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Last Build Date: Sat, 24 Mar 2018 13:13:43 -0500

Copyright: Copyright 2018

Henderson on How We Dodged a Bullet, by David Henderson

Sat, 24 Mar 2018 13:13:43 -0500


Steensland would probably dislike the title of this review. The reason is that he sees the defeat in the U.S. Senate of Nixon's proposed Family Assistance Plan, which the House of Representatives passed in 1970 by a vote of 243-155, not as dodging a bullet but, on the contrary, as a huge lost opportunity. But one doesn't have to agree with his perspective to learn from his book.

Steensland gives a detailed account of the various proposals for some version of a GAI [Guaranteed Annual Income], starting with the Johnson administration, through the Nixon, Ford (briefly, given his two years in office), and Carter administrations. Although he is a sociologist, he exhibits a basic understanding of the effects of economic incentives on work and family dissolution. And, refreshingly, his book is relatively free of cheap shots at those with whom he disagrees. He tries hard to understand their views rather than merely dismissing them as unworthy. That makes it relatively easy to judge the arguments of the various players and come to conclusions different from Steensland's. In particular, I found the arguments against Nixon's proposal by some of Nixon's own staff much more convincing than Steensland did.

This is from David R. Henderson, "How We Dodged a Bullet," my review of Brian Steensland's The Failed Welfare Revolution: America's Struggle over Guaranteed Income Policy in Regulation, Spring 2008.

Another excerpt:

You can take one side or the other on each of the above issues. But, as one of Nixon's main advisers on welfare, Daniel Patrick Moynihan, became famous for saying, "Everyone is entitled to his own opinion, but not to his own facts." I repeat the quote because Moynihan, in pushing for one version of a plan, told Nixon a whopper. In an April 1969 letter to Nixon, Moynihan wrote, "For two weeks' growth in the Gross National Product you can all but eliminate family poverty in America." Um, no. The typical annual growth rate in those days was just above 3%, so two weeks of growth was about 0.12% of GNP. Even the cheapest plan would have cost well over half a percent of GNP, which is more than four times Moynihan's estimate.

And, finally, the relevance for today's policy issues:
Because there is a renewed push today for some form of GAI--even some libertarians advocate it--there's a lesson to be learned from Steensland's book. Some libertarians claim that we could have a reasonable GAI by cutting all other means-tested benefits. This turns out to be false, as I showed in "A Philosophical Economist's Case Against a Government-Guaranteed Basic Income" (Independent Review 19[4], 2015). But even if it were true, the Nixon proposal was for a major expansion of welfare spending, with no offsetting cuts in means-tested programs such as housing aid and food stamps. The lesson: libertarians who push for a GAI will end up being in an alliance whose main constituents want more government spending. And that's what they'll probably get.


Back to Basics: Whom Does a Protectionist Measure Hit?, by Contributing Guest

Fri, 23 Mar 2018 11:12:52 -0500

by Pierre Lemieux ...a state's protectionist measures are imposed on its own citizens or subjects. When he announced broad tariffs against Chinese imports, President Donald Trump said about the trade deficit, "It's out of control" ("U.S. To Apply Tariffs on About $60 Billion of Chinese Imports," Wall Street Journal, March 22, 2018). What this means is that American consumers and businesses who import goods from China are out of control, and the federal government will control them. With threats of retaliation and trade war, indeed with just the standard talk of "concessions" in ordinary trade negotiations, we tend to forget one simple and basic fact: a state's protectionist measures are imposed on its own citizens or subjects. Protectionist measures include taxes called tariffs or duties, import quotas, or straight import bans. Straight bans are rarer, but they exist: an example I mentioned in a recent Econlog post is the prohibition of hiring foreign ships to transport goods between American ports (mandated by the Jones Act of 1920). But a tariff set at a prohibitive level is equivalent to a ban: there were many examples in 19th-century America. Contemporary examples include the 50% tariff duty on alcohol and the 100% duty on tobacco in the United Arab Emirates. A tariff is always a sort of ban because it forbids importing without the state taking a cut (and thus increasing the price of the imported good). One key to understanding this is to grasp an elementary but important point: a tariff (or its equivalent) generally ends up being paid by domestic purchasers, since they translate into a higher domestic price. Foreign producers pay the tax, but get reimbursed by the higher price they can charge in the protected market. It is precisely to increase the domestic price they get that domestic producers lobby for the tariff. Most protectionist measures hurt foreign exporters too, for their market is thereby limited and they may have to compensate by producing less profitable goods. But this is an indirect effect of the direct action of a state forbidding something to its own citizens. The fundamental problem with protectionist measures is that they interfere with the benefits of exchange: they prevent the realization of the mutual benefits of a voluntary exchange between two parties, one of whom is a citizen or subject of the state that imposes the measures. If an American imports a solar panel or a bed from a Chinese producer, both believe they benefit from the exchange; otherwise, one would have walked away from the deal. The argument is not changed by the presence of intermediaries such as Walmart or the car company that imports steel in order to manufacture the car that a consumer wants. Reciprocity cannot be an argument against free trade. Any voluntary trade is reciprocal by its very nature: one party pays for something he (or it) thinks is worth more than the asking price; the other party gets a payment that he thinks is worth more than what he sells. Only collectivist reciprocity can be an argument, when the state decides what individuals will exchange at which conditions. It is true that a voluntary exchange harms third parties--if we adopt a very general and neutral concept of "harm." Suppose you buy a lawn-mowing service from a gardener. Some of the latter's competitors have lost the sale (although the more customers in market, the less noticeable this harm will be). Also, other potential buyers have been overbid by you, one of the successful buyers. The typical free-market price is the result of an invisible auction: it is the price at which the winning bidders have outbid others. These harms are ignored because they are merely transfers in the sense that one wins what the other loses. On the contrary, coercive restrictions on exchange create harms that are not compensated by larger gains. This is the standard economic argument for free markets. An indication that harms to disappointed competitors and losing bidders should not count is that otherwise the argument against fr[...]

What if Trump wins the China IP dispute?, by Scott Sumner

Thu, 22 Mar 2018 23:26:37 -0500

I don't think the US will win its trade war with China, nor do I think a win would be desirable. Nonetheless, it's worth thinking about what would constitute a win. Who would benefit and who would lose?

In my view a win would entail the following:

1. China agrees to stop stealing US intellectual property, and instead buys the intellectual property.

2. After China gives in, we remove the tariffs on Chinese goods that were imposed in retaliation for IP theft.

If that were to occur, who would win and who would lose? One group is obvious:

1. US IP producers would be winners. This would boost incomes in areas such as Hollywood and Silicon Valley, as there would be less piracy and more commercial exports of films, music, software, etc.

Here are some other effects of a US victory:

2. US imports would increase. That's because any policy that boosts exports also tends to boost imports. While the increase in exports would be mostly in IP goods, the increased imports would be in middle and lower tech goods, such as furniture, textiles, autos and auto parts, home appliances, etc.

3. The dollar would get stronger, which would reduce the export of non-IP products, such as oil and food.

4. The income distribution in America would become more unequal. Incomes would rise in coastal California, Boston, Manhattan and the DC area. Incomes would fall in the rust belt and parts of the South, as lower tech industries lost out to import competition. The farm belt and the oil patch would also be hit.

Is that what the protectionists want?

PS. Again, this is not a prediction of what will happen, rather what would happen.

If we "win".


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[...]

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[...]