May the fourth be with you.

Understanding the Effects of Tariffs

by Kyle Pomerleau and Erica York, AEI Economic Perspectives, April 23, 2025.

Excerpt:

In 2023, the US applied a simple average tariff of 3.4 percent on imports; that’s the result of 734 distinct tariff rates, the highest of which is 350 percent on some beverage and tobacco imports. While 46.5 percent of US imports were duty-free, certain categories of imports faced high average rates. For example, average rates were 16.1 percent for dairy, 11.6 percent for clothing, 15.0 percent for sugars and confectioneries, and 6.5 percent for petroleum. However, only 2.7 percent of imports (measured by share of import value) faced duties greater than 15 percent (WTO et al. 2024).

And:

A tariff would make untaxed, domestically produced goods more attractive to consumers than foreign-produced goods. As discussed above, this would shift labor and capital out of the export sector and into the import-competing sector of the economy. Although shifting means goods would not face direct taxation, it would produce inefficiencies. Labor and capital would move to less productive uses, leading to lower output and incomes than in the absence of tariffs.

You Autor Know

by Scott Winship, First World Problems, April 28, 2025.

Excerpt:

ADH [Autor, Dorn, and Hanson]  first assessed what they called the “China Syndrome” in a paper published in 2013.[ii] They leveraged the fact that different geographic areas (“commuting zones,” or CZs) had more or less susceptibility to import competition from China depending on their pre-Shock mix of industries. ADH assigned Chinese import growth in different industries to CZs based on the areas’ initial share of national employment in each industry. In other words, they assumed a CZ that initially had 4 percent of US employment in some manufacturing industry was hit twice as hard by increased Chinese imports within that industry as a CZ that initially had 2 percent of employment in the industry.

ADH summed these amounts across all manufacturing industries to get a measure of each CZ’s overall exposure to Chinese import growth. Finally, they scaled the growth in imports for each CZ by the area’s initial employment level. (Absorbing $1 million in imports is a bigger deal in a CZ with 50,000 workers than in one with 500,000 workers.) They found that stronger growth in Chinese imports in some CZs than in others caused those CZs to have worse manufacturing employment trajectories relative to the others than would have been the case absent the China Shock. If this seems like a very particular way to word the conclusion, the reason will become clearer below.

Assume for now that ADH’s estimates are unassailable. Do they suggest effects large enough to cause the economic, social, and political outcomes that are often blamed on the China Shock? To put them into context, imagine two large commuting zones each with 200,000 working-age people and 20,000 manufacturing workers in 2000.[iii]Imagine one of them was at the 10^th percentile of exposure to the China Shock—meaning that it was relatively unexposed to rising Chinese imports—and the other was on the other end, at the 90^th percentile. For simplicity, imagine further that they experience no population growth, and that in the absence of the China Shock, they would both have continued to have 20,000 manufacturing workers.

The 2013 paper implies that the CZ with the greater import exposure would have had about 2,700 fewer manufacturing workers than the other in 2007. [iv] On the one hand, that means that one out of every seven manufacturing workers would have lost their job in the one place but wouldn’t have in the other. On the other hand, it would mean a relative decline in the manufacturing employment rate of 1.4 percentage points—14 would-have-been manufacturing workers for every 1,000 working-age people.

DDF vs BHL

by David Friedman, David Friedman’s Substack, March 20, 2023.

Excerpts:

While I agreed with many of his points, that was not one of them. If “social justice” has a definite meaning in philosophy, philosophers should be able to offer clear definitions and the definitions offered by different philosophers should be consistent with each other. As the quotes above from two philosophers from the same faction of the same political movement demonstrate, they are not. The first specifies that it is about coercive institutions, the second about institutions in general. The second makes the evaluation of a society depend on how well it serves the interests of the poor and least advantaged, the first makes it depend on maintaining a minimal standard for “conscientious people.” The poor and disadvantaged are not all conscientious, conscientious people are not all poor and disadvantaged. Both definitions look more like political rhetoric than political philosophy.

Not only are the definitions not consistent with each other, neither has a clear meaning. Consider, for instance, “minimally decent lives.” A modern making a list of the requirements would almost certainly include access to decent medical care. By that definition no human being prior to 1900 lived a minimally decent life, since what we consider reasonable medical care did not then exist.

And:

To continue …  . “Advocates of social justice believe the moral justification of our institutions depends on how well these institutions serve the interests of the poor and least advantaged.” Depends entirely? Two societies are equally justified if they equally serve the interests of (say) the bottom 10% of the income distribution even if in one of them the rulers live a life of luxury supported by the taxes of everyone else above the bottom or if, in one, almost everyone above the bottom 10% is a (well taken care of) slave? Does Brennan think there is any human being who thinks none of that matters, that the moral justification of the institutions depends only on how well they serve the bottom of the distribution?

The obvious response is that advocates of social justice believe that the justification of the society depends in part on the implications for poor people. But so does very nearly everyone else. Utilitarians believe that the justification of the society depends on how well it serves everyone’s interests, the poor and disadvantaged included. Similarly for most alternative candidates. The concept that, according to Brennan, has a definite meaning in philosophy either has a meaning that nobody could take seriously or a meaning that distinguishes it from practically none of the alternative concepts. I agree with Jason that consequences matter, but that agreement does not define social justice.

California’s Environmental Regulations Are a Mess. Why Won’t Lawmakers Fix Them?

by Steven Greenhut, Reason, May2, 2025,

Excerpt:

And if you think these cynical efforts to gum up the construction process help the environment, then consider this alarming point from that analysis: “Projects designed to advance California’s environmental policy objectives are the most frequent targets of CEQA lawsuits.” These include transit projects, multi-family housing, parks, schools and libraries. It notes that 80 percent of the CEQA lawsuits are in infill locations, which is where environmentalists want us to build.

CEQA criticism has grown even on the political Left thanks largely to the law’s stifling effect on new housing construction. As everyone here knows, California faces a severe housing crisis as the median home price statewide has soared above $800,000 and well over $1 million in many coastal metros. That has led to massive rent spikes and has exacerbated our homelessness situation. Lawmakers have—to their credit—passed targeted exemptions and streamlining provisions for particular types of housing projects (infill, multi-family, duplexes), but it’s not enough.

A 2022 report for the Center for Jobs and the Economy by Holland & Knight attorney Jennifer Hernandez notes that despite those new laws, “CEQA lawsuits targeting new housing production, in contrast, continue to expand—with 47,999 housing units targeted in the CEQA lawsuits filed just in 2020.” The California Air Resources Board (CARB) “acknowledges that two-thirds of CEQA lawsuits allege violations of climate impacts.”

Free Markets Did Not Fail the Middle Class

by Norbert Michel and Jerome Famularo, Cato at Liberty, May 2, 2025.

Excerpt:

Here’s just one more example of how wrong the populists’ income stagnation story is. Real median household income, for all American households, increased 73 percent from 1968 to 2024. That’s not stagnation. Interestingly, that figure is biased downward because of changing household characteristics, such as smaller families, an aging population, and more single folks.

As Figure 1 shows, real median income for married couples with children increased by 132 percent from 1968 to 2024. That’s pretty much the polar opposite of stagnation.

The post My Weekly Reading for May 4, 2025 appeared first on Econlib.

Our job as safety professionals is to determine the cause of the accident, deliver that information to the public, and provide recommendations to prevent tragedy in the future.  As professionals, we owe it to the victims to get it right. In aviation, the body responsible for accident and incident investigation is the National Transportation Safety Board (NTSB).  An independent agency, the NTSB has no prosecutorial or law enforcement teeth to mete out punishment; their sole mission is to determine the cause of transportation accidents and formulate recommendations for safety.  But to do so, they must have access to accurate information and have the ability to assess the information they do have, even if it is outside their technical expertise.  

A parallel can be drawn with the general public.  Since the age of social media there is the ability for the public to access information at a nearly unprecedented scale.  But the quality of that information varies widely, from the accurate and truthful, to the absolutely goofy (and before anyone asks, yes, the Earth is round.  We figured it out like 3000 years ago with a couple of sticks in the desert.  Please stop coming to the flight deck to ask.  I don’t care what you saw on the tickety-toks).  I’m familiar with Amy Willis’s Searching for Truth in a Social Media World discussing a conversation between Russ Roberts and Arnold Kling on feedback loops with regard for information EconTalk, and while I haven’t formulated a good answer to her question of why bad information simply doesn’t go out of business, I would like to share my perspective on information gathering.

How do safety professionals vet their information to make sure it is accurate and unbiased?  The answer is simple, if a bit counter-intuitive: by inviting everyone vested interest to the table.  The investigative process of the NTSB relies on what they call the Party System.  In a high-stakes investigation such an accident with fatalities, there are plenty of interested parties with an interest in the outcome: the aircraft manufacturer would be eager to show their systems were safe and reliable, the airline would want to demonstrate their business practices were not at fault, etc.  The NTSB determines what parties are interested and have expertise they require (within limits: those with legal or litigative positions are not allowed to be assigned to the investigative process, but for the sake of this metaphor, we’ll pretend they don’t exist).  Those who have the technical expertise or insight are invited to actively participate in the investigation.  Eventually, each party is asked to prepare a factual report and they are all asked to verify the accuracy of the others.  The parties do not participate in the actual analysis and report writing writing phase, but their own reports and findings are included in the public docket.  The NTSB then deliberates over the final result and reports their findings.  At its very core, this Party system uses each organization’s self-interest as a check on the others’ self-interest.  

Let’s expand this metaphor to something we’re all more familiar with: ourselves.  Constantly, we are assaulted by a deluge of information.  Most of it is about as useful as glow-in-the-dark sunglasses.  But just because information is bad, inaccurate, or biased, does that mean it should be excluded from the public?  That decision should come down to the individual.  Like the NTSB, we have a moral responsibility to ourselves and our community to seek out the best possible information.  We should hear as many different (relevant) perspectives as possible, rattle them around in our head for a bit, then determine a course of action.  We have the capacity to do so.  It’s a disservice to public discourse if we start excluding ideas because they don’t pass a fact check or they’re too “woke”. Invite everyone to lay their cards on the table, and use self interest as a motivator rather than an axe.   

Dennis Murphy is a professional airline pilot with a background in aviation safety, accident investigation, and causality. When he’s not flying 737s, he enjoys the company of his wife, their dogs, cats, and bees.

The post Party Time: Lessons from the aviation investigative process on “fact checking” appeared first on Econlib.

Another example is occurring in California, a state that is home to many of the richest corporations on Earth.  Our relatively high income tax rates generate a firehouse of revenue from places like Silicon Valley.  In poorer states, tax money would be allocated more carefully, to insure a basic level of public services.  Because California has far more money than needed for these basic services, they’ve decided to waste vast sums on a high-speed rail boondoggle.

The plan originally adopted by voters in 2008 called for a high-speed rail line to be built between LA and San Francisco, by the year 2020.  To no one’s surprise, the cost estimates have escalated, even as the project has run far behind schedule:

The project’s price tag now exceeds $100 billion, more than triple the initial estimate. It has mostly been funded by the state through the voter-approved bond and money from the state’s cap-and-trade program. A little less than a quarter of the money has come from the federal government.

The authority has already spent about $13 billion.

And not a single mile of track has been laid.  But it gets worse, much worse.  The state has now abandoned the goal of building high-speed rail between LA and San Francisco.  The new plan calls for the high-speed rail line to be built between Palmdale and Gilroy:

Finishing the line in the Valley is just the first step. Next, the train has to extend north toward the San Francisco Bay Area and south toward Los Angeles. Choudri’s goal within the next 20 years is to build to Gilroy, about 70 miles (113 kilometers) southeast of San Francisco. Under current public transit, it would then take at least one more train transfer to get into the city.

Southward, he envisions building to Palmdale, 37 miles (60 kilometers) northeast of Los Angeles. From there, it takes more than one hour to drive or two hours on an existing train line to reach Los Angeles.

Technically, it would still be possible to take a series of trains from LA to San Francisco, but it would take more like 7 hours, rather than the promised 3 hours.  In the unlikely event that this project is completed in 2045, almost no one will take the train (actually series of trains, with transfers.)  I can fly round trip from Orange County of Oakland for $80 in one hour each way; why would I take a 7-hour train trip at a far higher price?

So why did this fiasco occur?  In a sensible world, the authorities would have figured out a plan before starting construction.  At some point they would have discovered that the project was infeasible, and abandoned the idea.  But the actual goal was not a high-speed rail line; it was funding lots of contracts building high-speed rail lines.  That project has succeeded.  For the contractors, Palmdale to Gilroy is just as good as LA to San Francisco.  Thus they decided to immediately begin constructing the line in order to present “facts on the ground” that would make it less likely that the project was abandoned.  To be clear, on a cost/benefit basis it still makes sense to abandon this project, even after $13 billion has been spent, because the actual costs will undoubtedly vastly exceed the current $100 billion estimate.

Early on, the French were brought over to help build the line.  They were so appalled by the incompetence of the California officials that they left in disgust.  They shifted over to Morocco where they built a high-speed rail line that is already up and running.

PS.  Off topic, in a recent post I discussed how the Trump effect had shifted the Canadian election from the Conservatives to the Liberals.  The post ended by suggesting “Up next, Australia”.

Here’s today Financial Times:

Anthony Albanese has ridden a wave of anti-Trump sentiment to win a landslide second term as Australian prime minister, just three months after polls suggested he faced a humiliating defeat. 

Albanese has become the first Australian prime minister in more than 20 years to claim back-to-back victories and the first Labor leader to achieve that feat since Bob Hawke in 1990. 

Labor needed 76 seats to form a government and was projected to win almost 90 seats as the count continued.

The pendulum effect in action.  Canada, Australia, where will it hit next?

The post Spoiled by success appeared first on Econlib.

In its press releases (including the release of April 30), the Bureau of Economic Analysis (BEA) chooses the second formulation instead of the first one or of both together. This focus is highly misleading and does not correspond to the bureau’s methodology and technical literature.

The total value of the final goods and services produced domestically in an economy (including capital goods and any increase in inventories) is, by definition, equal to total expenditures (including savings and what is produced but not sold during the period under consideration). In other words, looking at GDP from the expenditures side, we have the familiar equation:

GDP = C + I + G + X – M.

Forget M for the moment. The equation, which is an accounting identity, says that GDP must also be equal to the sum of consumption expenditures (C), investment expenditures (I), government expenditures (G), and exports (X), if none of these components include imports, for GDP is gross domestic product. In fact, each of these four variables (C, I, G, X), as statistically collected, does include imports. Consequently, the (separately calculated) total value of imports (M) must be subtracted to remove the imports from the total. Hence the formula above.

The equation is typically rewritten as its exact mathematical equivalent

GDP = C + I +G + (X – M),

mistakenly suggesting the false interpretation that the “net exports” or “trade deficit” (X – M) subtract something from GDP. The expert or the economics student who has taken a good college course of introductory macroeconomics knows that this interpretation is not correct. But the ordinary person or the superficial journalist or editor is easily misled. The false interpretation also provides the protectionist activists (like Peter Navarro, despite his Harvard PhD in economics!) with the invalid argument that imports reduce GDP.

The reader interested in further explanations and citations including to the BEA) will find several articles and posts of mine: “Gross Domestic Error in The Economist,” EconLog, May 28, 2019); “The St. Louis Fed on Imports and GDP,” EconLog, September 6, 2018; “Peter Navarro’s Conversion,” Regulation, Fall 2018; “Misleading Bureaucratese,” EconLog, October 30, 2017); “A Glaring Misuse of GDP,” Regulation, Winter 2016-2017, (p. 68) ; “Are Imports a Drag on the Economy?” Regulation, Fall 2015.

As you can verify, the Wall Street Journal has not come to grips with this simple statistical fact. Very interestingly, and for the first time to my knowledge, The Economist has just shown that it understands: see “Don’t Blame Imports for the Fall in America’s GDP,” May 1, 2025.

It is important to distinguish between an accounting identity (such as the one discussed above) and an economic argument. The former is true by definition; the latter needs a valid theory and supporting evidence. It is difficult, if not impossible, to build a valid protectionist theory demonstrating that imports reduce GDP. Standard economic theory, on the contrary, can explain, among other phenomena, how a foreign war embargo or, equivalently, domestic tariffs or bans can hit production via imported inputs (inputs account for more than half of all imports in America).

According to the BEA’s advance estimate (which is nearly always revised as more data become available), the American GDP declined by 0.3% in the first quarter of 2025 compared to the last quarter of 2024, while imports increased by 41%.

One explanation for the coincidence of higher imports and lower GDP in Q1 is the frontloading of imports before President Trump’s tariffs hit. Consumers, intermediaries, and producers tried to beat the tariff deadlines. For example, car dealers increased their inventories of foreign-made cars (or those containing foreign-made parts) to satisfy the demand of their customers. The high maritime traffic between China and Los Angeles confirms the frontloading of many other imports. Responding to consumer demand, domestic production of substitutes could have been consequently reduced. But the phenomenon would soon be compensated by the (reverse) substitution of domestic for imported production as the tariffs come into force.

Another explanation is simply that the uncertainty and pessimistic expectations provoked by Trump’s protectionist intentions were sufficient to start a recession, which is defined as negative levels of GDP and their consequences in terms of unemployment, etc. We will learn more as events develop and new data become available, but not with the help of an accounting identity that says nothing about imports.

******************************

ChatGPT took the initiative of adding a wall picture. It seemed to me that the person on the left looked like Adam Smith and the one in the middle like Karl Marx. I asked “him” about that and he confirmed. The one on the right, he said, is John Maynard Keynes. I decided it was not a bad idea and kept it, although such a picture would be unusual in a newsroom.

Puzzled journalist

The post Imports Arithmetic Doesn’t Explain GDP Drop appeared first on Econlib.

The show also has many economic themes and examples.  I have a series of blog posts planned discussing these as I progress through my rewatch.  This post is the first of what I hope will be many.  I will do my best to keep posts spoiler free, but when necessary, I will label spoilers.  

In the episode Killing Magic (season 1, episode 3), Frieren and her human apprentice Fern head to a village where a powerful general in the Demon King’s army has been sealed away since the war 80 years earlier.  During the war, this general, Qual, devastated the human armies with a powerful spell named Zoltraak.  This spell could bypass all barriers; there was no counter for it.  Its very name struck terror into the hearts of the humans.  This was the stuff of legends.  Indeed, Qual itself was so powerful that it could only be sealed away; no magic could touch it.  

Fast-forward 80 years (to the present) and the seal around Qual has failed.  Frieren and Fern arrive to destroy Qual once and for all.  Qual, recognizing Frieren from the battle 80 years earlier, proceeds to threaten her and unleashes his all-powerful spell.  Fern blocks the spell.  Fern’s surprise is palpable:  “I don’t understand, Mistress Frieren.  That was just ordinary offensive magic.”  Frieren goes on to explain: humans, unlike demons and elves, are not innately magical.  They’ve had to adapt and overcome the challenges facing them.  Conversely, demons are innately and powerfully magical; they do not know how to adapt.  They just bludgeon everything until it submits.  When Zoltraak devastated human armies decades ago, the humans dedicated themselves to reverse-engineering it, understanding it, and perfecting it.  More importantly, the humans simplified it and it became so common that this spell, once solely in the hands of just one extraordinarily powerful demon, is now commonplace against even the lowest-skilled human mages.

Here we see a demonstration of what Julian Simon calls “the ultimate resource,” namely the human mind.  Humans are insanely creative when faced with problems.  When prices are allowed to fluctuate (signaling relative scarcity/abundance) and proper institutions are in place that allow for and reward creativity, humanity is able to accomplish amazing things.  Consequently, the impossible becomes not only possible, but commonplace.  Coupled with the fact that technological change is a combinatorial process, it becomes mind-boggling what problems free humans can overcome. 

Thus, we see another implication: that problems sow the seeds of their own destruction (or, as Frieren put it: “Zoltraak is just too powerful”).  Faced with challenges, humans will overcome.  If protected from challenges, stagnation results.  To quote the economist Mark Perry: “competition breeds competence.”  Competition not only breeds competence, but breeds superiority.  Let us unleash human creativity.

The post Zoltraak: Competition versus Stagnation appeared first on Econlib.

Brussels wants to increase purchases of US goods by €50bn to address the “problem” in the trade relationship, the EU’s top negotiator has said, adding that the bloc is making “certain progress” towards striking a deal. . . . 

Šefčovič said the key argument he was making to US trade representative Jamieson Greer and commerce secretary Howard Lutnick was taking account of American services exports to the EU, which would bring the overall trade deficit with Europe to only about €50bn.

That could be closed rapidly with deals to purchase more US gas and agricultural products, he said.

“If what we are looking at as a problem in the deficit is €50bn, I believe that we can really . . . solve this problem very quickly through LNG purchases, through some agricultural products like soyabeans, or other areas,” Sefcovic said.

Of course, the European purchase of an additional $50 billion worth of soybeans and natural gas would do almost nothing to reduce the overall US trade deficit, but it would reduce the US bilateral trade deficit with Europe (while enlarging the deficit by an equal amount with other countries.)  This is due to the fact that commodities are fungible, or easily interchangeable.

Suppose that Europe had previous been purchasing soybeans from Brazil and natural gas from Qatar.  And suppose that East Asian countries had been buying soybeans and natural gas from the US.  Commodity trade could be rerouted such that Europe now bought its soybeans and natural gas from the US, while Brazilian soybeans and Qatari gas was rerouted to East Asia.  Nothing would change except that transportation costs would be a bit higher, making the world a bit poorer.

In the kabuki theatre of American politics this might be viewed as a “big win”.  After all, we now live in an imaginary world where nothing is real.  A world where the administration saved 258,000,000 American lives (probably including your life), just in the past three months.  That’s 3/4th of the US population.

The Europeans seem to have realized that if America wishes to play in this imaginary world, their best strategy is to play along, to humor the administration by pretending that bilateral trade deficits are real.

PS.  I searched for the 1932 Betty Boop cartoon entitled “Crazy Town”, but the copies on the internet are of very low quality.  I saw these at the theatre when I was young, and for my money they are the best cartoons ever.  (Especially the surrealistic pre-code ones.)  These films are still under copyright, presumably because that will encourage “innovation”.  (Yes, I’m being sarcastic.)

Here’s a unicorn:

Le Vue (La Dame à la licorne) – Musée de Cluny Paris

The post Game theory in Crazy Town appeared first on Econlib.

At my institute, the Bridwell Institute for Economic Freedom, we spend our days trying to understand how variations in economic freedom impact broader social and economic trends. The Economic Freedom of the World Annual Report (EFW), on which my colleagues Robert Lawson and Ryan Murphy are two of several co-authors, contains a variety of metrics that help capture what it means for a country to be economically free. Area four (out of five) tracks several indicators related to freedom to trade internationally. In 1970, the first year for which we have data, the US ranked 4th in the world for trade freedom. We currently rank 53rd. There are 165 countries included in the most recent version of the index, so we aren’t even in the top quartile of countries for freedom to trade. 

It’s important to note that our data is released on a two-year lag, so our most recent economic freedom data is for the year 2022. If Trump’s trade agenda succeeds even a little bit, our relative ranking on world trade will deteriorate even further. 

The Freedom to Trade Internationally component of the EFW is comprised of 10 variables spread across four subcomponents: (1) tariffs, (2) regulatory trade barriers, (3) black market exchange rates, and (4) controls of the movement of capital and people. Both tariffs and non-tariff barriers are higher than they were in the early 2000s, though they have remained relatively stable since the early 20-teens. Still, we rank 62nd in the tariff subcomponent of the index, and 31st in the regulatory trade barrier component. We have no notable black market exchange rates that would impact the index. Where we have seen substantial deterioration since 2000 is in the fourth subcomponent reflecting controls on the movement of capital and people. 

It’s important to note that the “movement of people” here does not refer to immigration, though that is another area on which Trump’s current policies are proving problematic. This instead refers to the freedom of foreigners to visit our country for purposes of either business or pleasure. We make this process unnecessarily difficult, ranking 44th in this category. 

We also substantially regulate the flow of capital both into and out of our country. We rank 66th in the capital controls category. There are a number of controls, for instance, on the ability of non-residents to invest in the United States. These sorts of capital controls have a number of negative consequences, including distorting resource allocation, limiting access to foreign capital, discouraging foreign investment, and increasing costs due to the administrative burden of enforcing these restrictions. 

The EFW rankings are relative rankings, so we can fall either because our terms of trade have deteriorated or because other countries have improved. As Douglas Irwin said in a recent WSJ article, “The U.S. shouldn’t have stupid tariff policies just because other countries have stupid tariff policies.” We’re now in a world in which other countries are enacting stupid policies in response to Trump’s misguided trade agenda. Even if our relative rankings improve, raw scores will undoubtedly decline here and abroad. 

On a fundamental level, President Trump doesn’t believe that positive sum games are possible. The world, in his view, is a zero-sum game. Yet worldwide the average person is 4.4 times richer than they were in 1950, even with a concurrent explosion in population of 5.5 billion people. This explosion in prosperity was facilitated by the international alliances that were forged over this period. Indeed, countries like South Korea, Taiwan, and Singapore who opened themselves up to comprehensive international trade are now more than 30 times richer than they were in 1950. Trade is the ultimate positive sum game. 

Two and a half centuries ago, Adam Smith explained that the way to prosperity was not mercantilism, but instead through creating opportunities to truck, barter, and exchange. President Trump’s policies are currently cutting off those engines of prosperity. In doing so, he is creating the conditions for a precipitous fall in economic freedom, which will likewise destroy many of the benefits that freedom brings. 

Meg Tuszynski is the Managing Director of the Bridwell Institute for Economic Freedom in the Cox School of Business at Southern Methodist University. She is also a Research Assistant Professor in the Cox School.

The post Free Trade and Economic Freedom appeared first on Econlib.

I agree with his goal, and I’m doing my bit here to publicize it.

He writes:

May Day began as a holiday for socialists and labor union activists, not just communists. But over time, the date was taken over by the Soviet Union and other communist regimes and used as a propaganda tool to prop up their [authority]. I suggest that we instead use it as a day to commemorate those regimes’ millions of victims. The authoritative Black Book of Communism estimates the total at 80 to 100 million dead, greater than that caused by all other twentieth century tyrannies combined. We appropriately have a Holocaust Memorial Day. It is equally appropriate to commemorate the victims of the twentieth century’s other great totalitarian tyranny. And May Day is the most fitting day to do so.

Our comparative neglect of communist crimes has serious costs. Victims of Communism Day can serve the dual purpose of appropriately commemorating the millions of victims, and diminishing the likelihood that such atrocities will recur. Just as Holocaust Memorial Day and other similar events promote awareness of the dangers of racism, anti-Semitism, and radical nationalism, so Victims of Communism Day can increase awareness of the dangers of left-wing forms of totalitarianism, and government domination of the economy and civil society.

While communism is most closely associated with Russia, where the first communist regime was established, it had comparably horrendous effects in other nations around the world. The highest death toll for a communist regime was not in Russia, but in China. Mao Zedong’s Great Leap Forward was likely the biggest episode of mass murder in the entire history of the world.

Just as Paris is well worth a mass, so victims of Communism deserve a day.

I lost my copy of the Black Book of Communism in my 2007 fire, but I do recommend at least paging through it to see the horror.

Even from an early age, when I learned what Stalin had done in Ukraine, I was inoculated against Communism. Although, truth be told, it actually happened earlier than that, in 1956, when the USSR’s government invaded Hungary. When people ask what was the first major historical event I remember happening in real time, the invasion of Hungary is the one that comes up. I was 5 years old and turned 6 later that month.

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It certainly is true that consumption is the end goal of all production.  Without consumption, production is valueless.  We work in order to achieve some desired end, not the other way around.  But what is also valuable is investment.  Investment, to the economist, is not buying of stocks and bonds (although those are valuable activities as well), but rather purchases of capital equipment, homes, and other things that go into production.  More precisely, investment is “the production or construction of capital goods that provide a ‘flow’ of future service” (Economics: Private and Public Choice by James Gwartney, Richard Stroup, Russell Sobel, and David Macpherson, 17th Ed, pg. 137).  Investment, therefore, is key to fueling economic growth well into the future.

Imports exceeding exports necessarily means that more desired goods are flowing into the country.  Likewise, it means that more investment funds are flowing into the country as well.  Foreigners want American goods (we are the second largest exporter in the world at approximately $3 trillion worth of exports in 2023 alone), but they also want to put their savings into America.  A greater supply of savings means a lower interest rate (all else held equal).  Consequently, American firms and individuals can invest more than they otherwise would as the price of money falls.  This means more business creation, more homes, more college degrees, more retrofits, more upgrades, more research, more of everything that improves production, innovation, and general welfare.  Instead of the American production possibilities frontier being limited by domestic savings alone, it can be enhanced with foreign savings.  Trade lets us both consume beyond the production possibilities frontier and advance the production possibilities frontier.  All while using fewer resources.

Political efforts to reduce the trade deficit results in killing the golden goose.  Borrowing costs will rise, investment will fall, and so will the standard of living. We have seen these results with the trillions of dollars in wealth that was annihilated by the “Liberation Day” tariffs.  Treasury Bond rates have been increasing.  In turn, slower economic growth and higher borrowing costs will actively inhibit the Administration’s supposed goal of righting the fiscal ship. 

In short, I propose enhancing Kevin’s rebranding as “consumption and investment surplus.”  Trade deficits help Americans get wealthier not just now (consumption) but in the future as well (investment). 

PS. While working on my International Trade lectures for this semester, I came across an interesting paradox: Americans earn more on their investments abroad than foreigners earn on their American investments.  Yet, the trade deficit, and net investment position, are negative (implying foreigners are investing more in the US than the US is abroad).  What accounts for this paradox?  Risk.  The US is seen as a safe haven, so foreigners put their money here.  But Americans search out a combination of risk and safety, so they chase the higher interest rates abroad while keeping some here.  Consequently, American investments abroad earn a higher return than foreign investments in the US.  This position reverses in bad times: Foreigners end up earning more on their US investments than US citizens do abroad as the US citizens bring money back to safe havens and the riskier investments do not pan out.  See Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United States? (CBO, 2005) and New Evidence on the US Excess Return on Foreign Portfolios (Bertaut, et al, 2024).

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Rules and their administration increase in complexity over time.

We can see this play out in many forms. Small companies and startups can often have rather vague and open-ended policies that give wide latitude for discretion. Large multination companies have voluminous writings on company policies and procedures attempting to spell out how to act in every edge case. As startups grow and eventually become large companies, we can see this process carry out. As Lam puts it:

There’s a very natural evolution in administering rules in an organization, small to large, such that, over time, rules and their administration only become longer and more complex, never shorter or simpler.

This is an almost unavoidable process, and not entirely without value, because making rules more detailed and specific helps bring out two important values in rules or laws:

Fairness requires that rules need to fully inform people about what compliance requires. Philosophers of law call this the guidance value of law.

When rules or laws are vague and unclear, it’s hard for any given person to know how they need to conduct themselves to avoid running afoul of the rules. If you don’t clearly understand what behavior falls in or out of bounds, you are subject to arbitrary enforcement. This same issue provides another important value that mirrors guidance value for those subject to laws – those who enforce the laws also need to have a clear understanding of what the law requires:

The rule of law also requires that enforcers be given sufficient instruction on when a law is violated. Philosophers of law call this the process value of law.

He cites an example of a city with a very complex noise ordinance outlining very specific noise levels permitted at all manner of locations, for all kinds of events, for all hours of the day, including a clause that noise at an individual property may not exceed the ambient noise level by more than five decibels. Applying these ideas, Lam says:

This law has very poor guidance value but good process value. The typical citizen does not own a decibel meter and does not know that decibel scales are logarithmic so as to understand a five decibel difference. The typical complainant probably cannot tell you where a violator’s property line is. But any police officer carrying a decibel meter can show a violator right away why they are receiving a citation.

But what Lam sees as the most important driver of the first law of bureaudynamics is mistrust. This leads to a demand for more complex and precise rules, partly on the part of enforcers:

The more mistrust, the more rule makers will expect the devious citizen to look for loopholes and exceptions to the rule and anticipate them, turning a rule into pages of subsections and clauses. Legislation, a saying goes, is aimed at the dumbest and most devious among us.

But this demand is driven to a greater degree by citizen mistrust of enforcers:

Similarly, the mistrustful citizen reasons that enforcers will be tyrants, exercising unreasonable power over them unless the rules prohibit it. This is why citizens, not enforcers, tend to push for high process-value rules. Given a choice, they will refuse to accept any tax law with the clause “or other similar cases” or any laws that give interpretive discretion.

This leads to the second law of bureaudynamics:

Pressures to remove discretion in rule making are far greater than pressures to grant it.

Lam describes a Supreme Court doctrine going back to 1926 called “void for vagueness” that is often applied to strike down laws that are insufficiently precise, and leave too much room for interpretive discretion:

Whether the law is too vague depends on two tests. The first is whether an ordinary, reasonable person can understand how to comply with the law in various circumstances. This is the guidance value test. A law without sufficient guidance value, the reasoning goes, should not be a law. The second test is whether the law encourages arbitrary and discriminatory enforcement. This is a process value test. A law on the books with absolutely no process value is one that encourages, or at least permits, arbitrary and discriminatory enforcement.

The mistrust leading to ever more complex rules also leads to a bias in favor of removing the application of individual judgment to individual cases:

Mistrust is the root of legalism. And the asymmetry between how easy it is to lose trust and how hard it is to restore it explains why we only seem to march towards legalism and never away from it. Mistrust is the common explanation for both laws of bureaudynamics. It takes one high-profile case of someone exploiting a loophole in a rule and getting away with it to transform entire institutions into legalistic ones. It takes generations of complex rule making, fanatical compliance officers, and overzealous bureaucracies gumming up efficient or effective governance for anyone to hint at the need for reform.

While Lam admits legalism has strong arguments in support of it in the abstract, in the real world the drive toward legalism is less the result of these arguments and more a result of these unfolding laws of bureaudynamics.

Still, discretion is not gone from this world, nor can it ever be. In the next post I’ll be looking at how Lam examines the use of discretion in one of the most contentious areas of this debate – law enforcement.

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