Politics

Now Published: Prohibition and Percolation

Zachary Bartsch2 Comments

My new article, “Prohibition and Percolation: The Roaring Success of Coffee During US Alcohol Prohibition”, is now published in Southern Economic Journal. It’s the first statistical analysis of coffee imports and salience during prohibition. Other authors had speculated that coffee substituted alcohol after the 18th amendment, but I did the work of running the stats, creating indices, and checking for robustness.

My contributions include:

  • National and state indices for coffee and coffee shops from major and local newspapers.
  • A textual index of the same from book mentions.
  • I uncover that prohibition is when modern coffee shops became popular.
  • The surge in coffee imports was likely not related to trade policy or the end of World War I
  • Both demand for coffee and supply increased as part of an intentional industry effort to replace alcohol and saloons.
  • An easy to follow application of time series structural break tests.
  • An easy to follow application of a modern differences in differences method for state dry laws and coffee newspaper mentions.
  • Evidence from a variety of sources including patents, newspapers, trade data, Ngrams, naval conflicts, & Wholesale prices.

Generally, the empirical evidence and the main theory is straightforward. I learned several new empirical methods for this paper and the economic logic in the robustness section was a blast to puzzle-out. Finally, it was an easy article to be excited about since people are generally passionate about their coffee.

Bartsch, Zachary. 2025. “Prohibition and Percolation: The Roaring Success of Coffee During US Alcohol Prohibition.” Southern Economic Journal, ahead of print, September 22. https://doi.org/10.1002/soej.12794.

Economic Freedom of the World 2025

James Bailey1 Comment

The Fraser Institute released their latest report on the Economic Freedom of the World today, measuring economic policy in all countries as of 2023. They made this excellent Rosling-style graphic that sums up their data along with why it matters:

In short: almost every country with high economic freedom gets rich, and every country that gets rich either has high economic freedom or tons of oil. This rising tide of prosperity lifts all boats:

This greater prosperity that comes with economic freedom goes well beyond “just having more stuff”:

The full report, along with the underlying data going back to 1970, is here. The authors are doing great work and releasing it for free, so no complaints, but two additional things I’d like to see from them are a graphic showing which countries had the biggest changes in economic freedom since last year, and links to the underlying program used to create the above graphs so that readers could hover over each dot to identify the country (I suppose an independent blogger could do the first thing as easily as they could…).

FRDM is an ETF that invests in emerging markets with high economic freedom (I hold some), I imagine they will be rebalancing following the new report.

You Read It Here First

James BaileyLeave a comment

The subjects of two of our posts from 2023 are suddenly big stories.

First, here’s how I summed up New Orleans’ recovery from hurricane Katrina then:

Large institutions (university medical centers, the VA, the airport, museums, major hotels) have been driving this phase of the recovery. The neighborhoods are also recovering, but more slowly, particularly small business. Population is still well below 2005 levels. I generally think inequality has been overrated in national discussions of the last 15 years relative to concerns about poverty and overall prosperity, but even to me New Orleans is a strikingly unequal city; there’s so much wealth alongside so many people seeming to get very little benefit from it. The most persistent problems are the ones that remain from before Katrina: the roads, the schools, and the crime; taken together, the dysfunctional public sector.

The New York Times had a similar take yesterday:

Today, New Orleans is smaller, poorer and more unequal than before the storm. It hasn’t rebuilt a durable middle class, and lacks basic services and a major economic engine outside of its storied tourism industry…. New Orleans now ranks as the most income-unequal major city in America…. In areas that attracted investment — the French Quarter, the Bywater and the shiny biomedical corridor — there are few outward signs of the hurricane’s impact. But travel to places like Pontchartrain Park, Milneburg and New Orleans East that were once home to a vibrant Black middle class, and there are abandoned homes and broken streets — entire communities that never regained their pre-Katrina luster…. Meanwhile, basic city functions remain unreliable.

I wrote in 2023 about a then-new Philadelphia Fed working paper claiming that mortgage fraud is widespread:

The fraud is that investors are buying properties to flip or rent out, but claim they are buying them to live there in order to get cheaper mortgages…. One third of all investors is a lot of fraud!… such widespread fraud is concerning, and I hope lenders (especially the subsidized GSEs) find a way to crack down on it…. This mortgage fraud paper seems like a bombshell to me and I’m surprised it seems to have received no media attention; journalists take note. For everyone else, I suppose you read obscure econ blogs precisely to find out about the things that haven’t yet made the papers.

Well, that paper has now got its fair share of attention from the media and the GSEs. Bill Pulte, director of the Federal Housing Finance Agency and chairman of Fannie Mae and Freddie Mac, has been going after Biden-appointed Federal Reserve Governor Lisa Cook over allegations that she mis-stated her primary residence on a mortgage application:

Pulte has written many dozens of tweets about this, at least one of which cited the Philly Fed paper:

Now President Trump is trying to fire Cook. Federal Reserve Governors can only be fired “for cause” and none ever have been, but Trump is using this alleged mortgage fraud to try to make Cook the first.

The Trump administration seems to have made the same realization as Xi Jinping did back in 2012– that when corruption is sufficiently widespread, some of your political opponents have likely engaged in it and so can be legally targeted in an anti-corruption crackdown (while corruption by your friends is overlooked).

I’m one of a few people hoping for the Fed to be run the most competent technocrats with a minimum of political interference:

But I’m not expecting it.

Remember, you read it here first.

Government Makes Quasi-Nationalization Deal to Assure Supply of Critical Rare Earths for Defense 

Scott BuchananLeave a comment

If top government officials were regular readers of this blog, they would have been warned by a headline here more than two years ago, “China To Squeeze West by Restricting Export of Essential Rare Earths “.  For the last few years, the U.S. has been trying to limit Chinese access to the most powerful computing chips, which are largely made by American company Nvidia. But China has some high cards to play in this game. It produces some 90% of refined rare earths and rare earth products like magnets.  These super-powerful neodymium-containing magnets are utterly critical components in all kinds of high-tech products, including wind turbine generators and electric motors for electric vehicles and drones, and miscellaneous military hardware.

It has been painfully obvious at least since 2010, when China put the squeeze on Japan by unofficially slowing rare earth exports to Japan over a territorial dispute, that it was only a matter of time before China played that card again. But the West slumbered on. There is a reasonable amount of rare earth ores that are mined outside China, but nobody wanted to build and operate the expensive and environmentally messy processes to refine the rare earth minerals (carbonates, oxides, phosphates) into the pure metals. Unlike the esoteric and hard-to-imitate processing for cutting edge computing chips, anyone can gear up and start refining rare earth ores. It mainly just takes money, lots and lots of it, to build and operate all the processing equipment for the multiple steps involved*. There was little free market incentive for a Western company to invest in expensive processing, since China could readily bankrupt them by cutting prices as soon as they started up their shiny new process line. Reportedly, the Chinese used this tactic twice before (in 2002 and 2012) to kill nascent refining of the rare earth ores at Mountain Pass mine in California.

As of April of this year, in response to ongoing U.S. export restrictions on chips, China threw its latest rare earth card down on the table, requiring export licenses and imposing other restrictions that throttled rare earth exports. Western manufacturers were soon howling in pain. As of early June:

Global automakers are sounding the alarm on an impending shortage of rare earth magnets as China’s restrictions on the material vital for the automotive, defence and clean energy industries threaten production delays around the world.

German automakers became the latest to warn that China’s export restrictions threaten to shut down production and rattle their local economies, following a similar complaint from an Indian EV maker last week. U.S., Japanese and South Korean automakers warned President Donald Trump on May 9 car factories could close.

The Trump administration quickly caved on chips and in July permitted boatloads of high-end H20 Nvidia chips to ship to China, in return for resumption of rare earth exports from China. Score one for the CCP. As of mid-August, rare earth shipments had climbed back to around half of their pre-May levels, but China ominously warned Western companies against trying to stockpile any reserves of rare earths, or they would “face shortages” in the future.

After this ignominious face-slapping, the administration finally did something that should have been done years ago: they gave an American company a solid financial incentive to buckle down and do the dirty work of refining rare earth ores at large scale. The Defense Department inked a deal with MP Materials Corp, the current operator of the Mountain Pass mine and the modest refining operation there to quickly ramp up production:

The Department of Defense is investing capital in MP across several fronts. This includes a $400 million convertible preferred equity, struck at a fixed conversion price of $30.03. The government gets 10-year MP stock warrants also set for a $30.03 price. As planned, this would get the Department of Defense to about a 15% ownership position in MP Materials. In addition, the Department of Defense will lend MP Materials $150 million at a highly competitive interest rate to help the company expand its heavy rare earth element separation capabilities.

It’s not just a financing deal, however. This arrangement also provides a striking level of influence over pricing and profitability for MP Materials going forward.

For one thing, the Department of Defense will provide a price floor of $110 per kilogram for NdPr. NdPr is a product that is a combination of neodymium and praseodymium. This is a generous floor price…

The Department of Defense’s involvement now gives MP Materials the runway necessary to build what’s being dubbed the 10X magnet manufacturing expansion plant. The Department of Defense is committed to buying the output of this plant with a controlled cost-plus pricing structure. And there will be a profit split with the DoD getting a significant chunk of the upside above certain EBITDA thresholds.

This is being billed as a private-public partnership, but it is akin to nationalization. The government will be heavily involved in planning output and setting pricing here, as well as sharing in profits.  Fans of laissez-faire free markets may be understandably queasy over this arrangement, but national security considerations seem to make this necessary.

I predict that further “private-public” deals will be struck to subsidize Western production of vital materials. Let’s be clear: massive subsidies or similar incentives, in one form or another, will be needed. And this means that Americans will have to devote more resources to grinding out industrial materials, and less to consumer goods; hence, we will likely live in smaller houses, perhaps (gasp) lacking granite countertops and recessed lighting. Economics is all about trade-offs.

Due to its vast, lower-paid, hard-working and highly-capable workforce, the whole Chinese supply chain and production costs run far, far cheaper than anything in the West. We don’t have to produce 100% of what we use, even say 40% might be enough to keep from being helplessly squeezed by another nation. How to do this without descending into unproductive rent-seeking rip-offs will be a challenge.

Some other materials candidates:  China has as of December 2024 completely shut off exports to the U.S. of three key non-rare earth technical elements, gallium, germanium and antimony, so those might be a good place to start. China mines or refines between half and 90% of global supply of those minerals. Also, China has instituted export regulations of for more key metals (tungsten, tellurium, bismuth, indium and molybdenum-related products), so these may be further subjects for squeeze plays. Finally, “China is the world’s top graphite producer and exporter, and also refines more than 90% of the world’s graphite into a material that is used in virtually all EV batteries,” so that is yet another vital material where the West must decide how much it is worth to break its dependence on an unreliable trading partner.

We Don’t Have Mass Starvations Like We Used To

Zachary BartschLeave a comment

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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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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Freedom for Freestanding Birth Centers

James BaileyLeave a comment

Iowa recently joined the growing list of states where midwives or obstetricians can open a freestanding birth center without needing to convince a state board that it is economically necessary. The Des Moines Register provides an excellent summary:

A Des Moines midwife who sued the state for permission to open a new birthing center may have lost a battle in court, but ultimately, she has won the war.

Caitlin Hainley of the Des Moines Midwife Collective sought to open a standalone birthing center in Des Moines, essentially a single-family home repurposed with birthing tubs and other equipment needed to give birth in a comfortable, home-like environment.

To do so, the collective alleged in its 2023 lawsuit, would have required going through a lengthy, expensive regulatory process that would give already established maternity facilities, such as local hospitals, the chance to argue against granting what is known as a certificate of need for the new facility, essentially vetoing competition.

A federal district judge ruled in November that Iowa’s certificate-of-need law is constitutional, finding that legislators had a rational interest in protecting existing hospitals and health care providers.

But while losing the first round in court, the collective’s cause was winning support in a more important venue: the Iowa Capitol. Iowa legislators in their 2025 session passed a bill, which Gov. Kim Reynolds signed on May 1, removing birth centers from the definition of health facilities covered by the certificate-of-need law. The law will formally take effect July 1.

I’m honored to have played a small part in this as the expert witness in the lawsuit.

If you’d like to get involved in making sure birth options are available your state, a great place to start would be to attend the Zoom seminar Roadmap For Reform: Advancing Birth Freedom on July 23rd. It is hosted by the Pacific Legal Foundation, which represented the midwives pro-bono in the Iowa case.

There is strong momentum here with Connecticut, Kentucky, Michigan, Vermont, and West Virginia also recently repealing Certificate of Need requirements for birth centers, but a variety of other barriers remain. States often require freestanding birth centers to obtain a transfer agreement with a nearby hospital before opening to ensure that the hospital will take their emergency cases, even though hospitals are legally required to take all emergency cases. The problem is that hospitals provide both complementary services (emergency care) and substitute services (labor and delivery), and they often choose not to sign transfer agreements in order to prevent competition from a partial substitute. This whole area would benefit both from more academic study, as well as more investigation from antitrust enforcement.

But for today, congratulations to Caitlin Hainley and to Iowa on their victory.

Economic Impact of Agricultural Worker Deportations Leads to Administration Policy Reversals

Scott Buchanan1 Comment

Here is a chart of the evolution of U.S. farm workforce between 1991 and 2022:

Source: USDA

A bit over 40% of current U.S. farm workers are illegal immigrants. In some regions and sectors, the percentage is much higher. The work is often uncomfortable and dangerous, and far from the cool urban centers. This is work that very few U.S. born workers would consider doing, unless the pay was very high, so it would be difficult to replace the immigrant labor on farms in the near term. I don’t know how much the need for manpower would change if cheap illegal workers were not available, and therefore productivity was supplemented with automation.

It apparently didn’t occur to some members of the administration that deporting a lot of these workers (and frightening the rest into hiding) would have a crippling effect on American agriculture. Sure enough, there have recently been reports in some areas of workers not showing up and crops going unharvested.

It is difficult for me as a non-expert to determine how severe and widespread the problems actually are so far. Anti-Trump sources naturally emphasize the genuine problems that do exist and predict apocalyptic melt-down, whereas other sources are more measured. I suspect that the largest agribusinesses have kept better abreast of the law, while smaller operations have cut legal corners and may have that catch up to them. For instance, a small meat packer in Omaha reported operating at only 30% capacity after ICE raids, whereas the CEO of giant Tyson Foods claimed that “every one who works at Tyson Foods is authorized to do so,” and that the company “is in complete compliance” with all the immigration regulations.

With at least some of these wholly predictable problems from mass deportations now becoming reality, the administration is undergoing internal debates and policy adjustments in response. On June 12, President Trump very candidly acknowledged the issue, writing on Truth Social, “Our great Farmers and people in the hotel and leisure business have been stating that our very aggressive policy on immigration is taking very good, long-time workers away from them, with those jobs being almost impossible to replace…. We must protect our Farmers, but get the CRIMINALS OUT OF THE USA. Changes are coming!” 

The next day, ICE official Tatum King wrote regional leaders to halt investigations of the agricultural industry, along with hotels and restaurants. That directive was apparently walked back a few days later, under pressure from outraged conservative supporters and from Deputy White House Chief of Staff Stephen Miller. Miller, an immigration hard-liner, wants to double the ICE deportation quota, up to 3,000 per day.

This issue could go in various ways from here. Hard-liners on the left and on the right have a way of pushing their agendas to unpalatable extremes. It can be argued that the Democrats could easily have won in 2024 had their policies been more moderate. Similarly, if immigration hard-liners get their way now, I predict that the result will be their worst nightmare: a public revulsion against enforcing immigration laws in general. If farmers and restaurateurs start going bust, and food shortages and price spikes appear in the supermarket, public support for the administration and its project of deporting illegal immigrants will reverse in a big way. Some right-wing pundits would not be bothered by an electoral debacle, since their style is to stay constantly outraged, and (as the liberal news outlets currently demonstrate), it is easier to project non-stop outrage when your party is out of power.

An optimist, however, might see in this controversy an opening for some sort of long-term, rational solution to the farm worker issue. Agricultural Secretary Brooke Rollins has proposed expansion of the H-2A visa program, which allows for temporary agricultural worker residency to fill labor shortages. This is somewhat similar to the European guest worker programs, though with significant differences. H-2A requires the farmer to provide housing and take legal responsibility for his or her workers. H-2B visas allow for temporary non-agricultural workers, without as much employer responsibility. A bill was introduced into Congress with bi-partisan support to modernize the H-2A program, so that legislative effort may have legs. Maybe there can be a (gasp!) compromise.

President Trump last week came out strongly in favor of this sort of solution, with a surprisingly positive take on the (illegal) workers who have worked diligently on a farm for years. By “put you in charge” he is seems to refer to the responsibilities that H-2A employers undertake for their employers, and perhaps extending that to H-2B employers. He acknowledges that the far-right will not be happy, but hopes “they’ll understand.” From Newsweek:

“We’re working on legislation right now where – farmers, look, they know better. They work with them for years. You had cases where…people have worked for a farm, on a farm for 14, 15 years and they get thrown out pretty viciously and we can’t do it. We gotta work with the farmers, and people that have hotels and leisure properties too,” he said at the Iowa State Fairgrounds in Des Moines on Thursday.

“We’re gonna work with them and we’re gonna work very strong and smart, and we’re gonna put you in charge. We’re gonna make you responsible and I think that that’s going to make a lot of people happy. Now, serious radical right people, who I also happen to like a lot, they may not be quite as happy but they’ll understand. Won’t they? Do you think so?”

We shall see.

The Ugly Gray Rhino Gathers Speed

James Bailey1 Comment

A black swan is a crisis that comes out of nowhere. A gray rhino, by contrast, is a problem we have known about for a long time, but can’t or won’t stop, that will at some point crash into a full-blown crisis.

The US national debt is a classic gray rhino. The problem has slowly been getting worse for 25 years, but the crisis still seems far enough off that almost no one wants to incur real costs today to solve the problem. During the 2007-2009 financial crisis and the 2020-2021 Covid pandemic we had good reasons to run deficits. But we’ve ignored the Keynesian solution of paying back the deficits incurred in bad times with surpluses in good times.

We are currently in reasonably good economic times, but about to pass a mega-spending bill that blows the deficit up from its already-too-high-levels. At a time when we should be running a surplus, we are instead running a deficit around 6% of GDP:

Source: Congressional Budget Office

Our ‘primary deficit’ is lower, a more manageable 3% of GDP. But if interest rates go higher, either for structural reasons or because of a loss of confidence in the US government’s willingness to pay its debts, the total deficit could spiral higher rapidly. The CBO optimistically assumed that the interest rate on 10-year treasuries will fall below 4% in the 2030s, from 4.3% today:

Source: Congressional Budget Office

But their scoring of H.R. 1 (“One Big Beautiful Bill Act”) shows it adding $3 trillion to the debt over the next 10 years, increasing the deficit by ~1% of GDP per year.

I already suspected this gray rhino would eventually cause a crisis, but this bill and the milieu that produced turn it into a near guarantee- nothing stops the deficit train until we hit a full blown crisis. That crisis is no longer just a long-term issue for your kids and grandkids to worry about- you will see it in 7 years or so. Unfortunately, that is still far enough away that current politicians have no incentive to take costly steps to avoid it. In fact, deficits will probably make the economy stronger for a year or two before they start making things worse- convenient for all the Congresspeople up for election in less than 2 years.

Here are the ways I see this playing out, from most to least likely:

  1. By around 2032, either the slowly aging population or a sudden spike in interest rates forces the government to touch at least one of the third rails of American politics: cut Social Security, cut Medicare, or substantially raise taxes on the middle class (explicitly or through inflation).
  2. We get bailed out again by God’s Special Providence for fools, drunks, and the United States of America. AI brings productivity miracles bigger than those of computers and the internet, letting GDP grow faster than our debts.
  3. We default on the national debt (but this is a risky option because we will still want to run big deficits, and lenders will only lend if they expect to get paid back).
  4. We do all the smart policy reforms that economists recommend in time to head off the crisis and stop the rhino. Medical spending falls without important services being cut thanks to supply-side reforms or cheap miracle drugs (GLP-1s going off patent?).

I’m hoping of course for numbers 2 and 4, but after this bill I’m expecting the rhino.

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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