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Also in this newsletter: new weapons for Ukraine, German recovery, the value of loyalty

Separate Brussels probe targets Chinese medical market amid growing trade tensions with Beijing

Also in today’s newsletter, Tesla shares soar in after-hours trading, and Dimon praises ‘booming’ US economy

An ECB interest rate cut soon would make sense but the Fed faces a more difficult call in the US

Pound rises against dollar as chief economist Huw Pill sets a different tone from deputy governor

The search for the neutral rate is proving elusive

AmCham China highlights concerns about lack of regulatory clarity as Beijing seeks to shore up confidence

Grocery price growth eases to 3.2% in four weeks to mid-April as retailers focus on special offers

Wisconsin comedian Charlie Berens has a great routine about 4-way stops in the Midwest. Midwest drivers are so nice and obsequious that they’ll endlessly wave the other guy on at the stop sign, even when they were there first and have the right-of-way. Like all good comedy, it’s funny because it’s at least a little bit true. As a small-town Midwesterner, I can vouch for the authenticity of the joke. In the past month I have had three separate Midwest stop sign incidents, in which the other driver, having the right-of-way, attempts to yield and wave me on, out of turn. Now I’m a proud Midwesterner, but maybe I’m just not that nice, or maybe something just really bothers me about people not following the rules. When this happens to me, I like to point at the stop sign, trying to let the other driver know there’s an established set of rules and I, having aced driver’s education, expect you to follow them. Indeed, one time I actually rolled the window down and shouted “I have a stop sign!” and insisted the other driver proceed (she didn’t even have a stop sign in this case—it’s worse than Berens knows!)

The last time this happened I got so agitated that I had to pause and reflect on why this form of rule-breaking bothers me so much. After all, the other person is just trying to be nice- “Midwest nice.” Doesn’t that reflect well on the folks in my part of the country? I had an epiphany in the car, though—I realized that the attempted “niceness” was actually irritating because it disrupted my strongly-founded expectations about what should happen based on a very clear and well-known set of rules. I felt like Walter Sobchak from The Big Lebowski: “Am I the only one around here who gives a (expletive) about the rules?!” (Don’t worry, I did not come close to threatening the other driver). Simply speaking, the other driver’s action, though well-intentioned, was not nice in its outcome. It was irritating, it led to confusion and delay which, though minor, were nonetheless irritating. Rules are meant to be followed, not arbitrarily set aside on a whim for the perceived benefit of a stranger. We could have a good-faith argument about whether a particular rule is just and proper, but in cases where the rules are obviously fair and designed to generate smooth social interactions among strangers—like stop signs—not following the rules is an anti-social act. 

Then the larger revelation struck me: we are living in an age of excessive “niceness” and attempts by well-meaning people to just be nice are increasingly leading to rule-breaking and societal decay. The stop sign thing is emblematic of a larger problem. True, stop sign yielders are generally harmless, so maybe I should calm down about it. But in other cases, when people choose to not follow the rules in an attempt to be nice, the consequences can be more than merely annoying, they can be downright dangerous.

Examples of excessive niceness are all around us and range from mundane and mildly annoying, to potentially deadly. Here’s a brief list, I’m sure you can think of some yourself:

parents want to be nice to their kids, so they withhold harsh discipline and their kids become unruly brats teachers try to be nice to students so they don’t give low grades or critical feedback efforts to “stop the stigma” associated with bad behaviors like drug, alcohol, or porn addiction, because stigmatizing people (literally, marking them with disgrace) is perceived as mean waiving the “rules” of family life, for instance expecting parents to marry and fully commit to raising their children, because it’s judgmental suspending meritocracy to help the “disadvantaged” have access to better jobs or careers

This last example is most worrisome, and is cropping up in DEI-inspired programs that water down or eliminate competency requirements for the sake of increasing representation of disadvantaged groups. Many commentators on the right are raising alarm about such efforts afoot in the airline industry to “diversify” their pilot corps. If the easing of competency standards is happening, and there’s ample evidence to back up the stories, we could be looking at deadly consequences when under-trained, under-qualified “diversity hires” make fatal errors at the controls of a passenger jet. 

So yeah, maybe we should rethink “niceness.” Don’t get me wrong—I’m not against niceness, I’m just against taking a good thing too far. In statistics there’s a categorization of errors that may be helpful in explaining the “too nice” problem. A Type I error is a false positive—establishing causal effect when it’s not true, for example assigning effectiveness to a drug when it really had none, and the clinical trial results were just random chance. A Type II error is a false negative—finding that the drug was not effective when it actually is, but perhaps the clinical trial was improperly calibrated to capture its true impact. 

Being needlessly mean—acting the jerk—is a Type I error.  You lash out at your wife or kids for a harmless mistake. The bad attitude and angry outburst is not warranted, you should not have ruled in favor of your anger. This problem is usually easy to spot and remediation is seldom controversial—no one likes a jerk, and we all know one when we see him. Being too nice, though, is tricky—it’s a Type II error. You are in the right to yell, or maybe just use harsh language, because the other person misbehaved and deserved a social sanction. But most of us don’t like confrontation, and it’s often easier to just put on the nice face, not call out the other guy’s bad behavior, and just slink away. This is the path of least resistance. I’ll admit that I’m guilty—I am non-confrontational and probably have let too many bad actions slide.  

So what’s to be done about the excessive niceness epidemic? I’m thinking about setting up seminars on optimal anger: “Hi, I’m Tyler and my love language is tough love. Don’t like it? Get over it!” Kidding aside, it’s tricky. There are no easy answers, and as the greatest living economist Thomas Sowell has so eloquently stated, “There are no solutions, only tradeoffs.” All I can ask as an economist is that people acknowledge the problem—it’s just as possible to be too nice, as it is to be too mean. To paraphrase Martin Luther, you can fall off both sides of the horse. It can be bad to be not nice; it can be bad to be too nice. The trick is to find an optimum, to balance the tradeoffs between the problems. Too mean (Type I error) is usually obvious, so the key is to critically assess all our actions and strive to recognize when we might be sliding into the “too nice” Type II error. Sternness has its place. If insisting on following the rules makes me appear jerky to my Midwest cohorts, so be it. If that’s the price of living in a world where the rules work to the benefit of all, I’m willing to pay it.  

 

Tyler Watts is a professor of economics and management at Ferris State University.

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The Financial Times has an interesting interview with Esther Duflo, who was awarded the Nobel Prize in Economics in 2019. She argues that developed nations have a moral duty to compensate poor countries for the damage done by carbon emissions:

If you combine these three numbers, you get basically the money value of the cost of carbon in the air. [University of Chicago economist] Michael Greenstone and his team estimated it to be $37 a tonne. So, take $37 a tonne, multiply by 14bn tonnes a year of carbon emissions — that’s the total footprint, including consumption, of Europe and the US. And you get about a little over $500bn a year. That’s the damage that we impose on poor countries, just the mortality damage. Just from the rich part of the world to the poor part of the world.

So that’s what I call a moral debt. This is not what it would cost to adapt; this is not what it would cost to mitigate. This is what we owe.

She advocates raising these funds by taxing the rich:

The minimum tax on corporations has been fixed at 15 per cent [under an international agreement]. But originally, the number that was proposed was 25. So I’m thinking, well, there is maybe a bit of margin. And if you went from 15 to 18 per cent, you could raise about $200bn a year.

And then, in February, the G20 discussed the proposal of Gabriel Zucman and the EU Tax Observatory of a tax on the super-rich — a tax of 2 per cent yearly on the wealth of the 3,000 richest billionaires. That would raise $300bn. So if you combine these two, you get to your $500bn.

I am sympathetic to her claim that Western carbon emissions have hurt poor countries, although as a utilitarian I don’t think in terms of “moral debts”.  What does that phrase actually mean?  Does it mean that transferring $500 billion from the rich world to the poor world would make the world a better place?  If so, then why not say so?  Why speak in terms of moral debts?

By now I may have antagonized both sides, supporters of Duflo’s proposal and conservatives that are skeptical of utilitarianism.  So let’s examine some specific flaws in Duflo’s approach to public policy.

Duflo is correct that rich countries have imposed large negative externalities on poor countries, by warming the Earth’s climate.  But she overlooks the fact that rich countries have also imposed large positive externalities on poor countries, or that these positive externalities are an order of magnitude larger than the negative externalities.  Here are three obvious examples:

1.  Western technology has caused the population of poor countries to be vastly larger than it would have been without contact with the West.

2. Western technology has caused life expectancy in poor countries to be much longer than it was before being exposed to this technology.

3.  Western technology has caused per capita GDP in poor countries to be far higher than it would have been without this technology.

So if we were to take seriously the idea that externalities cause moral debt, then we would be forced to conclude that the poor world should pay vast reparations to the rich world.  To me, this idea seems absurd.  To be sure, many people I speak with favor forcing China to pay far more for technology they have taken from Western firms. But these people are often silent on the West’s “moral debt” for paper, the compass, gunpowder, the printing press, and all the other Chinese inventions that helped to shape the modern world. 

History is almost infinitely complex, and thus any attempt to develop a ledger of net moral debits and credits based on positive and negative externalities will end up foundering on a host of arbitrary judgments.

A second problem is that Duflo’s proposed tax makes no sense if the underlying problem is externalities.  Economic theory suggests the optimal remedy for negative externalities is to impose a tax equal to the external cost—in this case a carbon tax.  (This is assuming that transactions costs prevent a voluntary solution.)  Instead, Duflo proposes a tax on the rich, which would do little or nothing to address the problem of global warming.

In my view, Duflo’s proposal is an illustration of what can go wrong when you replace utilitarian reasoning with deontological reasoning.  When it comes to public policy, it is not useful to think in terms of “moral debts”.  Rather there are policies that boost aggregate global utility and policies that reduce aggregate global utility.  A policy that slows capital accumulation while doing nothing to address global warming is not likely to boost global utility.

PS.  I am not arguing that victims should never be compensated for damages they receive.  Rather I am suggesting that compensation schemes should be judged on utilitarian grounds.  Thus our legal system is based on the premise that people and companies are generally liable for specific damages imposed on others.

PPS.  I suppose a wealth tax on billionaires sounds “progressive”, especially if the money is given to “poor countries”.  But people like Bill Gates donate a larger share of their wealth to poor countries than do rich governments, and it’s likely that (dollar for dollar) his donations are more effective than those of governments.  In fairness, Duflo suggests donating the money directly to the people in poor countries (which is much better than the approach used in many government run foreign aid programs), but I suspect that once governments become involved the money will end up moving from one government to another.

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Thomas Sowell frequently emphasizes the importance of thinking beyond the immediate and obvious impact of some economic policy and thinking through the larger implications. He actually wrote an entire book dedicated to this idea – Applied Economics: Thinking Beyond Stage One. A similar and useful exercise to evaluate an idea is to really try to work out not what will unfold next, but what that idea, if true, should imply for the present situation. Here are two common examples where this would come in handy.

First, some people believe that all the value a business generates for consumers and stockholders is generated by the workers. Meanwhile, the owners of the business don’t create or contribute value – they merely siphon off the value created by the workers, while paying the workers less than the value they generate. If this was true, this has a pretty clear implication – business owners should be incentivized to hire as many workers as possible! After all, by this understanding, workers generate more value than they are paid, which means maximizing the size of your workforce is a surefire way to maximize the money you can make. The very last thing a greedy business owner would want to do is fire his workers – because if workers generate more value than they paid, cutting jobs means the business owner will necessarily lose more than he gains. Yet, we’re often told that cutting jobs is itself motivated by greedy business owners trying to increase their profits – which would be mathematically impossible in a world where all value is created by workers. The idea that greedy business owners pay workers less than the value they generate and the idea that greedy business owners cut jobs to increase their profits contradict each other – yet both ideas seem to fit comfortably into many heads at the same time. 

Another common belief is that some particular groups of people are discriminated against when trying to get auto loans or mortgages. Sometimes this is buttressed with references to studies that say, in effect, “We used our data and controlled for these seventeen different confounding variables, and found that all else equal, freckled people with identical financial credentials were less likely to get approved for a mortgage than non-freckled people.” Does this mean that freckled people are being discriminated against? Maybe. Or maybe there are other relevant confounding variables the study fails to take into account. But if you hold the belief that freckled people are being discriminated against, there’s a clear implication for the present situation. We should expect to find that freckled people have unusually low rates of payment delinquency or default. After all, the claim is that freckled people need to be disproportionately financially secure compared to non-freckled people to be approved for equivalent loans, which necessarily means the loans granted to freckled people should be at a disproportionately low risk of delinquency. Meanwhile, if there’s a group that reliably has a disproportionately high risk of delinquency or default, that would imply getting approved for a loan is actually disproportionately easy for that group, all else equal. The idea that there are groups of people who must be disproportionately well-qualified to get a loan but are also at disproportionately high risk of default are also contradictory to each other. Yet these ideas, too, are often held in tandem by people. 

What are some other examples you can think of? 

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A commenter on a recent Pierre Lemieux post wrote:

The only shot Trump has (and had) at the Presidency is due to the arcane system used in America to elect Presidents (why not use direct presidential elections like the rest of the world? … it is so much clearer and easy to understand! … even France abandoned electoral colleges in 1962!!)

The commenter could be right about the presidency of other countries. I don’t know enough to know.

But if he extends it to Prime Ministers, he’s wrong. The Parliamentary system I grew up with, as a Canadian, eh, is one in which the Prime Minister is the one who’s head of the party with a majority of the members of Parliament. (Or, if it’s a coalition government, the Prime Minister is the head of the party that has put together a coalition that contains a majority of Parliament. That’s the case with Justin Trudeau in Canada, whose coalition depends on having NDP members.) Britain, New Zealand, and Australia have similar parliamentary systems.

It’s very similar to an electoral vote system. Your party can get fewer votes than the other major party, but if they’re distributed right, you can get a majority of the seats in Parliament or, at least, more seats than the other major party. That actually happened in Canada twice in the last 10 years. In the September 2021 election, if the candidate whose party won the most votes had become Prime Minister, we would be referring to Erin O’Toole as Prime Minister O’Toole. In the October 2019 election, if the candidate whose party won the most votes had become Prime Minister, we would have referred to the Prime Minister in late 2019 as Prime Minister Andrew Scheer.

I wrote about this in 2021. One commenter made a very good point. I’ll quote the parts I agree with:

A popular vote for President comes with its own problems.

1. You incentivize corruption in your strong holds. For example, Democrats in California don’t need to cheat to win California. But if adding 100k votes could be meaningful generally, then why not? This isn’t dem specific; Republicans in Republican strongholds would face the same incentive.

2. You would need uniform voting rules. Far from obvious that is ideal. If you don’t have uniform voting rules, then in a real sense the popular vote isn’t the popular vote.

3. How do you deal with recounts on a national stage if the vote is close?

Note: The pic above is of Parliament Hill in Ottawa.

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Five Fiscal Truths

by Ryan Bourne, Cato at Liberty, April 18, 2024.

Excerpt:

The recorded federal deficit from 2023, at $1.7 trillion (or 6.3 percent of gross domestic product, or GDP), was 23 percent higher than in 2022, but even that was pushed artificially downward by the Congressional Budget Office (CBO) recording the Supreme Court’s cancellation of Biden’s student loan forgiveness plan as a one‐​off spending cut. The underlying figure was around $2 trillion, or 7.4 percent of GDP. This is easily the largest deficit recorded outside wars or acute emergencies since the Great Depression of the 1930s.

Figure 1 shows the CBO’s budget deficit projections for the next 10 years. It estimates, on current policy, that annual deficits will grow to $2.6 trillion per year by 2034. This likely understates the scale of red ink. It assumes that large portions of the Tax Cuts and Jobs Act will be allowed to simply expire, that no other large spending programs will be introduced after the next presidential election, and that no unexpected shocks or recessions will hit in the interim. The feds are simply borrowing vast amounts, especially given today’s sanguine macroeconomic conditions.

 

America’s New Regulation Busters

by Andy Kessler, Wall Street Journal, April 14, 2024.

Excerpt:

Most venture capitalists invest and help startups with new strategies and hiring a team. Mr. Churi describes what he does as “trench warfare,” fighting with regulators and incumbents deal by deal. He notes that “we have built houses the same way for 1,000 years—with sticks and bricks.” A startup, ICON, hoped to create homes for the homeless in Texas using a giant 3-D printing machine that deposits layers of concrete. It can “print” a 500-square-foot home in 24 hours. For $4,000. Game changing.

Then came the regulators. Mr. Churi says that for homes, international fire safety codes say, “ ‘You’ve got to put the wooden joists like this.’ But there are no wooden joists. The whole thing is inherently fireproof—it’s concrete.” As for regulators, “they’re like, ‘You’ve got to put the wooden joists like that. See it says it right here on the page.’ ” They grappled with fire-code permitting bodies. “New language got passed. It took two years.”

There’s so much I LOVE about this article. I remember David Friedman, in his first book, The Machinery of Freedom, quoting H.L. Hunt’s statement “If this country is worth saving, it’s worth saving at a profit.” I don’t literally agree with that statement and I bet David doesn’t either. But I think he quoted it because it’s getting at a good point: if people can make a profit by increasing freedom, they’ll be more likely to increase freedom than if they can’t.

IRS’s Most Wanted: The $200,000 Man

by the Editorial Board, Wall Street Journal, April 2, 2024.

Excerpt:

The most recent data suggests the IRS is still focused on the middle class. As of last summer, 63% of new audits targeted taxpayers with income of less than $200,000. Only a small overall share reached the very highest earners, while 80% of audits covered filers earning less than $1 million. Don’t forget to save those charitable-giving receipts.

My comment:

In 2021, the last year for which the IRS gives the relevant data, those with AGI of $682,577 or more were in the top 1 percent. [See Table 4.1.] So devoting 20% of audits to the less than 1% of taxpayers with income over $1 million does constitute focusing on high-income people.

I am NOT defending the IRS. I’m defending numeracy and the importance of not misleading readers.

 

Crime Rates, Not the Number of Crimes, Are a Better Way to Judge Immigrant Criminality

by Alex Nowrasteh, Cato at Liberty, April 17, 2024.

Excerpt:

Cuccinelli’s statement that crime rates don’t matter, that only the number of crimes matters, says nothing substantive about the potential danger that immigrants pose to Americans. Let me give an example. Under Cuccinelli’s interpretation, a city with 100 murders is twenty times more dangerous than a city with five murders. But if the city with 100 murders has a million residents and the city with five murders has only 100 residents, then the city with fewer murders is far more dangerous to the residents. The city with one million residents and 100 murders has a homicide rate of 10 per 100,000. The city with 100 residents and five murders has a homicide rate of 5,000 per 100,000, which is 500 times as great as the larger city with 20 times the number of murders.

This is an extreme example, but an example necessary to explain why crime rates are more important to understand relative to criminality and danger than the number of crimes. Which city would you want to live in?

My comment:  Alex makes a good point. There’s a further point. In any large group of people, some are going to be criminals. If the group is big enough (and assuming that we’re not talking about people who are in prison or on trial for crime), the vast majority are not criminal in the usual sense. (I defer to Harvey Silverglate’s point in his book with the highly exaggerated title Three Felonies a Day.)

I think Alex could have made the point even more strongly. There are tradeoffs. Whether the population at issue is born in America or born elsewhere, there is a risk of crime. That’s a cost. There are also benefits. We get their labor and their contribution to our culture. It’s not enough to say that the pool of immigrants contains criminals. It also contains very productive people, and their number is a multiple of the number who are criminals. You can’t do a cost/benefit analysis by considering only the costs. As my friend and fellow economist Alan Reynolds once said, that’s single-entry bookkeeping.

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