A very short response to Bruno Gonçalves Rosi’s reflection on Latin American Conservatism

With his “The Problem with Conservatism in Latin America, Bruno Gonçalves Rosi brings to NOL a very interesting debate on politics and history. In the case of Hispanic America the controversy is quite severe: during the 17th-century Spain and its colonies were undergoing an incremental process of liberalization and modernization known as “Bourbon Reforms.” These reforms implied a language unification (adopting Castilian – later named “Spanish” – as the national language), an increasing centralization of political administration, and free trade between Spain and its colonies, among other aspects.

In the case of the Spanish colonies in America, the Bourbon Reforms implied that Spanish-born subjects were preferred over American-born ones to take up public duties, and also that American products could not compete with Spanish ones. Up until then, commerce among Spain and its American colonies was restrained to gold and a narrow scope of goods. Free commerce had been allowed only in cases of extreme scarcity (for example, between Buenos Aires and South Africa) and for a very short lapse of time. The Bourbon Reforms put a severe strain on the incipient local production of the Hispanic American colonies that had flourished as consequence of closed markets. Sometimes inefficient local processes of production were outperformed by more competitive Spanish goods. But in other cases, efficient local industries were banned because they were regarded as a menace to Spanish ones.

Thus, the reactions to the Bourbon Reforms were of two opposite kinds: the Liberals rejected them because they limited the free trade only to Spain and its colonies and the modernization process was too slow. Liberals demanded free trade with all countries. On the other side, the Conservatives sought to go back to the Habsburg era: they rejected Modernity and free trade and demanded protectionism. The Emancipatory process of Spanish America was carried out by the conjunction of the Liberal and the Conservative reaction against the Bourbon Reforms. Once independence was fulfilled, the two parties became acutely antagonist to each other…perhaps up until today.

The history of Latin American Conservatism and Liberalism is worth our attention not only because of political history itself, but because it gives us a model to ponder the processes of departure from political and economic commonwealths that have been seen in the recent years -and perhaps are not closed yet.

On immigration, trade, and inequality: why nobody should care (that much)

Recently, I read snippets from George Borjas’s book, We Wanted Workers (I got distracted and reverted to reading Leah Platt Boustan’s Competition in the Promised Land).On its heels came this article by Dani Rodrik in Foreign Policy. Both work make the same case, that free movement of goods and people may imply some negative effects on inequality. Borjas argues that immigration increases inequality while Rodrik argues that low-skilled workers are displaced.

Both arguments are not convincing.

First of all, immigration will always increase inequality in one area. This is by definition. Unless the migrants follow the same distributional pattern as the host population, inequality will increase. If somebody from Cuba enters the United States at the tenth percentile, he increases inequality by swelling the ranks of low earners. If somebody from China enters the United States at the 90th percentile, he increases inequality by swelling the ranks of the high earners. However, from a global perspective (world population), inequality has actually dropped since the migrant has a greater income than in the past. After all, bringing a Haitian to the US may increase US inequality measures but the ten-fold increase in his income (this number comes from my colleague Ben Powell) means that worldwide inequality drops.

To be honest, I know that Borjas is probably aware of this point, but many of those who spin his work don’t get it. Borjas’s argument is little more sophisticated. His claim is that low-skilled workers (high school dropouts) see their wages go down while everybody else (high school graduates and university graduates) gains from immigration. This increases inequality because they are left behind economically. But this is where his argument is alike that of Rodrik and where it misses the target dramatically.

While I could be lazy and simply say that many other scholars place Borjas at the extreme of the spectrum of academics with regards to the effects of immigration on labor markets. Indeed, there are more scholars who find that low-skilled workers also gain from immigration all things being equal. But, I won’t be lazy. Let me assume, for the sake of argument, that the empirical result is valid. If unskilled workers are displaced, why can’t they find new employment elsewhere. If the effects of immigration are so positive for everybody else, it means that everybody else is substantially richer and they can demand more goods. Are there barriers preventing the unskilled from acquiring jobs? The answer is emphatically yes.

The ability to find a new form of employment following changes in the labor market depends on the frictions that exist on the labor market. Some of them are natural. We have to assume search costs (time, energy, some money) to look for a job and get the training for that job. But there are also barriers that create unnecessary frictions. The rise of occupational licencing is one of those (growing) frictions (see here, here and here). We could also point out that product regulations tend to affect the prices of goods that weigh more heavily in the consumption baskets of lower-income workers (here and here) thus pulling the poorest down. We could also point to the fact that states with right to work laws seem to have enjoyed more limited increases in inequality than the states without such laws (here). We could also underline the fact that housing regulations are making it harder for unskilled workers to move to dynamic areas, thus locking them in low-productivity areas (here). And the list could go on for a few more pages, but I think the point is made: there are tons of factors that make displacement a problem. However, those who worry about it when it comes from changes resulting from trade or immigration are concerned with a minor (and positive in the long-run) variable. In a way, Borjas and Rodrik are (rightfully) concerned about the poorest but they fail to identify the problem like if a doctor was concerned with his patient’s loss of sight rather than concentrating on the brain tumor that caused the loss.

Free trade and open borders generate massive benefits. But there are short-term costs as production methods and resources are being reallocated. Many government policies amplify exponentially these costs and delay reallocation. This creates the inequality they bemoan.

Stock markets and economic growth: from Smoot-Hawley to Donald Trump

In a recent article for the Freeman, Steve Horwitz (who has the great misfortune of being my co-author) argued that stock markets tell us very little about trends in economic growth. Stock markets tell us a lot about profits, but profits of firms on the stock market may be higher because of cronyism. Basically, that is Steve’s argument. He applies this argument in order to respond to those who say that a soaring stock market is the proof that Donald Trump is “good” for the economy.

I know Steve’s article was published roughly a month ago, so I am a little late. But I tend to believe it is never too late to talk about economic history. And basically, its worth pointing out that there are economic history examples to show Steve’s point. In fact, its the best example: Smoot-Hawley.

Bernard Beaudreau from Laval University has advanced, for some years, an underconsumptionist view of the Great Depression (I consider it a “dead theory”). While I am highly unconvinced by this theory (in both its original and current “post-keynesian” reformulation), Beaudreau tries hard to resurrect the theory (see here and here) and merits to be discussed. In the process, Beaudreau attempted to reestimated the effects of of Smoot-Hawley on the stock market with an events study. Unconvinced about the rest of his research, this is a clear instance of sorting the wheat from the chaff. In this case, the wheat is his work (see here for his article in Essays in Economic and Business History) on Smoot-Hawley.

Basically, Beaudreau found that good news regarding the probability of the adoption of the tariff bill actually pushed the stock market to appreciate. Thus, Smoot-Hawley -which had so many negative macroeconomic ramifications* – actually boosted the stock market. Firms that gained from the rising tariffs actually saw greater profits for themselves and thus the firms on the stock market would have been excited at the prospect of restricting their competitors. If that is true, could it be that Donald Trump is the modern equivalent (for the stock market) of Smoot-Hawley.

*NDLR: I believe that Allan Meltzer was right in saying that the Smoot-Hawley might have had monetary ramifications that contributed to the money supply collapse. It was a real shock that precipitated the collapse of weak banks which then caused a nominal shock and then the sh*t hit the proverbial fan.

Inflation in Canada and the US since 1774

It is often said that Canada and the United States are very much alike, except for the fact that Canada has tons of French people (myself included) and free (TANSTAFL) healthcare. It is also often said that when the US economy catches a cold, Canada gets pneumonia.

From an economic historian’s perspective, this is a hard claim to swallow without making tons of nuances. Yes, economic conditions in Canada are heavily affected by those in the US. But, the evidence for that generally concerns the twentieth century. There is very little before that. The first pieces of evidence we have for Canada start only in the 1870s. In fact, that evidence is also subject to many caveats (my work with Michael Hinton suggests that the GDP deflator for Canada from 1870 to 1900 causes a considerable underestimation of Canadian economic growth during the period and that Canada).

Thus, we do not know if that was always true. To some extent, I am tempted to believe that this is true, but that it is has grown “truer” over time. Canada used to be geared towards Britain and Europe for a long time, but, progressively, it became more connected with the United States. Now, the Maddison project data shows that Canada in terms of GDP per capita converged towards that of the United States from the 1870s to the present day. Morris Altman produced revised estimates of Canadian GDP growth (here) that show a moderately steeper convergence between 1870 and 1929. Given the amount of capital movements between both countries, this is not really surprising (in fact, excluding Quebec from Canada brings the two countries closer together).  But again, we don’t go back further than 1870.

So, to see if this is the case, I decided to take my paper (online since yesterday) on creating a price index for Canada since 1688. Measuring Worth offers an American Price Index that starts in 1774. If the two economies began to become more interlinked, then a price index that goes back to the founding of the United States should do the trick. The result is below.


I organized the data by time period and it seems that the rates are generally correlated (which you would expect since global monetary conditions do suggest some long-terms similarities in terms of price trends – I have many reservations about the book I am citing here, but it gets the empirical point across). However, the dispersion seems to collapse over time. As we move from the colonial era to the modern era, inflation rates get more tightly grouped together. Free trade, lower transport costs, central bank policy, capital mobility and labor mobility would have factored in to mean that things become more tightly knit.

It does seem like Canada and the US became more interdependent over time.

I have more to come on this!

What if fake news was merely an attempt at political entrepreneurship?

Fake news! The new plague that besets mankind! That is largely the new name given to what 19th century folks would have called “yellow journalism“.

Yellow journalism was sensationalist to the point of distorting the news in order to carry a very emotional message. Generally embedded in that message was a political narrative supporting progressive reforms (not all yellow journalists were progressive but it seems that most were).

The aim of many progressives was to design a new society, to reform the old society by getting rid of old institutions. In many cases, economic historians have documented that these reforms (like with prohibition, workers compensation, antitrust) ended up serving very narrow interest groups who either allied themselves with reforming zealots (as in bootleggers helping baptists pass Sunday sales bans), gained through the restriction of competition or gained at the expense of future workers and minorities. But it is not as if the “previous” order was paradise. The postbellum era prior to the progressive era was highly protectionist, used public funds to bailout poorly performing railways and solicited the federal army to deal with natives rather than peacefully deal with them.  Basically, both eras had their political entrepreneurs who found their way in the political process to obtain favors.

Progressives who indulged in yellow journalism merely wanted to replace one set of political entrepreneurs with another. Just like the Alt-Right, from which emanates most of the fake news. In a way, both are exactly the same. Many members of the Alt-Right are not interested in restraining government abuses, they’re in favor of redirecting government indulgences towards them (Trump did promise less immigration with paid maternity leaves and no reduction in social transfers). Some are well-meaning like the baptists of lore. But there are still bootleggers (example: Steven Mnuchin from Goldman Sachs) who co-opt the process in order to continue indulging in rent-seeking just as they did before.

Are we about to swap one bad set of institutions for another? Given that all I see is the same type of political entrepreneurs (after all, Bannon from the flagship of the fake news alt-right outlet Breitbart is now a member of the government) as those we saw during the progressive era, I am inclined to respond “yes”.

Trump’s rejection of TPP: a political economy comment

Trump’s rejection of the Trans-Pacific Partnership (TPP) seems virtually certain. Without the United States and with a weak Canadian prime minister on the issue (who got elected without a clear position on it), the agreement will die a swift death. By dying that rapidly, it confirms a point I have been making for years: agreements like the TPP are managed trade that generate as much (if not more) opposition than genuine free trade agreements (those that could fit on a few pages, not 10,000).

Protectionism are basically income-redistributing schemes. Shifting from protectionism to free trade means altering these schemes. Thus, the political opposition and the agreements we have seen over the last decades where special dispensations are placed inside the agreements. In some instances, like the Canada-US Free Trade Agreement of 1988 (CUFTA), this leads to genuinely freer (not free) trade. In other cases, like CAFTA in the early 2000s, the agreement is nothing less than rent-seeking by different means.

In the case of TPP, it seems that popular discontent is large enough to kill this very complex (and flawed) agreement. I am not sure whether or not, in net terms, the TPP was an improvement over the current state of affairs. What I am sure is that the opposition was similar to what the opposition would have been with unilateral trade liberalization.

At this point, small countries with no influence on world demand (like Canada) should simply go “at it alone”. What I mean is that unilateral trade liberalization is the way to go. There is a strong case for unilateral trade liberalization (see notably the work of Edwards and Lederman) for small economies. A large part of the cost of protectionism is not the level of tariffs and quotas, but the distortions generated in relative prices that lead to inefficient allocations of resources.The low hanging fruits are to be found in the tree of leveling the field. Small countries could convert quotas into tariffs and set a uniform (across the board) low tariff (see Chile’s case).Although far from ideal free trade (no barriers), this would represent a considerable improvement over the distorted relative entry barriers.

In such a situation, the political costs would be the same as those with agreements like the TPP, but the benefits would be infinitely larger making it easier for governments to proceed. The narrative would also be easy to sell to electorates: no special treatment for anyone. In the long-term, this may even “spillover” into multilateral trade agreements by reducing frictions during negotiations.

A libertarian case for Hillary Clinton

I have abstained from commenting on the American presidential race between Donald Trump and Hillary Clinton (sorry Rick) for so long because I just wasn’t very interested in it. I’m still not that interested in it, but the topic has come up quite a bit lately here at NOL so I thought I’d throw in my two cents.

First, though, I thought I’d use up a couple of paragraphs to explain why I don’t really follow American presidential elections, even though most intelligent people, in most parts of the world, do. American presidents simply don’t have a lot of power in domestic American politics. Congress controls the purse strings, makes the laws, and, in the case of the House of Representatives at least, is closer to the People than is the President. The Supreme Court is in charge of deciding which laws are good and which are not, and in some cases even has the power to create laws where Congress or the People simply aren’t getting the job done (Proposition 8 in California comes to mind). To me, that makes the executive branch the most boring branch of government.

The one area in American politics where the head of the executive branch does have a lot of leeway, foreign policy, is one area where I’m not particularly worried about either candidate. I’m not worried because both, despite holding views of the world I strongly disagree with, are not advocating anything radical or unpredictable. I’d rather have a presidential candidate advocate the same old garbage of getting in Russia’s face and keeping troops in South Korea because that way I know they’re ignorant and, more importantly, I know they know they’re ignorant on such matters because they defer to the Washington Consensus.

Libertarians don’t like statists and we don’t like statist policies. Some of us don’t even think voting is worth the effort (or even a good idea). I think there is a case to be made, though, for Libertarians and libertarians to get out and vote this fall for Hillary Clinton over Donald Trump. My case rests on 3 hugely important facts (at least to libertarians and Libertarians).

Fact #1: Thanks to the recent wikileaks revelations, we know for sure that Hillary Clinton is in favor of free trade. This is THE most important reason to vote for Hillary Clinton in the fall. Imagine if the United States, led by Trump’s isolationism, were to begin breaking its trade agreements with the rest of the world. Yikes. Free trade has lifted hundreds of millions of people out of poverty over the last 30 years, but because the majority of beneficiaries to trade liberalization have happened to not be American citizens, demagoguery ensues. I understand that Clinton has expressed skepticism in US free trade agreements on the campaign trail, but when you’re in a party that is vying for potential voters who feel they have been hurt by free trade, you’ve gotta do what you’ve gotta do.

Regardless of what Clinton says to the masses, her record on free trade while holding political offices is impressive (a ‘No’ vote on CAFTA notwithstanding). Free trade, or trade liberalization, is one of the fundamental tenets of libertarianism. Individual liberty cannot be realized or even partly realized without markets that are free from the constraints of governments and the factions that manipulate them. Donald Trump, like Bernie Sanders, wants to reverse decades of trade liberalization and the benefits that such a policy has bestowed upon humanity.

(Digression: Libertarians and libertarians are so adamant about free trade not only because it loosens the grip of the state over peoples’ lives, but also because it makes everybody – not just fellow countrymen – better off. When libertarians and Libertarians hear protectionist sentiments from the political class, you will often see or hear us point out that the Great Depression of the 1930s was hastened not only because of central banking policies but also because of the isolationist tariffs that Congress threw up as a response to the economic downturn caused by the new central bank’s policies. Free trade is a BFD.)

Fact #2: Hillary Clinton is much more individualist than Donald Trump. Women’s rights is an individualist issue, and always has been, even though Clinton has made a mockery of the historical movement by playing the “gender card” and defending (and pledging to expand) subsidies in the name of women’s rights. Trump wants to “make America great again,” but Hillary just wants your vote, any way she can get it. If that ain’t individualist, I don’t know what is.

Hillary Clinton is not a racist, either. She marched against The State’s oppression of black Americans in the South and against The State’s discrimination against black Americans in the rest of the country throughout the 1960s. (For what it’s worth, I don’t think The Donald is a racist. Businessmen rarely are, for reasons that should be obvious to any fair-minded person, but his rhetoric on race is absolutely toxic, and he knows it. His deplorable actions bring to mind a certain F-word I won’t mention here.)

Trump may or not be a racist – I’ll give him the benefit of the doubt – but I don’t know for sure. Clinton is definitely not a racist.

Fact #3: Hillary Clinton is a lawyer and she knows how our government is supposed to work (even if she doesn’t like it). One could make the case that Trump knows how our federal system of government works, too, given his braggadocio about buying off politicians, but his is a vulgar understanding of what is, after all, a magnificent example of compromise and diplomacy over our more primal urges. Lawyers make better politicians than businessmen. As Alexis de Tocqueville remarked way back in his 1831 ethnography of the United States:

“the authority [Americans] have entrusted to members of the legal profession, and the influence which these individuals exercise in the Government, is the most powerful existing security against the excesses of democracy […] When the American people is intoxicated by passion, or carried away by the impetuosity of its ideas, it is checked and stopped by the almost invisible influence of its legal counsellors, who secretly oppose their aristocratic propensities to its democratic instincts, their superstitious attachment to what is antique to its love of novelty, their narrow views to its immense designs, and their habitual procrastination to its ardent impatience.”

Lawyers, Tocqueville observed, make up a sort of informal aristocracy in America because their training in the field of law requires them to have a deep respect for precedent and “a taste and a reverence for what is old.” Businessmen are not used to the clumsy, inefficient coalition-building necessary for good governance. That’s why businessman George W Bush was such a failure and attorney Bill Clinton was such a success. Any good libertarian needs to acknowledge the benefits that come from specialization and the division of labor. Any really good libertarian, the kind that has actually read a little bit of FA Hayek’s work, knows that change in the political and institutional arena needs to be done slowly, and preferably through the legal system (no matter how imperfect it may be).

I know all about the bad stuff that Hillary has supported and voted for in the past (especially on foreign policy, and even more especially on foreign policy in Africa). I get it. I really do. But Donald Trump represents a very nasty strain of thought that has swept into power of the country’s Right-leaning political party. His nationalism is antithetical to libertarianism in a way that Clinton’s typical corruption and condescension is not: libertarianism has a long history in this country of dealing with Clinton-esque figures. The American polity was forged by consensus and thus has recourse, perhaps more so than any other presidential system, to constrain exactly this type of persona. This persona is egotistical and out for personal glory and prestige, but libertarians, progressives, conservatives, and others here in the United States have institutions and networks that were created specifically for presidencies run by people like Clinton.

We’re small in number, too small to have a significant impact if we all voted for Clinton, but we have an outsized impact in the realm of ideas and policy. Get behind Clinton in any way that you can, because more of the same ain’t all that bad.