Sometime in the early 1970s, when I was 12 or 13 years old, amazing news swept through my family: Uncle Malcolm was going to fly to a business meeting in Baltimore. I’d never known anyone who flew commercially, so this development struck me as stupendous. And stupendous it was.
To see Uncle Malcolm off from the airport on his exotic journey were my parents, my three siblings and me, my maternal grandparents, and my Uncle Eddie with his wife and two daughters. An entire clan gathered at the airport just to watch Uncle Malcolm board the plane. (This was long before non-passengers were prohibited from going through security.)
I remember it well. It was a nighttime flight. I stood at the airport-terminal window looking out at the nose of the big jetliner that Uncle Malcolm had just boarded, envying him for doing something that I’d never done and had no reason to think that I would ever do. Standing next to me, gazing at the plane, was my Uncle Eddie.
“I hope,” I told him without much real hope, “that one day I’ll get to fly in an airplane.”
“I bet you will one day,” Uncle Eddie replied kindly, although with how much sincerity I cannot say.
…..
Here’s the view from 30,000 feet. When producers are allowed to compete on all margins, including price, they discover the optimal mix of prices and amenities that best satisfy their customers. When governments obstruct that competition, it gets redirected into changing the quality of goods and services such that the resulting price-quality mixes are less desirable than would be the mixes that emerge without government intervention.
After airlines were deregulated almost 50 years ago, consumers revealed that they wanted lower prices with less quality. And by more recently rejecting the bare service offered by Spirit Airlines, consumers revealed that quality can be so low that even very low prices are insufficient compensation to put up with such low quality. These results emerged from competitive market processes and deserve respect. But alas, just as airline regulation forced American air passengers to buy what they would have preferred not to buy, the government’s continuing itch to override market processes will oblige consumers in the future — whenever such interventions occur — to suffer worse economic outcomes.
Here’s a letter to the Wall Street Journal.
Editor:
Greg Ip warns that China’s “industrial policy of everything” will leave the “rest of the world in dust” (“Beijing’s ‘Industrial Policy of Everything’ Leaves Rest of the World in the Dust,” May 15).
We’ve seen this movie before. An authoritarian government replaces the allocation of resources by markets with allocation by mandarins. That government boasts that its brilliant central plans will unleash an economic boom that will energize all of its industries and raise them to global dominance. Politicians and pundits in countries with market economies are enchanted by the authoritarian state’s swagger, fine words, and pretty plans; they insist that the only hope for saving their economies from the superpower economy being engineered abroad is for their governments also to suppress free markets and elevate government’s role in the economy.
Yet at the end of every such flick, the governmentalization of the foreign economy is revealed to have produced, not a mighty warrior, but a corrupt, dissolute, and diseased invalid.
If politicians and bureaucrats could reliably outperform markets, China’s economy would have been at peak performance under Mao, India would have enjoyed spectacular economic growth under Nehru, and the Soviet Union would still exist, with the standard of living of its citizens being the highest in the world. We Americans, meanwhile – cursed as we are with our bumbling market economy – would be among the poorest people on earth.
But, of course, reality proved otherwise. Why does Mr. Ip suppose that the conclusion of Pres. Xi’s remake of this tired movie will be different?
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Their presumption is that a government can expertly run the economy if only staffed with expert businesspeople. In a recent episode of his podcast, tech investor and venture capitalist Joe Lonsdale talked with former private equity investor Ben Black, the new CEO of the U.S. International Development Finance Corporation (DFC), about the $205 billion budget he oversees “to invest in U.S. strategic interests, build new markets, and deliver real returns for taxpayers.”
While I appreciate the optimism, it reflects a fundamental misunderstanding of what makes private markets work. The government is not some company unluckily plagued by incompetent executives. It is a different institution entirely from those beholden to the market. In the private sector, competitively determined prices, profits, and losses reveal what works and what doesn’t. These signals are ruthless and, thankfully, clear. Good investments get rewarded. Bad ones get punished. The feedback is quick and the accountability personal.
A government operates on different—and worse—incentives, constraints, and feedback mechanisms. Injecting it with private-sector knowledge and ambition does little to change the dysfunctional features of political decision making. It has no prices set by supply and demand to guide its political decisions. It has no profit signals for strategic investments and no loss mechanism to punish faulty judgment. When a government agency backs the wrong project, nobody can be expected to lose a job or salary. When a sovereign wealth fund makes a bad bet, the bill is covered by taxpayers who had no say in the matter.
The provisions that became Section 122 were scrutinized as the bill moved through Congress. Witnesses at hearings before the House Ways and Means and Senate Finance Committees questioned the effectiveness of using tariffs to address fundamental BoP problems in light of the US adopting a floating exchange rate. Rep. Henry Reuss (D‑WI), who would later chair the House Banking Committee, approved of the bill yet described Section 122 as “superfluous and unwise” given the dollar’s floating rate. House Ways and Means Committee Chair Wilbur Mills (D‑AR) and Nixon’s Treasury Secretary George Schultz agreed that exchange rate adjustments, rather than tariffs, would be a more effective solution for a longer-term BoP problem.
The Trade Act of 1974 was enacted on January 3, 1975, meaning that Section 122 lay in disuse for more than 50 years until President Trump used it to impose the current 10 percent tariffs. In most of the intervening years, the US had run persistent trade deficits, yet presidents had not felt compelled to invoke Section 122. This issue came to a head in 1984, when the Senate Finance Committee asked the Reagan White House to determine the applicability of the statute for addressing the nation’s trade deficit. As [Phil] Magness explains, Martin Feldstein, the chair of Reagan’s Council of Economic Advisers, rejected this contention, arguing that because net private investment offset the US current account deficit, the country did not need to draw down its official reserves and thus the US was not experiencing a BoP deficit.
…..
Even though President Trump has tried to justify the tariffs as necessary “to deal with large and persistent balance of payments deficits” pursuant to Section 122(a)(1), the economics of the BoP today explain why the alternative justifications under the statute also do not hold up. Section 122(a)(2) permits tariffs “to prevent an imminent and significant depreciation of the dollar.” Measured against a basket of currencies, the US dollar indeed depreciated by 8 percent between January 21, 2025, and February 19, 2026 (i.e., the day before the Supreme Court’s IEEPA ruling), but this rate of change is not uncommon over the course of a year in the floating-rate era. (And in fact, the dollar has slightly appreciated since the ruling.)
More importantly, the depreciation since January 2025 is the result of other political and economic factors, not the US being unable to finance its current account deficit (which it does year after year through financial account surplus). Because these accounts practically offset each other, it is unnecessary to impose tariffs “to cooperate with other countries in correcting an international balance-of-payments disequilibrium” under Section 122(a)(3), notwithstanding concerns about excess surpluses and deficits across different countries’ current accounts.
I’ve been reading with horror about the Food and Drug Administration’s recent rejection of Replimune RP1 injection, one of the most promising drugs to fight metastatic melanoma in recent years. As a result of this decision, thousands of desperate patients have lost a chance at being among the one-third who have failed other courses of treatment and have already benefited from the drug in trials.
Numerous journalists, led by the Journal’s Allysia Finley, quote leading oncologists decrying the absurd and dysfunctional process that led to the FDA’s decision. Under the leadership of Marty Makary, who resigned this week under pressure from President Trump, the FDA twice moved the goalposts for approving Replimune RP1. One new requirement asked for an inhumane placebo control group, to which no physician could agree.
Mr. Trump reportedly lost patience with Dr. Makary and his deputy Vinay Prasad, who had been fired once already, for stalling on the approval of fruit-flavored vapes—no joke. But perhaps the FDA can revisit Replimune RP1. Replimune Group stock, which plunged after the rejection, rose with the news of Dr. Makary’s departure.
Time is of the essence. Replimune Group, a small biotech firm in Woburn, Mass., has laid off 60% of its workforce and is concentrating its limited resources on a treatment for an ocular uveal melanoma, a rare but also deadly form of the cancer.
GMU Econ alum Jeremy Horpedahl asked Google Gemini Pro to imagine a world without data centers.
… is from page 97 of Eamonn Butler’s excellent 2021 book, An Introduction to Trade & Globalisation:
Too often, people imagine that global value chains arise naturally, by themselves. In fact, such highly sophisticated structures do not come together by chance. Someone has to decide which of the many parts of the production process are best sources from where and from whom. Are there economies of scale if manufacturing is done by a single firm, for example, or is it better divided between specialist firms and countries – technical components being made in skilled-labour countries, say, and assembly done in cheap-labour countries? Whatever the answers, all the various elements in the production chain must be designed, financed, made, assembled, finished, packaged, transported, marketed and sold into a diverse array of countries with diverse rules and diverse consumers. That all takes conscious planning and management by practitioners who have an international reach and a deep, direct and up-to-date understanding of the markets in which they operate. TNCs [transnational corporations] have all these qualifications.
DBx: Yes.
Pundits, professors, and politicians talk glibly about ‘reshoring’ supply chains and about the need to take account of the risks of sourcing inputs from this or that foreign country. The pundits, professors, and politicians who talk this way presume either that existing supply arrangements are random or that the private firms that rely upon various sources for their supplies are myopically motivated exclusively to pay the lowest monetary prices today for their supplies.
Each of these presumptions is mistaken. Private business people have strong incentives to correctly assess the various risks and rewards of alternative sources of supplies and to choose those particular sources that are most likely to work best over the long run. Of course, they won’t always get it right, but what’s the realistic alternative? The notion that elected officials and their bureaucratic underlings in government will outperform private decision-makers – the belief that think-tank pundits, professors of this, that, and the other thing, or government officials have more expertise, information, skill, and incentive to correctly determine how to arrange supply sources – is ludicrous. Yet this belief is so commonplace that it strikes few people as odd.
The likelihood of pundit Oren Cass, professor Dani Rodrik, politician Donald Trump, or political appointee Jamieson Greer having deeper insight than do business people spending their own money into the most appropriate ways to source supplies is no higher than is the likelihood of me having such deeper insight. And I assure you that I have no such insight. This likelihood, in short, is practically zero.
A more-general point here is that all proponents of industrial policy suffer a from the arrogant pretension that they have information – or access to information – not only that they simply do not have, but that is impossible for anyone to have independently of an on-going competitive discovery process.
Here’s a letter to the Financial Times.
Editor:
Daire MacFadden parrots what is perhaps the single-most repeated line in today’s discussions of international trade and U.S. trade deficits: “persistent imbalances have hollowed out domestic manufacturing” (“A Keynesian solution to global imbalances,” May 10).
Although this claim about the alleged hollowing-out of domestic industry echoes hither and yon as if it’s beyond doubt, it is false.
It is false theoretically because a country can run persistent trade deficits (as the U.S. has done now for 50 consecutive years) as a result of that country attracting global capital that enlarges that country’s industrial base directly – for example, Kia building a factory in West Point, Georgia. An influx of global capital can also enlarge that country’s capital base indirectly by lowering domestic interest rates which, in turn, spurs domestic investment.
What’s so carelessly called “imbalances” in today’s world of flexible exchange rates are not imbalances at all, for trade (or “current-account”) deficits are exactly offset by capital-account surpluses.
MacFadden’s claim is also false empirically. Since 1975 – the last year when the U.S. ran an annual trade surplus – both inflation-adjusted U.S. industrial production and U.S. industrial capacity have grown by 148 percent (as U.S. population has grown by 59%). It’s true that industrial production in America has been flat for the past 15 years, but the same is true, for example, for industrial production in Germany – which has run persistent trade surpluses.*
And the U.S. today produces more manufacturing output than does any country on earth except China – a country with more than four times the population of the U.S. Per-capita, Americans today produce 150 percent more manufacturing output than do the Chinese.
These assertions of the U.S. economy being “hollowed out” are, well, hollow.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030* See these figures, the first showing German industrial output, and the second showing Germany’s trade balances.
The Cato Institute’s Colin Grabow reports that “waiver data reveal how the Jones Act blocks American trade.” Three slices:
Since the Trump administration waived the Jones Act on March 17 for energy products, fertilizer, and related inputs, the US Maritime Administration has been publishing voyage-level data on every domestic cargo movement that has utilized the 1920 law’s suspension. We’ve turned that data into an interactive infographic that lets readers explore all 45 voyages completed thus far, including the vessels involved, cargo carried, and ports visited.
…..
It’s all further confirmation that the law has been suppressing intra-US trade. But that’s just from a higher level. Some of the granular data produced by the waiver provides arguably even more noteworthy insights.
…..
For an administration committed to “America First” economics, the early results clearly show that the law is not protecting American commerce but blocking it. No wonder the Jones Act’s supporters are so adamant that the waiver go away.
Public choice economist James Buchanan made this point with characteristic clarity. In Democracy in Deficit, co-authored with Richard Wagner, he argued that the most important legacy of John Maynard Keynes was not a specific policy prescription but a shift in fiscal norms. Before the Keynesian revolution, there was a widely held expectation, though imperfectly observed, that governments should balance their budgets over the business cycle, running deficits only in exceptional circumstances. The old Hamiltonian norm. And Keynesian economics, properly understood, also called for deficits in recessions and offsetting restraint or surpluses in expansions. But Buchanan’s and Wagner’s insight was that democratic politics would not implement the symmetry embedded in that prescription. Deficits in downturns are politically attractive; surpluses in good times require tax increases or spending cuts on a satisfied electorate and are therefore systematically avoided. The result is a persistent deficit bias: deficits in recessions, insufficient surpluses in expansions, and a gradual accumulation of debt over time.
Buchanan and Wagner’s conclusion was institutional rather than merely descriptive. Because ordinary political incentives tend to produce this asymmetry, they argued for fiscal rules, such as a balanced-budget requirement, to better align policy with long-run sustainability. The continued growth of large, unfunded commitments in programs such as Social Security and Medicare reflects, in part, the same underlying political dynamics Buchanan and Wagner identified: not a deliberate embrace of permanent deficits as theory, but the predictable outcome of a system in which the discipline required to run surpluses is politically fragile.
But energy doesn’t have to be a zero-sum game. Many data centers are motivated to build out their own energy capacity, which would help insulate nearby residents from price shocks while also ensuring steady supply for themselves. Government can help by getting out of the way of energy producers and embracing an all-of-the-above approach to production.
In Gallup’s poll, 18 percent of data center opponents now cite water usage as a reason they would oppose a data center, but that’s a less defensible worry. Much of the alarm traces to Karen Hao’s 2025 bestseller “Empire of AI,” which claimed a Google data center in Chile could consume more than a thousand times a town’s water supply. That figure is off by a factor of a thousand, due to a unit conversion error Hao later acknowledged.
Jason Sorens busts the myth of an ‘oversupply’ of housing in the U.S.
Michael Strain explains that “the war on billionaires is dangerous nonsense.” A slice:
Moreover, like tech entrepreneurs, hedge-fund managers create value that accrues to all of society. Apart from building projects and tax revenue, firms like Citadel help to ensure that capital is allocated efficiently throughout the economy, which ultimately makes workers throughout the entire economy more productive, increasing their wages and living standards.
Here’s the abstract of a new paper by Daniela Vidart:
This paper examines correspondence education as an alternative educational pathway in early 20th-century America. Using newly digitized records from the International Correspondence Schools—the largest such institution, with over 4 million students by 1940—linked to census data, I show that enrollment increased the likelihood of skilled employment by 6-10pp within 3-10 years, particularly among younger students who used it as a substitute for high school. I develop a general equilibrium Roy-style model where individuals sort into educational options by ability. Consistent with the model, correspondence education facilitated skill acquisition for lower-ability individuals and improved selection into high school, amplifying its returns.
[DBx: Note that the International Correspondence Schools were private, for-profit enterprises and, thus, they are an historical example of how private-sector entrepreneurs supplied valuable education.]
… is from page 73 of Deirdre McCloskey’s forthcoming book, Equality of Permission [original emphasis]:
An equality of outcome, the brain surgeon paid at the finish line, or the tenth mile, the same as the street sweeper, certainly comports with an equality of souls…. But unfortunately in large groups the ignoring of a person’s marginal work product, and making payments according to the noble belief in the equality of human worth – in which all us monotheists and modern liberals do, I affirm yet again, fervently believe – does not work. Through gross misallocation in the short run, and the collapse of spurs to innovation in the long, such an enforced equality of outcome leads in a large group to a dismal equality of poverty, and then to tyranny. Such attempts fail every time at large scale, even when they are kindly and sincere and gentle.
I’m pleased that the Washington Post published this letter of mine.
Alvin E. Roth made a compelling case for allowing people to receive monetary payments in exchange for donating kidneys [“90,000 people are waiting for an organ that can’t be bought,” op-ed, May 10]. Squeamishness about such transactions doesn’t come close to outweighing the enormous benefits of saving thousands of lives.
But in the unfortunately likely event that such squeamishness continues to prevent payment for kidney donations, an intermediate step is worthwhile – namely, as University of Michigan law professor Adam Pritchard and I first proposed in the 1990s, when people receive or renew their driver’s licenses, offer to pay them to sign up to be organ donors.
As of 2023, just under 50 percent of licensed drivers in the U.S. are registered donors. A small inducement — say, $50 — to register would likely result in a large increase in registrations without anyone sacrificing a kidney or other organ unless and until they are declared dead.
Taking this intermediate step toward compensating people for offering kidneys for transplant might increase the likelihood of the best policy — the one proposed by Roth — eventually being adopted.
Donald J. Boudreaux, Fairfax
The writer is an economics professor at George Mason University and a senior fellow at the Mercatus Center.
At first glance, the airline and auto industries seem much different. Airlines are frequently in and out of bankruptcy court, while the large automakers have avoided that fate since the recession of 2007-09 thanks to massive and recurring government intervention. But both are domestic industries operating in a global world, kept afloat by a regulatory scaffolding that gives priority to producer stability over consumer welfare and industry efficiency.
While we rightly celebrate the 1978 Airline Deregulation Act, airports and foreign competitors that could serve U.S. routes weren’t deregulated. Public airport monopolies and duopolies allow airlines to raise fares. With foreign carriers prohibited from flying domestic U.S. routes, domestic fares have been kept artificially high even while load factors approached 85% just before the Iran war. As a result, when a domestic shock hits, the system lacks the diversified global networks and capital depth needed to absorb the blow.
…..
From the 1964 “Chicken Tax” to the 100% tariffs on Chinese electric vehicles in 2025, Washington has walled off the American consumer. These barriers have allowed domestic makers to abandon the low-cost econobox segment entirely, focusing instead on $80,000 SUVs. Because they are shielded from the $15,000-a-car global competitors that are modernizing fleets in Europe and Asia, automakers have become addicted to a narrow, affluent demographic.
In both industries, the government’s protectionist solution has become poisonous. By shielding companies from the efficiency frontier of global competition, we have created industries that are too small to be truly global yet too large to be allowed to fail locally.
Resolving this crisis of financial brittleness requires a shift from a national-champion model to a global-industry model.
Worried about the politics of affordability heading into the midterms, President Donald Trump has already exempted other food staples and home goods. In February, he allowed more beef imports from Argentina. He would have taken this additional step earlier if not for lobbying by ranchers, who want to keep beef prices as high as possible.
My intrepid Mercatus Center colleague, Veronique de Rugy, talks with Jessica Melugin about antitrust.
Short of praising the Met Gala, it’s hard to think of a more controversial thing you could do online than defend big business. The left has long crusaded against corporate America, but increasingly the populist right does too, turned off by toxic business practices like DEI and ESG.
But what happens when the contempt for business goes too far? What happens when it destroys a low-cost airline, hurting American workers and consumers?
This is the situation confronting those who cheered on the Biden administration’s antitrust revolution. Under the oversight of Jonathan Kanter at the Department of Justice’s Antitrust Division and Lina Khan at the Federal Trade Commission, the government largely abandoned the consumer welfare standard, which holds that the feds should interfere with mergers or business contracts only if the consumer stands to be directly harmed.
…..
The consumer welfare standard is, of course, meant to place the consumer front and center in antitrust policy. But it also functions as a restraint on regulators, creating clear and limited criteria for when government may intervene in markets. It understands that left to their own devices, regulators will act arbitrarily and create unintended consequences they can’t foresee at the outset.
This is exactly what the Biden team wrought with Spirit Airlines. Now, all eyes turn to Donald Trump. Trump has never fully thrown in with the anti-bigs, but some in his administration, including his Antitrust Division interim head Omeed Assefi and FTC Chairman Andrew Ferguson, risk paying an unhealthy amount of homage to Khan and the rest of the Biden antitrust enforcers by keeping alive antitrust suits with little obvious connection to the consumer welfare standard.
Current enforcers should treat Spirit Airlines not as a mere talking point against the Biden administration but also as a cautionary tale. The left claims to fight the bigs, but their meddling too often hurts those they try to help. The right has its own brand of populism, but it must avoid the left’s mistakes if it’s going to be effective.
For Hume, we should assume knavery in our political reasoning because collective action—the core of political life—distorts judgment and encourages knavish behavior toward those outside our social groups. Political life, in other words, brings out the knavery in us. In democratic politics, ordinary people of apparently decent character come together and end up authorizing coercive acts of injustice and, in some cases, outright moral atrocities.
Desmond Lachman warns of the U.S. government’s fiscal incontinence.
Arnold Kling brings his usual wisdom to this discussion of Zionism vs. anti-Zionism. A slice:
Once again, the Zionist project is caught in the middle of external conflicts. In this case, it is the conflict between Third Worldism and the Western tradition.
Third Worldism unites the left and Islamists. The Islamists are a bigger part of the alliance in Britain than in the United States. They have a shared hostility to markets, to American power, and to white people. (On straight vs. queer, the left and the Islamists would seem to disagree, but they apparently have set aside their differences.)
Whatever accidents of history that allowed the state of Israel to get to where it is today, I think that it would be terrible to see the country sacrificed on the altar of Third Worldism. That ideology strikes me as evil and backward. I believe that most Americans reject it. But it would not surprise me to see the Democrats adopt it in 2028.
When the state actively enters the commercial field, there is everywhere an accompanying increase of economic nationalism, no matter whether it is on the basis of socialism as in Soviet Russia or on the basis of capitalism as in Western and Central Europe.
DBx: Yes.
American progressives have much to answer for. They led the way over the decades to intrude the U.S. government into the American economy. Among the unsurprising, although not to say inevitable, outcomes is MAGAism.
Please note that I don’t excuse members of today’s “New Right” and of other MAGA-aligned movements for their economic ignorance and arrogance. I only note that their economic understanding and policy proposals share much more with those of progressives than they – and progressives – care to admit.
