There is an article at The National Interest by Michael Lind that I found thought-provoking. Its subject is “geoeconomics”:

FOR DECADES, the study of international security has been divorced from the study of international trade and investment, along with domestic economic development. In political science departments on university campuses, self-described realists debate defense and diplomacy with idealists of various kinds. In the economics department next door, there is no debate; the academic economists almost unanimously agree that free trade and investment benefit all sides. They instead postulate an ideal world where national borders would be insignificant and there would be free flows of goods, services, money and labor.

Even before Donald Trump became the first president in living memory to explicitly promote U.S. economic nationalism, the wall that divided the national-security realists and the free-market economists was crumbling—mainly because of the rise of China, which has benefited from a version of statist economics while challenging U.S. military hegemony in Asia. Slowly but inevitably, debates about national security and the global economy are merging into a single dispute about relative national power. This marks a revival of what Edward Luttwak has called “geo-economics.”

The article includes observations with which I agree and some about which I am skeptical. For example, IMO this is obvious:

Any country which hopes to be an independent great power must be able to obtain and maintain its own state-of-the-art manufacturing sector, if only for fear of falling behind in the economic arms race inspired by the security dilemma.

except, presumably, to those who think the United States can remain an independent great power on the basis of finance, health care, and other service industries while diminishing its manufacturing sector.

I’m skeptical about this:

In the jejune version of Econ 101, which is all that most policymakers and pundits know of economics, all markets are naturally competitive and divided among many small producers. There are constant or diminishing returns to scale—that is to say, a bigger producer is not necessarily more efficient than a small one.

This assumption was valid in the pre-industrial era, when a single blacksmithing firm employing a thousand blacksmiths working side by side under one roof could not turn out horseshoes any better or more rapidly than a thousand self-employed blacksmiths. But modern mechanized manufacturing industries are characterized by increasing returns to scale. An automobile factory with assembly lines can churn out automobiles more efficiently and cheaply than a team of artisans assembling one automobile at a time by from scratch.

Based on my knowledge and experience, while businesses that have increasing returns of scale up to a point are commonplace, businesses that have increasing returns at any scale are extremely rare. If that were not the case natural monopolies would be very common. Study after study has found that they are vanishingly rare. In almost every case monopolies are a consequence of policy rather than of natural forces.

That is true for multiple reasons. For one thing, while the cost per unit of inputs may go down up to a certain point, they plateau. It’s generally cheaper although not a lot cheaper to buy 10 smartphones than it is to buy 1. Is it really a lot cheaper per unit to buy 100,000 smartphones than it is to buy 10,000?

Additionally, bureaucracies don’t increase in cost linearly with size but at best at n log n or, more likely at n². Consequently, I suspect that the likelihood of a business or an industry to realize increasing returns to scale depends on the relationship between the cost of inputs and the price of outputs at all scales.

I found this claim intriguingly vague:

In increasing-returns industries, including the manufacturing industries that are the basis of modern military power, Econ 101 does not apply. Markets are imperfect. Efficiency is produced by scale, not competition. Because bigger firms and establishments are more efficient, unchecked competition tends to drive out small firms, leading to oligopoly and perhaps to monopoly.

What are “increasing-returns industries”? Is there such a thing? This smacks of “no true Scotsman” to me. Going from the general to the concrete, are Chinese manufacturers able to produce less expensively than U. S. manufacturers because of economies of scale or because of lower labor costs per unit output?

I think there are unquestionably rent-seeking sectors in which managers are able to lobby to prevent competition. That is amazingly common. I wish Mr. Lind would name specific companies so I could test his hypothesis.

I also think that developments like improved communications and additive manufacturing are disrupting the operations of companies in practically every sector at a ferocious rate. While it is true that by 1920 an automobile assembly line could produce automobiles faster and less expensively than an individual artisan could in 1900, I’m not convinced that the same conclusions can be drawn about producing things in factories that can now be produced in the home using a 3D printer, especially when transportation costs are taken into account.

At Politico Aaron David Miller, Eugene Rumer, and Richard Sokolsky explain why removing our troops from Syria is the right course of action:

U.S. policy in Syria has been unclear, confused and unrealistic for nearly a decade—a never-ending mission impossible without realistic goals or the means to achieve them. Yes, people are rightly enraged at Trump’s willful abandonment of the Kurds and his disregard for U.S. credibility and interests. But this indignation should not obscure the fact: U.S. policy in Syria was headed for trouble. Chaotic and destructive as they are, Trump’s actions have served to lay bare some uncomfortable truths and realities about U.S. policy toward Syria. Yes, Trump has played the role of both arsonist and fireman. He can sanction Turkey and send Vice President Pence on any number of cease-fire missions. But there’s no going back. A new approach, and not a quixotic American vision of how we would like Syria to be, is now required.

They present five reasons:

1. The cooperation between the United States and Kurds in Syria has been purely pragmatic on the part of both parties. Now pragmatism points in another direction.
2. Allowing Russia to be the power broker in Syria is more in our interests than trying to assume that role ourselves.
3. Assad is not a good guy but he or his regime will remain in power in Syria for the foreseeable future and that’s better than the likely alternatives.
4. DAESH won’t go away but fighting terrorists in Syria won’t stop terrorist attacks in the United States.
5. Syria is not a vital U. S. interest.

The three authors of the article are genuine authorities in their fields with extensive credentials and experience; they are not partisan hacks. But they don’t represent the interventionist cabal that has dominated Washington foreign policy thinking for so long, either. If your antipathy for the Trump Administration is not based solely on the person of Trump and you wish that Trump would consult with some experts before acting, these three are precisely the sort of experts he should be heeding.

There’s a good post by John Cochrane at his blog. Here’s a snippet:

Economists should be spending their time studying the disincentives of the tax system, not its “fairness,” on which we have little professional expertise. Yes, you heard it here, economics really has nothing to say about whether “the rich” should pay more or less taxes — but we have a lot to say about what happens to economies that tax away the incentive to become rich, to study, move, start businesses, innovate, hire others, and produce great products along the way. But the (dis) incentives of the tax system are even more opaque, again deliberately. Not even every tax economist I have ever asked the question of can answer “what is your all-in marginal tax rate?” If it were clear, I suspect a lot more people would stop working!

He puts in an oar for a value-added tax. Value-added taxes have two main defects: they are largely hidden and they are terribly regressive. It is possible to correct the regressivity. For example, you could “prebate” the tax on a sliding scale based on income. That would also have the problem of eliminating the simplicity of the VAT. Not a single country with a VAT does this which I think should tell you something.

You could also prebate the tax without respect to income a la Andrew Yang. That reduces the regressivity while preserving the simplicity. IMO a VAT while intellectually appealing would be disastrous in the United States due to our low degree of social cohesion and the furtiveness of the VAT. It would also be catastrophic for state and local governments.

At RealClearPolitics Igor Magalhaes asks a great question—how do you measure border security?

The border is remarkably vast and diverse: 1,933 miles long, with varying climates and terrains, stretching from the Pacific coast to the estuary of the Rio Grande River. This makes monitoring, enforcing laws, and measuring activity extremely demanding.

The clandestine nature of illegal immigration is another obstacle. While the increased use and reliability of technology have made monitoring the border more efficient, it is still far from perfect. The lack of assets in remote areas and sophisticated evasion techniques allow many foreign nationals to enter the country undetected.

Given that it is currently impossible to physically detect all illegal border crossings, other methods are used to gauge border security. Conducting surveys and using statistical models are two of them. While both are useful tools and provide great insight, neither is immune to defects. Their primary flaw is that they fail to incorporate major groups of the border crossing community by focusing mainly on adult Mexican nationals — who now make up a decreasing percentage of illegal border crossers.

The failure to capture the true composition of border crossers is actually a feature of the whole border security metrics’ framework. This is especially true with the absence of asylum claims — the leading cause of the current crisis — in their measurements.

Apprehensions are, obviously, a terrible metric. They tell you almost nothing. You don’t know whether apprehensions represent 1% of those entering, 10%, or 90%.

It would help if there weren’t a taboo against determining how many people are in the country illegally and how long they’ve been here. The figure 10 million is often thrown out but the actual figure may be much, much higher.

I’m not even sure how you’d go about measuring border security. Unfortunately typically for the sort of piece this article represents, the author does not appear to, either.

The editors of the Wall Street Journal say that the only winners in the recently settled GM strike are the union leaders:

Remind us again why the United Auto Workers went on strike for five weeks against General Motors ? The terms of the tentative deal struck this week show that the union made itself look relevant at the cost of lost wages and perhaps future profit-sharing for workers.

UAW leaders this week agreed to a new four-year labor contract with GM, though 46,000 workers won’t return to work unless they ratify the deal by next Friday. Most will have lost more in pay during the strike than they appear to have gained in the new contract.

The company itself, too, has lost:

By some estimates the strike has cost GM $2.5 billion in profit, which will reduce the annual profit-sharing bonuses that go to workers. While the labor deal includes an $11,000 per worker ratification bonus—$3,000 more than what GM originally offered—we calculate that workers lost between roughly $5,100 to $8,200 in pay during the strike, based on their hourly wage rate.

All of this sounds terribly familiar to me. It reminds me of G. K. Chesterton’s wisecrack, “It is terrible to contemplate how few politicians are hanged.” Obviously, politicians aren’t the only ones.

In her column at the Washington Post Megan McArdle sings the praises of the Cleveland Clinic’s “patient-centered” model of health care delivery and urges Democrats to devote more attention to health care delivery rather than just focusing on payment:

If you offered sick people a choice between reforming the payment side of the system so that everything functions more like Medicare, or reforming the delivery side so that all hospitals function more like the Cleveland Clinic or Kaiser, they might well choose to reform the delivery side. Medical bills are scary, of course, but so is navigating through the fractured mazes of different systems that most very sick people end up caught between — in which vulnerable patients often feel like a lost package, or else an industrial input. So it’s worth asking why Democratic politicians — like too many health systems — seem so relentlessly focused on the money rather than the patients.

One answer is that reforming delivery systems is hard. The government can’t command other health systems to replicate the cultural values, or the institutional expertise, of a Kaiser Permanente or a Cleveland Clinic or a Mayo Clinic. All the government can do is alter payment schedules. And when the Obama administration tried to use that financial lever, it turned out that in the absence of a better institutional culture, patients saw, at best, marginal improvements. At worst, the results were perverse: New Medicare rules that penalized hospital readmissions seem to have resulted in the deaths of some patients.

Unfortunately, if Democrats aren’t going to reform the delivery system, then they probably can’t reform the payment system, either. Because unless America gets a handle on how patients are cared for, we can’t care for millions more of them at a price the American taxpayer will accept.

The phrase “the willing suspension of disbelief”, originally coined by the poet Samuel Taylor Coleridge, refers to Aristotle’s theory of the drama in which the viewer allows him- or herself to accept fiction as reality to experience a catharsis, an overturning of the emotions that brings reality into a different perspective.

Support for Medicare for All requires the willing suspension of disbelief. To accept it as financially, politically, and practically workable you must believe that physicians have lots of slack capacity and will accept a substantial pay cut. I know physicians. I have physicians in my family. I have yet to meet a physician who was not industrious in the extreme. I do not believe that our health care providers have a lot of slack capacity.

I do think that physicians are overpaid for the same reason I think that Chicago teachers are overpaid. The compensation of professionals must remain tethered to the abilities of the communities they serve to pay and both physician pay and that of Chicago teachers have lost that mooring. Despite that belief I do not believe that physicians will accept a pay cut without changing their behavior.

Our current health care providers cannot deliver 3% or 6% or 10% more care. Doing that will require 3% or 6% or 10% more providers. Because of the way health care is actually provided in the United States providing more care may well require a lot more than that. The approaches used by the Cleveland Clinic which include detaching output from physician compensation and a sort of assembly line approach to medicine may well allow more care to be provided without increasing costs but I don’t believe that will be enough.

That will require much more drastic changes including changes of attitude on the part of both providers and patients and changing attitudes is something very hard to effect. Accepting that will take place without dire necessity would require a willing suspension of disbelief on my part.

In his most recent New York Times column David Brooks points to the grave moral necessity of voting for Elizabeth Warren in 2020:

And yet, if it comes to Trump vs. Warren in a general election, the only plausible choice is to support Warren. Over the past month Donald Trump has given us fresh reminders of the unique and exceptional ways he corrupts American life. You’re either part of removing that corruption or you are not. When your nation’s political system is in danger, staying home and not voting is not a responsible option.

Politics is downstream from morality and culture. Warren represents a policy wrong turn, in my view, but policies can be argued about and reversed. Trump represents a much more important and fundamental threat — to the norms, values, standards and soul of this country.

That sounds familiar to me since precisely the same argument was made to me for voting for Hillary Clinton. What is that old wisecrack about doing the same thing repeatedly and expecting different results? The Democrats seem hellbent on reproducing Hillary Clinton as closely as possible in their candidate for 2020. Except this time around it’s Hillary Clinton with even less meaningful experience and practically no discernible interest in foreign policy.

Maybe the results will be different this time.

At the Wall Street Journal Laurence Kotlikoff critiques the NYT by Saez and Zucman I commented on last week:

Economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley are advising Elizabeth Warren’s presidential campaign and drawing generous media attention for their assertion that the U.S. tax system is flat—that the middle class and poor pay as great a share of their income in taxes as the rich. They’re wrong, and three huge mistakes underlie their analysis.

The biggest mistake is to focus on gross, not net, taxes. They ignore transfer payments, like Social Security, which are disproportionately paid to the poor. In doing so, they mistake language for economics.

To see the problem, consider a simple thought experiment. Joe, a minimum-wage employee, earns $15,000 a year. The government taxes Joe $1,000 and transfers him $600, so that he pays $400 on net. In another scenario, Joe pays $10,000 in taxes and collects $9,600 in transfer payments. Again, he pays $400 on net. But in the first scenario, Messrs. Saez and Zuchman would report Joe’s gross tax rate as a reasonable 6.7% ($1,000 over $15,000). In the second, they’d call it an onerous 66.7%.

The flaw in their method is even more obvious when you consider that American tax laws incorporate benefit subsystems, and benefit laws incorporate tax subsystems. The federal personal income tax, for instance, includes the earned-income tax credit, a major transfer program. The Social Security benefit system includes the earnings test, a major tax. If the focus is on gross taxes, should the EITC be excluded and Social Security’s earnings test included? Economics can’t say. What it does say is look past the language and measure net, not gross, taxes.

Messrs. Saez and Zucman’s second mistake is measuring progressivity on a one-year rather than a remaining-lifetime basis. That ignores the fiscal system’s double taxation: Income earned, taxed and saved this year will be subject to future taxation on interest, dividends and capital gains. This omission disproportionately understates taxes for the rich, who save at a higher rate. The current-year focus also understates benefits paid to the poor, since future benefits are a bigger share of their resources.

Their third mistake is failing to adjust for age. The old have paid most of their lifetime taxes, which makes them now look like tax cheats, particularly those who saved out of previously highly taxed labor income. With changing demographics, this problem will deeply confuse tax progressivity comparisons over time.

Economic theory suggests a better way to measure fiscal progressivity: Include each and every federal and state tax and benefit; measure net, not gross, taxes; focus on each age group separately; add together the present value of each future year’s net taxes; and measure a household’s remaining lifetime net tax rate by dividing the present value of its remaining lifetime net taxes by the household’s remaining lifetime resources—its current net wealth plus its human wealth (the present value of its future labor earnings).

Yes, that’s a mouthful, and making the calculations is even more difficult than describing them. But another UC Berkeley economist, Alan Auerbach, and I have made them. Our findings, based on the Federal Reserve’s 2016 Survey of Consumer Finances, could not differ more from those of Messrs. Saez and Zucman.

I’ll focus on 40-year-olds, but the results are similar for all age groups. Each dollar of pretax remaining lifetime resources of those in the top 1% of the resource distribution is, on average, taxed on net at a 34.5% rate. For those in the top quintile, the average net tax rate is 28.4%. For those in the bottom quintile, every dollar of pre-tax resources is matched by a 46.6% net subsidy. (The tax rises steadily to 4.2% for the second quintile, 12.6% for the third and 18.5% for the fourth.)

Thus, far from being flat, the net tax rate facing middle age Americans rises rapidly with their resources—from negative 46.4% for the bottom 20% to positive 34.5% for the top 1%. The average net rates for the current year only (not including future net taxes) for this cohort understate true progressivity. They range from negative 9.8% for the bottom 20% to positive 38.2% for the top 1%.

Our study also considers inequality in remaining lifetime spending rather than partial measures like inequality in wealth, to which French economist Thomas Piketty has paid so much attention. Spending—including the ability to pass money to your child using bequests and gifts—is, after all, the key concern. Among 40-year-olds, the richest 1% own 34.1% of their cohort’s net wealth, but account for only 14.5% of its remaining lifetime spending. The poorest 20% own only 0.6% of the cohort’s wealth, but are expected to do 7.3% of its spending.

America’s progressive fiscal system, as well as the more even distribution of human wealth, makes spending inequality far smaller than wealth inequality. Nonetheless, average spending by top 1% households is miles higher than average spending by those in the bottom fifth. Like Messrs. Saez and Zucman and Ms. Warren, I am appalled by the degree of U.S. inequality and seek to reduce it. But if economists dramatically understate fiscal progressivity, it may encourage reforms that go far overboard.

Those are rookie errors and they’re exactly what you’d expect from a pair of young elite Frenchmen. Every instinct they have is wrong because it pertains to France rather than the United States. Let’s repeat Dr. Kotlikoff’s most significant observation:

The flaw in their method is even more obvious when you consider that American tax laws incorporate benefit subsystems, and benefit laws incorporate tax subsystems.

We don’t just need tax reform and entitlements reform. We need to disaggregate tax policy, benefits policy, and economic policy, a much taller order. With systems as complex as these have become over time it’s just too difficult to evaluate their effects. You can’t tell whether they’re working or not.

The editors of the Wall Street Journal remark on the Chicago teachers’ strike:

The teachers union has enlisted custodians, bus drivers and security guards to join its strike in solidarity. “We’re about to teach the new mayor a lesson,” American Federation of Teachers president Randi Weingarten declared at a labor rally on Monday. For taxpayers and parents, the strike is a lesson in what happens when public unions run the government.

Mayor Lightfoot is not handling this situation the way I would have but I guess that’s why she has an office in City Hall.

Chicago’s credit rating is already the lowest of any major city—teetering on the verge of junk. The Chicago Public Schools’s credit rating is likewise the lowest of any major school system. If the city or the schools borrow more they are incredibly likely to have those ratings further reduced which will make it literally impossible to borrow. Every billion of additional commitment will need to come from additional taxes. That will drive more people out which will increase the burden on those who remain. It’s a vicious circle from which the escape lies in a direction it would require political courage to take. I’m guessing the circle continues.