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… is from page 97 of Eamonn Butler’s excellent 2021 book, An Introduction to Trade & Globalisation:

Too often, people imagine that global value chains arise naturally, by themselves. In fact, such highly sophisticated structures do not come together by chance. Someone has to decide which of the many parts of the production process are best sources from where and from whom. Are there economies of scale if manufacturing is done by a single firm, for example, or is it better divided between specialist firms and countries – technical components being made in skilled-labour countries, say, and assembly done in cheap-labour countries? Whatever the answers, all the various elements in the production chain must be designed, financed, made, assembled, finished, packaged, transported, marketed and sold into a diverse array of countries with diverse rules and diverse consumers. That all takes conscious planning and management by practitioners who have an international reach and a deep, direct and up-to-date understanding of the markets in which they operate. TNCs [transnational corporations] have all these qualifications.

DBx: Yes.

Pundits, professors, and politicians talk glibly about ‘reshoring’ supply chains and about the need to take account of the risks of sourcing inputs from this or that foreign country. The pundits, professors, and politicians who talk this way presume either that existing supply arrangements are random or that the private firms that rely upon various sources for their supplies are myopically motivated exclusively to pay the lowest monetary prices today for their supplies.

Each of these presumptions is mistaken. Private business people have strong incentives to correctly assess the various risks and rewards of alternative sources of supplies and to choose those particular sources that are most likely to work best over the long run. Of course, they won’t always get it right, but what’s the realistic alternative? The notion that elected officials and their bureaucratic underlings in government will outperform private decision-makers – the belief that think-tank pundits, professors of this, that, and the other thing, or government officials have more expertise, information, skill, and incentive to correctly determine how to arrange supply sources – is ludicrous. Yet this belief is so commonplace that it strikes few people as odd.

The likelihood of pundit Oren Cass, professor Dani Rodrik, politician Donald Trump, or political appointee Jamieson Greer having deeper insight than do business people spending their own money into the most appropriate ways to source supplies is no higher than is the likelihood of me having such deeper insight. And I assure you that I have no such insight. This likelihood, in short, is practically zero.

A more-general point here is that all proponents of industrial policy suffer a from the arrogant pretension that they have information – or access to information – not only that they simply do not have, but that is impossible for anyone to have independently of an on-going competitive discovery process.

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Here’s a letter to the Financial Times.

Editor:

Daire MacFadden parrots what is perhaps the single-most repeated line in today’s discussions of international trade and U.S. trade deficits: “persistent imbalances have hollowed out domestic manufacturing” (“A Keynesian solution to global imbalances,” May 10).

Although this claim about the alleged hollowing-out of domestic industry echoes hither and yon as if it’s beyond doubt, it is false.

It is false theoretically because a country can run persistent trade deficits (as the U.S. has done now for 50 consecutive years) as a result of that country attracting global capital that enlarges that country’s industrial base directly – for example, Kia building a factory in West Point, Georgia. An influx of global capital can also enlarge that country’s capital base indirectly by lowering domestic interest rates which, in turn, spurs domestic investment.

What’s so carelessly called “imbalances” in today’s world of flexible exchange rates are not imbalances at all, for trade (or “current-account”) deficits are exactly offset by capital-account surpluses.

MacFadden’s claim is also false empirically. Since 1975 – the last year when the U.S. ran an annual trade surplus – both inflation-adjusted U.S. industrial production and U.S. industrial capacity have grown by 148 percent (as U.S. population has grown by 59%). It’s true that industrial production in America has been flat for the past 15 years, but the same is true, for example, for industrial production in Germany – which has run persistent trade surpluses.*

And the U.S. today produces more manufacturing output than does any country on earth except China – a country with more than four times the population of the U.S. Per-capita, Americans today produce 150 percent more manufacturing output than do the Chinese.

These assertions of the U.S. economy being “hollowed out” are, well, hollow.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* See these figures, the first showing German industrial output, and the second showing Germany’s trade balances.

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The Cato Institute’s Colin Grabow reports that “waiver data reveal how the Jones Act blocks American trade.” Three slices:

Since the Trump administration waived the Jones Act on March 17 for energy products, fertilizer, and related inputs, the US Maritime Administration has been publishing voyage-level data on every domestic cargo movement that has utilized the 1920 law’s suspension. We’ve turned that data into an interactive infographic that lets readers explore all 45 voyages completed thus far, including the vessels involved, cargo carried, and ports visited.

…..

It’s all further confirmation that the law has been suppressing intra-US trade. But that’s just from a higher level. Some of the granular data produced by the waiver provides arguably even more noteworthy insights.

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For an administration committed to “America First” economics, the early results clearly show that the law is not protecting American commerce but blocking it. No wonder the Jones Act’s supporters are so adamant that the waiver go away.

My intrepid Mercatus Center colleague, Veronique de Rugy, writes not only about John Maynard Keynes and his advocacy of deficit spending during economic downturns, but also about Jim Buchanan’s and Dick Wagner’s explanation that Keynesian economics is politically unworkable. A slice:

Public choice economist James Buchanan made this point with characteristic clarity. In Democracy in Deficit, co-authored with Richard Wagner, he argued that the most important legacy of John Maynard Keynes was not a specific policy prescription but a shift in fiscal norms. Before the Keynesian revolution, there was a widely held expectation, though imperfectly observed, that governments should balance their budgets over the business cycle, running deficits only in exceptional circumstances. The old Hamiltonian norm. And Keynesian economics, properly understood, also called for deficits in recessions and offsetting restraint or surpluses in expansions. But Buchanan’s and Wagner’s insight was that democratic politics would not implement the symmetry embedded in that prescription. Deficits in downturns are politically attractive; surpluses in good times require tax increases or spending cuts on a satisfied electorate and are therefore systematically avoided. The result is a persistent deficit bias: deficits in recessions, insufficient surpluses in expansions, and a gradual accumulation of debt over time.

Buchanan and Wagner’s conclusion was institutional rather than merely descriptive. Because ordinary political incentives tend to produce this asymmetry, they argued for fiscal rules, such as a balanced-budget requirement, to better align policy with long-run sustainability. The continued growth of large, unfunded commitments in programs such as Social Security and Medicare reflects, in part, the same underlying political dynamics Buchanan and Wagner identified: not a deliberate embrace of permanent deficits as theory, but the predictable outcome of a system in which the discipline required to run surpluses is politically fragile.

The Washington Post‘s Editorial Board offers sound reasons for tamping down hostility to data centers. A slice:

But energy doesn’t have to be a zero-sum game. Many data centers are motivated to build out their own energy capacity, which would help insulate nearby residents from price shocks while also ensuring steady supply for themselves. Government can help by getting out of the way of energy producers and embracing an all-of-the-above approach to production.

In Gallup’s poll, 18 percent of data center opponents now cite water usage as a reason they would oppose a data center, but that’s a less defensible worry. Much of the alarm traces to Karen Hao’s 2025 bestseller “Empire of AI,” which claimed a Google data center in Chile could consume more than a thousand times a town’s water supply. That figure is off by a factor of a thousand, due to a unit conversion error Hao later acknowledged.

Jason Sorens busts the myth of an ‘oversupply’ of housing in the U.S.

Michael Strain explains that “the war on billionaires is dangerous nonsense.” A slice:

Moreover, like tech entrepreneurs, hedge-fund managers create value that accrues to all of society. Apart from building projects and tax revenue, firms like Citadel help to ensure that capital is allocated efficiently throughout the economy, which ultimately makes workers throughout the entire economy more productive, increasing their wages and living standards.

Here’s the abstract of a new paper by Daniela Vidart:

This paper examines correspondence education as an alternative educational pathway in early 20th-century America. Using newly digitized records from the International Correspondence Schools—the largest such institution, with over 4 million students by 1940—linked to census data, I show that enrollment increased the likelihood of skilled employment by 6-10pp within 3-10 years, particularly among younger students who used it as a substitute for high school. I develop a general equilibrium Roy-style model where individuals sort into educational options by ability. Consistent with the model, correspondence education facilitated skill acquisition for lower-ability individuals and improved selection into high school, amplifying its returns.

[DBx: Note that the International Correspondence Schools were private, for-profit enterprises and, thus, they are an historical example of how private-sector entrepreneurs supplied valuable education.]

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… is from page 73 of Deirdre McCloskey’s forthcoming book, Equality of Permission [original emphasis]:

An equality of outcome, the brain surgeon paid at the finish line, or the tenth mile, the same as the street sweeper, certainly comports with an equality of souls…. But unfortunately in large groups the ignoring of a person’s marginal work product, and making payments according to the noble belief in the equality of human worth – in which all us monotheists and modern liberals do, I affirm yet again, fervently believe – does not work. Through gross misallocation in the short run, and the collapse of spurs to innovation in the long, such an enforced equality of outcome leads in a large group to a dismal equality of poverty, and then to tyranny. Such attempts fail every time at large scale, even when they are kindly and sincere and gentle.

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I’m pleased that the Washington Post published this letter of mine.

Alvin E. Roth made a compelling case for allowing people to receive monetary payments in exchange for donating kidneys [“90,000 people are waiting for an organ that can’t be bought,” op-ed, May 10]. Squeamishness about such transactions doesn’t come close to outweighing the enormous benefits of saving thousands of lives.

But in the unfortunately likely event that such squeamishness continues to prevent payment for kidney donations, an intermediate step is worthwhile – namely, as University of Michigan law professor Adam Pritchard and I first proposed in the 1990s, when people receive or renew their driver’s licenses, offer to pay them to sign up to be organ donors.

As of 2023, just under 50 percent of licensed drivers in the U.S. are registered donors. A small inducement — say, $50 — to register would likely result in a large increase in registrations without anyone sacrificing a kidney or other organ unless and until they are declared dead.

Taking this intermediate step toward compensating people for offering kidneys for transplant might increase the likelihood of the best policy — the one proposed by Roth — eventually being adopted.

Donald J. Boudreaux, Fairfax

The writer is an economics professor at George Mason University and a senior fellow at the Mercatus Center.

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Clifford Winston explains what shouldn’t – but, alas, what always does – need explaining: Protecting companies from competition might well increase their market share, but it also weakens them; it makes them less efficient and more fragile. Two slices:

At first glance, the airline and auto industries seem much different. Airlines are frequently in and out of bankruptcy court, while the large automakers have avoided that fate since the recession of 2007-09 thanks to massive and recurring government intervention. But both are domestic industries operating in a global world, kept afloat by a regulatory scaffolding that gives priority to producer stability over consumer welfare and industry efficiency.

While we rightly celebrate the 1978 Airline Deregulation Act, airports and foreign competitors that could serve U.S. routes weren’t deregulated. Public airport monopolies and duopolies allow airlines to raise fares. With foreign carriers prohibited from flying domestic U.S. routes, domestic fares have been kept artificially high even while load factors approached 85% just before the Iran war. As a result, when a domestic shock hits, the system lacks the diversified global networks and capital depth needed to absorb the blow.

…..

From the 1964 “Chicken Tax” to the 100% tariffs on Chinese electric vehicles in 2025, Washington has walled off the American consumer. These barriers have allowed domestic makers to abandon the low-cost econobox segment entirely, focusing instead on $80,000 SUVs. Because they are shielded from the $15,000-a-car global competitors that are modernizing fleets in Europe and Asia, automakers have become addicted to a narrow, affluent demographic.

In both industries, the government’s protectionist solution has become poisonous. By shielding companies from the efficiency frontier of global competition, we have created industries that are too small to be truly global yet too large to be allowed to fail locally.

Resolving this crisis of financial brittleness requires a shift from a national-champion model to a global-industry model.

The Washington Post‘s Editorial Board correctly points to the Trump administration’s suspension of its tariffs punitive taxes on Americans’ purchases of imported beef as the administration’s “tacit admission that tariffs raise prices.” A slice:

Worried about the politics of affordability heading into the midterms, President Donald Trump has already exempted other food staples and home goods. In February, he allowed more beef imports from Argentina. He would have taken this additional step earlier if not for lobbying by ranchers, who want to keep beef prices as high as possible.

My intrepid Mercatus Center colleague, Veronique de Rugy, talks with Jessica Melugin about antitrust.

My GMU Econ colleague Thomas Stratmann, writing at National Review, makes the case that the failure of Spirit Airlines offers a good opportunity to reset antitrust. Two slices:

Short of praising the Met Gala, it’s hard to think of a more controversial thing you could do online than defend big business. The left has long crusaded against corporate America, but increasingly the populist right does too, turned off by toxic business practices like DEI and ESG.

But what happens when the contempt for business goes too far? What happens when it destroys a low-cost airline, hurting American workers and consumers?

This is the situation confronting those who cheered on the Biden administration’s antitrust revolution. Under the oversight of Jonathan Kanter at the Department of Justice’s Antitrust Division and Lina Khan at the Federal Trade Commission, the government largely abandoned the consumer welfare standard, which holds that the feds should interfere with mergers or business contracts only if the consumer stands to be directly harmed.

…..

The consumer welfare standard is, of course, meant to place the consumer front and center in antitrust policy. But it also functions as a restraint on regulators, creating clear and limited criteria for when government may intervene in markets. It understands that left to their own devices, regulators will act arbitrarily and create unintended consequences they can’t foresee at the outset.

This is exactly what the Biden team wrought with Spirit Airlines. Now, all eyes turn to Donald Trump. Trump has never fully thrown in with the anti-bigs, but some in his administration, including his Antitrust Division interim head Omeed Assefi and FTC Chairman Andrew Ferguson, risk paying an unhealthy amount of homage to Khan and the rest of the Biden antitrust enforcers by keeping alive antitrust suits with little obvious connection to the consumer welfare standard.

Current enforcers should treat Spirit Airlines not as a mere talking point against the Biden administration but also as a cautionary tale. The left claims to fight the bigs, but their meddling too often hurts those they try to help. The right has its own brand of populism, but it must avoid the left’s mistakes if it’s going to be effective.

GMU Econ alum Erik Matson writes insightfully about David Hume’s counsel that, when we ponder politics, it’s wise to assume that everyone is a knave. A slice:

For Hume, we should assume knavery in our political reasoning because collective action—the core of political life—distorts judgment and encourages knavish behavior toward those outside our social groups. Political life, in other words, brings out the knavery in us. In democratic politics, ordinary people of apparently decent character come together and end up authorizing coercive acts of injustice and, in some cases, outright moral atrocities.

Desmond Lachman warns of the U.S. government’s fiscal incontinence.

My Mercatus Center colleague Garrett Brown interviews my great emeritus GMU Econ colleague Richard Wagner about American federalism.

Arnold Kling brings his usual wisdom to this discussion of Zionism vs. anti-Zionism. A slice:

Once again, the Zionist project is caught in the middle of external conflicts. In this case, it is the conflict between Third Worldism and the Western tradition.

Third Worldism unites the left and Islamists. The Islamists are a bigger part of the alliance in Britain than in the United States. They have a shared hostility to markets, to American power, and to white people. (On straight vs. queer, the left and the Islamists would seem to disagree, but they apparently have set aside their differences.)

Whatever accidents of history that allowed the state of Israel to get to where it is today, I think that it would be terrible to see the country sacrificed on the altar of Third Worldism. That ideology strikes me as evil and backward. I believe that most Americans reject it. But it would not surprise me to see the Democrats adopt it in 2028.

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… is from page 523 of Richard Lewinsohn’s August 1933 Current History paper, “The Rise of Economic Nationalism”:

When the state actively enters the commercial field, there is everywhere an accompanying increase of economic nationalism, no matter whether it is on the basis of socialism as in Soviet Russia or on the basis of capitalism as in Western and Central Europe.

DBx: Yes.

American progressives have much to answer for. They led the way over the decades to intrude the U.S. government into the American economy. Among the unsurprising, although not to say inevitable, outcomes is MAGAism.

Please note that I don’t excuse members of today’s “New Right” and of other MAGA-aligned movements for their economic ignorance and arrogance. I only note that their economic understanding and policy proposals share much more with those of progressives than they – and progressives – care to admit.

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David Henderson’s new biographical essay on Anne Krueger is now up at the Concise Encyclopedia of Economics. Two slices:

Possibly Krueger’s most important contribution to economics is her June 1974 article in the American Economic Review, “The Political Economy of the Rent-Seeking Society.” While in some ways, Gordon Tullock had beat her to the punch with his 1967 article in the Western Economic Journal, “The Welfare Effects of Tariffs, Monopoly, and Theft,” Krueger did a more careful analysis. She also introduced the term that stuck, namely “rent seeking,” and presented some estimates that showed the potentially large cost of rent seeking to the economies of Turkey and India. That she chose those two countries was a natural result of her having spent significant time in both countries, carefully studying their economic systems. In particular, she had closely examined quotas on imports that both countries’ governments used extensively. When a government has discretion in allocating quotas, potential importers will compete for those quotas. The competition might even take the form of bribing government officials.

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Krueger defends the idea that globalization, whatever its problems, has created large net benefits for the people affected by it. In Struggling with Success: Challenges Facing the International Economy (2012), a collection of her speeches and essays, she wrote that, starting in about 1800, globalization led to huge gains for industrial countries and then, after World War II, led to huge gains for almost all countries. The evidence for this, she noted, is that life expectancies increased dramatically around the world, debilitating disease has fallen, and real incomes have risen by a large percentage. How did globalization contribute? By increasing trade across borders. Globalization increased over the last two centuries and especially since World War II for two main reasons: falling transportation costs and reductions in tariffs and in other trade barriers.

The Editorial Board of the Wall Street Journal explains that “cutting the beef tariff is a good idea, but pausing the federal gas tax isn’t.” Two slices:

Mr. Trump may not want to be reminded, but John McCain pitched a gas tax holiday in 2008 during his presidential campaign as prices surged toward $4 a gallon. Ditto Joe Biden in June 2022 when prices hit $5 a gallon after Russia’s invasion of Ukraine. Republicans panned Mr. Biden’s proposal as a “gimmick,” and neither placated voters.

That’s because a temporary pause on the federal gas tax won’t appreciably reduce how much Americans pay at the pump. After the tax holiday ends, prices will increase. A suspension would cost the highway trust fund about $2.1 billion a month in revenue, which would have to be made up with general fund revenue.

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Tariffs are charged on [beef] imports that exceed the quotas, typically at a rate of 26.4%. The quotas are intended to protect U.S. ranchers from foreign competition, but there are other ways to help the industry without raising costs for Americans. For example, ease livestock regulations and Endangered Species Act protections for wolves that prey on cattle.

The best and most immediate way Mr. Trump could reduce costs for Americans would be to drop his tariffs en toto. We know that won’t happen, but it would be a big political and economic winner.

Larry Martin counsels against scrapping the USMCA (the successor agreement to NAFTA).

GMU Econ alum Eli Dourado tweets: (HT Scott Lincicome)

Q1 numbers are in, and utilization-adjusted TFP is down 2.18% annualized.

I regret to report that the 20s are still not roaring.

It seems as though Gavin Newsom’s policy proposals are now concocted by writers for Saturday Night Live. Here’s a slice from a Wall Street Journal editorial:

California’s government can’t keep homeless off the streets, keep energy prices low, or do much of anything else well. But never fear, Gov. Gavin Newsom’s state diaper service is here.

The California Governor who wants to be President said Friday that the state will soon begin providing every “newborn delivered in a participating California hospital” 400 diapers at no cost. “This is what affordability looks like,” he said. “It’s not a slogan. It’s a box. It’s a box of diapers.” Apparently he’s serious.

Californians pay an average of $6.15 a gallon for gasoline, and most can’t afford to buy a home (median price: $750,000). Many parents struggle to pay for a Happy Meal because the state’s $20-an-hour minimum wage for fast-food workers has increased prices. But here’s a box of diapers as a political salve for the state’s costly policies.

J.D. Tuccille is correct: “Don’t waste time arguing over the Surgeon General nominee. Abolish the office.”

Vance Ginn argues that “freedom still works.”

Constanza Mazzina reflects on Adam Smith’s influence in Argentina. A slice:

As the global intellectual community commemorates the 250th anniversary of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776) this year, the lens of history often focuses on the industrial heartlands of Europe or the early expansion of the United States. However, one of the deepest and most successful applications of Smithian philosophy occurred in the Southern Cone of the Americas. Juan Bautista Alberdi, the intellectual father of the Argentine Constitution (1853), did not merely read Smith; he transformed his economic theories into a foundational institutional framework for a new nation. By analyzing Alberdi’s work, we see that the “Argentine Miracle” at the turn of the nineteenth century, was not a geographic accident, but a deliberate institutional translation of the Scottish Enlightenment.

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… is from page 4 of the late historian Joyce Appleby’s (uneven) 2010 book, The Relentless Revolution: A History of Capitalism:

[I]t can’t be stressed too much that capitalism is as much a cultural as an economic system. A new way of establishing political order emerged. People reversed how they looked at the past and the future. They reconceived human nature. At a very personal level, men and women began making plans for themselves that would once have appeared ludicrous in their ambitious reach.