Category: Law
Thanksgiving and the Lessons of Political Economy
It’s been a while so time to re-up my 2004 post on thanksgiving and the lessons of political economy. Here it is with no indent:
It’s one of the ironies of American history that when the Pilgrims first arrived at Plymouth rock they promptly set about creating a communist society. Of course, they were soon starving to death.
Fortunately, “after much debate of things,” Governor William Bradford ended corn collectivism, decreeing that each family should keep the corn that it produced. In one of the most insightful statements of political economy ever penned, Bradford described the results of the new and old systems.
[Ending corn collectivism] had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.
The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients applauded by some of later times; that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labours and victuals, clothes, etc., with the meaner and younger sort, thought it some indignity and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. Upon the point all being to have alike, and all to do alike, they thought themselves in the like condition, and one as good as another; and so, if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them. And would have been worse if they had been men of another condition. Let none object this is men’s corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course fitter for them.
Among Bradford’s many insights it’s amazing that he saw so clearly how collectivism failed not only as an economic system but that even among godly men “it did at least much diminish and take off the mutual respects that should be preserved amongst them.” And it shocks me to my core when he writes that to make the collectivist system work would have required “great tyranny and oppression.” Can you imagine how much pain the twentieth century could have avoided if Bradford’s insights been more widely recognized?
Environmental “Justice” Recreates Redlining
It’s been said that the radical left often ends up duplicating the policies of the radical right, just under different names and justifications, e.g. separate but equal, scientific thinking is “white” thinking and so forth. Here’s another example from Salim Furth: the re-creation of redlining. Redlining was the practice of making it more difficult to access financial products such as mortgages by grading some neighborhoods as “hazardous” for investment. Either by design or result, redlining was often associated with minority populations.
Salim shows that Massachusetts has created a modern redlining system.
In Massachusetts, the context is that MEPA (its mini-NEPA) requires projects of a certain size to go through either a moderately-expensive or a quite-expensive process. Some types of projects automatically [require] the quite-expensive Environmental Impact Review process. The #maleg passed a 2021 “Environmental Justice” law, which defined certain people – oh euphemism treadmill! – as “Environmental Justice populations.”…So any housing (or other) project that requires a permit from a state agency and is within 1 mile of a “Environmental Justice population” now automatically triggers the expensive EIR process….How expensive? I was told it can run from $150k to $1m, and take 6 to 12 months. That’s a lot of additional delay in a state where delays are already extreme.
If there’s a, uh, silver lining here, it’s that “EJ Population” is defined so capaciously that it includes super-rich areas of Lexington (32% Asian, $206k median hh income), because all “minorities” are automatically disadvantaged. So it’s much less targeted to disinvested places than the original redlining. But the downside is that it’s *extremely well targeted* to discourage investment anywhere near transit or jobs. The non-EJ places are the sprawly exurbs. So maybe they *tried* to reinvent redlining, but all they really accomplished was reinventing subsidies for sprawl and raising housing costs along the way!
…This is a good, sobering reminder that for every 1 step forward by pro-housing advocacy, the blue states can manage 2 steps backward via wokery, proceduralism and anti-market ideas…
The Consequences of Limiting the Tax Deductibility of R&D
We study the tax payment and innovation consequences of limiting the tax deductibility of research and development (“R&D”) expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms’ fiscal year ends to test the effects of the R&D tax change in a difference-indifferences framework. We first document that affected U.S. firms’ cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy-relevant evidence about the significant real effects of limiting innovation tax incentives.
That is from a new paper by Mary Cowx, Rebecca Lester, and Michelle L. Nessa. Via the excellent Kevin Lewis.
More Randian villains
Gavin Newsom, California’s Democratic governor, announced on Monday that he would reinstate a tax credit for electric vehicle purchases if the incoming Trump Administration removes federal EV tax credits. But the state may not extend the credits to Tesla because of the company’s large market share. Tesla’s stock price fell 4% on Monday.
Here is more from The Information (gated). GPT comments.
Regulating Sausages
In the comments on Sunstein on DOGE many people argued that regulations were mostly about safety. Well, maybe. It’s best to think about this in the context of a real example. Here is a tiny bit of the Federal Meat Inspection Act regulating sausage production:
In the preparation of sausage, one of the following methods may be used:
Method No. 1. The meat shall be ground or chopped into pieces not exceeding three fourths of an inch in diameter. A dry-curing mixture containing not less than 3 1⁄3 pounds of salt to each hundredweight of the unstuffed sausage shall be thoroughly mixed with the ground or chopped meat. After being stuffed, sausage having a diameter not exceeding 3 1⁄2 inches, measured at the time of stuffing, shall be held in a drying room not less than 20 days at a temperature not lower than 45 °F., except that in sausage of the variety known as pepperoni, if in casings not exceeding 1 3⁄8 inches in diameter measured at the time of stuffing, the period of drying may be reduced to 15 days. In no case, however, shall the sausage be released from the drying room in less than 25 days from the time the curing materials are added, except that sausage of the variety known as pepperoni, if in casings not exceeding the size specified, may be released at the expiration of 20 days from the time the curing materials are added. Sausage in casings exceeding 3 1⁄2 inches, but not exceeding 4 inches, in diameter at the time of stuffing, shall be held in a drying room not less than 35 days at a temperature not lower than 45 °F., and in no case shall the sausage be released from the drying room in less than 40 days from the time the curing materials are added to the meat.
The act goes on like this for many, many pages. All to regulate sausages. Sausage making, once an artisan’s craft, has become a compliance exercise that perhaps only corporations can realistically manage. One can certainly see that regulations of this extensiveness lock-in production methods. Woe be to the person who wants to produce a thinner, fatter or less salty sausage let alone who tries to pioneer a new method of sausage making even if it tastes better or is safer. Is such prescriptive regulation the only way to maintain the safety of our sausages? Could not tort law, insurance, and a few simple rules substitute at lower cost and without stifling innovation?
Against federal usury laws for credit cards
That is the topic of my latest Bloomberg column, here is one excerpt:
Given that background, simple economics would indicate that an interest rate cap of 10% would mean that only people with strong credit ratings would be able to borrow money on their cards. Those with lower net wealth, or poorer payment histories, would be blocked from using credit cards for credit, because they would no longer be profitable to serve. They would also find it harder to get the other services of credit cards, such as rewards or payment conveniences. Keep in mind that the average borrowing rate on credit cards today is more than 20%.
Then there are the secondary consequences. If someone cannot borrow against his or her credit card, maybe payday loans will be the next option. Are they so much better? The logic of the Sanders-Trump proposal, pursued consistently, would choke off borrowing for people with high credit risk. Should the government close all the pawn shops as well? In the limiting case, there are loan sharks and other more desperate measures. Why give those businesses greater opportunities to expand?
It is a legitimate question, of course, whether so much consumer borrowing is productive and beneficial. Many people borrow money to engage in sports gambling, for example, a negative-sum and sometimes addictive pursuit. Yet productive uses of borrowing are legion. What if you are a recent immigrant who just got your first job, and want to buy your kids some sports equipment so they can play after school? Should the federal government be making this more difficult for you?
The right to borrow money is inextricably linked with other liberties. Sanders, for instance, is pro-choice when it comes to abortion. So why would he support restricting a woman’s right to borrow money to finance that abortion, or to borrow money to travel across state lines? The question is all the more pressing in a post Roe v. Wade world, where the costs of obtaining an abortion have been rising.
Ultimately, freedom of choice is intertwined with the freedom not only to spend money, but also to borrow it. And since money is a general medium of exchange, there is no way to stop only the “bad uses” of borrowed money. Thus there arises a fundamental question: Who is more qualified to make the final decisions about how best to use their financial resources, US citizens or their government?
Recommended.
Human Challenge Trials Aren’t Riskier than RCTs
Nature: Keller Scholl got out of quarantine 13 days ago, and he’s still not feeling 100%. The itchiness — far and away the worst symptom, he says — is mostly gone, and now the graduate student just feels exhausted. “I’m trying to get enough sleep,” he says.
Scholl’s symptoms might be uncomfortable, but they are also of his own making. That’s because he signed up to be a volunteer in the first human ‘challenge trial’ involving Zika virus, a mosquito-borne pathogen that can cause fever, pain and, in some cases, a brain-development problem in infants. In standard infectious-disease trials, researchers test drugs or vaccines on people who already have, or might catch, a disease. But in challenge trials, healthy people agree to become infected with a pathogen so that scientists can gather preliminary data on possible drugs and vaccines before bigger trials take place. “Accelerating a Zika vaccine by a month, a few days, that does a lot of good in the world,” says Scholl, who studies at Pardee RAND Graduate School in Santa Monica, California.
Keller spent time here at GMU working with Robin Hanson and hanging out with the lunch gang. Way to go Keller! Thank you!
The rest of the article uncritically repeats the usual claims from so-called “bioethicists” that human challenge trials (HCTs) are unethical because they involve risks. Of course, HCTs carry risks—so what? Randomized controlled trials (RCTs) also require that participants are exposed to risk. Indeed, for participants in the placebo arm of an RCT, the risks are identical. Furthermore, since RCTs require more participants to achieve statistical validity than HCTs, they must expose more people to harm and, as a result, it’s even possible that more participants are harmed in an RCT than an HCT. Thus, HCTs are not necessarily more risky to participants than RCTs and, of course, to the extent that they speed up results, they can save many lives and greatly reduce risk to everyone else in the the larger society.
In my talk, The Economic Way of Thinking in a Pandemic (starting around 10:52, though the entire presentation is worthwhile), I explain the real reason why bioethicists and physicians hesitate over human challenge trials: they fear feeling personally responsible if a participant is harmed. “We exposed this person to risk, and they died.” Well, yes. But my response is, it’s not about you! Set aside personal emotions and focus on what saves the most lives.
Hat tip: Alexander Berger who pointed to this story that I had missed earlier.
How DOGE is really going to work
In the last few days, Vivek has issued a series of tweets showing he understands how the regulatory process works. That is good, but in turn it means DOGE ambitions end up scaled down. Now there is a WSJ piece by Vivek and Elon. Here is what I take to be the critical passage:
DOGE will work with legal experts embedded in government agencies, aided by advanced technology, to apply these rulings to federal regulations enacted by such agencies. DOGE will present this list of regulations to President Trump, who can, by executive action, immediately pause the enforcement of those regulations and initiate the process for review and rescission.
I’m all for this (and more), but take a look at what we are getting here. Paused enforcement is better than nothing, but the rule doesn’t go away. In the meantime, private companies probably will continue to act as if the rule may continue, given limited time horizons in politics and indeed for DOGE itself. The process for “review and rescission” of course is extremely time-consuming and labor-intensive. Again, bring it on but just do not expect too much from this. Note further that “right-leaning regulatory troops” are quite thin on the ground, most of all in these agencies.
The column has numerous further points of interest, which perhaps I will take up in the future. Here is a very good indeed essential piece by Stuart Buck on government efficiency, Here again is my earlier Bloomberg column on priorities for DOGE. James Broughel has a sunset suggestion for regulations.
Bike lanes are not about bikes
The city [WDC] has built about 20 miles of bike lanes in the past five years, but despite that, the portion of D.C. residents who bike to work peaked in 2017 and has decreased each year since, falling from 5 percent to 3 percent. So who are these lanes for?
And:
Across town, on South Dakota Avenue NE, the fight is ongoing, and, as The Post’s Rachel Weiner reported, this squabble reveals an essential truth about bike lanes as weapons of civic planning: They are often installed not to satisfy the barely measurable trickle of residents who pedal to work but mainly to make car traffic worse enough that people will be discouraged from driving.
Here is the full piece by Marc Fisher. A rare sane take on an ultra-mood-affiliated topic. You may recall my earlier and unfulfilled request for a good cost-benefit analysis on bike lanes for American cities. Houston fortunately is moving away from this idea, and no “I love the Netherlands” is not an effective counter to the issues at stake here.
New Zealand’s Regulatory Standards Act
“To lift productivity and wages, ACT’s coalition agreement includes a commitment to pass a Regulatory Standards Act.
“The Bill will codify principles of good regulatory practice for existing and future regulations,” says Mr Seymour.
“It seeks to bring the same level of discipline to regulation that the Public Finance Act brings to public spending, with the Ministry for Regulation playing a role akin to that of Treasury.
“Some regulations operate differently in practice than they do in theory. To make regulators accountable to the New Zealanders they regulate, the Bill contains a recourse mechanism, by establishing a Regulatory Standards Board. The Board will assess complaints and challenges to regulations, issuing non-binding recommendations and public reports.
“If we raise the political cost of making bad laws by allowing New Zealanders to hold regulators accountable, the outcome will be better law-making, higher productivity, and higher wages.
I am pleased to, many years ago, have done preperatory work with Bryce Wilkinson on the ideas behind this legislation. I am told this is likely to pass, here is more on the bill.
The Impact of Divorce Laws on the Equilibrium in the Marriage Market
Does easier divorce affect who marries whom? I exploit time variation in the adoption of unilateral divorce across the United States and show that it increases assortative matching among newlyweds. To unravel the underlying mechanisms, I estimate a novel life-cycle equilibrium model of marriage, labor supply, consumption, and divorce under the baseline mutual consent divorce regime. By solving the model under unilateral divorce, I find that, consistent with the data, assortative matching increases. Effects are largely due to changes in choices when risk sharing and cooperation within marriage decrease, which highlights the importance of considering equilibrium effects when evaluating family policies.
That is from a new JPE piece by Ana Reynoso.
MR Podcast: Insurance!
In our new Marginal Revolution Podcast Tyler and I talk insurance, the history of insurance, the economics of insurance, the prospects for new types of insurance and more. Did you know that life insurance was once considered repugnant and was often illegal?
Tyler and I were both surprised how little good work there is on insurance. Here’s Tyler:
[Y]ou look at microeconomic theory. You feel all insurance should be a simple thing. There is risk aversion. You buy the contract. You look at the actual history. It’s very hard to make sense of it. The more I learned, I found the more questions I had. I didn’t fall into some, oh, now I understand what was happening kind of pattern. And the second is simply, I had been underrating Charles Ives. He was more than a great composer. Those are my takeaways.
Here’s one more bit:
COWEN: I want to get to the big, big question about insurance and see what you think. This is my worry. My worry is the agency problems behind insurance never have been solved.
….TABARROK: It is a peculiar market in the sense that all of your revenues come early.
COWEN: That’s right.
TABARROK: You’re selling all of this insurance, and everything is great because all of the money is coming in and your costs don’t come until much, much later. Your customers need to be convinced that you’re going to be around for a long time and are going to fulfill these implicit debts. Which is one reason insurance companies like to have big buildings with giant columns, like banks, to make them look solid. How do we guarantee that? I absolutely agree that’s a huge problem. I hate to say, but, there is a lot of insurance regulation which is precisely meant to deal with this problem.
COWEN: At the state level, you can choose the state. There’s reinsurance through Bermuda or other locales….[But] the problem is not just the company, it’s the person buying the insurance. You could have an insurance company. They advertise, we hold only T-bills and you know they’re safe. People don’t want that. It’s not what I would want. I want the riskier life insurance to get a higher return on the package.
The fact that it’s not for me, makes it really easy to spend for something that promises higher return. They don’t pay it all off, or oh, whatever, but I’ll be dead then, and you don’t think that explicitly. But your ability to monitor the true safety is maybe fairly weak. Maybe it’s efficient to have a bunch of these not pay off, and you get the higher yields on average. You don’t want full safety in most spheres of human existence. The real risk is that you die, right?
TABARROK: If anything, the insurance markets have becoming safer over time because as they get larger, law of large numbers does mean that the risk falls.
COWEN: Assets are more and more correlated over time, I would say.
TABARROK: Well, so we have reinsurance…
COWEN: It’s not that everyone’s going to die at once. The problem is the assets all go crazy at the same time. The world’s more globalized, the gains in the S&P 500 have been concentrated in seven or eight stocks lately. There’s a lot of worrying signs on the asset side, this higher correlation and the law of large numbers is working against you. Fewer publicly traded companies. A place like China is not really somewhere you’re going to be investing in. Maybe you would have thought that 15 years ago. It seems to me going in the wrong direction.
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How to make DOGE work
That is the topic of my latest Bloomberg column, here is one excerpt:
Another priority should be to deregulate medical trials. America is now in a golden age of medical discovery, with mRNA vaccines, anti-malaria vaccines, GLP-1 weight loss drugs and new treatments against cancer all showing great promise. AI may bring about still more advances.
Unfortunately, the US system of clinical trials remains a major obstacle to turning all this science into medicine. There are regulations concerning hospital protocols, the design of the trials, FDA requirements, the procedures of universities and institutional review boards, and the handling of data, among other barriers. America can have better and speedier approval procedures without lowering its standards.
Of all the tasks I’ve outlined, this is by far the most difficult, because it involves changes in so many different kinds of institutions. Yet it has one of the highest possible payoffs, because more treatments might be developed and made available if the clinical trial process weren’t so onerous. Reforming clinical trials should also appeal to older Americans, who are especially likely to vote and who think the most about their medical care. The goal should be an America where most people live to 90.
Many Republicans are very excited about DOGE. But its governance structure is undefined and untested. It does not have a natural home or an enduring constituency. It cannot engage in much favor-trading. Its ability to keep Trump’s attention and loyalty may prove limited. And it’s not clear that deregulation is a priority for many voters.
The more I read about DOGE from Vivek and Musk, the more I feel it needs a greater sense of prioritization.
Let’s reform taxation for expats
That is the topic of my latest Bloomberg column. We should tax on the basis of residency, not citizenship. Only Eritrea shares with us the practice of doing the latter. Here is one excerpt:
There is another possible gain, one which may have more appeal to the incoming administration than to economists like me. Trump and his advisers have long worried about the US trade deficit, and there has been talk of taxing foreign direct investment to weaken the dollar and boost US exports. Rather than discourage foreign investment in the US, why not do something more positive — and encourage US investment abroad?
If Americans leave and start new businesses around the world, using previously domestic capital, that too will bring downward pressure on the dollar. Thus could Trumpian ends be achieved by more constructive means. As a bonus, such a plan would not alienate foreign countries, as they tend to view a tax on FDI as a tax on their citizens.
This tax reform also might benefit US exports more directly. Say a US company wants to send an employee abroad to do market research and explore distribution channels for future sales. The US tax system should not turn this into a difficult ordeal.
Encouraging more Americans to work abroad also is a form of foreign aid, as many of them will grow or start businesses, creating jobs and tax revenue for the foreign country. And it is a form of foreign aid that benefits US citizens rather than costing them money. In fact, given the prowess of US business, it may be one of America’s most effective forms of foreign aid.
This one we should just do.
The 1970s Crime Wave
Tyler and I wrap up our series of podcasts on the 1970s with The 1970s Crime Wave. Here’s one bit:
TABARROK: …people think that mass incarceration is a peculiarly American phenomena, or that it came out of nowhere, or was due solely to racism. Michelle Alexander’s, The New Jim Crow, takes his view. In fact, the United States was not a mass incarceration society in the 1960s.
It became one in the 1980s and 1990s due to the crime wave of the 1970s. It was not simply due to racism. It is true Blacks do commit more crimes relative to their population than whites, but Blacks are also overrepresented as victims. The simple fact of the matter is that Black victims of crime, the majority group, demanded more incarceration of Black criminals. In 1973, the NAACP demanded that the government lengthen minimum prison terms for muggers, pushers, and first-degree murders.
The Black newspaper, the Amsterdam News, advocated mandatory life sentences for “the non-addict drug pusher of hard drugs.” The Black columnist, Carl Rowan, wrote that “locking up thugs is not vindictive.” Eric Holder, under Obama, he was the secretary of—
COWEN: Of something.
TABARROK: Yes, of something. He called for stop and frisk. Eric Holder called for stop and frisk. Back then, the criminal justice system was also called racist, but the racism that people were pointing to was that Black criminals were let back on the streets to terrorize Black victims, and that Black criminals were given sentences which were too light. That was the criticism back then. It was Black and white victims together who drove the punishment of criminals. I think this actually tells you about two falsehoods. First, the primary driver of mass imprisonment was not racism. It was violent crime.
Second, this also puts the lie, sometimes you hear from conservatives, to this idea that Black leaders don’t care about Black-on-Black crime. That’s a lie. Many Black leaders have been, and were, and are tough on crime. Now, it’s true, as crime began to fall in the 1990s, many Blacks and whites began to have misgivings about mass incarceration. Crime was a huge problem in the 1970s and 1980s, and it hit the United States like a brick. It seemed to come out of nowhere. You can’t blame people for seeking solutions, even if the solutions come with their own problems.
A lot of amazing stuff in this episode. Here’s our Marginal Revolution Podcast 1970s trilogy
- 1970s Inflation: The Economic Fever That Changed America
- Oil Shocks, Price Controls and War
- The 1970s Crime Wave
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