Five Fiscal Truths by Ryan Bourne, Cato at Liberty, April 18, 2024. Excerpt: The recorded federal deficit from 2023, at $1.7 trillion (or 6.3 percent of gross domestic product, or GDP), was 23 percent higher than in 2022, but even that was pushed artificially downward by the Congressional Budget Office (CBO) recording the Supreme Court’s cancellation of Biden’s student loan forgiveness plan as a one‐​off spending cut. The underlying figure was around $2 trillion, or 7.4 percent of GDP. This is easily the largest deficit recorded outside wars or acute emergencies since the Great Depression of the 1930s. Figure 1 shows the CBO’s budget deficit projections for the next 10 years. It estimates, on current policy, that annual deficits will grow to $2.6 trillion per year by 2034. This likely understates the scale of red ink. It assumes that large portions of the Tax Cuts and Jobs Act will be allowed to simply expire, that no other large spending programs will be introduced after the next presidential election, and that no unexpected shocks or recessions will hit in the interim. The feds are simply borrowing vast amounts, especially given today’s sanguine macroeconomic conditions.   America’s New Regulation Busters by Andy Kessler, Wall Street Journal, April 14, 2024. Excerpt: Most venture capitalists invest and help startups with new strategies and hiring a team. Mr. Churi describes what he does as “trench warfare,” fighting with regulators and incumbents deal by deal. He notes that “we have built houses the same way for 1,000 years—with sticks and bricks.” A startup, ICON, hoped to create homes for the homeless in Texas using a giant 3-D printing machine that deposits layers of concrete. It can “print” a 500-square-foot home in 24 hours. For $4,000. Game changing. Then came the regulators. Mr. Churi says that for homes, international fire safety codes say, “ ‘You’ve got to put the wooden joists like this.’ But there are no wooden joists. The whole thing is inherently fireproof—it’s concrete.” As for regulators, “they’re like, ‘You’ve got to put the wooden joists like that. See it says it right here on the page.’ ” They grappled with fire-code permitting bodies. “New language got passed. It took two years.” There’s so much I LOVE about this article. I remember David Friedman, in his first book, The Machinery of Freedom, quoting H.L. Hunt’s statement “If this country is worth saving, it’s worth saving at a profit.” I don’t literally agree with that statement and I bet David doesn’t either. But I think he quoted it because it’s getting at a good point: if people can make a profit by increasing freedom, they’ll be more likely to increase freedom than if they can’t. IRS’s Most Wanted: The $200,000 Man by the Editorial Board, Wall Street Journal, April 2, 2024. Excerpt: The most recent data suggests the IRS is still focused on the middle class. As of last summer, 63% of new audits targeted taxpayers with income of less than $200,000. Only a small overall share reached the very highest earners, while 80% of audits covered filers earning less than $1 million. Don’t forget to save those charitable-giving receipts. My comment: In 2021, the last year for which the IRS gives the relevant data, those with AGI of $682,577 or more were in the top 1 percent. [See Table 4.1.] So devoting 20% of audits to the less than 1% of taxpayers with income over $1 million does constitute focusing on high-income people. I am NOT defending the IRS. I’m defending numeracy and the importance of not misleading readers.   Crime Rates, Not the Number of Crimes, Are a Better Way to Judge Immigrant Criminality by Alex Nowrasteh, Cato at Liberty, April 17, 2024. Excerpt: Cuccinelli’s statement that crime rates don’t matter, that only the number of crimes matters, says nothing substantive about the potential danger that immigrants pose to Americans. Let me give an example. Under Cuccinelli’s interpretation, a city with 100 murders is twenty times more dangerous than a city with five murders. But if the city with 100 murders has a million residents and the city with five murders has only 100 residents, then the city with fewer murders is far more dangerous to the residents. The city with one million residents and 100 murders has a homicide rate of 10 per 100,000. The city with 100 residents and five murders has a homicide rate of 5,000 per 100,000, which is 500 times as great as the larger city with 20 times the number of murders. This is an extreme example, but an example necessary to explain why crime rates are more important to understand relative to criminality and danger than the number of crimes. Which city would you want to live in? My comment:  Alex makes a good point. There’s a further point. In any large group of people, some are going to be criminals. If the group is big enough (and assuming that we’re not talking about people who are in prison or on trial for crime), the vast majority are not criminal in the usual sense. (I defer to Harvey Silverglate’s point in his book with the highly exaggerated title Three Felonies a Day.) I think Alex could have made the point even more strongly. There are tradeoffs. Whether the population at issue is born in America or born elsewhere, there is a risk of crime. That’s a cost. There are also benefits. We get their labor and their contribution to our culture. It’s not enough to say that the pool of immigrants contains criminals. It also contains very productive people, and their number is a multiple of the number who are criminals. You can’t do a cost/benefit analysis by considering only the costs. As my friend and fellow economist Alan Reynolds once said, that’s single-entry bookkeeping. (0 COMMENTS)

People who distinguish “human costs” from “economic costs” are either making an ideological statement or don’t understand what economic theory usefully calls a cost. Just to quote one example: a Financial Times columnist mentioned, as if it goes without saying, the “economic, military and human costs” of further confrontation with the Iranian rulers (“Israel Has No Good Choices on Iran,” April 16, 2024). In economic theory, a cost is the sacrifice of something scarce (if only one’s time) to pursue a desired outcome or avoid an undesired one. (Note that in both cases, the cost is an opportunity cost: avoiding an undesired outcome implies a more desired alternative; and what is sacrificed for a desired outcome is scarce because it, or the resources to produce it, could be used for some other purpose.) Desired and undesired outcomes only concern human individuals and are evaluated in individual minds. Economic theory is the result of a few centuries of scientific efforts, by some of the most brilliant minds among mankind, to understand cost, benefit, and value in a logically consistent way, and understand what is going on in society. The ideological reason for distinguishing “human costs” from “economic costs” may be virtue signaling. It amounts to saying, “Look, I am concerned with human costs, while my opponents are only concerned with costs on Sirius, nine light-yers from humans”; or  “Here is my badge of honor for membership in the bien-pensant society.” A Martian landing on Earth might think that singling out “human costs” (as if there were anything else than costs to humans) is necessary to distinguish them from animal costs. To lighten the atmosphere, we might think of the cost a bear has to incur for his beer consumption. (See the featured image of this post.) Back to humans, there is no epistemological objection to labeling a cat a dog, and a dog a cat, provided everybody understands which animal is referred to. There is no deep epistemological objection to calling “human costs” only those costs that do not fall on shunned or hated individuals—social pariahs, bad capitalists, or individuals whose pension funds are invested in capitalist enterprises. But such a distinction is a moral one at best, a morally arbitrary one at worst, and is useless for understanding how society (interindividual relations) works. The distinction between human and economic costs echoes subliminal advertising for very questionable ideologies. One objection to my claim is that “economic and human costs” is a just a standard way of speaking that everybody understands. But my point is precisely that “everybody” wrongly understands it as implying that economic costs are not all human costs. And there are ways in which an economically literate newspaper could tweak the standard expression without loss of rhetorical benefit. For, example, one could say “economic costs, including costs of life and limb” or “economic costs, including of course all sorts of human costs.” In the Financial Times quote at the beginning of this post, the “military” is redundant except in such constructions as “economic costs, including of course military costs and costs of life and limb.” My fear is that most writers at the Financial Times, like in other media, do think that there are two sorts of costs: the costs to bad or unpopular people, and human costs. ****************************** The featured image of this post, a collaboration between your humble blogger and DALL-E, shows a bear paying for its beer, suggesting that costs than human costs exist. That’s news for the checkout girl. (0 COMMENTS)

Several decades of neoliberal economic reforms brought about the greatest global reduction in poverty ever achieved, by far. But success brings laziness, and many countries began to take their achievements for granted. Even successful policies fail to eliminate all economic problems, and because neoliberalism was the dominant strategy from the 1980s to the 2000s, pundits began to (wrongly) blame neoliberalism for the remaining economic problems. Reform momentum slowed, and policies moved back in a more statist direction. Nonetheless, when countries get into serious economic difficulty, their policymakers remain aware that neoliberalism is the only regime that is reliably effective. Here’s the FT: They include most prominently Turkey, Argentina, Egypt, Nigeria and Kenya, and they carry some weight. All five of these reforming countries are in the 40 largest emerging economies, so their turn for the better is reinforcing the global economic recovery as well. Battered by high inflation, debt and deficits, their foreign exchange coffers were emptying when global interest rates rose sharply in 2022. As higher borrowing costs drove their debts deeper into distress, they had no choice but to change. Their leaders — who in Argentina, Kenya and Nigeria were newly elected with a mandate for reform — don’t quite say so out loud, but their plans came straight from the pages of the old and much-maligned Washington consensus. Budget discipline and heeding market forces are the only policy choices that work when a nation runs out of money. Statism is a luxury that bankrupt countries cannot afford to engage in. (0 COMMENTS)

Co-blogger Pierre Lemieux writes: Whatever one thinks of the criminal prosecutions and state “civil” suits against Donald Trump (and there are good reasons to question many aspects of them), they represent the powerful state that he has not disavowed, except perhaps in occasional and incoherent baby talk, as long as he was running it. And there is something special about the way he sells this sort of state, provided he runs it, to his followers. America was in terminal decline before him, in four years he made it great again, it’s not great anymore since the election was stolen from him, but he will quickly make it great again if the election is not rigged. There are two ways to disavow a powerful state: with words and with actions. I favor the latter. The former is, literally, just talk. It’s true that Donald Trump didn’t disavow the powerful state with words. And, in many, many ways, he didn’t do it with actions. But he did do it one important way with non-action. Recall that in the 2016 campaign, when he would even mention his opponent Hilary Clinton, some of his most zealous supporters would yell, “Lock her up.” I don’t know if Trump said it back, although I wouldn’t be surprised. But those are words. What did he do to Hilary Clinton after he became President? Nothing. He didn’t appoint a special prosecutor, although he certainly had grounds to do so. What did his 2020 opponent, Joe Biden, do after he became President? Appointed an Attorney General with an ax to grind, who did appoint a special prosecutor to go after Donald Trump. Donald Trump is, in so many ways, a person to whom it’s hard to be sympathetic. But Alvin Bragg, Letitia James, Joe Biden, Merrick Garland, and Juan Merchan, to name five, have made me sympathetic to him. They are going so far beyond what is fair and appropriate, in a way that Donald Trump never did. The pic above is of Judge Juan Merchan. (0 COMMENTS)

Whatever one thinks of the criminal prosecutions and state “civil” suits against Donald Trump (and there are good reasons to question many aspects of them), they represent the powerful state that he has not disavowed, except perhaps in occasional and incoherent baby talk, as long as he was running it. And there is something special about the way he sells this sort of state, provided he runs it, to his followers. America was in terminal decline before him, in four years he made it great again, it’s not great anymore since the election was stolen from him, but he will quickly make it great again if the election is not rigged. Exactly as he sees elections, he will only think the trial jury is fair if it renders the right verdict. He says it with no shame (“Jury for Donald Trump’s Hush-Money Trial Takes Shape: An Oncology Nurse, a Software Engineer, a Teacher,” Wall Street Journal, April 16, 2024): After court, Trump headed up to a Harlem bodega for a campaign event. Asked by reporters about the jurors that have been selected, the Republican nominee said, “I’ll let you know in about two months.” Politicians and rulers are typically ordinary Joes with more dangerous incentives, and I don’t want to propose any other as a Platonic model. But on the probability distribution, there is something special in Mr. Trump’s character and the way he deals with truth and reality, as an article in the current issue of The Economist would suggest (“Truth Social Is a Mind-Bending Win for Donald Trump,” April 18, 2024). Just the article’s artwork (much better than mine with DALL-E) is worth the detour. Three excerpts from the article: Since shares in Donald Trump’s media firm began trading publicly on March 26th, their value has slid by more than half. … The performance of Mr Trump’s stock [in his media firm] so far represents the purest demonstration of his power not just to bend reality, but to convert illusion into reality—and also, maybe, of how Americans are coming to confuse the two. … What Mr Trump has called “truthful hyperbole”, and others call lying, has been central to his success. When he built Trump Tower it had 58 floors, but in numbering them he skipped ten to claim 68 instead. This tactic has occasionally caught up with him, most severely in the $355m penalty imposed on him in February after a New York judge found Mr Trump had lied for years to secure loans and make deals—trebling the size of his penthouse apartment, for example, and valuing his Mar-a-Lago estate in Florida based on its potential for residential development, though he had surrendered the rights to develop it as anything but a club. ****************************** By Pierre Lemieux and DALL-E (0 COMMENTS)

Economic and business historian Robert Hessen died on Monday, April 15 at age 87. I wrote some reminiscences of him on my Substack site, “I Blog to Differ.” Here I want to link to his 2 contributions to my Concise Encyclopedia of Economics. One is his article “Corporations.” Here are two key paragraphs. Here’s a key paragraph: To differentiate it from a partnership, a corporation should be defined as a legal and contractual mechanism for creating and operating a business for profit, using capital from investors that will be managed on their behalf by directors and officers. To lawyers, however, the classic definition is Chief Justice John Marshall’s 1819 remark that “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.”1 But Marshall’s definition is useless because it is a metaphor; it makes a corporation a judicial hallucination. I so often hear people say that corporations are created by the state. It happens especially when I’m on talk shows dealing with callers. That’s false. I always think of how well Bob Hessen dealt with the issue in his article: Attempts by economists to define corporations have been equally unsatisfactory. In 1917 Joseph S. Davis wrote: “A corporation [is] a group of individuals authorized by law to act as a unit.”2 This definition is defective because it also fits partnerships and labor unions, which are not corporations. Economist Jonathan Hughes wrote that a corporation is a “multiple partnership” and that “the privilege of incorporation is the gift of the state to collective business ventures.”3Economist Robert Heilbroner wrote that a corporation is “an entity created by the state,” granted a charter that enables it to exist “in its own right as a ‘person’ created by law.”4 But charters enacted by state legislatures literally ceased to exist in the mid-nineteenth century. The actual procedure for creating a corporation consists of filing a registration document with a state official (like recording the use of a fictitious business name), and the state’s role is purely formal and automatic. To call incorporation a “privilege” implies that individuals have no right to create a corporation. But why is government permission needed? Who would be wronged if businesses adopted corporate features by contract? Whose rights would be violated if a firm declared itself to be a unit for the purposes of suing and being sued or holding and conveying title to property, or that it would continue in existence despite the death or withdrawal of its officers or investors, or that its shares are freely transferable, or if it asserted limited liability for its debt obligations? (Liability for torts is a separate issue; see Hessen 1979, pp. 18–21.) If potential creditors find any of these features objectionable, they can negotiate to exclude or modify them. His other entry in the Encyclopedia is “Capitalism.” It’s full of gems. Here’s the opening paragraph: Capitalism,” a term of disparagement coined by socialists in the mid-nineteenth century, is a misnomer for “economic individualism,” which Adam Smith earlier called “the obvious and simple system of natural liberty” (Wealth of Nations). Economic individualism’s basic premise is that the pursuit of self-interest and the right to own private property are morally defensible and legally legitimate. Its major corollary is that the state exists to protect individual rights. Subject to certain restrictions, individuals (alone or with others) are free to decide where to invest, what to produce or sell, and what prices to charge. There is no natural limit to the range of their efforts in terms of assets, sales, and profits; or the number of customers, employees, and investors; or whether they operate in local, regional, national, or international markets. Here’s another great paragraph: In early-nineteenth-century England the most visible face of capitalism was the textile factories that hired women and children. Critics (Richard Oastler and Robert Southey, among others) denounced the mill owners as heartless exploiters and described the working conditions—long hours, low pay, monotonous routine—as if they were unprecedented. Believing that poverty was new, not merely more visible in crowded towns and villages, critics compared contemporary times unfavorably with earlier centuries. Their claims of increasing misery, however, were based on ignorance of how squalid life actually had been earlier. Before children began earning money working in factories, they had been sent to live in parish poorhouses; apprenticed as unpaid household servants; rented out for backbreaking agricultural labor; or became beggars, vagrants, thieves, and prostitutes. The precapitalist “good old days” simply never existed (see industrial revolution and the standard of living). And: Despite these constraints, which worked sporadically and unpredictably, the benefits of capitalism were widely diffused. Luxuries quickly were transformed into necessities. At first, the luxuries were cheap cotton clothes, fresh meat, and white bread; then sewing machines, bicycles, sporting goods, and musical instruments; then automobiles, washing machines, clothes dryers, and refrigerators; then telephones, radios, televisions, air conditioners, and freezers; and most recently, TiVos, digital cameras, DVD players, and cell phones. That these amenities had become available to most people did not cause capitalism’s critics to recant, or even to relent. Instead, they ingeniously reversed themselves. Marxist philosopher Herbert Marcuse proclaimed that the real evil of capitalism is prosperity, because it seduces workers away from their historic mission—the revolutionary overthrow of capitalism—by supplying them with cars and household appliances, which he called “tools of enslavement.”1 Some critics reject capitalism by extolling “the simple life” and labeling prosperity mindless materialism. In the 1950s, critics such as John Kenneth Galbraith and Vance Packard attacked the legitimacy of consumer demand, asserting that if goods had to be advertised in order to sell, they could not be serving any authentic human needs.2 They charged that consumers are brainwashed by Madison Avenue and crave whatever the giant corporations choose to produce and advertise, and complained that the “public sector” is starved while frivolous private desires are being satisfied. And having seen that capitalism reduced poverty instead of intensifying it, critics such as Gar Alperovitz and Michael Harrington proclaimed equality the highest moral value, calling for higher taxes on incomes and inheritances to massively redistribute wealth, not only nationally but also internationally.3   (0 COMMENTS)

I have frequently argued that China has the world’s largest economy, at least if measured in PPP terms. (Of course in per capita terms they are still only a middle-income country.)  Others insist on using market exchange rates, which suggest the US economy is still significantly larger. Fair enough. But you need to be careful when drawing implications using market exchange rates. They do tell us something about China relative to the US, but they tell us nothing about China in absolute terms. Thus it’s a mistake to look at graphs showing China’s (US dollar) GDP stagnating in recent years and assume that the Chinese economy has stopped converging on developed country status. After all, there is more than one pair of exchange rates.  So let’s now do Japan.The following graph shows the ratio of China’s per capita GDP and Japan’s per capita GDP. In 1994, I got married in Beijing. At the time, China’s per capita GDP was about 1% of Japan’s. That’s really low. By 2022 (the last year shown), it was over 37% of Japan’s and still rising fast. Now it’s close to 40%. So if we really believe that market exchange rates are the right way to think about China’s growth (I don’t), we’d have to conclude that China is rapidly converging on developed country status.  Just since 2010, it gone from about 10% to 40% of Japan’s per capita income. Of course the weak yen overstates China’s advance. But just as the yen is an outlier on the low side, the US dollar is an outlier on the strong side. Most other developed countries have relatively weak currencies when measured against the US dollar, and thus it makes more sense to regard the dollar as unusually strong—we are the outlier.This leads to some quite misleading graphs if you rely on comparisons using market exchange rates: Notice that Japanese workers have gone from almost twice as well paid as American workers in the mid-1990s, to just over 1/3 as well paid today.  To be clear, I’m on record arguing that the poor performance of the Japanese economy is somewhat real (and not just demographics), but this vastly overstates the problem.  The yen has become dramatically weaker, especially in real terms.  The Japanese economy is mediocre, but not horrible. PS.  Some have argued that Chinese data is unreliable.  But any tourist that visits China (both cities and rural areas), quickly discovers that the country looks significantly richer than suggested by the official per capita GDP (roughly $13,000, vs. $85,000 in the US.)  And China is now about 70% urban, so the poor countryside (which is no longer anywhere near so poor as it was) is no longer a plausible explanation.  China as a whole is still middle income, but significant portions of China look quite developed.  (Shiny new airports, subways, expressways, shopping malls, affluent urban neighborhoods, etc.) (0 COMMENTS)

The YouTube algorithm is a mysterious thing. It’s supposed to recommend videos you might like, based on videos you’ve watched and rated before, but as far as I can tell the recommendations are generated randomly by a half-asleep chimpanzee. Still, just as broken clocks are still right twice a day, random suggestions can manage to highlight things worth checking out. A while back, the YouTube algorithm put, of all things, a clip from Sesame Street in my recommended videos. This episode featured a guest appearance by Brett Goldstein, best known for his role in Ted Lasso as the hot-tempered and extremely foul-mouthed professional athlete Roy Kent. Curiosity got the better of me, so I checked it out.  (As an aside, the writers of this episode seemed to include a metaphorical wink to any adults in the audience who are familiar with the Roy Kent character – when Goldstein is told that the letter of the day is F, he responds by saying how much he loves using the letter F.)  In the clip, Goldstein and a Sesame Street character named Tamir have just finished baking cookies and announce they will be revealing the word of the day. Tamir tells us that the word of the day is “fairness.” Goldstein responds by telling the audience that “fairness is when each of us gets what we need.” This immediately causes Cookie Monster to appear and declare that he needs one of the cookies that Goldstein and Tamir just made. Goldstein agrees that Cookie Monster should be given one of the cookies because that would be fair. Shortly after this, they decide to go play some soccer but first need to clean up the mess made from baking the cookies. At that point, they tell Cookie Monster that fairness requires him to help them clean up the mess they made.  Of note, Cookie Monster being given a cookie and helping clean up the mess isn’t presented as an example of a fair exchange. It’s not that Cookie Monster offers to help them clean up the mess in exchange for one of the cookies, and then both parties agree that would be fair. Each act is treated as independent of, and unrelated to, the other. If Cookie Monster had happened to show up after the mess had been cleaned, fairness would still have required him to be given a cookie he had no part in creating, and if Cookie Monster had arrived after the cookies were gone, fairness would still have required him to use his labor cleaning up a mess he had no part in making. What this immediately brought to mind was a story from my own childhood that also aspired to teach a lesson about fairness, albeit with a very different conception of what that means. I’m referring to Aesop’s fable of The Ant and the Grasshopper. On the off chance you’ve never heard this fable, it can be briefly summed up as follows: In the summer months, an ant and a grasshopper lived in a field together. The ant spent his days toiling, collecting food and storing it underground in his nest. The grasshopper spent his days relaxing, playing music, and living in the moment with no worry for the future. When the winter came, the grasshopper was left cold and starving, unable to find food, while the ant stayed secure in his nest and fed himself with the food he stored away as a result of his toils. Now, by the definition of “fairness” given by Sesame Street, we should conclude that this is a story about the unfairness suffered by the grasshopper. After all, “fairness” is when each of us gets what we need, and in the winter months, the grasshopper needed food and shelter but didn’t get any. Ergo, the grasshopper going hungry while the ant remained fed was, by definition, unfair. But that wasn’t the moral of the story. Instead, it was considered obvious that the grasshopper’s fate was completely fair, because fairness wasn’t taken to mean “each of us gets what we need,” but something more like “each of us gets what we earn.” Even if you needed something, you couldn’t simply take it away from someone under the guise of “fairness.” Fairness didn’t give you the right to insist others be made worse off for your benefit, and that you owed them nothing in return.  Of course, none of this is to speak out against helping those in need. Offering to help someone clean up in the kitchen, or offering to share some cookies you just made, is a very nice thing to do, and I would do that myself. But it’s taking things a bit too far to demand that others give you their cookies or help clean up your mess because otherwise it’s not fair. That turns virtue into vice, and converts kindness into self-absorbed entitlement.  (0 COMMENTS)

Economic models of cooperation and conflict are often based on the Prisoner’s Dilemma (PD) of game theory. As simple as this model is, it helps us understand whether or not a war will be fought, where “fought” includes escalation steps through retaliation—the current situation between the government of Israël and the government of Iran. Assume two countries each governed by its respective ruler, S and R. (In the simplest model, it may not matter who the ruler is and whether it is an individual or a group.) Each ruler faces the alternative of fighting with the other or not. By definition of a PD, each ruler prefers no war, that is, no mutual fighting; let’s give each ruler a utility index of 2 and 3 for a situation of fighting and not fighting respectively. A higher utility number represents a more preferred situation (a situation with higher “utility”). Each ruler, however, would still prefer to fight if he is the only one to do it and the other chickens out; this means a utility number of 4 for that situation,  the top preferred option for each of them. The worst alternative from each player’s perspective is to be the “sucker,” the pacifist who ends up being defeated; the utility index is thus 1 for the non-fighter in this situation. No cardinal significance must be attached to these utility numbers: they only represent the rankings of different situations. Rank 4 only means the most preferred situation, and 1 the least preferred, with 3 and 2 in between. A situation less preferred can simply be less miserable, with a smaller net loss. This setup is represented by the PD payoff matrix below. For our two players, we have four possible combinations or situations of “FIGHTING” or “NO fighting”; each cell, marked A to D, represents one of these combinations. The “payoffs” could be sums of money; here, they are our utility rankings, which we assume to be the same for the two players. The first number in a cell gives the rank of that situation for S (the line player, blue in my chart) given the corresponding (column) choice by R. The second number in the cell gives the rank of that situation for R (the column player, red in my chart) given the corresponding (row) choice of S. For example, Cell B tells us that if S does not fight but R does, the latter gets his most preferred situation while S is the sucker and gets his worst possible result (being defeated or severely handicapped). In Cell C, S and R switch places as the sucker (R) and the most satisfied (S). The player who exploits the sucker is called a “free rider”: the bellicist gets a free ride to the detriment of the pacifist. Both S and R would prefer to land in Cell A than in Cell D, but the logic of a PD pushes them into the latter. The reason is easy to see. Consider S’s choices. If R should decide to fight, S should do the same (Cell D), lest he be the sucker and get a utility of 1 instead of 2. But if R decides not to fight, S should fight anyway because he would then get a utility of 4 instead of 3. Whatever R will do, it is in the interest of S to fight; it is his “dominant strategy.” And R makes the same reasoning for himself. So both will fight and the system will end up in Cell D. (On the PD, I provide some short complementary explanation in my review of Anthony de Jasay’s Social Contract, Free Ride in the Spring issue of Regulation.) This simple model explains many real-world events. Once a ruler views his interaction with another as a PD game, he has an incentive to fight (attack or retaliate). The ruled don’t necessarily all have the same interest, but nationalist propaganda may lead them to a contrary belief. One way to prevent war is to change some payoffs in the ruler’s matrix so as to tweak his incentives. For example, if S or R realizes that, given the wealth he may lose or the other’s military capabilities—if war  threatens his own power, for example—war would be too costly. The preference indices will change in the matrix; try 4,4 in cell A and 3,3 in cell D, with 2,1 and 1,2 in the other diagonal. New incentives will have eliminated the PD nature of the game. Another way to stop the automatic drift into Cell D is for the two players to realize that, instead of a one-shot game, they are engaged in repeated interactions in which cooperation—notably through trade—will make Cell A more profitable than a free ride over several rounds. However, this path is likely to be inaccessible if S or R are autocratic rulers, who don’t personally benefit from trade and individual liberty as much as ordinary people. The possibility of transforming a PD conflictual game into a repeated cooperative game was brilliantly explained by political scientist Robert Axelrod in his 1984 book The Evolution of Cooperation (Basic Books, 1984). Like all models, this one hides some complexities of the world. It does not explicitly incorporate deterrence, which is essential for preventing war as soon as one of the players views the game as a PD. But when deterrence has not worked—one did attack—the question is whether a counter-attack, and which sort, will have a better deterrent effect or will just be another step in mutual retaliation, that is, open war. In the current Middle East situation, religion on the Iranian rulers’ side makes matters worse by countering rational considerations of military potential. Preferences are thus likely to differ from a PD matrix. “When you shot arrows at the enemies, you did not shoot; rather God did,” goes a saying among Iranian radical zealots (quoted in “Iranians Fear Their Brittle Regime Will Drag Them Into War,” The Economist, April 15, 2024). You cannot (always) lose with God on your side. God or Allah shooting the arrow, by Pierre Lemieux and DALL-E (0 COMMENTS)

In an earlier post, I listed some questions for interventionists to consider before advocating their interventions.  This is part of my ongoing crusade to get interventionists to think about things as they actually are as opposed to a blank slate.  These two modes of thinking I call “status quo reasoning” (seeing the world as it is) versus “state of nature reasoning” (seeing the world as a blank slate). Some recent research demonstrates the importance of status quo reasoning.  In a new working paper at the National Bureau of Economic Research entitled “The Market and Climate Implications of U.S. LNG Exports” James Stock of Harvard University and Matthew Zaragoza-Watkins of UC Davis examine how the US moving from a net importer of natural gas to a net exporter has affected greenhouse gas emissions.  For a while after fracking began in the US, natural gas prices became disconnected from other energy prices as the US market was flooded with natural gas and export options didn’t really exist.  However, over the course of 2012-2016, approvals were granted and LNG export terminals were built, allowing the US energy companies to export LNG around the world.  By tapping into the global market, US natural gas prices “reconnected” to world energy market prices: natural gas prices rose and began moving in tandem with oil and coal, as has been the historical trend.   What is interesting is their discussion on climate effects.  In their abstract, they write: “We estimate that the domestic gas price effect of this recoupling is comparable to a $30/ton carbon tax.  For coal prices, which are coupled to gas through competition in the power sector, this effect is comparable to a $20/ton carbon tax.  Using the NREL ReEDS model, we estimate that this recoupling reduces US 2030 power sector CO2 emissions by roughly 145 million metric tons” (emphasis added) Many supporters of a carbon tax erroneously claim there is no price on carbon. That is the fallacious “state of nature” reasoning I discuss above. In the state of nature, there is no price of carbon. But in the real world, there is a price on carbon.  There may not be a monetary price, but there is always some form of price.  When natural gas (a considerably cleaner producer of energy than oil and coal) entered the market, carbon use fell.  Furthermore, as the price of natural gas coupled with other energy prices, people economized on natural gas usage (which, though cleaner than other sources of energy, still releases CO2), as well as on oil and coal.  All in all, the effect of this was a reduction of carbon emissions as if a carbon tax was applied!  The market, quite unintentionally, helped solve the externality by imposing a price on carbon. What’s more, this market alternative to carbon taxes is probably, on net, more efficient than a similar carbon tax.  That is, even though this coupling had the same effect as a $30/ton carbon tax, it likely did so with less waste.  Whenever we talk about public policy, we must discuss the political process and how the sausage is made.  Politics is a messy business, and imposing a carbon tax is no different.  Even if we assume that the tax is passed costlessly and without any political shenanigans surrounding it, there are still the administrative costs of the tax (that is, any cost incurred while administering the tax: hiring people to collect it and calculate it, audits, and so on), which reduce its effectiveness.  But with this market process, those potential costs do not exist.   In a state of nature, the interventionist could propose a carbon tax too high (or too low).  But, taking the status quo into account, in looking at the total effects and not just the marginal effects (as Ronald Coase stressed so long ago in The Problem of Social Cost), we have a much clearer picture of what interventions may be necessary and which may not.   (0 COMMENTS)