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… is from page 329 of Amity Shlaes’s wonderful 2007 book, The Forgotten Man:

The inexorable New Deal emphasis on the group over the individual was not liberal in the classic sense.

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Here’s a letter to a new correspondent:

Mr. N__:

Thanks for your email.

About my letter in Thursday’s Washington Post, you correctly infer that I do not believe that the U.S. economy is “threatened by a foreign government creating excess capacity in its industries.”

First, it’s impossible for any government to create excess capacity in all industries. Resources cannot be diverted into, say, the steel industry without being diverted away from other industries – say, the aluminum and electronics industries – thus causing capacity in those other industries to be inadequate.

Second, excess capacity exists if the value of the output produced by that capacity is less than is the cost of the resources that are used to create and operate that capacity. This situation implies that, were these resources not tied up in that excess capacity, they would instead produce outputs of higher value in other industries in that country.

Third, therefore, whenever a government diverts resources into, say, the steel industry to create excess capacity there, it harms its economy by arranging to produce steel that’s worth less than the outputs that would instead have been produced had that diversion of resources not occurred. That country winds up suffering losses on the additional steel that it produces, as it also foregoes the economic gains that it would have reaped on the outputs that it fails to produce because its government foolishly diverted resources into excess steelmaking capacity.

So, no, if other governments are undermining the productiveness of their economies by creating excess capacity in some of their industries, we should not much fret about their stupidity threatening our economy.

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

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Alex Chalmers makes clear that “AI won’t fix central planning.” (HT Arnold Kling)

Kevin Frazier and Jennifer Huddleston identify five flaws in pending AI legislation.

Jim Dorn draws lessons for monetary policy from William McChesney Martin’s famous “punch bowl” speech. Two slices:

William McChesney Martin Jr. was chairman of the Federal Reserve Board from 1951 to 1970. He is perhaps best known for his “punch bowl” speech delivered on October 19, 1955, to the New York Group of the Investment Bankers Association of America. His often-quoted line in the penultimate paragraph reads: “The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up” (Martin 1955: 12). He made this statement in the context of a recent increase in the Fed’s discount rate, which tightened monetary policy.

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Two main lessons can be drawn from Martin’s punch bowl speech. First, the Fed needs to be prudent and humble in exercising its monetary powers. There are limits to what the Fed can do. Its main function should be to safeguard the dollar’s long-run value by adhering to a predictable, responsible monetary framework. Second, a rules-based approach to policy—both monetary and fiscal—is consistent with the moral element in private enterprise. Freedom is best protected by limited government, so individuals have a wide range of choices under a just rule of law.

Today, we have a discretionary government fiat money system. Much of the Fed’s bureaucracy could be abolished by a simple monetary rule rather than the complex framework currently in place (see Dorn 2018). Whether the punch bowl will be removed, under increasing political pressure to use the Fed to monetarize fiscal deficits and expand its mandate to include environmental and social issues, remains to be seen. After more than 70 years, Martin’s speech remains relevant both for monetary policy and the moral state of the union.

My intrepid Mercatus Center colleague, Veronique de Rugy, explains that “California’s billionaire tax won’t save hospitals.” A slice:

Stanford’s Joshua Rauh and several coauthors find that the California wealth tax’s projected revenue is a fantasy. Supporters advertised $100 billion in collections. Building on sound analysis as opposed to wishful thinking, Rauh’s team saw billionaires already leaving and, as a result, other future tax revenues disintegrating. By driving high earners out permanently, the most likely “net present value” of the wealth tax is negative $24.7 billion.

Whether politicians and voters want to admit it or not, the real problem is still spending. California’s revenue has surged by 55 percent since 2019, but Sacramento has expanded state spending commitments by 68 percent. It patched budget deficits in three consecutive years ($27 billion, $55 billion, and $15 billion) not by fixing the underlying problem but by drawing down reserves and applying onetime fixes. The Legislative Analyst’s Office now projects a fourth consecutive deficit, this time reaching nearly $18 billion in 2026-27 and growing to $35 billion annually by 2027-28. Medi-Cal alone will hit an all-time high, taking $49 billion from the General Fund.

The Washington Post‘s Editorial Board has a good idea for rescuing airline passengers in the U.S. from the whims and wiles of government. A slice:

Currently 20 American airports use private contractors, not the Transportation Security Administration, to screen passengers. And those private contractors still get paid regardless of whether Congress passes legislation on time.

The federal government’s Screening Partnership Program (SPP) allows airports to apply to use qualified private companies for passenger screening, rather than relying on unionized federal employees. TSA still gets to set all the regulations and standards for the private screeners. The agency just doesn’t do the screening itself.

This is a much better way to do airport security. A government agency regulating itself creates conflicts of interest. International Civil Aviation Organization standards say that security providers and regulators should be independent.

Jarrett Dieterle decries “the progressive war on cheap eats.”

GMU Econ alum Nikolai Wenzel explains what shouldn’t – but, alas, what today nevertheless does – need explaining: government-imposed caps on interest rates are economically harmful.

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… is from page 335 of the “Random Thoughts” section of Thomas Sowell’s 2010 book, Dismantling America:

The reason so many people misunderstand so many issues is not that these issues are so complex, but that people do not want a factual or analytical explanation that leaves them emotionally unsatisfied. They want villains to hate and heroes to cheer – and they don’t want explanations that fail to give them that.

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Phil Magness, on his Facebook page, shared a tweet by someone who believes that the New York Times, in its obituary of the consistently, wildly wrong Paul Ehrlich, was justified in describing Ehrlich’s mistaken predictions as “premature.”

Ehrlich in 1968 predicted that within a decade humanity would suffer massive worldwide starvation. 1968 was 58 years ago. It was before man landed on the moon. Before microwave ovens were commonplace. Before low-priced pocket calculators were a thing. Before Watergate. Before the Beatles broke up. Before most Americans owned color televisions.

For anyone in 2026 to attempt to justify describing Ehrlich’s whackadoodle, consistent-proven-spectacularly wrong predictions as “premature” is ridiculous. They were and remain wrong, not only in their specifics, but also on the broader point that Ehrlich incessantly sought to make.

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With the close of 2025, the United States has run 50 consecutive years of annual trade deficits. Should we Americans despair? No.

As regular patrons of Cafe Hayek know, a common complaint about U.S. trade deficits is that these deficits – said to be ‘funded’ by a combination of Americans going further into debt to foreigners and Americans selling off assets to foreigners – drain wealth from America. As regular patrons of Cafe Hayek also know, this Cafe’s proprietor never tires of reminding people that, although some part of U.S. trade deficits might be caused by Americans borrowing money from, or selling assets to, foreigners, rising U.S. trade deficits do not necessarily mean increasing American indebtedness or that we Americans are selling our assets to foreigners.

In earlier posts I’ve reported on data that belie the assertion that U.S. trade deficits necessarily drain wealth from the U.S. Here I report such data that are more complete – specifically, I count as part of Americans’ liabilities not only our private debt but also that portion of federal-, state-, and local-government debt for which the average American household is liable. Here are the conclusions, with all dollars converted into 2025$ using this personal-consumption-expenditure deflator.

In Q3 2025 (the latest date for which all relevant data are available), the average real net worth of U.S. households – taking account of all outstanding debt issued by federal, state, and local governments – was $1,031,144.

Expressed in 2025 dollars:

In 2001 (Q3), the quarter before China joined the World Trade Organization, the average real net worth of U.S. households was $583,989.

In 1993 (Q4), the quarter before NAFTA took effect, the average real net worth of U.S. households was $424,630.

At the end of 1975 – that is, in Q4 1975 – the last year the U.S. ran an annual trade surplus, the average real net worth of U.S. households was $339,074.

Therefore, in Q3 2025, the average real net worth of U.S. households was:

–   77% higher than it was in 2001
– 143% higher than it was in 1994
– 204% higher than it was in 1975.

Note that I do not include among households’ assets their share of the market value of government-owned assets. Were I to do so, I doubt that the percentage changes over the years in the average real net worth of U.S. households would be much different from the figures reported above.

The bottom line is that because wealth can – and, when markets are reasonably free, does – grow, a country that consistently runs trade deficits does not necessarily thereby lose wealth. Indeed, trade deficits – representing, as they do, net inflows into the country of global capital – can help to increase the wealth of the nation. The data in the U.S. are consistent with this optimistic take on U.S. trade deficits.

Details on how I calculated these figures are below the fold.

[continue reading…]

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Peter Coclanis isn’t favorably impressed with John Cassidy’s new book, Capitalism and Its Critics. Two slices:

Over the past 200 years or so, capitalism has ushered in levels of economic growth, development, and overall human flourishing unknown and well-nigh inconceivable to our species anywhere in the world at any earlier point in time. It has been responsible for an explosion of wealth creation over the centuries covered by Cassidy. In the developed world, people today are roughly 25 times richer in real terms than they were in A.D. 1800. In the developing world they are roughly eleven times richer. Even during the frequently derided capitalist era we have just lived through—that of neoliberalism, or hyperglobalization, or what have you—we find very significant economic gains worldwide, huge declines in the proportion of the world’s population living in extreme poverty, and impressive increases in living standards, educational levels, and human health, particularly in the developing world. Cassidy knows this and grudgingly acknowledges it from time to time. He even includes an astonishing graph showing the spike in global average GDP that capitalism precipitated. But that doesn’t stop him from lamenting the persistence of the world’s most successful economic system for the better part of 600 pages.

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Cassidy has little time for neoclassical economics or marginalism. He gives Jevons and Walras a single mention and Menger none at all. He sees neoclassicists as apologists for capitalism, and he seems to rue the fact that “[a]fter 1890, when Alfred Marshall, a professor at Cambridge, published his Principles of Economics, most economists used supply and demand curves, rather than the labor theory of value, to explain how market prices get determined.” It is not surprising, then, that Cassidy treats later adherents of “orthodox” economics—dissimilar figures ranging from Hayek and Friedman to Paul Samuelson and Robert Solow—with distaste or aversion. For Cassidy, the only acceptable camp to be in is that of managed capitalism. He deplores the laissez-faire eras in capitalism’s history, to wit: everything from circa 1770, when he begins, to the 1930s, plus the neoliberal era stretching from the late 1970s or early 1980s until the financial crisis of 2007-09 and beyond, some would say almost to the present day. It is during these long periods, Cassidy believes, that capitalism’s shortcomings have been most egregiously on display. That leaves only the period of managed capitalism—give or take 40 years, between the mid-1930s and the mid-1970s—to praise or emulate.

One can challenge the idea that another era of “managed capitalism” is even possible: not for nothing does leftist historian Jefferson Cowie refer to the 1930s-70s in the U.S. as “the great exception.” But Cassidy’s interpretation of capitalism’s long-term trajectory is seriously flawed as well. As numerous scholars over the years have pointed out, capitalism has been responsible for an explosion of wealth creation over the centuries covered by Cassidy. In his view, none of this can make up for what he considers capitalism’s worst flaw: inequality, particularly the inequality represented by the so-called 1%.

George Will continues to warn of the dangers of the U.S. government’s fiscal incontinence – what he describes as “the nation’s acceleration self-assassination.” Two slices:

The Congressional Budget Office projects that in 10 years, the nation will annually be spending more than $2 trillion (two thousand billion) just on debt service, which already is the fastest-growing part of the budget. The national debt will exceed $40 trillion by the end of October, the Peterson Foundation projects.

The debt has doubled in the 10 years since Donald Trump, on March 31, 2016, vowed to eliminate the debt in eight years. He did not try, but if he had, he would have been stymied by this grinding political dynamic:

The fastest-growing age cohort is people 65 and older. They are high-propensity voters because the more government subsidizes them, the higher are the stakes of politics for them. And because of their powerful incentive to vote (in order to defend and enlarge their benefits), the political class has a permanent incentive to intensify the elderly’s incentive by enriching those benefits. Last year, the president’s One Big Beautiful Bill Act increased the standard tax deduction for seniors — and only for them.

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Kevin R. Kosar of the American Enterprise Institute says the 50-year (1975-2025) average of annual budget deficits as a percentage of GDP has been 3.8 percent. Since 1946, that average has been surpassed only eight times. Three of those, however, were 2023, 2024 and 2025.

Jack Nicastro is correct: “Government shutdowns won’t stop airport security if airport security isn’t run by the government.”

The Editorial Board of the Wall Street Journal reflects on the unfortunate legacy of the late Paul Ehrlich. Two slices:

The Stanford biologist Paul Ehrlich, who died Friday at age 93, made his most important contribution to the world by losing a bet. It helped educate millions that his ideas about scarcity and human ingenuity were wrong.

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It was really a wager over human beings and free markets. If Ehrlich was right, and people were devouring the Earth’s resources, then the price of those resources would go up. If Simon was right, human beings would respond to shortages with ingenuity, and prices would, in the long term, go down. In 1990 Simon won the bet and Ehrlich paid up.

Today the nations such as China that embraced population control most wholeheartedly are now worried about a birth dearth. Ehrlich’s life is a lesson that brilliant men can become captive to bad ideas that become intellectual fashion and do great harm. At least he honored his bet.

Colin Grabow warns again of the folly of the Jones Act.

About the Jones Act, the Washington Post‘s Editorial Board points out that “Trump’s 60-day suspension gives Congress the cover to repeal the archaic shipping law.” Two slices:

The law was supposed to encourage more domestic shipbuilding. But outside of mobilization during the world wars, commercial shipbuilding has not been one of America’s strong suits for 150 years, despite — or perhaps because of — near constant protectionism since the founding of the country.

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The costs the Jones Act imposes are significant in the aggregate. Repeal would save U.S. consumers $769 million per year on petroleum alone, according to a 2023 study. But these savings would be barely noticeable at the level of a gallon of gasoline, probably only a few cents in the regions most affected.

And Colin Grabow tweets: (HT Scott Lincicome)

Waiver less than 24 hours old and foreign ships are already being chartered. Each of these voyages represents a cost savings. If cheaper Jones Act-compliant alternatives were available, they would have been used. Shows the existence of demand the JA fleet couldn’t meet.

Also calling for repeal of the Jones Act is Eric Boehm.

Surse Pierpoint reports this (not-so-)shocking fact: “Starbucks CEO Howard Schultz ditches Seattle after wealth tax vote.”

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… is from pages 63-64 of the late William Baumol’s 2002 book, The Free-Market Innovation Machine [original emphasis]:

But in both Roman and Chinese societies there were two types of activity that incurred unambiguous disgrace: participation in commerce or in productive activity (with the possible exception of some gentlemanly agricultural undertakings). In Rome, for example, such disgraceful endeavors were left to freedmen – to manumitted slaves and their sons. And these individuals, too, strove to accumulate sufficient means so that they could afford to leave their degrading occupations, ar at least make it possible for later generations in their families to achieve respectabilty. It is little wonder, then, that there was not much productive entrepreneurship in these societies. Even though the Chinese, in particular, produced an astonishing abundance of inventions, there was little innovation, in the sense of the application and distribution of the inventions. Most such inventions were put to little productive use and often soon disappeared and were completely forgotten.

DBx: The lesson: The more we denigrate commerce and entrepreneurship, the poorer we will be.

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Here’s a letter of mine that will appear in tomorrow’s – the March 19th – print edition of the Washington Post:

Regarding the March 12 news article “White House takes first step toward permanent fix for tariffs ruled illegal”:

Citing Section 301 of the Trade Act of 1974, the Trump administration announced a move to impose new tariffs by accusing more than a dozen countries of having “structural excess capacity.” Although Section 301 doesn’t mention excess capacity, it does permit the U.S. Trade Representative to restrict imports from trading partners found to impose what the Congressional Research Service calls “unfair and inequitable” burdens on American trade.

Forget that the economic meaning of “unfair and inequitable” — like that of “excess capacity” — is so vague as to invite abuse. Instead, recognize that for a foreign government to artificially create excess capacity in any industry within its jurisdiction requires drawing workers and resources away from other industries within its jurisdiction. If some industries in, say, Japan, really do have excess capacity, then other industries in Japan must have inadequate capacity. This artificially created inadequate capacity not only self-inflicts economic harm on countries that have it; it also might cause some foreign industries to reduce their production, increasing Americans’ opportunities to export.

Protectionists, of course, never mention this flip side of the “excess capacity” argument for raising U.S. tariffs.

Donald J. Boudreaux, Fairfax

The writer is the Martha and Nelson Getchell chair for the study of free-market capitalism at George Mason University’s Mercatus Center.