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Defending stability and prosperity is a test of America’s corporate responsibility
Greenback enjoys strongest month in two years ahead of presidential election
October figure far below average forecast of 100,000 job gains and comes just four days before US election
We should debate excessive policy easing and the neglect of credit and debt developments
The Democratic candidate stands for continuity of the values that underpin US prosperity
Japan and Italy aren’t quite as stagnant as you think
Political instability and meagre investment hobble large parts of the world
Also in today’s newsletter, bets on US election volatility rise, and UK borrowing costs soar
Funding boost will be wiped out by cost of meeting higher employer levy, say contracted service providers and education bodies
Our partners shouldn’t blame us for a shift aimed at solving the problems they have caused
Even when there is a clear policy shift to trade on, timing and implementation of changes is critical
Policymakers are grappling with some increasingly murky numbers
Families affected will be worse off by more than £1,000 a year
Falling sales for luxury, beauty and beer companies fuel doubts about Beijing’s attempts to boost confidence
Volkswagen and its EU rivals have allowed China to steal a march in EVs

I recently read Herman Melville’s novel entitled The Confidence-Man. (At least I assumed it was a novel when I picked it up, although often it seemed more like a series of anecdotes.  I need to reread it.)  In the story, Melville portrays a series of con men (or is it just one?), pretending to be a physician, philanthropist, pharmacist, philosopher, psychologist, investment advisor, etc.

One of Melville’s characters observes that it is almost impossible for the economy to function without trust:

Confidence is the indispensable basis of all sorts of business transactions.  Without it, commerce between man and man, as between country and country, would, like a watch, run down and stop.

Unfortunately, evolution gives an advantage to those who take advantage of others.  Fortunately, an equilibrium is reached where only a small part of the population consists of sociopaths.  Here’s Melville:

“Pray, which do you think are most, knaves or fools?”

“Having met with few or none of either, I hardly think I am competent to answer.”

“I will answer for you.  Fools are most.”

“Why do you think so?”

“For the same reason that I think oats are numerically more than horses.  Don’t knaves munch up fools just as horses do oats?”

One character argues that only machines can be trusted:

“I’m now on the road to get me made some sort of machine to do my work.  Machines for me.  My cider-mill—does that ever steal my cider?  My mowing-machine—does that ever lay a-bed mornings? My corn-husker—does that ever give me insolence? No: Cider-mill, mowing-machine, corn-husker—all faithfully attend to their business.  Disinterested, too; no board, no wages; yet doing good all their lives long; shining examples that virtue is its own reward—the only practical Christians I know.”

“Oh dear, dear, dear, dear!”

And he anticipates the day when machines shall replace all workers:

“Hence these thousand new inventions—carding machines, horse-shoe machines, tunnel-boring machines, reaping machines, apple-paring machines, boot-blacking machines, sewing machines, shaving machines, run-of-errand machines, dumb-waiter machines, and the Lord-only-knows-what machines; all of which announce the era when that refractory animal, the working or serving man, shall be a buried bygone, a superseded fossil.”  

Melville wrote this in 1857, relatively early in the new industrial economy.  In some ways, the issue of “confidence” is probably much more central to today’s economy than to the economy of the 1850s, when most Americans were farmers and lived in small villages where people knew each other.  The following is from a 2021 paper on psychopathology:

In this direction, it has been proposed that it would be possible to find higher levels of psychopathic traits in certain professions or occupations (e.g., entrepreneurs, managers, politicians, investors, salesmen, surgeons, lawyers, telemarketing employees). The reason behind this could be that it is precisely these traits the ones that could boost the tasks involved in those professions or occupations and even facilitate success in them (Hare, 2003bDutton, 2012Babiak and Hare, 2019Fritzon et al., 2020). . . . 

In this regard, Dutton (2012), after applying the Levenson Self-Report Psychopathy Scale (LSRP; Levenson et al., 1995) online to 5,400 people and asking about their profession, found that, in the United Kingdom, the 10 professions with the highest levels of psychopathic traits were company CEOs, lawyers, radio or television characters, salespersons, surgeons, journalists, priests, police officers, chefs, and civil servants.

There’s a great deal of discussion about what AI will or will not be able to do in the future.  I see less discussion of how AI will address the problem of confidence.  Who would you trust more, a human selling herbal remedies, or an AI dispensing advice on herbal medicine?  A human real estate agent, or an AI providing information on houses for sale?  A human investment advisor or an AI giving investment advice? 

If Melville is right, then the biggest thing that AIs will have going for them is that people trust machines more than they trust other people.  Recall how Uber mostly solved the taxi regulation problem.  Perhaps AIs will solve the principal-agent problem.

PS.  This is a link to Melville’s novel.  Chapter 7 provides an amusing take on effective altruism (especially the portion from the bottom of page 53 to page 58.)  

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Nocera and McLean’s priceless PPE analysis

I suspect regular readers of this blog are familiar with what basic economics tells us we can expect to see as a result of price controls. Let’s say that for some good, there is a large positive demand shock or negative supply shock, or both. This shifts the demand curve to the right, or supply curve to the left, or, again, both curves shift right and left respectively. As a result, the market-clearing price – that is, the point where the two curves intersect – sharply increases. If the law prevents the price from rising to the market clearing level, what should we expect to see?

We should expect to see the quantity demanded (i.e., the amount people want to buy at the artificially suppressed price) to vastly exceed the quantity supplied (i.e., the amount producers are willing to sell at the artificially suppressed price). So when price controls are in effect, we should expect to see severe shortages. A knock-on effect of these shortages can be the creation of black markets – funneling the good in question out of the open market and selling it at higher prices through black markets. Black markets, in turn, greatly increase the risk of fraud and deception.

The vast majority of economists oppose price controls for these (among other) reasons. This is true even when, as Jon Murphy recently pointed out, supply is fixed in the short run. If there is a dire need for some good, you want two things to happen. First, you want to increase the quantity supplied. That is to say, you want to ensure that production is operating at the maximum current capacity. And in the longer term, you would want to increase supply – that is, increase the capacity for production. High prices do both – they encourage current producers to crank out as many units as they possibly can with their current capacity, and encourage them and other potential producers to increase their capacity to produce even more the good in question going forward.

Suppose tomorrow, scientists announce that eating 100 grams of cranberries per day has been proven to make one immune from ever developing cancer. What would happen in the short run? There would be a huge increase in the demand for cranberries – the demand curve would shift sharply to the right. Cranberries, in turn, would become much more expensive, so even though demand will drastically increase, the quantity demanded will not rise by all that much, at least in the short run. What would happen on the production front? For any given cranberry farm, you’d expect there are some marginal adjustments they could make to increase output, but those changes hadn’t been worth the cost of making. But when the price rises, those adjustments become worth making. You’d expect current cranberry farmers to immediately try to maximize their yields and push as many cranberries out the door as they possibly could.

In the longer term, you’d expect them to increase their cranberry production capacity, and you’d also expect to see many other people shift away from growing blackberries or marionberries and start growing cranberries instead. This, in turn, shifts the supply curve to the right as well, bringing the market price for cranberries back down. The process of adjustment will take some time, but if your goal was to make sure lots of people can take advantage of cranberries and their cancer-preventing properties, implementing price controls on cranberries would be your worst enemy, because it would prevent these adjustments from occurring. And if that happened, you can expect a black market in cranberries will arise, with all the negative effects that come alongside black markets.

In The Big Fail: What the Pandemic Revealed About Who America Protects and Who It Leaves Behind, Joe Nocera and Bethany McLean lay out in detail many terrible hardships during Covid-19 pandemic caused by shortages of personal protective equipment, or PPE, such as N95 masks or hospital gowns. Everything they lay out reads like a checklist perfectly designed to highlight every negative side effect standard economics predicts when price controls are put into effect. And yet, perplexingly, price controls on PPE are completely absent from the story they tell. They briefly quote a statement made by Jared Kushner saying that free markets were the answer to the problem, and seemingly take that at face value as a representation of what actual policy was. But, of course, there was never anything close to a free market operating with regards to PPE production or distribution. In March 2020, the Trump White House was already issuing statements about how the Federal Government was on the alert to prevent any so-called “price gouging related to medical resources needed to respond to the coronavirus.”

Nocera and McLean describe how a massive black market arose for PPE, and how desperate medical facilities turned to these black markets to try to get the needed supplies. Some facilities were able to acquire supplies on the black market at prices producers were forbidden from selling on the open market – but many others fell victim to fraud.

One other interesting note in the above linked statement from the White House is the assurance that the “Federal Emergency Management Agency (FEMA) is sending respirators, surgical masks, face shields, and gloves to places they are needed most.” That is, FEMA was going to try its hand at distributing resources from a top-down, command and control style. But experience quickly taught people not to trust this. It got to the point that FEMA had to put out a statement of their own addressing concerns that FEMA itself was essentially stealing PPE. FEMA described their actions in this way:

The Department of Justice (DOJ) has assembled a COVID-19 Hoarding and Price Gouging task force to identify cases of price gouging and may alert FEMA to some shipments and stockpiles of PPE. Under Defense Production Act authorities, FEMA may then compel a price gouger to sell PPE in its control to FEMA at prevailing market prices, not gouging prices.

That last sentence is a bit disingenuous – it would be more accurate to say that FEMA would compel people to sell to FEMA at artificially suppressed prices rather than actual market prices. But at least this raised the possibility that FEMA would, as the federal government assured us, send those “respirators, surgical masks, face shields, and gloves to places they are needed most”, right?

Nocera and McLean don’t have much good to say about this here. For example, they describe the case of Marc Schessel, who was attempting to buy N95 masks at market prices to distribute them to hospitals. This is how they described what happened:

The second purpose of the memo was to plead with the Trump Administration to let the hospital consortium he had put together buy twenty-five million N95 masks for which it had contracted in China. “We want to pay the purchase price and pick up the masks today, and then to immediately begin distributing them to the hospitals where they are needed – today,” wrote Schessel. His biggest fear – incredibly – was that the federal government was going to steal them. He had begun to hear rumors that the N95s his consortium was planning to buy were going to be snatched up by FEMA – the Federal Emergency Management Agency – instead. Who could say where they would wind up in FEMA got them?

…Schessel concluded his memo with this promise: “We will make sure the masks get to the hospitals that need them. Today. We will not hoard them so that they get stuck in a bureaucratic abyss or doled out for political purposes.”

Months later, reflecting on his effort to get the government more involved in finding and distributing PPE, a disgusted Schessel said, “It was a complete waste of time. FEMA took the masks. We never saw them again. The government never had the slightest interest in helping hospitals get PPE.”

And it wasn’t just that Schessel, personally, didn’t see them again. No other hospital or medical facility saw them either. And this was not an isolated incident:

Time and again during the first year of the pandemic, one or another arm of the federal government walked off with PPE that a state or a hospital had managed to track down and import. Though there had long been rumors that the PPE wound up hidden away on military bases, the truth is that nobody knows where it went.

While Nocera and McLean document in dramatic detail event after event that perfectly lines up with what economists warn price controls will create, it’s a shame they never examine the link between the policies in place and those outcomes. Nonetheless, they helpfully illustrate just how devastating such policies can be.

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Electric Vehicles Price Theory Problem: Cutsinger’s Solution

[Editor’s note: Welcome to the second of our new series on Price Theory problems with Professor Bryan Cutsinger. We reprint this month’s question below; you can also view the original post from earlier this month here. You can also see the solution to last month’s problem here.]

 

Question:

According to the Energy Information Administration, crude oil jointly supplies gasoline, heating oil, jet fuel, lubricating oils, asphalt, and many other products. Suppose the widespread adoption of electric vehicles (EVs) reduces gasoline demand but does not affect the demand for the other products jointly supplied by oil. How will the widespread adoption of EVs affect the price of these other products?

 

Answer:

The idea for this question is inspired by Deirdre McCloskey’s terrific price theory text, The Applied Theory of Price. I like this question because it highlights the interconnectedness of markets and how powerful the supply and demand framework can be.

Let’s review two important ideas before getting to the answer. 

The first idea is that we can read a demand curve as a schedule showing the maximum quantity consumers are willing to buy at a particular price, or we can read a demand curve as a schedule indicating the highest price consumers are willing to pay for a particular quantity, reflecting the marginal values of different quantities. For example, if the price of oil is $50 per barrel and the quantity of oil demanded at this price is 100 barrels, the marginal value of the 100th barrel is $50.

The second idea is that when a good jointly supplies multiple products, as oil does, the demand curve for that good reflects the vertical sum of the demand curves for those products. For example, suppose that oil jointly supplies just gasoline and jet fuel in fixed proportions. Let’s say that the marginal value of the gasoline produced by the 100th barrel of oil is $30 and the marginal value of jet fuel produced by that same barrel is $20. In this case, the maximum price people would be willing to pay for the 100th barrel would be $30+$20=$50. 

 

With these two ideas in mind, let’s turn to answering the question. To be clear, my answer assumes that both sides of the oil market–suppliers and demanders–are price takers, and that the oil supply curve slopes upwards. We could consider other alternatives to these baseline assumptions, but for our purposes, these assumptions will do.

A fall in gasoline demand reduces both the oil price and the quantity of oil supplied to the market. As a result, the supply of the other distillates produced by oil must also fall since suppliers are producing fewer barrels of oil. Thus, the prices of these distillates must rise to ensure that the quantities of these distillates demanded equals the now lower quantity supplied.

Figure 1 illustrates this scenario graphically. For simplicity, the figure only includes the demand for two distillates–namely, gasoline and jet fuel. The demand curve D_Oil reflects the total demand for oil, i.e., it consists of the demand for oil as gasoline plus the demand for oil as jet fuel. The demand curve d_JF reflects the demand for oil as jet fuel. The vertical distance between the demand for oil as jet fuel, d_JF, and the total demand for oil, D_Oil, represents the demand for oil as gasoline.

 

 

Initially, there are Q*_1 barrels of oil available. At this quantity, the price of oil as jet fuel is P*_JF. Lower gasoline demand reduces the total demand for oil,, illustrated in Figure 1 by the demand curve D’_Oil. At the new price, suppliers are only willing to supply Q*_2 barrels of oil, so the price of jet fuel must rise to P’_JF.

 

Bryan Cutsinger is an assistant professor of economics in the College of Business at Florida Atlantic University and a Phil Smith Fellow at the Phil Smith Center for Free Enterprise. He is also a fellow with the Sound Money Project at the American Institute for Economic Research, and a member of the editorial board for the journal Public Choice.

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Bearing Witness to War

Not everyone values 2500+ year old epic poems. If that’s you, give an expert the chance to convince you. In this episode of EconTalk, Russ Roberts interviews Claudia Hauer about war, education, and strategic humanism. Hauer is an expert at making the case for the importance of reading classical texts and often had to as a visiting professor at the U. S. Air Force Academy. Hauer, a faculty member at St. John’s College (Santa Fe) where students learn ancient Greek as a part of their education, is also the author of Strategic Humanism: Lessons on Leadership from the Ancient Greeks, which is the focus of this interview.

Dr. Hauer mentions teaching these two very different student populations: U. S. Air Force officers-in-training and St. John’s College students, who specifically sought out a “great books” style education. Hauer argues that both groups of students, disparate as they may be in their approaches and goals, have something to take away from the humanities, particularly the ancient Greek epic poetry she teaches them. 

Hauer’s students from the Air Force Academy often entered the classroom convinced that an ancient war poem has little to offer them. On the surface, the weapons and ways of combat portrayed in Homer are very far from modern life and war. During Hauer’s and Roberts’ conversation, they refer to this notion of practical knowledge: τέχνη (technê) in classical Greek. 

Technê is a notion that can (in most cases) be translated as craft, i.e. how we achieve excellence (in Greek: ἀρετή [aretê]) in a particular domain. It is professional knowledge, experiential knowledge that comes from doing a thing. It is, as Roberts mentions, the root of our word technology but it does not mean exactly the same thing.

Hauer argues that the Greeks, even for non-specialists, are worth reading, and describes how she successfully convinced her classes of officers-in-training that they could find a reading of Homer worthwhile. The Greek tradition of how best to be human, she argues, is still worth discussing even a couple thousand years later, and in the case of those training to lead in the military, these texts have particular relevance:

I do think it’s important that we read it if only to bear witness to some of those objectifying tendencies during war. But, even above and beyond, it teaches us certain timeless lessons about comradeship during war, and also those cycles. Jonathan Shay has this book, Achilles in Vietnam, in which he points out that the cycles, the emotional cycles that we see unleashed in Achilles over the course of the Iliad–betrayal by the commander, withdrawal from the fighting, death of his close friend, and then a cycle of grief that leads to murderous, barbaric rage. Jonathan Shay points out that these cycles are timeless: that they continue to play out on the fields of battle.

And so I think, insofar as what happens in the Iliad is still a part of the war landscape, I think it’s important that we read it. Could we get beyond that? Could we actually push into some territory that suggests it’s worth reading for its own sake? I think, the similes–I think the way Homer sets the backdrop of war against the natural landscape, and explores the way men fighting are like lions, or like natural forces, like torrents of rain or thunderstorms–I think he’s really starting this work that the Greeks will continue in their literature, which is: How do we begin to locate the domain of the human being against our sort of helplessness as creatures in this world of force and power?

And, we don’t always fully understand our relationship to nature, our relationship to the animals. And that’s the problem that the Greeks worked out in all of their literatures–is that, because the gods didn’t hand human being to them on the platter of scripture, they kind of have to work it out for themselves. In that sense, I would argue that the Iliad, we should read it for its own sake.

Like many moderns with a humanist education, much of my adult life will be spent behind a laptop. What kind of technê does that require? Did my education equip me with any sort of technê? Is knowing how best to be human a form of technê? Is it something that can be taught or transmitted? Technê as a concept is ubiquitous in Greek literature and philosophy. In Meno, Plato opens with a question: “Can you tell me, Socrates, whether virtue is acquired by teaching or by practice; or if neither by teaching nor practice, then whether it comes to man by nature, or in what other way?” Without getting too far into the Greek text (Plato uses a different word similar in meaning to technê), it is clear that readers are being invited to contemplate the practical implications of knowledge about what is good and true. 

Aristotle treats similar questions in Metaphysics, where he distinguishes between the knowledge of an artisan and a master craftsman. For Aristotle, experience is a necessary but not sufficient condition for knowledge. Wisdom is what elevates experience, although he notes that simple experience also can be a very useful thing for humans, as “It would seem that for practical purposes experience is in no way inferior to art; indeed we see men of experience succeeding more than those who have theory without experience.”

In their philosophical discussions, poems and plays, the Greeks had complex and sophisticated views on practical knowledge, and there are far more examples than I can list here. These conversations are accessible to us (particularly given resources online like the Online Library of Liberty) whether we are a soldier, sailor, academic or autodidact. We are still asking these human questions.

 

Here are some other questions to consider:

1- Dr. Hauer convinced her Air Force Academy students to read the Iliad, a poem about war. Does it have relevance for those of us who aren’t engaged in developing the technê of war or the technê of reading Greek literature? How might that be? Is it more or less relevant than the Odyssey, as mentioned in the podcast episode?

 

2- The humanities can be viewed as impractical, since they are not often directly connected to job training. However, the ancient Greeks were very much interested in the practical implications of ideas about knowledge. Why did the Greeks distinguish between purely contemplative knowledge and practical expertise? What may their approach to knowledge acquisition have to teach us about education today?

 

3- What parallels can we draw between physically practical skills, like carpentry, athletics, medicine, or making art, and how we practice virtue?

 

4- Would the ancient Greeks consider the humanities as we conceive of them now to be a form of technê? In what ways are the humanities similar to the kinds of technê present in professional fields, such as medicine, the military, etc.?

 

5- What kinds of humanistic disciplines do you believe would most benefit from the ancient Greek insights on knowledge transmission, and how? What can students of the humanities learn from modern practical disciplines?

 

Related Resources

Liberty Matters: Why Read the Ancients? Essays by Roosevelt Montás, Anika Prather, Aeon J. Skoble, and Jennifer A. Frey

“A leadership class from the ancient world”, essay by Josiah Osgood

“Mr. Truman’s Degree”, essay by G. E. M. Anscombe (1956)

τέχνη, Henry George Liddell, Robert Scott, A Greek-English Lexicon

Technē in the Routledge Encyclopedia of Philosophy

 

Nancy Vander Veer has a BA in Classics from Samford University. She taught high school Latin in the US and held programs and fundraising roles at the Paideia Institute. Based in Rome, Italy, she is currently completing a masters in European Social and Economic History at the Philipps-Universität Marburg.

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In the section above, I stated that people often think that “there’s a special problem when we buy from people in other countries.” In a sense, that’s true. If you buy a low-end toaster, chances are that it’s made in China. Buying one from China means that you’re not buying one made anywhere else, including in America. So, Americans who might have produced toasters here, admittedly at a much higher cost, don’t get those jobs.

But there are three important responses to that point. First, workers who don’t produce toasters here produce other goods or services. Our current unemployment rate, U-3, which is a measure of people who are out of work and looking for work, is a low 4.1 percent. Moreover, the ratio of the number of job openings to the number of unemployed workers is 1.1.  There are more jobs vacancies than there are unemployed people.

Second, there is nothing special about the fact that the toaster is produced in another country. If I buy GAF shingles produced in Baltimore, Maryland, rather than Owens Corning shingles made in Portland, Oregon, I help to employ someone in Baltimore instead of someone in Portland. But we don’t hear a lot of upset about that.

You might say that’s because at least either way I’m employing a worker in America. So, it comes down to jobs. But then go back to my first point. American residents who don’t have jobs producing toasters do get jobs producing other things.

The third point is that most people exaggerate the number of jobs lost to imports and fail to understand the number of jobs lost to technological innovation. Our manufacturing output is only 6.4 percent below its all-time high, which was in 2007. We aren’t “deindustrializing.” Instead, our industrial sector, due to improved technology, is becoming more productive. Manufacturing employment is 33.9 percent below its peak in 1979. Moreover, manufacturing employment as a percent of all employment, which hit its peak in December 1943 at 38.7 percent and its postwar peak in September 1948 at 31.9 percent, is now 8.1 percent.

This is from David R. Henderson, “Why Trade Should Be Free,” Defining Ideas, October 30, 2024.

 

Read the whole thing. Be aware that it’s longer than my usual article. I had a lot to cover.

Thanks to Don Boudreaux for giving comments and suggesting data sources.

 

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Henderson on Pandemic Planning

I recently started reading The Big Fail: What the Pandemic Revealed About Who American Protects and Who It Leaves Behind, by Joe Nocera and Bethany McLean. They had previously written the book All the Devils are Here: The Hidden History of the Financial Crisis, which I found to be one of the better books on the 2008 financial crisis, so when I saw their new book I was eager to dive in. I expect I’ll have more to say about it going forward, but one thing that jumped out at me in the early chapters was the mindset of government officials in the years leading up to the Covid-19 pandemic, and of one in particular – Donald Ainslie Henderson. (Yes, I will confess that I deliberately made the headline of this post slightly click-baity, at least for the regular EconLog reader!)

In the aftermath of the Covid-19 pandemic, it wasn’t at all uncommon to hear people rail against the government for being unprepared and for its complete lack of planning in the event of a major pandemic. But Nocera and McLean point out that, in fact, plans had been worked on and established for years prior to the arrival of Covid-19 in America.

Plans for handling a national pandemic began to be put together in 2005, as a result of then President George W. Bush reading John M. Barry’s book about the 1918 flu pandemic, The Great InfluenzaAfter finishing the book, President Bush told his officials “Look, this happens every 100 years. We need a national strategy.”

While this is when the government began to formulate a national strategy in earnest, there had been many urging this step be taken before, as Nocera and McLean write:

Indeed, for decades there had been a small group of scientists who tried to warn the government about the potentially disastrous consequences of a pandemic. The leader of the ad hoc group was an epidemiologist named Donald Ainslie Henderson, or D. A. Henderson, as he was known to everyone, including his wife.

And Henderson, shall we say, knew a bit more than most about controlling the spread of disease:

In 1966, as a thirty-seven year old scientist, Henderson was lent to the World Health Organization to lead a program with a seemingly impossible task: eradicating smallpox, one of the world’s great scourges. Henderson turned out to be a remarkable leader, and in the span of a decade he and his team pulled it off.

Henderson was brought in to help with the development of a strategy: “By the time Bush began pushing his administration to come up with a pandemic plan, Henderson was seventy-eight years old. He had spent a decade as the dean of the Johns Hopkins School of Hygiene and Public Health, and had rotated in and out of government several times.” He joined the “Center for Health Security when Bush began agitating for a pandemic plan. But because of his stature, he was brought into some of the administration’s discussions. He was not happy with what he was hearing.”

Why was he unhappy? Henderson was different from most health officials in one particularly interesting way. He was not what Adam Smith would famously call the man of system, described by Smith in the following way:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess–board. He does not consider that the pieces upon the chess–board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess–board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.

Henderson was keenly aware that people have “a principle of motion” all of their own, and fruitlessly tried to get other officials to understand that. One of Henderson’s colleagues, Tara O’Toole, described his mindset this way:

“D.A. kept saying, ‘Look, you have to be practical about this,'” O’Toole recalls. “‘And you have to be humble about what public health can actually do, especially over sustained periods. Society is complicated, and you don’t get to control it.’ There was also the fact that D.A. and I had been in government. We had a pretty clear sense of what government was, and wasn’t, capable of.”

Henderson particularly stressed the importance of situations being managed through decentralized, hands on, real world experience rather than top-down planning. His ability to understand this was no small part of the reason why his team’s efforts to eradicate smallpox was successful. In planning discussions, he would emphasize the importance of understanding that people aren’t simply chess pieces that can be moved around at will:

Henderson liked to say that there were two kinds of epidemiologists: those who used “shoe leather” – that is, they got out of the office and talked to people to learn about a disease and its spread – and those who used computer models. He was firmly in the shoe-leather camp. In meetings to hash out the plan, he made his position plain: he opposed creating policy based on hypothetical models – which, after all, were themselves based on hypothetical assumptions. “What computer models cannot incorporate is the effects that various mitigation strategies might have on the behavior of the population and the consequent course of the epidemic”, he said. “There is simply too little experience to predict how a 21st century population would respond, for example, to the closure of all schools for periods of many weeks or months, or to the cancellation of all gatherings of more than 1,000 people.”

However, the leadership of the pandemic planning team had a very different mindset:

The two men heading the planning team were Carter Mecher, the gadfly at the Department of Veteran Affairs, and Richard Hatchett, and oncologist who had been serving as Bush’s biodefense adviser since 2002. They were smart and dedicated, but neither had any experience with epidemiology or pandemics.

Mecher and Hatchett didn’t share Henderson’s reservations about centralized, top-down plans based on hypothetical models. And that’s putting it mildly:

They wound up embracing a model built by a high school student, Laura Glass, for a science project.

Eventually, President Bush’s prediction came true – we had a pandemic that seemed comparable to the 1918 flu. And there was a plan in place, ready to go for Alex Azar, the then Secretary of Health and Human Services:

Azar immediately began “marching through the pandemic playbook,” as he’d later put it, that had been written in the Bush administration and updated by the Obama administration. But for all the man-hours that had been spent putting together the pandemic plans, the documents were essentially worthless. Reality was a lot different from a simulation or a war-game exercise.

It turned out that in practice, the “plan” was in the best case worthless, and in many cases actively harmful. While Mecher and Hatchett saw their role as creating a playbook for everyone to follow, Henderson saw the goal as maximizing the opportunities for people to adjust and adapt in their own way. It’s worth pondering how different the world might look today if policymakers had taken Henderson’s advice in the era of Covid-19 – or what it might look like today if the smallpox eradication effort had been run by people like Mecher and Hatchett.

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Almost every single day, I seem to encounter at least one article that I find highly annoying.  In many cases, it involves a bad government policy.  And most of those bad policies are aimed at addressing very real problems, but the cost of the policy ends up exceeding the benefit.

Consider the sport of snow skiing.  If I had my way, I’d make it impossible for skiers to sue ski slopes when they injured themselves while skiing.

I don’t expect my idea to be adopted.  If I proposed it to the legislature, someone would point out that it would even ban lawsuits when the injury was 100% the fault of the ski slope operator—say when they accidentally left a metal rake on the slope, and a skier tripped over it and broke a leg.

I agree that it would be unfortunate if skiers were not allowed to sue ski slopes over rakes accidentally being left on the slope.  Nonetheless, I don’t wish to allow skiers to sue the ski slope for any injury incurred while skiing.  My rationale is that the harm done by preventing justified lawsuits for ski injuries is trivial compared to the benefit derived from preventing frivolous lawsuits over ski injuries.

More generally, I’d prefer to radically reduce the amount of lawsuits in most other areas, even though it would prevent some valid lawsuits from occurring.  Thus the legislature may wish to ban lawsuits for “pain and suffering” after an auto accident, unless there is clearly identifiable physical damage to the body.  Yes, that would prevent some valid claims.  But frivolous lawsuits resulting from auto accidents have recently increased dramatically in California, and insurance rates are soaring.

A recent article in Reason points to a good example of the perfect being the enemy of the good:

The idea was that concerned citizens with easy access to the courts would be the ultimate check on bureaucrats casually greenlighting environmentally ruinous projects.

An unintended consequence of CEQA is that anyone can file a lawsuit to wring concessions out of project sponsors, including concessions that have nothing to do with protecting the environment.

Because California’s strict zoning laws frequently require developers to seek some sort of discretionary government approval, this opens up a lot of opportunities for cynical actors to use CEQA to shake down builders.

Indeed, this practice is common enough to have a nickname: “greenmailing.” . . .

For the past decade, the developer Relevant Group has been building hotels in the Hollywood neighborhood of Los Angeles. Time and again, after the city approved the company’s projects, another neighborhood developer filed petitions arguing that the city’s approval violated CEQA by studying traffic, noise, and other impacts enough.

The litigious developer in this case is Stephan Nourmand, principal of Sunset Landmark Development, which owns and operates the Hollywood Athletic Club near Relevant’s projects.

Nourmand’s company dropped its lawsuits challenging the approval of two of Relevant’s hotel projects after the developer agreed to pay $5.5 million.

When Nourmand sued over the approval of another of Relevant’s hotel projects in 2018, Relevant’s lawyer met with him to try and convince him to drop the lawsuit. According to court filings, Nourmand told the lawyer “You know the drill. It’s going to take a check to make this go away.”

This seems like a classic example of creating a worse situation by attempting to create a perfect situation.

I very much doubt that California’s CEQA law would pass any sort of reasonable cost-benefit test.  In the real world, governments often end up banning many projects where the benefits greatly exceed the costs.  Regulators almost always err on the side of too much regulation.

Let’s say that you convinced me that I was wrong, and that the CEQA is actually a great policy.  Assume that in the majority of cases where local governments reject projects on CEQA grounds, the total social costs of the projects exceeds the benefits.  Even in that case, I’d oppose allowing people to sue over CEQA approved projects.  When lawsuits occur in cases where the project has already been approved by regulators, the vast majority of the objections will be without merit.

Most lawsuits over CEQA decisions probably end up hurting the environment.  Many of the lawsuits are fought over issues like “density” and “congestion”.  But adding density to cities like Los Angeles is actually good for the environment.

Our society seems very averse to ever allowing a situation where someone is not allowed to sue even though a lawsuit would be justified.  But it’s almost never optimal to ask for perfection in any area.  Imagine if new highways were never approved until the highway engineers guaranteed there would be no fatal accidents.  If our tort law policy is to insure that there are zero cases where justified lawsuits are not allowed, then we will end up with far too many lawsuits by any reasonable cost-benefit standard.

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I just learned from Condi Rice yesterday that my long-time Hoover Institution colleague and long-time friend Tom Moore has died. He died on August 23. He was 93.

Tom was an excellent economist. He wrote the article titled “Trucking Deregulation” in The Fortune Encyclopedia of Economics, 1993, which later, after the rights reverted to me, became The Concise Encyclopedia of Economics. Then, when I put together the second edition of The Concise Encyclopedia of Economics, Tom wrote an update titled “Surface Transportation Deregulation.”

Tom was one of the early advocates of deregulation. At a forum on inflation held by President Ford in 1974, Tom circulated a statement calling for deregulation of transportation, airlines, energy, and a number of other sectors. (I’m going by memory here. The copy he gave me was destroyed in my 2007 office fire.) As I recall, he got the vast majority of economists, a group that included many Democrats as well as Republicans, to sign the statement.

Tom also wrote, for the second edition of the Concise Encyclopedia, the article “Global Warming: A Balance Sheet.” I reread his piece as background to this post. I find heartening how well some of his analysis holds up almost 20 years after he wrote.

Here’s an excerpt:

The media and many others have attributed to global warming every possible weather, from more to less climate variability, from more rainfall to more drought, and from more violent winter storms to fewer and weaker cold weather surges. But an examination of its likely effects suggests little basis for that gloomy view. According to the IPCC, global warming would warm winters more than summers, would produce more precipitation, and would lead to more of an increase in temperatures at higher latitudes—that is, in already cold regions—than at the equator.

How would climate affect economies? Climate affects principally agriculture, forestry, and fishing. For the United States, these three total less than 2 percent of the GDP. Manufacturing, most service industries, and nearly all extractive industries are immune to direct impacts from climate shifts. Factories can be built practically anywhere—in northern Sweden or in Canada, in Texas, Central America, or Mexico. Banking, insurance, medical services, retailing, education, and a wide variety of other services can prosper as well in warm climates (with air-conditioning) as in cold (with central heating). A warmer climate will lower transportation costs: less snow and ice will torment truckers and automobile drivers; fewer winter storms will disrupt air travel; bad weather in the summer has fewer disruptive effects and passes quickly; a lower incidence of storms and less fog will make shipping less risky. Higher temperatures will leave mining and the extractive industries largely unaffected; oil drilling in the northern seas and mining in the mountains might even benefit.

A few services, such as tourism, may be more susceptible to weather. A warmer climate would likely change the nature and location of pleasure trips. Many ski resorts, for example, might face less reliably cold weather and shorter seasons. Warmer conditions might also mean that fewer northerners would feel the need to vacation in Florida or the Caribbean. At the same time, new tourist opportunities might develop in Alaska, northern Canada, and other locales at higher latitudes or upper elevations. Shorter winters would benefit most outdoor recreation, such as golf, hiking, tennis, and picnicking.

In many parts of the world, warmer weather should mean longer growing seasons. If the world were to warm, the hotter climate would enhance evaporation from the seas and, in all probability, lead to more precipitation worldwide. Moreover, the enrichment of the atmosphere with CO2would fertilize plants, making for more vigorous growth. The IPCC assessment of warming is that “a few degrees of projected warming will lead to general increases in temperate crop yields, with some regional variation” (IPCC 2001, p. 32). Bjørn Lomborg, a Danish environmentalist and statistician, reported that with moderate adaptation by farmers, warming would boost cereal production in richer countries by 4–14 percent, while cutting them in poorer countries by 6–7 percent (2001, p. 288). The U.S. Department of Agriculture, in a cautious report, reviewed the likely influence of global warming and concluded that the overall effect on world food production would be slightly positive and that, therefore, agricultural prices would probably decrease (Kane et al. 1991).

Global warming could melt glaciers and thus cause rising sea levels, which would flood low-lying regions, including a number of islands and delta areas. The high-end estimate by the IPCC of the rise in the sea level by the year 2100 is three feet. Economists such as William Cline, William Nordhaus, and Richard Morgenstern, starting with this three-foot assumption, have estimated the costs of building dikes and levees and of the loss of land for the United States at $7–$10.6 billion annually, or about 0.1 percent of America’s GDP. For some small low-lying island nations, the problems would be much more severe; in some cases they might even be completely submerged.

The whole piece is well worth reading, as are his two pieces on transportation deregulation.

Today or tomorrow, depending on my time constraint, I’ll share, over at my Substack, my story about how I came across Tom’s work in 1972. I’ll post the link here.

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 The minimum wage law is a snare and a delusion. It preys upon the weakest economic actors in the land. Before the advent of this pernicious law way back in the 1930s, the unemployment rate of whites and blacks, young and old, was about the same. There were no marked differences regarding joblessness for any of these categories. Nowadays, the unemployment rate of teenaged blacks is quadruple, yes, quadruple, that of middle aged whites.

Why is this?

The law is an unemployment law, not an employment law. It mandates that anyone with a productivity level below that stipulated by law will be unemployable. If the law requires a wage of $10 per hour, and your productivity is only $7 hourly, then any firm foolish enough to hire you will effectively lose $3 every 60 minutes. Either they will not hire you, or, they will go broke if they do that once too often. Raising the level from $10 to $15 will just mean that those with a productivity of $13, who could have worked with a law requiring salaries of $10, can no longer do so.

The minimum wage law is thus not a floor which when raised boosts compensation to labor. No, rather, it is a high jump bar that the worker needs to exceed in order to get a job in the first place. The higher is it raised, the harder it is to jump over, into employment. If it really were floor, undergirding wages, why not  boost it to $100 per hour, or better yet $1000? Then, we’d all be rich. Why not cut off all foreign aid to poor countries, and tell them, instead, to institute a minimum wage law, and keep raising its level until national poverty were ended?

Bernie Sanders wants to raise the minimum wage level to $17 per hour. That is more than double the present federal level of $7.25. Does he want to move black teen unemployment rates up from quadruple that of middle aged whites to quintuple? To sextuple? To septuple levels? (True confession: I had to look up these words). Presumably not. What, then, is the explanation for his stance? Economic illiteracy.

All too often, research on this matter focuses on increases in the minimum wage level. Who cares about mere increases? The entire rotten law ought to be repealed, and salt sown where once it stood. For at any level, it makes it impossible for those whose productivity is below the level stipulated by law. Card and Krueger [1] would disagree. They found that a slight increase in its level in New Jersey did not lead to more unemployment of the unskilled than in neighboring Pennsylvania, which did not raise its mandated legal wage. But their statistics were proven to be unreliable, and, in any case, we should be comparing the law with its absence, not with a slightly higher or lower level.

Fire burns people. It does so at 150 degrees Fahrenheit, as well as at 152 degrees. Suppose a chemist cannot discern much of a difference between these two temperatures, and then concludes that there is nothing wrong with burning people. What should we say to him? We should aver that there is something seriously wrong with his analysis. We should respond to the Cards and Kruegers of the world in much the same manner.

[1] Notable supporters of minimum wage legislation are Card and Krueger, 1994, 2000. For critiques, see Block, 2001;  Burkhauser, Couch and Wittenburg, David, 1996;  Burkhauser and Finnegan, 1989; Gallaway and Adie, 1995;  Hamermesh and Welch, 1995; Neumark and Wascher, 2000

Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans.

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Remunerations Determined by Markets or Politics?

In our more or less free societies, we regularly see confirmations of an idea well defended by Friedrich Hayek and by Anthony de Jasay. The idea is that remunerations determined by politics, that is, by coercive authorities under the threat of punishment, are not only less efficient but also more conflictual than if determined only by impersonal markets.

In a recent example, the International Longshoremen Association (ILA), a government-protected union (as they all are by labor laws and government bureaus), called a strike. Its leader, Harold Daggett, haughtily threatened 200 million consumers. Of the many employers of his members (container carriers and terminal operators), he said: “We’re going to show these greedy bastards you can’t survive without us!” On their side, the greedy longshoremen are not proletarians: they earn between nearly $100,000 to more than $250,000 a year, much above the average salary in the US (about $60,000). In 2020, 665 dockworkers at the Port of New York and New Jersey were in the more-than-$250,000 category. As a union apparatchik, Daggett himself earns over $900,000 a year; his son, who works for the same unions, earns more than $700,000. ILA temporarily settled the strike for a more than 60% wage increase but still wants to stop automation. This is in a context where the most productive port in America (Charleston) is ranked 53rd in the world. (See “A Ports Strike Shows the Stranglehold One Union Has on Trade,” The Economist, October 2, 2024; “A Dockworkers Walkout Would Close Ports From Maine to Texas and Slam the U.S. Economy,” Wall Street Journal, September 30, 2024; and “The Profane 78-Year-Old Leading the Dockworkers Strike,” Wall Street Journal, October 2, 2024).

Similar phenomena can be observed in all countries where governments or their trade-union proxies exert a direct influence on wages. It extends to public sector unions, who have their hands directly in the public treasury. Consider unions representing employees of the London Underground, the subway system run by a local government body in the UK capital. The secretary general of one of the unions said that the pay offer to its members fell “short of what [they] deserve” (“London Underground Workers to Strike Over Pay,” Financial Times, October 16, 2024). In France, employees of the government’s public transport organizations regularly go on strike for more money and benefits; the strikes are respectfully called “social movements” (mouvements sociaux).

An individual naturally thinks that his value “to society” is not well enough recognized by his fellow humans and especially by his fellow citizens. The phenomenon is analogous to how an individual not familiar with economics thinks the prices he pays for what he buys are too high while the price he receives for his labor services is too low. The complaint takes many forms: I am not fairly remunerated according to my needs, my talents, or what I deserve according to this or that criterion; I don’t get the respect owed to me. Before its members rejected the latest offer from Boeing, which is in deep financial trouble and is cutting 10% of its workforce, the International Association of Machinists and Aerospace Workers declared (“Boeing Workers to Vote on Ending Strike in Critical Week for Plane Maker,” Financial Times, October 20, 2024; also “Boeing Factory Workers Reject Latest Contract Offer,” October 24, 2024):

Workers will ultimately decide if this specific proposal is sufficient in meeting their very legitimate needs and goal of achieving respect and fairness at Boeing.

In a free society, with wages and other benefits determined on markets, this temptation is countered by the fact that the determination is not made by an organization. An employee’s bosses may appear to make it, but it is an illusion: the employee is free to move to another employer or to become self-employed; if he doesn’t, it is because he suspects he could not gain more (at constant risk). There is no identifiable authority that underestimates his value. Remuneration is impersonally determined.

This mechanism does not work when politics determines remuneration. An organization—either a democratic assembly or some strongman—is able to determine by law or diktat the value of your services. The process is typically called “social justice” according to some criteria or other. When it supports richer individuals, the process is called “industrial policy” or something similar. Because everybody thinks he deserves more, the game consists in staking your claims more forcefully to have them politically enforced. The individuals who win are those who are better organized and more politically powerful. In the meantime, the game has changed from impersonal to personal, from voluntary exchange to government commands, from a positive-sum game to zero-sum and eventually negative-sum.

Perhaps one can persuade oneself that the market is more efficient and just than politics with the following thought experiment. Imagine a perfectly democratic system whereby remunerated occupations would be divided into a certain number of categories and an online referendum would be held regularly (every quinquennium or every year or every month or every day) to determine the remuneration to prevail in each category. Would you prefer this system to free agreements on markets?

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The quest for social justce

The quest for social justce

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