Author: Zachary Bartsch

We Don’t Have Mass Starvations Like We Used To

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Two ideas coalesced to contribute to this post. First, for years in my Principles of Macroeconomics course I’ve taught that we no longer have mass starvation events due to A) Flexible prices & B) Access to international trade. Second, my thinking and taxonomy here has been refined by the work of Michael Munger on capitalism as a distinct concept from other pre-requisite social institutions.

Munger distinguishes between trade, markets, and capitalism. Trade could be barter or include other narrow sets of familiar trading partners, such as neighbors and bloodlines.  Markets additionally include impersonal trade. That is, a set of norms and even legal institutions emerge concerning commercial transactions that permit dependably buying and selling with strangers. Finally, capitalism includes both of these prerequisites in addition to the ability to raise funds by selling partial stakes in firms – or shares.

This last feature’s importance is due to the fact that debt or bond financing can’t fund very large and innovative endeavors because the upside to lenders is too small. That is, bonds are best for capital intensive projects that have a dependable rates of return that, hopefully, exceed the cost of borrowing. Selling shares of ownership in a company lets a diverse set of smaller stakeholders enjoy the upside of a speculative project. Importantly, speculative projects are innovative. They’re not always successful, but they are innovative in a way that bond and debt financing can’t satisfy. Selling equity shares open untapped capital markets.

With this refined taxonomy, I can better specify that it’s not access to international trade that is necessary to consistently prevent mass starvation. It’s access to international markets. For clarity, below is a 2×2 matrix that identifies which features characterize the presence of either flexible prices or access to international markets.

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The 2018 Tariffs in Many Graphs

Zachary Bartsch2 Comments

Did president Trump’s first term tariffs, enacted in 2018, increase manufacturing employment or even just manufacturing output? Let’s set the stage.

Manufacturing employment was at its peak in 1979 at 19.6 million. That number declined to 18m by the 1980s, 17.3m in the 1990s. By 2010, the statistics bottom out at 11.4m. Since then, there has been a rise and plateau to about 12.8m if we omit the pandemic.

Historically, economists weren’t too worried about the transition to services for a while. After all, despite falling employment in manufacturing, output continued to rise through 2007. But, after the financial crisis, output has been flat since 2014, again, if we omit the pandemic. Since manufacturing employment has since risen by 5% through 2025, that reflects falling productivity per worker. That’s not comforting to either economists or to people who want more things “Made in the USA”.

https://fred.stlouisfed.org/graph/?g=1LxMV

Looking at the graphs, there’s no long term bump from the 2018 tariffs in either employment or output. If you squint, then maybe you can argue that there was a year-long bump in both – but that’s really charitable. But let’s not commit the fallacy of composition. What about the categories of manufacturing? After all, the 2018 tariffs were targeted at solar panels, washing machines, and steel. Smaller or less exciting tariffs followed.

Breaking it down into the major manufacturing categories of durables, nondurables, and ‘other’ (which includes printed material and minimally processed wood products),  only durable manufacturing output briefly got a bump in 2018. But we can break it down further.

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Hayek on The Volatility Pie

Zachary Bartsch4 Comments

In the Road to Serfdom, Friedrich Hayek uses some basic quantitative logic to make an important point about employment and political economy.

Hayek starts by assuming that government jobs are stable relative to those in the private sector. This might seem obvious, but let’s just start by checking the premises. Below are the percent change in total compensation and total employment for government employees and for the private sector. From year to year, private employment and total compensation is more volatile. So, Hayek’s initial premise is correct.

https://fred.stlouisfed.org/graph/?g=1LcUK
https://fred.stlouisfed.org/graph/?g=1LcOu

From there, he proceeds to say that if any part of income or employment is guaranteed or stabilized by the government, then the result must be that the risk and volatility is borne elsewhere in the economy. He reasons that if there is a decline in total spending, then stable government pay and employment implies that the private sector must have a deeper recession than the overall economy. Looking at the above graphs, both government employment and the total compensation are much less volatile.

But can’t governments intervene in macroeconomic stabilization policies effectively? Yes! They can and do stabilize the economy, especially with monetary policy. But Hayek is referring to individual stabilizations. For any individual to be guaranteed an income, all others must necessarily experience greater income volatility. How’s that?

Consider two individuals. Person #1 has an average income of $100. In any given year, his income might be $10 – or 10% – higher or lower than average. For the moment, person #2 is not employed and has income volatility of zero. If the government provides a job with a constant pay rate to person #2, then they still have zero income volatility. But instead of earning a consistent $0, person #2 earns a consistent $50. Nice.

Of course, person #2 gets his pay from somewhere. By one means or another, it comes from person #1. Let’s be generous and assume the tax on person #1 has no resulting behavioral effect. His new average income is $50, being $10 higher or lower in any given year. But now, that $10 deviation is over a base of $50 rather than $100. Person #1’s income varies by 20% relative to his new average!

Reasoning through this, we can consider that a person has a stable portion of their income and a volatile portion. If someone takes a part of your stable portion and leaves you with all of your volatile portion, then your remaining income is now more volatile on average. I think that this point is interesting enough all by itself.

IRL, many of our taxes are not lump sum. Rather, progressive taxation causes a negative incentive for production & earnings. The downside is that we produce less. The upside is that the government takes a higher proportion of our volatile income than of our stable income (because income changes are always on the margin and those marginal dollars are taxed at a higher rate). So, the government shares the income volatility of the private sector. By continuing to pay government employees a stable salary, the government is effectively absorbing some of that year-to-year income volatility on behalf of its employees.* The government is, in a sense, providing income insurance to a subgroup.

What does this have to do with The Road to Serfdom? Hayek argues that, as the government employs an increasing proportion of the population, the remaining private sector experiences increasing income and employment volatility. Such volatility increases private risk exposure so much that people begin to fawn over and increasingly compete for the stability found in government work. He gets anthropological and argues that the economic attraction to government jobs will introduce greater competition for those jobs and subsequently greater esteem and respect for those who are able to get them. This process makes the government jobs even more attractive.

My own two cents is that there is nothing internally unstable about this process. Total real income would fall compared to the alternative. However, such a state of affairs might be externally unstable as other governments/economies compete with the increasingly socialist one.

*An important analogue is that firms behave in a similar way. An individual may receive a relatively constant salary so long as they are employed. But the result must be that the firm bears more of the net-profit volatility. So, as more people want stable private sector jobs, the profit volatility of firms would increase and result in greater [seemingly windfall] profits and losses.

Organization of the Federal Reserve – OR, Why The President is Impotent against the Fed

Zachary Bartsch3 Comments

In my recent post that included Federal Reserve political independence, I dared to use the word ‘trust’, and commenters let me know that they were not pleased about it. In strict economic terms, there is no such thing as trust. Either that, or it’s the same thing as expectations or maybe low-information expectations. Since it wasn’t the main thrust of my post, I didn’t lay-out the informed reasoning behind my confidence in President Trump’s inability to cause Argentina or Turkey or even 1970’s US levels of political influence on the Fed.

In short, I’m not worried about it because the operational structure of the Fed and the means by which individuals join the Fed are determined by congress and are pretty robust. Below is a diagram that I made. I know that it’s a lot, but I’ll explain below.

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I’m Chair! 😬

Zachary Bartsch2 Comments

As of July 1st of this year, I am the Chairman of the Department of Economics at my university. It’s one of those positions that includes more work and not much compensation. Depending on who I tell, I’m given both congratulations and condolences. Generally, at my university there is an expectation that department faculty ‘take turns’ being chair. So, we’re expected to serve whether the pay is good or not. There’s a lot of informal practice around this process.

In addition, Economics Majors have been less popular at liberal arts institutions over the past several years. No one knows why and there are probably multiple reasons. At my institution, our department has healthy enrollment among the peripheral majors. So, the Economics BA and BS have lower enrollment, but the Business Economics and the Global Affairs majors are more popular than ever.

All the same, I’d like to increase the number of students who have declared majors in our department and the number of Economics graduates. How do I do that?

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Impossible Trinity of Macroeconomic Stability

Zachary Bartsch6 Comments

Trump wants both low taxes and low interest rates. I hope that he doesn’t get it.

For the last ten days of my Principles of Macroeconomics course, I emphasize the aggregate supply and aggregate demand model coupled with monetary offset. What’s monetary offset? It says that, given some target and administrative insulation, the Federal Reserve can ‘offset’ the aggregate demand effects of government fiscal policy. It’s what gives us a relatively stable economy, despite big fiscal policy changes from administration to administration.

For example, if the Fed has a 2% inflation target, then they have an idea of how much total spending in the economy (NGDP) must change. If the federal government changes tax revenues or spends more, then the Fed can increase or decrease the money supply in order to achieve the NGDP growth rate that will realize their target. For example, after the 2017 Tax and Jobs Act lowered taxes, the Federal Funds rate rose in 2018. The effect of the tax cuts on NGDP were *offset* by monetary policy tightening to keep inflation near 2%.

If the Fed doesn’t engage in monetary offset, then fiscal policy has a bigger impact on the business cycle, causing more erratic bouts of unemployment and inflation. The economy would be less stable. Importantly, monetary offset  works in both directions. It prevents tight fiscal policy from driving us into a national depression, and loose fiscal policy from fueling inflation. That’s good since politicians face an incentive/speed/knowledge/political problem.

Personally, I would love lower taxes and lower interest rates. I’d get to enjoy more of my income rather than sending it to uncle Sam and, after refinancing, I’d pay less to service my debts. BUT, the same is true for everyone else too. All of that greater spending would result in higher prices and persistent inflation.

Right now, low taxes and high spending meant that the government is running persistent budget deficits – it’s borrowing money. That’s stimulative. If the Fed lowers interest rates, individuals would refinance and borrow more. That’s also stimulative. If both fiscal and monetary policy are stimulative as part of achieving the Fed’s target, then there is nothing wrong. But deviation from that policy goal brings economic turbulence.

This analysis implies an impossible trinity of macroeconomic stability (not the one from international trade):

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The Simple Utility Function Vs. Socialism

Zachary Bartsch1 Comment

I’m a big fan of Friedrich Hayek. I first read his work in an academic setting. But many people first encounter him via The Road to Serfdom, his book that outlines the political and social consequences of state economic controls. I always meant to go back and read it, but it usually took a back seat to other works. Now, I’m slowly making my way through.

A lovely snippet includes Hayek explaining the popular sentiment that “it’s only money” or that money-related concerns are base or superficial. Such an attitude is especially common when people recount their childhood or family life during times of financial difficulty. The story often goes “times were hard, but we had each other”. Similarly, a popularly derisive trope is that economists ‘only care about money’ [, rather than the more important things].

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My Perfunctory Intern

Zachary Bartsch1 Comment

A couple years ago, my Co-blogger Mike described his productive, but novice intern. The helper could summarize expert opinion, but they had no real understanding of their own. To boot, they were fast and tireless. Of course, he was talking about ChatGPT. Joy has also written in multiple places about the errors made by ChatGPT, including fake citations.

I use ChatGPT Pro, which has Web access and my experience is that it is not so tireless. Much like Mike, I have used ChatGPT to help me write Python code. I know the basics of python, and how to read a lot of of it. However, the multitude of methods and possible arguments are not nestled firmly in my skull. I’m much faster at reading, rather than writing Python code. Therefore, ChatGPT has been amazing… Mostly.

I have found that ChatGPT is more like an intern than many suppose:

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US State Growth Statistics 2005-2024

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In macroeconomics we have basic tools to help us talk about economic growth, which is simply the percent change in RGDP per capita. What causes growth? Lot’s of things. All else constant, if more people are employed, then more will be produced. But the productivity of those workers matters too. That’s why we calculate average labor productivity (ALP), which is the GDP per worker. This tells us how much each worker produces. All else constant, more ALP means more GDP.*

What affects ALP? Nearly everything: Technology, demographics, health, culture, and public policy. Most of these have long-term effects. So, it’s better to think in terms of regimes. After all, incurring debt now can result in a lot of investment and production, but there’s no guarantee that it can be sustained year after year. This is why I don’t get terribly excited about individual good or bad policies at any moment. There’s a lot of ruin in a nation. I care more about the long-run policy regime that is fostered over time.

Given the variety of inputs to economic growth, there’s always plenty of room for complaint about policy – even if the economy is doing well. In this post, I’m inspired by a Youtube video that a student shared with me. The OP laments poor policy in Massachusetts. But compared to some other nearby states, MA is doing just fine economically. This is not the same as saying that the OP is wrong about poor policies. Rather, a regime of policy, technology, interests, etc. is built over time and there can be a lot wrong in growing economies.

In the interest of being comprehensive, this post includes basic growth stats for all states from 2005 through 2024 (the years of FRED-state GDP).** First, let’s start with the basic building blocks of population, employment, and RGDP. Institutions matter. Policy affects whether people migrate to/from the state, fertility, how many people are employed, and what they can produce.

People like to talk about migration and the flocking to Texas & Florida. But that fails to catch the people who choose to stay in their state. Utah is  43% more populous than it was 20 years ago. But you don’t hear much clamoring for their state policies. Idaho and Nevada also beat Florida in terms of percent change. Where are the calls to be like Idaho? Employment largely tracks population, though not perfectly. The RGDP numbers can change quickly with commodity prices, reflected in the performance of North Dakota. But remember, these numbers cover a 20 year span. So, any one blockbuster or dower year won’t move the rankings much.

Of course, these figures just set the stage. What about the employment-population ratio, ALP, and RGDP per capita? Read on.

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Salty SALT in the OBBB

Zachary Bartsch1 Comment

The Republicans hold a majority in both chambers of congress and they are the party of the president. They want to use that opportunity to pass substantial legislation that addresses their priorities. Hence, the One, Big, Beautiful Bill (OBBB). But, just like the Democratic party, Republican congressmen are a coalition with various and sometimes divergent policy agendas. There are ‘Trump’ Republicans, who want tariffs, executive orders, and deportations. There are more liberal members who want more free markets. You can also find the odd ‘crypto bro’, blue-state representatives, and deficit hawks. Given the slim majority in the House of Representatives, they all have to get something out of the legislation. Put them together, and what have you got?* You get a signature piece of legislation that no one is happy about but everyone touts.

One example of such compromise is the State and Local Tax federal income tax deduction, or SALT deduction. The idea behind it is that income shouldn’t be taxed twice. If you pay a part of your income to your state government in the form of taxes, then the argument goes that you shouldn’t be taxed on that part of your income because you never actually saw it in your bank account. The state took it and effectively lowered your income. The state and local taxes get deducted from the taxable income that you report to the federal government.  The reasoning is that you shouldn’t need to pay taxes on your taxes.

Paying taxes on your taxes sounds bad. And plenty of people don’t like one tax, much less two. The Tax Foundation has done a lot of good work to cut through the chaff and has published many pieces on the SALT deduction over the years.**

Cut and Dry SALT Deduction Facts:

  • It’s a tax cut
  • It reduces federal tax revenue
  • It adds tax code complication
  • It is used by people who itemize rather than take the standard income tax deduction
  • Prior to the 2017 Tax & Jobs Act, there was no limit on the SALT deduction. After, the limit was $10k.
  • The current OBBB increases the SALT deduction.

Those are the basics. Everything else is analysis. The Grover Norquist Republicans never see a tax cut that looks bad, so they’d like to see the SALT limit raised or disappear. Tax think tanks that like simplicity don’t like the SALT deduction because it adds complication. Plenty of others say they don’t like complication, but often change their mind when it comes to the details (much like cutting government waste). Think tanks tend to be a bit lonely on this point.

People mostly care about the SALT deduction due to the distributional effects. Who ends up benefiting from the deduction? The short answer is people who 1) itemize & 2) have heavy state and local tax bills. Who is that? Rich people of course! They have high incomes and lots of wealth and real estate – on which they pay taxes. But not all rich people pay loads of state taxes. So the SALT deduction is a tax cut that primarily benefits rich people who live in high tax districts. Where’s that? See the below.

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