Liberalism according to The Economist

Tuesday, November 12th, 2019


In Liberalism at Large Alexander Zevin explores the world according to the Economist:

He shows how its editors and contributors pioneered the revolving doors that link media, politics, business, and finance—alumni have gone on to such jobs as deputy governor of the Bank of England, Prime Minister of Britain, and President of Italy—and how such people have defined, at crucial moments in history, liberalism’s ever-changing relationship with capitalism, imperialism, democracy, and war.

A capsule version of this thesis can be found in the career of James Wilson, The Economist’s founder and first editor. Wilson, who was born in Scotland and became the owner of a struggling hatmaking business, intended his journal to develop and disseminate the doctrine of laissez-faire—“nothing but pure principles,” as he put it. He was particularly vociferous in his opposition to the Corn Laws, agricultural tariffs that were unpopular with merchants. The Corn Laws were repealed in 1846, three years after the magazine first appeared, and Wilson began to proselytize more energetically for free trade and the increasingly prominent discipline of economics. He became a Member of Parliament and held several positions in the British government. He also founded a pan-Asian bank, now known as Standard Chartered, which expanded fast on the back of the opium trade with China. In 1859, Wilson became Chancellor of the Indian Exchequer. He died in India the following year, trying to reconfigure the country’s financial system.

During his short career as a journalist-cum-crusader, Wilson briskly clarified what he meant by “pure principles.” He opposed a ban on trading with slaveholding countries on the ground that it would punish slaves as well as British consumers. In the eighteen-forties, when Ireland was struck with famine, which was largely caused by free trade—the British insisted on exporting Irish food, despite catastrophic crop failure—Wilson called for a homeopathic remedy: more free trade. With Irish intransigence becoming a nuisance, he advised the British to respond with “powerful, resolute, but just repression.” Wilson was equally stern with those suffering from rising inequality at home. In his view, the government was wrong to oblige rail companies to provide better service for working-class passengers, who were hitherto forced to travel in exposed freight cars: “Where the most profit is made, the public is best served. Limit the profit, and you limit the exertion of ingenuity in a thousand ways.” A factory bill limiting women to a twelve-hour workday was deemed equally pernicious. As for public schooling, common people should be “left to provide education as they provide food for themselves.”

Start with a big blatant neglected fact

Friday, November 8th, 2019

How does Bryan Caplan pick book topics?

How do I pick book topics? On reflection, I usually start with what appears to be a big blatant neglected fact. Then I try to discover whether anything in the universe is big enough to explain this alleged fact away. If a laborious search uncovers nothing sufficient, I am left with the seed of a book: One Big Fact that Overawes All Doubts.

Thus, my Myth of the Rational Voter starts with what appears to be a big blatant neglected fact: the typical voter seems highly irrational. He uses deeply flawed intellectual methods, and holds a wide range of absurd views. Twist and turn the issue as you please, and this big blatant neglected fact remains.

Selfish Reasons to Have More Kids, similarly, begins with a rather different big blatant neglected alleged fact: Modern parenting is obsessed with “investing” in kids’ long-run outcomes, yet twin and adoption researchers consistently conclude that the long-run effect of nurture is grossly overrated. Yes, the latter fact is only “blatant” after you read the research, but once you read it, you can’t unread it.

What’s the One Big Fact that Overawes All Doubts in The Case Against Education? This: education is highly lucrative even though the curriculum is highly irrelevant in the real world. Yes, it takes a book to investigate the many efforts to explain this One Big Fact away (“learning how to learn,” anyone?). But without One Big Fact, there’d be no book.

Finally, the big motivated fact behind Open Borders is that simply letting a foreigner move to the First World vastly multiplies his labor earnings overnight. A Haitian really can make twenty times as much money in Miami the week after he leaves Port-au-Prince – and the reason is clearly that the Haitian is vastly more productive in the U.S. Which really makes you wonder: Why would anyone want to stop another human being from escaping poverty by enriching the world? Giving this starting point, anti-immigration arguments are largely attempts to explain this big blatant neglected fact away. Given what restrictionist arguments are up against, it’s hardly surprising that they don’t measure up.

On reflection, my current book project, Poverty: Who To Blame doesn’t seem to fit this formula. The book will rest on three or four big blatant neglected facts rather than one. Yet perhaps as I write, One Big Fact that Overawes All Doubts will come into focus…

Corruption may or may not be illegal

Sunday, November 3rd, 2019

Michael Munger explains Gordon Tullock’s joyfully contrarianism thoughts on corruption:

Corruption may or may not be illegal, but it’s always a bad thing. Isn’t it?

Some think of corruption — the misuse of public trust in the powers of political office for private gain — as comparing (a) the honest services and choices of a public official with (b) actions “corrupted” by considerations that are not legitimate. Harvard law professor Lawrence Lessig has claimed that a decision is corrupt if the official is improperly, even if only subtly, influenced by the anticipation of some sort of economic gain or loss. Fordham University law professor Zephyr Teachout has claimed that if a public official acts in consideration of a private benefit outside of the standard compensation for his or her office, the action is automatically corrupt.

Suppose, though, you are an entrepreneur in a developing nation and you have a good idea for a new company. It normally takes six months to have a telephone or internet line set up, because the state monopoly utility company is notoriously inefficient. But if you pay lagay (“speed money” in Tagalog), or if you khilana para (“feed him” in Hindi), a happily willing, competent work crew will be there tomorrow. Who will actually cough up the cash? Whoever values the service most. Which means that the most economically productive firms and the best new ideas will get to jump the queue.

In a system with bad rules or limited state capacity, tacit endorsement of corruption improves the working of the system. The more inefficient the system, the greater the efficiency increase in the near term, as scarce resources are directed first to higher-value uses.

But as Tullock asks, “And then what?” In this case, two things happen. First, because the scarcity of the resources is artificial and discretionary, the state actors who formally and informally control those resources will adjust access strategically so as to increase the quantity of “rents” (i.e., undeserved benefits) they receive. In my example, the phone company might announce a mandatory two-year waiting period, increasing the value of access to the “informal” workaround of bribes. Second, those with control over the resources and thus access to the rents will start competing — very likely by offering bribes of their own — to maintain their lucrative positions.

Tullock noticed this phenomenon for himself at several points during his career. When he was briefly in private practice as an attorney in Chicago, his job as a junior associate involved paying bribes to minor officials in the Kelly-Nash political machine to ensure that his firm had fast access to records that might otherwise take weeks to secure through normal channels. Later, while working for the U.S. Foreign Service in Tientsin, China, he had the experience of being there on the ground during the Communist takeover of 1948–49.

Tullock was struck by a presentation from an academic who decried the corrupt practices of the Chiang Kai-shek regime in Taiwan but lauded the new Communist regime on the mainland. In particular, the academic pooh-poohed the supposedly “restrictive” travel policies of the Communists, noting that it was easy to bribe officials to obtain passes.

To Tullock, both regimes seemed corrupt. But he also realized that corruption, far from being an immediate problem, was the only thing that made the cumbersome Rube Goldberg governing mechanisms work at all. “While corruption usually meets with disapproval,” he wrote in Contemporary Economic Policy in 1996, “it may have some redeeming features. It may make possible smaller or no salary payments to officials who, if carefully supervised, will still carry out their functions on a fee-for-service basis. The purchase of government jobs usually is thought to be corrupt, but in some cases, it has worked out quite well.”

He filed this lesson away in the late 1940s and often came back to puzzle over it for the next 65 years. If corruption is actually a benefit — at least in countries with bad institutions or sharply limited state capacity — then what is the problem? All we need to do is suggest that developing nations cultivate corrupt systems and voilà! Problem solved.

Of course, that’s not right, and this realization is what led Tullock to his signature contribution to the study of public policy: the problem of “rent-seeking.” In China, he said, officials write laws with the explicit expectation of selling “permits” that would exempt the “customers” from having to obey the regulation. In addition, officials may purposely limit the total number of exemptions so they can auction them off to the highest bidder. In the short term, corruption is a workaround for bad government, but in the long run corruption locks in bad government and encourages abuses of state power.

Tullock used the example of an official in Fukien (now Fujian), a province from which many citizens illegally traveled to Indonesia to work, returning with substantial sums of cash and goods. Local officials set up elaborate programs under which going abroad to work was technically not allowed but in fact actively encouraged for those who could expect to earn good wages. Officials charged licensing fees that were high enough to substantially enrich the “sellers,” but they made sure the cost was not so high that it would deter workers from traveling abroad in the first place.

The problem is that the system became firmly entrenched, and the bribes came to be capitalized in the “prices” for getting a job as a local official in Fukien. In fact, the “salaries” of government officials could be rendered as negative numbers. The opportunity to collect bribes was so lucrative that the positions were essentially sold as franchises, with officials paying their superiors, who paid their superiors, and so on.

This system, once in place, is nearly impossible to root out. In open, noncorrupt systems, parents might save or borrow to pay for law school or some other training for their children. But in a corrupt system, people save or borrow to pay the bribes necessary to get the kinds of jobs where bribes from citizens provide a good living. If a new, reform-oriented government comes into office, the reaction from government officials is likely to be fierce, possibly violent. After all, they paid for their corrupt jobs fair and square, and they expect to be able to collect.

“Evidence suggests that officials tended to draw a large part of their personal income from bribes,” Tullock wrote in his 1996 paper. “Indeed, it is almost certain that once a government structure has been set up so various people make profits, changing the structure in such a way to shrink the profits will be extremely hard, regardless of whether the profits are legal or not. Firing civil servants may be even harder than firing college professors.”

A passage from a recent New York Times article on illegal “sand-mining” in India puts the situation in stark relief: “Construction is the business where criminals have the best opportunities to launder the most money, [one real estate agent] explained, and a cascade of bribes go ‘to the topmost levels in the government.’…You pay 6 percent in bribes up front. Then, after the first payment, you pay another 7 percent, half of which goes to the state’s top politicians. The development authority’s junior engineer gets 3 percent. The associate engineer gets 1.5 percent. The senior manager gets 3 percent, and so on — until the total reached an astonishing 30 percent.”

For Tullock, the really interesting question is not why so many governments are corrupt. Instead, the puzzle is how any government manages to solve this problem and avoid corruption. The benefits, to those in power, of creating arbitrary restrictions and then selling indulgences to exempt the wealthy and powerful seem irresistible. The U.S. Internal Revenue Code is replete with relatively high income tax rates, at least on paper. But as each industry or investment group pays its “bribe” to Congress by organizing voting support, making campaign contributions, and the like, the actual rates to which it is subject are reduced, often sharply, via esoteric subsidies, tax credits, or deductions.

In the early 16th century, Martin Luther recognized this kind of corruption in the Catholic Church. In his “Thesis 27,” Luther complained of priests “who say that as soon as the coin jingles into the money box, the soul flies out of purgatory.” He was referring to an actual jingle, dating to long before Mad Men — perhaps the first ever used in advertising. A little rhyme, attributed to a German monk named Johann Tetzel (1465–1519), translates to: “As soon as the money in the chest rings, a soul from purgatory to heaven springs.” The very idea of judgment had been hijacked by some members of the Church as a way to increase their revenue, selling “Get out of purgatory” cards.

A lot of work has been done since Tullock first wrote about this problem. Our understanding of the temptations of corruption, especially in developing nations — he called it “the transitional gains trap” in a famous article in 1975 — is now standard economics. But Tullock saw the problem clearly in the 1950s.

Somehow nationality is the final frontier

Friday, November 1st, 2019

Zach Weinersmith‘s Saturday Morning Breakfast Cereal comic doesn’t normally cover political topics, but his new Open Borders graphic novel — which is certainly graphic, but doesn’t appear to be a novel — with Bryan Caplan has just come out, and it does deal with a contentious topic.

“Thanks to the power of Zach Weinersmith, it’s fun to read for all ages.”

SMBC Open Borders Concerns

They discuss the book here:

Only heartless trolls worry about costs

Wednesday, October 30th, 2019

Michael Munger looks back at the joyful contrarianism of Gordon Tullock, starting with his insights into safety regulations:

Should governments mandate more safety in products? The usual terms of debate weigh reduced injuries — the “human toll” — against increased cost, with only heartless “rational choice” trolls actually worrying much about costs. The idea that perfect safety is morally undesirable, because such policies have enormous opportunity costs, is obviously, annoyingly important — and a big part of the reason economists often end up standing alone at parties, studying the wallpaper pattern.

Safety is valuable, of course. But economists pitch their arguments “at the margin,” meaning for the last increment. The first improvements in safety are cheap and uncontroversial: reliable brakes, turn signals, seat belts, safety glass in windshields. The next increment — airbags, anti-lock braking systems — comes at much greater cost and with a smaller associated reduction in injuries. Ultimately, the only way to make cars completely safe is to park them and throw away the keys. Driving is dangerous.

Tullock’s contribution was to ask, “And then what?” The problem is worse, actually much worse, than the increasing marginal cost of safety improvements. The safety of the car, after all, is just one factor; drivers and their attitudes toward danger are the key missing variable. The state can only mandate the safety of the car. Ultimately, the driver’s behavior determines the risk of driving.

This observation is now sometimes called the “Peltzman Effect,” after the University of Chicago economist Sam Peltzman, but Tullock had argued some versions of it for decades. As the University of California, Irvine economist Richard McKenzie recalls it, Tullock noticed that safer cars reduced the costs of accidents for drivers. If the government “subsidizes” accidents by mandating airbags, there will be more accidents. Worse, because of increased automobile speed and recklessness, there will be more pedestrian injuries and deaths. Safer cars mean more injuries.

Tullock’s famous counterproposal was to place a long, sharp dagger firmly in the center of the steering column. His earliest notion of this was to have the tip pointing back and locked one inch from the driver’s chest. By the time I talked to him about it, in the 1990s, the idea had evolved to work more like an airbag, so that the dagger would be hidden but would deploy with explosive force in the event of an accident.

Calling this conclusion counterintuitive is an understatement — but there is an important insight underlying Tullock’s drollery. The risk of injury is jointly determined by the behavior of all the people who are driving in a particular area. If I’m aggressive and cause a wreck, I’ve imposed additional risk on you. If safety “improvements” subsidize risk-taking, and some — not all, necessarily, just some — people drive more aggressively, then the observed reductions in injuries from safer cars will be much less than regulators expect. Worse, no individual driver can, by behaving safely, escape these bad effects. Safety regulations have negative externalities.

The most annoying thing about Tullock was that he was usually right. He was even right about car safety regulation (though maybe not about the dagger!): According to the American Automobile Association, there have been substantial increases in driver aggressiveness since 2000, with eight out of 10 drivers admitting to having intentionally tailgated another car and nearly half saying they have bumped, rammed, or gotten out of their cars to threaten the occupants of another vehicle. While the direct causal mechanism is complex, this increase in aggressiveness tracks the imposition of universal requirements for airbags and anti-lock brake systems in 1998.

This problem is borne out in the real “national sport” of America, NASCAR. Starting in 1988, the racing entity imposed “restrictor plates” as a safety measure, limiting the airflow into an engine (and therefore the horsepower, and speed, of cars). Restrictors were required in response to the horrific “going airborne” May 1987 accident of Bobby Allison at Talladega, where the car flew into the upper restraining fence and disintegrated, injuring five spectators, including one who lost his eye. But two refereed journal articles, one in the Southern Economic Journal in 2004 by J.B. O’Roark and W.C. Wood, and one in 2010 in Public Choice by A.T. Pope and R.D. Tollison, concluded that safety improvements had increased the number of crashes and multi-car pileups in the sport (though they had not affected the total number of deaths).

That is what you would expect. If speeds are suppressed and safety equipment is improved, the risks of death and serious injury are lowered. The result should be increases in risky behavior by drivers, including close drafting and “trading paint,” the euphemism NASCAR uses for high-speed bumping.

In February 2018, NASCAR switched from restrictor plates to the more precise and consistent “tapered spacers,” which have the same effect and the same “safety” rationale. The 2018 NASCAR “Cup Series” champion, Joey Logano, was clear about the likely outcome: “I totally expect to crash more cars,” the Associated Press quoted him saying. “As cars are closer and drivers are more aggressive, a mistake will create a bigger crash. We can’t get away from it.”

Of course, Tullock would ask, “And then what?” NASCAR is not stupid; it may not be an accident (sorry) that there are more crashes with the same level of driver safety. That may very well be the point: NASCAR fans come for the racin’, but they stay for the wreckin’. Using a “safety” rationale — particularly one that really does reduce injuries slightly — as a means of increasing the number of wrecks makes a lot of economic sense. If the authorities really wanted to prevent accidents, NASCAR would put big daggers in steering columns, not little tapered spacers in carburetors.

Most wealth isn’t devoted to extravagant consumption

Monday, October 28th, 2019

Everyone, regardless of their income and wealth level, would take a hit from the Democrats’ proposed wealth tax:

That’s because, contrary to what American progressives believe, most wealth isn’t devoted to extravagant consumption. Instead, it’s invested in companies; it’s used to fund research and development that will create better goods and services for consumers; it serves as the capital that innovators and producers borrow from banks to grow their businesses. In other words, most wealth is used to fuel other wealth-producing activities that improve well-being.

So whether a wealth tax will create a real disincentive to accumulate capital or force rich taxpayers to send a larger share of their money to the IRS, less capital will be available for everyone in the economy to use for their own businesses and training. That means that many Americans beyond the super wealthy will get burned by the tax.

This negative consequence is a reason why so many countries that had wealth taxes in the 1990s have since abandoned them. The cost of implementing a wealth tax and annually assessing assets often costs more than the tax actually raises in revenue. In France, for instance, the administration cost was double the revenue raised. As such, it’s not surprising that the country dropped its wealth tax in 2018.

China will spend money and endure a dirty industry

Sunday, October 20th, 2019

Coal-burning China’s embrace of electric vehicles may also be more about money than the environment:

China produces less than 5% of the world’s oil — used in combustion engines — but about 45% of the globe’s coal, used in electricity production for EVs. In much the way that the U.S. is the world’s largest user of homegrown crops for motor fuel despite widespread criticism of ethanol subsidies as costly and environmentally damaging, China will spend money and endure a dirty industry to be energy independent as well.

More than that, though, Beijing wants to dominate tomorrow’s car industry. China’s opening to the West came too late for it to be a major exporter of internal combustion engine vehicles, but it has made aggressive moves to dominate battery production, including securing sources of key metals. Through lavish subsidies it already has by far the world’s largest domestic EV market.

Doesn’t that sound laissez unfair?

Saturday, October 19th, 2019

The March of History pits Mises vs. Marx in a Hamilton-esque rap battle:

Workers of the world — ASSEMBLE!
It’s time for the ruling classes to tremble.
I’m the people’s hero, the MVP:
M – A – R – X! Yeah, you know me!

Let’s go back to when men were free.
We hunted and gathered communally.
But get ready, ’cause here comes the twist,
A villain appears, called a “capitalist”.

He puts the proletariat — that’s US — in chains,
exploits our labor, and pockets the gains.
Though slick ads he trick lads and ladies in kind,
selling fake needs he poisons our hearts and minds.

He rots our soul through alienation
pursuing limitless accumulation.
He works us into an early grave,
through debt, steals back the money we save.

Greed is the gospel! Profit? GOD.
The rich get richer through graft and fraud.
The poor get poorer, but YOU don’t care.
Doesn’t that sound laissez unfair?

200 years I’ve been singing this song,
Now my chorus is 99% strong.
The revolution’s here. It’s time to repent.
Your moment is over — your capital’s SPENT!

A Nobel-winning economist goes to Burning Man

Wednesday, October 16th, 2019

Economist Paul Romer went to Burning Man:

It was the first time that Mr. Romer, the former chief economist of the World Bank, had attended the annual bacchanal.

A week earlier, there was hardly anything here, in the remote desert of northwest Nevada. Then tens of thousands of people had just shown up, many in the middle of the night. They had formed an instant city, with a road network, and a raucous street life, and a weird make-do architecture.

[...]

To economists, cities are labor markets. And labor markets can’t function when there are no roads leading workers out of their favelas, or when would-be inventors never meet because they live in gridlock.

Mr. Romer’s answer is to do with this moment what Burning Man does every summer: Stake out the street grid; separate public from private space; and leave room for what’s to come. Then let the free market take over. No market mechanism can ever create the road network that connects everyone. The government must do that first.

[...]

Most of the structure that has been added since feels invisible to the people who come: the streets that are surveyed to be exactly 40 feet wide, the plazas that steer people together without crowding them, the 430 fire extinguishers around town, each tracked by its own QR code.

[...]

After 1996, the founders also began putting up a fence around the city, a pentagon with perfectly straight sightlines. Nominally, it is a “trash fence,” catching debris before it blows into the desert. But it also defines the edge of the city, so that it is possible to stand at the boundary line and stare out into an open desert uncluttered by tents or plywood art. The fence is an urban growth boundary. It is as much about keeping out interlopers as keeping people in.

The whole point is sacrifice

Sunday, August 18th, 2019

Is recycling useful, Michael Munger asks, or is it garbage?

And “recycling” is, after all, not just one homogeneous activity, but a whole collection of possible streams of waste or resources, each of which has to be evaluated separately. Should we recycle aluminum cans? Probably, because the price of recycling aluminum compares very favorably to using virgin materials, the mining and smelting of which are expensive in terms of energy and harmful to the environment.

Should we recycle toilet paper? We could, at some price. But it’s likely not worth it, because it can be composted, it would be awfully hard to clean and sort, and in any case paper products are actually a renewable resource, rather like wheat. You rarely hear someone saying, “Save the wheat! Give up bread!” But that kind of argument is often made for paper, even though the trees grown to produce pulp are simply a fast-growing crop grown on farms expressly for that purpose.

For recycling to be a socially commendable activity, it has to pass one of two tests: the profit test, or the net environmental-savings test. If something passes the profit test, it’s likely already being done. People are already recycling gold or other commodities from the waste stream, if the costs of doing so are less than the amount for which the resource can be sold.

Voluntary “recycling” like scrap iron or aluminum businesses will take care of that on their own. The real question arises with mandatory recycling programs — people recycle because they will be fined if they don’t, not because they expect to make money—or “voluntary” recycling programs such as those at universities or other communities where failure to recycle earns you public shaming.

For coercive or social-pressure recycling to make sense, three things have to be true.

1. Scale. You need substantial amounts of the “input,” or garbage. Hauling small amounts is wasteful. Many suburban neighborhoods in the U.S. have small amounts of recycling out by the curb, and fossil fuel–powered trucks come by spewing greenhouse gases. Part of the reason wheat and pork bellies are valuable is that the average costs of transport and handling are low, because the scale is so large. I once watched a young woman in Vitacura, Chile, wait in line in her idling auto for more than 10 minutes so she could park and put two two-liter plastic bottles into a recycle bin. That’s not economics, that’s a religious ceremony. Without scale, most recycling harms the environment.

2. Convenience. There is one resource we can’t get more of: time. Our lives pass quickly, and we have many things to do. But we are asked to donate our time to recycling, to “save” resources. We are asked to wash out and clean the stuff (I actually know people who run their garbage through the dishwasher, so it will be clean. Think of the time, coal-produced electricity, and hot water that uses.) Then we are supposed to sort the garbage and deliver it to the recycling facility.

Why isn’t this done at the recycling facility? Because the government realizes (correctly) it is too expensive, and the costs would swamp the tiny savings, if there are any, in doing recycling in the first place. But if the costs of cleaning and sorting are too great at scale, with commercial resources, why isn’t the sum of the individual costs of cleaning and sorting, in each household, even greater?

If you add up the time being wasted on recycling rituals, it’s even more expensive to ask each household to do it. The difference is that this is an implicit tax, a donation required of citizens, and doesn’t cost money from the public budget. But time is the least renewable of all resources; demanding that it be donated to a pointless or even harmful ritual such as recycling glass is government malpractice.

3. Environmental savings. For recycling to make any sense, it must cost less to dispose of recycled material than to put the stuff in a landfill. But we have plenty of landfill space, in most of the country. And much of the heaviest material we want to recycle, particularly glass, is chemically inert and will not decompose in a landfill.

Ground “recycled” glass, or “cullet,” is less useful than the virgin silica sand from which glass is made. Cullet has impurities and chemical colorings that make it difficult to use for glass without further processing. To be clear, then: landfilling glass does no environmental harm, and the glass is more expensive than the virgin material it is supposed to replace. Further, glass is heavy, and carting it to distant processing centers, in any but the most urban areas, pollutes the air.

So, is recycling useful? As I said at the outset, for some things it is. Aluminum cans and corrugated cardboard, if they can be collected clean and at scale, are highly recyclable. I myself, on finding an aluminum can in the garbage, will generally take it out and try to find a recycle bin. It seems dumb to waste the aluminum, even though the value of the aluminum in one can is less than 2 cents.

But for most other things, recycling harms the environment. I’m not (just) saying it’s costly. I’m saying recycling is harmful. If you care about the environment, you should put your bottles and other glass in the regular garbage, every time.

[...]

Once you begin to think of recycling as a symbol of religious devotion rather than a pragmatic solution to environmental problems, the whole thing makes more sense.

As in any religious ceremony, the whole point is sacrifice: Abraham was ready to slay Isaac; Catholics give up meat during Lent; Muslims fast all day during Ramadan. And a young woman in Chile with two two-liter bottles sits in her car in line, knowing she is publicly visible and that her green moral virtue is apparent to everyone.

A reproach to every existing government

Friday, August 2nd, 2019

The theory of market failure is a reproach to the free-market economy, but, Bryan Caplan notes, it’s also a reproach to every existing government:

How so? Because market failure theory recommends specific government policies — and actually-existing governments rarely adopt anything like them.

What do I have in mind?

1. When markets produce too much of something, market failure theory tells governments to impose corrective taxes that correspond to the severity of the excess — then let people do as they please. In the real world, in contrast, governments normally pass a phone book’s worth of regulations. They rarely consider the cost of the regulations, and almost never just let people bypass regulations by paying a high fee. Thus, you can’t buy your way out of an Environmental Impact Statement or heroin prohibition — and if the theory of market failure is right, this rigidity is deeply dysfunctional.

2. When markets produce too little of something, market failure theory tells governments to provide corrective subsidies that correspond to the severity of the shortfall — then let people do as they please. In the real world, in contrast, governments tend to directly run industries with alleged positive externalities. Public education and health care are the obvious example, but the same goes for national parks, government lands, etc. Furthermore, government firms routinely offer even non-rival products for gratis or next-to-gratis — even when the products have clear negative externalities such as road congestion and subsidized energy.

3. While the theory of market failure abhors monopoly, actually-existing governments do much to stifle competition. This is most grotesque for real estate and immigration, which most governments view with dire suspicion, but perhaps most blatant for occupational licensing. Again, if negative externalities were the real rationale for these restrictions, governments would just impose taxes — then let everyone build, move, and work as they please.

Most people tacitly assume a more elaborate counter-factual

Wednesday, July 31st, 2019

Does burning your money make you poor?

Almost everyone responds, “Obviously.”  And in a sense, it is obvious.  If you take all your money and burn it, you’ll be hungry and homeless as a result.  QED.

In another sense, though, burning money might not change a thing.  How so?  Suppose if you don’t burn your money, you flush it down the toilet instead.  Empirical researchers who look will detect zero effect of burning money on your standard of living.  Why?  Because your Plan B is just as impoverishing as your Plan A.

As far as I know, no researcher bothers to study the connection between burning cash and living in poverty.  But researchers do study analogous issues, like: Does becoming a single mother lead to poverty?  At least according to some studies, once you adjust for preexisting characteristics, women who have kids out of wedlock are no poorer than women who don’t.

How is this even possible?  You have to think about what single moms would have done if they hadn’t gotten pregnant.  Maybe they would have just spent more time hanging out with irresponsible boyfriends and partying.  If so, researchers will detect no effect of single motherhood on poverty.

There’s nothing literally wrong with this result, but it is easily misinterpreted.  Key point: Most people who affirm that “Single motherhood causes poverty” tacitly assume a more elaborate counter-factual.  Something like: “Continuously working full-time without getting pregnant.”  And if that’s the counter-factual, “Single motherhood causes poverty” is almost as undeniable as “Burning money makes you poor.”  Empirical research can and occasionally does disprove common sense.  But more often empirical research just addresses a different but superficially similar question.

A synthesis between cosmopolitanism and nationalism

Monday, July 29th, 2019

Razib Khan discusses the emergence of a cosmopolitan class in th 19th-century Europe — in part to emphasize that it was not purely a matter of Jewish assimilation:

The great families of Europe which came to dominate the polities of the continent after the fall of the Roman Empire were not tied to one particular national identity or ethnicity. The Anglo-Norman kings famously spoke French, and many of them lacked facility with English. Meanwhile, the mother of the king of France was from Kiev, and, and half Russian and half Swedish. Queen Elizabeth’s family consciously shed their German affinities in the early 20th-century, while her husband’s family had the throne of Greece for several decades, though apparently, he considers himself “more Danish” than anything else.

In the Islamic world for centuries Egypt was ruled by a separate caste of Turks and Circassians, the Mamelukes, even after the Ottoman conquest. The famous Safavid dynasty, which converted Iran to Shia Islam in the 16th-century, was Azeri Turk in language, but their ancestry seems to have been a recent mix of Kurd, Turk, and Pontic Greek. And let’s not forget India, where Turkic and Afghan Muslims ruled vast swaths of the subcontinent for centuries.

The period between 1815 and the present is unique in the supremacy of a particular national idea. It also coincides with the high tide of European dominance in the world. The world is going through economic and cultural rebalancing, but we don’t have the language or the expectations to understand this. The current age is one of globalization, though not necessarily any greater than the decades around 1900. But that was a more limited, European world, with the emergence of a trans-Atlantic elite (remember Winston Churchill’s mother was American). Today we have an international class of people with passports from specific nations, but global affinities. I do have friends who express more fellow-feeling and comfort with upper-middle-class elements in Dubai, London, and Singapore, than with their own fellow citizens in the hinterlands. This is partly a function of the importance of travel to the new sub-elite. And yet in the United States, 64 percent of people do not have a valid passport.

The reality is that people with passports are not going away. And the people without passports are not going away. Both of these groups have to accommodate the contingent historical reality that Westphalian nation-states exist, and we aren’t going to instantaneously create a new political arrangement which can conveniently integrate both groups. The problem with the nature of elite media, academia, and cultural and economic productivity producers is that passport holders dominate these sectors. In the 1990s this led to a delusion that the nation-state would dissolve in substance, if not de jure, just like the state boundaries in the USA are basically administrative realities.

That’s not happening. And the non-passport holding class has been negatively affected in various ways by the efficiencies of globalization, in some ways in absolute terms, but definitely in positional terms. Mainstream parties of the Left and Right, being of the passport holding class, hoped that these consequences would not be extreme. But they have been extreme. And the late 2000s financial crisis undermined what credibility the elite among the passport holding class did have.

At some point, the passport holders need to put neoclassical economic textbooks to the side and accept that there are non-economic variables which generate social cohesion and positive externalities, which allow for prosperity. And the acidic impact of globalization is eroding those factors across the developed world, resulting in the rise of populism.

But just as the medieval Catholic commonwealth is not coming back, the national systems of 1950 are not coming back. The current wave of populists is in denial, and refuses to engage with the global oligarchy’s existence, along with the much larger sub-elite of the new class global upper-middle-class. At some point, a reckoning will occur because the passport holders pay a disproportionate amount of the taxes.

What we need to see in the next few decades is a dialogue, and synthesis, between global cosmopolitanism and regional nationalism. The very forces of global efficiency have now shown us that the gains to trade and integration are not equally distributed, and the non-passport holding class, the populist voter, will never join the universal global class. But neither is the second era of globalization going to end as the first did. We are simply too integrated, and travel and communication are too easy.

Every era’s monetary institutions are virtually unimaginable until they are created

Tuesday, July 23rd, 2019

On Bretton Woods’ 75th Anniversary, Tyler Cowen reminds us that every era’s monetary institutions are virtually unimaginable until they are created:

Every era’s monetary institutions are virtually unimaginable until they are created. Looking forward, don’t assume the status quo will hold forever, but rather prepare to be shocked.

Consider the broader history of monetary and financial institutions. The gold standard (and sometimes bi-metallic) regime that marked the Western world from 1815-1914 was without precedent. In medieval times, gold, silver, copper and bills of exchange — from multiple issuers — all circulated as means of payment, and often there was no single dominant form of money. As the gold standard evolved, however, claims to gold became a global means of settling claims and easing foreign trade and investment. While the system was based on some central bank intervention, most notably from the Bank of England, it was self-regulating to a remarkable degree, and it formed the backbone of one of the West’s most successful eras of economic growth. It was not obvious that the West would arrive at such a felicitous arrangement.Now fast forward to the current day. Currencies are fiat, the ties to gold are gone, and most exchange rates for the major currencies are freely floating, with periodic central bank intervention to manipulate exchange rates. For all the criticism it receives, this arrangement has also proved to be a viable global monetary order, and it has been accompanied by an excellent overall record for global growth.

Yet this fiat monetary order might also have seemed, to previous generations of economists, unlikely to succeed. Fiat currencies were associated with the assignat hyperinflations of the French Revolution, the floating exchange rates and competitive devaluations of the 1920s were not a success, and it was hardly obvious that most of the world’s major central banks would pursue inflation targets of below 2%. Until recent times, the record of floating fiat currencies was mostly disastrous.

It is considered bizarre that former Fed Chairman Alan Greenspan advocated a gold standard in 1967, but in fact it was a pretty reasonable view at the time, even if it turned out to be incorrect. And it wasn’t just Greenspan who didn’t see where the world was heading; Benn Steil, in his well-known book on Bretton Woods, wrote: “Keynes thought of freely floating rates as a sort of blind groping … and certainly not as a viable alternative model for underpinning trade relations among nations.” In reality, we are just emerging from arguably the world’s most rapid age of globalization, from about 1990 to 2007.

The Bretton Woods arrangements also seemed highly unlikely until they were in place. They involved a complicated system of exchange rate pegs, capital controls and a “gold pool” (and other methods) to control gold prices and redemption ratios. What’s more, the whole thing was dependent on America’s role as global hegemon, both politically and economically. The dollar still was tied to gold, and the other major currencies tied to the dollar, but as the system evolved it required that no one was too keen to redeem dollars for gold (the French unwillingness to abide by this stricture was one proximate cause of the collapse of Bretton Woods).

I don’t think a monetary economist from, say, 1890 could have imagined that such an arrangement would prove possible, much less successful. Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth for both the U.S. and Western Europe.

At the same time, once Bretton Woods ended in the early 1970s, few people thought it was possible to turn back the clock. The system required the U.S. to be a creditor nation, to hold much of the world’s gold stock, and for countries such as France to defer to American wishes on gold convertibility. Once again, the line between an “imaginable” and “unimaginable” monetary arrangement proved to be a thin one.

Another surprising monetary innovation would be the euro. Both Milton Friedman and Paul Krugman warned that the euro was unlikely to succeed and persist. Yet it has proven more durable than many people expected, and there does not seem to be an end in sight. This kind of a common fiat currency, spread across so many nations, is without precedent in world history.

So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.

Where is the Texas of Spain?

Sunday, July 21st, 2019

Bryan Caplan just returned from Spain:

The quickest way to explain Spain to an American: Spain is the California of Europe.  I grew up in Los Angeles, and often found myself looking around and thinking, “This could easily be California.”  The parallel is most obvious for geography — the deserts, the mountains, the coasts.  But it’s also true architecturally; the typical building in Madrid looks like it was built in California in 1975.  And at least in summer, the climates of Spain and California match closely.  Spain’s left-wing politics would also resonate with Californians, but Spain doesn’t seem very leftist by European standards.  Indeed, Spaniards often told me that their parents remain staunch Franco supporters.

He shares some reflections:

1. Overall, Spain was richer and more functional than I expected. The grocery stores are very well-stocked; the worst grocery store I saw in Spain offered higher quality, more variety, and lower prices than the best grocery store I saw in Denmark, Sweden, or Norway. Restaurants are cheap, even in the tourist areas. Almost all workers I encountered did their jobs with a friendly and professional attitude. There is near-zero violent crime, though many locals warned us about pickpockets.

2. The biggest surprise was the low level of English knowledge of the population. Even in tourist areas, most people spoke virtually no English. Without my sons, I would have been reduced to pantomiming (or Google translate) many times a day. Movie theaters were nevertheless full of undubbed Hollywood movies, and signs in (broken) English were omnipresent.

3. I wasn’t surprised by the high level of immigration, but I was shocked by its distribution. While there are many migrants from Spanish America, no single country has sent more than 15% of Spain’s migrants! The biggest source country, to my surprise, is Romania; my wife chatted with fellow Romanians on a near-daily basis. I was puzzled until a Romanian Uber driver told me that a Romanian can attain near-fluent Spanish in 3-4 months. Morocco comes in at #2, but Muslims are less visible in Madrid than in any other European capital I’ve visited.

4. 75% of our Uber drivers were immigrants, so we heard many tales of the immigrant experience. Romanians aside, we had drivers from Venezuela, Peru, Ecuador, Colombia, and Pakistan. Even the Pakistanis seemed highly assimilated and almost overjoyed to reside in Spain. By the way, Uber in Spain works even better than in the U.S. The median wait time was 3 minutes, and the prices were about one-third less than in the U.S.

5. Refugees from Chavismo were prominent and vocal. One Venezuelan Uber driver was vocally pro-Trump. You might credit Trump’s opposition to Maduro, but the driver said she liked him because “He doesn’t talk like a regular politician.” I wanted to ask, “Couldn’t you say the same about Chavez and Maduro?!” but I was in listening mode.

6. I’ve long been dumbfounded by Spain’s high unemployment rate, which peaked at around 27% during the Great Recession and currently stands at about 15%. Could labor market regulation really be so much worse in Spain than in France or Italy? My chats with local economists — and observation of the labor market — confirmed my skepticism. According to these sources, a lot of officially “unemployed” workers are lying to collect unemployment insurance while they work in the black market.

[...]

7. If I didn’t know the history of the Spanish Civil War, I never would have guessed that Spain ever had a militant labor movement. Tipping was even rarer than in France, but sincere devotion to customer service seems higher than in the U.S. Perhaps my sons charmed them with their high-brow Spanish, but I doubt that explains more than a small share of what I saw. A rental car worker apologized for charging me for returning my car with a 95% full tank, adding, “Sorry, but my boss will yell at me if I don’t.”

8. Catalan independence is a weighty issue for both Barcelona and Madrid libertarians. Madrid libertarians say that an independent Catalonia would be very socialist; Barcelona libertarians say the opposite. I found the madrileños slightly more compelling here, but thought both groups were wasting time on this distraction. Libertarians around the world should downplay identity and focus on the policy trinity of deregulating immigration, employment, and housing. (Plus austerity, of course).

9. UFM Madrid Director Gonzalo Melián was originally an architect. We discussed Spanish housing regulation at length, and I walked away thinking that Spain is strangling construction about as severely as the U.S. does.

10. Spanish housing regulation is especially crazy, however, because the country is unbelievably empty. You can see vast unused lands even ten miles from Madrid. The train trip to Barcelona passes through hundreds of miles of desert. Yes, the U.S. has even lower population density, but Spain is empty even in regions where many millions of people would plausibly like to live. Indeed, population density in Spain is actually lower than in the contiguous U.S.

Naturally, Caplan thinks that Spain needs more immigrants:

12. My biggest epiphany: Spain has more to gain from immigration than virtually any other country on Earth. There are almost 500 million native Spanish speakers on Earth — and only 47 million people in Spain. (Never mind all those non-Spanish speakers who can acquire fluency in less than a year!) Nearly all of these Spanish speakers live in countries that are markedly poorer and more dangerous than Spain, so vast numbers would love to migrate. And due to the low linguistic and cultural barriers, the migrants are ready to hit the ground running. You can already see migration-fueled growth all over Spain, but that’s only a small fraction of Spain’s potential.

[...]

14. How can immigration to Spain be such a free lunch? Simple: Expanding a well-functioning economy is far easier than fixing a poorly-functioning economy. The Romanian economy, for example, has low productivity. Romanian people, however, produce far more in Spain than at home. Give them four months to learn the language, and they’re ready to roll.

15. According to my sources, Spain’s immigration laws stubbornly willfully defy this economic logic. When illegal migrants register with the government, they immediately become eligible for many government benefits. Before migrants can legally work, however, they must wait three years. Unsurprisingly, then, you see many people who look like illegal immigrants working informally on the streets, peddling bottled water, sunglasses, purses, and the like. I met one family that was sponsoring Venezuelan refugees. Without their sponsorship, the refugees would basically be held as prisoners in a government camp — or even get deported to Venezuela. Why not flip these policies, so migrants can work immediately, but wait three years to become eligible for government benefits? Who really thinks that people have a right to the labor of others, but no right to labor themselves?

[...]

Where is the Texas of Spain? I don’t know, but that’s where the future is.