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Here’s a letter to the Wall Street Journal.

Editor:

Greg Ip’s argument that cryptocurrencies, being privately issued, will fail as money relies heavily on his historical claim that privately issued bank notes in the 19^th-century United States failed as money (“Stablecoins Are Private Money. That’s Why They’re a Risk to the Economy.” May 25). Mr. Ip’s history is incomplete.

It’s true that problems plagued privately issued bank notes in 19^th-century America. But research by Hugh Rockoff, George Selgin, Lawrence H. White and others reveals that these troubles were caused not by the bank-notes’ privateness but, instead, by government restrictions. Most notably, but not only, legislation restricted branch banking and required privately issued bank notes to be collateralized by state-government and railroad securities that sometimes proved to be junk.*

In contrast, where banking was less encumbered by government restrictions – places such as Scotland in the 18^th and 19^th centuries, and Canada in the 19^th century – privately issued bank notes served very well as money.

Nor is history kind to Mr. Ip’s suggestion that government money serves well as a store of value. In the 124 years from 1790 through 1913 (the year the Federal Reserve was created), the dollar lost approximately eight percent of its value, yet in the 114 years since the Fed’s creation (1913-2026), the dollar lost a whopping 97 percent of its value.**

If cryptocurrencies fail to serve as good money, the reason won’t be that private issuers of money are destined to perform more poorly than government issuers.

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

* George A. Selgin and Lawrence H. White, “How Would the Invisible Hand Handle Money?” Journal of Economic Literature, December 1994, Vol. 32, pages 1718-1749.

** George Selgin, William D. Lastrapes, and Lawrence H. White, “Has the Fed Been a Failure?” Cato Policy Report, November/December 2012, and “Consumer Price Index, 1800- ” Federal Reserve Bank of Minneapolis.

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My Mercatus Center colleague Rebecca Lowe – a native of Great Britain – tells why she loves America. A slice:

The values underlying the Declaration of Independence — freedom, equality, justice — don’t belong to any place. Yes, you might find them here in America more than you find them in other places. That’s one reason I live here. And you might find them in John Locke’s work more than you find them in other people’s works. But they reflect truths about humanity; about what it is to be human. They reflect moral truths. So they are John Locke’s, and Americans’, only in a loose descriptive sense.

I love America, and I love the Declaration of Independence, not because of great phrases like “the pursuit of happiness”. But because America and the Declaration of Independence represent a commitment to the pursuit of moral truth. And there’s nothing more important to me — or for all of us.

Agustina Vergara Cid praises immigrants to America who “have fought for America’s founding promise because they understood it, not because they inherited it.” A slice:

Lafayette chose to fight for America after he became enamored with the cause for independence. In 1778, he wrote: “The moment I heard of America I loved her; the moment I knew she was fighting for freedom I burnt with a desire of bleeding for her; and the moment I shall be able to serve her, at any time, or in any part of the world, will be the happiest of my life.”

Jordan McGillis, writing at National Review, explains how “a market-based rare earths policy can counter China.” A slice:

On the one hand, since geopolitical risk is and always has been a factor in corporate capital allocation, we could simply let market actors price in the potential for Chinese export stoppage and adjust accordingly. That’s not just an optimistic theory drawn up on Econ 101 blackboards. In the middle of the pandemic, the world’s top semiconductor manufacturer, TSMC, responded to market risk dynamics by planning a new plant in Arizona — two years before Congress would pass industrial-policy legislation on semiconductors. In the minerals sector in 2023, six months after China announced its new export controls on gallium and germanium, an American company announced a massive discovery in Wyoming, as I wrote about for National Review Online (“New Wyoming Dig Shows Limits of China’s Export Controls,” January 22, 2024). Consistent with the laissez-faire attitude is trade with non-adversarial countries, environmental regulatory reform, and innovation to reduce the importance of the vulnerable minerals altogether.

“Detroit once ruled Canada’s car Industry. Trump’s tariffs may end that.” A slice from this New York Times report: (HT Scott Lincicome)

At the industry’s peak around the turn of the last century, cars and trucks, most made by U.S. manufacturers, accounted for nearly 40 percent of all exports from Ontario, Canada’s industrial center and most populous province.

The massive factories and the hundreds of thousands of workers they employed underscored the tight bonds between the United States and Canada.

For over 60 years, Canada’s auto industry had thrived from free trade agreements that sent much of its production to the United States. By ending tariffs, those agreements also made cars built in American factories affordable for Canadians, a boon to U.S. industry.

But Mr. Trump’s tariff campaign is shattering that dynamic, hollowing out the once-mighty Detroit-based carmakers in Canada. The future of a free-trade agreement that has knit together Canada, the United States and Mexico is also up in the air.

David Bier reports on just how radically restrictive immigration policy has become under Trump. A slice:

The Department of Homeland Security (DHS) announced Friday that it will cease granting green card applications except in extraordinary circumstances. In short, DHS grants green cards when a qualified immigrant who is inside the United States applies to adjust their status to legal permanent residence. Now, every legal immigrant must leave the country—that is, self-deport—even if they are qualified for a green card and even if leaving would disqualify them.

The policy is a radical expansion of DHS’s “quiet quitting” on legal immigration that has been going on for months. As I previously detailed, DHS—or, more precisely, its component known as US Citizenship and Immigration Services (USCIS)—has slashed green card approvals in half over the last year. This drop came primarily from not processing applications. Now USCIS’s new memorandum details a plan for mass denials. USCIS has gone from the “quiet-quit” to walking out on 1.2 million green card applicants.

“Exit taxes won’t save failing states.”

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… is from page 113 of my late, great colleague Walter Williams’s 2015 book, American Contempt for Liberty, which is a collection of many of Walter’s columns and essays; this quotation specifically is from Walter’s November 6th, 2013, syndicated column, “Congressionally Duped Americans“:

The only way Congress can send checks to Social Security and Medicare recipients is to take the earnings of a person currently in the workforce. The way Congress conceals its Ponzi scheme is to dupe Social Security and Medicare recipients into thinking that it’s their money that is put away and invested. Therefore, Social Security recipients want their monthly check and are oblivious about who has to pay and the pending economic calamity that awaits future generations because of the federal government’s $100 trillion-plus unfunded liability, of which Social Security and Medicare are the major parts.

DBx: Although Walter overestimated the size of the unfunded liabilities – these are today estimated to be $73.2 trillion – his larger point remains standing and strong: the U.S. government’s debt is a gigantic burden for future generations of Americans.

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GMU alum Tom Savidge explains how federal transfer payments in the United States undermine Americans’ freedom.

Phil Magness and Stan Veuger make clear that Section 122 of the Trade Act of 1974 – the statutory provision used by Trump to impose his post-Learning Resources tariffs – does not support those tariffs. Two slices:

On May 7 a three-judge panel of the Court of International Trade (CIT) ruled against the Trump administration’s latest round of global 10% tariffs. The government argued that Section 122 of the Trade Act of 1974 authorizes these import duties because we face a “large and serious balance-of-payments deficit.” There is one problem: we do not.

Historically, under the Bretton Woods system of fixed exchange rates, a balance-of-payments deficit meant a drawdown on the country’s official reserve assets. But Bretton Woods ended half a century ago. Under the flexible exchange rate system we have today, there cannot be a surplus of dollars that forces an outflux of gold or otherwise triggers a balance-of-payments crisis. Instead, the exchange rate–the price of the dollar–simply adjusts.

After previously acknowledging that trade deficits and balance-of-payments deficits are “conceptually distinct,” the Trump administration is now attempting to blur the distinction. Thankfully, the CIT, relying heavily on legislative history, saw through this chicanery.

As the government prepares to appeal its case to the Federal Circuit, it is important to emphasize how badly they have misconstrued Section 122’s purpose. One aspect of its history has not received much attention yet: its relationship with the General Agreement on Tariffs and Trade (GATT). This landmark trade agreement makes it crystal clear what a balance-of-payments deficit is.

Article XII of the GATT, as amended in 1955, allows member states to enact import restrictions to safeguard the balance of payments. This provision only permits countermeasures “to forestall the imminent threat of, or to stop, a serious decline in [a member state’s] monetary reserves” or, if reserves were very low, “to achieve a reasonable rate of increase in its reserves.” This is precisely how economists, plaintiffs, historians, and now the CIT have defined the balance-of-payments. And the provision remains in force. In fact, the administration invoked Article XII as the legal basis for its Section 122 tariffs when it notified the WTO.

Congress was fully aware of this article when, in 1973, it started work on what would become the Trade Act of 1974. In fact, in June of that year the Senate Finance Committee commissioned a study of how Article XII worked. In the study, Article XII’s conceptualization of balance-of-payments deficits is simply taken as given. The same year marked the beginning of the Tokyo Round of GATT negotiations. By revising our trade laws, Congress aimed to equip US negotiators with leverage tools under the GATT provisions – not to run afoul of Article XII by dramatically expanding the definition of balance-of-payments deficits, as Trump now imagines.

The language of Section 122 itself makes the distinction between balance-of-payments and trade deficits clear as well. It explicitly refers to the trade balance just a few lines down from the balance-of-payments provision the government relies on, demonstrating that legislators saw it as a distinct concept.
…..

The economics and history are clear. Section 122 applied to monetary reserve balances, not trade deficits. If President Trump wants to impose a worldwide tariff because he believes that will improve the economy, he should convince Congress to pass legislation. He should not be allowed to rely on word games to circumvent the Constitution.

Richard Salsman is understandably no fan of the new animated movie Animal Farm.

The Editorial Board of the Washington Post applauds Trump’s hesitation to have government regulate AI. A slice:

On Thursday, President Donald Trump abruptly pulled the plug on the signing of an executive order that would have given federal agencies an early look at the nation’s most powerful artificial intelligence models before their public release. That’s good news: Even the supposedly voluntary review system under consideration could have hardened into a government chokepoint on U.S. AI development.

Speaking of government regulation of AI, National Review‘s Andrew Stuttaford rightly criticizes the E.U.’s hare-brained, heavy-handed approach – as well as the E.U.’s laughable justification for its suffocating officiousness.

Phil Magness tweets: (HT Scott Lincicome)

In 2018 Zucman published a paper in a top econ journal that inadvertently revealed the total federal/state/local tax rate of the top 0.001% was ~40%.

A year later, he realized this undermined his wealth tax. So he fudged the stats to fit his politics.

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… is from page 140 of Deirdre McCloskey’s forthcoming book, Equality of Permission:

Liberalism permitted the trying out of new ideas to become astoundingly commonplace and astoundingly productive, because it let (almost) everyone try out novelties. New ideas arose therefore from ordinary people, not merely from the heights, as to the contrary the Enlightenment assuredly did in person or in patronage. The new ideas, whether material or institutional or ideational, and at length science itself, came largely from poor people liberated by equality of permission to have a go.

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Here’s a letter to a new correspondent.

Mr. S__:

You write that you and other “average Americans have got President Trump’s back since we’ve been fed up with elites forcing free trade down our throats.”

I see. So what you’re saying is that you’re fed up with people who want to increase your freedom to spend your income as you choose. That’s interesting.

Suppose your next-door neighbor, Sam, arms himself with a loaded .45 caliber pistol and plants himself by your front door. And then each time someone delivers a package or Uber Eats meal to your home, Sam demands that you and your family pay to him – to Sam – ten percent of the purchase price. If you refuse, Sam – waving his weapon menacingly – prevents you from completing the purchase that you wish to make.

But Sam doesn’t want you to think he’s a brute. Oh no! He means well. “Be grateful,” Sam assures you, “for by increasing your cost of home delivery, I make you more likely to shop in person at the local mall and to dine out at local restaurants. I’m helping our town’s economy! You should thank me!”

Several days later, your neighbor from across the street, after observing Sam’s actions, organizes others of your neighbors to put an end to Sam’s interference with your and your family’s freedom to spend your money as you choose.

Would you accuse these neighbors, who try to stop Sam from molesting you, of forcing free trade down your and your family’s throats? Would you label these neighbors as “elites” who should mind their own business? Or would you understand that the person who is forcing his preferences down your and your family’s throats is, in fact, Sam and not your neighbors who simply wish to prevent Sam from molesting you so that you and your family are left free to spend your income in whatever peaceful ways you choose?

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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Stefan Bartl writes about “the march of a new global economic order.” A slice:

The bipartisan turn away from free trade has been a public-policy blunder that favors politically protected industries while neglecting consumers. That is the snowball effect of government intervention: tariffs generate retaliation, retaliation justifies subsidies, subsidies create managed purchase agreements, and managed agreements necessitate new boards, exemptions, and political bargaining.

The US–China trade war began under Trump in 2018, remained largely intact under Biden, and has escalated further in Trump’s second term. The contrast is striking: while China lowered its average tariffs on the rest of the world from 8.0 percent in early 2018 to about 6.5 percent by early 2022, the United States raised its average tariffs on the rest of the world from 2.2 percent in January 2018 to 18.4 percent today.

According to PIIE, average US tariffs on Chinese goods stand at 47.5 percent and cover all imports from China, while China’s average tariffs on US goods stand at 31.9 percent. This is no longer temporary leverage. It is structural protectionism.

Hooray – seriously – for Gov. Spanberger.

The Laffer Curve is real. A slice:

The stereotypical British émigré used to be the retiree packing up for sunnier climes in Spain or France. These days it’s the younger worker who moves to Dubai for lower taxes and then delays returning to Britain. These are some of Britain’s most entrepreneurial people, and they’re spending their prime tax-paying years out of the country.

They’re in good company. The annual “rich list” of Britain’s wealthiest, published last week by the Sunday Times of London (owned by the same company as the Journal), found a race for the exits. One-sixth of the people on the list two years ago have dropped off, and 111 of the British citizens on the 350-name list live offshore.

Only one foreign billionaire moved to Britain: Warren Stephens, the U.S. ambassador. As a diplomat, he’s exempt from British taxation.

Wall Street Journal columnist Joseph Sternberg argues that “there’s no moral bar against choosing welfare over economic growth. But don’t deny the trade-off.” A slice:

Those who argue that Europe’s falling-behind is overstated (typically American liberals and America-skeptic Europeans) claim that for various reasons Europe’s standard of living doesn’t feel all that far behind America’s, to the point that differences in nominal output are irrelevant. European quality of life may even be better than America’s in important ways. Those on the other side (generally euroskeptic Americans and Europeans with experience of both places) observe that over the longer term a country’s capacity to participate in the global marketplace matters more than its feelings.

The latter perspective is more convincing in light of the main economic questions preoccupying Europe: How can the Continent navigate a demographic transition that will strain its social-welfare systems to the breaking point while also meeting the defense-spending demands of a more dangerous world? Any credible solutions hinge on Europe’s ability to purchase raw materials and technology on the open global market, and also to borrow from foreigners. Per capita output data gussied up by various adjustments to create hypothetical “purchasing power parity” metrics that flatter Europe don’t tell you what you need to know.

My Mercatus Center colleague Alden Abbott tells of “the case of the vanishing competitor.”

University of Dubuque political philosopher Adam Smith is an old-fashioned professor.

Billy Binion explains that “Trump’s ‘anti-weaponization fund’ is built on a contradiction.”

Judge Glock tweets: (HT Scott Lincicome)

It is actually a reasonable question to ask if any companies, in the history of humanity, have been less in need of government money than semiconductor chip companies in 2026.

This is not a sector that investors are unwilling to invest in.

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… is from page 113 of Steven Landsburg’s 2018 book, Can You Outsmart an Economist?:

To say that it costs $100 to produce a particular bushel of wheat is to say that $100 worth of resources – land, labor, pesticides, fuel, and more – are exhausted in the process. In the long run, societies prosper by husbanding their resources. That is, societies prosper by minimizing production costs.

DBx: Yes. And particular resources are worth $100 only because when used in their best possible way the result is a contribution worth at least $100 to consumers – as revealed by people’s willingness to pay $100 for the results of this use of those resources.

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Protectionists and other skeptics of free markets routinely accuse economists of being unaware of the full range of human interests. “Economists’ focus on ‘efficiency’ and ‘cost’ causes them to miss the fact that human beings’ wants and needs aren’t limited to money and material things. Economists are silly.” Yet all such accusations reveal only that the protectionists and market-skeptics who make them don’t understand economics. Ultimately – as economists understand – all costs are non-monetary; costs are the subjectively felt or imagined satisfactions that humans forego by taking action A rather than action B.

And importantly, because our world is one of inescapable scarcity, our world is also one of inescapable costs. By “efficiency,” then, all economists mean is the human quest to achieve any particular goal at the lowest-possible cost – that is, by keeping to a minimum, in that quest, the exhaustion of the fewest amount of resources (including time) so that as many as possible resources remain available to satisfy other human desires (including taking leisure, contributing to churches and charitable causes, and living in preferred locales).

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Here’s a note to a long-time reader of Café Hayek.

Mr. B__:

Thanks for sending along Michael Pettis’s essay “Comparative advantage is not competitive advantage.” I must, however, be blunt: his essay is gobbledygook.

I have neither inclination nor time to deal with every error, but I’ll point out the worst of these: Pettis mistakenly insists that international trade is guided by comparative advantage only if that trade is what Pettis calls “balanced trade” – meaning, no trade deficits or surpluses.

As best as I can figure – Pettis, being confused, writes confusingly – his theory is that trade surpluses and deficits arise only, or at least mainly, when some governments subsidize production. The resulting excess production is then exported at prices below cost. The subsidized countries run trade surpluses that force other countries to run trade deficits. (Forget here that there’s no evidence to support Pettis’s empirical claim that trade-deficit countries generally suffer deindustrialization and reduced aggregate demand.)

To support his theoretical case, Pettis correctly notes that trade is “balanced” in David Ricardo’s famous example of comparative advantage. Yet in that example, trade is balanced only because Ricardo explicitly assumed away international capital flows. By assumption, therefore, countries export only to import. Under these circumstances, a country that exports, say, $1B worth of stuff obviously wants to import $1B worth of stuff. Once we allow for international capital flows, however, export earnings have two possible, alternative uses: to purchase imports or to be invested abroad.

In today’s real world in which cross-border investment is possible, some countries are at a comparative disadvantage to other countries at attracting capital. These countries run capital-account deficits – and, hence, trade surpluses (because they export more than they import) – not because their governments arrange for them to produce excessively but, rather, because their governments make investing at home less attractive than investing abroad. The residents of these countries use some of their export earnings, not to buy imports, but to invest abroad. Other countries that have comparatively better economic and monetary policies are thus net attractors of global capital. The United States in this latter condition.

Contrary to Pettis’s belief, the resulting patterns of trade – including the trade surpluses and deficits – reflect comparative advantage and belie his assertion that comparative advantage “can only be expressed in balanced trade.”

Let me close by highlighting a passage in Pettis’s essay that reveals just how feebly he grasps economics. He writes that “the whole point of Ricardo’s model was to make (and prove) the counterintuitive point that … the world benefits from balanced trade even when one country can produce everything more cheaply.”

Face palm.

The point of Ricardo’s model has nothing to do with proving the benefits of balanced trade. In Ricardo’s example, England would still have a comparative advantage over Portugal at producing cloth even if, for whatever reason, the Portuguese refused to import from England as much as England imports from Portugal. Even with “unbalanced” trade, England would be able to acquire wine at a lower cost by producing cloth and trading it for Portuguese wine rather than by producing wine at home.

Ricardo’s point instead was to explain that a foreign country does not necessarily produce some output – say, cloth – at a lower cost than cloth is produced at home just because cloth is produced in that foreign country using fewer inputs (including time) than are used at home to produce cloth. What matters is how much other output – say, wine – that other country sacrifices by producing cloth compared to how much wine the home country sacrifices by producing cloth.

Ricardo explained that if the amounts of these foregone outputs differ from country to country, then one of these countries is the low-cost producer of cloth while the other is the low-cost producer of wine. There is no country that “can produce everything more cheaply.” The fact that Pettis supposes that the country that uses the fewest inputs to produce each product “can produce everything more cheaply” means that he misunderstands comparative advantage.

If you want to understand international trade, read Doug Irwin. Read Anne Krueger. Read Jagdish Bhagwati. Read Leland Yeager. Read Fritz Machlup. Read Gottfried Haberler. Read Russ Roberts. Read Pierre Lemieux. Don’t read Michael Pettis.

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