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Last Build Date: Wed, 21 Mar 2018 23:58:54 -0500

Copyright: Copyright 2018

Henderson on George Melloan, by David Henderson

Wed, 21 Mar 2018 23:58:54 -0500


We can thank [Bob] Bartley for making supply-side economics understandable, popular, and influential. Supply-side economics, as he and other Journal writers describe it, is the idea that high marginal tax rates discourage work, saving, and investment. It still shocks me how little emphasis academic economists placed on that insight before Bartley came along.

Remember that the top marginal tax rate on individual income in the 1970s was a whopping 70%, so the idea that marginal tax rates matter should not have been so controversial.
The Journal's persistent call for lower marginal tax rates helped strengthen President Ronald Reagan's hand. From 1981 to 1987, Reagan and Congress cut the tax rate paid by the highest-income people from 70% to 28%. For that, those of us who believe in giving people incentives to produce and those of us who believe that people should keep more of their income should thank the Journal.

But there was a downside to this advocacy. First, many of the Journal's unsigned editorials (under the heading "Review and Outlook") and guest op-eds during the Bartley era suggested that the economic growth sparked by tax cuts would result in higher federal tax revenues than if tax rates weren't cut. Reasonable back-of-the-envelope calculations showed that this was highly unlikely. As economist Lawrence Lindsey demonstrated with a careful examination of the data, more taxes were paid by the highest-income people, whose marginal tax rates were cut in the early 1980s from 70% to 50%. But it was not true for taxpayers overall.

Second, because the Journal's editors did not worry much about the revenue effects of large cuts in tax rates, they didn't put much emphasis on proposals for reining in federal government spending. Imagine, for example, that the editors had advocated in 1972 that federal spending rise by 0.5 percentage points less per year than it actually did rise. In 1972, federal government spending was $244.3 billion. In 2016, it was $3,852.6 billion. That's a compounded annual growth rate of 6.5%. If our imaginary editors had gotten their way and federal spending had instead risen by "only" 6% annually, it would have been $3,172.4 billion in 2016. The result, with taxes the same as they are, would have been a federal budget surplus of $95.6 billion rather than the actual budget deficit of $584.7 billion.

This is from David R. Henderson, "The
Journal Through Time," Regulation, Spring 2018. It's the lead book review in the Spring issue. Read the whole thing.


Forza Italia!, by Scott Sumner

Wed, 21 Mar 2018 15:57:42 -0500

The title of this post was the campaign slogan of Silvio Berlusconi. It's often translated as "Let's Go Italy!" Instead, Berlusconi's government presided over unprecedented economic decline, with real GDP per capita now lower than in the year 2000: Berlusconi had the right idea---Italy does need a more dynamic economy---he simply failed at executing this policy. Martin Wolf has a piece in the FT that shows how Italy has done poorer than other Eurozone countries with the exception of Greece: Wolf is very pessimistic about Italy's prospects: Germany's nominal GDP rose by 34 per cent between the first quarter of 2007 and the last quarter of 2017 (a compound average annual rate of 2.7 per cent). Italy's rose by a mere 9 per cent over the same period (a compound average annual rate of 0.8 per cent). Not surprisingly, given modest overall growth of nominal GDP, even Germany's core annual inflation averaged a little over 1 per cent. Such low inflation in the core creditor country made adjustments in competitiveness within the eurozone far more difficult. If the Italian government had been able to pursue its traditional policy of devaluation and inflation, it could have generated a far stronger rise in nominal GDP. That would surely also have delivered higher levels of real output. Italy's real GDP in the last quarter of 2017 was, instead, 5 per cent below its level in the first quarter of 2007, while its real GDP per head was still some 9 per cent below the 2007 level a full decade later. No wonder Italians are disillusioned. No doubt, Italy has huge structural economic problems, which tightly constrain growth, but potential output cannot have fallen this much since 2007. Italy also suffers from chronically deficient demand, a failing that the eurozone, as it is now run, is simply unable to remedy. This is partly because overall demand has been too weak and partly because, within the rules, demand cannot be directed to where it is weakest. A prolonged recession, with high unemployment and low employment has inescapable political consequences. But the biggest frustration may be that the people Italians vote for have next to no room for manoeuvre. Wolf has provided a reasonable analysis of the problems facing Italy, but in the end I think it's a mistake to frame things in this way. It diverts attention away from what Italy needs to do. There's no obvious reason why Italy cannot grow fast. Consider: 1. Italy grew very dramatically between 1950 and 2000. 2. Northern Italy is fairly affluent by European standards. 3. Other countries such as Germany are able to do relatively well, despite using the euro as a currency. 4. Italian Americans have done well, despite the fact that most originally came from southern Italy, the most depressed part of the country In recent months, I've seen a number of articles describing the plight of center-left parties in Europe. One problem might be their defeatist attitude. Having built the world's most successful welfare states, Europe's center-left doesn't know where to go next. The southern half of Europe is not doing well, and voters can sense when a party is not offering any answers. It's true that negative demand shocks have adversely affected Italy. But that doesn't explain why GDP has not risen since 2000. Wages are not sticky for 18 years. Italy also faces major supply side ("structural") problems, not just a lack of demand. I'm under no illusions that it will be easy to reform Italy's economy. There are all sorts of special interest groups that would put up roadblocks. But it's important to be clear as to what the problem is. A bit easier money from the ECB or fiscal transfers from Germany are not going to solve Italy's growth problem. The only solution is supply-side reforms. Italy doesn't need German money; they need German public policies. European voters sense this, which is why they have recently been opting for politicians that make bold promises, not those with a defeatist attitude. It doesn't mean that the politici[...]

Capitalism vs. Socialism Debate Video, by Bryan Caplan

Wed, 21 Mar 2018 14:23:02 -0500

You've read the opening statements.  You've read my point-by-point and big picture replies.  Now here's the full video of the Caplan-Bruenig debate.  Thanks to IHS for putting this all together.  Enjoy!

src="" allow="autoplay; encrypted-media" allowfullscreen="" width="400" height="225" frameborder="0">


Henderson at Mississippi State, by David Henderson

Tue, 20 Mar 2018 23:41:52 -0500

I will be speaking tomorrow at Mississippi State University in Starkville, MS.

Topic: Economic Inequality: Popular Misconceptions and Important Facts
Place: Mississippi State University, McCool Hall (the business building), Room 236
Date: Wednesday, March 21
Time: 5:00 p.m.

The talk will be similar to this one.

If you are an EconLog reader and you attend, please come up before or after and say hi.


Me at Trinity, by Bryan Caplan

Tue, 20 Mar 2018 19:21:20 -0500

I'm discussing education at Trinity College with Columbia's Miguel Urquiola on Thursday.  Details here.  Hope to see you there!


Reminder on Troy Speech Today, by David Henderson

Tue, 20 Mar 2018 13:56:19 -0500

I'll be giving a speech at Troy University in Troy, Alabama this afternoon.

Topic: How Economists Helped End the Draft
Location: Troy University, 129 Bibb Graves Hall
Date: March 20
Time: 5:00 p.m.

If you're an EconLog reader and want to attend, please come up and say hi before or after.

If you want to see a version of the talk--I've tweaked it only a little since then--see this one I gave at Middle Tennessee State University in Murfreesboro, TN.

Dan Sutter of Troy University's Johnson Center posted this short piece on the talk.


Steelmanning the Iraq War, by Bryan Caplan

Tue, 20 Mar 2018 00:07:12 -0500

The Iraq War started 15 years ago today.  I always opposed it, for my standard pacifist reasons.  But here is a case for the Iraq War that would have intellectually and morally impressed me at the time.  To be clear: Though I'm the author, I strongly disagree with this speech.  Still, I'd enjoy talking to someone who sincerely believed it.You can treat what follows as a steelmanning exercise.  (It's not really an Ideological Turing Test because as far as I know, no prominent advocate of the Iraq War would agree with it).  Alternately, you can treat it as mirror: Actual war-makers are blameworthy insofar as they fall short of the standards it exemplifies.My fellow Americans,In World War II, over 400,000 American soldiers lost their lives over the course of four years.  It was a tremendous and tragic loss.  But it was absolutely worth it.  The sacrifice of the fallen is the foundation of the amazingly peaceful and prosperous world in which we live.  Yes, we take their achievement for granted.  But the achievement was so great that it would have been worth paying a far steeper price. Now our nation and the civilized world face another grave challenge.  We saw it plainly in the terrorist attacks of September 11, 2001.  But those attacks are only a symptom of a festering threat to the peace and prosperity of the world.  What is that threat?  Though I fear to alienate possible allies, the best name for that threat is: Muslim tyranny.  Whether Sunni, Shiites, or "secular," the Muslim world is almost entirely ruled by governments that have little respect for democracy, and even less for human rights.  After years of study - and careful analysis of DARPA-sponsored prediction markets - I conclude with heavy heart that Muslim tyranny will not fix itself.  Indeed, its theory and practice is spreading and intensifying, threatening Central Asia, Africa, and even Europe.For now, I freely admit, Muslim tyranny poses little military threat to the civilized world.  But the same was once true for Communism and fascism.  These threats could and should have been removed in their infancy, sparing mankind countless horrors.  While we cannot undo the mistakes of the past, we can avoid repeating them.  As your leader, I say we must.Make no mistake about it: Our mission will be painful and long.  If you are not prepared to lose a million American lives to achieve lasting victory, we should not go to war.  If you are not prepared for a hundred-year occupation, we should not go to war.  If you are not prepared for a thousand domestic retaliatory terrorist attacks, we should not go to war.  If you are not prepared for the war to spread far beyond the borders of Iraq, we should not go to war.  I do not seek enthusiastic but short-lived support; indeed, fickle support is more dangerous than thoughtful opposition.  Instead, I ask each of you to visualize the immense and lasting suffering our country and the world are going to endure if we follow my lead.  Indeed, I ask you to visualize the vast numbers of innocent lives our war will destroy.  Think of all the children the United States and its allies burned to cinders in World War II.  To win, we will have to do the same.  Nothing can justify such atrocities - except a high probability of making Muslim tyranny history.  Why start with Iraq?  By the standards of the region, Saddam Hussein's Baathist regime is "secular."  But it is a ghastly tyranny, and its Islamic roots insulate it from the life-giving ideas of human rights and democracy.  Furthermore, it is extremely diplomatically isolated.  Militarily, we can defeat them with ease - and turn Iraq into a model for the rest of the Muslim world.It would be criminal to invade Iraq without meticulously desc[...]

The West was right about China, by Scott Sumner

Mon, 19 Mar 2018 16:41:13 -0500

The Economist magazine has a recent cover entitled:

How the West Got China Wrong

One of the stories inside the issue suggests that during the 1990s and 2000s, many western pundits were increasingly optimistic that China would gradually move closer to Western values. The magazine now says that these pundits were wrong.

Part of what is so spectacular about the decline of Sino-optimism is how recently and how thoroughly it held the high ground. The idea that global engagement and rising prosperity would drive Chinese convergence with Western values was one of the last beliefs shared by all sides in the Washington elite.

I'd say they were right. If the pundits missed anything, it was the fact that the rest of the world would become more authoritarian and nationalistic, notably Russia, Turkey, India, the US and many European countries. Thus while it's true that China has recently become more nationalistic and authoritarian, it's not true that they've moved further away from Western values. We've moved in their direction.

Life in Chinese cities today is much more like life in the West than was the case 20 years ago, and 20 years from now Chinese life will be even more similar. History shows that in the long run, rising prosperity brings liberalism. But we also know that there can be major setbacks (observe 1914-45), and that progress is not a straight line.

If China were moving toward authoritarian nationalism while the rest of the world was moving toward liberalism, then I'd be worried about predictions that China will eventually converge with the West. But that's not what we are seeing, and it's not what I expect to see in the future.

It's of course possible that I'll be wrong, and that nationalism will be the wave of the future. But given that the younger generation is far less nationalistic than the older generation, I think it more likely that the world eventually swings back toward liberalism, one funeral at a time.

PS. Mercatus has recently published a new primer on NGDP targeting as well as futures targeting, written by Ethan Roberts and myself. I recommend it to people who want a short introduction to the concept.


The Danger of Intellectual Ruts, by Contributing Guest

Mon, 19 Mar 2018 13:34:37 -0500

by Pierre Lemieux Peter Navarro's film raises one interesting question: How can somebody be so wrong? In the wake of the new tariffs on steel, a Wall Street Journal story reminds us of the steel industry's influence over the U.S. government ("Navarro's Ties to Nucor Highlight Trump Advisers' Steel-Industry Connections," March 16, 2018). Many of the senior advisors to the President have worked in or for the steel industry. Peter Navarro, a senior trade advisor, received $1 million from Nucor Corp., a steel manufacturer, to produce a 2012 documentary film, Death by China, against imports in general and from China in particular. A book with the same title was published in 2011, co-authored with journalist Greg Autry. These facts confirm one of the conclusions of public-choice theory and the theory of collective action: special interests, especially producers' interests, will capture the government to obtain interventions to their benefit. This is called rent-seeking, of which steel tariffs are just an example. The poor economics of Navarro's documentary has been well criticized by Daniel Griswold of the Mercatus Center. The film is pure propaganda. So is the book, but I will focus on the film here. Peter Navarro's film raises one interesting question: How can somebody be so wrong? Among the errors, one is particularly glaring. It is worth watching Peter Navarro at 1:08:12 in the film. With great certitude and professorial confidence, he says: And the argument is pretty simple. The gross domestic product grows with only four things: consumption, investment, government spending, and net exports. And when you run a trade deficit, the simple math of that is that that's a negative in terms of growth. This is simply and demonstrably false. As I explained in a previous post here ("Misleading Bureaucratese"), GDP is not equal to the sum of consumption, investment, government expenditures, and net exports (exports minus imports). It is instead the sum of consumption (right!), investment (right!), government expenditures (right!), and exports (not net exports!). GDP is the acronym of gross domestic product, and only expenditures on domestic production are included. The reason why, as a pure accounting operation, the national statisticians of the Bureau of Economic Analysis (BEA) subtract imports is that they are already included in the measure they have of consumption, investment, and government expenditures. The value of GDP they thus calculate does not include imports in any way--and specifically not as a subtraction--because GDP cannot include them by definition. In short, imports do not reduce GDP or its growth in any way. A good introductory textbook of macroeconomics will explain this. Moreover, one can easily check it in the official explanation of the nature and measurement of GDP, the BEA's Concepts and Methods of the U.S. National Income and Product Accounts (November 2017). I quote from p. 2-9: Thus, GDP is equal to personal consumption expenditures (PCE) plus gross private domestic fixed investment plus change in private inventories plus government consumption expenditures and gross investment plus exports minus imports. In this calculation, imports offset the non-U.S. production that is included in the other final-expenditure components. For example, PCE includes expenditures on imported cars as well on domestically produced cars; thus, in order to properly measure domestic production, the sales of foreign-produced cars that are included in PCE are offset by a comparable entry in the imports of these cars. All statistical agencies in the world follow the same methodology. How can somebody like Peter Navarro, who after all has a Ph.D. in economics from Harvard University and used to teach business at the University of California at Irvine, defend an interpretation that contradicts a fact that even[...]

Uber Scam?, by David Henderson

Sat, 17 Mar 2018 17:57:35 -0500

I'm a big fan of Uber. I'm in New York City this weekend and have had great success using it. The fares, though high, have been below the cab fares and the cars don't play those horrible ads that assault you in New York's Yellow cabs. Plus I had 2 good conversations with a driver from Ghana and a driver from India who's a Muslim refugee.

I had something happen 2 hours ago, though, that makes me wonder. I don't know if this is a scam: thus the question mark at the end of title. I just wonder if it is and I wonder if others have had this experience.

I walked in 14 minutes to a Chinese restaurant 2 long blocks and 13 short blocks away to get there by noon when it opened. I timed it perfectly and gave the take out order. I wanted to get the food back to our hotel room while it was still hot. I didn't know how long the food would take and so I waited until it came out before I ordered an Uber. My strategy made sense, I thought, because when I got on Uber, it looked like only a 4-minute wait.

So when the food came, I contacted Uber immediately and it looked like that same 4-minute wait. The fare would have been only about $6.50. A driver named Mohamad accepted. Then Uber started tracing his path and it looked as if he was moving away. That might have made sense because of the way he might have been aiming along with all the one-way streets there are. But then the estimated wait turned into 5 minutes, then 6 minutes. Then a minute or two later, it turned into 8 minutes and he was clearly driving even further away. Had I been confident that it would have been 8 minutes, I would have hung tough. But I wasn't. I knew I could walk it in 12 minutes. So I cancelled and, of course, was told that there might be a small cancellation fee since Mohamad had accepted and was on his way. That made sense to me. But now it looks, from my credit card statement, as if the fee was about $12.

I'm not familiar enough with Uber to understand all the ins and outs to be sure that the $12 fee is for this and not for some other trip. It's just that there's no other trip I've taken in the last few days that would have had a fare that low.

So here's what I'm wondering. Are there some Uber drivers who will accept the trip and then reconsider and look for a better fare? Then they drive away, thinking that the customer might get fed up, as I did, and cancel. Then they get both the cancellation fee and the next customer, who probably is going further.

I'm asking this as a customer but also as an economist who wants markets to work well and who believes that they normally do. Is this a case where they don't work really well? Any insights from people who have used Uber a lot and have canceled at least a few times would be appreciated. Comments that are not informative or insightful will not be appreciated.