Macro myths
by Scott Sumner, The Pursuit of Happiness, February 5, 2025.
Excerpt:
I recently spoke to some Bentley University students (via zoom) about my views on the Great Recession. In this post, I summarize the substance of my talk. Long-time readers will have seen these arguments, but this blog has attracted some new readers who have asked me to justify contrarian claims such as, ”Tight money caused the Great Recession.” Here (in bold print) are 18 common misconceptions about the Great Recession:
DRH note: Like his long-time readers, I’ve seen Scott make these arguments. This is the first time I’ve seen them in one place.
The New Consensus on the Minimum Wage
by Alex Tabarrok, Marginal Revolution, February 4, 2025.
Excerpt:
My take is that there is an evolving new consensus on the minimum wage. Namely, the effects of the minimum wage are heterogeneous and take place on more margins than employment. Read Jeffrey Clemens’s brilliant and accessible paper in the JEP for the theory. A good example of the heterogeneous impact is this new paper by Clemens, Gentry and Meer on how the minimum wage makes it more difficult for the disabled to get jobs:
Alex quotes Clemens, Gentry, and Meer:
We find that large minimum wage increases significantly reduce employment and labor force participation for individuals of all working ages with severe disabilities.
DRH note: I’m glad to see that Clemens, Gentry, and Meer looked at the bad effects of the minimum wage on severely disabled people. From July 1986 to January 1987, I was the economics editor of National Review. My job, assigned to me by William F. Buckley, Jr., was to write two short unsigned pieces for every biweekly issue. They took all my pieces but one and rarely changed them. One of the two exceptions was my editorial on this issue: I expressed upset at the effect of the minimum wage on disabled people and gave an example from my hometown, Pacific Grove. The editor kept the piece but edited out the emotion: I still think that was a mistake.
Don’t Believe Him
by Ezra Klein, New York Times, February 2, 2025.
Excerpt:
I had a conversation a couple [of] months ago with someone who knows how the federal government works about as well as anyone alive. I asked him what would worry him most if he saw Trump doing it. What he told me is that he would worry most if Trump went slowly. If he began his term by doing things that made him more popular and made his opposition weaker and more confused. If he tried to build strength for the midterms while slowly expanding his powers and chipping away at the deep state where it was weakest.
But he didn’t. And so the opposition to Trump, which seemed so listless after the election, is beginning to rouse itself.
There is a subreddit for federal employees where one of the top posts reads: “This non ‘buyout’ really seems to have backfired. I’ll be honest, before that email went out, I was looking for any way to get out of this fresh hell. But now I am fired up to make these goons as frustrated as possible.” As I write this, it’s been upvoted more than 39,000 times and civil servant after civil servant is echoing the initial sentiment.
In Iowa this week, Democrats flipped a State Senate seat in a district that Trump won easily in 2024. The attempted spending freeze gave Democrats their voice back, as they zeroed in on the popular programs Trump had imperiled. Trump isn’t building support; he’s losing it. Trump isn’t fracturing his opposition; he’s uniting it.
DRH comment: I’m not sure Klein is right, but it’s an interesting perspective. Time will tell.
Getting better: How Louisiana is raising reading and math scores
by Joanne Jacobs, Thinking and Linking, February 3, 2025.
Excerpts:
Louisiana, never known for education excellence was the big winner on the 2024 NAEP when it comes to progress in the last few years, writes Chad Aldeman. “It was the closest state to recovering from COVID-related declines in 8th grade reading and math, and it was the only state in which fourth-grade reading scores were higher in 2024 than in 2019.”
And:
The state will not waste time “chasing shiny things,” says Brumley. Teachers will not be asked to serve as social workers or nurses. “Smart, responsive school systems are thinking about ways to be more efficient and allow their teachers as much time on task as possible.”
Some of the NAEP reporting assumes Louisiana’s success is all about teaching the phonics part of the “science of reading,” writes Natalie Wexler. There’s a lot more. The state has ensured that “educators understand the connection between reading and knowledge.”
DRH comments: First, I love the phonics part. That’s how I learned to read, before I got to Grade One. (Thank goodness we didn’t have kindergarten in my small rural Manitoba town. That way I got one additional year of freedom.) Second, I’ve been impressed by Joanne Jacobs, and her focus, for a few decades. I first met her at a Hoover conference on education in the mid-1990s. Here’s her bio. When I met her, she was with the San Jose Mercury News.
Recommended Readings on Free Trade Versus Protectionism
by Williamson M. Evers, January 24, 2025.
Economists, going back to Adam Smith and David Ricardo, are virtually unanimous that free trade benefits consumers and the overall economy. But there exist special interests who would gain in the short run from protectionist barriers. And there is a large segment of the public that doesn’t understand the arguments for free trade. Not surprisingly, there are politicians who are all too willing to gain votes by catering to protectionist interests.
People, farms, firms, and factories in America should be able to trade freely with people, farms, firms, and factories across international boundaries. You should, for example, be able to buy shoes made in Ethiopia. Economist William Niskanen stresses the moral case for free trade: Individuals have the right “to make consensual arrangements across national borders.” Without governmental interference, such voluntary interaction is harmonious and mutually beneficial. People don’t trade unless they believe they will be better off afterwards.
Much international trade can be explained by comparative advantage. Economist Donald J. Boudreaux explains that “the chief nontrivial insight” found in the idea of comparative advantage is that an economic concern’s “technical ability to produce a product” is, by itself, “irrelevant” for resolving whether “that entity should produce that product itself” or “acquire that product by first producing something else and then trading that something else” for the desired product.
DRH comment: As with everything Bill Evers does, this set of readings is extensive and impressive.
Trump’s Tariffs Require Customs Agents To Check All Mail from China
by Jack Nicastro, Reason, February 6, 2025.
Excerpts:
President Donald Trump announced his promised tariffs on Saturday and paused those levied against Mexico and Canada on Monday for 30 days. In addition to threatening to impose double-digit duties on all products imported from Canada, Mexico, and China(whose tariffs took effect on Tuesday), each of the president’s executive orders eliminates duty-free exemptions for low-dollar-value imports, known as de minimis exemptions. Eliminating these exemptions would increase the price of goods from international bargain brands enjoyed by cash-strapped consumers.
De minimis is Latin for “concerning trifles,” per Merriam-Webster. The aptly named exemption applies to shipments “imported by one person on one day having an aggregate fair retail value in the country of shipment of not more than $800,” according to U.S. Customs and Border Protection (CBP). The Congressional Research Service (CRS) reports that the U.S. imported $54.5 billion worth of de minimis products in 2023, 34 percent ($18.4 billion) of which came from China.
Chinese e-commerce firms Temu and Shein had grown to make up 17 percent of the entire American discount market by 2023, according to the CRS. These discount brands contract with Chinese firms to make and ship goods directly to consumers, avoiding expensive tariffs via de minimis, explains Bloomberg. This business model caters to lower-income Americans who are willing to wait weeks instead of days to save more of their hard-earned dollars. Eliminating the de minimis exemption means that the cheap consumer goods sold by these brands will be subjected to the additional 10 percent duty on Chinese products, some fraction of which will inevitably be passed on to American consumers.
The rule announced by CBP to carry out Trump’s executive order imposing duties on China goes even further, requiring formal inspection for all mail shipments from China “without regard to their value.” Christine McDaniel, senior research fellow at the Mercatus Center, tells Reason that this will require CBP to subject roughly 917 million more parcels to formal entry, a process so complex that CBP recommends importers outsource it to third-party brokers (whose services cost around $100). McDaniel says processing so many more parcels “could be prohibitively costly in terms of resources for CBP.”
READER COMMENTS
Andrew_FL
Feb 9 2025 at 2:11pm
My understanding is that there are, or were, exemptions for the minimum wage, at least nationally, for some jobs for severely disabled individuals? If memory serves Hillary Clinton promised to eliminate them if she became President.
David Henderson
Feb 9 2025 at 2:38pm
I’m pretty sure that’s not true. I worked on that issue when I was at the Labor Department for the first half of 1982 and got to know the law quite well.
But there are two possibilities: I’m remembering incorrectly or the law has changed.
steve
Feb 9 2025 at 3:04pm
Looks like it is true. The employer has to tell the employee they will make less than the minimum wage and also put it in writing. They need to make some kind of effort to determine how much less work the disabled person does. We had several disabled people working for us. As I recall my admin assistant said it wasn’t much work to do the compliance work.
https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/RightsForWorkersWithDisabilities.pdf
Steve
Alan Goldhammer
Feb 9 2025 at 4:00pm
I completely agree with David on phonics. I can remember as a kid reading “Highlights for Children” (amazingly still around today!!) and they had a nice section that was entitled ‘Fun with Phonics’ (IIRC). Our two daughters had subscriptions to the magazine when they were young. Phonics works!!!
Regarding Ezra Klein, I think President Trump has made a major mistake of empowering Elon and his Musketeers. If the Dems get out in front of this in a big way, focusing on privacy and letting an unelected individual run rampant in computer systems they can get some major credibility. The other thing that will appeal to folks is the Consumer Finance Protection Bureau and that it has already saved consumers over $20B since its inception. That the big banks oppose it says it all. There will be other opportunities before the midterms and “assuming” the Dems can get things together, there could be a massive shift in Congress. Having oligarchs in power does not bode well.
David Henderson
Feb 9 2025 at 5:21pm
Glad you agree on phonics.
By the way, unelected people often get to look at the government’s computer systems. The President, the Veep, 435 Members of the House, and 100 Senators don’t have time.
Alan Goldhammer
Feb 10 2025 at 1:20pm
“By the way, unelected people often get to look at the government’s computer systems. The President, the Veep, 435 Members of the House, and 100 Senators don’t have time.”
Quite right but they are vetted consulting firms!!!! I’ve had friends who work(ed) at places such as MITRE, BoozAllen, and BCG that have had this type of access. However, this is not like giving Elon and The Musketeers unfettered Depending on the type of work they are doing a security clearance is required. I had to undergo such a clearance back in 1990 when I was working on a Congressional Office of Technology Assessment panel on ‘Weapons of Mass Destruction. It turned out, the panel members did not need access to any classified material in order to complete the report. It was one of the more interesting projects that I worked on and I ended up becoming somewhat of an expert on BW agents and later was an advisor to the State Department prior to the third review conference on the BWC.
It’s sad that Congress did away with the OTA back in 1994. They did good work providing reports on a variety of important issues. Perhaps this is one reason that our representatives are less knowledgeable about important matters.
David Henderson
Feb 10 2025 at 1:43pm
As you can see, I was challenging your statement. I’m glad you agree.
Richard W Fulmer
Feb 10 2025 at 12:24pm
That’s a bit like saying that pulling the knife out of a murder victim is what killed him. The Fed’s tight money policy was preceded by its loose money policy. Sooner or later it was going to have to rein in the “printing presses” or face runaway inflation. And tight money was hardly the only contributor to the Great Recession. Here’s my list (feel free to add to it):
• The Federal Deposit Insurance Corporation (FDIC): The 1984 bailout of Continental Illinois and subsequent bailouts created moral hazard – convincing financial firms they could take excessive risks, expecting government rescue if things went south.
• The Federal Reserve bailed out Long-Term Capital Management in 1998, creating further expectations of government rescues. It also kept interest rates exceptionally low after the dot-com bust and 9/11, fueling a credit and housing bubble.
• Congress pressured Freddie Mac and Fannie Mae to purchase hundreds of billions of dollars’ worth of subprime mortgages and loosened borrowing standards, encouraging risky lending.
• The Community Reinvestment Act (CRA), originally signed by Jimmy Carter and later expanded by Bill Clinton, further inflating the housing bubble by pushing banks to issue risky loans.
• The American Dream Down Payment Initiative, signed by George W. Bush, encouraged homeownership through subsidized down payments, adding more fuel to the housing bubble.
• The SEC’s mark-to-market accounting rules amplified financial instability by forcing firms to revalue mortgage-backed securities in ways that exaggerated both booms and busts.
• The Basel Accords: These international banking regulations encouraged financial institutions to use bundled subprime mortgages as “reserves,” increasing systemic risk.
• Credit rating agencies (Moody’s, S&P, Fitch) assigned high ratings to mortgage-backed securities and derivatives that were far riskier than advertised.
• Loan originators could sell their risky mortgages to Freddie Mac and Fannie Mae, so they had little incentive to ensure borrowers could actually repay.
• Financial firms (Lehman Brothers, Bear Stearns, AIG, Citigroup, Goldman Sachs, Countrywide Financial, etc.) heavily invested in mortgage-backed securities and derivatives, misjudging the risks.
• Real estate speculators (house flippers) artificially drove up home prices and walked away from their mortgages when values dropped.
• State “non-recourse” laws: In certain states, borrowers could default on their mortgages without being held personally liable, encouraging reckless borrowing.
• Individual borrowers who took out loans they couldn’t afford and defaulted when the market crashed.
Craig
Feb 11 2025 at 3:42pm
You know back in the 1900s as my children now call anything before the year 2000, when I came out of school I was firmly an advocate of free trade. While it does remain my core position, the actual application of free trade I find a bit problematic. In my mind, it meant the guy from China gets to sell in China and the US and I get to sell in the US and China and we’ll find out who is better. Well, turned out I wasn’t allowed to sell things there actually to customers who very much wanted to buy from me. But that brings me to your quote.
“Chinese e-commerce firms Temu and Shein had grown to make up 17 percent of the entire American discount market by 2023, according to the CRS. These discount brands contract with Chinese firms to make and ship goods directly to consumers, avoiding expensive tariffs via de minimis”
Of course this isn’t the whole story. This story begins with subsidized freight, paid by the US government no less, pursuant to the postal treaty. So if you wanted to buy Widget X, you could buy it from alibaba, ebay, whatever, a guy in China or me in NJ. So naturally you would want to get the best deal and because of this postal treaty I could make Widget X (in my case a byproduct of my main product) cheaper and if you were in NJ you’d probably buy it from me if you were local and knew I existed, but you probably didn’t and the price from China wasn’t just lower, the price from China was LOWER THAN THE PRICE I WOULD HAVE TO PAY SIMPLY TO SHIP THE PRODUCT TO YOU.
So if the price point on alibaba was $5, I could make it for $2 and sell it for $4.50, but if I have to mail it to you now that was at least another $4, so I go to $8.50 delivered, but location is supposed to be MY comparative advantage. In the US labor is dear so I’m SUPPOSED to focus on making things where the additional cost of labor is offset by the additional cost of sending something from a place far away like China (but that price was artificially LESS).
And now you got Trump.
Richard W Fulmer
Feb 11 2025 at 5:47pm
You can add to that the U.S. government’s indirect transportation subsidies that the Foreign Dredging Act of 1906 and the Merchant Marine Act of 1920 (the Jones Act) give to foreign manufacturers. By increasing the cost of transportation within the U.S., the Acts often make purchasing from abroad much cheaper.
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