Having recently returned from travel, I’ve gathered several reflections that may be of interest. I plan to expand more on these ideas in separate articles.

No Airbus of AI:

The Economist recently ran an article discussing how Europe’s success with the merger of Airbus remains virtually unrepeated across the Eurozone. A mix of antitrust policy, suffocating regulations, and high taxation are cited as some of the reasons for this phenomenon. While at an event at the University of Amsterdam, I was chatting with a Dutch commerce regulator about Europe’s inability to control the ethics surrounding Artificial Intelligence technology. It was clear that seeing the nail of AI has her (and likely most of her colleagues) reaching for the hammer of regulation. I asked a few probing questions about her beliefs on entrepreneurs’ culpability in the misuse of technology, to which she held very strong views in the affirmative. The drawback, of course, is that Europe’s regulatory death-grip on entrepreneurship is a key reason that it creates so few world-beating companies, which is a key reason that its governments struggle to control their own destiny—all the more poignant amidst the AI revolution and the tired repetition of this long-told story. Though basing a complete assessment on a singular conversation would be premature, such ossified nature of the state’s attitudes indicates this is unlikely to change.

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Could we be killing the next Uber?:

As many are in an outright panic over America’s fiscal situation and the fiscal suicide-bomb which is the Big Beautiful Bill, interest rates are starting to bite those around America. As the period of secular stagnation, free money, and easy monetary policy silently dies (at least, for now), my mind has been on Uber. Uber made nearly $10 billion in profit last year, a number which markets expect to grow. 2023 was the year we first saw a net profit from Uber since its inception in 2009. A striking thing about the 2010s is that it allowed for the creation of companies like Uber, which for most of its history was an unprofitable app that had decent execution on a pretty good idea with a lot of upside. Not only was the smartphone key, but the low interest rate environment allowed investors to make big bets on the growth companies of the future, sustaining them for years of unprofitability while they worked out the kinks of the business model. I’m convinced that Uber, putting the obvious technological factors aside, probably wouldn’t have had much of a shot in most of the 20th century on private investment alone because higher interest rates would’ve demanded a degree of profitability that would not have been achieved in the shorter-term-higher-discount rate environment.

So the question is what Uber’s won’t or aren’t being created in the 2020s because of the current fiscal and monetary situation. What key innovations are we crowding out?

Though Tyler Cowen has argued that, philosophically, it’s impractical to have a social discount rate (the rate by which you discount the value of the future), higher interest rates combined with AI doomsdayers saying we’ll all be killed by superintelligences in 2030 might change the practical calculus of many agents, giving society a kind of Children of Men feel, where military power is prioritized and climate change is forgotten (which is what we see in the ‘Big Beautiful Bill’). As the future gets discounted, practical consequences will be greater pressure on democracy as people prioritize their near-term returns from the ‘system’ rather than their philosophical and ontological relationship to the ‘system’, with haphazard, destructive tariffs and economic policy flying under the guise of cultural revitalization and constructive system overhaul.

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As Eminem himself said, “everybody, just follow me, 'Cause we need a little controversy, 'Cause it feels so empty without me.” I’m back from a 3-year hiatus. The game felt too empty without me. So welcome back to Rational Exuberance— another potentially controversial corner on the internet.

There’s a lot to talk about. A lot has happened. I won’t go too in depth on this post—but I do want to offer my broad-strokes takes on what I’m seeing.

Populism forges on across the world. America has started to kneecap its own economy. There is a House bill proposing to blow up the deficit. Housing is still painfully expensive.

I’m convinced we need a return to neoliberalism. Actually, return is a bit of a misnomer. I’ve become more convinced that we need neoliberalism because we never really tried it.

Think about it—congestion pricing, a classic econ 101 issue. Every econ textbook has been promoting this for the last 40 years. Did the ‘neoliberal USA’ of Regan and Clinton adopt this? Of course not. The US’s first implementation of congestion pricing just happened in Manhattan five months ago. It only took 40 or so years.

How about the welfare state? Did the US totally gut the welfare state because of Milton Friedman? The evidence doesn’t necessarily point to that conclusion.

Climate change? Carbon taxes is the neoliberal proposition. Ultimately, it never got tried.

And as we look at the genuine economic problems of our day, neoliberalism seems to have little to do with the cause, but potentially everything to do with the solution.

Just a few examples—housing. Housing costs are the single biggest economic challenge facing the average person in the developed world today. The litany of veto points allows rent-seeking localities to inhibit development and impose crushing regulations to halt housing production. The housing crisis is fundamentally a regulatory issue, with specific deregulation being critical to the solution.

Healthcare? Still exorbitantly expensive. Restrictions on medical schools, hospital development, and medical licensing make services artificially expensive. The same goes for other forms of occupational licensing—and to the university system. With the rising cost of childcare, we see a similar pattern.

Local veto points have allowed NIMBYs to cripple the rollout of green technologies and major infrastructure projects.

Tariffs are kneecapping American manufacturers by driving up input costs and stifling investment.

The demographic pyramid will force America to open its borders to more legal immigration—or at least a rotational worker program—in order to prevent the complete bankruptcy of the state (that is, of course, assuming AI doesn’t replace most jobs in the next few years).

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A lot of the bread-and-butter issues facing the average American are self-inflicted wounds. We need pragmatic, limited governance that gets out of the way and lets America build.

That said, we do need to update some of our neoliberal priors on state intervention. In critical industries like battery and chip technologies, we need public-private partnerships to foster competitiveness and safeguard national security.

At the same time, America faces cultural questions that neoliberalism alone won’t solve. I can admit that I don’t have all the answers to those questions. But those focused on cultural revitalization also need to grapple with the fact that you still need an economic policy. And “bringing back the factories” and “keeping out immigrants,” apart from being economically problematic, don’t seem likely to achieve those well-intentioned goals.

To quote Eminem again:

“Nobody wants to see Marshall no more.”

He was referring to Marshall Mathers. I’m referring to Alfred Marshall. But either way, we’re witnessing a broad shift away from Econ 101 principles, free markets, and the very fundamentals that could help us overcome today’s challenges. We abandon these principles at our peril.

On a warm, humid morning in the Florida Straits, a line of ships approached the harbor of Key West, bearing Cuban migrants fleeing persecution from the Castro regime. President Jimmy Carter ordered a state of emergency and attempted a blockade, but despite the best efforts of the U.S. Coast Guard, more than 100,000 migrants landed on the shores of Florida during the next six months. The Mariel Boatlift, as it was later named, offers a lesson about the transformative power of migration, and reminds us why wealthy countries should open their borders.

Under current immigration rules, millions of the world’s poorest suffer greatly, trapped in unproductive economies. The economic gains from unlocking labor mobility are astronomical — and yet are largely ignored. It’s like an old joke in economics: an economist sees a $100 bill on a crowded sidewalk and doesn’t stop, assuming that if it were a true $100 bill it would’ve been taken already. In that vein, economist Michael Clemens’ studies of immigration show that opening the borders of rich countries for more free movement of labor would double the world’s GDP; in effect, we are ignoring “trillion-dollar bills on the sidewalk” (Clemens, 2011).

Most people in the world live poor, difficult lives. But the world isn’t full of poor people; rather, it’s full of capable people who live in poor places. A study found that Nigerian high school graduates who moved to the U.S. made fifteen times as much as their counterparts who stayed in Nigeria for work (Clemens et al., 2019). Rich countries offer greater access to capital, better legal systems, more market opportunities, and other ingredients for higher productivity.Immigration restrictions thus prevent the full productive capacity of the world’s individuals from being realized. Additionally, the populations of Europe and North America are aging fast, threatening younger generations with massive tax burdens to pay for pensions and eldercare. Immigration would drastically reduce this tax burden by increasing the number of overall workers, staving off the otherwise inevitable ossification of wealthy societies. 

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Immigration discussions inevitably bring up the wellbeing of workers in the West. Concerns about how immigrants might lower wages for workers are well-intentioned but unfounded. When over 100,000 Cubans landed in Florida, Miami’s labor force expanded by ten percent within months. According to one analysis, however, the impact on Miami workers’ wages across all skill levels was effectively zero (Card, 1990). This makes sense: As immigrants take jobs, they spend money, creating demand for new jobs, which means they ultimately didn’t “take jobs” from American workers at all. Migrations around the world have been studied similarly, and none has found significant adverse effects on existing workers.

By opening borders, rich countries could unleash the greatest gains in human freedom and flourishing in world history.

Hello! It’s been a while. College has been busy, but I will try to be more consistent with my posts. Here is my essay I submitted for the Alfred Marshall Foundation essay contest at Cambridge, discussing the solutions to the threat of stagflation:

Question 1: Economies are facing soaring inflation rates despite tepid growth, which commentators have attributed to various causes. Discuss what you think the appropriate policies are to address fears of ‘stagflation’.

Soaring inflation from an aggressive fiscal and monetary expansion accompanied with lacklustre growth brought about by multifarious supply shocks have lowered real living standards across the world. Solutions to mitigate stagflation involve the reduction in aggregate demand to induce disinflation, and the alleviation of supply-side constraints to expand the productive capacity of the economy to regain losses in living standards. Rich-world economies are faced with both high inflation and sluggish GDP growth. The main cause of high inflation has been the massive fiscal expansion unleashed during the pandemic, with the public debt-to-GDP ratio for OECD economies rising 17 percentage points since the start of the Covid 19 pandemic. In the United States, Federal Reserve assets expanded by over $3 trillion within three months. The savings rate for consumers reached a high of 35% during the pandemic, responsible for much of the economic contraction, as consumer spending makes up 70% of the economy. The low savings rate during the pandemic led to a drop in the money multiplier, which has subsequently accelerated as shown in the drop of the savings rate, accelerating the upward pressure on aggregate demand.While the Fed has started to taper reserves in response to double-digit inflation, the interest rate rise shown in 30-year fixed-rate mortgages has already halted, with rates falling 80 basis points from their peak over the past month. Continued monetary tapering is essential for further inflation reduction, as employment remains strong in the United States and a ‘soft landing’ remains a target for policymakers. In the standard model, a reduction in aggregate demand can increase the severity of recession. However, job vacancies sit near their all time high, suggesting this effect is currently weak, and the US economy can sustain more asset tapering from the Fed before employment becomes an issue.

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The aggressive sanctions regime imposed by the United States and European Union on the Russian economy in response to the invasion of Ukraine has created a negative supply shock by disrupting and banning certain kinds of trade, particularly in agricultural products and metals. The main effect of these sanctions on the world economy is an inward shift in the short-run aggregate supply curve, exacerbating inflation and unemployment. Rather than parse out the normative geopolitical questions of the effectiveness of the NATO sanctions regime in this essay, changes in the current trade and tariff regime for the US and Europe offers low-hanging fruit to increase aggregate supply. Eliminating tariffs would eliminate their associated deadweight losses and upward pressure on prices. Eliminating tariffs brought about by President Trump’s trade war would reduce the CPI by 1.3 percentage points according to one analysis (Robinson, 2022). Additionally, reductions in these tariffs would boost exports and overall output. Many economists detract from such economic reforms when economies are in macroeconomic flux, with Vittorio Corbo and Stanley Fisher stating in a World Bank volume: “In countries with acute macroeconomic problems, structural reforms designed to increase efficiency and restore growth...should only be initiated when sufficient progress has been made in reducing macroeconomic imbalances''(Rodrik, 1993). Analysis from Rodrik finds that the effects of trade liberalisation, both their positive fiscal impact and its disinflationary effects will not be limited by macroeconomic instability (Rodrik, 1993). Unleashing the free flow of goods and services to the rest of the world is a crucial step in fighting today’s stagflation.

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One cause of the recent economic contraction and the rising cost of services comes from the high rate of baby-boomer retirements during the pandemic. Given that labour (L) is a key factor of net national production in the aggregate production function (Y = F ( K,L )), a decrease in the supply of labour will contribute to slowing economic growth. The Covid-19 pandemic induced more baby boomers into retirement, creating a supply shock in the supply of labour, contributing to the inward shift of aggregate supply (Faria-e-Castro, 2021). By August, 2021, the number of people who had retired before their expected retirement reached 3 million in the United States alone. Ageing populations across the OECD are likely to exacerbate this decline in labour participation, which hasn’t recovered since the start of the pandemic while unemployment has. The main policy lever governments have to increase the supply of labour is through immigration. Due to border closures during the pandemic, the foreign-born working-age population in the United States is an estimated 1.8 million people below trend (Peri and Zaiour, 2022). Immigrants are a key driver of labour force growth in countries where fertility rates are low—70% of the increase in the labour force between 2010 and 2020 was from foreign-born workers (Economist, 2022). Many critics of immigration claim a tight labour market is something that shouldn’t be alleviated because immigrants decrease wages for lower skill workers. Upon reviewing the literature, this is untrue, as analysis of mass migrations show minimal or no effect on low-skill worker wages because the increase in supply of labour is offset by an increase in the demand for labour as immigrants consume goods and services (Card, 1990). The purpose of immigration is to increase the productive capacity of the economy during a time of slow growth, as well as create more businesses to further expand the productive capacity of the economy and further accelerate economic growth. Immigration and Entrepreneurship in the United States finds that, “ immigrants act more as "job creators" than "job takers" and that non-U.S. born founders play outsized roles in U.S. high-growth entrepreneurship”(Azoulay, 2020). Increasing immigration levels to close the gap with the previous trend is wise to ameliorate short and long run supply issues in the age of stagflation.

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Tackling stagflation involves examining efficient ways to manipulate both aggregate supply and demand that go beyond a simple fiscal or monetary tool. Limiting aggregate demand in the short run is important to alleviate short-run inflation while reforming the mobility of people and goods is essential to medium-term and long-term prosperity and output expansion. A concerted effort from governments to fix both issues is essential.

Bibliography:

Azoulay, P. (2020). Immigration and entrepreneurship in the United States - NBER.

Retrieved August 16, 2022, from

https://www.nber.org/system/files/working_papers/w27778/w27778.pdf

Card, D. (1990). David Card - National Bureau of Economic Research. Retrieved August

16, 2022, from https://www.nber.org/system/files/working_papers/w3069/w3069.pdf

The Economist Newspaper. (2022). A shortfall in immigration has become an economic

problem for America. The Economist. Retrieved August 16, 2022, from

https://www.economist.com/united-states/2022/07/28/a-shortfall-in-immigration-has-beco

me-an-economic-problem-for-america

Faria-e-Castro, M. (2021). The Covid Retirement Boom - Federal Reserve Bank of St.

Louis. St Louis Fed. Retrieved August 16, 2022, from

https://files.stlouisfed.org/files/htdocs/publications/economic-synopses/2021/10/15/the-cov

id-retirement-boom.pdf

Robinson, S. (2022, March 29). Can liberalizing trade reduce US CPI inflation? insights

from an economywide analysis. PIIE. Retrieved August 16, 2022, from

https://www.piie.com/blogs/realtime-economic-issues-watch/can-liberalizing-trade-reduce-

us-cpi-inflation-insights

World Bank. (2022). GDP (current US$) - OECD members. Data. Retrieved August 16,

2022, from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=OE

Zaiour, G. P. and R., Peri, G., Zaiour, R., Butcher, K., Butcher, K., Moran, K., & Watson, T.

(2022, April 5). Labor shortages and the immigration shortfall. Econofact. Retrieved

August 16, 2022, from https://econofact.org/labor-shortages-and-the-immigration-shortfall

Gas prices fell by an average of 80 cents a gallon over the past month, something to be celebrated by those occupying the White House. Expensive gas due to supply disruptions, like the OPEC embargo of the 1970s, are bad because they arbitrarily limit the productive capacity of the economy. But higher gas prices due to a gas tax are different.

Gas produces what are called “negative externalities.” These are negative consequences of consumption that are externalized onto society rather than the consumer. These include carbon emissions, local air pollution, and congestion of roads. As a driver, you don’t bear the cost of your own car increasing congestion, your contribution to global warming, and the air pollution created by your driving. In economics, a utility maximizing outcome involves taxing externalities such that the consumer “internalizes” these costs. This means taxing gas. Now there are already gas taxes in the US, with Pennsylvania charging the highest gas tax at 57 cents a gallon. According to an analysis at UC Davis, the optimal gas tax rate for California would be $1.37. This is more than three times the current gas tax in California. This would optimally internalize the external costs of driving, and increase total welfare, and would be a good idea for the US to adopt. As gas becomes taxed, people drive less, clearing roads and lowering pollution to a significant degree, while also being freely able to make necessary trips and price in their driving’s costs and benefits.

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Now, what about people’s budgets? This is a valid concern. Many working class people’s financial positions have been hurt by expensive gas as of late. Wouldn’t the new taxes cause more harm? My answer: they don’t have to. The government can send out checks to each American equivalent to the per capita revenue from the tax. The median consumer of gas would be taxed and then paid by the government the same amount back. This solves two problems. It correctly curbs overall driving with the gas tax, but at the same time compensates people in the process. Those who drive a lot will lose out, those who can curb their driving will receive a windfall.

Of course, this is politically toxic. I am not suggesting Biden propose this to win the midterms (though I doubt his approval ratings can get any lower.) Raising the gas tax would increase overall welfare maximization for Americans. We live in a democracy, so this wish will probably have to wait.

In the segment, Maher mocks Mathew Yglesias’ argument for “One Billion Americans” something I strongly support, and will write more about at a later date. Maher opens his critique of Yglesias’ argument claiming that while, we have enough space, we don’t have enough ‘resources.’ Maher follows that line with “Didn’t we just run out of baby formula?” showing he probably hasn’t read “One Billion Americans” nor has he thought about the dynamics between population and resources. The obvious rebuttal is that people not only consume things, but they also create things. Baby formula is one of those things. If America had a billion people, we’d have about three times as many people, roughly three times as many babies, and "(probably) three times as many people making baby formula to feed all the babies.

Maher then says “You can make a billion Americans but they’re all not going to want to live in North Dakota.” Not everyone would live in North Dakota, but he overlooks the fact that we really could have a lot more people living in the upper midwest and rural areas. The fact that America has many places that are probably nicer to live in than North Dakota makes it seem like North Dakota is a terrible place to live. However, if you think about how the rest of the world lives, living in North Dakota is an amazing place to live compared with San Salvador or Mombasa. I find place-based immigration proposals to fight depopulation intriguing—instead of an employer being the one to sponsor a visa, a state sponsors the person, and they can only work in that state for X number of years, before being able to move wherever they want. This could effectively fight depopulation in regions of the country that are facing economic and cultural flight due to depopulation.

Maher then, quite comically, brings up Thomas Malthus’ theory from 1798, where “population grows exponentially, but water and food do not, hasn’t really changed.” While Malthus was a revolutionary economist for his time, this theory has made him rather infamous because it turned out to be totally wrong (also, Maher’s characterization of Malthus’ theory isn’t entirely accurate either, but Maher gets so much wrong in the episode it really isn’t worth correcting him on this.) Agricultural productivity increased (which Maher acknowledges), making Malthus’ claims largely irrelevant at today’s level of agricultural science. But, Maher claims that food growing is “still finite.” While yes, it sort of is, that doesn’t mean it’s worth being concerned about in the context of population growth. The largest agricultural exporter is the United States. The second largest food exporter is the Netherlands. Yes, that tiny little country that should be underwater. The Dutch have advanced greenhouses that grow food at super space efficient levels. Space is not the issue to food production, and the world is nowhere near the ‘limit’. Much of the US’s grain is used to feed livestock, and because of the biological science of trophic levels, this means there is a big calorie “waste” in the production of meat. If food became sufficiently scarce, we could alleviate a shortage of calories by eating the grains directly rather than eating meat.

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Maher’s response to the problems of depopulation is “isn’t running out of water an even bigger problem.” Maher repeats “running out of water” many times throughout the episode but doesn’t explain how we “run out of water.” Earth has plenty of water. It is in fact covered with it. Here is a picture of earth if you don’t believe me:

Excuse my smarminess. In all seriousness though, I don’t understand what Maher’s concern is. Yes, of course most of the water is salt water. But there are desalination plants which convert sea water into drinkable water, something already done in Israel where there are few sources of fresh water. Obviously, this doesn’t mean we shouldn’t care about water management. Desalination is more expensive than taking water directly from a clean river, so ways to manage water better (through pricing mechanisms) would be welcome. But the idea that with one billion Americans we would just die of thirst is ludicrous. And this brings me to my main point, which is that humans can adapt, and specific resource constraints are overblown.

Here is an unorthodox but fascinating Twitter thread I saw a few months back:

To summarize, wealth is really only created and consumed by the fashioning of resources through ideas. Ideas are what create wealth, and better ideas are what generate wealth and improve our living standards. Resources may be fixed, but ideas can be used to find replacement resources and use resources more efficiently. In the 1800s people lit lamps with whale oil. When everyone realized we were going to run out of whales, the world didn’t just stop using light, people switched to kerosene. Then electricity.

Many people have a curious conception that if X is a natural resource then it is scarce, limited, and necessary, and that if we deplete it we might all die. I’ve come up with a little test called the Scarce Factor Test, to see if a resource really is an integral factor to our society, and to think differently about how we view said resource. The test involves three questions.

Is the resource:

Scarce? (is its availability threatened by our consumption of it?)

Unscalable? (can the supply be increased?)

Necessary? (is there no substitute?)

Let’s start with the air we breathe. Is it scarce? Well, no, not really. Air quality is lower than in some places, which is a genuine local concern, but it isn’t globally scarce by any means. So air fails the Scarce Factor Test. What about fresh water? Fresh water is indeed scarce. It is limited and it’s consumption by one group of people can affect the consumption of other groups (look no further than the Colorado river). Is it necessary? Yes, absolutely. We are not going to change our biology such that we won’t need water. Is it impossible to increase supply? No, the supply can be increased through desalination plants. So water fails the Scarce Factor Test too. Oil? It’s scarce, but it’s also scalable, and (with some time) its consumption can be substituted for using different machines, making it not necessary.

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As you can see, it’s difficult to find a resource that passes this test. That is to prove a point. The point is that in basically every case, resources can be substituted, or the supply can be expanded. Now these come with costs, but these costs are rarely examined. Public discussion of resources and scarcity usually consists of “Oil has limited proven reserves, so in 30 years when all the oil runs out all our cars will come to a shuddering halt and the world will end.” This fear of “peak oil” was created in the 1970s, it is one of the most notorious resource apocalypse claims, and clearly has not come to pass.

The important thing is we need to use cost benefit analyses in our thinking. I am of the view that CO2 emissions are a very big problem. Building lots of solar and electric cars are important in fighting climate change and mitigating the associated costs. At the same time, I don’t think we should, this year, ban gasoline car sales, ban flying on planes, and stop producing cement, steel, and oil. The environmental gains pale in comparison to the real economic devastation that would be unleashed. We shouldn’t just consume every resource with abandon, because costs of switching to different forms of consumption may be high, but we also shouldn’t limit the growth of economies or the growth of America’s population based on blanket claims about the “scarcity” of natural resources and our impending collapse.

Maher’s episode may ring true to some people because things going on around us can seemingly be explained by too big a population. We’ve had supply chain issues, a baby formula shortage, high gas prices, high home prices, and a mass shortage of grain. Yet none of these things come from a sudden appearance of people, or too many people. They are supply shocks, be it Covid lockdowns in China, war in Ukraine, regulations on oil production, or economic sanctions. Population is not the issue, the issue largely comes down to governance and the choices societies make; Governments and individuals chose to carry out lockdowns, wars, or regulations. The environment can be protected without being dogmatic.

The bill is called the Inflation Reduction Act, and is focused on deficit-reduction, climate, and healthcare. Here is a great chart from the Washington Post that shows what is being spent (per the Committee for a Responsible Federal Budget).

Clearly, most of the money spent is on climate. I am in support of this spending. My theory of how to mitigate the worst effects of climate change are to use government incentives to lower the cost of renewable technology, leading to cheap, clean power that the developing countries of the world can install without limiting their economic growth. We’ll still get warming that’ll harm ecosystems and cause damage, but we live in a world of tradeoffs and I see little point in proposals like the Green New Deal that completely revamp the economy in a matter of just a few years. I would like a carbon tax to be the primary incentive to switch away from fossil fuels, though politically that is impossible (just look at how mad people are about gas prices), so subsidies and tax breaks are methods that I see as the next best thing.

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(As a side note, I find it odd that many people miss the point that you can tax carbon making green technologies relatively cheap, lowering emissions and power bills. In a comparative government class, I remember many students believed the way government “solves” climate change is by bludgeoning fossil fuel companies into collapse with targeted regulation and taxes, which is a terrible idea.)

Notably, there is a $7,500 tax credit for new electric car purchases for couples making less than $300,000 and individuals making less than $150,000. Ultimately, using subsidies like these to increase electric car uptake can help solve the chicken and egg problem of electric cars and charging stations—no one buys electric cars because there are limited charging stations, and no one builds charging stations because few people are buying electric cars. Subsidies to increase EV purchases can kickstart this process.

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There is $1.5 billion allocated for reducing methane emissions, which is pretty low-hanging fruit given that un-combusted methane is a mind-boggling 67 times more potent as a greenhouse gas than CO2. An additional $27 billion allocated for a green bank, where government funds green projects, is interesting. Ideally, these funds will be spent mainly on moonshot and experimental technologies that are less mainstream—think fusion power or hydrogen storage, though I doubt that will be the case.

Controversially, the bill also has provisions that expedite permitting for fossil fuel production, though I find the production bans and restrictions to be of limited logic in general so this doesn’t bother me.

On the revenue side, there are some big contributors. More funding for the IRS will will increase tax receipts, and a 15 percent corporate minimum tax makes a lot of sense. Many companies have been able to use various loopholes and R&D deductions to pay little to no taxes for many years. For example, Amazon’s effective tax rate was 6% last year, which Harvard Economist Larry Summers has been a big critic of, and I’m glad they’re making this change.

Both of these tax changes will be disinflationary over the short and medium term, which is a very good thing. The US needs to decrease aggregate demand in the short run to curtail price inflation, even if it means making the recession we’re in worse. The health savings provisions involve price caps for certain drugs, which, given some of the market failures in parts of the pharmaceutical market, are a good thing. The negotiation of drug prices is a great change.

Overall, the bill is a solid step in the right direction, with decent spending and good savings on the revenue side that will reduce the deficit and ultimately inflation. Additionally, the investments in clean energy will weaken inflation in the medium term (4-7 years). While the exact methods for fixing America’s problems aren’t optimal or ideal, they do address some core challenges America faces, making this bill good for it’s time.

In politics, a fine bill for a big problem can be a great outcome.

A main point of discussion for internet political hobbyists are the shortcomings of America’s car dependence and the need for more sustainable, safe, and accessible transit in the form of public transportation. European cities are often heralded as models for public transit, with a city such as Milan (with the same population as Detroit) containing a sophisticated subway system to rival that of New York City, the only city in America with an expansive and effective public transportation system.

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There are several reasons for this, with a notable reason being the high cost of rail construction in the US; the catastrophic flop of California’s high speed rail project is a notable example. Many YIMBYs (yes in my backyard) say that America needs to unleash its public transportation potential to fight climate change and reinvent cities, but I am skeptical that this could happen. While I am optimistic on the issue of increased housing construction through high density zoning, I doubt the political will or priority is there to pass a large bill constructing extensive public transit.

I expect the US to develop a modest high-speed rail network between a handful of large cities over the next two decades, mainly by private sector funding and investment, but I am overall bearish on the US government’s ability to construct public transit. The US will remain a car dependent place, but that might not be a bad thing.

There are a handful of reasons America’s car dependence are a problem (for now).

One issue is traffic fatalities:

The United States’ prevalence of cars as a mode of transportation means that far more people are killed in traffic accidents. A rapid move to public transportation would certainly decrease this number, given that more miles would be travelled using relatively safer means of transportation.

Another reason is access. Owning a car can be expensive, but a car is necessary in many parts of the US because cities aren’t built to be walkable. People are surrounded by large residential areas, making a walk to a store very far for many people. For poor people, this can limit employment opportunities and job prospects, making living difficult in many areas.

Finally, there is the question of climate change. Cars are generally driven by just one person, making the per person emissions very high. Public transport uptake could, in theory, reduce emissions.

So why am I optimistic about America’s car dependence? Cars are changing. Cars are rapidly becoming electrified—8.6% of cars sold in 2021 were electric, and this trend is going to accelerate, limiting the harmful effects cars currently have on the environment. Secondly, cars will soon become autonomous. This will reduce traffic fatalities to near zero, as well as mitigate concerns about traffic jams because autonomous cars that can talk to each other will be able to coordinate routes that mitigate both traffic and collisions. With autonomous vehicles there will be a massive drop in the cost of Uber-like ride-share services, because a driver won’t be needed.

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Imagine a world where many middle class Americans own an autonomous car like today. It’s all electric, and it allows people to work during their commutes by driving itself (assuming they don’t work remote at this point). Maybe a family has 2 cars, but are only using 1 at a given moment. They can use a service to rent out their autonomous vehicle for a small sum to someone without a car and give an autonomous taxi ride to that person. This both makes the experience of cars better, as well as makes the need for a car decrease, because more and more autonomous cars will be driving around, giving people rides at a moment’s notice.

And it is in this world that I think Americans are better placed than Europeans. America already has the car infrastructure to support this system. America has far more extensive and wide roads than Europe. And in most cases, having a car is more convenient than public transportation. You’re in a private space, it is usually faster, and you don’t have to run to catch your bus or train. With the rollout of technology, the car’s negatives will mostly have been eliminated, while the benefits remain. By 2040, the US will be on the right side of this trend.

This is my first Substack book review. I’ll be posting about my favorite (nonfiction) books I’ve read in the future.

New Ideas From Dead Economists was not a book I planned on reading. Bored out of my mind writing an essay about The Handmaid’s Tale* in the library, my eye was caught by its bright red spine amidst the grey and muddy green-colored books in my school’s economics section. I flipped through the pages, expecting to find some moderately interesting, but ultimately repetitive ideas and theories about economics that might’ve been discussed in Econ 101. Instead, I was met with a fascinating history of some of economics’ greatest thinkers.

Disclaimer: I read half the book on a lawn chair in the Tuileries while in Paris, which likely contributed to my positivity about the book.

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New Ideas From Dead Economists, by Dr Todd Buchholz, covers some of the most famous economists that have contributed to the discipline, including Adam Smith, David Ricardo, Karl Marx, and John Maynard Keynes, to name a few. Adam Smith is the first economist covered, discussing both his biographical and ideological ventures. I appreciate the recognition Buchholz gives to Adam Smith’s book The Theory of Moral Sentiments, which is an under-appreciated book. Smith investigates why people exercise integrity even when no one is watching, concluding that people imagine there is an “impartial spectator” watching and judging our every move. Smith essentially created the concept of a Freudian ‘Super-ego’ over a century before psychoanalysis and the superego were commonly discussed by mainstream thinkers of the day.

Its inclusion in New Ideas efficiently portrays the way in which many of the great economists weren’t simply ‘economists.’ Given Adam Smith was the ‘Father of Economics’ economics was not a field at the time of his writing. Todd Buchholz explains the first economics department wasn’t established until the Cambridge Economics Department in 1903. Thus, thinkers like John Stewart Mill and Adam Smith were thinkers of “Political Economy” which made them less empirical and more philosophically and humanistically oriented than economists of later years (though empirical research also increased due to the ubiquity of computing).

I particularly enjoyed the chapter on David Ricardo, the economist famous for first understanding comparative advantage, and its explanation in the benefits of free trade. Buchholz includes a hilarious satirical work from Frédéric Bastiat, written when the French were considering import tariffs in 1840:

Gentlemen:

We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light, that he is flooding the domestic market with it at an incredibly low price. This rival is none other than…..

the sun

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s‐eyes, deadlights and blinds; in short, all openings, holes, chinks, and fissures. If you shut off as much as possible all access to natural light and thereby create a need for artificial light, what industry in France will not ultimately be encouraged? If France consumes more tallow, there will have to be more cattle and sheep. . . .

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New Ideas helpfully lays out how John Maynard Keynes revolutionized economics, and how the context in which he learned the discipline (particularly through the Treaty of Versailles) shaped his later views, similar to the history given in Zach Carter’s 2020 book The Price of Peace.

Some have criticized Buchholz’s book for being too dismissive of Karl Marx through his poor depiction. Buchholz does characterize Marx as an alcoholic, which probably affects a reader’s perception of him, but Buchholz also does an effective job of explaining his skepticism for Marx’s theories, particularly by including Alfred Marshall’s critique of Marx’s “Labor Theory of Value.”

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My interest in economics started in seventh grade, from which I have taken numerous online courses, lectures, read many of books, and worked as a research assistant. To learn so many new things about economics after five years of interest in such a short and simple book impressed me, which is why I would recommend it to everyone. Additionally, a lot of easily accessible information about economics and economic history doesn’t take a close look discussing thinkers like John Stuart Mill, Thorstein Veblen, and Thomas Malthus. The book discusses these thinkers and more at a time when, despite the ubiquity of Econ 101 principles easily accessible online, many intro courses are bereft of information about these thinkers. New Ideas from Dead Economists is readable for anyone who has never taken an economics course, and is a book I highly recommend.

Rating: 9/10

*Admittedly, I did not read The Handmaid’s Tale (it was too boring), nor do I even know how it ends, but my efforts were enough to earn a B on the essay.

In contrast, a poor country is a place of low productivity. There are many causes of this, some big reasons being a lack of technological application, poor property protections/legal systems, and low human capital. Because of this, opportunities for high-paying jobs—or even formal jobs at all—are scarce.

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In poor countries, many services are incredibly cheap compared to rich countries, even if the service provided is practically identical. For example, the average haircut in Mexico costs around 90 pesos (roughly $5.) In contrast, haircuts in Oslo, Norway, cost $95 on average. Part of this can be attributed to the setting where the service is being provided—the rent and amenities for a barber shop in Oslo are much more expensive than in Mexico, which certainly raises the price of a haircut to some degree. However, a large portion of the cost comes from the labor cost. So why do Norwegian barbers charge so much more than Mexican barbers if they’re providing a nearly identical service?

“If Norwegian barbers were paid like barbers in Mexico, no one in Norway would cut hair because the job opportunities are so much greater.”

This question was studied by Hungarian economist Béla Balassa (pictured below). Balassa found that the reason Norwegian barbers charged much higher prices than Mexican barbers is that in Norway, the abundance of high productivity jobs mean that a high salary (in comparison to the Mexican barbers) is required to attract workers to cut hair. In Norway, most workers are more productive than their Mexican counterparts simply due to the political system, organization and management, private property protections, access to capital, and many other factors.

While in theory it would be efficient to outsource labor-intensive industries that can’t become more productive (like cutting hair) to low productivity countries, cutting hair isn’t a tradable commodity and thus it’s impossible. Norwegians need their hair cut one way or another, so the wages for barbers rise with the market wages of Norway, making haircuts far more expensive in Norway. If Norwegian barbers were paid like barbers in Mexico, no one in Norway would cut hair because the job opportunities are so much greater.

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Béla Balassa’s principle leaves us with two important considerations. First, the most efficient outcome would be to let Mexicans move to Norway and work in a high productivity economy. Secondly, when in Mexico, get a haircut.

Above, is a chart of how prices have changed across industries between 1997 and 2017. This chart is absolutely fascinating, and it shows us something that general statistics of wages and inflation don’t capture.

Notice how products in lesser regulated industries—such as software, toys, TVs, cars, and clothing, became cheaper since 1997. Given the wage increases shown, this makes these products more affordable than before. These sectors are more competitive, globalized, and, in general, less regulated sectors than the sectors higher up the chart.

Healthcare and the costs of college top the list, with prices for hospital services rising an astonishing 250% in just 20 years. Both healthcare and higher education are industries that involve more government intervention and cartel-style governance.

Marc Andreessen brought up this correlation during his recent Econtalk episode with Russ Roberts. Andreessen correctly points out that government policies have, in part, led to these wild price run-ups. Andreessen explains how in many of these industries the government restricts supply, leading to price increases. These are followed up by subsidizing demand, further exacerbating the price rise. Some econ-101 style graphs show this change below:

The first image is before, and the second is after. In the second image, the supply curve as moved to the left (supply restriction) and the demand curve has moved to the right (demand subsidy), leading to an inevitable price increase.

In the healthcare system, there are a myriad of regulations on hospital construction via Certificate of Need laws. In many states, these laws allow incumbent hospitals to deny entry of additional hospitals in the market, keeping the prices of hospital services artificially high. On the demand side, the government subsidies healthcare in the form of tax breaks for companies that buy health insurance for employees, Medicare, and Medicaid.

This problem also exists in higher education. To be eligible for federal funding, a university needs to be approved by an accreditation agency. The problem is that the accreditation agencies are run by existing universities, meaning that federal dollars subsidize the incumbents, making innovation difficult for alternative forms of education looking to disrupt higher education. As was discussed in my previous post about competition, the threat of entry forces incumbents to charge relatively competitive prices in many industries. In an industry where the incumbents can vote out entrepreneurs from competing, it is no surprise that supply is restricted and prices (in the form of tuition) run high. On the demand side, the federal government offers subsidized loans with low interest rates, boosting demand in the face of government-sanctioned supply restriction.

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Interestingly, the costs of housing have risen at the same rate as overall inflation. This is because the graph is showing housing expenses for all people all over the country. Housing is relatively cheap in many places in the US, particularly the south and rust belt. Additionally, the graph goes to 2017, so it misses the massive run-up in housing prices over the past five years. The worst run-ups in housing costs are in concentrated metro areas where, once again, supply is artificially restricted while demand is subsidized. Communities who fight new development in their neighborhood restrict the housing supply in their city, content to preserve their wishful mirages of what their city should look like, even if it means ratcheting up rents on all, and particularly the poor. A most egregious case happened recently in Berkeley, where a NIMBY (not in my backyard) activist sued UC Berkeley for ‘environmental damage’ forcing the school to slash their incoming freshman class by a third, and denying a top-tier educational experience to thousands of young people. On the demand side, housing vouchers and subsidies inflate demand, further increasing upward price pressures.

“If you ran a political experiment [where you price out the American Dream] the response would be populism”

-Marc Andreessen

Life in America is getting better overall, but it is unsurprising that populist forces have taken hold when the three key pillars of the American Dream—a home, an education, and good healthcare—have all faced enormous price run ups. The fact that these sectors are such large portions of the economy further reinforces how important it is for us to get public policy for these sectors right. As Andreessen states in the interview, “If you ran a political experiment [where you price out the American Dream] the response would be populism.” Alleviating the artificial supply restrictions that have been imposed is the first step towards making the American Dream more affordable, and relaxing the political tension of the current moment.

The above graph is one example of a wage stagnation graph that doesn’t capture the full picture. I’ll explain why.

Wage stagnation is a pervasive slogan and concept among both the progressive left and the national conservative right. It is used to decry ‘neoliberalism’ and it is a supposed smoking gun for all the problems with capitalism, corporatism, immigrants, free trade, the Chinese, or insert any other thing you don’t like.

This is the kind of graph that gets thrown around a lot. Supposedly, there was some sort of “great decoupling” between productivity numbers and wages. And yet, it really is an illusion.

As pointed out in a paper by Martin Feldstein, the deflators used in the graph (the metric that adjusts for inflation) are different for the productivity number and the wage number.

The […] problem is the way in which nominal output and nominal compensation are converted to real values before making the comparison. Although any consistent deflation of the two series of nominal values will show similar movements of productivity and compensation, it is misleading in this context to use two different deflators, one for measuring productivity and the other for measuring real compensation.

Feldstein points out that while the deflator for the business sector between 1970 and 2006 averaged 3.8%, the Consumer Price Index averaged 4.3%, meaning that the wage numbers were getting downwardly adjusted for inflation more than the productivity numbers. This is because productivity numbers usually use the business sector deflator while wages use the CPI as a deflator:

The average rise in real productivity was 2.9 percent while the average rise in real compensation as conventionally measured using the consumer price index averaged just 1.7 percent. This difference of 1.2 percentage points is however very misleading because of the use of the consumer price index. If we instead compare the average rise in nominal productivity (5.4 percent from 2000 through the third quarter of 2007) with the average increase in nominal compensation (5.0 percent), the gap is reduced to 0.4 percent. In real terms, productivity rose 2.9 percent while the corresponding measure of compensation rose 2.5 percent.

Additionally, “wages” aren’t even a fully correct measure. While wages are important, total compensation is the more accurate number. Feldstein points out that between 1970 and 2006 the share of compensation that came in the form of wages fell from 89% to 80%, meaning non-wage compensation increased. In other words, it cost companies more to provide health coverage for their employees as health care has become more expensive. This is still a problem because it eats into workers actual take home pay, but it’s an indictment of the healthcare system, not of wage growth.

Feldstein covers more of these points in detail and I’d recommend reading it because it’s an easy read for most that avoids jargon and complicated equations.

A quick search on St Louis Fred shows that real hourly compensation has increased by quite a lot since the year 1970, by about 50% in fact! This is a far more accurate picture than the graph from Pew that shows no wage gains in 40 years. Some skeptics might pull up the figure that median household income has not risen by nearly as much:

This looks like an increase of about 20-25%, a more modest increase than the hourly compensation figures would suggest. This might even imply a degree of stagnation for America’s families. But what many don’t realize is that the measure of households is misleading. As divorce has increased, the number of households has also increased, meaning that while incomes have risen, they’ve been divided into smaller and smaller households, statistically shrinking the real wage gains.

I first learned about this while reading Thomas Sowell’s Basic Economics, and it’s a truly striking point to think about. The number of households has grown, dividing the income gains among more households with fewer people in them. If we take a look at median personal income, we see, again, that the wage gains seem to be about 50%.

So it is clear there have been some strong wage gains for the vast majority of Americans over the last 40 years, and the claims of stagnation are just wrong. Additionally, the CPI that is adjusting many of these compensation graphs for inflation is known to overstate the effect inflation has on people’s living standards. For example, the benefits of the internet and wikipedia are not picked up in the data, yet they clearly have some positive benefit, albeit small. Globalization has allowed us to get a greater range of products from a greater variety of places, something that itself isn’t exactly picked up by the CPI.

The next time someone tries to convince you wages have decoupled from productivity, looking to the deflators can quickly deflate their argument.

So, I thought I’d send out a recent essay I wrote for a scholarship application on the importance of international travel in a globalized economy. I lost the scholarship competition, so maybe take my words here with a grain of salt.

International travel enhances the economic development of countries around the world in two ways—through stronger relationships and the faster diffusion of ideas.

The rise of global trade and the post-World War II order of international cooperation has increased the returns on investments in diplomacy and interaction with foreign countries. Forging relationships with other nations is an essential element in securing a country’s economic success and military protection. Many diplomatic relationships require high-level private talks, necessitating travel between countries to bring power-brokers to the bargaining table. Just as it took the man who united Saudi Arabia, Ibn Saud, a trip from Riyadh to the Suez Canal to negotiate military protection and economic cooperation with President Franklin Delano Roosevelt in 1945, it requires travel for leaders, executives, and citizens alike to forge mutually beneficial relationships with other counterparts in countries.

Ideas are essential to a country’s prosperity. In Econ 101, it is taught that output is a function of land, labor, and capital, all of which are catalyzed by a, a term denoted as the application of technology and ideas. While land, labor, and capital are all important, applying the factors of production effectively and efficiently is essential to a productive economy. During post-war reconstruction, Japan sent their experts to American companies and factories to understand how goods were effectively produced, how employees were managed, and how a modern economy was to be built. Seamless international travel was vital to making that happen. As globalization opens a growing number of industries and market sectors to cross-border competition, international travel not only facilitates the sharing of goods but also allows for innovative policies and practices to be more widely spread as well.

Another way that ideas spread via international travel is through a process called normative isomorphism. Normative isomorphism is the diffusion of best practices and policies as people disperse into different areas, countries, and fields. As experts move from one country to another, the leading practices of their field can diffuse into their new country’s institutions, increasing the overall capability and effectiveness of those institutions. These practices can have massive knock-on economic effects, shaping the global economy as a whole. For example, while there is widespread concern about inflation in 2022, global inflation in general has fallen since the 1980s, falling from roughly 8% per year to just 2% annually during the 2010s. This decline has been attributed to the effects of normative isomorphism, as a growing number of economists, connected via global travel and networks, draw on training they receive at the International Monetary Fund or the World Bank to shape developing economies at home. As these economists move into economic consultancy, leadership, or advisory roles in the governments of developing countries, their ingrained worries about inflation have been shown to diffuse throughout the

institutions in which they work, creating a global consensus about managing the dangers of inflation. This, in turn, has promoted global macroeconomic stability since the adoption of floating exchange rates in the 1970s.

Ultimately, for successful countries, international travel is a critical part of their openness to the world—an openness that has been enabled and necessitated by the power and reach of globalization. The movement of people and ideas through international travel staves off cultural and institutional ossification. It is a gift that countries can choose to embrace, for the benefit of their citizens and the world at large.

A central point of Democratic Socialism is the belief in workplace democracy as essential for human flourishing. Their line of reasoning states: Conventional liberal democracy is just a mirage by which capitalists purchase control of the government and continue the oppression of workers and the extraction of the surplus value of their labor in the form of profit.” The proposed solution is usually a worker cooperative, a company that is owned and run by workers. In a company like this, no profit is earned over the long run because everything produced by labor goes to the workers themselves. Some radical socialist thinkers have proposed that the government subsidize or mandate some kind of worker cooperative structure on companies. For reasons I will lay out, I think there would be terrible efficiency losses from subsidizing or mandating worker cooperatives, and those cooperatives would underdeliver on the promised welfare gains of workplace democracy. (I will probably do a later post on the problems with the Labor Theory of Value and the importance of entrepreneurship, but those arguments are not included here.)

Many socialists have lauded Mondragon, the largest worker cooperative in the world, located in the Basque region of Spain. Research has shown that worker cooperatives were more productive than traditionally owned firms in the plywood industry. Socialists usually use this as evidence to support worker cooperatives and their mandate. Yet when I hear claims of equal or even greater productivity, I immediately become skeptical of the need of government intervention. If worker-owned firms are more productive, they should outcompete traditional firms in the long run, making government action superfluous.

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It’s a bit similar to when I hear progressives assert that a higher minimum wage can raise worker wellbeing and in turn raise a firm’s profits. While I would support a moderate hike in the minimum wage, it’s quite the stretch to say it will raise profits through productivity gains. If it was more profitable to pay workers more, companies would’ve likely already done it.

Related to this point, I’ve been thinking about the true value of workplace democracy among workers. Prominent socialist writer Nathan Robinson of Current Affairs has talked about how giving workers the ability to fire their manager through a collective “no confidence” style vote would encourage better workplace practices as well as give workers a level of empowerment that grants them dignity in their job. While these all sound like nice things, I’m skeptical that workers really value things like “workplace democracy” as much as Nathan Robinson think.

Why do I think that? Well, suppose at the average restaurant in a town, workers are paid $10 an hour. Now, imagine that the workers really value workplace democracy like many socialists say they would—let’s say it gives them $4 an hour worth of satisfaction. A worker cooperative with full-fledged worker democracy would be able to essentially pay their workers $7 an hour, with $4 of invisible benefit from the workplace democracy and dignity granted by the cooperative’s ownership structure, thus giving the workers $11 in total monetary and non-monetary compensation. Such low real wages would allow the restaurant to undercut every other restaurant in the city on prices. The capitalist firms would be forced to adopt similar practices of offering democracy as a form of intangible benefits, and soon every restaurant in the town is a worker cooperative or at least is run like one. Of course, I’ve never heard of this happening, and you probably haven’t either. This is because I don’t think workers value workplace democracy as much as lefty polemicists think they do. Workers generally want to make more money and improve their living standards, and the fact that we don’t see companies that offer workplace democracy able to undercut traditional company salaries tells me that workers don’t value democratic structures as much as public intellectuals claim.

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Additionally, the goal of worker cooperatives are to maximize wages for workers, not profits. This lack of a need for profit allows them to pay workers more than their competitors. By this logic, you’d think if they are equally as productive as a traditional business they should outcompete and out innovate the traditional businesses, because they don’t have to return capital to shareholders.

And if worker cooperatives can out compete traditional companies, I see little issue with that! Higher productivity means cheaper products and better wages! However, in the real world it rarely plays out this neatly. I think the grave efficiency losses from mandating worker cooperatives would make this kind of proposal incredibly harmful if introduced, as well as not deliver on the welfare promises of workplace democracy made by left-wing intellectuals and advocates.

Upon arrival to Paris last week, my Dad and I approached a taxi driver at Charles de Gaulle. My dad said—with a perfect accent, “Hyatt Regency Paris Étoile,” to which the driver replied, “Fifty-three euros.” We agreed, and the driver proceeded to drive like he was F1 driver Fernando Alonso, running stop signs, braking late, speeding on the highway, and maintaining less than one second of following distance on the highway. After a few minutes of this madness, the economics of the situation dawned on me. With a pre-agreed price, the driver had no incentive to drive slow or take the long way to our hotel. The faster the driver could finish his route, the faster he could take the next person. This leads to more rides for people and lower prices, which are huge efficiency gains. This form of pre payment removes the moral hazard from the transaction. On the downside, the aggressive driving does increase the chance of a wreck, so not agreeing on the price beforehand might give you a smoother ride.

Another interesting interaction happened on our way back to the airport. As we pulled away from the hotel our driver said, “Only cash!” My dad and I didn’t have enough cash, so we said, “We can’t pay,” and tried to get out of the taxi. Our driver sped off without warning, and started driving us to the airport. We awkwardly sat in the back, wondering if he didn’t understand our English. Then we saw him pull out a card reader from under the passenger seat. That’s when it hit us. He didn’t want to pay the card fee. So next time you are asked to pay cash for a taxi, say you don’t have any and try to get out. You are likely to witness some magic, as the driver conjures a card reader out of thin air.

1. We should not just liberate Ukraine. This is a pretty obvious one to most people, but I’ll explain why. While watching Ukrainian cities get bombed to pieces is horrifying, the US should not send in troops to protect Ukraine. This would genuinely cause World War 3, with a NATO vs Russia war that would elevate this war to a whole new level. You’d have fighting not just in Ukraine, but in Belarus, Poland, and the Baltic states, and the death toll would likely creep into the millions even if the war stayed conventional.

2. We shouldn’t worry about a “domino theory” Some responses to the first opinion say something along the lines of, “If we let Putin get away with this, won’t he just attack another small country? And another?” To that I say, “Which ones?” This is a map of NATO:

   

   Obviously, Ukraine is not in NATO. Belarus is a Russian ally. Sweden and Finland aren’t part of NATO yet, but they just announced they will join. Moldova is genuinely the only other European country Russia could move into. If Russia attacked any other country in Europe we would defend them because they’re in NATO. And crucially, because they’re in NATO Russia probably won’t attack them because Putin and Russia know that the US will come to their aid.

3. Russia is afraid to fight NATO. The fact that Russia hasn’t invaded the Baltic states by taking NATO military support as an attack is telling. Despite Europe and America pouring arms into Ukraine, Russia hasn’t mobilized or attacked NATO positions, thus not taking military support as an act of war. The fact that Russia has turned to nuclear saber-rattling is also telling, because it shows that its best hope is to make NATO fear a war for fear of nuclear confrontation. This indicates Russia knows its capabilities in conventional war are highly limited. The invasion of Ukraine was clearly not part of a larger attack to provoke NATO.

4. The End of History was…right? When a global event hits breaking news, it is routine to see self-aggrandizing “intellectuals” mock Francis Fukuyama’s theory of “The End of History.” Most critics though have never even read The End of History’s thesis. Many think it means that nothing will happen ever again, and that banal events are all the world will come to know. The actual meaning however, is that while historical events will still happen—wars, coups, elections—the ideological struggle between capitalism and socialism has ended, and liberal democracy had triumphed as the final form of sustainable “good” government. In essence, ideological evolution was largely over. 9/11 and the election of Donald Trump were, despite histrionic accusations on Twitter, not disproving of The End of History. The war in Ukraine has revived the strength of the thesis by showing that the true struggle between powers will not be an axis of cultural or ideological struggle, but a struggle in creating capable states and preserving liberty and democracy. Ukraine is siding with NATO because Ukranians want to be rich and free, as have most former-Soviet nations. State capability is an issue on display during the war, and in general, Western governments have looked competent, accurate, and strong in the face of Russian aggression. This cuts against the anti-Western rhetoric in response to the West’s poor handling of the COVID-19 pandemic, and reaffirms the importance of the freedoms granted by liberal democracy. The war also highlights the importance of a strong and capable state in the survival of liberal democracy.

5. Poor countries will be some of the worst victims. Like I wrote in an earlier piece, the supply shortages created by the war and sanctions have caused food prices to rise. Because poorer people spend a higher percentage of their income on food compared to the median, rising food prices increase the inflation burden on the world’s poorer people, people so poor that many can barely afford enough calories to sustain their lives. Food shortages can very quickly cause riots and government collapse. Across Africa, where many governments are on precarious footing, this is likely to harm political and economic development.

6. The welcoming of Ukrainian migrants is good—but also telling. One fantastic part of European response to the invasion of Ukraine is the welcoming of Ukraine’s refugees. It is both the humanitarian thing to do and an economically strong play given Europe’s aging population—more workers can help pay for bloated European pensions. Hopefully many of the Ukrainians stay in Europe and hopefully the Europeans let them stay. However, the welcoming of Ukrainian refugees does reveal what many already knew about anti-migrant politicians. Namely, it’s mainly about race. Let me step back for a second to explain what I mean. During the 2015 migrant crisis, Syrian refugees were storming the Greek (and thus EU) border through Turkey to flee conflict in Syria. Angela Merkel declared, “Wir Schaffen Das,” basically saying “We can take this.” Germany let in over one million migrants, showing a great desire to improve the lives if people as well as an awareness to the impending demographic problems facing the continent. In the face of this, Hungary’s president Viktor Orban—the model leader of modern conservatives—shut Hungarian borders and wouldn’t let in Syrians. The purpose of closed borders to conservatives was to preserve Hungarian “culture” and “sovereignty” in the face of cosmopolitan neoliberals who seek to integrate all people. And yet, Hungary has (rightly) let in roughly 150,000 refugees from the war. Despite both being European, Hungarians and Ukrainians still speak a different language and are culturally different groups. Ultimately, one cannot deny that the race of the migrants plays an integral role in the border policies of nationalist leaders. This plays out across Europe—it’s telling that Italy is paying people to move to small towns bereft of people when there are hundreds of thousands of Africans who would move there for free.

In reaction to supply chain backlogs, it has become increasingly popular to grill free trade institutions such as the WTO for undermining “national sovereignty” and “destroying American jobs.” In Josh Hawley’s recent op-ed, he presents a plan that explains, “If companies want access to the American market for these critical and essential goods, then over 50 percent of the value of those goods they sell in America must be made in America.” The forceful re-shoring of American jobs and the massive government overreach required in such a plan would inevitably drive prices through the roof of all kinds of products, leaving Americans poorer than before.

Trump’s “national security” based trade war is one example of the problems with re-shoring American production. The Trump tariffs present three problems: they hurt American consumers, American exporters of related industries, and American exporters of industries that fall victim to retaliatory tariffs.

The harm to American consumers is obvious—consumers must either pay the tax (because a tariff is just a tax on an arbitrary foreign product) or they pay the more expensive “Made in America” price. This price is a very high price. According to empirical work about American protectionism (shown in the figure above), saving manufacturing jobs through tariffs has cost American consumers $500,000 per job. We see this play out in the sugar industry, where heavy sugar protection since the country’s founding have allowed sugar producers to extract rent-seeking profits and making sugar more expensive.

Retaliatory tariffs are also quite intuitive—countries that are upset at new tariffs respond in kind with their own tariffs, hurting American exporters of industries that are sometimes completely unrelated and arbitrary to the initial round of American tariffs, but who have now lost market share to uncompetitive foreign firms.

The final pernicious more nuanced damage of tariffs is its impact on American exporters and economic competitiveness. By creating a tariff, American companies have automatically and artificially lost ground to foreign firms that they compete with. This has been documented in the sugar industry tariffs, with multiple companies shifting candy production to Mexico and Canada due to the access to cheaper sugar. In a study by Aaron Flaaen and Justin Pierce, the Trump tariffs to “boost national security and manufacturing” actually decreased the number of US manufacturing jobs by 0.6% compared with the counterfactual. With manufacturing costs being sensitive to input costs, price hikes on products lower down the value chain raise the costs of the production of final products. When steel and aluminum tariffs make steel more expensive for American car makers, American cars become more expensive to produce, making Ford and GM lose competitive ground to Volkswagen and Toyota, companies which pay cheaper world market prices for steel and aluminum.

The ultimate issue with national security tariffs is that it opens the door to anti-competitive rent-seeking by domestic producers, who now have every incentive to lobby government officials to impose tariffs and insulate them from foreign competitors. Companies that succeed will no longer be those that can compete with efficiency. A companies’ ability to survive in the ruthless world of competition will be determined by its ability to earn a rubber stamp of “national security” approval from Congress, content to overcharge Americans and underdeliver on service from its protection.

This is obviously a bad argument. But while many people wouldn’t take such a histrionic accusation as valid, many on the left are still inclined to subscribe to notions that capitalists can just raise prices to increase their profits. This debate is relevant today, with many on the left suspecting that corporations are using the guise of inflation to raise prices drastically. While I don’t have time to respond to all the critiques of capitalism in the realm of pricing power, I want to show how viewing the economy as a competitive market and not as a black box of supply and demand can help readers see the problem with activist posts like the one I saw.

In basic microeconomics, the theory of the firm is one of the basic units of study. The concept of “perfect competition” is introduced as one of four generic models for a firm (with monopolistic competition, oligopoly, and monopoly being the other three.) In perfect competition, producers sell fungible products (corn farming is commonly used). In the perfect competition model there are a few implications. The first is that all producers charge the same price. This is intuitive, because if you’re a corn farmer and you charged more than the market price no one would buy your corn. Additionally, no one would charge under market price because producers are coming in and out so frequently that there is no way to “grab marketshare” or undercut your competitors.

Grocery stores fit more into the monopolistic competition framework, which is effectively a kind of perfect competition where products aren’t entirely fungible. Fast food is an easy example of monopolistic competition. Nearly all firms produce some kind of burger, but Mcdonald’s has their own monopoly on the Big Mac. Still, these firms are ruthlessly competitive and thus charge similar prices. If there are only a few fast food restaurants in a city and they start marking up their products, they’ll quickly find more fast food chains entering the market to undercut their overcharging of products.

So how does this relate to inner city stores? Well, suppose the corner store in an inner city neighborhood is charging twice as much as the suburban Walmart, and they are making a huge profit off it. Does the system just stay as is? Obviously not, and this is where the crucial point comes in. Many critics of capitalism have not fully been taught how capitalism works. Too often, pro capitalist individuals say, “Well the price is what it should be because of supply and demand.” And usually that’s not wrong, but it also doesn’t show the skeptic why capitalism is so effective.

While we can’t quantify everything, the theory about markets isn’t a complete black box of vaguely specified supply and demand. Playing out the scenario of a store will show us the benefits of competition and capitalism.

At the Safeway that I work, a standard 12.5oz bottle of Jarritos Mandarin goes for $1.29. Let’s say that the “exploitative” inner city store store sells them for $5—an insane price. What would happen in the area? The answer is someone would soon make their own store. They would charge $4 and steal a lot of business from the original entrepreneur. In response, the original store cuts the price to $3 to win back business. You can see the price is starting to come down due to competition. What if both stores kept their prices at $4? Another store would come in and undercut them. Now let’s say they keep bidding down their prices until each store charges roughly $2 per bottle, but then the undercutting stops. Aha! Oppression! The price is now $2 in the city but still only $1.29 at the suburban Safeway! The instagram post was right! Or was it?

If prices stabilize, this means the firms are operating at the standard rate of accounting profit, making no economic profit. Economic profit is different than accounting profit. Economic profit is the profit made minus the opportunity cost of the next best business. If an entrepreneur can make $6,000 in monthly profit owning a store that sells shoes, but starts making $10,000 selling Jarritos, they’ve made an economic profit of $4000. Ine of the key insights of perfect competition is that there is no long run economic profit. This is intuitive. If you can make $10,000 selling Jarritos but only $6,000 selling shoes, shoe sellers will convert to Jarritos venders until the prices are driven down to the point where the profits from selling shoes and Jarritos are the same.

The implications of this are that the stores selling Jarritos for $2 are up against the natural level of profit. Any more price cuts, and it would be more profitable to do other things. This would push vendors to stop selling Jarritos and move back to shoes or another industry (remember, selling shoes is just an arbitrary thing, it could be any industry.)

So, the difference in price from the suburbs and the inner city shops must be coming from the costs. Pretty quickly, the pieces start to fit together. An inner city neighborhood with high poverty might have higher crime rates. This would force the shop to spend more on security. Insurance against theft or damage is likely to be more expensive because of the location. The biggest reason for the cost disparity is that inner city areas don’t have the space for large stores, so vendors are forced to selling in small corner shops. These are far less efficient because they lose advantage of the economies of scale that places like Walmart have to make products cheap.

When imagining a market as a place with aggressive entrepreneurs looking to grab profit wherever an industry slackens into largesse and overcharging, it gives someone greater clarity about how capitalism works. This doesn’t apply to every industry, as intellectual property and branding make it more difficult to undercut or mimic a brand—Jordan 1s and Reeboks are both shoes, yet Jordan’s go for $200 while Reeboks sell for $35. But these rules are strong in industries where fungible products are being sold such as grocery stores, fast food, and agriculture.

It’s important to acknowledge the different economic situations faced by individuals and groups of people. Using capitalism as a scapegoat for the world’s problems is lazy, and an archetypical practice of slacktivist Instagram.

In response to the invasion of Ukraine, Noah Smith republished a blogpost of his from 2011 titled "The Tamerlane Principle” because of its relevance to the current situation. In the post, Noah Smith explains “an economically interventionist state is necessary for the preservation of human liberty.” Smith explains that his fundamental critique of libertarianism is based on “The Tamerlane Principle.”

This principle is based on the conquests of Timur the Lane, a conquerer in Asia who lived during the fourteenth century known as “Tamerlane.” He conquered any weaker power with brutality and force, and stands as an archetypal tyrant. As Smith’s article explains, “City after city, fortress after fortress, fell into the hands of the conquerors, ‘until there were no more enemies left in these provinces, and no one who did not obey Tamerlane.’”

This is where the central point of “The Tamerlane Principle” comes in:

The only thing that can protect people against the Tamerlanes of the world is a strong, economically prosperous, well-organized nation state. And the only way you get a strong, economically prosperous, well-organized nation state is to have a strong, centralized government that provides lots of public goods. Roads, ports, schools, technological R&D. You need these things because everything we know about economic development says that these things are absolutely essential for a nation to have a high GDP. And a high GDP is necessary for a nation to win wars with hypothetical Tamerlanes.

There is a valid point here. Public goods are necessary in the development of societies, such as the goods that Noah Smith mentions. State capacity is strongly associated with high GDP, which together are necessary and sufficient for high levels of human wellbeing. This fact is recognized by economists. Libertarian economists Alex Tabarrok and Tyler Cowen identify as state capacity libertarians. This means they believe the scope of government should be limited, but governments should be effective and capable in the specific tasks they do carry out.

Despite this, the principle is flawed on a practical level. While public goods are essential for America’s high GDP, most of our government’s spending is not on public goods at all. The vast majority is spent on welfare programs, social security, and healthcare. When examining federal spending for 2021, most of the public goods Noah Smith mentions get barely funded compared with transfer payments and healthcare. For example, income security (welfare) is 24% of the federal budget, Social Security is 17%, health (mostly medicaid money to states) is 12%, and medicare is an additional 10%. In total, 63% of federal spending goes to transfer payments and various health programs. Combined, this spending totals to $4.2 trillion. Now, this includes around $600 billion of temporary stimulus payments as part of COVID relief, but without those the total comes to $3.6 trillion. What is striking is that this equals roughly 18% of GDP, which is more than what the federal government collects in individual, corporate, and social security/medicare taxes combined.

The public goods that are so heavily emphasized in “The Tamerlane Principle” are much smaller portions of government spending. The US shells out roughly $450 billion on infrastructure across all levels of government, roughly 2.5% of GDP. The federal government spends just $35 billion on space science and technology (NASA), a number that could and probably should be much higher. Spending on k-12 education—another essential public good—comes in at just 3.1% of GDP (and is mainly funded by states). National defense is roughly 3% of GDP.

This is why I view “The Tamerlane Principle” as somewhat incompatible to the way the current US government runs. Near the end of the post, Noah Smith writes:

If you think this is a silly, alarmist statement, just observe how our recent neglect of public goods, along with our refusal to tax ourselves, is forcing us to make defense cuts(and will soon force us to make many more).

The reality is it is not our unwillingness to tax, but the federal government’s willingness to maintain sizable mandatory spending commitments, brought about by the general public’s sacrosanct treatment of certain transfer payment systems.

I am not in favor of completely eliminating the welfare programs I have mentioned for a few reasons I won’t get into here, but no matter your view it’s a moot point because of the argument “The Tamerlane Principle” attempts to make.

The reason “The Tamerlane Principle” is a poor argument is that government provision of significant and robust public goods can be maintained while taxing and spending can be significantly diminished. Paring back federal spending to a significant degree (over 50%, for example) could be done without damaging public goods because of the majority of government spending is associated with social programs not targeted to, necessary, or directly effective in raising GDP.

“The Tamerlane Principle” is indeed a solid argument against libertarians who believe in such a diminished state role that the government should only provide things like national defense and police. But this extreme libertarian view—that basic public goods such as roads should be privatized—is fringe, making arguing against ‘libertarianism’ with “The Tamerlane Principle” a straw man argument.

Both are very large exporters of grain. Russia and Ukraine together are responsible for approximately 25% of global wheat exports, and also about 25% of exported grain. That grain is no longer available to global markets, which has caused food prices to soar on global markets.

Wheat is a commodity with many substitutes—if wheat gets too expensive, people can always switch to rice or corn. This means that a major wheat shortage like the one we’re experiencing is causing consumers in all countries to switch to other sources of food. This limits the increase in wheat prices, but it causes the price surge to spill over into all similar substitutes of wheat as their respective demands increase. What this means is that food has become vastly more expensive in just two weeks.

This is highly relevant to Nigeria, a country where 40% of the population lives in extreme poverty ($1.90 a day). Nigeria’s woes are expressed by the reality of Engel Curve. The Engel Curve describes the relationship with income and consumption patterns of food.

People who make less money spend a higher percentage of their income on food. As a person’s income increases, their marginal propensity to consume food decreases. For a poor country like Nigeria, the implication is that a large portion of Nigerian’s income goes toward food. When food becomes more expensive, this puts an enormous squeeze on their financial situation.

This is also likely to hurt their economy from a consumption perspective. A salient analogy is the increase in gas prices in the US. Consumers are paying more for the same product at the pump, leaving less income to spend on a new car, movie tickets, eating out, etc, causing a decrease in overall output. Fortunately, gas doesn’t make up the majority of consumption, so the impact—while notable—isn’t likely to be crippling to the US.

In Nigeria, more income spent on food is leading to less consumption in other sectors of the economy. Nigerians have reportedly started to increase their purchases of unregulated medicines and herbal treatments as their budgets get squeezed by food price inflation. This both hurts conventional drug makers and distributers in Nigeria, and will likely lead to adverse medical outcomes for some.

The political implications are unclear at this stage, but African and Middle Eastern countries have experienced riots and massive political instability over inflation and food shortages. It doesn’t help that northern Nigeria—the place that is home to most farming in Nigeria—is increasingly losing what little shreds of stability it had due to increasing attacks from Boko Haram, among other groups. These attacks are likely to increase as the French pare back their military presence in the Sahel.

While much of the supply shock attention has been placed on oil and gas markets, Noah Smith recently drew attention to the Russian invasion’s impact on food markets. After reading the article I created a powerpoint presentation for my high school AP Comparative Government class about how the increase in food scarcity has impacted Nigeria, which I later learned was not needed for the class. I have decided to share the main points of my presentation in this article.