The Equilibrium Paradox: Somebody Has to Do It

image source

Before Ken Rogoff and Larry Summers achieve their laudable goal of doing in the $100 bill, it is worth taking a moment to contemplate the $100 bill on the sidewalk that the proverbial economist doesn’t bother to pick up because if it were real, she reasons that it would have already been picked up. 

Let me call the general category within which this proverb falls the equilibrium paradox. The equilibrium paradox appears in many guises. In asset markets, someone must be rewarded for getting asset prices in line, or they won’t get there. So the asset markets cannot be totally efficient. In product markets, supernormal profits must sometimes exist or there is nothing to induce firms to enter and drive profits toward zero. For the progress of technology, there must be moments when someone points out that doing something a certain way is inferior to some other way of doing it without being successfully brushed aside by the rejoinder “Oh, so you think we have been stupid in the way we have always done it.” And in public policy, any change must get past the objection “If that would work, don’t you think we would have already tried it?”

Martin Weitzman is the reason I am a macroeconomist. His book The Share Economy: Conquering Stagflationis still a must-read 30 years after its first publication. I like what he says on pages 45 and 46 about the equilibrium paradox in the policy realm:

A doctrine of extreme fundamentalist economic philosophy argues that every existing economic institution or custom in a market economy has a deep-seated rationale that must be fully understood before any corrective action can be taken. (Incidentally, after it is fully understood, according to the doctrine, typically no action will need to be taken.) Such followers of the “no free lunch” school will undoubtedly find the message of this book irrelevant–after all, if we have a wage system, they will argue, it must already be an optimal system in some sense or why else would we have it in the first place? There is an economists’ joke about economists who look at the world this way: “How many true believers in ‘efficient markets’ does it take to screw in a lightbulb?” None–because the market has already done it for them. 

Extremists of that faith act like the precocious but obsessive young surgeon who refuses to perform an appendectomy because he doesn’t understand why the appendix exists in the first place. The truth is that vestigial organs are present in economic systems as well as in biological ones–despite denials of the possibility based, in both cases, on vague or superficial generalities about Darwinian survival value. Whether or not the immature surgeon understands the ultimate reason for the human appendix is irrelevant, of course, compared to the far more compelling insight that a patient with acute appendicitis can be saved by a routine operation. 

Yet, the equilibrium reasoning that generates the equilibrium paradox has a great deal of force to it. It does make sense to wonder if a seeming opportunity might be too good to be true. It is important to look for whether there is some reason that others might have missed something. On the other hand, it is important to wonder if there haven’t already been many, many people who have looked at that seeming opportunity and rejected it after following exactly the investigative path one would oneself end up following if one proceeded further.    

Humility is typically a virtue, but it is not a virtue if it prevents one from seeing one’s duty. If somebody has to do it, it is important to see when the appropriate somebody is you.

The most obvious case where the somebody who has to do it is you is when it is the course of your own life that is at issue. I often marvel at how I can confidently predict that one of my students will succeed, knowing that they will work hard to ensure that success. But it is no good for that student to sit back and say “I know I will succeed, so I don’t have to work so hard.” Somebody has to do it, or it won’t happen–and that somebody is them. 

The Equilibrium Paradox and Donald Trump

I thought again about the equilibrium paradox on reading Daniel Drezner’s Washington Post essay “My very peculiar and speculative theory of why the GOP has not stopped Donald Trump.” He writes:

For the past few years, political scientists and pollsters have developed a number of explanations, indicators and theories for why some candidates do well and others don’t. The Party Decides, for example, has been the primary theory driving how political analysts have thought about presidential campaigns. It seemed to explain nomination fights of the recent past quite well.

When Trump announced that he was running last summer, his lack of establishment support and high unfavorables made it extremely easy to very smart people to confidently assert that he had almost no chance at securing the GOP nomination. …

So why has it been proved wrong? My hypothesis is that GOP decision-makers also read the same analyses and concluded that they did not need to do anything to stop Trump.

This is the equilibrium paradox. In effect, Daniel Drezner argues that equilibrium reasoning made everyone think someone else would cut Donald Trump down to size. But somebody has to do it, or it doesn’t get done. And in this case, it needed to be a critical mass of somebodies.

Having used this analysis of Donald’s success as an example of the equilibrium paradox, readers might suspect a negative attitude toward Donald Trump as a possible next president of the United States. Indeed, not being either a Republican or a Democrat and making an effort be generally nonpartisan politically (while very partisan on particular policies) does not prevent me from having opinions about candidates. I wrote a great deal about my second-cousin once-removed Mitt Romney during the last presidential election season (my favorite–and the one still worth reading is “The Magic of Etch-a-Sketch: A Supply-Side Liberal Fantasy”), and I wrote about Hillary Clinton in my 2014 post “Sliding Doors: Hillary vs. Barack.” 

Most importantly, I think choosing Donald Trump would be a giant leap in the dark, since on most substantive policy questions he basically says “trust me.” Occasionally, a leap in the dark leads to a wonderful landing. But not that often! In any case, I am enough of an optimist that I will hope for the best if Donald does in fact become President of the United States, but I will expect trouble. It is always possible to be surprised.

It is reasonably clear that Donald will do something about immigration policy that is contrary to the views I expressed in “‘The Hunger Games’ Is Hardly Our Future–It’s Already Here.” And his defense of the status quo in old age policies, without any modifications, is likely to be contrary to intergenerational fairness. But on the other hand, a Donald Trump presidency could be a real gift to comedians–as long as the Supreme Court prevents Donald from abrogating the 1st Amendment enough to sue the comedians for their characterizations of him.

The vein of discontent that Donald Trump has tapped into in a large segment of the American electorate is important to pay attention to. The kinds of economic policies I have discussed here on this blog could do quite a bit to make things better for those folks–except in areas where making them better off is at the expense of making someone else much, much worse off. But I believe there are enough Pareto improvements and near Pareto improvements to be had that there are many things that could be done to reduce this discontent without too much harm to other people. In writing this, I am thinking about what I wrote near the end of “Why Thinking about China is the Key to a Free World” on “Strengthening the case for freedom.” 

Resolving the equilibrium paradox requires each of us to figure out when something that needs to be done is a job that falls to me or a job that falls to you. Making a mistake on that score can leave the job undone.

Barack Obama: Football as the Best Sports Analogy for Politics

Wilson F1005R NCAA Leather Official Football

On Vox, Libby Nelson distilledJerry Seinfeld’s interview with Barack Obama. Here is the most interesting bit:

Seinfeld asks what sport politics is most like: “It’s probably most like football,” Obama said. “A lot of players. A lot of specialization. A lot of hitting. A lot of attrition. But then every once in awhile, you’ll see an opening, you hit the line, you get one yard, you try a play, you get sacked, now it’s like, third and 15… you have to punt a lot. But every once in awhile, you see a hole, and then there’s open field.”

I am reminded of the one time I used football as a political metaphor: 

• Preventing Recession-Fighting from Becoming a Political Football

The height of my actual football career was playing on a little league team back in 1974 with Kyle Wittingham, now head football coach for the University of Utah.

Brad DeLong on Managing China’s Peaceful Rise

image source

In his speech “The Grand Strategy of Rising Superpower Management”at the Munk School Trans-Pacific Partnership Conference Geopolitics Panel, Brad DeLong gives extremely important advice about managing China’s peaceful rise. In my own writing, I have focused on what the United States needs to do to keep itself strong in order to counterbalance China (1, 2) and the hope that India will rise as well to provide another counterbalance to China. Brad speaks directly to what must be done in the US relationship with China. He begins by reminding his listeners about the days when the US was a brash up-and-coming superpower, then makes the analogy to China. I can’t think of wiser words about managing the US relationship with China. Here is a taste: 

The mid-nineteenth century United States of America was a rising superpower, aggressively confident of its system. …

… successive British governments, investors, noblemen and noblewomen, merchants, and manufacturers strove mightily to bind the United States to Britain. Material common economic interests and mutual economic interdependence grew. Conflicting political ideal interests fell away. …

The binding of the rising superpower back in the nineteenth century had many policy and non-policy parts, not all of them conscious or deliberate. but whether it was Cecil Rhodes’s offering free acculturation at Oxford to young members of the American elite, British investors entrusting the House of Morgan with their money, the Dukes of Marlborough offering their sons to daughters of plutocrats Consuelo Vanderbilt and Jenny Jerome, it was effective—so effective that just when Nazi Germany attacked the Franco-British army in 1940 the Prime Minister of Britain was a man who, as a natural-born citizen of the United States, was also perfectly well-qualified to be the American president. …

Come 2047 and again in 2071 and in the years after 2075, the NATO powers are going to need China and China’s elite to believe and to have material and ideal interests broadly aligned with those of NATO. Thus there is nothing more dangerous for America’s future national security and nothing more destructive to America’s future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible. There is little more dangerous to the NATO powers than a Chinese elite whose values and interests are not broadly consonant with those of America. And there is nothing more conducive to aligning the interests of China and its elite with those of the NATO powers than a China which is (a) growing richer, (b) increasingly entranced by the economic and cultural successes of North Atlantic civilization, © treated with respect, and (d) incentivized to strive for victory not in negative-sum military power but in positive-sum economic and technological games of international relations.

Noah Smith: Hey, Republicans! Push Deregulation, Not Tax Cuts →

Note: On Facebook, Carmi Turchick offered these interesting references:

Graef, P., & Mehlkop, G. (2002). The impact of economic freedom on corruption: different patterns for rich and poor countries. European Journal of Political Economy, 19, 605-620

Kotera, G., Okada, K., & Samreth, S. (2012). Government size, democracy, and corruption: An empirical investigation. Economic Modelling, 29(6), 2340-2348.

A number of papers show the expected negative effects of increased corruption on growth and these papers show that lower levels of regulation in well developed economies corresponds with higher levels of corruption. This is not the same in developing economies, there more regulation corresponds with more corruption, the regulations are excuses for bribery. 

Expansionist India

I received a comment on my post “Will Narendra Modi’s Economic Reforms Put India on the Road to Being a Superpower?” that I thought was important enough that I should make it into a guest post. It had a lot of information that I had been unaware of. The author chose to remain anonymous. Here is what shehe wrote:

---

I am surfing the web and chanced upon this site, nice blog. Since you are opened to revision in response to cogent arguments, I am going to take a stab here. I think you have a fundamental misunderstanding of India. Yes I know, India is a democracy and all that. But this is a rather superficial understanding of the country. You might not have heard of India’s territorial disputes in the news, but this doesn’t mean India does not have them. In fact India (with the possible exception of Bangladesh, since I read that India and Bangladesh have reached an agreement to settle their borders this January) has not settled its borders with any of its neighbors. And worst, India has the dubious distinction of annexing every single of its neighbors land since it was created by the British in 1947. I know this may come as a shock to you, but here are the links you may want to check out:

1947 Annexation of Kashmir

http://www.counterpunch.org/2015/02/06/indias-shame/

http://thediplomat.com/2015/08/kashmirs-young-rebels/

1949 Annexation of Manipur

http://www.tehelka.com/manipurs-merger-with-india-was-a-forced-annexation/

1949 Annexation of Tripura

http://www.crescent-online.net/2009/09/the-myths-of-one-nation-and-one-hinduism-in-india-zawahir-siddique-2316-articles.html

1951 Annexation of South Tibet:

http://kanglaonline.com/2011/06/khathing-the-taking-of-tawang/

http://www.mainstreamweekly.net/article2582.html

1961 Annexation of Goa:

http://goa-invasion-1961.blogspot.in/2013/09/india-pirated-goa-china-is-regaining_16.html

1962 Annexation of Kalapani, Nepal:

http://www.eurasiareview.com/07032012-indian-hegemony-in-nepal-oped/

1962 Aggression against China:

http://gregoryclark.net/redif.html

http://asiapacific.anu.edu.au/news-events/podcasts/renewed-tension-indiachina-border-whos-blame

1971 Annexation of Turtuk, Pakistan:

http://www.openthemagazine.com/article/nation/suddenly-indian

1972 Annexation of Tin Bigha, Bangladesh

http://www.dhakatribune.com/op-ed/2014/feb/20/killing-fields

1975 Annexation of Sikkim (the whole country):

http://nepalitimes.com/issue/35/Nation/9621#.UohjPHQo6LA

http://www.amazon.com/Smash-Grab-Annexation-Sunanda-Datta-Ray/dp/9383260386

http://indiatoday.intoday.in/story/annexation-of-sikkim-by-india-was-not-legal-wangchuk-namgyal/1/391498.html

1983 (Aborted) Attempted invasion of Mauritius

http://thediplomat.com/2013/03/when-india-almost-invaded-mauritius/

1990 (Failed) Attempted annexation of Bhutan:

http://www.nytimes.com/1990/10/07/world/india-based-groups-seek-to-disrupt-bhutan.html

2006 Annexation of Duars, Bhutan:

http://wangchasangey.blogspot.in/2015/11/different-kind-of-anxieties-on.html#comment-form

2013 Annexation of Moreh, Myanmar

http://www.huffingtonpost.com/nehginpao-kipgen/easing-indiamyanmar-borde_b_4633040.html

If you talk to India’s neighbors, the words ‘bullying’, 'hegemonic’, 'meddling’, 'intrusive’…are probably some of the adjective its neighbors will use to describe India. A recent example is India rejection of Bhutan’s plan to build a highway in the southern part of Bhutan. An earlier example is India’s creation of the Tamil Tigers which plunged Sri Lanka into many years of civil war. You might not have aware of it, but India has a rather testy relations with almost all of its neighbors.

As to why India is such a misunderstood country, I pondered it for a long time and here are the reason I think may have something to do with it.

1) India was created under British auspices and hence British India relations have a sort of mentor protégé element to it. As such Britain is naturally protective of India and hence tacitly approved or at least tolerate India’s aggression. Britain, as one the key member of the West, set the tone of how India should be treated.

2) In the early years after India’s creation in 1947, Britain saw India as a kind of proxy that represents Britain’s interest in South Asia. As such India’s aggression was not viewed to be detrimental to the world’s order. In fact not many people know, after 1947 a lot of the British Raj officials stayed and served in the new government especially in the foreign policy department. Hence the expansionary instinct (in order words land grabbing) of the British Raj continues in the new country.

3) The subcontinent was colonized for two hundred years, when it gained independence, there were a lot of goodwill towards India all over the world, not less from Britain itself. The situation is not dissimilar to South Africa. Nehru was basically the Nelson Mandela of his time. India skillfully exploits this sentiment and assume a role of moral superiority in dealing with international affairs. Nehru is famous for his self-righteousness internationally. This makes it hard to criticize India.

4) India is a democracy. The notion that democracies are intrinsically peaceful is seldom challenged. In fact the belief is so strong that whatever India says are usually accepted as fact with no question asked. Take Sikkim as an example, fifteen years before Saddam Hussein annexed Kuwait, India annexed Sikkim. But how do India explain its act? According to India’s explanation, 97% of Sikkimese voted to join India, so India just spread its democracy to Sikkim by 'incorporating’ Sikkim into the India. I remembered when before the first gulf war when Saddam Hussein said he conducted an election and 99% of Iraqi voted for him, it was immediately dismissed as ridiculous (which it is). But when India says the same thing, it was accepted as fact.

5) Gandhi is a well-known icon of India. And Gandhi’s non-violence struggle against the British are well-known. This non-violence stereotype stick and people just assume that India is non-violence against its neighbors also. But of course nothing is further from the truth. Over seventy thousands Kashmiris disappeared without a trace in India occupied Kashmir with many show up in mass graves. A few years ago there was an uprising in Kashmir and in one demonstration Indian troops gunned down hundreds of Kashmiris. But the press seems not to be too bother about it. India gets away with murder, literally.

John Stuart Mill: Making the Government More Powerful than Necessary is Inimical to Freedom

Though often misattributed to Thomas Jefferson, this is actually a folk quotation that first appeared in print in 1952, but had been said by many people before that and by many after that. For example, Gerald Ford said it in a joint session of Congress on August 12, 1974.

Among all the critiques of too much government power, John Stuart Mill’s critique in paragraph 20 of On Liberty “Chapter V: Applications” is one of the most eloquent:

The third, and most cogent reason for restricting the interference of government, is the great evil of adding unnecessarily to its power. Every function superadded to those already exercised by the government, causes its influence over hopes and fears to be more widely diffused, and converts, more and more, the active and ambitious part of the public into hangers-on of the government, or of some party which aims at becoming the government. If the roads, the railways, the banks, the insurance offices, the great joint-stock companies, the universities, and the public charities, were all of them branches of the government; if, in addition, the municipal corporations and local boards, with all that now devolves on them, became departments of the central administration; if the employees of all these different enterprises were appointed and paid by the government, and looked to the government for every rise in life; not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name. And the evil would be greater, the more efficiently and scientifically the administrative machinery was constructed—the more skillful the arrangements for obtaining the best qualified hands and heads with which to work it. In England it has of late been proposed that all the members of the civil service of government should be selected by competitive examination, to obtain for those employments the most intelligent and instructed persons procurable; and much has been said and written for and against this proposal. One of the arguments most insisted on by its opponents, is that the occupation of a permanent official servant of the State does not hold out sufficient prospects of emolument and importance to attract the highest talents, which will always be able to find a more inviting career in the professions, or in the service of companies and other public bodies. One would not have been surprised if this argument had been used by the friends of the proposition, as an answer to its principal difficulty. Coming from the opponents it is strange enough. What is urged as an objection is the safety-valve of the proposed system. If indeed all the high talent of the country could be drawn into the service of the government, a proposal tending to bring about that result might well inspire uneasiness. If every part of the business of society which required organized concert, or large and comprehensive views, were in the hands of the government, and if government offices were universally filled by the ablest men, all the enlarged culture and practised intelligence in the country, except the purely speculative, would be concentrated in a numerous bureaucracy, to whom alone the rest of the community would look for all things: the multitude for direction and dictation in all they had to do; the able and aspiring for personal advancement. To be admitted into the ranks of this bureaucracy, and when admitted, to rise therein, would be the sole objects of ambition. Under this régime, not only is the outside public ill-qualified, for want of practical experience, to criticize or check the mode of operation of the bureaucracy, but even if the accidents of despotic or the natural working of popular institutions occasionally raise to the summit a ruler or rulers of reforming inclinations, no reform can be effected which is contrary to the interest of the bureaucracy. Such is the melancholy condition of the Russian empire, as shown in the accounts of those who have had sufficient opportunity of observation. The Czar himself is powerless against the bureaucratic body; he can send any one of them to Siberia, but he cannot govern without them, or against their will. On every decree of his they have a tacit veto, by merely refraining from carrying it into effect. In countries of more advanced civilization and of a more insurrectionary spirit, the public, accustomed to expect everything to be done for them by the State, or at least to do nothing for themselves without asking from the State not only leave to do it, but even how it is to be done, naturally hold the State responsible for all evil which befalls them, and when the evil exceeds their amount of patience, they rise against the government and make what is called a revolution; whereupon somebody else, with or without legitimate authority from the nation, vaults into the seat, issues his orders to the bureaucracy, and everything goes on much as it did before; the bureaucracy being unchanged, and nobody else being capable of taking their place.

(I modernized some of the spelling.) To try to unpack this paragraph, John Stuart Mill’s worries about overly strong government are

1. rent-seeking
2. people being focused on pleasing and influencing government officials, with all of the loss of freedom that entails
3. leaving too few talented organizers in the private sphere
4. absorbing the consciousness of people of ambition
5. rule by the civil service, with a lack of full democratic accountability, as one sees for example in Japan. 

This is a serious list of things well worth being concerned about. For a practical alternative to making the government every bigger and more powerful, while still getting the public things done we should get done, see my post “How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide.” 

Minority Opinions

image source

Today I am grateful to live in a country that is relatively tolerant of people being different and having different views. That is a good thing, because the idea that there is a majority on any substantial combination of views is probably an illusion in the sense that people are consciously or subconsciously tilting their views into conformity with what they perceive to be the norm, while underneath, they may be much less alike than they are pretending to be.  

Within economics, there is an enormous variety of different views. That is an important reason why it is easy to feel that one’s work is underappreciated. Even if one strives mightily to be the best possible economist, and feels one has succeeded, the definition of “best” is dramatically different from one economist to the next. So how one’s paper fares at a journal, for example, depends a lot on the referee lottery: how close the gradient describing “better” that is in the mind of one’s referee is to being in the same direction as the gradient describing “better” in one’s own mind. There is no one unified evaluation criterion. To most of us it seems there should be a uniform evaluation criterion–the standards each one of us personal holds. But that is not the way it is; people are just too different. This is especially true in macroeconomics. I hear that the gradient defining “better” is a bit more similar among different microeconomic theorists than it is among macroeconomists. But even among microeconomic theorists tastes differ greatly from one person to the next. 

When people have different views–especially when they have different views on things that they care about even more than economists care about their own take on the discipline–it is crucial to have a system that allows people with different views to coexist well. Freedom within a relatively minimalist framework to preserve order is one of the best ways to allow people with dramatically different views to coexist well. There are other things that can help, but allowing each person a bubble of freedom around herhimself is the most basic. In comparison to the other alternatives on offer, the United States of America does pretty well at that.

Cass Sunstein on the Rule of Law

image source

In the Obama administration, Cass Sunstein tried with mixed success to restrain the overgrowth of administrative law–an overgrowth that has long since seriously violated “rule of law” principles. In his Bloomberg View column “The Rule of Law Wins One for Tom Brady,” Cass explains what the “rule of law” means, with an application to football’s “Deflategate.” Here is the key paragraph, with numbering added to Cass’s words:

“Many people think that the concept has to do with democracy or liberty, or that it requires free markets. But it’s much narrower than that. Reduced to its essentials, the rule of law has just two components.

1. First, the law involved has to be clear and comprehensible, so that people can know, in advance, on what grounds they might be punished.
2. Second, people generally have a right to be heard, and that requires notice of the charges against them, and a fair opportunity to rebut those charges before an unbiased tribunal.”

John Stuart Mill Worries about Money Corrupting Advocacy and Facilitation

image source

John Stuart Mill is not always as libertarian as people think. After defending free speech vigorously in an earlier chapter, in paragraph 8 of On Liberty “Chapter V: Applications,” he defends the idea of driving vice underground if the people advocating and facilitating it are likely to be advocating and facilitating it primarily for the money. However, he makes an interesting distinction: if paid facilitation is necessary to enable people to pursue vice, it must be allowed. But if home-production is adequate to make the vice possible, then it is legitimate to make the market provision of facilitation illegal in order to drive it underground, where it will be less of a bad influence. Here is what he writes:

There is another question to which an answer must be found, consistent with the principles which have been laid down. In cases of personal conduct supposed to be blameable, but which respect for liberty precludes society from preventing or punishing, because the evil directly resulting falls wholly on the agent; what the agent is free to do, ought other persons to be equally free to counsel or instigate? This question is not free from difficulty. The case of a person who solicits another to do an act, is not strictly a case of self-regarding conduct. To give advice or offer inducements to any one, is a social act, and may, therefore, like actions in general which affect others, be supposed amenable to social control. But a little reflection corrects the first impression, by showing that if the case is not strictly within the definition of individual liberty, yet the reasons on which the principle of individual liberty is grounded, are applicable to it. If people must be allowed, in whatever concerns only themselves, to act as seems best to themselves at their own peril, they must equally be free to consult with one another about what is fit to be so done; to exchange opinions, and give and receive suggestions. Whatever it is permitted to do, it must be permitted to advise to do. The question is doubtful, only when the instigator derives a personal benefit from his advice; when he makes it his occupation, for subsistence or pecuniary gain, to promote what society and the State consider to be an evil. Then, indeed, a new element of complication is introduced; namely, the existence of classes of persons with an interest opposed to what is considered as the public weal, and whose mode of living is grounded on the counteraction of it. Ought this to be interfered with, or not? Fornication, for example, must be tolerated, and so must gambling; but should a person be free to be a pimp, or to keep a gambling-house? The case is one of those which lie on the exact boundary line between two principles, and it is not at once apparent to which of the two it properly belongs. There are arguments on both sides. On the side of toleration it may be said, that the fact of following anything as an occupation, and living or profiting by the practice of it, cannot make that criminal which would otherwise be admissible; that the act should either be consistently permitted or consistently prohibited; that if the principles which we have hitherto defended are true, society has no business, as society, to decide anything to be wrong which concerns only the individual; that it cannot go beyond dissuasion, and that one person should be as free to persuade, as another to dissuade. In opposition to this it may be contended, that although the public, or the State, are not warranted in authoritatively deciding, for purposes of repression or punishment, that such or such conduct affecting only the interests of the individual is good or bad, they are fully justified in assuming, if they regard it as bad, that its being so or not is at least a disputable question: That, this being supposed, they cannot be acting wrongly in endeavouring to exclude the influence of solicitations which are not disinterested, of instigators who cannot possibly be impartial—who have a direct personal interest on one side, and that side the one which the State believes to be wrong, and who confessedly promote it for personal objects only. There can surely, it may be urged, be nothing lost, no sacrifice of good, by so ordering matters that persons shall make their election, either wisely or foolishly, on their own prompting, as free as possible from the arts of persons who stimulate their inclinations for interested purposes of their own. Thus (it may be said) though the statutes respecting unlawful games are utterly indefensible—though all persons should be free to gamble in their own or each other’s houses, or in any place of meeting established by their own subscriptions, and open only to the members and their visitors—yet public gambling-houses should not be permitted. It is true that the prohibition is never effectual, and that, whatever amount of tyrannical power may be given to the police, gambling-houses can always be maintained under other pretences; but they may be compelled to conduct their operations with a certain degree of secrecy and mystery, so that nobody knows anything about them but those who seek them; and more than this, society ought not to aim at. There is considerable force in these arguments. I will not venture to decide whether they are sufficient to justify the moral anomaly of punishing the accessary, when the principal is (and must be) allowed to go free; of fining or imprisoning the procurer, but not the fornicator, the gambling-house keeper, but not the gambler. Still less ought the common operations of buying and selling to be interfered with on analogous grounds. Almost every article which is bought and sold may be used in excess, and the sellers have a pecuniary interest in encouraging that excess; but no argument can be founded on this, in favour, for instance, of the Maine Law; because the class of dealers in strong drinks, though interested in their abuse, are indispensably required for the sake of their legitimate use. The interest, however, of these dealers in promoting intemperance is a real evil, and justifies the State in imposing restrictions and requiring guarantees which, but for that justification, would be infringements of legitimate liberty.

John Stuart Mill’s emphasis in this passage on the corrupting influence of money makes me think about the debate over restrictions on campaign contributions. There, I do think that the distinction the Supreme Court has made between direct contributions to a candidate and “independent” expenditures makes some sense. But I might draw the line a little differently: as long as money will only help a candidate win an election, this seems important enough for free speech that it should probably be allowed. But if money is given into such direct control of the candidate that the candidate can turn it to personal use–including even moderate luxury on the campaign trail–the potential for corruption seems more severe and the argument for limiting things becomes greater. This is actually an argument for prohibiting campaign funds from being used for the candidate’s comfort rather than an argument for limiting contributions to a campaign fund. If such a restriction had the side-effect of discouraging people who like high levels of material comfort–that they can’t pay for out of their own pockets–from running for office, that might not be a bad thing.

Rick Perry’s New Look

Wikipedia article on Rick Perry

In my book, Ben Bernanke is a hero for making US monetary policy as good as it was in the aftermath of the Financial Crisis of late 2008 and during the Great Recession that followed. So I will not easily forgive Rick Perry for calling Ben’s actions “almost treacherous – or treasonous in my opinion” in a speech back in August, 2011. 

Yet, I was intrigued by Rick Perry’s emphases said in what the Wall Street Journal called “Perry’s Race Talk,” that happened on July 2, 2015. In addition to education reform and criminal justice reform to reduce the number of Americans in prison, Rick talked about the importance of allowing enough construction so that more people can live in our most attractive cities without subsidies:

There is a lot of talk in Washington about inequality. Income inequality. But there is a lot less talk about the inequality that arises from the high cost of everyday life,” Mr. Perry says. “In blue state coastal cities, you have these strict zoning laws, environmental regulations that have prevented builders from expanding the housing supply. And that may be great for the venture capitalist who wants to keep a nice view of San Francisco Bay, but it’s not so great for the single mother working two jobs in order to pay rent and still put food on the table for her kids.

I began to more fully realize the importance of this issue when I wrote “The Wrong Side of Cobb-Douglas: Matt Rognlie’s Smackdown of Thomas Piketty Gains Traction.” Here is a key paragraph from that post (which is well worth reading in its entirety):

Above, I wrote that developers should have to pay some of the costs of reductions in the quality of life nearby when higher density is unpleasant to live nearby–say by blocking out the sun. In an earlier version of this post, I actually made the serious mistake of saying they should pay for the reduction in “land values” from development nearby. But that is wrong by a cost-benefit test. Suppose a particular housing development is neutral for the quality of life nearby. Then it would still reduce the values of land nearby by providing more housing competition. This is not a social loss but rather a shift in wealth from landowners renters and future buyers of land, which reduces inequality. So a key conceptual issue for appropriate land policy is to not think of everything that reduces neighboring land values as a bad thing, but to distinguish when (and how much) it brings down land prices by reducing the quality of life nearby from when (and how much) it brings down land prices by providing additional housing competition.

To put a point on it, a simple political economy analysis indicates that, whatever the right amount of housing in an area from a cost-benefit point of few, the local homeowners and building owners will tend to want too little of it, since any extra housing provides competition for one of their assets. If they were to get their hands on some type of government machinery allowing them to hinder the construction of additional housing …

This is a problem in most advanced countries. For example, the Sveriges Riksbank, the central bank of Sweden, is quite concerned about financial stability. But a few inquiries indicated that this was primarily a concern about the skyrocketing prices of houses in Stockholm. Those prices have at least as much to do with barriers to the construction of new housing as they do with any monetary policy action.

In general, I think the issue of allowing enough construction so that people who are not rich have a chance to live in attractive cities is important enough that it should come to mind whenever one thinks about supply-side reforms. It is also an affront to human dignity to lean toward excluding people, as I discussed in “’Keep the Riffraff Out!’” and “The Message of Jesus for Non-Supernaturalists.”

Next Year’s Momentous Supreme Court Decision: Reining in Public Sector Unions?

immediate image source (ultimate source is the Wall Street Journal)

After its momentous decisions this year legalizing gay marriage throughout the US, saving Obamacare one more time, and preserving the option of nonpartisan redistricting, the Supreme Court of the United States said it will decide next year on whether public sector unions can legally force those who work for the government to pay union dues even if they disagree with what the union is doing. If the Supreme Court addresses this question squarely, this will be a momentous decision because public sector unions are where the action is in unionization. In the last three decades, unionization fell dramatically in the private sector, but rose dramatically in the public sector (see above). The most likely reason is that public sector unions can offer political foot-soldiers to garner votes for those of their bosses who behave themselves as well as labor peace, while private sector unions can only provide labor peace. Without the combination of a political weapon and a strike weapon, I don’t see how public sector unions could have been so much more successful than private unions. Thus, I think the challengers’ contention the public sector unions are inherently political is quite reasonable.

I am cheering for the challengers because I think a reduction in the power of public sector unions would be a big boon to the US economy. It is often very valuable to for the government to provide additional public goods. But it is not so great to pay a higher price for the same level of government-provided goods and services, simply because public sector unions have effectively brandished their two weapons: the political weapon and the strike weapon. Our concern for income distribution should always be focused on the lot of the very poorest.

image source

So whenever workers who are already typically paid more than comparable workers in the private sector have their wages go up further, it pushes the income distribution in the wrong way. And raising the cost of government employees who help the poor can easily lead to lower levels of service provided to the poor. This can often happen not only from price effects, but also from overall government budget pressures, as when overly generous delayed pension payments from a corrupt bargain between public sector unions and politicians that were never subjected to voter approval come due. And of course, government unions can often obstruct innovations (particularly in education) as well as draining limited government funds with wage demands that go beyond comparable private sector wages.

image source

(Of course, I myself am officially a government employee, since the University of Michigan is a state university, but my salary owes nothing to a union. And part of my salary comes ultimately from the federal government, in the form of research support; I earnestly try to produce enough valuable research to make that a good bargain.)

Nonpartisan Redistricting

From the Wikipedia article “Redistricting Commision”: 

Legislatures control redistricting in states marked yellow, while commissions control redistricting in states marked green. In states marked purple, non-partisan staff proposes the maps, but the state legislature votes on the proposal. States marked grey have only one representative.

Since at least August 19, 2012, in my post “Persuasion,” I have been an enthusiastic proponent of nonpartisan. There I wrote:

Many people may not realize the extent to which political polarization in the House of Representatives arises from partisan and pro-incumbent redistricting. When electoral districts are designed to be either safe Republican or safe Democratic districts, then the main fear for a politician seeking reelection is losing in the primary. That typically pulls members of the House of Representatives toward the extremes. Nonpartisan redistricting is a way to have more districts be competitive in the general election and so make those running for Congress worry more about the general election relative to how much they worry about the primary. I believe this would pull politicians toward to center and toward a greater willingness to work with those in the other party. Getting change to happen in this area will be hard, but there are groups already working on this. I believe the long-run value to our Republic of nonpartisan redistricting would be substantial.

In other words since most (all but about 40 of 435) Congressional districts are designed to be safe for one party or the other, those in Congress often take actions to please their bases rather than the center. That in turn tends to push Congress toward being more of an arena of posturing rather and less of an arena for deliberating about helpful legislation.  

So I am pleased that the Supreme Court upheld the constitutionality of redistricting commissions. (I am not sure the text of the Constitution fully supports this decision, so ideally it would be good to have a constitutional amendment declaring them legal–and going beyond that, requiring them for all states.)

I hope with the issue of constitutionality settled that more and more states adopt redistricting commissions. Though this may involve short-run sacrifices of reelection probabilities, I think this is actually even in the long-run interest of a party in control of a given state, since parties that get used to appealing to the center to a greater degree are likely to grow in influence.

Bring Turkey into the European Union

The day before the Turkish election on June 7, I posted a link to the Economist’s editorial “Why Turks Should Vote Kurd: It Is the Best Way of Stopping Their Country’s Drift Towards Autocracy,” with the note

True democracy can be lost. Turks need to protect theirs.

So it was good news indeed when Turks voted resoundingly to stop Recep Tayyip Erdogan’s hopes to create a powerful presidency for himself. 

I find myself again in full agreement with the Economist in its June 13th editorial “Sultan at Bay,” in which the editorial staff wrote:

The European Union, too, should do more. It was partly because Turkey’s membership talks, begun in 2005, seemed to go nowhere that Mr Erdogan drifted towards autocracy. Now that Turks have so thrillingly demonstrated their democratic credentials, the EU should revive the negotiations. There is also new hope that the age-old Cyprus problem might be solved (see article). Turkey matters hugely for the future of Europe. Resurrecting its aspirations for EU membership would be a fine reward for its admirable voters.

As I preached in my sermon the day of the Turkish election, “The Message of Jesus for Non-Supernaturalists,” including others in things that are working relatively well is one of the most powerful ways of making the world a better place. The European Union is far from perfect, but in a global context it counts as something that is working relatively well.   

Extending the blessings of the European Union into the Middle East seems especially valuable in trying to foster stability in this volatile area of the world. It is a bit optimistic, but it is not too much to hope that from now on, electoral competition in Turkey will make the Turkish government more pro-Kurd, which could be especially valuable in shifting the balance in the Middle East in a favorable direction.

Jaewon Lee: Lobbying vs. Bribery

Link to Jaewon Lee’s Facebook page

I am pleased to host this guest post by Jaewon Lee, a student in my “Monetary and Financial Theory” class. This is the 15th student guest post this semester. You can see the rest here. Jaewon’s thesis is this: 

Lobbying is an effective tool to reduce corruption and expand public involvement across economic and political sectors.

I found his contrast between the US and South Korea especially interesting. This post also reminds me of Matt Stambaugh’s very interesting proposal to restrict lobbying by having every meeting with a government official videotaped and posted on YouTube. Although at the end of the day, I felt this hampered free speech too much, it could be just right for convincing South Koreans to allow lobbying at all. 

Here is Jaewon:

---

In the United States, there are many complaints about the influence of lobbyists. Lobbying is defined as a legalized activity in which special interest groups hire professional advocates to argue for specific legislation in decision-making bodies (Wikipedia). Lobbying activity is controversial. Lobbying is often perceived to be a symptomatic problem that has corrupting influence. The concern is that only wealthy companies and interest group will be able to influence lawmakers and government officials. However, the proponents of lobbying argue that the process of lobbying provides legislators and other government officials with necessary information to convey the viewpoints of constituents.

In South Korea, lobbying is illegal. On March 3, 2015, South Korea’s legislative approved a new anti-corruption law that reinforces stricter regulations and restrictions on lobbying. The bill punishes government officials and lawmakers for accepting any form of funding from private interests even without conditions attached. It will be the a very restrictive set of regulations for blocking any form of lobbying or favor in the political area. Moreover, the legislation “sets a maximum penalty of up to three years in prison as well as 30 million won ($27,300) in fines for bribery involving public officials.” The public believes that corruption in business and government remains a major problem. So when I came to the U.S. from South Korea and found out that lobbying was legal, I was surprised. The very different perspectives on lobbying in the United States and South Korea raise the question of whether lobbying is an effective tool to reduce corruption.

Is it a good idea to make lobbying illegal? If lobbying were banned, bribery might take its place. According to Giovannoni’s academic article on “Lobbying, corruption and political influence,”lobbying and corruption are substitutes and lobbying is a more effective instrument for political influence than corruption, even in poorer, less developed countries. Lobbying often occurs in a system that enjoys high levels of political stability. Because lobbying and corruption are substitutes, eliminating lobbying to fix the unequal influence of money is not an optimal choice. What eliminating lobbying does is to drive efforts to influence the government underground. In countries where lobbying activity is illegal, legalizing lobbying might be seen as legalizing corruption. However, it is not right to equate lobbying with bribery. A responsive government needs to hear various viewpoints to inform the legislative process. In the absence of lobbying, the public would lose an importance channel to influence policies. As for concerns about the influence of wealth on politics, if lobbying is made illegal, policies might favor wealthier individuals even more because rich and powerful people can afford to spend money on even more costly bribery activities. As I have wrote in my previous blog post about big Korean conglomerates (the chaebols), these conglomerates that dominate the wide spectrum of Korean society are expanding to the point where they are too big to fail. A failure to democratize the business environment and an effort to ban lobbying minimizes the access and contribution of the public to the debate about what to do with these conglomerates.

Of course, lobbying has its own flaws it is unrestricted. Unlimited contributions from lobbyists, along with the preferential access that leads to may disrupt access by others to political influence and can tilt things toward wealthy groups even if not so badly as out-and-out bribery. To the extent democracy is defined by equal participation and influence by individuals, unregulated lobbying will not meet such goals. According to Mullin’s article in the Wall Street Journal, Comcast Corps engaged in massive lobbying activities when they heard that President Obama was preparing to call for tough new Internet regulation. The sight of companies exerting that kind of influence through lobbying is why most Koreans oppose lobbying. But strong enough restrictions may alleviate such concerns. If Korea legalized lobbying, it could address this issue by granting making lobbying easier for non-profit organizations than for profit-making corporations. For instance, by disallowing lobbying as a business expense in the tax code, the government can make it more expensive for for-profit firms to lobby. Moreover, transparency in the flow of money used in lobbying can minimize negative consequences. The rules could also require lobbyists to report all meetings with government officials.

Lobbying activities, under the right restrictions can improve the participation of the people in influencing government policy. Money previously spent on bribery can come into the light of lobbying reporting requirements. And in Korea, properly managed lobbying might provide a countervailing influence for the power of the big conglomerates–the chaebols.

Will Wilkinson: Belief and the Atomism Of Social Change →

For a long time, I have thought that changing the mind of the public is a more reliable way to bring change than political tactics. One of the best examples I know is the invention and focus on the idea of second-hand smoke, which ultimately transformed tobacco policy in the US. Another great example was the decision to emphasize gay marriage in the effort to advance gay rights–which highlighted the commonalities between gays and lesbians and everyone else. This was combined with the powerful influence of popular TV shows such as “Will and Grace” in getting people to see gays and lesbians in their full humanity.

The link above is to a nice essay by Will Wilkinson on this process of changing the minds of people in general as a way to effect social change.

Congyi Liu: America Should Join the Asian Infrastructure Investment Bank

I am pleased to host this guest post by Congyi Liu, a student in my“Monetary and Financial Theory” class. This is the 12th student guest post this semester. You can see the rest here.

I was impressed with how well Congyi persuaded me of something I didn’t want to be persuaded of, since my instinct, like that of the US government, is to wish the AIIB away as a tool of China’s power. Here is Congyi:

---

“’China is playing the long game effectively,’ said Cornell University economist Eswar Prasad, a former senior China official at the IMF. ‘They are in absolutely no rush. They know other countries will come to them.’”

This long game’s name is called AIIB (Asian Infrastructure Investment Bank), which was proposed by Beijing in 2013 initially. From the name, we can infer that this is an investing bank mainly for developing infrastructures in Asian countries. However, the members are not limited only for Asian countries, while British, Germany, France have announced to join in. Chinese government injected 49 percent of initial capital to the new bank. Till now, the collected funds have been almost prepared. “Meanwhile, the bank is on track to reach its target of $100 billion in registered capital, up from the $50 billion initially announced and that China is providing, according to Chinese and Western officials.” The start-up capital was only $10 billion of the World Bank, though we should consider about the time cost and inflation rate. But, without doubt, AIIB will definitely not only be an Asian but a worldly economic and financial center.

For such a big game, will America be a role paler? I think so whereas American government officials do not. Admittedly, at the first glance, we may consider that America should set tremendous barriers for China to form AIIB to firm its dominant status of the world’s economy. However, what is the really wise choice for America? Join in!

America’s join will provide a positive influence to form a valid and qualified regulation within AIIB. “Over the past year, however, the U.S. has urged its allies not to sign up for the bank, saying it would be an instrument of Beijing’s foreign policy and that without proper governing rules it could contribute to debt and corruption in borrowing nations.” America expressed that they did not frown to form AIIB, but could not nod to China’s regulatory policies. They worry that China is not qualified to govern and lead such a huge organization successfully. They doubt China is not capable to provide rules and regulations scientifically and efficiently. If America join AIIB, they can bring many matured rules and regulations by their various former experiences from leading the World Bank and IMF. After all, global economic chaos will also present negative effects on America. As AIIB has such a magnificent scale, if this organization expose essential problems, it is hard to image America will not suffer any harm.

Joining in AIIB also help America lessen China’s dominant power. “Another pending issue is how to structure the board of directors at the new bank. In the World Bank and the IMF, countries are represented by resident directors who are actively involved in the institutions and vote on new projects, programs and policies. Those representatives act as a check on management. The U.S. has been pushing the Chinese to adopt the same structure, according to those involved in the discussions, but Beijing is resisting. Instead, it wants the bank’s management, which will likely mean Chinese officials, to have a more powerful position.” Without America’s joining, China will absolutely be the sole dominator of AIIB. Then, China will readily and legitimately introduce some foreign policies that benefit itself. That is definitely what America did not want to see. “Still, Mr. Jin, interim chief of the new bank, said over the weekend that more than 35 countries will join as the bank’s founding members by the end of this month. South Korea and Australia, key U.S. allies in the Asia-Pacific region, are also expected to come on board by then, according to Chinese officials involved in the effort.” Moreover, as some America’s allies joined AIIB for their own profits, America could draw them on the same side to against China and balance the authority in the AIIB.

Till now, 46 countries have applied to join in AIIB and this number will continue goes up seemingly. China successively introduced “One Belt and One Road” and AIIB, the goal is so clear—forming and consolidating the Eurasian Economic Community. After setting down the deep fraternity between African countries, China is ready to lobby Europe with its strong power. If America cannot propose some effective strategy back, the day of China’s dominance will come soon. Actually, Joining AIIB is an indispensable move for America.

Congyi Liu

Virginia Postrel: The Glamour of Harmony

“… [the 1939 New York World’s Fair’s] merchandising sold both political planning and commercial products—and packaged both in glamour. It encouraged visitors to project themselves into a future not only of abundant goods and impressive technology but of effortless harmony and order. The fair did not acknowledge any contradiction between individual choices in the marketplace and ‘cooperative’ political planning. In its glamorous depictions of the future, all groups worked together in harmony, and individual and collective plans exactly coincided. By editing out conflicts, the fair heightened the allure of both its commercial exhibits and the politically directed future. It sold a world where everyone wanted the same thing, a world without trade-offs or losers.”

– Virgina Postrel, The Power of Glamour, pp. 191-192

Virginia Postrel: The Glamour of Terrorism

“Jihadi terrorism combines two ancient forms of glamour, the martial and the religious, with the modern allure of media celebrity. It promises to fulfill a host of desires: for purity and meaning, union with God, historical significance, attention and fame, a sense of belonging, even (posthumous) riches and beautiful women. The jihadi’s ultimate goal of a restored caliphate exemplifies the glamorous utopia, while the terrorist plot recalls the synchronization of heist movies, with a secret and intricate plan in which every team member is important and the goal is to outwit authorities and commit a crime. It’s not hard to imagine how appealing all this might be to a bored, alienated, and impressionable person.”

– Virgina Postrel, The Power of Glamour, pp. 220-221

Quartz #54—>The National Security Case for Raising the Gasoline Tax Right Now

Link to the Column on Quartz

Here is the full text of my 54th Quartz column, “America’s national security case for raising the gasoline tax right now," brought home to supplysideliberal.com. It was first published on December 5, 2014. Links to all my other columns can be found here.

At this writing, this is one of my most popular Quartz column ever. You can see a list of my most popular columns here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 5, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

---

The world is a dangerous place. The Russianannexation of the Crimea and invasion of Eastern Ukraine behind tissue-thin pretenses has set Europe on edge. Hard-line factions in Iran are working to sabotage talks to rein in Iran’s nuclear program, in counterpoint to dark words from Bret Stephens in the Wall Street Journal speculating that the Obama administration has accepted the inevitability of an Iranian atom bomb. Meanwhile the Islamic State has carved out large chunks of Iraq and Syria for its grim caliphate. And China, despite its growing economic problems amidst its periodic saber-rattling, is still on track to besting the US in the overall size of its economy, simply because it has four times as many people as the US. (While GDP per personmatters for many international comparison it is total GDP that matters most for military strength.)

To deal with the long-run danger of Chinese dominance, the best strategy is to bring more people into the American fold, as I wrote in “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?” But to shrink the more immediate threats from Russia, Iran, and ISIS down to size, there is another remedy: low prices for oil. Russia’s and Iran’s economies survive economic sanctions as well as they do because of oil revenue. Iran has plenty of money to enrich uranium and build missiles because of oil revenue. And the Islamic State earns millions of dollars a day from smuggled oil to help fund its murderous operations. Lowering the world price of oil puts less money in the hands of our enemies.

More subtly, lowering the world price of oil may help undercut or prevent dictators that may become our enemies in the near future. Economists and political scientists have noticed the “natural resource curse” in which many countries have dysfunctional politics because of natural resources. In a country without many natural resources, people are the main source of wealth; they have to be handled with care by rulers or they won’t produce much wealth. But in a country with oil, controlling the oil fields is enough to control most of the wealth of the country, and provides enough funds to buy off the people without giving them freedom, or to pay soldiers to intimidate the people.

Fortunately, the world price of oil has just fallen dramatically. On November 28, 2014, the Wall Street Journal began its editorial “The New Oil Order” with these words:

America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly $116 in June.

Here, the Journal appropriately gives much of the credit to the fracking boom in the US. In addition, the world’s economic troubles have reduced the demand for oil. And the rulers of Saudi Arabia realize (better than most Americans) that low oil prices are a way to weaken its rival Iran.

What can we do to keep the price of the oil that Russia, Iran and the Islamic State are selling as low as possible?

1. We can keep the fracking boom going

…and open the way for building the pipelines needed to ship oil and natural gas from point A to point B.

2. We can pour more money into solar power research

On November 19, I saw a talk by former Energy Secretary and Nobel Laureate Steven Chu at a (natural gas and oil-funded) conference in Doha, Qatar. He said solar power is close to being cheaper than conventional energy sources even without subsidies. (See also Ramez Naam’s Scientific American article “Smaller, cheaper, faster: Does Moore’s law apply to solar cells?”) Already, solar panels are cheap enough that installation costs are becoming the biggest issue. And there, German firms have figured out how to bring installation costs down far below installation costs in the US. Pushing solar power faster along the path it is already going could do a lot to keep oil demand from pushing prices up as the world economy improves.

3. We can increase gasoline and oil taxes and devote the proceeds to rebuilding our military to combat the new national security challenges that confront us

Gasoline and oil taxes raise the price of oil to consumers, but they also lower the price of oil to producers like Russia and Iran—especially if we convince our allies to raise their gasoline and fossil fuel taxes as well (which they might be willing to do, even though for many, their gasoline taxes are much higher than ours already). A basic principle from Economics 101 is that at the end of the day, taxes affect all players in a market, whoever officially pays them. For oil what that means is that although higher gasoline and oil taxes would involve some sacrifice from US consumers and US producers for the sake of national security, they are also taxes that, at the end of the day, are paid in a real way by US enemies.

One way to make an increase in gasoline and oil taxes easier to swallow is to phase those taxes in over time. Economic theory predicts that credible future gasoline and oil taxes will bring down the price of oil now. If everyone knows and believes gasoline and oil taxes will increase over time, the value of keeping oil in the ground to sell it in the future will be lower, so that oil is more likely to be put on the market now—at a lower price. And down the road, if solar power continues to get cheaper—and new ways to store power get cheaper, too—those gasoline and oil taxes in the future won’t be as painful as they would be now.

For too long, the US and many of its allies have either ignored the dangers of the world and turned inward, or have been drawn into fighting wars against dictators or terrorists funded by oil riches. One of the best ways for the US and its allies to support the valiant men and women who fight and die to defend the free world and to keep those parts of the world that are struggling towards freedom from descending into chaos is by taking high oil revenues out of our enemies’ war chests.

---

Technical Note: In light of the title, I should point out that, from an efficiency standpoint (without regard to politics), there may no justification for phasing in a gasoline tax increase slowly. If a national security externality were like an environmental externality, that externality should ideally be reflected in the tax rate right now. But the national security externality is actually a pecuniary externality, so it would take some nontrivial reasoning to figure out whether or not there is any justification for phasing a gasoline tax in. It is an optimal taxation problem in which money in the hands of certain parties counts negatively. 

Syndication: I am pleased that this column was syndicated here to another Atlantic Company website as well: Defense One. Here is a screen shot: