More on the US-EU trade deal
Here is my column from The Free Press:
But the real exercise, and critique of the tariffs, has to be a comparative one. After all, it is estimated that the tariffs will bring in between $1.5 trillion and $5.2 trillion of revenue over the next decade.
A good debate would be “the Trump tariffs” vs. “a more comprehensive VAT with lower rates and a broader base.” But, rightly or not, Democratic Party intellectuals likely would lose that debate in the eyes of the public and perhaps even in their own party. They probably would not lose it with professional economists, though in this regard I am an outlier in terms of the spending cuts I would favor.
Of course this helps explain the apparent paradox of why the stock market is these days up and not down. But many people do not wish to look too closely at that issue…
Taxes and tariffs
Here is an NBER paper from May that I do not think I covered:
We evaluate the aggregate effects of a change in tariffs on the US and world economies when tariff revenue is used to enact fiscal reform. Our model combines a standard international model of fiscal policy with taxes and a dynamic model of trade participation and tariffs that allows for uncertainty and transitions. We consider effects of permanent and temporary tariffs–with and without retaliation–when tariff revenue is used to reduce taxes on capital or labor or to subsidize investment. Compared to a lump sum redistribution, using tariff revenue for these reforms always boosts economic activity. Key to our analysis is the effect of trade dynamics on import substitution, such that tariff revenue after an increase in tariffs is higher in the short run than in the long run. When increasing the tariff by 20 percentage points, the revenue raised is largest when tariffs are temporary, unilateral, and used to subsidize investment, increasing by about 2 percent of GDP. This case also yields a large temporary increase in the trade balance. We find the welfare-maximizing unilateral tariff is close to 18 percent when tariff revenue is used to subsidize investment compared to 0 percent under a lump sum redistribution. We also find cutting capital taxes does not generate as much growth as introducing an investment subsidy since tariffs raise the price of investment substantially.
That is from
I’ll say it again: tariffs bad, bad, bad! But they are bad because they are a revenue grab, which will lead to consumption taxes being a new and major source of enhancement of government power and influence. Current policy may well evolve into some sick, distorted version of a VAT, with larger government to boot. But from a normal “Democratic Party, economics PhD view of government,” there is nothing so especially terrible about tariffs, at least not compared to other modes of taxation.
Berthold and Emanuel Lasker
A fun rabbit hole! Berthold was world chess champion Emanuel Lasker’s older brother, and also his first wife was Elsa Lasker-Schüler, the avant-garde German Jewish poet and playwright.
In the 1880s (!) he developed what later was called “Fischer Random” chess, Chess960, or now “freestyle chess,” as Magnus Carlsen has dubbed it. The opening arrangement of the pieces is randomized on the back rank, to make the game more interesting and also avoid the risks of excessive opening preparation and too many draws. He was prescient in this regard, though at the time chess was very far from having exhausted the possiblities for interesting openings that were not played out.
For a while he was one of the top ten chess players in the world, and he served as mentor to his brother Emanuel. Emanuel, in due time, became world chess champion, was an avid and excellent bridge and go player, invented a variant of checkers called “Lasca,” made significant contributions to mathematics, and was known for his work in Kantian philosophy.
Of all world chess champions, he is perhaps the one whose peers failed to give him much of a serious challenge. Until of course Capablanca beat him in 1921.
Thursday assorted links
1. “Here, we apply econometric causal inference techniques to 740,249 hours of human discourse from 360,445 YouTube academic talks and 771,591 conversational podcast episodes across multiple disciplines. We detect a measurable and abrupt increase in the use of words preferentially generated by ChatGPT, such as delve, comprehend, boast, swift, and meticulous, after its release.” I wonder if this is more true since this 2024 paper? Here is a related tweet thread. I do hear Alex using the word “delve” more.
2. New start-up with claims about embryo screening.
3. A report from “the fast-growing Canadian poor” (not my term).
4. Helsinki goes a full year without a traffic fatality.
5. Noam Brown on the new reasoning models and agnosticism.
6. Claims about Korean studying.
7. Dean Karlan on foreign aid and DOGE, with transcript. Very good piece, credit to Santi Ruiz.
The Australian Josh Szeps interviews me
Here is the video.
It was too hot to Spinoza to make an appearance, alas.
Say it ain’t so, Cecil…
New British cars may have to be fitted with breathalyser technology and black box-style recorders under Labour plans to align with EU vehicle safety laws.
The Government said copying European rules would drive down costs…
Here is the full Telegraph article. It seems more complicated than that, instead the car has to allow for the possibility of installation of such a device, without the use of the device, or the device, being required per se. So the black box is more concerning to me. It would mean that a complete monitoring of your whereabouts and driving behavior could become possible. There are Event Data Recorders in most newer US cars, but to date they are not used for very much. Perhaps the American ethos prevents slippery slope on this one?
These are not just extreme paranoid fears. When driving with a Spanish rental car this summer, the car issued an annoying, recurring beep every time it was being driven over the speed limit, even by small amounts. For one thing, the road synchs with the beeping device do not always accurately reflect the posted speed limits. For another, often the speed limit would suddenly fall by 20km, but of course you should decelerate rather than slamming on the brakes. For another, it can be dangerous to always drive below or even at the speed limit, especially when overtaking and I do mean sane rather than crazy overtaking.
So on these issues matters could indeed get much worse.
What does consulting do?
It is actually pretty useful:
This paper provides the first systematic and comprehensive empirical study of management and strategy consulting. We unveil the workings of this opaque industry by drawing on universal administrative business-to-business transaction data based on value-added tax links from Belgium (2002-2023). These data permit us to document the nature of consulting engagements, take-up patterns, and the effects on client firms. We document that consulting take-up is concentrated among large, high-labor-productivity firms. For TFP and profitability, we find a U-shaped pattern: both high and low performers hire consultants. New clients spend on average 3% of payroll on consulting, typically in episodic engagements lasting less than one year. Using difference-in-differences designs exploiting these sharp consulting events, we find positive effects on labor productivity of 3.6% over five years, driven by modest employment reductions alongside stable or growing revenue. Average wages rise by 2.7% with no decline in labor’s share of value added, suggesting productivity gains do not come at workers’ expense through rent-shifting. We do observe organizational restructuring with small increases in dismissal rates, and higher services procurement but reduced labor outsourcing. Our heterogeneity analysis reveals larger productivity gains for initially less productive firms, suggesting improvements in allocative efficiency. Our findings broadly align with ex-ante predictions from surveyed academic economists and consulting professionals, validating the productivity-enhancing view of consulting endorsed by most practitioners though only half of academics, while lending less support to a rent-shifting view favored by many economists.
That is from a new NBER working paper by
What should Evan Goldfine ask me about Bach?
Here is Evan with 37 theses about Bach. He now also has an all-Bach podcast, and he and I are recording tomorrow afternoon. So what should he ask me?
Indonesia monkey markets in everything
At a cliff-side temple on the tropical island of Bali, an unexpected group of criminals is running one of the world’s most sophisticated scam operations.
Every week, they steal dozens of phones, wallets and other valuables from tourists in broad daylight and exchange them for handsome rewards. It’s been going on for decades and nobody’s been able to stop it.
The culprits? Long-tailed macaques.
“The monkeys have taken over the temple,” said Jonathan Hammé, a tourist from London whose sunglasses were stolen by a monkey during a visit last year. “They’re running a scam.”
Here is more from the WSJ.
Wednesday assorted links
1. NYT on human challenge trials.
2. Notes on spite.
3. Henry Oliver on Rear Window.
4. ” Alexandria – a free open source Great Books Library where you can talk to an AI tutor (“Virgil”) in the margins of the books.”
5. Indonesia climbing the value chain.
6. Anton Howes podcast on Henry VIII and the industrial and commercial revolutions.
My 1988 Southeast Asia trip
This was by far the longest trip I ever have done, at about seven weeks, and I did it by myself. I had just taught one year at UC Irvine, and I thought time was ripe to learn something about the other side of the Pacific. I just set out and decided to do it, even though most assistant professors would have been better advised to stick to their work commitments. Here are a few points and lessons from that trip:
1. I started in late June, and I recall switching planes in Seoul, and on the TV seeing the final moments of game seven of the Lakers vs. the Pistons.
2. The heat and humidity did not bother me. The storms and rain in Taiwan did impress me, however.
3. So much tourism has become much worse. I was able to do a jungle walk from Chieng Mai, and felt that the hill tribes were genuinely surprised to encounter me. I enjoyed teaching the children there the song “Old McDonald had a farm.” I also saw Koh Samui before many other tourists started to go there.
3b. I will never, ever again ride on an elephant, especially when the elephant has the option of dragging its rider into contact with low-lying tree branches in the Thai jungle. One guy from the Israeli army was in our group, and he fell off the elephant, though he was unharmed. Rider beware. The beasts are truly very, very smart, and I could tell they were enjoying this game.
4. Unexpectedly, Taiwan was my favorite part of the trip. The bus ride down the east coast, from Suao to Hualien to this day remains one of the best trip segments I ever have taken. The marble gorges in the center of the country also were A+.
5. Hong Kong bored me more than I was expecting. I spent a good bit of time watching Wimbledon there (Boris Becker), and reading Boswell’s Life of Johnson, still a favorite book of mine.
6. Rather than spending a full week in Hong Kong, on a lark I took a four-day trip into mainland China, as it was then called. I am very glad I did that. This was package tourism, as was standard for a Chinese visit at the time, but I saw China as a very poor country, full of bicycles and stank. Guangzhou of course. What impressed me the most was the level of energy shown by the children when I visited a grade school.
7. I did the whole trip with a single backpack, which I now find unimaginable. That perhaps reflects some deterioration of my capabilities. Most of all, I need to carry around more books these days, plus a laptop and iPad and various chargers.
8. The food peaks in Thailand were incredible, but the median Thai dish in Thailand was worse than my median Thai meal in Orange County, CA at the time. A lot of the meats were stringy and somewhat unpleasant. My best meal was a crab curry in Bangkok. I never got sick from the food, though I think I was queasy for half in a day in Chieng Mai.
9. The people were extremely friendly and helpful to me everywhere.
10. Favorite part of Malaysia was Penang. Southern Thailand was pretty boring.
10. I ended the trip in Singapore. I quite enjoyed that, most of all the South Indian food places, and how they ladled out the chutneys, which were new to me. At the time, my motto on Singapore was “it is so boring it was interesting.” Now of course there are many more things to do and see there, and it is just outright interesting. I have since been back seven more times, reflecting my fondness for the place. I am very glad I saw it at a time closer to “the early days.”
Overall, the length of the trip felt a bit excessive to me. But where would I have wished to cut? That said, since then I have not done another trip for longer than a month.
One big benefit of traveling is the diversity of places you can see. But another big benefit — not to be neglected — is the diversity of eras you can sample. I am so, so glad I saw what those places were like in the late 1980s, China most of all and also the hill tribes. No history books can compensate for that.
So that is a very good reason to travel NOW. And to travel to places that are going to change a lot.
The British Navy snapped up so many of the good personnel
Circa WWI:
Before the War Office had awoken to the demands of modern war, the Admiralty had. Put in its orders, protected its workers from conscription and claimed a large share of national steel production. Of the 480,000 protected industrial workers in July 1915, 400,000 belonged to the Admiralty, which controlled three-quarters of the maritime industrial labor force and virtually all its skilled men. The Ministry of Munitions never succeeded in laying claim to any of them and had to rely heavily on unskilled women throughout the war…This generated much resentment among less fortunate, or less provident, ministries and ministers.
That is from the truly excellent The Price of Victory: A Naval History of Britain 1815-1945, by N.A.M. Rodger. Reading Rodger you get a sense of how frequently and how well he thinks about “how institutions actually work,” and how rarely so many other historians actually do that.
Tuesday assorted links
1. Chinese temples are being transformed into consumption opportunities, https://www.sixthtone.com/news/1017275
2. Andrew Batson visits India, https://andrewbatson.com/2025/07/27/india-and-the-invidious-comparison-with-china/
3. New paper on the economics of stablecoins, https://www.nber.org/papers/w34066#fromrss
4. Dan Wang on Breakneck, a new letter, https://danwang.co/breakneck/
5. What does YIMBY for Africa look like?, https://asteriskmag.com/issues/11/yes-in-my-bamako-yard
6. Ads in AI are OK, https://www.strangeloopcanon.com/p/yes-ads-are-inevitable-in-ai-its
7. It is not just selection, owning a small business makes people more conservative and more skeptical about government regulation, https://www.cambridge.org/core/journals/british-journal-of-political-science/article/politics-of-small-business-owners/492835B42B70C24F6613B352E4C3B83E
8. Long piece on Xi and Xi and power, https://jamestown.org/program/terminal-authority-assessing-the-ccps-emerging-crisis-of-political-succession/
A household expenditure approach to measuring AI progress
Often researchers focus on the capabilities of AI models, for instance what kinds of problems they might solve. Or how they might boost productivity growth rates. But a different question is to ask how they might lower cost of living for ordinary Americans. And while I am optimistic about the future prospects and powers of AI models, on that particular question I think progress will be slow, mostly though through no fault of the AIs.
If you consider a typical household budget, some of the major categories might be:
A. Rent and home purchase
B. Food
C. Health care
D. Education
Let us consider each in turn. Do note that in the longer run AI will do a lot to accelerate and advance science. But in the next five years, most of those advances may not be so visible or available. And so I will focus on some budgetary items in the short run:
A. When it comes to rent, a lot of the constraints are on the supply side. So even very powerful AI will not alleviate those problems. In fact strong AI could make it more profitable to live near other talented people, which could raise a lot of rents. Real wages for the talented would go up too, still I would not expect rents to fall per se.
Strong AI might make it easier to live say in Maine, which would involve a de facto lowering of rents, even if no single rental price falls. Again, maybe.
B. When it comes to food, in some long run AI will genetically engineer better and stronger crops, which in time will be cheaper. We will develop better methods of irrigation, better systems for trading land, better systems for predicting the weather and protecting against storms, and so on. Still, I observe that agricultural improvements (whether AI-rooted or not) can spread very slowly. A lot of rural Mexico still does not use tractors, for instance.
So I can see AI lowering the price of food in twenty years, but in the meantime a lot of real world, institutional, legal, and supply side constraints and bottlenecks will bind. In the short run, greater energy demands could well make food more expensive.
C. When it comes to health care, I expect all sorts of fabulous new discoveries. I am not sure how rapidly they will arrive, but at some point most Americans will die of old age, if they survive accidents, and of course driverless vehicles will limit some of those too. Imagine most people living to the age of 97, or something like that.
In terms of human welfare, that is a wonderful outcome. Still, there will be a lot more treatments, maybe some of them customized for you, as is the case with some of the new cancer treatments. Living to 97, your overall health care expenses probably will go up. It will be worth it, by far, but I cannot say this will alleviate cost of living concerns. It might even make them worse. Your total expenditures on health care are likely to rise.
D. When it comes to education, the highly motivated and curious already learn a lot more from AI and are more productive. (Much of those gains, though, translate into more leisure time at work, at least until institutions adjust more systematically.). I am not sure when AI will truly help to motivate the less motivated learners. But I expect not right away, and maybe not for a long time. That said, a good deal of education is much cheaper right now, and also more effective. But the kinds of learning associated with the lower school grades are not cheaper at all, and for the higher levels you still will have to pay for credentialing for the foreseeable future.
In sum, I think it will take a good while before AI significantly lowers the cost of living, at least for most people. We have a lot of other constraints in the system. So perhaps AI will not be that popular. So the AIs could be just tremendous in terms of their intrinsic quality (as I expect and indeed already is true), and yet living costs would not fall all that much, and could even go up.
Monday assorted links
1. For a start, so many people then are smoking and have PTSD.
2. Oops (music video).
3. Alpha school spreading? (NYT), https://www.nytimes.com/2025/07/27/us/politics/ai-alpha-school-austin-texas.html?smid=nytcore-ios-share&referringSource=articleShare
4. Dire results on inequality in South Africa, https://x.com/manysheva_k/status/1948833739230118077?s=61
5. The surprising durability of Africa’s colonial borders, https://www.noemamag.com/the-surprising-durability-of-africas-colonial-borders/
6. O3 on Edwardian naval fire clock computers, https://chatgpt.com/share/68865e84-7358-8010-8343-e99d050565a1