New York’s Data Center Self-Sabotage Gov. Kathy Hochul finds another way to hurt economic development in the state.

WSJ editorial.

The article discusses how it is regulation and not data centers that are driving up costs. 

Medicaid Spending Keeps Soaring So much for Democratic claims of onerous cuts. It’s up 10% so far this fiscal year.

WSJ editorial.

China’s Economy Is in Worse Shape Than You Think

The estimate of 4.3% GDP growth is below Beijing’s lowest projection—and it’s probably far too high

By Joseph C. Sternberg. Excerpts:

"Beijing’s statisticians on Wednesday said the gross domestic product grew 4.3% year-on-year in inflation-adjusted terms in the April through June quarter. China’s economic data are notoriously prone to fiddling for political purposes. And only this March, the Communist Party set a GDP growth target range of 4.5% to 5% for the year, its most pessimistic since the 1990s."

"Meanwhile there’s accumulating evidence that the country’s true GDP growth rate may be zero, or that the economy is in outright recession. Retail sales were a bright spot in the latest data, increasing 1% year-on-year in June, but looking across recent months this measure of domestic household consumption may be stuck in neutral. Measures of investment are in free fall: Fixed-asset investment has declined 5.7% year-to-date and real-estate investment is down 18%."

"Crude imports in July hit their lowest level in roughly a decade."

"refinery output also is declining"

"demand for energy within China . . . is dropping rapidly."

"it’s hard to find anyone who thinks any of this (more economic “stimulus”) would launch a durable economic recovery. One reason domestic consumption is dipping is that previous iterations of the consumption subsidy (a trade-in scheme, akin to the Obama-era “cash for clunkers” in the U.S., that rewards replacement of old items) pulled forward in time purchases that households would have made anyway, without setting in motion a Keynesian virtuous circle of new corporate investment to meet higher demand. As for public works, China has enough and Beijing’s more important fiscal priority remains bailing out heavily indebted local governments." 

"Domestic consumption is unlikely to revive until the real-estate market has found its bottom." 

Evicting Wall Street From the Housing Market Will Be Messy

Law restricting activities of big investors in residential real estate could mean less cash to build new supply

By Carol Ryan of The WSJ. Excerpts:

"Under the 21st Century ROAD to Housing Act . . . investors who already own more than 350 family homes can’t buy any more from the existing housing stock."

"Any landlords that don’t already have scale will find it hard to expand their portfolios through the exemptions."

"Big landlords are being nudged to pour cash into the build-to-rent sector instead. This means taking on development risk and constructing entire rental neighborhoods from scratch. The benefit of constructing whole rental communities in one area is that they are much cheaper to maintain than homes that are scattered across dispersed neighborhoods."

"Build-to-rent is exempt from restrictions under the new law. Like multifamily apartment buildings, it is an area of the housing market in which large investors can continue to operate freely."

"Anyone considering putting money into the housing market . . . must now weigh the risk that future administrations could tighten the rules further."

"Returns on build-to-rent investments don’t look high enough to compensate for the risk."

"Build-to-rent communities are hard—or impossible under some zoning rules—to sell off individually to consumers"

"Eight large institutional investors were net sellers of more than 3,000 homes in the second quarter of this year, a fivefold increase in net-selling activity from the same period of last year"

"some smaller investors plan to cash out permanently by selling homes to individual home buyers over time" 

Why the black market for marijuana is still flourishing in California

Letter to The WSJ. 

"It’s hardly a surprise that the black market for marijuana is still flourishing in California. The majority of the state’s crop has always been exported out of state, where sales remain illegal. So long as there remains a substantial out-of-state market where marijuana is illegal, black-market sales will persist.

Nevertheless, California Gov. Newsom was right to support legalization as a necessary first step to rolling back prohibition. Legalization has substantially reduced the scale of California’s illegal crop, which used to be measured in millions of plants eradicated per year.

Meanwhile, marijuana felonies have drastically dropped since legalization, more than 80,000 legal jobs have been created, and the state is raking in billions in tax revenue per year. It took decades to stamp out moonshining after alcohol prohibition was repealed, and the same will likely be true for marijuana.

Dale Gieringer

Director, California National Organization for Reform of Marijuana Laws" 

School Choice Succeeds in Arkansas

Education Freedom Accounts show results both academically and financially

By Tommy Schultz. He is CEO of the American Federation for Children. Excerpts:

"In the program’s second year, its students outperformed nearly 60% of students nationwide in math and English on standardized assessments."

"Education Freedom Accounts give priority to the core costs of a K-12 education—tuition, which accounts for 81% of spending, plus curriculum, supplies and testing—with sensible caps limiting transportation and extracurricular expenses to no more than 25% each of a single account. Parents know exactly what they can and can’t buy" 

The New York Times supports the use of standardized tests (like the ACT and SAT) in undergraduate admissions

See A Great University Undermines Its Mission. Excerpts:

"The committee concluded that scores on the SAT and ACT, the main standardized tests for college admissions, did a better job measuring student readiness for college than high school grades. High test scores were particularly good at finding talented students from low-income families and underrepresented minority groups. For these reasons, the committee recommended the system continue to require applicants to submit SAT or ACT scores.

The university’s leaders disregarded the report."

"the University of California began refusing to accept SAT or ACT scores, even from students who wanted to submit them"

"University leaders wrongly claimed that it would make admissions fairer and more equitable."

"The results have been terrible. At the University of California, San Diego, a faculty group last year reported “a steep decline in the academic preparation” among entering students. Last fall, for example, nearly 12 percent of first-year U.C.S.D. undergraduates were not qualified to take precalculus, a low-level class — up from only 0.5 percent in 2020." 

"Reading and writing skills have also deteriorated, and professors say they must spend time teaching elementary skills."

"the declines in preparedness among University of California students are larger than the regression elsewhere"

"[they] have essentially randomized aspects of the admissions process, admitting unprepared students while rejecting many who could thrive there."

"Even Janet Napolitano, who was the university president in 2020 and recommended a test-blind policy then, now favors its reversal."

"The critics claim that the two tests are biased and therefore a cause of inequities. The evidence indicates otherwise. Raj Chetty, a Harvard University economist, points out that other tests show similarly large economic and racial gaps. One example is the NAEP, a test of elementary and middle-school students for which almost nobody studies. This pattern suggests that SAT tutoring, which critics often blame for score gaps, plays only a limited role, perhaps because free tutoring is available from Khan Academy and elsewhere."

"The SAT and ACT . . . do appear to measure preparedness for highly selective colleges better than almost any other indicator, research shows." 

"Some other parts of applications — like student essays, extracurricular activities and teacher recommendations — are, in fact, biased toward affluent students."

"In 1970 only 7 percent of college freshmen nationwide had a high-school grade average of A or higher; today the share is roughly 40 percent."

"Any fair, reliable test would have results resembling those of the SAT and ACT."

"the test scores are especially useful at identifying strong students from low-income communities. When such a student receives even a pretty good score, it can be a sign of high potential." 

Lifting the SS payroll tax cap would close only about 30% of the long-term cash-flow deficit while raising some top marginal labor income tax rates to over 60%

Letter to The New York Times.

"Senators Bernie Moreno and Elizabeth Warren present lifting the payroll tax cap as a “common-sense” solution to Social Security’s financing challenges. But eliminating the cap would close only about 30 percent of the program’s long-term cash-flow deficit.

It would also sharply raise top marginal labor income tax rates to punitive levels, pushing top rates across many states over 60 percent (58 percent in Ohio and 62 percent in Massachusetts, the senators’ home states). Social Security was created to prevent poverty in old age, not to guarantee affluent retiree households six-figure annual benefits.

Rather than continually raising taxes to sustain ever-larger promises, policymakers should rethink the program’s purpose. A flatter benefit focused on basic retirement security, combined with greater reliance on private savings, would be more cost-effective and sustainable.

Romina Boccia
Washington
The writer is the director of budget and entitlement policy at the Cato Institute."

Fewer employers are screening job candidates for marijuana because it would make it tougher to find qualified candidates

See More U.S. Workers Are Testing Positive for Marijuana. Fewer Employers Are Concerned. As cannabis use grows, employers are rethinking pre-hire screens to avoid recruiting challenges by Celia Bernhardt of The WSJ. Excerpts:

"And fewer employers are screening job candidates for marijuana use at all, in part because it would make it tougher to find enough qualified candidates, said Todd Logsdon, a partner at employment law firm Fisher Phillips. 

“I’ve had other employers tell me, ‘If I test for that, I’m not gonna have any applicants,’” Logsdon said. “They’re being very choosy about which role they test for.”

In a 2024 survey of nearly 1,000 employers, the law firm found about half didn’t test for cannabis in the pre-hire process, often for that reason. Among those that did test, 44% said they faced recruiting challenges and nearly a quarter said they were considering loosening the policy.     

Citigroup and many of its Wall Street peers dropped the pre-hire test over the past decade. Retailers like AutoNation and Home Depot have done away with it for most positions as well. Amazon stopped testing for marijuana for most applicants in 2021." 

This article shows how competitive labor markets are. If employers had the power they could keep screening for marijuana use. 

Food Stamps Don’t Help National Wellbeing

No matter how much the government might give poor families, the official measure of poverty would remain unchanged

Letter to The WSJ. 

"Crystal FitzSimons’s letter “Fewer People on Food Stamps Isn’t Good News” (June 23) claims that SNAP lifts 3.6 million out of poverty. That is impossible because the Census Bureau refuses to count $1.6 trillion in government subsidies, including SNAP, as income. No matter how much the government might give poor families, the official measure of poverty would remain unchanged.

Ms. FitzSimons’s claim uses an experimental poverty measure that counts SNAP as income while omitting $1 trillion in other welfare, arbitrarily subtracts some spending, and capriciously raises the income defining poverty thresholds.

The $100 billion spent on SNAP in 2024 added nothing to national well-being. It merely redistributed it. If left with the original earners, it would either be consumed with the same effects, or it would be saved and invested, creating additional well-being, which it wouldn’t with SNAP.

While decrying the minimal adjustments to SNAP to prevent abuse, Ms. FitzSimons ignores the 60% of food stamp recipients who aren’t poor, even by the overstated Census metric.

John Early

Adjunct scholar, Cato Institute" 

Who Should Control Education?

By Alex Tokarev, Kristin Tokarev, Mitchell Ashley. From The Independent Institute.

"President Jimmy Carter wanted the support of the government teachers’ unions. So, during his reelection campaign, he created the U.S. Department of Education, promising it would improve America’s schools.

Has it?

After more than 45 years, billions of taxpayer dollars, and endless regulations under a bloated and ever-growing education bureaucracy, American students are falling behind many of their peers around the world. Reading scores have declined. Math scores are down. Parents are frustrated. Teachers complain they’re drowning in paperwork.

If the Department of Education hasn’t solved these problems after nearly half a century, why assume giving it more power will?

President Donald Trump says it won’t. His proposal to eliminate the department and return authority to states and ultimately to parents triggered predictable outrage. Critics warn it would “destroy public education.”

That’s nonsense.

The Department of Education doesn’t run America’s schools. States and local districts already do. Closing the department wouldn’t close schools. It would simply reduce Washington’s role. Education Secretary Linda McMahon recently spoke on the necessity to return control to parents and local public servants so that they can better serve the children. And that’s how it should be. Parents know their children better than bureaucrats in Washington ever will. Local communities understand their own needs. A rural district in Wyoming faces different challenges than schools in Chicago. Yet federal rules often treat them as if they’re the same. One-size-fits-all rarely fits anyone well.

Supporters of federal oversight say Washington provides accountability. Accountability to whom? Parents can vote out ineffective school board members. They can attend meetings. They can confront local officials. They can’t fire federal bureaucrats. The farther decisions move from families, the less influence families have.

Then there’s competition. Economist Milton Friedman argued that taxpayers can fund education without having the government manage it. Instead of subsidizing school systems, fund students. Let parents choose among public, charter, private, or other options. Competition changes behavior.

Restaurants compete for patrons. Stores try their best to satisfy shoppers. Businesses that disappoint customers lose them. Most public schools don’t face that pressure. Students are assigned largely by ZIP code. If the local school performs poorly, many parents have only two options: pay private tuition or move.

That’s not much of a choice.

School choice creates incentives that bureaucracy can’t. When families can leave, schools have stronger reasons to improve. Charter schools, education savings accounts, tax-credit scholarships, and vouchers all give parents leverage they otherwise lack.

None of this guarantees success. Eliminating the Department of Education won’t magically improve schools, and states are perfectly capable of making bad decisions. The real reform isn’t simply moving power from Washington to state capitals. It’s moving power to families. Critics raise a fair concern: poorer states and communities may struggle to fund education at the same level as wealthier ones.

But Washington hasn’t solved that problem either. Despite decades of federal involvement, achievement gaps remain stubbornly wide. More bureaucracy has not produced equal outcomes. A better approach is to expand opportunity. Wealthy families already exercise school choice by buying homes in better districts or paying private tuition. Friedman’s ideas and Trump’s policies extend that freedom to families with fewer resources.

The real question isn’t whether we’re “for” or “against” public education. It’s who education is supposed to serve. If a public school offers the best service, parents will choose it. If another institution better meets a child’s needs, parents should be free to choose that instead. Students should not be assigned to schools. Schools should compete for students.

For decades, Washington promised better results. The results are in. It’s time to trust the American parents."

The Hidden Problem With Democrats' $25 Minimum Wage Bill

The legislation would eliminate the tip credit for restaurant workers and other tipped employees—which has not worked out well in the past

By C. Jarrett Dieterle and Kurt Huffman in Reason.

"Across the country, progressive politicians continue to push for an ever-higher minimum wage. Whether it's New York City's Mamdani-led pursuit of $30 by '30, L.A.'s $30 "Olympic wage" for hotel workers, or Seattle's minimum wage for the gig economy, it's clear that the fight to raise the minimum is only escalating. Now, congressional Democrats have waded into the debate with the introduction of the Living Wage for All Act, spearheaded by Sen. Chris Murphy (D–Conn.).

Sen. Murphy's bill has garnered attention for seeking to increase the federal minimum wage from its current level at $7.25 per hour all the way up to a $25 per hour minimum in the coming years. (This would act as a wage floor, applying in any state that had a lower wage than the feds). But overlooked in the reporting so far is another key feature of the bill: its elimination of the tip credit for restaurant workers and other tipped employees.

The tip credit is what allows waiters and others in the hospitality industry to be paid below the statutory minimum wage on a per-hour basis, so long as their tips make up the difference. This legal structure has been a staple of the restaurant industry for over 60 years, and it often allows waiters to make far more than the minimum wage. (The national median wage for waiters is $27 per hour, according to the National Restaurant Association.)

Scrapping the tip credit could hurt both restaurants and tipped workers, especially when considering how customer behavior, tax law, and restaurant payroll decisions interact. First, phasing out the credit has the potential effect of reducing the amount that customers tip in the long term, as our culture could move away from the expectation of diners leaving voluntary gratuities.

Census Bureau research has found that when the tipped minimum wage rises, the employer-paid portion of server compensation rises, but tip income declines by a similar percentage, ultimately offsetting the increase. Tipping has become a cultural norm, which may make it a sticky habit that endures for a time, but in our era of tipping fatigue, it's also possible diners may welcome the opportunity to ditch tips.

A second consideration is how restaurants will likely respond to the tip credit's elimination. In our state-level "laboratories of democracy," we already can find a clue. Kurt Huffman, a co-author of this piece, owns and operates numerous restaurants in Portland, Oregon. Oregon has prohibited a tip credit for years, which has given Huffman firsthand experience with how restaurateurs often react to the tip credit's elimination.

Many restaurants in environments without the tip credit add mandatory service fees to checks or implement what are known as auto-gratuity policies. For instance, the restaurant may automatically tack on an 18–20 percent charge to a customer's bill. While this "auto-grat" ensures that a tip is paid by the customer, the catch is that the tip is no longer the property of the waiter but of the restaurant. The restaurant then usually keeps a portion of that tip (often anywhere from 25–40 percent) before distributing the balance to the employee.

That distinction matters. A mandatory service charge is not a tip under IRS rules. It is employer revenue; if the restaurant later distributes some or all of it to employees, the distributed amount is treated as wages.

This can, and often does, reduce the employee's take-home pay. If a restaurant keeps part of the mandatory service charge, as is customary, the worker may receive less than he or she would have received from a voluntary tip on the same check. The math gets worse under the new qualified-tips deduction, popularly known as "No Taxes on Tips." Qualified voluntary tips may be deductible from federal taxable income up to $25,000, but mandatory service charges and auto-gratuities are not eligible for such treatment.

Restaurants often adopt these service charges because they are afraid to raise menu prices. That is understandable, but it misses how guests process restaurant prices. As Huffman has observed from over thirty years in the restaurant business, customers do not treat all dollars on a check the same.

There are "menu dollars" and "manners dollars." A $20 salad plus a voluntary $4 tip does not feel like a $24 salad. The $20 is the price of the product; the $4 is a customary social payment. But a $20 salad with a mandatory 20 percent service charge collapses those categories. The restaurant has not avoided a price increase. It has moved the price increase to the bottom of the check, where it can feel like a surprise or a confiscated choice.

A final reality is that the locales that have recently moved to ax the tip credit have quickly come to regret the decision. Washington, D.C., prominently scrapped its tip credit in a 2022 ballot initiative. Under the new rules, the statutory minimum wage for waiters would rise from $5.35 per hour to the District's full minimum wage—a seemingly clear win for servers at first blush.

But on cue, D.C. experienced a nearly 5 percent decline in full-service restaurant and bar jobs in the wake of the tip credit's elimination. Tipped worker earnings reportedly dropped by $11.8 million, as many restaurants cut hours and waiters saw reduced tips. The results were so grim that the progressive D.C. Council voted to backtrack on the tip credit's full elimination.

In Chicago, which abolished the tip credit in 2023, 89 percent of restaurants have raised menu prices as a result of the higher labor costs, while 79 percent have cut worker hours, according to the Illinois Restaurant Association. As a result, Chicago's liberal city council also attempted to partially reverse course from its tip credit repeal. The effort was ultimately vetoed by Mayor Brandon Johnson.

The Living Wage for All Act purports to help workers by eliminating the tip credit. But real-world experience shows that the idea is undercooked. Higher mandated wages can look good on a pay stub while still leaving workers worse off if they lose tips, lose hours, or receive service-charge wages instead of qualified voluntary gratuities.

Policymakers should not weaken a compensation model that can deliver more after-tax dollars to workers. And restaurants that face higher wage mandates should not answer with mandatory fees that irritate customers and tax employees more heavily. The goal should be simple: Maximize the share of each guest dollar that reaches workers as after-tax take-home pay.

The best way to do that is to preserve the tip credit system and send the Living Wage for All Act back to the kitchen."

The Macroeconomic Effects of Tariffs

From Jeffrey Miron. 

"A recent study points out the dearth of historical research on the macroeconomic effects of tariffs, especially as a tool to analyze modern-day tariffs. The study

addressed this challenge by analyzing all major US tariff rate changes from 1840 to 2024. Drawing on historical research, congressional records, and statutes, we identified … 21 tariff rate changes, which we used to examine the macroeconomic effects of tariffs.

These examples

reveal that increasing tariff rates contracted the US economy. … tariff increases did not shield domestic industry despite their protective intent. Additionally, trade contracted markedly.

While tariffs might be expected to cause large price increases,

[o]verall prices increased [only] by around 0.5 percent at their peak. … [T]he simultaneous presence of supply-side inflationary pressures and demand-side pressures that slowed price growth could explain the muted overall change in aggregate prices.

To sum up, the

research indicates that tariff increases reduce domestic output and trade. While tariffs may protect some domestic industries, they ultimately reduce aggregate output, manufacturing activity, and the global competitiveness of US goods."

Marian Tupy disabuses American socialists of their economically ignorant belief that successful entrepreneurs steal their wealth from workers and consumers

From Cafe Hayek.

"Marian Tupy disabuses American socialists of their economically ignorant belief that successful entrepreneurs steal their wealth from workers and consumers. Two slices:

Early economists, such as James Mill and David Ricardo, theorized that the physical labor exerted to create a good is the real measure of its value. Karl Marx took the concept to its extreme: If labor creates all value, then profit must require unpaid labor, making every employer an expropriator and every fortune a crime.

Then, beginning in 1871, economists countered the labor theory of value. Carl Menger, William Stanley Jevons and Léon Walras demonstrated independently that value resides not in hours of toil but in the judgments of consumers. Writing a 500-page novel takes the same amount of physical labor as typing out 500 pages of the word “banana” repeatedly. Only the novel commands a price. Value is created whenever someone rearranges the world into a shape that others want. It is measured by the buyer, not the worker.

Entrepreneurs are the arrangers. Economist Israel Kirzner argued that entrepreneurship is alertness — noticing an opportunity that nobody else has found. The entrepreneur sees that resources combined in a certain way and priced at a certain level can be recombined into something consumers will value even more. The gap between the two is profit. Nothing is taken from workers, who are paid the wage they agree to, or from customers, who buy the product only when the purchase leaves them better off.

…..

A movement that believes wealth is stolen will tax it, cap it and make everyone poorer. Ideas drive growth, and ideas come from people who can profit from them. A world that cherishes entrepreneurs will enjoy advanced chips and revolutionary cures. A world that punishes its innovators will at least enjoy plenty of slogans."

Ridley: Why our public sector is so unproductive

The enduring lessons of Jevons and Baumol

By Matt Ridley. 

"Agatha Christie once remarked that she had never expected to grow rich enough to own a car or poor enough not to have servants. The reason this strikes us as bizarre today boils down to two names that you hear invoked a lot in the tech industry: Jevons and Baumol. One is shorthand for the expansion of products or professions with rising efficiency, the other for the shrinkage of products or professions with stagnant efficiency.

There’s a pleasing chronological symmetry between these twin ideas: William Stanley Jevons coined the Jevons paradox in 1865; William Jack Baumol described Baumol’s cost disease exactly a century later in 1965.

In his pessimistic book The Coal Question, Jevons forecast peak coal and consequent economic catastrophe for Britain. Energy efficiency would not come to our rescue, he argued. “It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth.” If you double the efficiency of steam engines, you do not burn less coal, you install more engines and soon burn more coal. He was wrong about peak coal, as later pessimists were wrong about peak oil and peak gas, but right about increased consumption.

A modern example: light-emitting diodes (LEDs) use about 15 per cent as much electricity as incandescent bulbs. Do we save that difference? Only at first, then we install more lights, leave them on longer and build things like the Las Vegas Sphere, which uses as much electricity as 50,000 homes.

The tech guru Erik Brynjolfsson points out that: “Pilots became dramatically more productive and effective once jets were invented. Did that mean that we didn’t need as many pilots because now pilots could do more work? No. We consumers decided that we’re going to fly more than ever. So now a lot more people fly. And there’s more demand for pilots.” If supersonic commercial flight eventually takes off, the falling cost of pilots and flight attendants (in the air for less time) will only increase demand for air travel.

The price of a single transistor has fallen over half a century from about $1 to less than a millionth of a cent. So we not only buy more of them but spend more on them. As Alex Danco puts it: “At $1 per transistor, computers made sense for military calculations and corporate payroll. At a thousandth of a cent, they made sense for word processing and databases. At a millionth of a cent, they made sense in thermostats and greeting cards. At a billionth of a cent, we embed them in disposable shipping tags that transmit their location once and are thrown away.”

Drones, space launches and genome sequencing are being Jevonised right now. As for artificial intelligence, “Jevons paradox strikes again,” says Satya Nadella of Microsoft. “As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of.” Aaron Levie of Box says: “Jevons paradox is coming to knowledge work. By making it far cheaper to take on any type of task that we can possibly imagine, we’re ultimately going to be doing far more.” AI will mean more jobs for lawyers, not fewer.

Marc Andreessen muses that it is “like the Daniel Day Lewis character in There Will Be Blood worrying ‘but what will happen, once we’ve satiated their demand for whale blubber?!’ Well, it turns out that there were a lot more useful ways to consume energy than burning the midnight oil.” As the cost of AI tokens collapses, we will use vastly more of them for vastly more uses.

But here’s where the Baumol twin comes in. For every industry that experiences efficiency gains, there’s another that does not. And this latter industry inevitably becomes less affordable. Baumol’s first example was string quartets: violinists are no more productive but you have to pay them more to prevent them running off to become software engineers. The productive industries drive up the labour costs in the rest of the economy. Andreessen jokes that if a hole appears in the wall of your house in California these days it is probably cheaper to glue a flat-screen television over it than hire a builder to repair it: a Jevons-deflated cost beats a Baumol-inflated one.

The big question of our age is can AI drag Baumol-shaded industries back into the sunlight of Jevons? Can it make things like healthcare, education, or government switch from rising costs to falling costs?

I fear not in the case of government because of a bureaucratic version of the Jevons and Baumol effects. As Cyril Northcote Parkinson put it in an article in the Economist in 1955: “Politicians and taxpayers have assumed (with occasional phases of doubt) that a rising total in the number of civil servants must reflect a growing volume of work to be done. Cynics, in questioning this belief, have imagined that the multiplication of officials must have left some of them idle or all of them able to work for shorter hours. But this is a matter in which faith and doubt seem equally misplaced.”

Since 1997, the British public sector has seen zero increase in productivity. That is to say, the average civil servant generates about the same output today as he did three decades ago. Think about this for a second. Thirty years ago fax machines were high-tech, the internet was in its infancy, emails were new, Wi-Fi was scarce, mobile phones were voice-only. How is it remotely possible to be no more productive today than then?

We know the answer. Each email is now copied to a dozen people, each report is pasted and copied till it is twice as long, each Zoom call has five times as many attendees, each mobile call is followed up by three times as many WhatsApp messages – and each day at the desk is interrupted by a training session on transgender anticolonial sustainability. That’s a sort of Jevons-Baumol effect: a Jevol?

Keeping Cool: The Air Conditioner That Changed America

The time price of air conditioning has fallen 98.6 percent since 1952. That ordinary luxury saves lives every summer.

By Gale L. Pooley. He teaches US economic history at Utah Tech University. Excerpt:

"One of the great triumphs of entrepreneurial capitalism is how quickly air conditioning traveled the familiar path from luxury to necessity. What began as an expensive convenience for a tiny elite became, within a generation, affordable to ordinary families. The market did not merely invent comfort — it democratized it.

In their report Time Well Spent: The Declining Real Cost of Living in America, Michael Cox and Richard Alm found that a 5,500-BTU air-conditioning unit cost about $350 in 1952. At the time, entry-level workers earned roughly 83 cents an hour, putting the time price at 422 hours.

Today, Walmart sells a far more efficient 6,000 BTU air-conditioning unit (with a remote control) for only $115. The current hourly wage for limited-service restaurant workers is around $19 an hour, putting the time price at six hours.

The time price has decreased by 98.6 percent. For the time it took US workers to earn the money to buy one unit in 1952, they get 70 today.

If air conditioning saves lives, why don’t more Europeans have it?

Europe’s electricity prices are typically much higher than the US, driven by higher taxes, network costs, renewable energy mandates, and energy import dependence. Customers in the US pay 17 to 19 cents per kilowatt-hour (kWh) compared to 25 to 32 cents in Europe. This means Europeans pay roughly 47 to 68 percent more per kWh than US customers.

Americans are also much richer than Europeans. According to World Bank data, American gross domestic product (GDP) per capita was $84,809 in 2024, while the European Union’s was 25 percent lower at $63,585. That $21,224 difference could buy a lot of comfortable cooling.

The European Union also prioritizes environmental targets over human comfort by imposing strict regulations for heating and cooling, making these amenities much more costly. The commission encourages citizens to use fans instead of air conditioning. Imagine the government doing that in Phoenix and Atlanta in July. Italy, Greece, and Spain even announced temperature limits in public spaces during the 2022 heatwave in an effort to meet these environmental objectives. Spain limited air conditioners to be set no lower than 80°F. No wonder European productivity is 38 percent lower than the US.

Historic preservation laws and strict landlord rules frequently ban exterior window units to maintain aesthetic uniformity.

While air conditioning ownership increases households’ electricity consumption, it may be a small price to pay for comfort and avoiding death.

The problem is not the climate but the policy mindset. Too many European regulators approach energy and technology through the ideological lens of scarcity rather than creative innovation and human flourishing. One reason such policies persist is that the officials who design them are largely insulated from the consequences of their decisions and rarely experience their costs directly. Instead, those costs are borne by millions of ordinary citizens.

Air conditioning is not ultimately a story about cooling. It is a story about knowledge. It transformed oppressive heat into comfort, inhospitable regions into thriving communities, and summer misery into year-round productivity. Coal, copper, and electricity become valuable only after humans discover how to harness them. The history of air conditioning is the history of knowledge triumphing over nature’s constraints.

The ultimate resource is neither energy nor matter. It is the infinite capacity of human beings to learn, create, and discover."

The Equal Pay Madness Just Got Madder

By Alex Tabarrok. 

"In my post Equality Act 2010 I discussed the UK’s absolutely insane wage policy:

In short, supply and demand have been replaced by judges and labor boards with the authority to deem which jobs are “equal” and therefore should be paid equally….No one is alleging that male and female warehouse workers were paid unequally or that male and female retail workers were paid unequally or that there was any direct or indirect discrimination. The only claim is that warehouse workers, who are less likely to be female than retail workers, earn more than retail workers. And since these jobs have been judged “equal,” the company has violated Equality Act 2010.

…The warehouse workers were almost 50% female (47.25%). So females were not barred from the higher paying jobs. The fact that 77.5% of the retail workers were female suggests that retail work has special appeal to females relative to males and thus that there are compensating differentials. Any of the three female plaintiffs could have taken jobs in the warehouse. If the jobs are equal and the warehouse jobs pay more this is, on the plaintiffs’ theory, “puzzling”. [Or, as Ayn Rand would say, blank out.]

In fact, the court case reveals that Next was struggling to fill the warehouse positions and offered any retail employee—including the plaintiffs—the opportunity to switch to warehouse work. On cross-examination, one of the plaintiffs admitted that, given the unpleasant conditions in the warehouse—described by the court as “the drone of machinery,…vibration, alarm sirens and the screeching of machinery, wheels and rollers, continuously present in all areas”—the warehouse job “did not seem particularly attractive” compared to the greater autonomy and more appealing environment of the retail job. The plaintiff added that she would only have considered the warehouse job if it paid “a lot more money.”

Well, here is the update. The outgoing Keir Starmer government is trying to massively expand these laws. The “equal value” framework previously applied only to sex discrimination; under the proposed law, employees could also bring equal-value claims based on race and disability. Remember, these laws have nothing to do with discrimination—they are about demanding, at the point of a gun, that apples and oranges sell for the same price because they’re both fruit.

The new law would also establish an Equal Pay Regulation and Enforcement Unit. As I said, Orwellian.

See also my post, How Britain Become as Poor as Mississippi."

NYC’s socialist movement forcing millionaires to flee the state — leaving Mamdani, DSA in a bind

By Judge Glock. Excerpts:

"A new Citizens Budget Committee report found that New York’s share of millionaires, those earning more than a million dollars a year, declined more than any other state since 2010. 

The state went from having 12.7% of all millionaires in the nation to 8.7%. 

Worse yet, in the more recent years, the state’s highest earners have been leaving much faster than its lowest earners." 

"New York City’s tax rates on the wealthy are already the highest in the nation."

"Economists Joshua Rauh and Ryan Shyu found that a California income-tax hike drove almost 1% of top taxable incomes out of the state in a single year. 

The loss of taxpayers and other changes among the well-off meant the state lost most of the cash it would otherwise have raised from the tax. 

Another study, by Enrico Moretti and Daniel Wilson, looked at how state taxes affected the movement of top scientists, a group that’s not thought to be particularly mercenary or focused on cash. 

They found a 1% increase in after-tax income in a state brought nearly 2% more star scientists into the state — while a tax increase drove them away."

"New York’s high rates explain why the state lost more than $7 billion of annual taxpayer income just to Fairfield County in Connecticut over a five-year span, 2019 to 2023 — and more than $7 billion just to Palm Beach County in Florida." 

Human aspiration is a disposition, not an exhaustible resource. Mokyr showed that civilizations which honor that aspiration grow, and those that suppress it stagnate

See The Lump of Labor Fallacy in the Age of AI by David Hebert.

"In conclusion, the problems with the lump of labor fallacy were settled long before AI arrived. Smith understood that human aspiration is a disposition, not an exhaustible resource. Mokyr showed that civilizations which honor that aspiration grow, and those that suppress it stagnate. The lump of labor fallacy gets the economics wrong because it makes fundamental errors in human nature and economic history.

But wrong ideas with organized constituencies do not stay defeated. The longshoremen’s contract shows what happens when the fallacy wins a political victory. If AI policy follows the same template, the damage will be measured not in port fees but in trillions of dollars of foregone growth and millions of jobs that never get created. The fallacy is intellectually bankrupt. Whether it remains politically solvent is the question that actually matters."

How Trump’s Tariffs Really ‘Work’

He hails Toyota’s investment, but what about the higher costs and manufacturing job losses?

WSJ editorial. Excerpts:

"Toyota may have made the decision for business reasons unrelated to his tariffs."

"The Japanese car maker’s press release lavished praise on Texas’s pro-business environment and included statements from the state’s political leaders (Attorney General Ken Paxton excepted). No mention of Mr. Trump or his tariffs. Toyota says the new plant will provide “flexibility” from “advanced manufacturing technologies,” which may offset the relatively higher labor costs in Texas."

"The U.S. has lost some 75,000 manufacturing jobs since January 2025, including 25,900 in motor vehicle and parts production. Manufacturing jobs have been declining since early 2023, so not all of these job losses stem from Mr. Trump’s border taxes."

"there’s no question his tariffs are raising costs for U.S. manufacturers. At the same time, foreign retaliation has hurt America’s farmers"

"evidence shows that U.S. companies, workers and consumers are picking up most of the tab."

"auto tariffs on Canada and Mexico alone added about $1,600 to the cost of each car made in the U.S. last year."

"tariffs drove a 10.4% increase in the average suggested retail price of a new car."

"Auto dealers—most of which are small businesses—absorbed about 4.5% of the manufacturer’s price increase."

"Dealers have shed 6,100 jobs since Mr. Trump became President."

"New vehicle sales have averaged 15.9 million in the first half of this year, down from the 17 to 18 million in the five years before the pandemic." 

How Government Spending Enriches the Wealthy

Covid relief programs and easy Fed policy inflated the value of assets such as stocks and real estate

By Vivek Ramaswamy. Excerpts:

"When Washington floods the economy with borrowed and freshly printed dollars, the money flows first into assets owned by the wealthiest Americans—stocks, bonds, real estate. Six relief laws pushed roughly $4.6 trillion out the door in the bipartisan response to the pandemic. The Federal Reserve cut interest rates to zero and more than doubled its balance sheet, from about $4 trillion to nearly $9 trillion.

Only some of that money reached working-class Americans. Economists at MIT found that about a quarter of the $800 billion from the Paycheck Protection Program went to workers who would have lost their jobs. Three-fourths landed in the top fifth of households by income, at a cost of $170,000 to $257,000 per job-year saved—a regressive windfall. The student-loan payment pause tells the same story: It has cost well over $200 billion and—because higher earners carry the biggest balances—most of that relief went to white-collar professionals.

As big government pumped money into the economy, assets boomed: The stock market has roughly tripled from its March 2020 low. The wealthiest 10% of households own 89% of all stocks, according to 2021 Federal Reserve data. The top 1% gained more than $6.5 trillion in equity wealth during the pandemic, while the bottom 90% added just $1.2 trillion. The wealth share of the top 1% hit a record high in mid-2021, and American billionaires’ fortunes swelled by roughly 70%."

"Consumer prices peaked at 9.1% in June 2022, with inflation growing at its fastest pace since 1981. Groceries rose 12.2% in a single year and gasoline nearly 60%. As paychecks lagged, real wages fell—down 3.6% over the year ending in June 2022"

"a post-pandemic property tax that hit states like Ohio hard. The only meaningful asset most middle-class Ohioans own is their house, and home prices in Ohio rose over 25% between 2020 and 2022. That paper gain was a financial curse for families intending to stay put: While real income remained flat, tax bills went up. Ohio homeowners absorbed, in 2023, the largest reappraisal shock on record. One analysis found the increase was more than seven times the size of the previous cycle’s, averaging nearly 35%." 

‘How to Win a Trade War’ Review: The Times of Tariffs

Germany before World War I provoked backlash because of its rise in exports and overproduction, similar to China today.

By Theodore Bunzel. He is the head of Lazard Geopolitical Advisory. He has worked in the political section of the U.S. Embassy in Moscow and at the U.S. Treasury Department. Excerpts:

"“How to Win a Trade War” shows us that, even in the age of Trump, many of today’s trade tensions are a historical rerun. Germany before World War I provoked backlash because of its sharp rise in exports and overproduction, similar to China today. Its cornering of an “extraordinary 90 percent of global production” of chemicals and dyes sparked fears of dependency among the Allies. Even the White House’s coercive Liberation Day tariffs have an echo in history: 1870s France hiked tariffs 24% on its neighbors and demanded they negotiate more favorable trade deals within six months, a gambit that—like Mr. Trump’s—largely succeeded in forcing trade partners to submit to new treaties.

With protectionism becoming more fashionable, Ms. Keynes and Mr. Bown provide a helpful reminder that tariffs are, generally speaking, economically destructive and rarely achieve their stated goals. Such policies impede growth, chill investment and—outside of commodities—are overwhelmingly paid for by the importing country. Even on trade deficits, the authors remind us, tariffs have historically had largely insignificant effects. While the evidence on tariffs and their effects on industrialization is more mixed, for every Japan or South Korea—which used barriers to turbocharge manufacturing in the postwar era—there are the smoldering examples of Brazilian personal computers or Indian autos."

Why Do Democrats Hate Medicare Advantage?

It’s the best program in the entire U.S. healthcare system, including even employer-sponsored plans

By John C. Goodman. Excerpts:

"Medicare has already had a competing public option for more than two decades. It’s called traditional Medicare, and it has been losing the competition. More than half of all Medicare enrollees are in private plans."

"What Mr. Doggett calls the “giant private insurance companies that profiteer off Medicare” are mostly the same companies that are administering Medicaid."

"78% of [Medicaid] enrollees are in private managed care plans, or MCOs."

"enrollees are normally required to join an MCO. Yet it’s rare to hear a congressional Democrat advocate less spending on “giant” MCOs “profiteering” off care for the poor."

[Medicare Advantage] "is the only program in our entire healthcare system in which a doctor who discovers a patient’s previously unknown health problem can send that information to the insurer"

"Medicare Advantage plans are the only plans in our healthcare system that actually want sick people as enrollees."

"for sick people in [ObamaCare] marketplace plans, the out-of-pocket exposure is the highest found anywhere." 

"Significantly more low-income beneficiaries were enrolled in Medicare Advantage plans (68% vs. 32%) in 2023. In 2021, such plans were also the preferred choice of black (59%) and Hispanic (67%) enrollees relative to whites (43%)."

"Medicare Advantage is the only program in our healthcare system in which health plans can specialize in the treatment of specific conditions"

"Medicare Advantage plans make money by keeping people healthy."

"Medicare Advantage plans make insulin available free in special-needs plans for diabetics."

"Most employer plans and exchange plans haven’t done the same because free or cheap insulin would attract diabetic enrollees"

"In traditional Medicare . . . “20% percent of diabetes patients routinely get ulcers and 20% of those ulcers turn into amputations.” In Medicare Advantage, the number of amputations is a tiny fraction of that." 

 

Socialism and the Decline of the Black Family

Children need fathers, but social fragmentation gives an advantage to those who seek centralized power

By Jason Riley. Excerpts:

"socialism’s impact on the traditional family structure is no less concerning. Children from intact families are more likely to finish school and avoid poverty. The absence of fathers is strongly correlated with teen parenthood, drug addiction and involvement with the criminal justice system. The cultural anthropologist Margaret Mead wrote that “every known human society rests firmly on the learned nurturing behavior of men” and that civilization “depends upon social inventions that will make each generation of males want to nurture women and children.”"

"socialists such as Karl Marx and Friedrich Engels dismissed the traditional family as a tool of oppression"

"many of the social and economic problems in low-income black communities stem from the sad fact that some 70% of black children are born to unwed parents and nearly 45% live with a single mother."

"Asians are the highest earners, followed by whites, Hispanics and blacks. Similarly, Asians have the highest marriage rates, followed by whites, Hispanics and blacks. Maybe it’s no coincidence."

"Following emancipation, one of the first things black people did was seek out spouses and children from whom they had been forcibly separated during slavery."

"Between 1890 and 1950, black men and women married earlier and were more likely to be married by 35 than their white peers, Mr. Squires writes. That suggests black attitudes toward marriage and child rearing today are the product of incentives and circumstances that developed long after the end of slavery. “More than 70 percent of black children were born to married parents in 1965—a century after the abolition of slavery,” Mr. Squires writes. “Today, only 30 percent are."

"The black family was more intact after three centuries of chattel slavery than after three generations of the federal government’s ‘war’ on poverty.”" 

Hamilton Was No Protectionist

The first Treasury secretary backed tariffs mostly to raise revenue and promote free trade

By Phil Gramm And Donald J. Boudreaux. Excerpts:

"the 21st century, when the average trade-weighted tariff rate of Organization for Economic Cooperation and Development member countries was below 3% and almost identical to that of the U.S., and the OECD found that the nontariff barriers of U.S. trading partners aren’t significantly higher than America’s nontariff barriers, it’s highly doubtful that Hamilton would support Trump policies."

"It’s true that Hamilton endorsed some elements of the infant-industry argument for tariffs, but he did so because American industry then was indeed in its infancy. America today occupies a completely different position"

"The conditions that led Hamilton to support tariffs have long since disappeared. He never saw protection of domestic manufacturing as a long-term policy but rather insisted that “continuance of bounties on manufactures long established must almost always be of questionable policy.”"

"among the greatest forces fostering U.S. industrialization was its trade deficit and resulting capital surplus"

"Hamilton described net inbound foreign capital as “a precious acquisition . . . a most valuable auxiliary, conducing to put in Motion a greater Quantity of productive labour, and a greater portion of useful enterprise than could exist without it.”"

"the British and Dutch invested heavily in America. They grew wealthy on those investments, and so did America."

"Hamilton knew that high protective tariffs, by discouraging importing and encouraging smuggling, suppressed those [tax revenue] collections."

"From 1816 through 1830, industrial production grew at an average annual rate of 4% as tariffs rose. From 1831 through 1860, industrial production exploded by 6.7% a year as tariffs fell." 

"between 1866 and 1900 average tariff rates fell from 41.8% to 27.6% and industrial production grew at an average annual rate of 5.6%."

"Frank Taussig concluded in 1915, it [industrialization] was fueled by “the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs.”" 

Does Rent Control Redistribute from Poorer to Richer?

From Jeffrey Miron.

"Rent control policies are gaining momentum on the campaign trail and in state houses. New research, though, confirms something economists have argued for a long time: rent control has serious adverse effects that undermine its rationale..

The study

examines the effects of a rent control ballot measure passed in Saint Paul, Minnesota, in November 2021, on property values. … [Researchers found that t]he law decreased rental property values by reducing expected future rental income and landlords’ incentives to invest in maintenance.

In addition,

the effects of Saint Paul’s rent control law varied significantly by the income levels of renters, landlords, and owner-occupants. On average, rent control generated financial gains for renters and losses for owners, as expected. However, higher-income renters gained more than lower-income renters. … [Also,] lower-income landlords lost more wealth relative to their income than higher-income landlords. Finally, owner-occupants, despite not directly participating in the rental market, bore the greatest share of the total losses.

The study

shows that the benefits of Saint Paul’s rent control law are distributed regressively to renters, while the costs are distributed regressively to landlords."

It’s Time To Legalize Kei Trucks

Restrictions on kei trucks are another way government drives up the cost of living

By Scott Beyer of The Independent Institute. 

"If you’ve spent time traveling the Third World—or Japan—you’ve seen them: tiny pickup trucks, built for cargo, hauling lumber, produce, construction materials, or even groups of workers. They’re ubiquitous in developing countries because they’re inexpensive, fuel-efficient, and well-suited for certain types of work. Yet for decades they’ve been largely absent from U.S. roads. That’s a shame, because the humble Japanese kei truck represents the kind of practical vehicle that would benefit Americans.

Kei trucks originated in Japan after World War II as part of the country’s “kei” (or light vehicle) classification. Manufacturers such as Suzuki and Mitsubishi designed them to meet strict size and engine limits while remaining surprisingly capable work vehicles. Although they typically produce around 50 horsepower, and sometimes only have top speeds of 60mph, they can haul loads approaching 1,000 pounds while achieving fuel economy that exceeds 35mpg. 

The reason Americans rarely see kei trucks has to do with regulation, not lack of demand. Federal law prevents newer kei models because imported vehicles must comply with the same crashworthiness, lighting, and emissions standards that apply to vehicles originally sold in the U.S. Meeting those standards is not worth it for Japanese manufacturers who never intended to sell kei trucks in the American market. 

There is one notable exception: once a vehicle reaches 25 years of age, it is exempt from many of those federal safety requirements. That means Americans who want a kei truck are largely limited to importing vehicles that are at least a quarter-century old. Even then, ownership is not straightforward. Several states—including Rhode Island and Georgia—have refused to title or register many kei trucks for normal highway use, while Maine has enacted restrictions that effectively bar them from public roads. Other states permit registration only under limited classifications, such as off-road, farm, or low-speed vehicle designations. 

The Trump administration has broadly emphasized cutting regulations and boosting domestic industry, and has directed that energy towards kei trucks. During the rollout of the “Freedom Means Affordable Cars” initiative, President Trump called the trucks “cute” and “beautiful” while criticizing barriers that prevent them from reaching U.S. soil. He tasked Transportation Secretary Sean Duffy with clearing obstacles to domestic production, so that kei-style trucks could bypass import tariffs like the 25% Chicken Tax (which specifically targets light trucks). However, this directive remains in early stages and faces hurdles within the federal code.

At state level, a wave of reforms has at least expanded access to the 25+ year-old kei trucks. Last year, Texas Senate Bill 1816 formally legalized titling, registration, and on-road use after earlier DMV inconsistencies. Such reforms typically enable operation, but mandate lower speed limits, require standard insurance/safety inspections, and can vary by jurisdiction. Meanwhile in other states, such as Oregon, reform efforts failed and kei trucks remain illegal to use on public roads. 

There are compelling economic reasons to welcome these vehicles. A brand-new full-size pickup truck now sells for $66,000 on average in America. It’s hard to find even quality used trucks nowadays for under $20,000. Brand new kei trucks are often sold in Japan for under $10,000. Many plumbers, electricians, landscapers, carpenters, farmers, and other small business owners would benefit from this cheaper option and don’t need massive four-door pickups that tow 15,000 pounds. 

Kei trucks are also at times more practical. Some models feature fold-down bed sides that allow forklifts to load pallets directly from either side of the truck. Their small footprint allows them to maneuver through tight alleys, narrow driveways, and crowded work sites that would frustrate drivers of a large pickup.

The most common argument against kei trucks concerns safety. Critics point out that they lack many of the crash protections found in newer American vehicles. That observation is true, but it also raises an obvious question: are kei trucks really so dangerous that Americans cannot be trusted to choose them, while motorcycles—which offer no crash protection whatsoever—remain legal? Society routinely allows adults to accept varying risk levels. 

Environmental objections are similarly unpersuasive. Some critics argue that kei trucks fail to meet modern emissions standards. Yet this argument actually highlights the inconsistency of current policy, which allows 25-year-old vehicles but not cleaner, newer versions. Kei trucks also achieve far better fuel economy than most full-size pickups.

Ultimately, kei trucks serve as a reminder that government regulations make everyday life more expensive. Here is a vehicle that has proven itself on farms, construction sites, and city streets worldwide, and is used by millions. Yet Americans cannot purchase a new one, even though their retail value starts at about 1/10th the average price of a new pickup truck. Nor can they purchase a 25-year-old one without paying thousands in extra taxes and duties. That is because regulators have more say in what consumers can drive than consumers themselves. The Trump administration should move forward with its kei truck deregulation efforts."

More Defense Spending Won’t Save the Economy

By Benjamin Giltner of Cato. 

"The Trump administration has failed so far to deliver on its affordability promises. Yet, in a recent Department of Defense video on X, Secretary Hegseth boasted that the administration’s $1.5 trillion proposed defense budget would “supercharge” the American economy. It’s not exactly a novel plan.

The secretary’s statement echoes a long-standing argument since the publishing of NSC-68 in 1950: More defense spending is good for the economy. Of course, as with all federal spending, defense budgets certainly do affect Americans—just not in the way Secretary Hegseth thinks. 

Instead of boosting economic growth, increased defense spending stunts the US economy, wastes money, and raises costs for Americans.

True enough, defense spending can create jobs and contribute to the economy. But this misses a more fundamental question: Which type of federal spending is most beneficial for the economy? The federal government can spend and borrow only so much money, and there are only so many resources and workers to go around. Should scientists be hired for defense research or domestic manufacturing? Should land be used for missile production or building a school? With limited resources and people, policymakers need to know how to spend federal dollars efficiently to limit waste and bloat. 

Herein lies the central problem with Hegseth’s argument: Of all federal outlays, defense spending creates the least number of jobs. And the reasoning is simple—it is a “parasitic output.” The finished products from defense spending—tanks, missiles, bullets, and so on—leave the market once they are made. When that $4 million Patriot missile is built, that’s it. That $4 million either sits in storage or explodes in combat. Parasitic output is accounted for as part of a country’s gross domestic product, which is why, among other reasons, measuring defense spending as a contribution to GDP is misleading. 

Increased defense spending also weakens America’s manufacturing industry, an economic sector in rough shape these days. The workers, research, and capital that could’ve been used to strengthen domestic manufacturing are being used to make weapons. Yes, building new weapons may increase employment rates. But such an obsessive focus on defense production means missing out on the wider employment and economic benefits of manufacturing other products with higher returns on investment. 

Additionally, increased defense spending puts upward pressure on inflation. As the federal government pumps more money into the economy with little return, inflation rises. To offset this, governments have three primary options: increase interest rates, raise taxes, or reduce spending in other sectors. All three options are politically unpopular. 

Reducing defense spending is the logical position for policymakers to take. Reforming the weapon acquisition process and walking back US military commitments abroad, for instance, are compelling policy options. But bolder action is needed. A spending cap should be placed on the defense budget, which is in fact how these budgets were made prior to the 1960s. Such a cap would force the military to make use of set funds, laying down an imperative to spend efficiently.

Matching the defense budget to America’s national interests makes sense in theory. And indeed, this is what the current Planning, Programming, Budgeting, and Execution process aims to do. Yet, threat inflation regularly goads Congress into paying any price to safeguard against exaggerated threats.

Proponents of hiking the defense budget argue that proposals to reduce defense spending put money before national security and that less spending in a world characterized by risk is radical. But what is truly radical is the notion that the United States can sustain its exorbitant defense spending indefinitely. It’s also radical to suppose that there are no trade-offs with federal spending. And it is radical to separate economic conditions from national security. 

If the Trump administration is serious about lowering costs for American families, it cannot pretend that defense spending is somehow exempt from basic economic realities. A larger Pentagon budget does not create prosperity out of thin air. Lawmakers will need to scrutinize defense spending more heavily if they hope to fix the country’s economic woes."

Single-payer health care systems are looking worse all the time

By Tyler Cowen.

"That is the theme of my latest Free Press piece, here is one excerpt from it:

Government-run systems often (not always) do a perfectly fine job setting a broken arm or administering a long-standing, well-known medication. They do much less well when it comes to developing, financing, and delivering a new immunological approach to fighting cancer, personalized to your individual genome at a cost of hundreds of thousands of dollars. In our rapidly arriving biomedical future, innovation capacity will matter above all else. And though they may not see it today, the people with the most life ahead of them will reap nearly all of the benefits of a dynamic system, or suffer the consequences of a paralytic one.

Thirty years ago, it was often debated whether the Canadian or British healthcare systems were better than what we have in the U.S. After all, they offered a kind of guaranteed access to health services. The details could differ, but often the healthcare had no upfront price or only a low user fee. In America, in contrast, healthcare was more expensive, there were many millions of uninsured people, and dealing with sometimes rapacious insurers and hospitals could involve significant emotional trauma.

But over time the British and Canadian systems look worse and worse. The queues and rationing have increased, as giving healthcare away for free makes it hard to satisfy demands in a timely manner. In Canada, for instance, the median wait time has risen from 9.3 weeks in the early 1990s to 28.6 weeks today. In the British National Health Service, only 65.3 percent of patients start treatment within 18 weeks.

Worse yet, both of those systems are undercapitalized. In Britain, healthcare is badly understaffed and underfunded. Yet the country already has high taxes, high debt, and slow economic growth, so it is not clear where the new money will come from to recapitalize the system.

And this sentence:

This entire dynamic will be intensified as the pace of medical innovation picks up.

Your life may depend on it."

High-ability individuals move in response to tax rates

See Taxation and International Migration of Superstars: Evidence from the European Football Market. 

"We analyze the effects of top tax rates on international migration of football players in 14 European countries since 1985. Both country case studies and multinomial regressions show evidence of strong mobility responses to tax rates, with an elasticity of the number of foreign (domestic) players to the net-of-tax rate around one (around 0.15). We also find evidence of sorting effects (low taxes attract high- ability players who displace low-ability players) and displacement effects (low taxes on foreigners displace domestic players). Those results can be rationalized in a simple model of migration and taxa- tion with rigid labor demand."

Robert Reich's CEO Pay Chart Is Wrong. Here's the Real Math.

The former U.S. labor secretary presents economic data in deceptive ways.

By Aaron Brown of Reason. 

"Robert Reich, an emeritus professor at the University of California, Berkeley, and a former U.S. labor secretary, makes popular economics videos arguing that the U.S. economy is rigged against workers.

One of his recent pieces caught my eye because it makes heavy use of numbers and charts. The video is a great example of how to misuse economic data to support a preconceived narrative—in this case, a fairy-tale account of evil CEOs stealing wealth from their employees.

At the outset of the video, Reich presents a chart showing that in 2024 the "typical worker" earned $36.49 per hour, while CEOs made—"ready for this?" Reich asks viewers—$431.80!

There are lots of problems with this chart, starting with the fact that it's labeled "CEO Salaries," but that's not what the $431.80 figure represents. Though he rarely sources his work, Reich's chart matches data from a report by the Economic Policy Institute (EPI), which measures what the leaders of the largest 350 public corporations in America earn, not all CEOs.

There are about 4,000 publicly traded corporations headquartered in the U.S., and even more privately held companies. They all have CEOs. Reich has cherry-picked the wealthiest and most successful faces in the crowd. This is like measuring what the highest-paid actors earn, setting aside all the struggling performers waiting tables, and claiming that acting is the world's most lucrative profession.

If you broaden the lens to include CEOs at ordinary-sized companies, Bureau of Labor Statistics (BLS) data show their pay looks a lot like that of other professionals: Median CEOs make about $200,000 a year, and their pay is growing at about the same pace as everyone else's.

Another problem is that the $431.80 is compensation realized in 2024. Most of it came from stock options granted for performance in previous years. In the prior five years, stock prices had roughly doubled, allowing CEOs to cash in compensation from past years. It's a lot of money, but perhaps not out of proportion to five years of service steering the world's largest and most successful businesses through the pandemic and doubling shareholder wealth. And only the CEOs who survived the turmoil and delivered the doublings were around to collect it. In a down year for the stock market, you might see compensation drop by 80 percent.

The CEOs of the largest American companies have seen their compensation grow at an extraordinary pace, but that's because the businesses they run have grown so large. A highly regarded paper by economists Xavier Gabaix and Augustin Landier, "Why Has CEO Pay Increased So Much?" showed that CEO compensation should scale with firm size, and that this effect explains the entire rise in CEO pay.

Today, Nvidia's market cap alone is more than two and a half times the entire S&P 500's market cap when it was created in 1957, adjusted for inflation. Comparing CEO pay at the largest firms in 1968 vs. what they make today is like equating the director of a late-night commercial for a personal injury law firm to the director of a Hollywood blockbuster. Nvidia CEO Jensen Huang impacts more economic value in an afternoon in 2026 than James Roche did as the CEO of General Motors in all of 1968.

The same compensation explosion has occurred across every winner-take-all field, affecting top athletes, movie stars, and best-selling authors. The highest NBA salary in 1968 was Wilt Chamberlain's $250,000-a-year deal with the Lakers, and the team also agreed to cover his taxes. Chamberlain's salary alone works out to roughly $2.2 million in today's dollars. Compare that to Steph Curry's record-setting $62.6 million pay package in the upcoming NBA season.

Yet Reich claims that "the system is rigged." Is the NBA also rigged in favor of Curry? Against whom?

Reich has more evidence that the economy is rigged against workers. He presents another chart showing, in his words, that "big corporations chronically underpay workers compared to the workers' productivity on the job. Productivity, that is, the value of their output, has soared and resulted in record corporate profits."

The source of Reich's chart, which shows the productivity-pay gap, was once again the EPI, which compares workers' earnings over time to the productivity of the U.S. economy.

The measure they used for worker pay doesn't include all employees. It's just "nonsupervisory workers," so it excludes management. The EPI says that it uses this dataset because it represents "the typical worker," or "roughly 80% of the U.S. workforce." The purpose of the chart, they explain, is to answer "a crucial question: Do typical workers in the United States share in the benefits of economic growth?"

The problem is that the EPI is drawing on an untrustworthy dataset. In 2005, the BLS published a note in the Federal Register repudiating its measure of nonsupervisory workers' earnings, stating that it had "limited value."

The agency also noted that the distinction between a "supervisory" and "nonsupervisory worker" was "not meaningful to survey respondents" and "that it is not possible to tabulate their payroll records" to reflect this distinction.

In 2003, Patricia Getz, who was in charge of employment statistics at the BLS, noted that "records are not kept for these groupings of workers," so employers weren't filling out this portion of the survey.

And this series only counts regular paychecks. Bonuses, profit sharing, and stock grants, which represent how a growing share of American workers are paid over the exact period this chart covers, are excluded entirely. 

The BLS sought to discontinue this data series altogether in favor of the all-employee series. In the end, it continued to collect and publish data on nonsupervisory workers, but the poor data quality renders this chart essentially worthless.

The wage measure favored by the BLS tracks compensation for all employees at all levels, not only because this is a more trustworthy dataset, but on the logical assumption that a company's gains in productivity reflect the combined efforts of all employees, including its officers and supervisors.

Reich also cites gross productivity before depreciation. Consider an Uber driver whose passengers pay $85,000 over a year, of which $30,000 goes toward expenses such as gas, insurance, and fees. The driver's gross productivity is $55,000. But her car might have depreciated $15,000, so the net productivity is $40,000. That $15,000 wasn't stolen from her paycheck by a greedy CEO; it's a true loss in economic value.

This matters because over the period Reich discusses, corporate assets shifted from slow-depreciation assets such as steel mills to faster-depreciating assets such as computers and software. Depreciation has risen from 12 percent of national income to 17 percent. Reich is counting that 5 percent difference as stolen from workers, but in fact, it disappeared.

Regardless, if we use the data favored by the BLS and compare all worker compensation to productivity, the divergence between pay and productivity disappears.

Reich's theory that workers are getting shafted has a third component: He claims that CEOs are "siphoning" profits into stock buybacks to boost their own compensation.

"Stock buybacks," he claims, "reduce the number of shares available for investors to purchase, which drives up the value of the remaining shares. Just simple supply and demand."

This is an elementary accounting error. Take a $10 billion market-cap company with 100 million shares trading at $100 each. It decides to do a 10 percent buyback, spending $1 billion to buy 10 million shares for $100 each. The $1 billion cash it spends makes it a $9 billion company. It now has 90 million shares outstanding. The stock price is the same $100 per share outstanding.

Of course, in real life, things are not so neat. Investors tend to take a buyback announcement as good news; the insiders think the stock is undervalued, and bid the price up a few percent. There are other cases where investors take the opposite view: The buyback is a sign the company has no better use of its cash and is fading. But the point is it's not "simple supply and demand"; it's a signal that might or might not help the stock price.

Moreover, Reich misunderstands the purpose of a stock buyback. Companies have two ways of transferring profits to their shareholders: They can pay a dividend or they can do a buyback. The economic effect is the same.

Reich sees buybacks as a way of diverting profits to themselves rather than sharing them with their workers. "Corporations and their CEOs are instead siphoning them off into stock buybacks," he says.

They're not "siphoning" money. They're paying out profits to their owners. All investors, even greedy ones, are entitled to a share of the earnings of the companies they own. That's the deal. And without it, nobody would invest in the first place.

"Stock buybacks used to be considered illegal stock manipulation until Ronald Reagan came along," Reich says. "CEOs can now effectively give themselves a raise while workers get the shaft."

Stock buybacks were never "considered illegal stock manipulation." In 1982, the SEC clarified a gray area, simplifying the legal treatment of stock buybacks and making it easier for companies to use them as an alternative to paying dividends.

Reich claims that stock buybacks are worse than paying dividends because they're a way for CEOs to enrich themselves. "These rising share prices bump up CEO pay because increasingly part of their compensation is in shares of stock," he says.

The problem with this theory is that boards of directors, not CEOs, decide whether to pursue stock buybacks. These are the same directors who negotiate CEO compensation. Buybacks are an item on the negotiation checklist, like benefits and contract length, not something CEOs sneak in afterward to inflate their earnings.

What's the evidence on how buybacks affect CEO compensation? A study in the Journal of Accounting and Economics found the relationship between buybacks and CEO compensation was spurious. Research by a compensation consulting firm that examined S&P 500 buybacks from 2018 to 2021 found the same picture from inside the boardroom: Pay packages rest on multiple performance metrics, and the companies making the largest buybacks adjust their incentive targets to cancel out the share-count effect.

So what does Reich conclude from all of this misinformation and misconceived data? That we need a slew of policies to rein in American capitalism. He says we should "raise the federal minimum wage," "strengthen labor unions," "use antitrust laws to break up big corporate monopolies," "raise taxes on corporations," and "ban stock buybacks."

Apart from his misinformed discussion of stock buybacks, Reich doesn't address those issues in his video. Instead, all he's done is cherry-pick the compensation of the top CEOs in America and use a faulty data series to claim the economy is rigged against workers.

The charts and numbers we use to argue about important questions in public life are too often presented in deceptive ways. It doesn't get much more deceptive than this video."