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Nick Gillespie decries this decryable reality about 9/11: “We still believe in the false promise of trading freedom for safety.”

John O. McGinnis finds some things to like and much to dislike about Daron Acemoglu’s book What Happened to Liberal Democracy? Two slices:

Daron Acemoglu won the Nobel Prize in economics in 2024 and is the third most cited economist of all time. Thus, the paradox of his new book, What Happened to Liberal Democracy?, is that its most serious analytic failures are economic. He provides a sincere and serious consideration of modern liberalism’s estrangement from the working class. But when he moves from description to solutions, the basic building blocks of economic analysis disappear. Imperfect markets are compared with an idealized government. Expansive agencies are proposed while the risk of their capture—well known in public-choice theory—is ignored. And while Acemoglu is known for integrating institutions into economics, he sometimes celebrates democratic consensus without attention to the elite institutions that formed it.

Acemoglu “pitches his tent” on the left side of liberalism, arguing that it “has historically been an engine of material and social progress.” Today he believes tradition should give birth to “working-class liberalism,” which means, for him, creating a more level economic playing field and technological change that complements rather than displaces labor. The book is well-intentioned. He recognizes that elites cannot be trusted to direct culture. But he never explains why they can be trusted to direct technology, redistribution, and the administrative state.

Acemoglu argues that the postindustrial economy puts a premium on cognitive skills useful in fields such as elevating finance, health, and education, while reducing the importance of manufacturing. He claims that automation “severs the link between mass production and shared prosperity” and has resulted in “the disappearance of good jobs for workers without a college degree.” Acemoglu thus endorses the economic explanation for populist discontent popular among left-liberals.

What is original about his account is his willingness to also highlight the contribution of left-liberals to working-class alienation. As in my own book, Why Democracy Needs the Rich, he sees the class of educated liberals as attracted to social engineering because it “confers on them greater status and social influence.” Acemoglu recognizes that this class then abused its power by imposing cultural values without democratic buy-in, further alienating the working class. He rues the fact that many on the contemporary Left became “convinced that protecting minorities and vulnerable groups and building a fairer economy required silencing those with opposite viewpoints.” This is a welcome admission, but Acemoglu is selective in his political economy. His distrust of elites largely vanishes when they administer the economic policies he favors, and he also fails to consider the influence of other powerful interest groups.

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Again, Acemoglu understands in the abstract that “community-level experimentation is vital for social adaptation in a changing world” and that “experimentation is powered by variation.” But he does not make sufficient use of federalism as the constitutional mechanism that enables such variation and, over time, helps build democratic consensus. Federalism permits different jurisdictions to have different policies. Our national guarantee of free speech then allows people to talk about the consequences, facilitating debate. That is how national consensus, if one is to be had, is best reached. When people have their say without it being preempted, they are much more likely to accept the result. Federalism is to political knowledge what competition is to economic knowledge—a process of decentralized discovery.

The book’s failures have some general lessons for left-liberals. Like classical liberals, they cannot avoid answering comparative institutional questions. Do ideas like nondomination actually empower state domination? What are the specific market failures that prevent the market from boosting welfare over the long run? What mechanisms prevent redistribution and new regulatory agencies from being captured by special interests? What protects pluralism when elites want to use courts or agencies to facilitate an elite consensus on the nation? Acemoglu is right to worry that elites can turn left-liberalism into an instrument of domination. But he never explains why the new AI agency he wants to empower would not become the next instrument of elites and interest groups.

Dave Hebert – native of Detroit, son of a manufacturing worker, and GMU Econ alum – talks with Jim Vinoski about manufacturing and trade.

The Editorial Board of the Washington Post is right: “President Donald Trump’s proposal to pay every adult citizen $5,000 if the GOP holds the House and Senate this fall is a desperate gimmick that betrays a profound lack of seriousness about the looming fiscal crisis.” A slice:

Pandering politicians routinely promote expensive ideas in the months before elections. Usually they’re offering new programs, more subsidies or tax cuts that won’t be paid for. The electorate has become habituated to promises of “free” buses, “free” child care and “free” medical coverage, as well as student loan debt cancellation. Trump’s checks-for-votes scheme is just more explicit.

Also critical of Trump’s obscene effort to buy votes with promises to give each American $5,000 picked from the pocket of another American is National Review‘s Charles Cooke. A slice:

Let us start with the obvious moral problem that the money in question does not belong to those to whom Trump is promising it. Explaining his idea, the president described it as a “dividend.” But, of course, it is no such thing. A dividend is money a company pays to its shareholders, usually from its profits. The United States is not a company; the voters are not its shareholders; and, to put it lightly, there are no profits to be shared. There is no reason whatsoever that each adult in America should be sent money from the federal government; there is no reason that, if it is to be sent, that money should be equally allocated; and there is no reason to condition such a payout upon the Republicans winning the midterms. This isn’t tax policy or fiscal policy; it is a reckless, shapeless, irritable spasm, divorced from the nature and purpose of our government and from the Constitution that created it.

Practically, the idea is deeply irresponsible. “Dividend” would remain the wrong word if the United States had no debt, a budget surplus, and 5 percent annual growth. But now? We are $40 trillion in debt. This year’s federal budget deficit will exceed $2 trillion. Sending $5,000 checks to every adult would cost around $1.3 trillion — more than the entire federal discretionary budget for 2026, and equivalent to about ten years of revenues from the tariffs that Trump’s feckless vice president insists will pay for this latest foray. Last year’s tax bill corrupted the sensible reforms of 2017 by adding a patchwork of irrational exemptions and special treatments: deductions for people who live in fiscally profligate states; preferences for workers who earn some of their income from tips; an expansion of the entitlements that are bankrupting us; and more. Trump’s checks-for-everyone gambit would corrupt our already corrupted budget in a similar — and considerably more consequential — manner.

Politically, the act would confirm for all time that the second Trump administration has been a failure. Trump was returned to office because a majority of voters believed that he could get inflation under control and thereby lower prices. Instead, Trump has publicly called for aggressive interest-rate cuts and imposed tariffs on all sectors of the economy. Adding another $1.3 trillion in stimulus would without doubt make the status quo worse. The populists are fond of insisting that the choice is between them and the socialists. This morning, that contention seems preposterous. Leaving to one side that the deliberate stoking of inflation by a president who defines himself as an anti-socialist is likely to lead to a thermostatic increase in the socialists’ support, one must ask the obvious question: If this is populism, what need is there of socialism at all?

Or as the Wall Street Journal‘s Editorial Board puts it: “Trump has a $5,000 bridge to sell you.” A slice:

Mr. Trump is resorting to this because voters are unhappy about inflation and don’t think his economic policies have helped them. His tariff tax increases are a big part of the reason. If he repealed those, he’d give the country an economic dividend without spending a dime.

Charles Hilu documents that cowardly GOP politicians willingly embarrass themselves by offering absurd justifications for Trump’s economically clueless policies – in this case, for Trump’s proposed ‘dividend’ checks of $5,000 to every adult American if the GOP retains control of both the House of Representatives and of the Senate. Two slices:

“Republicans have been fighting fraud, waste, and abuse in a lot of the mandatory programs,” Representative Andy Harris of Maryland, head of the conservative House Freedom Caucus, told National Review. “We should probably take half of those savings, apply half to the deficit, and then send the other half to citizens as a dividend check.”

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“I think the point he’s making and the point Republicans are making is that, with a growing economy, you cut the tax burden, you cut the regulatory burden, you get investment, you grow the economy, you get rising wages, and we are more about making sure people control their dollars and not hand all their dollars to government,” Senator John Hoeven of North Dakota told reporters.

About J.D. Vance’s outlandish attempt to justify Trump’s $5,000-per-adult-American vote-buying scheme, Brit Hume tweets: (HT Scott Lincicome)

What Vance is saying here is rubbish and he’s smart enough to know it. Politicians have been, in effect, bribing voters with their own money forever, but this takes it to a new level, not least because the tariff money wouldn’t come close to covering the payouts.

My intrepid Mercatus Center colleague, Veronique de Rugy, reveals the many problems with J.D. Vance’s scheme for government to subsidize stay-at-home parents.

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… is from page 637 of the final (2016) volume – Bourgeois Equality – of Deirdre McCloskey’s soaring trilogy on the essence of bourgeois values, on their transmission:

People want dignity, even more than they say they want income equality. And in a modern economy they achieve it. If we insist on ignoring the equality of genuine comfort, and if we marshal populist politics agains a first-act inequality of income that yields enrichment for the poor as much as it yields baubles for the rich, we can kill dignity and material comfort for the rest of us. It’s happened, repeatedly.

DBx: A wise and timely warning, this.

Please join me in wishing Deirdre a very happy birthday today. May she – for our sake no less than for her’s – live to see many, many more!

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… is from a recent Facebook post by GMU Econ alum Dave Hebert:

China has over 200 million workers in manufacturing, right now and produces roughly twice as much output as the 12.6 million American manufacturing workers.

In other words, ONE American manufacturing worker is as productive as EIGHT workers in China.

The American manufacturing worker (and sector) does not need to be “protected” from the rest of the world. They need to be unleashed upon the world.

DBx: Indeed so.

The graph was put together by GMU Econ alum Mark Perry and shared with me recently by email.

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Matt Ridley writes with his usual deep insightfulness about innovation. Three slices:

There is a paradox at the heart of innovation that I have yet to resolve in my own mind. Looking backwards, innovation looks inevitable and therefore predictable: once you invent the drone, warfare changes; once you invent the internet, social media arrives; once you invent electricity, the light bulb is unavoidable. Looking forwards, however, nobody sees these things coming.

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This unpredictability causes some very clever people to say some very stupid things when lured into speaking about the future. Talk of nuclear energy was “moonshine”, said Ernest Rutherford, the man who split the atom, in 1933. “There is no reason anyone would need a computer in their own home,” wrote Ken Olsen, the founder and chairman of the most successful computer company of the time, Digital Equipment Corporation, in 1977. “By 2005 or so it will become clear that the Internet’s effect on the economy has been no greater than the fax machine’s,” wrote the Nobel prize winning economist Paul Krugman in 1998. “There’s no chance that the iPhone is going to get any significant market share. No chance,” said Steve Ballmer of Microsoft in 2007.

This is why I insist there is no such thing as an expert on the future and “modellers” who pretend otherwise are often little better than those who practised “haruspicy” – interpreting the entrails of chickens. Complex dynamic systems like the economy, the weather or an epidemic just are not susceptible to anything resembling foresight, however sophisticated the mathematics that go into the models. In his 20-year study of expert predictions in economics, Philip Tetlock showed that the average expert was no better at foretelling what will happen in the future “than a dart-throwing chimpanzee”.

…..

Anyway, as I say, I still find it hard to reconcile the unpredictability of the future with the inevitability of innovations that follow certain inventions. One way to resolve this paradox, following Friedrich Hayek, is to remember that knowledge is dispersed throughout society – held as much between and among our heads as inside them. The wisdom of crowds decides when and how to apply a new technology and is far wiser than me, you or Ernest Rutherford.

Another solution is to invoke what I call Amara’s hype cycle. Roy Amara was a computer scientist in Silicon Valley in the 1960s. He was almost certainly not the first person who said this, but he was one of the clearest: that we underestimate the impact of a new technology in the long run but we overestimate it in the short run. That is why we are often disappointed by the early impacts of an invention (Krugman and the internet, for instance) but taken by surprise later. To put it in more technical terms, the adoption and development of an innovation is non-linear. It starts slowly, then takes off suddenly. That is inherently hard to forecast.

The Editorial Board of the Washington Post warns against the hysterical warnings about AI. Two slices:

These warnings have received outsize attention. Who can blame the public, already uncertain about the technology’s impact on their lives, for taking them seriously?

The forecasts are concerning, but they merit a certain skepticism. People working at the frontier may know more than most about what today’s models can do. But that does not give them special knowledge of what machines that do not yet exist will someday become — or how society will adapt to the challenge.

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Silicon Valley’s prophets of doom want government to fear AI enough to prohibit an unknowable future. The better answer is to make AI companies fear the consequences of behaving recklessly in the present.

Reason‘s Eric Boehm continues to write brilliantly against Trump’s protectionism battering of Americans’ economic freedom. A slice:

In short, the latest escalation of the pointless trade war with Canada means that Americans will no longer have the option of paying a hefty tax for the opportunity to import Canadian beer, wine, or liquor. That choice has now been revoked by the whim of one man—who is determined to substitute his own preferences for the free will of American businesses and consumers, the vast majority of whom do not quarrel with their trading partners on the northern side of the border.

Jonah Goldberg makes clear that J.D. Vance has almost nothing of relevance in common with Ronald Reagan. Three slices:

More to the point, it’s not the fault of Vance’s critics that people call him a postliberal. Vance has said he considers himself part of the “postliberal right.” When he was a senator, he told fellow postliberals that he was “explicitly anti-regime.” Now, I will give Vance the benefit of the doubt that he meant the Biden administration. But since we’re dinging the misuse of terms, it’s worth noting that in America the “regime,” as committed postliberals will acknowledge, is not a presidential administration but the constitutional order, or republican system of government. Vance, a Yale Law School graduate, surely knows this. Though his defenses of Donald Trump’s attempt to steal an election  suggest perhaps a more troubling understanding of the American regime. Vance’s association with “nationalism” isn’t as strong, but reasonable people can look at his speeches to Yoram Hazony’s National Conservatives as evidence that he sees himself as a nationalist as well. Hazony himself certainly thinks that’s the case.

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Whether you think Vance is a postliberal, a nationalist, or simply a more mainstream principled conservative political pragmatist, one thing you can’t persuade me—or many others—of is that he’s a Reaganesque politician in this regard. His big tent has a large and welcoming opening for edgelord Twitter addicts, traffickers in antisemitic bilge, and other fever-swampers, not to mention the aforementioned postliberals and nationalists who applaud “anti-regime” red meat. He encouraged the demonization of Haitian immigrants: “don’t let the crybabies in the media dissuade you, fellow patriots. Keep the cat memes flowing.” He rhetorically tilts to a form of nationalism that ranks heritage Americans and descendants of combatants—on either side!—of the Civil War above more recent arrivals. That is not how Reagan talked—or thought—about America.

Whether it’s just the need to impress his boss, or a sign of his online addictions, or pure pragmatic surrender to the nastiness of our politics, or the epiphenomena of some deeper phenomenological grievances and resentments, Vance embraces the idea that politics is mean and that meanness is self-justifying. Some of his fans can’t see it because fish don’t know they’re wet. Some do see it, but write it off as the price of politics in pursuit of the noble and necessary goal of purging what Michael describes as “an excess of liberal ideology in our ruling class and their institutions.” And some just love the meanness on its own terms.

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Vance is the chosen candidate of the very online, very angry, and very hostile factions of the right. He’s the choice of Kevin Roberts, Turning Point USA, and, at least until recently, Tucker Carlson—the same Carlson who Vance can’t bring himself to meaningfully criticize, even as Carlson seeps ever deeper into the antisemitic and paranoid swamp.

Phil Magness, Kevin Corinth, Scott Winship, and others discuss long-term trends in Americans’ living standards.

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… is from page 289 of Frank Knight’s January 1948 Philosophical Review paper, “Free Society: Its Basic Nature and Problem,” as this paper is reprinted in Knight’s 1956 collection, On the History and Method of Economics:

The establishment of freedom, rooted in the liberation of the mind from traditional dogma and mythology, enforced by ecclesiastical and political authority, is the greatest revolution of all time or since the dawn of conscious life.

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Here’s a letter to a new correspondent.

Mr. Barnett:

Thanks for sharing Oren Cass’s September 4^th post in which he argues that Trump’s tariffs are successful. Here are two reactions – one general, the other detailed.

First, no informed free-trader denies the possibility that protectionism can raise domestic manufacturing output, employment, and wages. Therefore, positive movements in these statistics do nothing to discredit the case against protectionism. That case is about the economy as a whole. Tariffs that artificially direct workers, capital, and other resources into manufacturing direct those same workers, capital, and resources out of other productive employments. Cass errs by implying that the rise in total manufacturing output and employment, and in some wages, are evidence of protectionism’s success.

As it happens, since “Liberation Day” (April 2^nd, 2025) the average inflation-adjusted wage in the non-farm economy as a whole has been flat, with the average real wage for all production and non-supervisory workers actually falling somewhat.*

Second, while it’s true that manufacturing output is up since “Liberation Day,” Cass too quickly praises protectionism. Indeed, if, as Cass suggests, we should interpret this change in manufacturing output as an effect of trade policy, then protectionism looks pretty bad.

In the 16 months starting in April 2025 through July 2026, manufacturing output rose at an average monthly rate of 0.12%. How does this figure stack up against past performances of manufacturing output, over the same time span, following some notable trade events – events that Cass and other protectionists routinely decry? Answer: Not well.

In the first 16 months (January 1976 through April 1977) of the U.S.’s current 50-year string of annual trade deficits, manufacturing output rose at an average monthly rate of 0.30% (or 2.5 times faster than the rate of growth since “Liberation Day”). In the first 16 months of NAFTA (January 1994 through April 1995), manufacturing output rose at an average monthly rate of 0.34% (or nearly three times faster than the rate of growth since “Liberation Day”). And in the first 16 months (December 2001 through March 2003) of China’s membership in the WTO, manufacturing output rose at an average monthly rate of 0.23% (or almost twice as fast as the rate of growth since “Liberation Day”).**

I concede that it’s child’s play to torture data into humming a desired hymn. But examination of enough appropriate data, over sufficiently long time spans, convincingly reveals that protectionism makes countries poorer while free trade enriches.

The empirical literature here is vast. It includes, but is hardly limited to, James Gwartney, Robert A. Lawson, Ryan Murphy, Matthew D. Mitchell, Horst Feldmann, and Walker Wright, Economic Freedom of the World: 2025 Annual Report; Douglas Irwin’s 2020 Free Trade Under Fire, Arvind Panagariya’s 2019 Free Trade & Prosperity; James Feyrer, “Trade and Income – Exploiting Time Series in Geography,” American Economic Journal: Applied Economics, Vol. 11, October 2019; and Romain Wacziarg and Karen Horn Welch, “Trade Liberalization and Growth: New Evidence,” World Bank Economic Review, Vol. 22, June 2008.

If you correspond also with Oren Cass, I recommend that you ask him to engage with this literature.

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

* I asked Claude to do these calculations: https://claude.ai/share/3c279e58-588c-4ce6-a9cc-6397fb35247b

** Calculated by me from these data.

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National Review‘s John Puri decries J.D. Vance’s latest collectivist policy proposal: Government subsidies for stay-at-home parents. Two slices:

Meanwhile, the administration’s proposal would expand eligibility for the subsidy to millions of married mothers who already choose to stay home. Those families would get the same kind of deadweight spending that went to the 75 percent of EV tax-credit recipients who would have purchased an electric car with or without the subsidy. Millions of other well-off married parents could stop working and reduce their incomes enough to newly qualify for the benefit.

Defenders insist that the proposal would merely repurpose existing spending, not add any more. But it would be impossible to target the new subsidy at only those parents who would otherwise work. If spending truly wouldn’t grow to accommodate new recipients, the change would necessarily redirect benefits from poorer single parents.

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The vice president and his allies are doing a motte-and-bailey routine. Among themselves, they openly discuss using state power and taxpayer money to privilege traditional ways of life. Then, when scrutinized by conservatives, they say they are just shifting current spending around. But no, this is a Republican administration seeking to expand the entitlement state so it can influence social outcomes.

Peter Earle unravels what shouldn’t be – but, alas, what nevertheless for many people is – a tariff mystery. A slice:

Impose a tariff. Businesses warn that costs will rise. Economists explain that tariffs are taxes on imports paid initially by domestic importers. Firms begin adjusting supply chains, absorbing margins or passing some of the additional cost downstream. Then exemptions appear, rates decline, offsets materialize, or entire categories of goods are quietly removed.

And we are asked to believe that the one thing connecting those decisions is not the cost imposed on Americans.

The November 2025 food exemptions are particularly difficult to explain away. The administration removed tariffs from products including coffee and beef amid concerns about grocery affordability. Contemporary reporting explicitly described the move as tariff relief aimed at easing pressure on consumers. But…? No, never mind.

This does not mean every tariff increase produces an immediate, one-for-one increase in retail prices. Exchange rates move. Foreign producers sometimes absorb part of the tax. Importers compress margins. Inventories delay pass-through. Businesses substitute suppliers. Consumers substitute products. The incidence of a tariff can be distributed across several parties and over time.

But none of that rescues the proposition that tariffs somehow make Americans richer by making imported goods more expensive. The repeated reversals demonstrate what should, for a nation owing so much to markets, prices, and property rights, be embarrassingly basic economics. When taxing an imported product begins creating politically uncomfortable consequences, the solution repeatedly turns out to be…taxing it less.

Justin Wolfers warns of the long-run ill-consequences of Trump’s tariffs punitive obstructions of Americans’ purchases of goods offered for sale by Canadians. Two slices:

One admirable thing about the president — and I’m being serious here — is that he ran as a tariff man. He was elected on that promise. He loves tariffs. He wanted to impose them. He was very, very clear about that.

Here’s the thing he didn’t do. Not once during the election campaign did he say that the country he wanted to target was Canada. Why?

The idea is absurd. Canada is a longtime friend and ally. We have deeply integrated manufacturing supply chains. It would hurt people in Canada. It would hurt people in the United States. And the president’s political instincts were strong enough that he understood not to run on tariffs against Canada.

Then he won the election. Many people forget that the very first trade policy action of the new Trump administration was a set of tariffs on Mexico, China, and Canada.

These were the so-called fentanyl tariffs. The stated goal was to use access to the American market as leverage to get those countries to stop the flow of fentanyl across their borders. That is fair enough, and the objective is good. There’s one problem, though. Almost no fentanyl came from Canada.

There was almost nothing Canada could do to eliminate fentanyl manufacturing or stop exports of fentanyl, because they basically didn’t have a fentanyl trade to stop in the first place. The stuff was crossing north from the United States about as often as it was crossing south.

So from Canada’s perspective — and from reality’s perspective — this was an arbitrary set of tariffs imposed because of something they hadn’t done. They retaliated with their own tariffs in March and April of 2025. Then the Supreme Court ruled the fentanyl tariffs unconstitutional, they vanished, and the president more or less forgot about Canada.

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We are now busily converting that one market into three separate ones. And what we’re spending to do it isn’t the tariff revenue, which is trivial, and it isn’t the 4% of Canadian exports, which they’ll re-route. What we’re spending is Canada’s belief that we are a country worth building a factory next to.

We lose the cluster. We lose the investment that would have come to the border. We lose the cheap parts that made American cars competitive. And we lose the thing that takes generations to build and one weekend to break, which is the assumption that a deal with the United States is a deal.

Bloomberg reports on strengthening ties between Canada and the E.U.

This CNBC piece only further confirms Trump’s complete ignorance of basics facts of international commerce. (HT Scott Lincicome)

The market is a process – an example of which is this reported in Wall Street Journal op-ed by Scott Morrison, who explains that in response to China’s attempt to abuse its large market share in critical minerals, “the U.S., Australia and other allies are finding ways to build around it.” A slice:

When a government exploits a chokepoint, whether Iran holding the Strait of Hormuz or China bringing down the boom on rare earths, it takes a risk. In the short term, Iran or China will achieve asymmetric gains, but over time these returns will diminish. Inventories rise, customers diversify, producers change investment plans, and infrastructure that had been too expensive becomes economical. That’s happening now with China’s hold on critical minerals, and it’s why Beijing’s trading partners are working together more effectively to break that hold.

Looking back, China probably did its trading partners a favor by exploiting the chokepoint it spent decades establishing. Dependence on China for critical minerals has been a national-security vulnerability for those trading partners for decades. We knew that well before China imposed export controls in 2023.

Reason‘s Jacob Sullum tells of growing opposition to Flock cameras.

Here’s Lynne Kiesling on Tocqueville.

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… is from page iv of the late Nobel-laureate Gary Becker’s Foreword to the 1990 second edition of David Friedman’s superb textbook, Price Theory: An Intermediate Text:

[C]onsider tariffs, quotas, and other protection against imports. Almost 200 years ago, Alexander Hamilton argued that “infant” industries in the United States should be protected by tariffs so that the growth of those industries would not be stifled by competition from imports. Yet the evidence is clear that import protection is mainly given not to growing infant industries but to what Friedman calls “senile” industries, like steel and shoes. He shows how competition for political influence among special interest groups provides political support for tariffs and other trade restrictions that mainly benefit old declining industries.

DBx: Yep.

I’ll here add one small addition to Becker‘s point. Hamilton argued that in many cases so-called ‘infant-industries’ are best nurtured, not with tariffs, but instead with “bounties” (that is, with subsidies – which Hamilton recognized as having much, although not everything, in common with protective tariffs).

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Economics textbooks teach that a core function of government is to “internalize externalities.” Observation teaches that a core function of government is to externalize internalties – as I explain in my latest column for AIER. A slice:

The most obvious example is taxation for purposes of income redistribution. Whatever the merits or demerits of a policy of redistribution, the essence of any such policy is that some people (the net recipients of tax revenues) live partially at the expense of other people (the net payers of tax revenues). Consistent application of the economic logic that powers textbook explanations of externalities leads to the conclusion that government-engineered income redistribution causes too many people to seek such redistribution (chiefly, by exerting less effort than they otherwise would to increase their own earnings), while at the same time causing high-income earners to exert too little effort at earning taxable income.

Absent redistribution, each person would be paid as income an amount closer to the value of what he or she contributes to the market economy — meaning, the market causes  each person to internalize the costs and benefits of whatever amount of effort they choose to devote to earning income. But redistribution obstructs this market result; it artificially dims both the personal penalty for not working and the personal reward for working.

Another example of the externalization of internalities is protectionism. Producers’ earnings in competitive markets reflect roughly the value of that product to consumers. When consumers spend their own incomes in whatever peaceful ways they choose, they personally pay the costs and reap the benefits of their choices. Producers that better please consumers are rewarded with higher profits — higher profits voluntarily paid to them by consumers. Markets, in other words, internalize on producers the value of their efforts to please consumers.

Protectionist tariffs and non-tariff barriers, by contrast, externalize this internality. By shrinking consumers’ range of choices, protectionism artificially increases consumer demand for the outputs of protected producers. Protected producers thus earn higher profits without creating more value for consumers. A consequence that belonged inside the producer-consumer relationship has been transferred outside it.

Protected firms free-ride on a portion of their fellow citizens’ incomes — the funds these citizens would otherwise have spent on imports. As a result of protectionism, producers exert less effort than otherwise to please consumers. Far from correcting a market failure, protectionism distorts markets. Protectionism externalizes an internality.