Also in today’s newsletter, Iran demands US compensation and the Fed defies Trump

Canada and Mexico lead diplomatic offensive in Washington as August 1 deadline looms

The country is one of the most exposed in Europe to Trump’s tariffs, intensifying fears that a golden era of growth will slow down

US president says trade deal would lower 25% levy on cars and include $350bn investment

Detroit carmaker has secured a $3bn credit line to prepare for rising cash pressure

US president lashes out at New Delhi’s trade policies and economic ties with Russia but signals deal is possible

As the president launches a trade war, follow the latest on tariffs and executive orders

European carmakers do not expect further concessions, despite lobbying for duties to be offset by exports from the US

In my first year of grad school, one of my professors had a long list of “forbidden words”. These were terms that do more to confuse than enlighten when used in economic analysis. Terms like “need”, “afford”, “exploits”, “vicious circle”, etc. Today, I’ll argue that we might wish to add the term “must” to that list.

Brian Albrecht has an outstanding new post that nicely illustrates the problem:

This approach eliminates human choice entirely. [Michael] Pettis treats markets as foreigners imposing their will: “the United States has no choice but to run a corresponding trade deficit.” Capital flows are just forced upon you like the weather if the government doesn’t do something about it. In his telling, Americans are passive victims who must automatically adjust their saving and spending when foreigners decide to invest here.

The starkest example: “If a country organizes its economy in such a way that its savings vastly exceed its investment, the rest of the world must automatically adjust either its savings or its investment.” I mean that must be true, but how does that framing help us? If I sell goods, does it make sense to say the rest of the world “must” buy them? Only under weird definitions of “must.” In both cases, we are looking at an outcome (savings > investment, or my sales > 0), not some abstract goal. These are the traded quantities. And, again, it removes any choice. Why am I selling the goods? Can policy change my sales? Sure. 

In a recent post, I tried to explain the confusion over the US current account deficit by looking at some other countries.  For instance, Australia has run fairly persistent current account deficits over the past few decades, whereas the Netherlands has run large current account surpluses.  There is a sense in which it is true that whenever non-Australian countries, in aggregate, run current account surpluses, then Australia “must” run a current account deficit, just as the fact that I succeed in selling goods from my small convenience store implies the rest of the world “must” buy goods from me.  Not must as an authoritarian order, rather “must” as an accounting relationship, quantity sold must equal quantity bought.  

It’s also true that if all non-Dutch countries, in aggregate, run a current account deficit, then the Netherlands must run a current account surplus.  And why stop there?  If Andorra runs a current account surplus, then all non-Andorran countries, in aggregate, must run a current account deficit. How dare those perfidious Andorrans force a current account deficit on the rest of the world!!

Now let’s think about possible explanations for Australia’s current account deficits and the Netherlands’ current account surpluses.  Does anyone seriously believe that a useful explanation for those patterns is: “Non-Australian countries run surpluses, and hence Australia must run a deficit, whereas non-Dutch countries run deficits, and hence the Netherlands must run surpluses.  That’s why Australia has a deficit and the Netherlands has a surplus.”  Is that what we mean by an “explanation”?

Albrecht’s entire post is excellent—read the whole thing.

(7 COMMENTS)

Time again for another one of my multi-post deep dives into a book I found interesting. This time, the book is We Have Never Been Woke: The Cultural Contradictions of a New Elite by Musa al-Gharbi. As always, my next several posts will be my attempts to reflect al-Gharbi’s views rather than my own, and to the extent there are questions in the comment section, I will attempt to form my answers in terms of al-Gharbi’s argument. My own degree of agreement and disagreement will be saved for the end of the series.

Many books have been written over the last several years critically examining the phenomenon of “wokeness,” often taking a pugnacious approach. Prominent among these are Chris Rufo’s America’s Cultural Revolution: How the Radical Left Conquered Everything, Richard Hanania’s The Origins of Woke: Civil Rights Law, Corporate America, and the Triumph of Identity Politics, and The Third Awokening: A 12 Point Plan for Rolling Back Progressive Extremism by Eric Kauffmann. I was far more interested in al-Gharbi’s work because, in contrast, his critique of wokeness comes from a sympathetic mindset. A sympathetic critic can often cast far more light than a hostile antagonist – I once pointed to Ezra Klein’s criticism of “everything-bagel liberalism” as an example of the same principle.

Musa al-Gharbi’s book examines the rise of “wokeness” not as a recent phenomenon, but as an event that has occurred multiple times in response to particular social conditions. “Wokeness” is simply the label used for the most recent wave of this event. In addition, al-Gharbi seeks to understand some key contradictions in wokeness in both its current and past forms. He opens by describing how, during his time at Columbia University, the behavior of the most “woke” students after President Trump’s 2016 presidential victory was perplexing to watch:

In the days that followed, many Columbia students claimed to be so traumatized by the electoral results that they couldn’t do their tests or homework. They needed time off, they insisted. There were a few things that were striking about these demands to me.

First, these are students at an Ivy League university—overwhelmingly people from wealthy backgrounds. And even if they didn’t come from wealth, they’re likely to leave well positioned. After all, Columbia is an elite school (i.e., a school designed to cultivate elites). And this is not a secret. Students choose to attend a school like Columbia instead of their local land-grant university precisely because they aspire to be more elite than most other college graduates (who, as we will see, themselves tend to be far better off than the rest of the population). People from less advantaged backgrounds routinely shed tears of joy when they get into schools like Columbia precisely because they know that they’ve just received a ticket to a different life.

Despite their elite (or elite-aspirant) status, these students acted as though they, personally, were going to suffer tremendous harm as a result of the election:

Instead, many students seemed to view themselves as somehow uniquely vulnerable to Trump and his regime, as being especially threatened or harmed. They demanded all manner of accommodations for themselves in order to cope with Trump’s victory—and the university eagerly and uncritically obliged.

Perhaps these students were only so affected because they were overcome with worry about how a Trump presidency would impact the poor and vulnerable. But al-Gharbi noticed that their ostensible concern for the vulnerable didn’t seem to manifest in any tangible way:

Meanwhile, there was this whole other constellation of people around the students who seemed to be literally invisible to them. The landscapers, the maintenance workers, the food preparation teams, the security guards. There was no major student movement on their behalf. And these were the people, according to the prevailing narrative, who stood to lose the most from Trump’s victory. While those attending classes at Columbia are overwhelmingly wealthy or upwardly mobile, these workers are generally from more humble backgrounds. They are disproportionately immigrants and minorities. Yet the students didn’t begin by demanding that those people receive a day off, nor by advocating for higher pay and better benefits or protections for those people. Instead, they were focused on themselves.

Meanwhile, the behavior of those who were ostensibly at risk of being harmed by a Trump presidency was notably less self-aggrandizing:

Nor were those ignored laborers – the people with the most at stake in this election (in the students’ own narrative) – saying they needed time off because they were too traumatized. They weren’t painting themselves as victims. Although the classrooms were full of tears in the days that followed, one never saw, say, the janitors making a scene, sobbing uncontrollably about politics as they scrubbed rich kids’ messes out of the toilets. They just showed up to work the next day and did their jobs.

The same observations could be made beyond the college campus and out in the professional world of the progressive elites:

When I left campus, walking around the Upper West side, or other affluent parts of Manhattan, similar scenes were playing out. The winners of the prevailing order were out on the streets, walking around in a daze like a bomb went off, comforting each other and weeping for the disadvantaged, even as they were chauffeured around and waited on—even more than usual—because they were just too distraught to do anything themselves. And they were able to indulge themselves in this way, of course, because the people who were serving them showed up to work per usual.

This event simply put a spotlight on a key phenomenon – how progressive elites in particular seem to live their lives professing concern for the poor and vulnerable while also benefiting from social systems that make life worse for those poor and vulnerable people. And far from merely being passive beneficiaries of this system, those same elites actively cultivate and structure the very arrangements they condemn as exploitative. This is the case with daily economic life:

Even the most sexist or bigoted rich white person in many other contexts wouldn’t be able to exploit women and minorities at the level the typical liberal professional in a city like Seattle, San Francisco, or Chicago does in their day-to-day lives…Instead, progressive bastions associated with the knowledge economy are the places with well-oiled machines for casually exploiting and discarding the vulnerable, desperate, and disadvantaged. And it’s largely Democrat-voting professionals who take advantage of them – even as they conspicuously lament inequality.

And al-Gharbi also notices this in activist activities as well – he describes how those out in the streets in the Upper West side protesting on behalf of the Black Lives Matter movement (themselves overwhelmingly white and financially well-off) would hold up signs and cheer and chant slogans for the movement:

However, on several occasions I observed demonstrators engaging in this ritual literally right in front of—sharing the median with—homeless Black men who didn’t even have shoes. They were crowding the benches that homeless people were using, standing amid the bags that contained their few worldly possessions, in order to cheer on BLM. Meanwhile, the Black guys right in front of them seemed to be invisible. They were a piece of scenery akin to a bench – an obstruction the demonstrators had to work around, lest they fall over while waving their BLM signs at passing cars.

In relatively short order, however, the community from which these protesters sprung up went on to ensure these “obstructions” were removed from the area:

In an area that voted more than nine to one for Hillary Clinton in the 2016 general election, and that would do the same for Joe Biden in the months that followed, in the midst of a global pandemic, and contemporaneous with a racial justice movement that they wholeheartedly supported in principle, Upper West Side liberals rallied together to declare “Not in my backyard” to the unsheltered—and they successfully pushed the city to move the poor somewhere else.

These experiences got al-Gharbi thinking about different ways in which the behavior of the “woke” seems diametrically opposed to the values and goals they profess. Why do social justice activists so often engage in activities that “don’t seem to well reflect the will and interests of those people who are supposed to be ‘helped’ by these gestures,” for example? If “social justice discourse is co-opted by the elites to serve their interests,” as is often alleged, what about the nature of social justice ideology makes it so congenial to the interests of the powerful? If being a member of a racial or sexual minority is a huge disadvantage, “then why are elites so eager to identify themselves as these very things, or to publicly associate themselves with people who can – even to the point of bending the truth to accomplish these goals?” At the bottom of it all, have the woke ever truly been woke, in the sense of seeking to make society a fairer and more just place? Or is wokeness a system of ideas that allows elites justify and perpetuate their privilege, at the expense of those they claim to be seeking to help?

Musa al-Gharbi has much of interest to say about all of this and more. But first, some basic ideas of the discussion need to be made clear. In my next post, I’ll lay out the general assumptions and ideas that form the foundation of al-Gharbi’s analysis, as well as his answer to two important questions – who are “we,” and what is “woke?”

(19 COMMENTS)

I fear we have to admit it: there is not a single truly free country among the 200 or so that occupy this planet. If there were one, we would have expected a representative of its state to declare publicly, about the current trade war, something like the following—let me put it in blockquote even if it is not an actual quote but a virtual one from an inexistent official:

Whatever others do, our government has decided to eliminate the last vestiges of tariffs and coercive barriers to trade. The citizens and residents of this country are free individuals who may trade with anybody—in the next village, the next country, or at the farthest reaches of the earth—who is willing and able to trade with them. Only a few restrictions exist, such as trade in stolen goods, the slave trade, hiring killers-for-hire, buying copper, and such. (Pardon my dark humor designed to lighten up these difficult times, but the last example in my list is, of course, a joke.) Anybody or any non-violent organization in the world who wishes to buy from, or sell to, the free men and women here, associated in firms or not, is welcome to try. Whether the sum of their trades results in a trade deficit or a trade surplus, more foreign investment or less, a higher or lower production of dolls, deodorant, or watermelons in some places, is really no busybody’s business. In our country, each person and private group minds its own business in a spirit of reciprocity; so does the government. Thanks to price signals and entrepreneurs, free markets adapt to desires for prosperity more efficiently than controlling and bullying politicians. Besides three centuries of economic analysis, history testifies to that.

Perhaps only one man in the last hundred years who could have said that: John Cowperthwaite, British administrator of Hong Kong between 1945 and 1971. The consequences were remarkable. (See my EconLog post, “Hong Kong and John Cowperthwaite.”)

I would add that, even with the blessing of electoral majorities, imitating what tyrants do to their subjects is not a recipe for liberty. An example is the Chinese state prohibiting its subjects who are dual citizens and therefore not captive dependents from leaving “their” national territory once they are caught there (see “U.S. Citizen Who Works for Commerce Dept. Ensnared in Chinese Exit Ban,” Washington Post, July 20, 2025). Should the U.S. government retaliate and promulgate the same ban in America? Ditto for trade.

This does not mean that there doesn’t exist countries that are freer or less unfree, of course. Note however that, except when we move close to the extremes, countries are not always easy to distinguish and classify on that scale, if only because freedom has many aspects, areas, or dimensions. These aspects occupy different positions in the preferences of different individuals. What seems clear is that free exchange between individuals is a paradigmatic feature of a free society. The reality is complex, but the ideal to pursue is not ambiguous.

It should not be forgotten either that some equilibria are not dynamically stable: a small move away from “more free” may well lead to a widening divergence from liberty. State intervention begets state intervention. Isn’t that happening today?

(19 COMMENTS)

Earlier this week, I posed the following problem in price theory.

The government imposes a binding price ceiling on oranges. But it does not impose any price ceiling on orange juice. After the price ceiling on oranges is imposed, what will happen to the price of orange juice? (Assume a competitive market for oranges.) Show your work.

I said I would post my answer. I also said that I would post a diagram of demand and supply. But the diagram got complicated because there are both demand and supply for oranges and demand and supply for orange juice. And, of course, while oranges are a crucial input into orange juice, oranges are also sold at retail as, simply, oranges.

The good news is that you don’t need to show the demand and supply for orange juice to get the answer. All you need do is recognize that a binding ceiling on oranges will cause the number of oranges produced to fall. That drives the result. You can show that result—the reduced number of oranges produced and sold—on a demand and supply curve for oranges, but you don’t need to. (I did have my students do it.)

When I taught the economics of binding price controls, whether price ceilings or price floors, the way I put it in my last 15 or so years of teaching is, “the short side of the market dominates.” If it’s a price ceiling, then the amount sold in the market is lower than if there’s no price ceiling; the supply side dominates—you can’t buy what no one is selling. If it’s a price floor, the amount sold in the market is lower than if there is no price floor; the demand side dominates—you can’t sell what no one is buying.

Now, back to the issue. With a smaller output of oranges produced, there will be less orange juice. The demand for orange juice is unchanged. (If it does change, it would rise as people realized that oranges are in shorter supply and so they substitute into buying orange juice; but this is a needless complication.) So with an unchanged demand curve for orange juice and reduced supply, the price of orange juice would rise. QED.

One commenter raised questions that are relevant to how much the price of orange juice would rise, but are not relevant to whether it rises.

AMW wrote:

Is this an open or closed economy?  Is it possible to import/export oranges and orange juice?  And how elastic are international supply and demand for oranges and orange juice?

All those are relevant questions for estimating the degree of increase. But let’s say orange producers export in order to avoid domestic price controls. That makes the domestic amount supplied even lower than otherwise and the price increase on orange juice even greater than otherwise.

Henri Hein put it well:

I’m with Jon Murphy and trying to keep it simple. With a price ceiling on oranges, the supply of oranges will fall. Presumably the demand for orange juice (at the price before the change) will remain the same. So the price of orange juice will have to rise.

Postcript:

One way to think about the problem is to think about the market for cars in 1946, after the U.S. government started allowing domestic car manufacturers to once again produce cars for the domestic market. Either car producers were hesitant to raise prices or remaining price controls forbade them from raising prices; I’ve forgotten which.

Either way, prices for new cars did not clear the market. So some car buyers would buy a car and “flip” it, that is, immediately sell at a higher price than they paid. Think of orange juice producers as “flipping” oranges.

(33 COMMENTS)

In this episode of EconTalk from January, Russ Roberts chatted with everyone’s favorite guest,  Duke University’s Michael Munger about Elon Musk’s  “Department of Government Efficiency” (DOGE) and the hope—or hype—behind delegating government slim-downs to big tech. As we’ve watched the DOGE drama unfold in the months since, it seems a good time to revisit this conversation.

When this episode was recorded, Roberts’ main question was: can Musk’s DOGE really shrink government bureaucracy? Munger, unsurprisingly, was skeptical. He argued that entrenched agencies, supported by robust statutory frameworks and career staff are nearly immune to reform. On the other hand, Roberts was cautiously optimistic, wondering if a dramatic shake-up might at least shift power dynamics—even if absolute success seems unlikely.

What do you think of each’s January stance in light of Musk’s departure from the government and the apparently limited success of DOGE? Was the effort always doomed to fail, or is there truth in the claims that there wasn’t really that much inefficiency to be found? We’d also be interested in reading your responses to the prompts below. Have a(nother) listen and share your thoughts with us today!

1- Very early in the conversation, Roberts states that he believes that moment to be the most libertarian moment of his lifetime. What examples does he use to make this case, and to what extent have these illustrations panned out since the first of the year? Late in the episode, he uses the term “cesarean” to describe the political moment in January. Is this a better metaphor? If so, why?

2- What are the two competing—and sometimes conflicting—impulses of libertarians (and classical liberals), according to Munger? What does Munger mean by “obedience to the unenforceable,” and why does he invoke the story of Odysseus and the Sirens to describe it? How might this challenge be lessened for policymakers?

3- In a related vein, Roberts bemoans the decay of [political] norms over time, noting that in many instances, the letter of the law has not changed, but many political rules are no longer enforced. Munger notes the history of budget deficits to illustrate. So, why are such huge deficits a modern phenomenon, if the institutions have allowed for it?

4- Munger praises fusionism*- the notion that libertarians and conservatives have common ground and should unite with regard to policy. He goes so far as to assert that conservatives and libertarians alone are ineffective; they need each other. Why does he say this, and to what extent do you agree?

* For a deeper discussion of fusionism, see this Great Antidote podcast episode with Stephanie Slade.

(0 COMMENTS)