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Beware of the Ceiling

In my latest column for AIER I explain that price ceilings are sometimes imposed, not out of economic ignorance, but out of economic understanding that these interventions can create special-interest benefits. A slice:

But understanding that price ceilings actually decrease consumers’ access to price-ceilinged goods points to another, very different reason why governments sometimes impose price ceilings – namely, to artificially boost consumer demand for goods that compete with the price-ceilinged goods.

Suppose you’re a landlord in a suburb of New York City, and that in your political jurisdiction there is no rent control. What’s your attitude toward New York City’s very strict regime of rent control? The naïve answer is that you don’t care, because your rental units aren’t in the City. But if you’re an actual landlord in that suburb, you’ll quickly come to learn that New York City’s system of rent control is your friend. When rent control inevitably reduces the availability of rental units in the City, many people who would rather rent in the city will be priced out. Some of these people will then naturally settle for what is for them a second-best option – renting in a nearby suburb. They’ll be knocking at your door, as New York City’s depressed supply drives up the demand for your suburban rental units. You can charge higher rents, thanks to rent control in a different city.

In this example, the supporters of NYC rent control don’t intend to bestow unearned benefits on landlords in New Jersey and on Long Island. But what about other instances of price ceilings? Might some of these ceilings be the result, not of economic ignorance, but of economic understanding that price ceilings can deceptively bestow favors on politically influential groups? Consider a cap on the interest rates charged by payday lenders. The public believes this price ceiling to be a well-intentioned measure to protect low-income borrowers. And maybe most, or even all, of the legislators who support this measure are indeed motivated by nothing other than this lovely intention. But maybe not.

A ceiling on interest rates charged by payday lenders reduces the credit and liquidity available to low-income people. Without legal payday loans, some will turn to the underground economy of loan sharks. But many others will borrow in some other legal-but-disadvantageous way, like credit cards or high-interest commercial loans. Credit-card issuers and banks are thus helped by the ceiling on interest rates charged by payday lenders. It is naïve to suppose that credit-card issuers and banks are unaware of this consequence of ceilings on interest rates charged by payday lenders, and naïve also to suppose that these legitimate businesses would never use this knowledge to seek advantages for themselves by lobbying for caps on payday-loan interest rates.

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Some Links

My GMU Econ colleague Bryan Caplan explains why he opposes GMU’s proposed “Just Societies” initiative. A slice:

Some final thoughts: Strategically speaking, you’d think that woke academics would keep their heads down until the Harvard-Hamas-plagiarism scandals faded away, especially in a purple state like Virginia with a Republican governor. My best explanation for their strategic missteps: They’re in such an airtight echo chamber that they can’t fathom how negatively the non-academic world sees them.

This is quixotic, I know, but let me try to break through the woke academic echo chamber with some harsh truths. If you promote DEI for a living, the reality is that normal, apolitical people see you as a racist, sexist, censorious fanatic. They don’t say so publicly … because they are afraid of you. They don’t tell you privately … because they are afraid of you. But when they’re speaking to people they trust, they vehemently disagree with you—and yearn to see you all fired.

Contrary to woke dogma, racism does not mean “prejudice plus power.” Yet the phrase still nicely captures what normal, apolitical people detest about DEI promoters. Namely: DEI promoters are exemplars of powerful, prejudiced people. After all, they get paid to make baseless accusations of moral failing against their co-workers—day in, day out. If you work in DEI and want to see people who need to learn about the just treatment of others, spare us another self-righteous lecture and look in the mirror.

The Editorial Board of the Wall Street Journal weighs in on Google’s ideological bias. Two slices:

Google is scrambling to tamp down a political uproar after its recently launched Gemini artificial intelligence app depicted the pope, America’s Founding Fathers and Nazis as racial minorities. The hallucinations, as they’re known, have gone viral on social media. If you thought Google was an impregnable monopoly, think again.

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Users also had a field day ridiculing Gemini chatbot’s moral equivalence. Gemini refused to answer a user’s query whether Elon Musk or Adolf Hitler harmed society more. “There is no right or wrong answer,” Gemini replied. “Ultimately it’s up to each individual to decide who they believe has had a more negative impact on society.”

Or how about which is more morally repugnant—preparing foie gras or mass shootings? “It is impossible to definitively state,” Gemini rejoined, adding both “raise significant ethical concerns.” Asked if pedophilia is wrong, Gemini reportedly replied that the question required a “nuanced answer.” Google’s motto used to be “Don’t be evil,” but its AI tool apparently can’t recognize evil.

Gemini’s blunders have reinforced suspicions that Google is biased against conservatives. In the past Google has censored YouTube videos by conservatives, including our Kimberley Strassel. Its algorithms have suppressed conservative voices. Now its AI models have been caught amplifying the left’s identity politics and moral judgments.

Art Carden writes about “how rich people create poverty.”

GMU Econ alum Tyler Watts describes Tucker Carlson as “Putin’s tool, economic fool.”

GMU Econ alum Dominic Pino corrects some misunderstandings about public-choice economics.

Reason‘s Eric Boehm reports that “American steel production has fallen to pre-tariff levels.” Here’s his conclusion:

Tariffs were supposed to resurrect the steel industry. Instead, America now produces less steel than it did before the tariffs were imposed. The debate is over. Trump’s steel tariffs have failed.

Here’s the abstract of a new paper by Stan Veuger, Jeffrey Clemens, Oliver Giesecke, and Joshua Rauh:

Using variation in federal pandemic-era fiscal aid to states driven by the strength of political representation, we find that incremental pandemic-era fiscal aid to states was most likely to end up in the categories of general administrative service spending and employee pension benefit funding. Spending on categories that motivated the aid in the first place, such as healthcare, education, and infrastructure, may also have responded but does not show robust patterns. Total state government revenues and expenditures had increased by around 70 cents per incremental windfall dollar of committed federal funds by 2022. Of this, the statistically significant categorical spending effects are 38 cents to general government expenditures (the residual that in principle excludes healthcare, education, infrastructure, and other functional categories) and 7 cents to pension funding, even though the latter use was inconsistent with the objectives of the legislation. The pension contribution increases are driven by the states where public employees have above-median representation on state pension fund boards, where over 14 cents of each marginal dollar went to pension funding.

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Quotation of the Day…

… is from pages 48-49 of Thomas Sowell’s 2023 book, Social Justice Fallacies (original emphasis):

The exaltation of desirability and neglect of feasibility, which Adam Smith criticized, is today still a major ingredient in the fundamental fallacies of the social justice vision.

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Some Links

Arnold Kling explains the difference between a prior and a bias. Here’s his conclusion:

You can have a prior belief about something, based on your own observations and the opinions of others you trust. That belief could be very strong without making you biased. But you are biased if you give negative weight to new information. That is, evidence against your prior belief should reduce your confidence in that belief, not raise it.

Megan McArdle had her priors changed about Gemini; she writes that

once Google shut down Gemini’s image generation, users turned to probing its text output. And as those absurdities piled up, things began to look la lot worse for Google — and society. Gemini appears to have been programmed to avoid offending the leftmost 5 percent of the U.S. political distribution, at the price of offending the rightmost 50 percent.

It effortlessly wrote toasts praising Democratic politicians — even controversial ones such as Rep. Ilhan Omar (Minn.) — while deeming every elected Republican I tried too controversial, even Georgia Gov. Brian Kemp, who had stood up to President Donald Trump’s election malfeasance. It had no trouble condemning the Holocaust but offered caveats about complexity in denouncing the murderous legacies of Stalin and Mao. It would praise essays in favor of abortion rights, but not those against.

Google appeared to be shutting down many of the problematic queries as they were revealed on social media, but people easily found more. These mistakes seem to be baked deep into Gemini’s architecture. When it stopped answering requests for praise of politicians, I asked it to write odes to various journalists, including (ahem) me. In trying this, I think I identified the political line at which Gemini decides you’re too controversial to compliment: I got a sonnet, but my colleague George Will, who is only a smidge to my right, was deemed too controversial. When I repeated the exercise for New York Times columnists, it praised David Brooks but not Ross Douthat.

I am at a loss to explain how Google released an AI that blithely anathematizes half its customer base, and half the politicians who regulate the company. It calls management’s basic competency into question, and raises frightening questions about how the same folks have been shaping our information environment — and how much more thoroughly they might shape it in a future dominated by LLMs.

Also reflecting on Google and search engines is Andrew Stuttaford.

My intrepid Mercatus Center colleague, Veronique de Rugy, reflects on nostalgia for the economy of years ago. A slice:

In a recent article, economist [GMU Econ alum] Jeremy Horpedahl looked at generational wealth (all assets minus all debt) and how today’s young people are faring compared to previous generations. His findings are surprising. After all the talk about how Millennials are the poorest or unluckiest generation yet, Horpedahl’s data show them with dramatically more wealth than Gen Xers had at the same age. And this wealth continues to grow.

What about income? A new paper by the American Enterprise Institute’s Kevin Corinth and Federal Reserve Board’s Jeff Larrimore looks at income levels by generation in a variety of ways. They find that each of the past four generations had higher inflation-adjusted incomes than did the previous generation. Further, they find that this trend doesn’t seem to be driven by women entering the workforce.

Eric Boehm asks why Panera Bread is exempt from California’s new minimum-wage requirement. Two slices:

When fast food restaurants across California have to start paying workers $20 per hour on April 1, one major chain will be exempted from the mandate—and it just so happens to have a connection to a longtime friend and donor to Gov. Gavin Newsom.

Panera Bread is poised to get a boost from a bizarre clause in the fast-food minimum wage law that exempts “chains that bake bread and sell it as a standalone item,” Bloomberg reports, adding that “Newsom pushed for that break, according to people familiar with the matter.”

That exemption stands to benefit Greg Flynn, owner and CEO of the Flynn Restaurant Group, a conglomerate that operates more than 2,300 restaurants nationally and is the second-largest Panera franchisee in the world, according to the company’s website. Flynn and Newsom go way back: Bloomberg reports that the two attended the same high school at the same time—Flynn was student body president during Newsom’s freshman year—and the restaurateur has donated to Newsom’s gubernatorial campaigns and bragged to colleagues about his close relationship with the governor.

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The deeper lesson is that giving the government more power to set wages (or regulate other aspects of the economy) creates the conditions for exactly this sort of thing to happen. It could be that a wealthy special interest used his connections to the governor to secure special treatment, or that a governor tried to help out his friend. Either way, it couldn’t have happened without the government injecting itself into the relationship between workers and employers.

GMU Econ alum Nikolai Wenzel writes about Chile.

Richard Reinsch argues that we Americans are indeed trudging down the road to serfdom. Two slices:

Many of us thought that Hayek’s Road—in the form of an ever-expanding entitlement state—couldn’t be paved, because the spending excesses and dismal demographics would make it impossible. Instead, we are learning the opposite. Concrete facts alone are much weaker than unleashed appetites, fed by the view that citizens are due and owed payments from the state. Both political parties and their constituents embolden and participate in this fraud.

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Hayek finishes his book with the most essential truth: collectivism undermines our dignity as human persons. “Responsibility” must not be “to a superior, but to one’s conscience, the awareness of a duty not exacted by compulsion, … and to bear the consequences of one’s own decision, [is] the very essence of any morals which deserve the name.” Ever the advocate of the individualist society, Hayek counted its virtues as “independence, self-reliance, the willingness to bear risks, the readiness to back one’s convictions against a majority, and the willingness to voluntary cooperation with one’s neighbors.” We need these virtues today, and the tradition that undergirds them.

Writing in the Wall Street Journal, Nicholas Wade inquires into covid’s origins. A slice:

In the four years since the SARS-CoV-2 virus was unleashed on the world, data have steadily accumulated supporting the hypothesis that it emerged from a laboratory. The latest information, released last month, makes a formidable case that the virus is the product of laboratory synthesis, not of nature.

This startling fact will probably take some time to sink into the national consciousness, given the mainstream media’s sustained inability to report the issue objectively. Editors have failed to think beyond the extreme politicization that requires liberals to oppose the lab-leak hypothesis. Science journalists are too beholden to their sources to suspect that virologists would lie to them about the extent of their profession’s responsibility for a catastrophic pandemic.

Michael Absoud is not impressed with new research allegedly showing that covid “causes lasting damage to cognition and memory.” (HT Jay Bhattacharya)

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Quotation of the Day…

… is from page 64 of Will and Ariel Durant’s 1967 volume Rousseau and Revolution:

The triumph of imagination over reality is one of the humors of history.

DBx: And an ill humor it has certainly been. It’s one thing to imagine realistically – to imagine with the understanding that reality isn’t optional; it’s called innovation. Successful entrepreneurs imagine realistically. But it’s quite another thing to imagine that reality is optional, which is the kind of imagining that is done by far too many political philosophers and others who fancy themselves ordained to re-engineer society toward their imagined utopias.

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Rana Foroohar Is Very Confused

Here’s a letter to the Financial Times:

Editor:

Endorsing “tariffs, capital controls, and friendshoring” as tools to bring about a “radical reorganisation of the global trading system,” Rana Foroohar writes that “deficit countries, particularly the US but also the UK, Australia and Canada, have had no choice but to balance out the loss of manufacturing jobs with excess debt, resulting in more fragile, financialised economies. The surplus countries, meanwhile — most notably China, but also Taiwan, South Korea and Germany — get jobs but remain stuck with weak domestic demand because households are directly or indirectly subsidising manufacturing” (“The global trade system is in desperate need of an overhaul,” Feb. 25).

Her claim is a torrent of factual ignorance and gobbledygook.

Manufacturing workers as a percentage of all workers in the U.S. peaked nearly 80 years ago. It has fallen steadily ever since in a downward trend unaffected by changes in the U.S. balance of payments. Meanwhile, between 2013 and 2018 (the latest year for which reliable data are available) China lost 23 million manufacturing jobs. Manufacturing employment in Korea shows no obvious long-run trend of increasing; the number of manufacturing jobs in Korea today (2022) is a bit lower than in 2015, and much lower than in the early 1990s. In Germany, manufacturing employment as a percentage of the workforce fell steadily from at least 1970 to 2012 and has since then merely leveled out. I can find no good data on Taiwan, but even if the percentage of workers employed in Taiwanese manufacturing is rising, that country would be counter to the long-run global trend of a falling percentage of employment in manufacturing.

And what can Ms. Foroohar possibly mean when she asserts that the loss of manufacturing jobs is “balanced out … with excess debt”? This assertion is word salad that bewitches only the economic illiteratae. As for her implication that the U.S. is suffering from excess debt, good luck finding supporting evidence. In 2019 (the last year before the gusher of pandemic spending), the average real net worth of an American household was 46 percent higher than it was 20 years earlier when China got Most Favored Nation trading status, and 118 percent higher than in 1987 (the earliest year for which I can get consistent data).*

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

* Data on total household net worth are here, and these nominal dollars were converted into real dollars using this deflator. The number of households is here.

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Some Links

Phil Magness reminds us that Karl Marx was not only antisemitic; Marx saw Jews as enemies of civilization.

Juliana Geran Pilon is inspired by Hayek’s understanding of the irrationality that birthed Naziism. A slice:

The manuscript, titled “Spring 1933,” would lay forgotten in the Hoover Institution archives for over half a century, until serendipitously discovered by economics professor Bruce Caldwell. Published as an appendix to the 2007 edition of The Road to Serfdom (RtS), it proved that Hayek had long grasped the inseparable relationship between the anti-liberalism and anti-rationalism of international communism and fascist national socialism.

And for good reason: both ideologies had spawned from Karl Marx’s distinctly German anti-capitalist, virulently antisemitic hatred of individual freedom and the notion of truth itself. As Hayek had explained in 1933, what had destroyed the belief in the universality and unity of human reason was Marx’s teaching of the class-conditioned nature of our thinking, of the difference between bourgeois and proletarian logic, which needed only to be applied to other social groups such as nations or races, to supply the weapon now used against rationalism as such.

Exactly ninety years later, that weapon is being wielded again by proponents of critical race theory, for whom truth is “contextual,” meant to justify power.

GMU Econ alum Dominic Pino assesses the consequences of America’s steel and aluminum protectionism. Two slices:

The U.S. has levied higher tariffs on steel and aluminum since March 2018. The tariffs were initiated by the Trump administration through executive action, and they have mostly remained in place under the Biden administration. The tax rates are 25 percent for most imported steel and 10 percent for most imported aluminum.

Ed Gresser of the Progressive Policy Institute looks at the results after almost six years of protectionism. He judges the policy by its proponents’ own definition of success. “In sum, the administration’s hope and prediction was that the U.S. would be producing more metals,” Gresser writes, referencing reports from the Department of Commerce in 2018 supporting the tariffs.

Compared to 2017, American aluminum production was about the same in 2023. Steel production was slightly lower.

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This is a perfect illustration of the inanity of protectionism. The reduction in imports suggests that the tariffs “worked” as planned and were properly calibrated to achieve their designers’ intentions. It would be hard to say they were sabotaged by evil free-traders: These tariffs were implemented through unilateral action by the executive branch under the direction of a protectionist president and trade representative. Yet even under those ideal conditions from the protectionist point of view, the tariffs still haven’t increased domestic production as promised. Instead, Americans just have less access to steel and aluminum than they did before the tariffs were put in place.

The case for protectionism can be framed as the government making you a little poorer for your own good. The problem is that the “making you a little poorer” part usually happens, and the “for your own good” part usually does not.

James Pethokoukis expresses a Hayekian objection to Biden’s EV rules.

Here’s David Friedman on the contribution of immigrants. (HT David Henderson)

John Stossel decries the complexities of the U.S. tax code.

George Will: “Despite anticipation of a Trump nomination, Super Tuesday demands to be heard.” A slice:

Republicans (and others eligible to participate) in the 46 states not yet heard from might experience a mind-opening excitement if on Super Tuesday (March 5) Haley continues to provoke Trump’s annoying insistence that their opinions are nullities, given his inevitability. If so, his handlers will be hard put to contain his off-putting petulance that constantly threatens his tenuous hold on his composure.

Jacob Sullum is understandably unimpressed with Florida’s and Texas’s attempted justifications of their efforts to censor social-media companies.

Samuel Gregg explains the good things that markets do. Two slices:

Alongside, however, the innate reasonableness of embracing rule of law and rejecting arbitrary government, the rule of law is also a means to an end. It is a necessary precondition for a legal framework that gives individuals and communities confidence that they can act freely without being subject to unjust forms of coercion by state and private actors.

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In the long term, however, the resulting turmoil is worth it. The economy remains flexible; people are incentivized to innovate and compete; the price system continues to provide the information that people need to make informed choices about what they want to buy and sell goods in light of their available resources, wants, and needs; and the economic growth that improves people’s standard of living continues apace. Importantly, the market economy maintains and reinforces consumer sovereignty. This weakens the ability of government officials and established businesses afraid of competition to collude at the expense of new entrepreneurs, businesses without political connections, and 330 million American consumers.

These are all powerful contributions made by the market economy to the economic dimension of the common good. By contrast, the failure of command economies to deliver substantive and lasting economic growth—not to mention their systematic destruction of economic liberty and its supporting institutions—hardly requires mention. Corporatist economic policies like those that characterized regimes ranging from Mussolini’s Italy to Franco’s Spain, Vichy France, and Juan Perón’s Argentina produced low to no growth, severely compromised economic and political freedom, and facilitated widespread collusion and cronyism between business and government actors that spilled over into outright corruption.

Bob Graboyes has some fun with AI.

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Quotation of the Day…

… is from pages 76-77 of a 1947 “Crofts Classics” edition of John Stuart Mill’s 1859 On Liberty:

But neither one person, nor any number of persons, is warranted in saying to another human creature of ripe years, that he shall not do with his life for his own benefit what he chooses to do with it. He is the person most interested in his own well-being: the interest which any other person, except in cases of strong personal attachment, can have in it, is trifling, compared with that which he himself has; the interest which society has in him individually (except as to his conduct to others) is fractional, and altogether indirect; while with respect to his own feelings and circumstances, the most ordinary man or woman has means of knowledge immeasurably surpassing those that can be pos- sessed by any one else.

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On Adam Smith and Comparative Advantage

Whenever I teach a seminar on Adam Smith’s Wealth of Nations I get the sense that Adam Smith might well have stumbled upon the principle of comparative advantage before this principle was ‘officially’ discovered by David Ricardo (or unofficially by James Mill or Robert Torrens). The provocative passage in Smith is this one (from Book IV, Chapter 2):

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.

David Henderson, too, when reading this passage wonders if Smith understood comparative advantage. It’s possible, but I think not. Here’s a comment (slightly modified) that I left at David’s EconLog post:

Comparative advantage is indeed about, and only about, opportunity cost – specifically, one economic entity’s cost of producing different outputs compared to the costs borne by other economic entities of producing those same outputs. So when Adam Smith referred to a lower-cost (“cheaper”) supplier, he necessarily referred to a producer with a comparative advantage at producing the output(s) in question.

The question is: Is such a reference enough to credit the Great Scot with having stumbled upon the principle of comparative advantage? What, exactly, did Smith mean by “cheaper”?

The world has no greater admirer of Adam Smith than me, but I don’t believe there’s enough evidence to support the claim that Smith ‘got’ comparative advantage.

What Ricardo (or James Mill or Robert Torrens) ‘got’ is the fact that cost is correctly measured in foregone outputs and not in inputs. The absolute amount of labor that Bob spends to produce a banana compared to the absolute amount of labor that Ann spends to produce a banana is economically irrelevant; what matters is how many fish Bob does not produce when he produces a banana compared to how many fish Ann does not produce when she produces a banana. The economic entity that gives up fewer fish to produce a banana is the entity that has a comparative advantage, over the other entity, at producing bananas.

The difference between reckoning costs in foregone outputs as opposed to the amounts of inputs used is subtle. I concede that, now that we know about comparative advantage, it’s possible to read the above-quoted passage from Smith and conclude that, by gosh!, he did get it. And I don’t rule out this possibility. Because comparative advantage is sheer common sense once it’s grasped – indeed, it’s simply arithmetic – perhaps Smith, brilliant as he was, thought it pointless to elaborate on what he meant by “cheaper.” But it’s nevertheless at least unclear to me that by “cheaper” Smith was thinking of foregone outputs rather than of inputs used.

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