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On December 21, 2024, my friend Dan Klein, an economics professor at George Mason University, sent out an email to a list that I’m no longer on but cc:ed me, with the following offer:
Anyone want to give me 8:1 odds that on Jan 21 Trump won’t have been inaugurated?
He linked to this post on X. I didn’t even bother clicking on the link because those odds looked good to me. We went back and forth a few times. I worried about things like intense storms that might slow it down by a day, and Dan was quite gracious in making the deadline midnight on January 21.
So I offered $800 against his $100 and he accepted. We both hoped that I would win.
I did win, and Dan has already informed me that he has sent the check. He gave me permission to post on this.
Would I have offered 20:1 odds? No. A number of things could have gone wrong. Trump could have been assassinated—he missed one attempt by turning his head. He could have been shot but not killed and laid up unconscious in bed. Dan’s worry, which I now know by having clicked on the X file (pun intended), is that the Democrats would have figured out a way to slow it down. I thought that to be highly unlikely. Whatever the reason for a delay, you can probably see why both Dan and I hoped I would win.
By the way, I have rarely had anything nice to say about Kamala Harris. But I thought she showed tremendous grace in overseeing the reporting of the electoral college votes on January 6.
(4 COMMENTS)This post might be misinterpreted in a couple ways, so read the following two points carefully:
1. I’m not defining liberalism in the American sense of left-of-center Democrat. I am using the term in the international sense of supporter of free speech, human rights, a market economy, democracy, civil rights, opposition to nationalism, etc.
2. In general, I don’t believe it makes sense to accuse people of being Nazis or Maoists. Almost everyone, including even extremists, now understand that these were highly flawed political movements.
Nonetheless, it’s worth thinking about why Maoism and Nazism were once so popular. Why did so many Chinese college students join the Red Guard and enthusiastically persecute their professors (and others)? Why did 37% of the German electorate vote for the Nazi Party in 1932? These questions cry out for an explanation.
Here’s an explanation that doesn’t work. “People were different then. Today’s people are much better.” Sorry, but that’s too simple. Do you really think that if you transported today’s college students back in time, and had then live under the conditions of 1966 China, they would have behaved much differently? And what if you put modern Germans into a time machine and sent them back in time to 1932. Yes, with their current knowledge base they would not vote for the Nazis. Not even the most right wing would do so. But what if they had lived in Germany during the Depression, and knew nothing about what happened next?
Of course, not everyone joined the Red Guard, and not everyone voted for the Nazis. So which people alive today would have joined the Red Guard? And which people alive today would have joined the Nazis?
Consider the woke extremists that enthusiastically denounce and shun people for not being sufficiently left wing on a check list of issues. Does anyone seriously believe they would not have been part of the contingent that joined the Red Guard? And think about people that are so anti-immigrant that they don’t even want us to accept high-skilled people from India and China because they worry about America’s European heritage being diluted. Does anyone seriously believe they would not have been among the 37% who voted for the Nazis?
I wish more people would do some serious soul searching, and honestly ask themselves how they would have behaved in some of these extreme situations.
Again, I’m not accusing modern nationalists of literally being Nazis. I don’t even think the 37% of Germans who voted for the Nazi Party were “Nazis” in the modern sense of the term. Most were presumably average people that made a bad decision. Nor do I believe that today’s woke extremists wish to beat and torture their professors. Instead, I see far left and far right wing ideologies as a sort of virus, which can infect people’s minds, even otherwise reasonable minds. And I see liberalism as a sort of vaccine. In July 1932, most Germans voted for either the Nazis or the Communist Party. The minority that didn’t lose their moral bearings voted for centrist parties such as the Social Democrats. Many of those centrists were “liberals”, using the international definition of the term. Who would you have voted for?
When politics gets extremely contentious and extremely tribal, people are pressured to take sides. We get told that extreme tactics are required because the other side is not playing fair. Of course the other side gets told the same thing. It’s hard to hold on to your principles when you are being accused of being a wishy washy moderate, unwilling to fight fire with fire. People hate it when they are ostracized by fellow members of their “tribe”. Sorry, but the enemy of your enemy is not your friend. Your only reliable political allies are those that share your core principles.
Bryan Caplan is a good example of someone who sticks to his principles, even when they might make him unpopular. I presume his fellow professors don’t agree with his opposition to feminism. I presume his fellow right wingers don’t like his advocacy of open borders. But he is passionately devoted to the cause of freedom. That core value acts as a sort of vaccine, making him immune to the lure of authoritarian ideologies. I have no doubt that if he had been born in another time and place, he would have avoided becoming an authoritarian of either the left or the right. How many people can honestly say they are sure that they would have done the right thing, if they had lived in a very different time and place?
Again, you are not a commie or a fascist. You do not favor slavery. But perhaps there’s still something wrong. You should express views that convince the thoughtful reader that had you lived in Weimar Germany you would have opposed both the communists and the fascists. You should express views that convince the thoughtful reader that you would have been an abolitionist in 1850. You should hold views that convince the thoughtful reader than in 1900 you would not have viewed the Irish, Italian and Jewish immigrants as scum that must be kept out of the country. Think about how you are expressing your views.
There are ways to favor redistribution without giving the impression that you would have been a Maoist. There are ways of opposing woke excesses without giving the impression that you would have been against the abolitionists. There are ways of opposing current levels of immigration without giving the impression that you would have been on the wrong side of that issue in 1900.
Unfortunately, not everyone is giving the right impression. Too often, I see people make arguments in such a way that I immediately recognize that they would have been on the wrong side during an earlier period in history. Don’t be that guy.
PS. Here’s today’s Bloomberg, discussing the mood among CEOs:
Now, with the return of Trump, many appear to be willing to do what it takes to protect and advance their interests. If that means abandoning, at least for now, some of the ideas celebrated at Davos, so be it. Making noises about equality, diversity and the fierce urgency of climate change just might have to wait.
“It’s sort of like, ‘OK, which time were you lying?’” Tom Glocer, a fixture on corporate boards like Morgan Stanley and Merck & Co. Inc., said of the abrupt change.
Yes indeed, which time were they lying? And were they even lying to themselves?
PPS. Here’s a FT article on the likely new Austrian chancellor:
“The probability is now very high of Kickl as chancellor,” said Thomas Hofer, a prominent Austrian political analyst. . . .
Kickl’s pro-Russian views, embrace of conspiratorial thinking around the Covid-19 pandemic and unsavoury flirtations with Austria’s Nazi past have made him too toxic for Nehammer and other centrists, who vowed to keep him out of power.
Kickl is obviously no Nazi, but who would he have voted for if he’d lived in 1932 Germany?
PPPS. Over at the now defunct MoneyIllusion, I used to do a lot of political blogging, arguing that the United States was becoming a banana republic. At the time, my views were regarded as rather eccentric. Based on this recent Matt Yglesias post, these views are now becoming mainstream among respected centrist pundits.
(3 COMMENTS)
The experience of the two last federal elections in America suggests that “the left” is more interested than “the right” in a peaceful transfer of power. (By “the left” and “the right,” I simply mean most individuals who identify with either the Democratic Party or the Republican Party.) Kamela Harris gave a magistral lesson to Donald Trump. But there is more to the left’s support for the peaceful transfer of power.
One reason may be that the peaceful transfer of power constitutes the main content of their thin democratic ideology. Isn’t majoritarian democracy the only thing they believe in? This hypothesis is not satisfactory because it is not clear why they would invoke the peaceful transfer of power in favor of a contender who, they claim, wishes, or is tempted to, abolish majoritarian democracy and who has already tried to interfere with it.
Another hypothesis is that the left believes in more than just the peaceful transfer of power, they believe in the peaceful transfer of unlimited power in order to engineer the sort of society defined by their century-old ideology or its remnants. But why wouldn’t they then object to a contending party gaining power to engineer a different kind of society?
The simplest hypothesis and perhaps the most plausible one is that the left believes that a majoritarian and unlimited democracy is bound to ultimately approve their program. “The people” cannot vote against itself—which, interestingly, is also what the populist right believes, a paradox that portends interminable strife.
These justifications for a peaceful transfer of power stand in stark contrast with the classical liberal tradition. For the latter, the peaceful transmission of power is not a means to impose on minorities the preferences and values of the majority, but simply a sort of veto against a totalitarian design from the party in power, to prevent unlimited power. The expression “liberal democracy” is not a pleonasm but emphasizes limited democracy.
A good (albeit a bit technical) expression of this opinion can be found in the book of political scientist William Riker, Liberalism Against Populism (1982). It is interestingly close to Friedrich Hayek’s conception of democracy as a way to keep the state constrained by long-term (thus “traditional”) and abstract “opinion” of what is just (see his book Law, Legislation, and Liberty [1973-1978], the three volumes of which are referenced at the bottom of the post just linked to). James Buchanan added a test of (plausible) unanimity for the general rules that result from an autoregulated social order; his book with Geoffrey Brennan, The Reason of Rules (1985), may be the best exposé of this theory.
If we follow Anthony de Jasay, one problem is that the left may very well be correct: in a regime of majoritarian democracy, he argues, it will ultimately prevail. De Jasay had two arguments which, however they fit together, lead to the same result. First, in a majoritarian democracy, those who promise to redistribute from the “rich” to the “poor” will necessarily win because the 51% at the bottom of the income distribution are arithmetically more numerous than the 49% at the top. Second, electoral competition will lead politicians to try to satisfy every grievance group at the expense of other people, simultaneously generating growing government power and mounting discontent, until the government has no choice but to abolish electoral competition.
To counter this prospect, is our only recourse to James Buchanan’s call to have “faith” in the maintenance of an autoregulated social order and in the classical-liberal ideal that “we can all be free”? (See his Why I, Too, Am Not a Conservative [2006].) This would still imply, it seems, that the peaceful transfer of power only makes sense for the classical liberal if it is a limited power that is trnasferred, and that the social, political, and economic institutions will protect its limitation.
The invocation of the peaceful transfer of power is generally taken to imply that power has not been gained fraudulently. This introduces another level of fuzziness. Anybody can claim that an election has been fraudulent because “the people” cannot vote against itself (even if tens of different independent courts find no technical fraud). If we expect an election to represent the “will of the people,” anybody can easily find that it doesn’t, for “the people” does not exist (see Riker again). Anybody can claim that the will of a unicorn is on his side.
It seems that the peaceful and non-fraudulent transfer of power is only meaningful if the transferred power is not unlimited and if voters consequently don’t expect too much from, or fear too much of, an election or referendum. An illiberal democracy is one where, at each election, many people fear for their peaceful lifestyles—“peaceful” meaning not imposed on, or coercively supported by, others.
Another argument for the peaceful transfer of power is that a temporary break in legality or a vacancy of constitutional legitimacy raises the age-old problem of who will rush into the breach. Those who will are not necessarily the most enlightened and liberal specimens of mankind. And judges may not be able to protect anyone against them. Reestablishing the rule of law and the so-called “norms” is not a simple matter.
All these considerations depend on where we are on the road to serfdom. And except if the “we” means 100%, it is not a numerical “we.”
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La Liberté guidant le peuple (Liberty Leading the People), by Eugène Delacroix to commemorate the July Revolution of 1830, which toppled King Charles X of France
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[ANNUAL LISTENER SURVEY: https://www.surveymonkey.com/r/KYV5XPG. Vote for your 2024 favorites!] How can opera, with words we rarely understand, make us cry? Why does opera, filled with melodrama, move us? Listen as poet and librettist Dana Gioia explains to EconTalk’s Russ Roberts why words matter more than we think, in both opera and on Broadway.
Regulations Keep Millions of Bedrooms Empty During a Housing Crisis
by Howard Husock, Reason, January 17, 2025.
Excerpts:
The U.S. is facing a housing affordability crisis, and new data from Realtor.comhighlight an often missed contributing factor: millions of empty bedrooms. Census data reveal 31.8 million “excess” bedrooms in American homes—compared to just 4 million in 1970. Overregulation, particularly in zoning and local occupancy laws, is among the culprits.
And:
But even if homeowners would like to make use of those “guest” rooms, they can run afoul of local laws. Research I conducted for the American Enterprise Institute found that in 23 of the 30 largest U.S. cities, there are laws that limit occupants deemed “unrelated,” defining a “family” only as a group whose members are related by blood, marriage, or adoption. In St. Louis, no more than three unrelated persons may live together. In Sugar Land, Texas, the limit is four. Private homeowner associations may be even more strict. In the Chase Oaks Homeowners Association in Plano, Texas, a “household” can comprise no more than two unrelated persons, though there is an exception for live-in employees.
Cutting Off Trade Will Make the U.S. Poorer and China More Totalitarian
by Johan Norberg, Reason, February 2025.
Excerpt:
But as a newly emboldened Trump assembles a Cabinet of national security hawks and economic nationalists, we seem to be heading for much more than that. Several of his choices to staff his administration have agitated for decoupling the American and Chinese economies and imposing harsh technology restrictions. And that would not make the situations that worry people about China better. It would make them much, much worse.
The first casualty of any trade war is the economy. Many Americans have the impression that only Beijing benefits from U.S.-China trade. But a one percentage point increase in imports from China caused a 1.9 percent decline in U.S. consumer prices, saving a representative American household roughly $1,500 a year, according to one estimate by London School of Economics professor Xavier Jaravel and Federal Reserve Board of Governors economist Erick Sager.
The effect was largest in product categories more popular among low-income consumers, such as apparel and consumer electronics. After winning an election largely because of discontent over inflation, Trump seems ready to start his second administration with tariffs that would raise consumer prices.
DRH comment: While I agree with the overall thrust of the article and also agree that opening to imports lowers prices, I think the 1.9% decline has to be wrong. It seems highly innumerate. It means, for example, that we could cut consumer prices by 3.8 percent if there were a two-percentage point increase in imports from China.
I would spell out my reasoning, but I invite the reader to think about it.
Price Controls Won’t Build Homes in L.A.by Jack Nicastro, Reason, January 17, 2025.
Excerpt:
Wildfires in Greater Los Angeles have claimed at least 25 lives and over 12,000 structures. To help the city rebuild faster, California Gov. Gavin Newsom waivedburdensome California Environmental Quality Act (CEQA) reviews and Coastal Act requirements for properties damaged and destroyed by the fires. Newsom also declared a state of emergency that triggered various provisions of California’s anti-price-gouging law.
Suspending CEQA reviews and Coastal Act requirements will expand housing by reducing the time and cost of construction. Outlawing prices from rising according to market forces will produce the opposite effect.
Section B of the anti-price-gouging law, effective until January 2026, forbids sellers from increasing the price of food, emergency services, and housing by more than 10 percent relative to pre-emergency prices. Section C, also active until January of next year, applies the same restriction to reconstruction services. Sections D, E, and F prohibit similar price increases on hotel and motel rates and rent, while outlawing evictions, until March 8.
Price controls cause shortages. That’s the opposite of pro-recovery policy.
For more on a major recovery from a much more decimated economy, a recovery that was due in substantial part to the ending of price controls, see David R. Henderson, “German Economic Miracle,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
(1 COMMENTS)
It turns out that “greedflation” is not just an American misconception, the same fallacy exists in many other countries. Kürşad Görgen has a blog discussing Turkish monetary policy issues, from a market monetarist perspective. Last year, he did a post discussing some rather unconventional views:
After the 2023 elections, Turkey abandoned its infamous NeoFisherian interest rate policy (which Erdoğan formalized as “interest is the cause, inflation is the result“), and adopted a more conventional policy with a new Central Bank head (who was recently fired). As of February 2024, Turkey’s interest rate is at 45%, and inflation increased to 64.8% in December. Meanwhile, the Turkish lira reached a new record low against the US dollar in early January, trading at over 30. . . .
Mahfi Egilmez, a relatively popular left-of-center economist in Turkey, recently discovered the concepts of greedflation and shrinkflation and decided to use them, claiming that there is a “greedflation problem” in Turkey.
Görgen did a very nice job of explaining the fallacy of greedflation, and included this graph of Turkish nominal GDP growth rates:
In my view, the best way to refute greedflation is to use an indirect approach. When someone insists that greed is the cause of inflation, tell them you’d be glad to discuss the issue, but first you’d like to discuss the role of greed in NGDP growth. After that issue has been addressed, it will be easier to see whether greed might have anything useful to add to the inflation issue.
Let’s think about the 110% growth in Turkish NGDP during 2022. As you know, NGDP is both aggregate nominal income and aggregate nominal spending. Wages and salaries are a big part of aggregate income. Is it plausible that greed caused Turkish companies to pay dramatically higher wages in 2022 than in 2021? I suppose their decision to pay higher wages was consistent with profit maximization, but I think it’s fair to say that a firm’s decision to pay higher wages is not generally viewed as “greedy” in the ordinary sense of the term.
Consumption is a big part of aggregate spending. Is it plausible that greed caused Turkish shoppers to spend twice as much as they were spending the year before? Again, I cannot see how the decision to spend much more money on roughly the same quantity of goods can be regarded as “greed”, in the ordinary sense of the term. Greedy people generally prefer not to spend lots of money.
To summarize, it seems inconceivable that greed could provide an explanation for a sharp acceleration in NGDP growth, especially given that we have alternative explanations that don’t rely of the mysterious surge in Turkish greediness between 2021 and 2023:
Tunc Satiroglu points out that there has been a 245% increase in the money supply since the CBRT started interest rate cuts in 2021
Once we have established that greed did not cause the 110% rise in NGDP, we can switch over to the inflation question. We know that NGDP growth is inflation plus real GDP growth (plus a compounding term.) What sort of trend real GDP growth rate seems plausible for Turkey? I don’t know the precise answer, but I suspect that nearly all experts would chose a figure between 0% and 10%. Which means that an NGDP growth rate of 110% made it almost inevitable that the inflation rate in 2022 would be extremely high.
To summarize:
It seems highly implausible that greed can explain very high NGDP growth rates.
Very high NGDP growth rates make high inflation almost inevitable.
Therefore . . .
Seriously, it’s embarrassing that we need to even discuss this issue. Astronomers discovered that the Earth went around the sun way back in the 1500s. Much of economics is still mired in views that are the equivalent of “the Earth is flat” in astronomy.
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Financial education is an essential component for the economic and social development of nations. In an increasingly interconnected world, understanding how personal finances and markets operate is an indispensable skill for individuals and economies alike. However, in countries like Colombia, the lack of financial education negatively impacts financial inclusion, investment, and economic growth. From a liberal perspective, this issue can be analyzed through the principles of authors like Leonard Read, Friedrich Hayek, and Milton Friedman, who emphasize the importance of individual choice and free markets as engines of progress.
Financial Education: A Tool for Economic Freedom
Leonard Read, in his iconic work I, Pencil, illustrates how markets enable cooperation among millions of people, even without direct interaction, to produce complex goods and services.
Similarly, financial education equips individuals to understand this system, empowering them to participate more effectively in the economy. Without basic knowledge of concepts such as compound interest, savings and investment, people cannot make informed decisions to maximize their well-being. The lack of financial education not only limits individual potential but also restricts markets’ capacity to generate wealth and growth.
Friedrich Hayek contributes to this discussion with his concept of “dispersed knowledge.” According to Hayek, knowledge does not reside in a central authority but is fragmented across society. Financial education, therefore, should not be viewed as a set of top-down rules but as a means for individuals to acquire the tools needed to interpret and use the knowledge available in markets. A financially educated citizen can act autonomously, making decisions that not only enhance their personal well-being but also contribute to market dynamism.
The Impact of Financial Education Deficiency in Colombia
According to the World Bank, approximately 2.5 billion people worldwide do not use formal financial services, and 75% of the poor do not have a bank account. Inclusion is key to reducing poverty and fostering prosperity. In Colombia, access to the financial system remains limited. According to data from Banca de las Oportunidades, in 2023, 15% of the adult population still lacked access to basic financial services such as savings accounts. Moreover, many individuals who access credit are unaware of how to manage their debts, leading to over-indebtedness problems. This not only affects families but also creates inefficiencies in the financial system and limits economic growth.
Milton Friedman, in Capitalism and Freedom, notes that a market-based economic system depends on individuals making rational decisions. Without financial education, this rationality is compromised, affecting both consumption and investment. In this context, financial education should be seen as a strategic investment to empower citizens and strengthen the national economy.
Financial Education and Investment: A Virtuous Circle
Financial education not only fosters saving but also promotes investment, a fundamental pillar of economic development. Hayek argued that savings and investment are essential for capital accumulation and innovation. In Colombia’s case, improving financial education would allow more people to participate in the stock market, invest in ventures, and generate employment.
Moreover, in a global context where technological innovation and the digital economy are redefining markets, financial education enables citizens to seize opportunities in areas such as crypto assets, crowdfunding, and e-commerce. These tools can serve as catalysts for Colombia to diversify its economy and reduce dependence on traditional sectors such as extractive industries.
Financial education is more than a practical tool; it is a pathway to ensuring economic freedom and social progress. As Leonard Read emphasizes, every economic choice we make is interconnected with millions of others’ decisions. For these choices to yield the best outcomes, citizens must be empowered with the necessary knowledge.
Colombia, and the world, face the challenge and opportunity of strengthening their populations’ financial education. This effort will not only drive economic development but also help build freer societies where individuals can fully enjoy the fruits of their labor and creativity. Ultimately, financial education is not just a matter of individual well-being but a driver for sustainable growth and shared prosperity.
Omar Camilo Hernández Mercado is a law student at the Universidad Libre de Colombia, Senior coordinator of Students for Liberty in Colombia, and a seminarist in “The Austrian School of Economics” at the International Bases Foundation.
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The FTC is rumored to be preparing legal action against Greystar, the largest landlord in the US, for “hidden fees”, also called “junk fees” (“FTC Prepares to Sue Largest U.S. Apartment Landlord Over Hidden Fees,” Wall Street Journal, January 13, 2025):
The FTC finalized its hidden-fees rule last month and said it would seek civil penalties from firms that violated the rule. It mentioned the hotel and live-event ticketing sectors, requiring “up-front disclosure of total price including fees.” …
If the potential FTC lawsuit proceeds, Greystar would become the first apartment landlord to face formal government allegations of hiding fees.
One can imagine hidden fees that would be fraudulent: for example, you rent a hotel room and once there, you realize that there is no bed, except for a special fee (and they refuse to reimburse you). In reality, many so-called hidden fees are prices for supplementary services: you go to the theatre and, besides the entry ticket, you have to pay for the popcorn. Most hidden fees lie somewhere in between these two examples and people just get used to them. Everybody knows he has to pay a separate fee to check his baggage on a flight and a late payment fee if he does not pay a minimum amount when his credit card is due. In all cases except obvious fraud, instead of waging coercive power—and, ultimately, putting their boots on the ground: the cops—governments should heed the first principle of liberal logic advanced by Anthony de Jasay: “In case of doubt, abstain.”
Ironically, the state (all levels of government) is the mother of all junk fees. Those are more difficult to avoid than private hidden fees. Here are a few examples taken at random:
State governments typically control insurance prices, which leads to shortages (no insurance available at the controlled prices), which are in most states alleviated by some form of public insurance of last resort, which private insurance companies are forced to finance in case of cost overrun. The government will push on private insurance premiums a hidden fee that subsidizes the insurance of those who cannot buy private insurance because of government intervention. (See the case of California: “California’s Wildfire Insurance Catastrophe,” Wall Street Journal, January 10, 2025). Deadweight losses from taxes bring a misallocation of resources, meaning that the supply of some goods and services that consumers want will be restricted, forcing prices up as if by junk fees. An inflation tax results from a government bidding up resource prices when it finances part of its debt by increasing the money supply. This includes the increase in interest cost (for mortgages, for instance) due to the fear of future inflation—something that may currently be going on. Hidden fees follow from the price caps that, in most states and at the federal level, kick in after a declaration of emergency. Price caps generate shortages and search costs (a government junk fee) for those who want the goods that disappear from legal markets; the higher prices on black or grey markets are another government junk fee. Junk fees are hidden in any good or service whose price is bid up by government subsidies to certain categories of demanders, notably in health care. Among the non-retired and non-studying able-bodied persons in the lower quintile of the income distribution, only one-third word (compared to two-thirds in the 1960s); the obvious cause is that the average household in that quintile gets about $45,000 a year in different government subsidies, in cash or in kind, an important part of which is in free Medicaid. What’s the point of working and losing these benefits? The government-financed Medicaid demand introduces a hidden fee in everybody’s medical services. The same of course is true for a large part of Medicare. A similar government junk fee is paid by anybody who purchases education from his own pocket. Any business regulation—for example, the coercive privileges granted to trade unions—causes hidden fees because it increases the cost of the goods and services produced. Customs tariffs are typically paid by national consumers in terms of higher prices. Like other forms of protectionism, they generate junk fees. (The fact that the owners and workers of protected companies get a hidden subsidy does not compensate for the junk fee imposed on others.) In any promise honored by politicians, there is a junk fee for those who have to finance the beneficiaries’ advantages, whether this cost is a tax increase or an invisible reduction in his subjective utility. The promise to help one group of voters is generally (Anthony de Jasay would say “always”) paid by other voters. Last time I checked the Harmonized Tariff Schedule of the United States, Revision 8 of the 2019 edition, it contained 3,882 pages, and I am sure it does not translate into fewer junk fees now. A dozen years ago, the Internal Revenue Code contained 2,652 pages, to which the regulations, rulings, and other clarifications, added about 9,000 pages, according to the Tax Foundation. Here again, the number of hidden has likely increased.The specific attack of the FTC on landlords’ “junk fees” may not be going anywhere (for now) because of the imminent change of government. Still, it illustrates another hidden fee in government intervention: the uncertainty created by the arbitrariness and constant changes in threatening laws and regulations.
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Government junk fees, by DALL-E (with some external influence)
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Fellow economist Susan Woodward sent me this anecdote about Ronald Coase and gambling that I thought worth sharing. It led me to remember my own interesting story about gambling and one famous economist.
Bob Hall [her husband] and I were talking about the 1987 Coase conference at Yale, which I attended but Bob did not.
I was a major buddy of John Peterman (then the director of the Federal Trade Commission’s Bureau of Economics) who was a favorite student of Coase, and so I was seated by Coase at the dinner. We talked about what I was working on (at the Council of Economic Advisers) and I answered, “National lotteries.” I opposed them because I thought the government should lean against all gambling. (I was raised Protestant.)
“No, no,” said Coase. His mother had had a very hard life, but she had bought a state lottery ticket every week, and spent the weekend fantasizing about what she would do if she won. It made her life much better! The utility gain, he stated, is highest from a low probability but high payoff lottery. Even if the odds are poor, state lotteries are good because they are honest. That changed my view.
Susan’s story reminded me of my own story. My mentor at Fortune magazine when I started writing frequently for Fortune in 1984 was Dan Seligman, the book review editor. [I’ve written about Dan’s mentoring here and here.] He also had a regular column called “Keeping Up.” Besides being a great writer, Dan had a great sense of humor and a solid understanding of economics.
One more thing about Dan is that he loved gambling. So when people criticized gambling and, even worse, pushed to ban it, Dan didn’t like that.
MIT Nobel Prize winner Paul Samuelson had written a negative statement about gambling. Samuelson stated, just as many economists and others maintain, that gambling is zero sum; what one side gains is exactly what the other side loses. But, as I said, Dan understood economics. He understood that if you observe people doing anything, they must like it. If they keep doing it, that’s further evidence that they like it. The fancy term economists use is “revealed preference.” Their actions reveal their preferences.
In essence, what people leave out when they say that gambling is zero-sum is the pleasure people get from gambling. Not everyone gets that pleasure and those who don’t tend not to gamble.
In his column, Seligman could have used the argument I just made. But he found a cleverer way of responding to Paul Samuelson. People who knew much about Samuelson knew that he loved playing tennis. Dan was one of those people. So he turned Samuelson’s anti-gambling argument against him. In tennis, argued Dan, when one side wins, the other side loses. So tennis is zero-sum. Should we then be critical of tennis and maybe even ban it?
You might respond that people enjoy tennis. Exactly.
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The title of this post is a nod to Alfred Marshall, who stressed that supply and demand analysis required we think about “both blades of the scissors.” Prices are not set by supply or demand alone – it is the interaction between the two that is crucial. It is for this reason Greg Mankiw once wisely commented that he was neither a supply-side economist nor a demand-side economist. He was a supply-and-demand economist.
This came to mind because I recently saw a journalist make a remark on Twitter I’ve seen in numerous forms before. Speaking out against immigration, this journalist declared it was obvious that increases in immigration – legal or otherwise – would decrease the wages of American workers, because “the law of supply and demand applies to labor too: more labor means cheaper labor.” This is doing analysis with one blade of the scissors.
Just as one-bladed scissors are terribly ineffective at being scissors, doing supply-and-demand analysis with only supply is equally ineffective. That’s why the term invoked by the aforementioned journalist is “the law of supply and demand.” We need to look at both blades of the scissors here.
When the supply of labor increases, what happens to the demand for labor? Does it stay fixed? Well, no. This is because increasing the supply of labor also makes labor more productive. Adam Smith lays it out in the opening lines of The Wealth of Nations:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
The more workers there are, the more extensive the division of labor can become. The more extensive the division of labor becomes, the greater the “improvement in the productive powers of labour.” The greater the productive powers of labor become, the greater the demand for labor becomes. Thus, increases in the total size of the labor force don’t just shift the labor supply curve to the right. The labor demand curve also shifts to the right. This is true whether the increase in the labor supply is due to immigration, a proverbial “baby boom,” or the large-scale entry of women into the workforce.
One example of this change in specialization can be seen in this paper by Giovanni Peri and Chad Sparber. They make the point that immigrant labor and native labor are not perfect substitutes. Immigrants and natives have different skill sets and strengths relative to each other, particularly in the market for workers with relatively little formal education. Native workers had advantages over immigrant workers in terms of communication and interaction skills, and native and immigrant workers specialized according to their comparative advantage. Thus as more immigrant workers began doing manual labor, more native workers shifted away from manual labor and into higher paying jobs in which they had a comparative advantage such as doing supervisory and coordination work. Thus, the division of labor reorganized along lines of greater specialization, increasing the productivity and efficiency of the labor force. This is just one of several mechanisms by which increases in the labor supply can increase labor productivity and wages.
Another way to see this might be to look at it from the other side. Right now, a major concern for many thinkers is a sort of inversion of Paul Ehrlich’s life work – rather than a population bomb, they worry about an impending population implosion. One country with rather dire looking projections is South Korea. According to current projections, their population in 2100 should be similar to their population in 1950. But in 1950, the median age for South Korea was just under 18 years old, while in 2100 the median age is projected to be just under 60 years old, with only about half of the total present-day population. The total working-age population, then, is projected to crash pretty hard.
When considering that kind of scenario, almost nobody feels tempted to respond “Wow, that will be so great for future generations! They’ll only have about half as many people engaged in productive work, and with such a low supply of workers, those workers will be so much wealthier because of it! After all, supply and demand applies to labor, so the fewer laborers there are, the wealthier laborers become!” Societies are impoverished, not enriched, by the loss of productive workers. And societies are enriched, not impoverished, by gaining them.
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