History

Chesterton on Prohibition, and Game Theory

Joy Buchanan1 Comment

English philosopher G.K. Chesterton traveled to America for a lecture tour. His observations are recorded in What I Saw in America (1922).

The book is not primarily about Prohibition nor is it mostly critical of America. He wrote one of his essays on Prohibition, which begins as follows:

This was 100 years ago, so start with this summary of the facts from Britannica:

Prohibition, legal prevention of the manufacture, sale, and transportation of alcoholic beverages in the United States from 1920 to 1933 under the terms of the Eighteenth Amendment. Although the temperance movement, which was widely supported, had succeeded in bringing about this legislation, millions of Americans were willing to drink liquor (distilled spirits) illegally…

Chesterton clearly is not a teetotaler, and I will not argue for or against temperance here. What was counterproductive about Prohibition is that elites passed a law that they would not abide by themselves.

Consider the decision by an individual to drink or not drink. For many people, drinking is social. If your friends are meeting at a bar, then you will drink at the bar to be with them. If your friends are going hiking with water bottles, then many people can pass the day without alcohol happily. We can model a game called Meeting Friends that has multiple equilibria.

Borrowing from Myerson (2009):

In such games, Schelling argued, anything in a game’s environment or history that focuses the players’ attention on one equilibrium may lead them to expect it, and so rationally to play it. This focal-point effect opens the door for cultural and environmental factors to influence rational behavior.

There was an opportunity for American elites to move social life to a new focal point after the 18th Amendment was passed. They could have led by example. Laws that do not follow norms cause problems, such as a large prison population arrested for drug offenses today. In 2021, I wrote about why attempts at drug prohibition helped the Taliban defeat the US coalition in Afghanistan.

Here’s my tweet thread last week about Chesterton and the American work ethic.

Myerson, R. B. (2009). Learning from Schelling’s strategy of conflict. Journal of Economic Literature, 47(4), 1109-25.

Average US Consumption: 1990 Vs 2021

Zachary Bartsch7 Comments

On Twitter, folks have been supporting and piling on to a guy whose bottom line was that we are able to afford much less now than we could in 1990 (I won’t link to it because he’s not a public figure). The piling on has been by economist-like people and the support has been from… others?

Regardless, the claim can be analyzed in a variety of ways. I’m more intimate with the macro statistics, so here’s one of many valid stabs at addressing the claim. I’ll be using aggregates and averages from the BEA consumer spending accounts.

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Farewell to the First Normal Semester in 3 Years

James Bailey1 Comment

Today as I gave my last final and took my kids to a huge school party, it struck me that things are finally back to something like 2019 levels of normality.

2020 was a lost cause, of course. I had high hopes for 2021 that vaccines would immediately get us back to normal. They did get my school back to fully in-person by Fall 2021, but not really back to normal, partly thanks to the variants. My students were out sick more than normal, and I was out watching my sick kids more than normal, as every cold meant they would be home until the school was sure it wasn’t Covid. Toward the end of the Spring 2022 semester worries were subsiding, and my state was pretty much fully re-opened, but things still weren’t really back to normal. Student attendance and effort were still way below normal, partly from the lingering effects of Covid, and partly from celebrating its end- partying to make up for lost time (and cheering on a great basketball team).

Fall 2022 finally felt like a basically normal semester. I still see the occasional mask, still hear from the occasional student out with Covid, and still have one kid missing 2 school days with every cough (policies stricter than 2019, but much relaxed from the days when both kids were at schools that could have them miss 5+ days with every non-Covid cough). Overall though student attendance and effort are back to what seem like normal levels. Up to Spring 22 I’d have students just disappear for a few weeks, not in class, not answering e-mails about why they weren’t showing up or completing work, needing lots of help to get on track once they finally reappeared. This Fall that didn’t happen; in my Senior Capstone everyone turned in a quality paper basically on-time and without me having to chase anyone down for it. Also, everyone just seemed happier now that their stress levels are back down to the baseline for college students.

This semester was nothing special- and that was beautiful.

Sympathy for the Sauds

James Bailey1 Comment

I’ve always been confused by the US alliance with Saudi Arabia. Its a state with values abhorrent to many Americans, and it seems like we don’t get much practical value out of the alliance.

This essay on Saudi history, politics, and economics by Matt Lakeman makes the situation more comprehensible. I still don’t know that I want the alliance, but I can now see how so many US presidents have continued with it without necessarily being stupid, crazy, or corrupt. In short, they think that most of the realistic alternatives are worse. Some highlights:

Before starting this research, I had the same perception as Wood that the Saudi economy is essentially what he calls a “petrol-rentier state.” Basically, Saudi Arabia sits on top of a giant ocean of easily-accessed oil which they suck out of the ground and sell at enormous profit to prop up the rest of their extremely inefficient economy and buy the loyalty of their own people and foreign powers. Saudi Arabia is the wealthiest large state in the Middle East today by sheer virtue of geographic luck rather than any innovation or business acumen on the part of its people.

And after doing my research, all of the above is… basically true.

But all of that should also be true of Iran, Iraq, Venezuela, Libya, and a few other countries which are also situated on giant oceans of oil but are far poorer than Saudi Arabia.

Economically, Saudi Arabia deserves little credit for its success. Politically, Saudi Arabia deserves a tremendous amount of credit for enabling its economic success. 

Dealing with the resource curse is always challenging, and foreign ownership is an additional challenge. How did they manage it?

the Sauds struck a clever balance between being too aggressive and too placating of the foreigners operating their oil wells. If the Saudi state had been aggressive and tried to nationalize its oil quickly, Saudi Arabia could have ended up becoming another Venezuela or Iran with lots of external political pressure from hostile Western countries and a low-efficiency oil industry. But if they had nationalized too late, they would have ended up like a lot of African nations who have all their natural wealth siphoned away by foreigners.

Instead, the Sauds executed a patient, and most importantly, amicable assertion of power over Aramco, which did not become fully owned by Saudis until 1974. At the very start of Aramco, the company was entirely owned and operated by Americans aside from menial labor. However, the Saudi government inserted a clause into their contract with the corporation requiring the American oil men to train Saudi citizens for management and engineering jobs. The Americans held up their end of the bargain, and over time, more and more Saudis took over management and technical positions.

In addition to carefully negotiating the balance of power with various foreigners, the Sauds have done so with the religious establishment:

Though the monarch has absolute power, his authority is at least in part derived from Saudi Arabia’s Islamic religious establishment. The ulema (a group of the highest-ranking clerics) is officially integrated into the government, and plays an important role in legal matters. However, the religious establishment has slowly been marginalized by the monarchy over the last few decades, and has possibly been subjugated entirely since the reform era began five years ago.

Winning freedom of action has been a long road with many setbacks:

[King] Abdulaziz constantly had to reassure enraged Wahhabi clerics that he wasn’t selling out the Arab homeland to treacherous infidels. IIRC, it was some time in the 1920s that Abdulaziz had to publicly smash a telegraph to prove to the clerics that he wasn’t bewitched by infidel technology.

In late 1979, 400-500 extremist Sunni Saudis seized the Grand Mosque in Mecca (the holiest Islamic site on earth) and demanded the overthrow of the Saud dynasty in favor of a theocratic state meant to await an imminent apocalypse. They held on for two weeks while managing to fight off waves of Saudi police and military squads. Eventually, three French commandos flew to Mecca, converted to Islam in a hotel room, and led a successful assault to retake the Mosque. Over 100 men died on each side, with hundreds more wounded.

The Grand Mosque seizure was the final wake-up call for the Saud dynasty. Something drastic had to be done or their regime would likely be ground down under mounting internal and external pressure…. King Khalid led a social/religious/political reactionary revolution within Saudi Arabia to align with the Sunni extremists. Up until about four years ago, Saudi society was still gender segregated and enforced a largely literalist interpretation of Sharia, hence the array of bizarre and antiquated laws – gender segregation in public, requiring women to cover their faces, outlawing of non-Muslim religious buildings (there are a few Shia mosques), restrictions on foreign media, etc. Saudi Arabia was always conservative, but most of these draconian laws were only put into place in the 1980s. The Saud dynasty purposefully induced a reactionary legal regime and pulled Saudi Arabia further away from liberalism.

The charitable take on making an already oppressive regime even more oppressive is that the Sauds were trying to bend Saudi Arabia to the extremists so the country would not break. And by all accounts, it worked; the conservative Wahhabi clerics backed by the Saud dynasty placated a sizeable portion of the Sunni extremists inside and outside of Saudi Arabia, and they became a pool of support against the Shia and Baathists. Saudi Arabia was certainly made a worse country for its citizens, but that was the price to pay for averting civil war.

More recently, Crown Prince Salman has consolidated power to the point where he can make modernizing reforms that Wahhabis might have opposed, like allowing women to drive, allowing non-Muslim foreigners to to get tourist visas, allowing music concerts, et c. Lakeman obviously likes these reforms, but at the same time worries that the concentrated power that so far Salman has largely used to enact positive reforms could be abused going forward, and on a larger scale than murdering the occasional dissident.

Wood argues that a worst case scenario parallel to MBS is Syrian Dictator Bashar al-Assad. Like MBS, there were high hopes that Assad would be a liberal reformer when he took over Syria. After all, Assad had been living and working in the UK as an ophthalmologist with no political aspirations, and was known to be a fan of Phil Collins. He was called to the throne after the unexpected death of his older brother, and so the West hoped that this nerdy British doctor would bring upper-middle class liberal values to Syria. Instead, Assad became one of the worst dictators of the modern Middle East, probably second only to Saddam Hussein.

I recommend reading the whole thing, here I’m quoting relatively small parts of an article full of interesting detail on the history, economics, and politics of Saudi Arabia. There’s also a section on visiting:

The silver lining to Saudi Arabia’s lack of tourism is that there aren’t many tourist restrictions. I went to two ancient settlements and I found no guards, no gates, no notices at all. I walked in, around, and on top of 2,000 year old houses, and I honestly have no idea if I was allowed to.

Thanksgiving Dinner is Once Again More Expensive (But Not the Most Expensive Ever)

Jeremy Horpedahl3 Comments

Last year inflation hadn’t quite hit the levels we would see in 2022, but they were already rising. When Thanksgiving rolled around, many media sources were reporting that it was the “most expensive Thanksgiving ever.” In nominal terms that was true, though in nominal terms it isn’t that surprising. In a post last year, I compared the prices of Thanksgiving dinners (using the same data from Farm Bureau) to median earnings going back to 1986. While 2021 was more expensive the 2020, it turned out it was still the second lowest it had been since 1986.

As you might expect, this year’s Thanksgiving dinner is even more expensive than last year in nominal terms. It’s up about 20% since last year or over $10 more, according to Farm Bureau. That’s certainly more than the overall rate of inflation (7.7% in the past 12 months) and more than inflation for groceries (12.4% in the past 12 months). But how does that compare with median wages? Comparing the 3rd quarter of this year with the same quarter in 2021, median wages are only up about 7%, certainly not enough to keep up with those rising turkey prices.

When we add 2022 to the historical chart, here’s what it looks like.

The spike in the last 2 years is clear in the chart but notice that at about 6% of median weekly earnings, we have essentially returned to the average level of the entire series. From 2017-2021, we could be thankful that the price of your Thanksgiving dinner had dropped below that 6% level. We’ll have to find something else to be thankful for this year.

But Who Will Build the Roads? 19th Century Edition

Jeremy Horpedahl1 Comment

In the United States and much of the developed world today, most roads are publicly provided, i.e., they are built and operated by governments. This is not exclusively true, as many private toll roads exist, but the vast majority of roads are owned and operated by governments. Must it be this way?

A recent working paper by Alan Rosevear, Dan Bogart, and Leigh Shaw-Taylor looks at a very important case study: Britain in the 19th century. Britain is important because they were the leading economy in the world at the time, at the forefront of the Industrial Revolution. How were roads built and improved in England and Wales at this time? Here’s what the authors have to say in the abstract:

“non-profit organizations, known as turnpike trusts, built more new roads by attracting private investors and capable surveyors. We also show the Government Mail Road had the highest quality. Nevertheless, most turnpike trust roads were good quality, indicating their practical achievements.”

In the conclusion of the paper, they further add:

“Our analysis demonstrates that turnpike trusts were responsible for building 4,000 miles of new, good quality road in England and Wales, much of it between 1810 and 1838. On a directly comparable basis, the not-for-profit trusts built thirty times the mileage than had been built with direct Government funding during the early 1800s.”

To be clear, this paper is not a completely new discovery. It was already well-known that private companies built roads in Britain, as the authors make clear in their literature review. Similarly, there were many private turnpikes and toll roads in the US in the 19th century, as summarized in an encyclopedia entry by Klein and Majewski.

The Rosevear et al. paper adds new important details. First, they document the extent of private road building and improvements in the 19th century. Second, they show that these roads were generally of good quality, or at least they were of good quality for the time. Prior research had not documented these facts, thus making this a very important advance in our understanding of this time period. But perhaps more importantly, we see the possibility that many more roads today could be privately built and funded with user fee, especially considering that we are much, much wealthier today than 19th century Britain, we have more extensive and functional capital markets for raising the funds, etc.

Mortgage Affordability Since 1971

Jeremy Horpedahl2 Comments

Mortgage interest rates are climbing quickly, while housing prices are still mostly high. These factors combined means that it is much more expensive to buy a home than in the recent past. But how much more expensive? And how does this compare with the past 50 years of history?

The chart below is my attempt to answer those questions. It shows the number of hours you would need to work at the average wage to make a mortgage payment (principal and interest) on the median new home in the US.

My goal here was to provide the most up-to-date estimate of this number consistent with the historical data. Thus, I had to use average wage data rather than median wage data, since the median hourly wage data is not available for 2022 yet. But as I’ve discussed before, while median and average wages are different, their rate of increase is roughly the same year-to-year, so it would show the same trends.

The final point plotted on the blue line in the chart is for August 2022, the last month for which we have median home price data, average wage data, and 30-year mortgage rates. Mortgage rates are the yearly average (or monthly average in the case of August 2022).

You’ll also notice a red dot at the very end of the series. This is my guess of where the line will be in October 2022, once we have complete data for these three variables (right now only mortgage rates are available in October for the three series I am using). I’m doing my best here to provide as much of a real-time picture as possible, given that rates are rising very sharply right now, while still providing consistent historical comparisons. If that estimate is roughly correct, mortgage costs on new homes are now less affordable than any year since 1990.

What do you notice in the chart?

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The Quotable Walter Russell Mead

James BaileyLeave a comment

I listen to a lot of podcasts, but many are forgettable, and even the good ones can be hard to share, since they get their point across slowly and gradually. But on the latest Conversations with Tyler, I found foreign policy thinker Walter Russell Mead to be eminently quotable. Some highlights:

On Germany:

Kennan’s goal for Germany was to have a united, neutral, disarmed Germany at the heart of Europe. In some ways, [laughs] Kennan’s goal looks, maybe, closer than ever.

China’s development plan, much more than its Taiwan policy or its human rights, is a gun pointed at the head of German business

On America:

Over the last 40 years, there’s been an enormous increase in the number of PhD grads engaged in the formation of American foreign policy. There’s also been an extraordinary decline in the effectiveness of American foreign policy. We really ought to take that to heart.

The American academy is actually a terrible place for coming to understand how world politics works.

One of the teachers at Groton used to take aside some of the boys — it was an all-boys school at the time — and explain to them how their family fortune was made. He might say, “Well, George, we’ve been reading a lot about war profiteers in World War I. You need to know that your grandfather . . .”

I think neoconservatism reflected a sense of people who’ve never been wrong and never been beaten, at least in their own minds

On the Middle East:

In the Arab world, the Middle East, Islamism, and jihad — just call it jihadi ideology more broadly — is seen to have failed. Like socialism, like Arab nationalism, it’s one more in a long list of failed ideological movements. Not that there still aren’t terrorists, or for that matter, Arab socialists, but it’s not the same.

Nobody really thought, in 2008, as George W. Bush left office, that you could possibly mess up the Middle East worse than the Bush administration. But President Obama proved that that was wrong and that you could actually take the Middle East at the end of 2008 and make it almost infinitely worse, both for American interests and for the safety and happiness of the people in the region

On Ukraine:

The message, actually the totality of the message that we sent to Putin [through the intelligence we released] is, “You are going to win if you do this”.

I read Mead’s book Special Providence in college and enjoyed it then, but have’t kept up with his work since. The book’s title comes from another great quote, this time attributed to Otto von Bismarck:

God has a special providence for fools, drunks and the United States of America.

“The central values of civilization are in danger”

Jeremy HorpedahlLeave a comment

The Mont Pelerin Society was founded 75 years ago. The title of this post was the opening sentence of the Statement of Aims the new Society agreed upon. They had many concerns about what they considered “central values,” but primary among those concerns were the dangers related to market economies: “a decline of belief in private property and the competitive market” and “the growth of theories which question the desirability of the rule of law.”

How has the world done since 1947? It’s easy to point to the decline of communism and socialism, both in practice and as a dominant theory, as a victory for the goals of the Mont Pelerin Society. However, we might be concerned that in the non-communist world, economic freedom has declined even as communism has failed. Let’s dig a little deeper.

One source we can use is an extension of the Fraser Institute’s Economic Freedom of the World index. The primary index only extends back to 1970, but recently Lawson and Murphy have constructed a version of the index which goes all the way back to 1950 for some countries. As far as I’m aware, they haven’t yet perfectly mapped the pre-1970 index with the primary index that extends to the present, but I’ll make a quick comparison using the available data. The 1950 data brings us very close to the date of the first MPS meeting.

Here’s a list of countries relevant to the discussion at MPS in 1947. The list includes countries where attendees came from, as well as other countries of interest to the discussion, such as China and Russia (I’m using the list from Caldwell’s recent edited transcripts of the 1947 meeting). Caveat: this isn’t a chain-linked index, so the 1950 and 2020 numbers are perfectly comparable. Also, the 2020 number only includes Areas 1-4 of the index, since that’s what the pre-1970 data contains.

The table above should give us some optimism about the state of market economies in the world from the perspective of 1947. Not only have China and Russia, clearly improved their economic freedom scores, but all of the Western market economies have as well. Again, exercise caution in interpreting these, since it’s not a chain-linked index, and it excludes one area of economic freedom (regulation, which surely has grown substantially since 1947). Despite those cautions, the picture in 2020 looks pretty good compared with 1950.

But what of other liberal institutions? While the MPS statement of aims doesn’t specifically mention democratic institutions, the threat to democracy seems to clearly be a concern in 1947 (“extensions of arbitrary power” and “freedom of thought and expression”).

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