clearly immigrants or descendants of immigrants looking for the food from their native lands. The ability to access ingredients or prepared food imported from all over the world makes their lives here in the United States that much better, whether they are newly arrived immigrants or long-standing citizens of any of dozens of ethnicities or nationalities.

    Jungle Jim’s is also a model of peaceful, tolerant interaction among diverse humans. Exchange doesn’t just make us better off, it makes us better people.

    In addition to the direct consumers who benefit from something like Jungle Jim’s, so do other producers. Although I cannot know for sure, I suspect that a number of the customers there that morning were chefs from local restaurants and catering businesses who know that they can buy the exotic ingredients they need, whether it’s sauces or spices or fresh produce. As consumers, of course, we enjoy our Chinese or Thai or Greek food, or American dishes influenced by those cuisines, but doing so is dependent on the ability of owners of those restaurants, regardless of their ethnicity, nationality, or citizenship status, to acquire those ingredients. For American chefs, the availability of imported ingredients at reasonable prices is crucial to pleasing their American consumers and making their businesses successful.

    Too often, we talk about international trade as being about the direct benefits to consumers. Those benefits are real. It’s true and important that Walmart can import goods from China and sell them to US consumers at low prices. It makes us, especially the least well-off among us, better off than we would be otherwise.

    But what that conversation forgets is that over half of US imports are actually inputs into the production of US-based firms. That’s about 8 percent of US Gross Domestic Product. Plus, many of those importers are also exporters. The firms who buy imported inputs use them to produce final goods here in the US then export some of them to the rest of the world.

    When we start to place limits on global trade through tariffs on imports, we are not just harming the producers of those goods in other countries. We are harming US manufacturers who rely on those imports for their production here (and the jobs that go with it). Raising tariffs on imported dry goods or produce makes food produced by American chefs at restaurants that employ Americans more expensive, thereby threatening the viability of those businesses and those jobs.

    If we raise the price of imported steel, we don’t just hurt foreign manufacturers, we hurt American firms who rely on that input for their production, including their exports.

    Standing in the crossroads of commerce that is Jungle Jim’s, I could not help think about these issues. Under one roof in the Cincinnati suburbs was a microcosm of the global economy: people with a variety of different wants and desires finding ways to mutually satisfy them through exchange. The building is the physical manifestation of the coordinating role of the market process. When we go to Jungle Jim’s, we see it. But when we move beyond a building, it becomes part of Bastiat’s unseen.

    The institutional framework of laws, rights, and finance that make exchange possible is the analogue in the market process to how the physical structure of the building makes possible the exchanges at Jungle Jim’s. The institutional framework is harder to see but is, in many ways, far more important. And because it’s harder to see, we don’t always understand how weakening it can destroy global exchange just as weakening a pillar or a beam at Jungle Jim’s could destroy the exchanges there.

    In fact, the invisible network of trade-facilitating institutions is what makes it possible for there to be a visible building in which trades take place. They are deeply intertwined.

    Every person who goes to Jungle Jim’s and enjoys its bounty should be considering the invisible structures that make the visible structure possible. The global market process, and the institutions such as the admittedly imperfect treaties like NAFTA and organizations like the WTO that facilitate it, are what make the local marketplaces possible.

    While you enjoy your French cheese, your Chilean wine, or your Bulgarian pickled mushrooms, consider the invisible network of institutions that make it possible for you to do so, and for your local chef to get them as well. Then consider how that invisible network does the same thing for the imported cars you buy and the imported components US car companies buy to make their cars.

    Because the market process of global trade is not a place or thing, it’s easy to forget and to take for granted. But like the marketplace of Jungle Jim’s, it cannot stand without its foundations. When we weaken those institutions and when we place limits on trade, we threaten the livelihoods and well-being of us all.

    This piece was originally published at the Foundation for Economic Education.

  4. Better market-oriented proposals that reduce income inequality

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    I was initially excited to see that progressive Dean Baker has written a piece on “Eight Market-Oriented Proposals That Reduce Income Inequality” for AEI. It begins promisingly by criticizing overly strict occupational licensing for high-skilled workers.  But it then studiously avoids the really big wins.  Namely:

    1. Immigration.  High-skilled immigration reduces conventionally measured inequality by making high-skilled workers more abundant relative to low-skilled workers.  And low-skilled immigration drastically reduces properly measured inequality by moving the absolutely poor to First World prosperity.  Estimates of the size of this effect are vast.

    2. Housing deregulation.  Letting developers build more housing in expensive areas of the country directly reduces inequality by making housing more affordable.  And it indirectly reduces inequality by making it more affordable to live in high-wage areas of the country.  Estimates of the size of this effect are also vast.

    To be fair, Baker does discuss occupational licensing as a barrier to high-skilled immigration.  But that’s only the tip of the immigration iceberg.  And his only “market-oriented proposal” for real estate, bizarrely, is a surtax on vacancy!  On the surface, he’s got a decent case:

    A vacant property tax can have a similar effect on the real estate market to that of reducing unemployment benefits and other supports on wages.

    But this misses the bigger picture: A vacancy tax also reduces the incentive to build housing in the first place, so it’s a lot more like a tax on firing workers than a reduction in unemployment benefits.  In the short-run, such a tax saves jobs, but in the long-run, it makes employers nervous about hiring.  A vacancy tax, similarly, keeps rental units on the market during bad times, but reduces the long-run payoff for construction.  Baker is flatly wrong to say, “Unlike most taxes, all the side effects of this tax are positive.”

    Governments around the world willfully create poverty and inequality.  I’m glad to see Baker calling attention to these ugly facts.  But focusing on relatively minor and not-so-market-oriented examples spreads the false impression that government-sponsored poverty and inequality is but a marginal issue.  Alas!

    This piece was originally posted at Econlog.

  5. War, diplomacy, and global uncertainty in the Trump era

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    Do Trump’s cabinet full of generals, his openness to torture, and the “peace through strength” message from the White House all signal that he plans to rely on military power to achieve international objectives? Or do his protectionist policies, his executive order restricting immigration, and his threats to impose tariffs indicate that the US will become more isolationist?

    While it’s difficult to determine what will happen in a Trump White House given these ideologically inconsistent policies, we can place them within the broader context of the present world order.

    The early 21st century marks a new era of globalization. Today the world enjoys an interconnectedness that is unprecedented in human history. World markets, high-speed communication, mass migration, and remarkable wealth development have benefitted many people, but not all of us, and not equally. Periods of high global economic integration leave behind those whose jobs go to places with cheaper labor. And this integration can also facilitate the concentration of wealth in the hands of the richest individuals.

    Presently, we are living through a backlash; in both the United States and Europe there is a rise of nativism and nationalism.

    As any history buff could tell you, this period looks ominously similar to the early 20th century, before World War I. At the time, many thought the globalized world could not fall into the destructiveness of war due to the economic costs associated with that folly.

    But it only took an individual Serbian nationalist, angered by the imperialism of the Austro-Hungarian Empire, to start one of the most destructive wars in Western history.

    If you’re not concerned yet, let’s examine the state of international relations between great powers. Trump has distanced himself from NATO allies, cuddled up to Putin, eliminated the Trans-Pacific Partnership trade agreement, and poked China in the eye by questioning the One China policy. One journalist describes Trump’s attitude toward China as “talk loudly.”

    These new stances occur during a period when there is one dominant power — America — and one rising power — China. Political scientist Graham Allison says that, in 12 out of 16 times when there was a dominant and a rising power, those states (or empires) went to war. The 4 times they did not go to war “required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged.”

    Considering Trump’s attitude, limited political experience, and his military build-up, it is unlikely that he will engage in the hard work of fundamentally altering the “attitudes and actions” of the United States. These new factors make Allison’s views all the more concerning. As he puts it,

    Based on the current trajectory, war between the United States and China in the decades ahead is not just possible, but much more likely than recognized at the moment… Moreover, current underestimations and misapprehensions of the hazards inherent in the U.S.-China relationship contribute greatly to those hazards. A risk … is that business as usual — not just an unexpected, extraordinary event — can trigger large-scale conflict.

    Needless to say, there are growing tensions between China and the United States. This occurs in an administration that wants to cut the State Department budget, which may cause a reduction in diplomatic efforts. Moreover, the new Secretary of State Rex Tillerson demonstrates a lack of diplomatic grace. With this in mind, I would like to leave you with a statement made in 2013 from the new Secretary of Defense, James Mattis: “If you don’t fund the State Department fully, then I need to buy more ammunition ultimately.”

  6. “America First!” and Anti-Social Communitarianism

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    The problem with communitarianism is that many communitarians make for bad community members. Many of them are “society first, individual second!” to the point of being anti-social. They aren’t the kind of people you’d want to live near.

    Look, I get why people like community. I live in a fairly tight-knit community myself. We have little parades and fun runs. Various civics groups throw get-togethers all year long. The PTA works miracles. People know their neighbors. We have block parties. People come out to watch the various dad bands (and even the occasional mom band) play at the pool club. It’s nice.

    But “American First!” isn’t just a plea to put America first or to treat our co-nationals as members of a giant community. Rather, it’s quite literally a threat, backed up with violence.

    Suppose you have a group of friends in high school. One of your friends starts to hang out with people in a different clique. You don’t like that–you think your friend isn’t taking your friendship seriously. So, you talk among yourselves and come up with a solution: You decide you’ll beat up your friend next time he tries to hang out with the other kids. (Or, alternatively, you decide you’ll let him hang out with the other kinds, but only if he first pays you $3000. Otherwise you’ll beat him up.)

    In this case, this doesn’t show that you really are loving, good friends who care a lot about community. Rather, it shows you are contemptible pieces of crap. You’re using anti-social methods to force people to maintain the kind of community you want. No reasonable person would want to be friends with you.

    Nothing changes when it comes to how we spend our money rather than whom we befriend:

    Random American: “Hmmm. I think I’m going to splurge on an entry-level luxury car. While Cadillac has made great strides over the past seven years, I’m going to go with a BMW 3-series instead of the Caddy ATS.”
    America First! Guy: “Are you kidding? Don’t you think you should buy American?”
    Random American: “Well, I considered it, but the 3-series better suits my needs and wants. I mean, I believe there is a time and place for charity, but I don’t buy cars out of a sense of charity.”
    America First! Guy: “You know what, bub? If you aren’t gonna buy American voluntarily, I’m going to make you do it. This here gun says you better buy that GM car, or otherwise I’m going to take $3000 out of your bank account to spend on whatever I damn well please. And you better hire an American to clean your house. And you better not rent your other house to some Haitian or Dominican. You put America first, or I’ll make you put it first.”

    Even if you think Random American should buy a GM car (a questionable claim at best), the America First! guy is a piece of garbage.

    If you think American First! justifies economic protectionism, then you aren’t worthy of being in community with anyone. You’re like a teenager who beats up your friends when they find new friends. You’re like a priest who beats up people when they convert to a different sect. You’re like an abusive boyfriend who threatens to beat up his girlfriend when she wants to see other guys. In short: You’re an abusive member of the community. You’ve shown your true colors. The louder you make your threats and the more America is filled with people like you, the less reason I have to care about America or want to put it first.

    This piece was originally published at Bleeding Heart Libertarians.

  7. You’re in Joseph Schumpeter’s economy now.

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    Just a decade ago, the smartphone sector was ruled by big dogs like Motorola, Nokia, Palm, and Blackberry. Before 2007, no one in that sector gave computer companies like Apple and Google much of a thought.

    Then came the iPhone and the Android operating system. Within a few short years, Google and Apple had almost totally displaced the old phone giants, and they got very rich doing so.

    That kind of turbulence is the new normal in our modern global economy. Innovators seem to constantly come out of nowhere to displace yesterday’s giants — only to immediately face threats of their own from still more scrappy upstarts.

    Put simply, we live in Joseph Schumpeter’s economy now. That Austrian-born economist famously called this state of productive upheaval the “perennial gale of creative destruction.” We can see this gale reverberating throughout the modern world, and many people now finally appreciate the crucial role of entrepreneur in this process — something Schumpeter made central to his theory of economic change.

    Indeed, on the occasion of his 134th birthday, we continue to see Schumpeter’s insights and influence all around us. Thomas K. McCraw began Prophet of Innovation, his magisterial biography of Schumpeter, by noting that “Schumpeter’s work was so powerful that today’s thinking about capitalism is in large part his — specifically, his emphasis on innovation, entrepreneurship, business strategy, and ‘creative destruction.’”

    Elevating the Entrepreneur

    While almost every economics program and business school promotes the centrality of entrepreneurialism to economic growth today, when Schumpeter was writing on these topics in the pre–World War II period, the entrepreneur was largely a forgotten figure in the simplistic neoclassical economic models of the day.

    Schumpeter swung an intellectual sledgehammer at those models and demolished them. Against those textbook theories and their simplistic obsession with static “equilibrium” and “perfect competition” end states, Schumpeter forcefully argued that economic change was instead “an organic process” that “never can be stationary.” Instead, he said, disequilibrium was the real key to the “this evolutionary character of the capitalistic process.” As Schumpeter explained in his 1942 masterwork, Capitalism, Socialism and Democracy:

    in capitalist reality as distinguished from its textbook picture, it is not [perfect] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

    “This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door” he argued. This is because the “ever-present threat” of dynamic, disruptive change “disciplines before it attacks.”

    Again, the spark that continuously reignites this process is the entrepreneur, who is always itching to do things different and better. “The function of entrepreneurs,” Schumpeter made clear,

    is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.

    Real Competition and Choice

    Schumpeter could have been describing any number of modern innovators who have pursued “an untried technological possibility” and ushered in one wave of creative destruction after another. Consider Uber, Airbnb, and the “sharing economy” more generally. A decade ago, no one had even heard of those companies or that term. Today, those two companies have a combined worth of $99 billion and have upended the sleepy old sectors of taxi cabs and hotel rooms.

    Who could have seen it coming? Certainly not all the state and local policy-makers who had spent decades micromanaging the transportation and hospitality sectors in the hope of somehow serving “the public interest.” Alas, all that they gave consumers was higher costs, less choice, and a whole lot of cronyism.

    It was only when Schumpeterian creative destruction entered the scene that things started to improve. By doing an end-run around the regulatory state, sharing-economy entrepreneurs have given the public their first taste of what real competition and choice look like.

    But even skilled business analysts and industry experts were caught off guard by these rapid changes. Most of them had taken their own static snapshot of those markets and not expected highly disruptive change to take hold any time soon.

    Of course, some people are just never happy, and now some policy-makers and regulatory-minded academics worry that new tech innovators are getting too big too quick, and they regularly lament what they regard as “monopolies” in the making.

    But Schumpeter had an answer for that complaint, too. He explained that uneven entrepreneurial gains — even supranormal short-term profits — must be tolerated if innovation is to occur. Innovators will only take risks if they can expect the potential for big gains from it. Attempts to curtail those potential benefits through hasty regulatory interventions or antitrust threats will sap the entrepreneurial spirit from the marketplace, limit technological innovation, and diminish the possibility of greater market dynamism and consumer choice over the long-haul.

    “In this respect,” Schumpeter concluded, “perfect competition is not only impossible but inferior,” precisely because it would sabotage “the most powerful engine of that progress … those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator.”

    The modern smartphone sector with its rapid innovation in devices and apps, validates this crucial insight.

    The pursuit of enormous potential profits is what fueled Apple’s and Google’s original daring dive into the risky waters of a seemingly stable and unassailable smartphone sector in the mid-2000s. And then the pursuit of profitability spawned a whole new constellation of “app” providers, who now give consumers access to millions of new mobile services at little to no cost.

    But again, Schumpeter had all this figured out 75 years ago when he noted that there was no discernable end point to the process of entrepreneurial-driven change.

    To survive, even the most successful companies have to be willing to quickly dispense with yesterday’s winning business plan before it is obliterated by the steamroller of relentless technological change and rapidly shifting consumer demand.

    Surprises are always right around the corner — yet they will only emerge if innovators are free of artificial constraint by government forces, which are always one or two steps behind fast-moving technological developments.

    Schumpeter’s Legacy

    It is for reasons like this that Schumpeter has such a diverse fan base these days. If anything, he perhaps commands too much attention relative to the many others — especially F.A. Hayek and Israel Kirzner — who also made essential contributions to “dynamic competition” theory and our understanding of the role that entrepreneurs play in catalyzing innovation and economic growth.

    But Schumpeter’s legacy is rightly cemented into the foundations of modern economics and business theory because, better than anyone before or since, he so eloquently defined and defended the inherently dynamic nature of economic change and spontaneous entrepreneurial activity.

    Of course, Schumpeter also feared that capitalism might sow the seeds of its own destruction by creating constituencies opposed to those continuous waves of disruptive change. To be sure, that’s an ongoing concern in our current era, as opposition to globalization and technological change seems to be gaining steam once again.

    Yet, the resiliency of the modern economy and the ongoing ingenuity of the innovators who continue to push it forward serve as a continuing testament to Schumpeter’s dynamic vision of economic progress and prosperity.

  8. What interest rates really are and what happens when governments change them

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    Interest rates are one of the most confused subjects in economics. What are they, really? And what is their role in economic crises like the housing bubble and crash of the 2000s?

    The first thing to clarify is what an interest rate is not. It is sometimes said by followers of John Maynard Keynes that the interest rate is “the price of money.” This should be said as clearly as possible: An interest rate is not the price of money.

    We can see this with an easy example. Assume that Smith lends 10 apples to Green in exchange for receiving 11 apples one year from now. It is clear that this is a loan agreement. It is also clear that the interest rate is 10%. However, there is no money involved.

    Would you say that because this loan takes place with apples then the interest rate is the price of apples? Probably not.

    In fact, interest rates are not even a monetary phenomenon. The apple-loan example could easily have taken place in a premonetary economy. This means that interest rates can exist before money does.

    The Price of Money and the Price of Time

    So, what is the price of money — and what are interest rates? First, the price of money, like the price of any good, is what an individual has to pay to buy money. When you go to your local coffee shop to get a coffee, you buy the coffee by giving money to the coffee shop. In that same transaction the coffee shop is buying money by selling coffee.

    To sell goods is to buy money. And when we buy a good we are selling money to the store.

    What then is an interest rate? We’ve already learned that an interest rate isn’t the price of money. Instead, an interest rate is the price of time.

    Consider again the apples example above where Green borrows 10 apples from Smith and has to return 11 apples a year later. If the loan were for more than 1 year, Green would probably have to return more than 11 apples.

    If you want me to lend you 100 dollars I could spend today, then you will have to give me back more than 100 dollars. How much more? That will depend on how impatient I am with regards to what I want to buy today with that $100. Just like the exchange of goods in the market determines the prices of goods, the exchange of time in the market determines the interest rates.

    Getting Interest Rates Wrong

    Where does the idea that the interest rate is the price of money come from? We can point to two sources. First, through Keynes’s influence — as wrong as Keynes was on this issue, his idea has been translated into economic models and many textbooks.

    Second, we cannot put time into a box and exchange it as we do with any other good, and so we cannot see time exchanged directly. This means that to make a time transaction we need the aid of another good. The most convenient good to use is the most commonly used good in the market, and that is money. That is why when you go to a bank they lend you dollars, not apples. Loans are done with money because it is convenient, not because interest rates are the price of money.

    Pizzas and Houses

    Now that we know that the interest rate is the price of time, we can say something about the effects of tampering with interest rates. Consider the most common case, which is when a central bank pushes the interest rate down. From the consumer point of view, the incentives to save are reduced. There is an increase in consumption at the expense of investment. This is because now the price to postpone consumption has been reduced.

    From the producer point of view, the cost of time has decreased. This is important, because producing goods requires time. To produce a pizza you need capital goods (an oven), intermediate goods (the cheese, etc.) and also time (20 minutes or so). But now time has a lower relative price with respect to other intermediate and final goods. This means that producers all across the economy are willing to use more time than they should in their production processes.

    New investment takes place in activities that take too long — more than they should at equilibrium. This is a misallocation of resources across time that can build serious imbalances not only into the real economy, but also in the financial markets where most of the time transactions take place.

    If in addition to the increase in credit there is a government regulation that channels most of the credit creation towards a specific market then a bubble might be created in that particular market. This, in a nutshell, is what produced the housing bubble and the subprime crisis in 2007–08.

    Because interest rates govern how resources are allocated in production across the whole economy, a mismanagement of their levels by a central bank can have very serious consequences for all of us.

  9. Trump is wrong: Muslim immigration is reducing radical Islamism

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    During his inaugural address, Donald Trump vowed to “completely eradicate” radical Islamic terrorism. Today, in its first moves intended to do that, the administration acknowledged its plans for a complete ban on immigrants and refugees from several majority Muslim countries, including Syria, Iraq, Iran, Libya, Somalia, Sudan and Yemen. Yet the new policy will work contrary to its goal. U.S. Muslim immigration is reducing radical Islamism and anti-Americanism around the world.

    For President Trump to fulfill his promise, America will need to do more than kill terrorists and arrest their collaborators. It will need to change the minds of many Muslims around the world about America and its institutions. Immigration is the best—perhaps the only—way that it can do this, and right now, U.S. Muslim immigration is reforming the religion, creating a new cohort of liberal Muslims able to combat Islamist arguments.

    For example, Pew Research Center polls reveal that an average of just 4 percent of Muslims in other countries consider homosexuality “morally acceptable,” compared to 45 percent among U.S. Muslims—81 percent of whom are either first or second generation immigrants. Only 20 percent of foreign Muslims believe that other religions can lead to eternal life, compared to 56 percent in the United States. Fully 55 percent of U.S. Muslims believe that the Quran should not be even a source among many for legislation, compared to just 15 percent elsewhere.

    This process of assimilation is actually accelerating as Muslim immigration to the United States has peaked. More immigration is not impeding integration. From 2007 to 2014, the share of U.S. Muslims who agree not just that homosexuality should be legal, but that it is “morally acceptable” rose from 27 percent to 45 percent. Pew also documents an 8 percent decline—from 50 percent to 42 percent—in the share of U.S. Muslims who believe that the Quran should be interpreted “literally.”

    These facts show that Americans as individuals are good at changing people’s minds. One Syrian refugee and her husband were resettled in Las Vegas—not really known as a haven for religious Muslims. “We had to Google it,” she told the Las Vegas Sun. “We read about its image as a sin city.” But even in the midst of the most extremely socially liberal environment in America, they were quickly won over. “When we came here, we liked it,” she said.

    America’s socially tolerant Muslims also reflect the fact that many Muslims who want to come to the United States are prone to accept our way of life from the start. “I immigrated to the U.S. and left my family and home because of my freedom,” one Syrian who escaped to Nashville said. “I also wanted to ensure such freedom is protected, not only for my children, but also for everyone else. I strongly believe in the U.S. Constitution and will fight to protect it, period! Everyone in my community felt the same way.”

    These warm feelings about the United States and religious freedom are being transmitted to families and friends around the world. “I want to keep painting the image to all of my family and friends about the goodness of the American people,” Marwan Batman told the Indy Star. “I wish other refugees would be able to come and experience the same things we have experienced … to find the same happiness we have found here.”

    This pattern is replicated repeatedly across the United States, where almost 20,000 Syrian refugees have come. “I didn’t know anything about Memphis,” one Syrian refugee told his local paper early last year. “The people have been excellent.” He wants everyone to know. “When I talk to my family they ask, ‘How is the treatment of Americans,’ and I say ‘it’s wonderful,’” he explained.

    America has changed a major world religion before. During the 19th and early 20th centuries, as Catholic immigrants poured in, its popes repeatedly condemned religious freedom as an anti-Catholic idea. Americans raised the alarm about this “invasion” of illiberal immigrants who operated their own schools and lived in separate neighborhoods.

    Yet it was this wave of immigration that changed the Church. Just after America elected its first Catholic president who vowed to fiercely defend the separation of Church and State, the Church evolved its view, pointing to liberal democracies as proof that freedom of conscience worked. American theologian John Courtney Murray even drafted its statement on religious liberty and convinced the Second Vatican Council to accept it in 1965.

    Something similar is already underway in a much smaller way among the 3 million U.S. Muslims. But for this movement to change Islam worldwide, there will need to be many more U.S. Muslims. Right now, they make up just 1 percent of the U.S. population, while Catholics represented a quarter in 1965.

    Rejecting Muslims from this part of the world will not make us safer. To “eradicate” radical Islamic terrorism completely, Trump will need more than just bombs and “extreme vetting.” He will need to convince many millions of people that freedom of religion and tolerance is better than jihad. He will need many more allies than he has now. Preventing potential allies from coming to the United States is no way to win this fight.

    This piece was originally published at Cato at Liberty.

  10. Obama’s cruel policy reversal on Cuban refugees

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    For some fifty years, the US has had a policy of welcoming refugees fleeing the brutal communist dictatorship in Cuba. In the 1990s, the policy was changed to “wetfoot, dryfoot,”under which Cubans who succeeded in reaching the United States would be allowed to stay, but those unfortunate enough to be caught at sea were barred. On Thursday, President Obama ended the wetfoot, dryfoot policy and made Cuban refugees “subject to removal,” like undocumented migrants from other countries. They might still gain official refugee or asylum status and be allowed to stay by proving that they have been personally targeted by the government on the basis of their political speech, religion or some other characteristics. But that is extremely difficult in most cases. For most Cubans, like other victims of communist governments, the main injustice they suffer is the everyday oppression meted out to all the regime’s subjects.

    There is absolutely no justification for Obama’s new policy. It is gratuitously cruel towards Cuban refugees, without creating any meaningful benefits. Despite some modest economic reforms, Cuba remains a repressive communist dictatorship whose people suffer massive oppression and poverty brought on by over fifty years of totalitarianism. Indeed, repression of dissent has actually increased since President Obama began to normalize relations with Cuba in December 2014.

    If anything, the United States would have done better to end the “wetfoot” portion of the policy and stop turning back Cuban refugees who have the misfortune to be caught at sea. Where a refugee happens to be found by US authorities is a morally arbitrary characteristic that in no way changes their status as victims of brutal tyranny.

    The main victims of Obama’s new policy will be Cubans denied the chance to seek freedom and opportunity. But native-born Americans will lose out as well. The hundreds of thousands of Cuban refugees who came to the US fleeing communism have made major contributions to our economy and society. As President Obama himself said just a few months ago: “In the United States, we have a clear monument to what the Cuban people can build: it’s called Miami.”

    President Obama and the US government are not responsible for the oppression that Cuban refugees are fleeing. But they are responsible for using force to compel refugees to return to a nation where further oppression is likely to be their lot. Such action makes the US government partially complicit in the injustice perpetrated by the Cuban regime.

    The main rationale for the policy change is that it is unfair to treat Cuban refugees differently from those fleeing other oppressive governments. As President Obama put it, we should treat them “the same way we treat migrants from other countries.” Ideally, we should welcome all who flee oppression, regardless of whether their oppressors are regimes of the left or the right, or radical Islamists.

    But the right way to remedy this inequality is not to treat Cuban refugees worse, but to treat other refugees better. And if the latter is not politically feasible, we should at least refrain from exacerbating the evil by facilitating the oppression of Cubans. It is better to protect Cuban refugees from the risk of deportation than none at all.

    If a police force disproportionately abuses blacks, it would be unjust to “fix” the inequality by inflicting similar abuse on whites or Asians. Inflicting abuse on other groups is both unjust in itself and unlikely to help blacks. Similarly, the injustice inflicted on refugees from other oppressive regimes cannot and should not by imposing similar injustices on Cubans.

    In his recent Farewell Address, President Obama rightly celebrated our history of welcoming “immigrants and refugees across oceans and the Rio Grande” and emphasized that “America wasn’t weakened by the presence of these newcomers; these newcomers embraced this nation’s creed, and this nation was strengthened.” Sadly, just two days later he himself violated the very principles he himself espoused.

    The president deserves credit for his previous efforts to protect undocumented migrants. But his legacy is tarnished by the gratuitous cruelty of what may well be his last major policy initiative.

    This piece was originally published at the Volokh Conspiracy at the Washington Post website.

  11. America changed, and the Rust Belt failed to adapt

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    On Friday, January 20, 2017, Donald Trump was sworn in as the 45th President of the United States. His victory in the 2016 election was a surprise to many, and his success in the so called Rust Belt made it happen. Wisconsin, Michigan and Pennsylvania all went to Trump, something that hadn’t happened for a Republican candidate since Ronald Reagan in 1984.

    Many of the voters in these states, especially those without college degrees, feel like economic opportunity is vanishing and the region’s population loss reflects that. The graph below shows the proportion of the country’s population that resided in Wisconsin, Illinois, Indiana, Michigan, Ohio, West Virginia, Pennsylvania and New York from 1950 to 2000. The orange line removes the population of New York City, since it is not part of the Rust Belt in the same way that Buffalo and western New York are and, unlike similar cities (e.g. Philadelphia), its population is such a large part of its state.

    Source: U.S. Census data and author’s calculations.

    In 1950, the Rust Belt, including New York City, contained over 38% of the country’s population and without it 33%. By 2000 the Rust-Belt’s share had fallen to 28% and 25% respectively.

    The population and economic decline of the Rust Belt is well known, and researchers have put forth a variety of reasons for it: the invention of air conditioning and people’s preference for milder winters and more suncheaper housing in the South and more market-friendly economic policies in other states are the most common.

    Some of these causes, like weather or geography, cannot be altered. Others are under the control of politicians, residents and firms. For example, every state in the Southeast is a right-to-work state, a policy that has been associated with more manufacturing activity, while only four of eight Rust-Belt states—Wisconsin, Indiana, Michigan and West Virginia—have adopted similar laws.

    But this doesn’t tell the whole story. The four Rust-Belt states with right-to-work laws didn’t start implementing them until 2012, while most of the Southeastern states have had the laws in place since the 1950s. This means Rust-Belt states have had a relatively unfavorable economic policy in place for at least the last 50 years. At this point, if Ohio, Illinois, Pennsylvania or New York ever adopt a right-to-work law they will merely be keeping pace.

    There is also evidence that the private employers and unions in the Rust Belt states contributed to the area’s economic decline. First, there was a general lack of competition in Rust-Belt industries such as steel, tires and automobiles in the decades following World War II. Each industry was dominated by a few domestic firms like U.S. Steel and General Motors (GM) and faced little foreign competition due to the destruction caused by the war. Since there was enough business to go around, firms felt little pressure to innovate or increase productivity.

    This reality was even recognized by the industries themselves. Alder et al. (2014) reprint a quote from the 1980 annual report of the American Iron and Steel Institute, which represented the large U.S. steel manufacturers:

    Inadequate capital formation in any industry produces meager gains in productivity, upward pressure on prices, sluggish job creation, and faltering economic growth. These effects have been magnified in the steel industry. Inadequate capital formation … has prevented adequate replacement and modernization of steelmaking facilities, thus hobbling the industry’s productivity and efficiency.

    In addition to the lack of competition for the products themselves, there was also a lack of competition in the region’s labor market. Two of the largest and most powerful unions in the country were based in the Rust Belt: the United Steelworkers (USW) and the United Auto Workers (UAW). These two unions were able to use the threat of widespread strikes to obtain higher wages, which increased production costs for Rust-Belt firms.

    This relationship can be seen in the figures below. The left shows the number of work stoppages involving over 1,000 workers per year from 1950 to 2000. The right shows the Rust Belt wage premium for manufacturing workers from 1950 to 2000.

    Source: Alder, Simeon, David Lagakos, and Lee Ohanian. Competitive pressure and the decline of the Rust Belt: A macroeconomic analysis. No. w20538. National Bureau of Economic Research, 2014.

    The number of work stoppages is a proxy for union power and as shown in the figure the Rust-Belt wage premium declines congruently with union power. Taking into account things like education and work experience (red line, right figure), manufacturing workers in the Rust Belt made about 13% more than similar workers in other regions from 1950 to 1980. As union power declined, this wage premium—and firms’ costs—declined along with it.

    The power of unions contributed to the lack of innovation and productivity improvements via what economists call a “hold up” problem. Firms bear the full cost of innovation and they know that any increase in profits due to productivity improvements will have to be bargained over with the unions. This makes them reluctant to invest, since they know unions will try to capture as large a share of the new profits as possible. After 1980 the “hold up” problem subsided as union power diminished.

    Alder et al. calculate that the lack of competition in both the output and labor markets of Rust-Belt industries can account for most of the decline in the region’s share of employment from 1950 to 2000.

    Unfortunately, by the time union power subsided and both workers and firms realized that they had fallen behind new foreign and domestic competitors it was too late. This result shouldn’t be surprising, as economist Joseph Schumpeter explained what happens to firms who fail to innovate in the face of competition back in 1942:

    The competition from the new commodity, the new technology, the new type of supply, the new organization….competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of existing firms but at their foundations and their very lives.

    American steel and automobile companies are not what they used to be and without the 2009 auto bailout two of the “Big Three” car companies—GM and Chrysler—might not exist.

    The people of the Rust Belt are disappointed with the American economy—and there are many policies not to like. Our tax code is a mess, economic freedom is declining and occupational licensing and zoning restrictions prevent people from getting better jobs and moving to better places. The first two are largely federal-level problems, but the last two, along with other sensible state-level reforms, are within the purview of Rust-Belt residents themselves. Thus, as with most things, some of the blame lies within.

    This article first appeared at Forbes.com.