The top 10 percent of households in the United States earn about 33.5 percent of all income, but they pay 45.1 percent of income-related taxes, including Social Security and Medicare taxes. In other words, their share of all income-related taxes is 1.35 times larger than as large as their share of income. That is the most progressive income tax share of any OECD nation. In Germany, the top 10 percent earn 29.2 percent of the income and pay 31.2 percent of income-related taxes, 1.07 times their share of income. The French top 10 percent earn 25.5 percent of the income and pay 28.0 percent of the income taxes, 1.10 times their share of income. If the top earners pay a smaller share of income taxes in other countries, that means everybody else pays a greater share. In the United States, the top 10 percent of income earners pay 7.6 percent of GDP in income-related taxes, and the bottom 90 percent pay 9.2 percent. In Germany, the top 10 percent of earners pay a similar 7.4 percent of GDP in income-based taxes, but the remaining 90 percent in Germany pay 16.4 percent of GDP, 77 percent more than in the United States. In France, the top 10 percent pay 7.1 percent of GDP; the remaining 90 percent of taxpayers pay 18.2 percent of GDP, 97 percent more than in the United States. Even in Sweden, the top 10 percent of earners pay only 5.9 percent of GDP in income-related taxes, 22 percent less than in the United States; the other 90 percent of earners pay 16.3 percent, 77 percent more than in the United States. This is from page 54 of Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality: How Government Biases Policy Debate. It was published in September. The book is first rate and their deep dive into the data is very careful. I learned a lot. My review of the book will be published on the Hoover Institution’s Defining Ideas site tomorrow. It’s a long review and so I didn’t have space to deal with the comparison between taxes in the United States and taxes in the OECD countries, most of which are in Europe. When I first read the paragraphs above, I said to myself, “Well, of course; that’s because most of the European countries have a stiff value-added tax (VAT.)” Then I read the paragraphs more carefully and saw that it’s about simply taxes on income and, therefore, doesn’t include the VAT. They drive that point home in the very next paragraph, on page 55, writing: Even these numbers understate just how progressive the total tax burden is in America. The United States collects only 35.8 percent of all tax revenues from sources other than income, such as sales and excise taxes, the smallest share of any country in the OECD. Most OECD members have large value-added taxes (VATs). These taxes are paid on most purchases by all consumers. The VAT is one of the most regressive forms of taxation, which means that the tax systems of the rest of the developed world are even less progressive than indicated by the income tax comparisons. Wow! Remember that two thirds of OECD countries have a VAT of 20 percent or more. (0 COMMENTS)

This tweet caught my eye: I prefer the glass half full (or more precisely one fourth full) interpretation.  Especially if the glass is very large.  And LA is an exceedingly large glass, comprising 502 square miles of land.  That means there is roughly 125 square miles of non-residentially zoned land, more than five times larger than Manhattan (which is 23 square miles.) Even though I’d prefer no zoning at all, I’m actually quite pleased to hear both candidates support much more housing in non-residential portions of LA. Residential zoning is a huge problem, but it’s far from the only problem when it comes to housing construction in California.  Almost as important is the excessively restrictive regulations on building new housing anywhere in the city, which make new housing construction much more expensive than it would be in a free market, or even in a less tightly regulated market like Chicago. Consider the following two facts: 1. In recent years, California has been experiencing a net out-migration of residents. 2. Most of California is run by progressive governments with highly dysfunctional policies in areas such as taxes, business regulation, crime and education. You might assume that those facts are closely related.  In fact, almost the entire net population outflow is due to bad housing policies.  If California simply deregulated housing, its population might grow almost as fast as in Texas and Florida.  Given the extremely high prices here, the construction of new housing would be enormously profitable if not constrained by regulation. I live in Orange County, one of the few places in California that is not poorly governed.  It also has a nice climate.  And yet the county is now actually losing population.  Irvine is the only Orange County community that is still growing rapidly.  That’s not because it’s better governed than the other OC cities, rather it is one of the few that still allows substantial home building.   Republicans like to criticize the ineffective progressive governance in most of this state.  And yet, even if all of the problems they correctly cite were fixed—if California were to become as business friendly as Texas and Florida—it would do little to stem the outflow of population from coastal California (although it would help the Central Valley.)  Unfortunately, some Republicans refuse to embrace the deregulation of housing, and at the national level the GOP is gradually shifting in a NIMBY direction. (0 COMMENTS)

Last week, President Biden said: Some airlines, if you want six more inches between you and the seat in front, you pay more money but you don’t know it until you purchase your ticket. Look, folks, these are junk fees, they’re unfair and they hit marginalized Americans the hardest, especially low-income folks and people of color. Actually, I just flew on Thursday and Monday, and I purchased more leg room. It felt closer to 3 inches than 6 inches, but whatever it was made a big difference. You actually do know it before you purchase your ticket. Indeed, the airlines make it quite obvious. Why doesn’t Biden know that? Could it be that he hasn’t purchased an airline ticket in a long time? Just a hunch. How are they unfair? They give people a choice. Lower-income people who, I presume he’s saying, value leg room less, can pay less. How does that hit marginalized Americans? Actually, I think it helps. The reason is that the payment for those extra 3 inches, multiplied over all the passengers who pay it on a given flight, more than makes up for the lost revenue from the extra seats the airline could have had, or else the airlines wouldn’t do it. If so, this helps marginalized Americans because the airline makes more money on the flight with more legroom. The airline needs to make a certain amount of revenue to justify a flight. There will be more flights and, therefore, more seats. So Biden can help marginalized Americans by withdrawing his statement. There’s a specific way he can disproportionately help black Americans: get the Food and Drug Administration to back off from its proposal to ban menthol cigarettes. The Harvard School of Public Health states: Manufacturers have long targeted Black Americans with advertisements for menthol cigarettes, which remain the overwhelming preference among Black smokers. Although they smoke at similar rates as the general population, Black smokers experience greater health consequences from the habit. This has been linked in part to their higher consumption of menthol cigarettes. Manufacturers tend to “target” people who want their product. The FDA is proposing to target black Americans by banning the product. If your view is that people’s preferences don’t count and that the government should prevent people from doing something that harms them, then you could conclude that the FDA is helping them. But if your view is that people should be allowed to consume even things that harm them, especially when they know, as pretty much everyone does, that cigarettes harm those who smoke them long-term, then you would conclude that the FDA is hurting them. My view is the latter.   (0 COMMENTS)

It’s hard to know what the appropriate penalties should be for any crime. But we can still take something from the economics of crime and apply it to the Paul Pelosi situation. Here’s what Lisa Mascaro, Stefanie Dazio, and Terry Chea write in “Paul Pelosi Attack: Suspect Faces State and Federal Charges,” NBC Bay Area, November 1, 2022: Additionally, DePape is charged federally with influencing, impeding, or retaliating against a federal official by threatening or injuring a family member. He also faces one count of attempted kidnapping of a United States official on account of the performance of official duties. In other words, because David DePape allegedly [I say “allegedly” to save myself from a lawsuit] attacked the husband of a politician, he faces charges in addition to the ones that he would have faced if he had attacked me. One of the path-breaking articles in the economics of crime was Gary Becker’s “Crime and Punishment: An Economic Approach,” published in the March/April 1968 edition of the Journal of Political Economy. I remember working my way through it in an intermediate microeconomics course that Kenneth Avio taught at the University of Western Ontario in the 1971-72 academic year. The bottom line that I took away from the article is that the higher the probability of catching a criminal, the lower should be the penalty the criminal faces. How is that relevant in the  DePape case? It pretty much has to be true that someone who assaults the husband of a woman who is second in line for the U.S. presidency (only after Vice-President Kamala Harris) has a high probability of being caught. This probability is much higher than the probability that the police would catch someone who assaulted me. So that means that the penalty for assaulting Paul Pelosi should be lower than the penalty for assaulting me, not higher as it is currently. Of course you could argue that it’s more important to protect relatives of politicians than to protect me because assaulting the relative could intimidate the politician and take her away from her useful work. The problem with that line of reasoning is that then we would have to make some judgment about the value of Speaker Pelosi’s work versus the value of mine. Hmmm. Postscript: My bio of Gary Becker in David R. Henderson, ed., The Concise Encyclopedia of Economics is here. The picture above is of him.     (0 COMMENTS)

It is possible to defend the nation-state, despite its history of oppression, persecution, tyranny, and war. Note that before this recent creation, life was not always a piece of cake for everybody either. For a more affirmative defense, suppose that all individuals and families on earth were offered an air ticket to move anywhere they want to live, no question asked. Those who like self-reliance and private guns could move to the United States. Those who like wine and sensuality could move to France. Those who like friendly, smiling people like in the Prisoner’s Village could move to the United Kingdom. Those who like wide uninhabited spaces with no guns and wall-to-wall Medicare could move to Canada. Those who like strict social norms and a sense of belonging might choose India or Afghanistan. Those who like the environment and poverty could move to Bhutan or Burundi. Those who like to be liberated from choice (except about where to queue and how to survive) would move to Venezuela or North Korea. These are just illustrations; please choose your own according to your preferences and values. (I take values to mean preferences for states of the world, as opposed to preferences for personal consumption and activities.) Once the new borders are drawn, the world would be composed of nation-states based on real common preferences and values as nationalists now imagine them, as opposed to the current reality of largely artificial assemblages in which coercive authorities impose arbitrary identities on most of their subjects. If one of these new nation-states did impose a common identity, it would correspond to what all its subjects want anyway. Even the woke could arguably carve out their own nation-state where they would live among themselves under a secular theocracy. The uniformity of individual preferences and values would prevent the voting irrationality predicated on the Condorcet paradox and Arrow’s theorem. Instead, the median voter would rule all the time but, all individuals being similar, every voter would the median voter and everybody would revel in the resulting mediocrity. They are however many problems with this simple model of perfect nation-states. The self-selection of individuals according to their own preferences would be difficult to start, for how would current rulers and their clienteles find in their interests to dismantle their exploitation playgrounds? But let’s disregard this obstacle. As the relocations proceed and new nation-state configurations emerge, many individuals would need to relocate again. Before reaching an equilibrium, where all individuals or a large proportion of them are satisfied and stop moving, assuming such an equilibrium exista, the process would need many rounds. This can be seen with simple computer simulations built on the famous Thomas Schelling model of segregation. Perhaps a very large number of plane tickets would be required—conceivably consuming all GDP. A mechanism would have to be devised to solve the problem of individuals attracted mainly by the welfare states of the (forecasted) richest countries, because parasites without hosts is not a stable solution. Still, if we respect “national sovereignty,” many individuals are bound to remain discontented. There are only about 200 countries in the word and barely two individuals among the billions alive have exactly the same preferences and values. Ultimately, every individual or family would need its own country, but the jury is still out on whether anarchy, even if desirable, is feasible. Even in our ideal self-selected nations, then, there would still be majorities exploiting minorities. The latter may be smaller, but this can make them more exploitable. The only solution for perfect “nationalism,” it seems, is that each country has some form of minimal or classical liberal state. The whole exercise of segregation would have only demonstrated that the peaceful coexistence of different individuals requires either subjection of some individual to others or else minimal states. As I indicated before, the president of Syldavia can only be president of all Syldavians if he drastically limits his interventions in Syldavians’ lives. If the foregoing is correct, the practical goal to pursue would be for each of us under his own more or less tyrannical nation-state,  to try to push it toward a minimal state. This is, together with independent moving (when possible) and a cosmopolitan outlook, the only way to increase the number of individuals whose preferences are not constantly overruled. The possibility of creating and maintaining geographical spaces in which to pursue this goal without foreign tyrants’ interference appears to be the only good defense of the nation-state system, although both “nation” and “state” then require scare quotes. (0 COMMENTS)

Richard Hanania recently suggested to Tyler Cowen that we might have been better off with a libertarian response to Covid. Tyler responded: Tyler: I have more sympathies for the libertarian solution than most people would. But I think in this case, it’s not time consistent. So one issue is simply how do you deal with legal liability? Now the FDA process, for all of its flaws, does give manufacturers the ability to bring the thing to market in a way consistent with corporate law and their other fiduciary responsibilities. So no FDA means everything is fair game in the court system. That is much worse even than the FDA. It’s a bigger constraint. But also, government won’t let them keep the prices high.Governments confiscate resources ex post. We know that, so you need to reward them upfront, even if in principle you think the higher price would be a better incentive. I would also point out that when there’s an externality through contagion, you don’t want the price of a vaccine to be very high. I have two thoughts on this response: 1. From one perspective, Tyler is actually showing the advantage of the libertarian approach to Covid.  It would be better if governments were not able to put price controls on vaccines.  It would be better if vaccine sellers could insist that customers sign contracts promising not to sue if there were bad side effects, and if those waivers were legally enforceable. 2.  Given that we do not live under that sort of libertarian regime, there may be a case for subsidizing vaccine development, or providing an FDA stamp of approval to reduce the risk of lawsuits. Similar examples occur in many contexts.  In an unregulated free market banking system with NGDP targeting, it probably makes no sense to have minimum capital requirements for banks.  But in a regime where FDIC creates moral hazard and Fed policy creates cycles in NGDP growth, there may be an argument for regulations that make the banking system a bit safer.  (Whether those regulations work in practice is another question, but it’s at least possible that some regulations are beneficial in terms of offsetting the negative effects of other regulations.) PS.  The interview also includes an interesting discussion of why Tyler believes that (at the margin) the developing world needs to become more woke. (0 COMMENTS)

It’s funny how certain ideas you encounter early in life can stick inside your head, regardless of where they came from. As a young child, I immensely enjoyed reading cheesy horror stories aimed at kids and teens. One book (I’ve long since forgotten the title or author) had a scene that lodged an idea in my head ever since. The book told the story of a vampire who lived in an old, abandoned house. One evening, a group of high schoolers snuck into the house (because…reasons?) and were trapped inside by the vampire. He explains that he only needs to take one victim and will let the rest of the group go. However, he insists that the teens themselves must decide who he will take. At one point, one of the teens volunteers herself to spare her friends. The vampire announces she is free to leave – he operates according to certain rules, and by those rules, volunteering has spared her. Immediately after this, another teen volunteers herself to the vampire, and he promptly accepts her offer. When she protests that the vampire is contradicting himself over the rules, he responds that it only seems that way to her because she doesn’t understand what the rules are. She was under the mistaken impression that the rule was “anyone who volunteers will be freed.” But the actual rule was that acts of genuine self-sacrifice would set someone free. Volunteering as a roundabout act of self-preservation didn’t confer the same result. To my young self, this was a fantastic twist in the story, and it lodged an idea into my young brain. If someone’s behavior seems inconsistent or contradictory to you, that probably just means you don’t really understand what’s animating their behavior in the first place. (If only a certain breed of behavioral economist on a mission to “correct” certain peoples “irrationally inconsistent” behavior had read cheesy vampire stories in their childhood – but that’s a rant for another day!) I was reminded of all of this when reading a remark by frequent commenter PhilH, where he suggests there is a contradiction in different metaphors economic liberals use to describe the market. One the one hand, classical liberals describe freedom in the market as “just freedom to do what you want,” but also describe the market itself as “an ‘invisible hand’ and a powerful force.” Is that a contradiction? How does one reconcile believing that market freedom is the freedom to do what you want, while also believing the market acts as an invisible hand powerfully directing people’s behavior? Whether this seems like a contradiction depends on what one means when they speak of force. To economic and classical liberals, “force” is narrowly defined to describe actual (or believably threatened) acts of violence. By contrast, adjusting your behavior in response to market signals does not qualify as “force” or a restriction on freedom. We don’t deny that the market can provide constraints on one’s behavior – which is why we frequently employ terms like “budget constraints” or “constrained maximization.” But when we speak of the freedom to act as you wish in the market, that does not mean “the positive ability to achieve anything you desire, free of constraint.” It simply means that you may do whatever is in your budget set, with a willing trading partner, and nobody may use force (as defined above) to stop you. Suppose I wanted to import a custom Lamborghini. Unfortunately, I look at the cost of doing so, and look at my bank account, and notice the massive gulf between the two. I end up with no Lamborghini in this case. Now imagine that my bank account was significantly bigger, so there was no budgetary constraint preventing me from importing that Lamborghini. However, suppose a law had been passed outlawing such imports. Here, too, I end up with no Lamborghini. In the first case, the invisible hand of the market is saying “If you attempt to get a Lamborghini, your trading partner will decline due to lack of payment, so no Lamborghini for you!” In the second case, the state is saying “If you and a trading partner voluntarily agree to exchange for a Lamborghini, it will be seized and you will be fined/arrested/subject to legal sanction, so no Lamborghini for you!” The result in both cases is the same, but economic liberals insist there is an important difference between the two. And given how different these situations are, we should not use the same word to describe them – doing that would be bad lexicography and would only muddle our thinking. So only situations involving threats or acts of violence or state sanction are called “force.” A good description of this issue (and a quippy response) can be found in Thomas Sowell’s book The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy: The cosmic perspective of course extends beyond the law. But, in whatever field it appears, its adherents are quick to say that people did not really have a “free choice” in what they did. Thus to Noam Chomsky, “freedom is illusion and mockery when conditions for the exercise of free choice do not exist” – and these conditions do not exist for “the person compelled to sell his labor power to survive,” i.e., for anyone who works for a living. Any circumstantial constraints or potential consequences hanging over people’s decisions makes their choices not “really” free. But this conception of a free choice requires an unconstrained universe. Only God could have a free choice – and only on the first day of creation, since He would be confronted on the second day by what He had already done on the first. Someone might agree with Chomsky and disagree with Sowell about freedoms and constraints. But even if Chomsky and his fellow thinkers are correct, the perspective of Sowell and economic liberals would merely be wrong – but it would not be contradictory. The seeming contradiction rests on a misunderstanding of what is meant by the terms.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.  (0 COMMENTS)

Economist and political scientist Michael Munger of Duke University talks about industrial policy with EconTalk host Russ Roberts. Munger argues that in a democracy, the default outcome for industrial policy is crony capitalism–attempts to improve on that outcome either by appointing experts or eliminating cronyism are going to fail for political reasons. The conversation concludes with a […] The post Michael Munger on Industrial Policy appeared first on Econlib.

There are an increasing number of reports that Russia’s attempt to use gas exports as a geopolitical weapon have backfired.  Here’s Bloomberg: Worse, Russia also tried to scare Ukraine’s friends out of the fight by wielding its brass energy knuckles, causing oil and gas prices to soar. But the West is now prying that weapon out of Russia’s hands, Clara Ferreira Marques writes, and will soon start bodying Russia with it. We’ve found workarounds for Russian energy; Europe is now swimming in so much gas it costs less than zero. Plus we’ve hurried up our embrace of renewables that will make Russia’s fossil fuels obsolete. And being deprived of foreign dollars and expertise will mean more of those fuels stay in the ground. Another Bloomberg article discusses the long run implications for Russia: Russia will never go back to fossil fuel exports at levels seen in 2021. Its share of internationally traded gas is seen shrinking from 30% last year to half of that by 2030. The country exported over 7 million barrels per day of oil last year, but the IEA estimates that falls by a quarter by 2030, even in the least-demanding scenario. By the mid-2020s, North America is exporting more oil than Russia. I see two important lessons from this fiasco: 1. Most pundits (including some economists) underestimate the ability of markets to do a “work around” when the supply of a key good is restricted.  We often read that it is technologically impossible to do without X, and that it will take many years to ramp up the production of alternatives.  Recall that during Covid we were assured that it would take a long time to produce various quantities of vaccines, masks, Paxlovid, etc., and then production easily blew right by the pessimistic forecasts.  I am not suggesting that supply constraints are never a problem (Europe still faces some problems this winter), rather that we should be skeptical about claims of how hard it will take to circumvent those restrictions. 2.  Related to the first point, attempts to use trade restraints as a geopolitical weapon often backfire.  I’m certainly not an expert on high tech products, but we need to be careful that attempts to embargo China don’t result in China doing a Sputnik-type project to develop its own production of cutting edge technologies.  In a future crisis, what gives the US more leverage, a situation where the Chinese economy depends on sophisticated computer chips from Taiwan and the US, or a situation where China has developed its own industries (even if a bit less “first generation”) and has become mostly self-sufficient? (1 COMMENTS)

Economist Roland Fryer worried about the fate of students in America’s inner-city schools, and he had a crazy idea- could monetary incentives affect student, teacher, and parent behavior? A natural enough question to be posed by an economist, but Fryer was shocked at how many people found financial incentives in education repulsive. What gives, he asked? Don’t middle class parents do this all the time??? Fryer and a dedicated team set out to see how they might improve outcomes for some of the nation’s most vulnerable students, and in this episode, he discusses what they did and what they found with EconTalk host Russ Roberts. Over the course of his research, Fryer has identified the five characteristics of successful schools- what he calls “the basic physics of education. These include 1) more time in school, 2) changed human capital strategy, 3) using data to inform instruction, 4) high dosage tutoring in small groups, and 5) a culture of high expectations. On of the most charming parts of the conversation is when Fryer describes his grandmother’s reaction to his findings. As she exclaimed, “Why aren’t they [all] doing it? Why is this revolutionary?” Do you think this is revolutionary? Can it be replicated? Why isn’t every school doing it? Let’s hear your thoughts. Use the prompts below to reply in the comments, or start your own conversation offline.     1- Fryer and his colleagues found that generally, paying students for output didn’t work, but paying for inputs did. What does this mean in practice? How were Fryer and his colleagues able to measure the price elasticity of the incentives they offered students? Again, what does this mean in practice? And perhaps most importantly, why did these results make Fryer less concerned about fostering “a love of learning” among these students? How do you feel about this claim?   2- Though Roberts reminds us all that implementing findings such as Fryer’s is never simple, why can’t we create a McDonalds-like template (or a “popcorn” button) for education reform? Or in other words, how would you answer Fryer’s Grandma?   3- Roberts asks Fryer what is the ONE thing he would suggest to the principal of a failing school? What is the “one-two punch” Fryer suggests, and to what extent do you find this a reasonable suggestion?   4- Fryer notes the tremendous variance in charter school success, which makes them interesting research subjects. That is, while on average charter schools perform only marginally better than traditional public schools, some fare much better, and others much worse. Roberts askes Fryer, should charter schools be expanded? How would you evaluate Fryer’s answer? How would you answer?   5- Both Roberts and Fryer admit to frustration in the way we typically talk about parents and schooling in poorer neighborhoods. What sort of inherent prejudices do such conversations reveal? What does Fryer mean when he says what we observe about the way poorer parents make choices about schools is more an information problem than a preference problem? How might changing the way we vies such decisions change the way we approach education reform?   (0 COMMENTS)