Category: Economics

Econ 101: Government Budgets

Newspapers are full of articles about the deaths or other losses that will result from proposed budget cuts. Today’s Washington Post, for example, headlined a story on USAID cuts “USAID cuts may cause 14 million more deaths in next five years, study says”  “Washington post /2025/07/01/”

If the government’s spending on X is reduced (aside from any improvement in efficiency) the benefits of that spending will be lost. But our resources are limited. If we spend more on X we have less to spend on Y.  So when we lament the losses from reduced spending on X we should take account of the gain from the increased spending on other things.

To put a bit of flesh on this issue, consider the following: “The administration has cut more than a hundred contracts and grants from the President’s Emergency Plan for AIDS Relief, the HIV and AIDS program credited with saving millions of lives in poor countries. President Donald Trump has shut down the agency that signed off on most PEPFAR spending and fired other staffers who supported it.”  “Rubio-pepfar-aids”

Evaluating whether this cut is “good or bad” is not easy because determining the likely alternative use of the money saved is not easy. If we stick to a fixed government budget total, the alternative use by the government of the money saved might save even more lives (or maybe not). But the saving could also be given to tax payers whose use of that money would reflect their own personal needs and priorities.  

The process used by Elon Musk’s DOGE to arrive at the spending and/or personnel cuts they proposed was not transparent thus is largely unknown to us. But I have serious doubts that it was appropriate. Semafor offers the following advice:

“A lot of US government work is highly inefficient, says the science reformer Stuart Buck. Federally funded scientists say they spend 44% of their research time on bureaucracy, federal procurement is “broken” and often results in the government buying products that don’t work, and “the Paperwork Reduction Act paradoxically results in endless paperwork.” “Many such cases,” says Buck. “We should have an official effort to address these issues… We could even call it a ‘Department of Government Efficiency.’” As you might be aware, there is one: It is “widely viewed as a failure,” but the basic idea is sound. How could we make it good?

“The first step, says Buck, would be taking a long time to deeply understand how each government agency works, so you don’t mistake routine human error or some statistical artifact for fraud. Second, it should focus on high-value reforms, like outdated data systems or software. Third, it should learn from previous attempts to cut red tape — because there have been many, not all of which worked. And importantly, a good DOGE would not mistake things we don’t use for “waste” — like an insurance policy, we hope pandemic preparedness infrastructure and fire departments are never used, but they’re in place in case we need them. The real-world DOGE is a failure, says Buck, because it ignored all of these strictures.”  “Semafor.com/newsletter/06/30/2025/”

I think some, if not many, government programs or activities should be reformed or eliminated. But those the public really want must be paid for by the public paying additional taxes or lending to the government (buying US bonds). U.S. debt is dangerously high (123% of US GDP) and continuing to grow.  So to the extend spending is not reduced, taxes should be raised.   

Looking for win-win

The essence of trade is that both the seller and buyer benefit (win-win). Without that feature the trade would not take place. The expansion of trade locally and then globally increased the output and thus incomes of the average person dramatically.

In 1820, about 80% of the world’s population lived in extreme poverty (defined as living on less than $2.15 per day in today’s terms). By 2019, this figure had fallen to roughly 10%. This decline is especially notable given that the global population increased more than sevenfold during this period.


The pace of poverty reduction accelerated in recent decades. From 1990 to 2019, the global extreme poverty rate dropped from 43% to below 10%, with the fastest declines occurring since the 1990s. This progress was driven largely by rapid economic growth in Asia, particularly in China and India.

The increase in win-win gains in income from trade have been promoted by broad agreement on rules and norms for “fair trade” to maximize the increase in incomes that results. These have been developed over time through what is now called the World Trade Organization (WTO). Tragically, rather than further improving its rules, the U.S. has undermined the WTO by refusing to appoint new members to its dispute resolution body.

The benefits of such collaborative cooperation have been sought and gained in other areas as well. To take one, the climate benefits of nuclear energy also carries the risks of destruction from nuclear bombs. Agreements among the countries with such capacity to contain and minimize the associated risks are reflected in the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) of 1968 (extended in 1995). The Comprehensive Test Ban Treaty (CTBT, 1996), several bilateral agreements with the USSR/Russia and others have further reduced the risks.

The dramatic development of Artificial Intelligence (AI) programs promises incredible increases in our incomes but also carries risks. As with nuclear energy, all would benefit from agreements that limit these risks. Cooperating in developing such guard rails is in everyone interest. The US is making a big mistake in attempting to stifle  China’s AI development rather than a win-win cooperation with them to maximize its promise while minimizing its risk.

The case for such cooperation with China is powerfully made by Alvin Graylin in a recent presentation to the Committee for the Republic (on whose board I serve) the other day. https://www.youtube.com/watch?v=Jg6brPvFJGw.

A perfect world (economically)

The goal of policy should be to maximize world income (output) and its distribution that reflects the contribution of each player. That occurs when resources (capital and labor) are allocate to their most productive uses. But how is that achieved? First by ensuring that the government does not interfere. If the government subsidizes an activity, it will draw resources from its most productive use to the subsidized one thus reducing income.

The government’s role is important for defining and protecting property rights and the rule of law and the basic infrastructure on which firms operate. For example, in the U.S. the government funded basic research because there is no market incentive to undertake it. Much of it provides knowledge that is never used or exploited, but some is exploited by private firms for purposes the government could not guess in advance.

In the real world, consumers’ tastes change and the products and services being offered evolve and the optimal allocation of resources (capital and labor) must evolve as well. Those that are not the most productive tend to go out of business, freeing those resources for better uses. When governments intervene via subsidies or differential taxes they invariably reduce the efficiency of resource allocation and thus lower incomes. Bilateral trade deals introduce large distortions in resource allocation and thus lower global income.

The global maximum thus requires common rules for fair trade globally. The World Trade Organization is the institution through which such rules are developed and enforced (or at lease it should be). Bilateral deals undermine the level playing field optimal resource allocation requires and thus lower world income. With the weakening of the WTO and other international rules and norms, the world is increasingly falling below the income it is capable of.

Econ 101: How much should we tax the rich?

Should the wealthy pay more taxes than the rest of us? Of course, no one disagrees with that. But how much more? Based on 2022 tax year, the latest available, the top 10% of income earners (those with adjusted gross income above $178,661) paid 72% of the total of $2.1 trillion taxes collected. Is that too much or too little or about right. The bottom 50% of income earners (less than AGI of $50,339) paid 3.0%. What is a “fair” distribution of the tax burden and/or an economically efficient distribution? Corporate income taxes raised $0.42 trillion that year and should really be abolished in our globally trading world.

I have written earlier (many times actually) that I support abolishing all income taxes (personal and corporate) and relying fully on consumption taxation. While it can be challenging to determine where things are produced, there is no question about where we consume them. But while waiting for that miracle to happen, how much more should higher income people pay in taxes than lower income people?

Fair Tax Act of 2023
Replacing Social Security with a Universal Basic Income

My sense of fairness (and economists norm for tax neutrality) says that the tax rate should be the same for everyone. In other words, if your income is twice mine, you should pay twice the tax. If all income taxes and welfare payments were replace with a Universal Basic Income for all and flat consumption tax (VAT) the result would be mildly progressive tax rates on income.

A note on Social Security: it is not a saving plan in which what you saved is there to pay out to you when you retire. https://wcoats.blog/?s=social+security

Econ 101: On-Shoring

What would be the consequences of on-shoring the production of all of our military needs? We would gain supply resilience in exchange for being poorer.

If the US makes everything it needs at home rather than buying it at lower cost abroad, it will reduce the risk of supply interruptions. The risks of domestic interruptions from natural disasters or labor strife are much smaller than the risk of foreign suppliers cutting us off for one reason or another.

But like insurance more generally this increase in resilience does not come free. Moving the capital and labor from what it was producing before to produce what we used to buy abroad means it moves from more productive to less productive activities. Our overall income will be lower.

This is the basic story of specialization in the production of our comparative advantage and trade for the rest versus self-sufficiency I have written about so many times before. Both are valuable—resilience and income. The US and the rest of the world have grown wealthier at a dramatic pace over the last several centuries because of the growth in trade from neighbors to the rest of the world following millennia of no growth. Where do you want to be in this trade off and who do you want to make that decision for you?

US Crypto Reserve

The establishment by the Federal government of a fund to invest in crypto assets is a terrible idea. First the US has no surpluses to invest. It would need to borrow the money to invest. While the fund might be stocked to some extend with confiscated bitcoin and other digital assets “The use of seized cryptocurrencies, however, could run into roadblocks as these assets often go back to the victims of financial crimes”  “The Hill”   Second it is a terrible precedent for the government to support and manipulate the private market for private assets. Third crypto assets yield no benefit to the American economy. They do not represent or fund investments in productive capital in our economy. They are simply a toy for those who like to gamble.

Crypto assets should not be confused with technical improvements in payment technology (improvements in the speed, efficiency, and/or cost of making payments with “real” money). Such improvements are welcomed.

Trump posted to Truth Social that: “A U.S. Crypto Reserve will elevate this critical industry after years of corrupt attacks by the Biden Administration, which is why my Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve that includes XRP, SOL, and ADA.” Trump had previously dismissed crypto as a scam. “The Hill–Trump announces US crypto reserve”

Econ 101: Budget Cuts

What criteria should guild when to cut some program’s budget? We must first get beyond the fact the any cut will result in having less of something. If it is inefficiency or corruption that we give up—good riddance. But usually, it will be something that has some value. That does not necessarily mean that the cut should not be made.

Consider this example from my in-tray today:

“The Trump administration has made drastic cuts to the National Oceanic and Atmospheric Administration (NOAA) that threaten to impact weather forecasting and other key services provided by the agency. 

In the wake of the wave of dismissals this week, lawmakers and former officials raised concerns about potential damage to services ranging from extreme weather responses to efforts to prevent objects from colliding in space.” “The Hill: Energy – Environment – NOAA cuts”

What should be considered when making such a decision is what other services were prevented by directing these resources to NOAA activities rather than alternative uses. Even if the government just increases it overall budget, the added taxes or borrowing will have alternative uses.

You will immediately understand the issue when you consider your own household budget. Your income is limited (unless you give up some leisure to work more hours). You might gain some pleasure spending more on X, but you can only do so by giving up some Y. If you benefit more from the extra X than you lose giving up Y, then you should do it. It passes the cost/benefit test of maximizing the benefit of your given income.  

In short, the fact that cutting the budget of some agency will cut some of its services is an incomplete argument for not cutting because if fails to take account of the rest of the cost/benefit assessment of the resulting reallocation of resources.

Such budget decisions are generally debated in Congress as it approves the government’s budget. It’s an imperfect process, like most of life, but it allows all views and pros and cons to be heard and considered. A body like Musk’s DOGE might be appropriate for evaluating the efficiency with which services are performed (perhaps proposing better information processing systems) and detecting corruption, but not for evaluating the desirability of such services themselves.

Say what?

During his very busy first few days President Trump did some things I liked and some things I didn’t like.

Among the many executive orders I liked were: a) DEI rollback in federal agencies; b) Plan to reduce US troops in Europe by 20,000; c) Freeze on Federal hiring (hopefully reviewing where more employees are needed and where fewer are needed; and d) Delay in TikTok ban (though I doubt he can legally override Congress with an executive order).

Among those I disliked were: a) Pardoning  over 1,500 convicted of storming the Capital on Jan 6 in an effort to overturn the election results; b) Joining Israel’s genocide of Palestinians by lifting American sanctions on illegal Jewish settlements in the West Bank “Trump-Israeli settlers in West Bank”; c) Halting Afghan refugee application processing and canceling flights for refugees approved to resettle in the U.S. This decision impacted thousands of refugees, including over 1,600 Afghans who had already been cleared for resettlement. “Refugee flights canceled”; and d) dropping government security protection for some of Trump’s enemies ( John Bolton, Mike Pompeo, Anthony Fauci, etc.)—This in America!!!

But in Trump’s address to the World Economic Forum in Davos on Thursday he said that the US is back under new management and “open for business”, turbo-charged by the “largest deregulation campaign in history”. In the same speech he warmed our trading partners to “come make your product in America” or face more tariffs. Aside from the direct contradiction between these two statements the shocking ignorance (or Trump babble) of the second statement left me (almost) speechless. “Trump’s Davos speech”

For starters the US work force is fully employed. Though some German cars, for example, are already assembled in the US, to produce Porsche here would require taking workers from whatever they are now producing (perhaps those producing exports to Germany that Germany would no long be able to afford). Or we could increase legal immigration (badly needed already anyway as birth rates fall and our aging population increases retirees relative to workers) and bring German workers here to build their cars. If Trump really meant what he said, it would not benefit the US (America First) or anyone else. We do not enjoy a high standard of living because we are self-sufficient but because we trade globally for the best deals. But Trump doesn’t seem to believe in free markets.

https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/  

The politics of Trade
Econ 101: Trade balance

Trump

President Reagan pointed to our beacon on the hill as the foundation of our relationship and leadership with the rest of the world. Soon to be President Trump’s approach is to threaten and bully the rest of the world.

“US President-elect Donald Trump’s trade policy challenges the post-war global trading system. By rejecting the World Trade Organization’s principles of non-discrimination and reciprocity, Trump proposes a power-based approach that would fundamentally alter international economic relations, risking the predictability and fairness that have underpinned global trade for seven decades.”  “How Trump threatens the world trading system”

But he hasn’t stopped there.  Though promising to end our “forever wars” and restraint in our international relations, Trump is coming on as the most aggressive President in memory:

“Many people have been understandably astonished by Donald Trump’s recently proclaimed desires to “take back” the Panama Canal “in full, quickly and without question” and to take over the self-governing Danish territory of Greenland.

“While Trump has written that “For purposes of National Security and Freedom around the world, the United States feels that the ownership and control of Greenland is an absolute necessity,” he would at least appear to be willing to pay Denmark for Greenland, as the U.S. paid Denmark for the Danish West Indies, renamed the U.S. Virgin Islands, in 1917.” “A thought on the Panama Canal and Greenland”

A bully, who forces rules on others that he disregards himself, will not serve America’s nor the worlds interests. We all want America to be safe, prosperous, and free. Thus, we must hope for and where possible promote a successful term for this and any other President. An important role can be, and hopefully will be played by the Republicans in Congress, starting with careful vetting of Trumps cabinet nominations. “Trump-bully-world-America-foreign-policy”

Econ 101: Our standard of living

In 1900, US income (GDP) was $4,096 per capita in 2023 dollars, while in 2023 it was $81,695. The US poverty rate fell from 56% to 11.1% over the same period. How was such a dramatic increase in our widely shared standard of living possible? The answer (without explaining how it came about) is increased labor productivity. Each worker has been able to produce more and more and hence earned a higher income.

Putting this differently, more and more people were automated out of their old jobs allowing them to find new ones and produce new things increasing overall output/incomes. Such dynamism does carry the temporary cost of finding new jobs and developing new skills. At any point over the last century that cost could have been prevented by freezing productivity improvements, but that would also have ended the growth in our incomes. Thank heavens such crazies did not win out. But it seems they never stop trying.

The International Longshoremen’s Association (ILA), the union that represents some 47,000 dockworkers, is threatening to strike if the United States Maritime Alliance (USMX), which oversees port operations, goes forward with plans to automate more of these port activities.

“’There has been a lot of discussion having to do with ‘automation’ on United States docks,’ Trump wrote in his post Thursday. ‘I’ve studied automation, and know just about everything there is to know about it. The amount of money saved is nowhere near the distress, hurt, and harm it causes for American Workers, in this case, our Longshoremen. Foreign companies have made a fortune in the U.S. by giving them access to our markets.’

“’For the great privilege of accessing our markets, these foreign companies should hire our incredible American Workers, instead of laying them off, and sending those profits back to foreign countries,” Trump wrote.” “WP: Trump – port-strike-automation”

Whether out of ignorance or deliberate obfuscation, Trump again misstates who gains and who pays. When foreign ships are unloaded in American ports it is the American consumers who benefit from any cost savings at the ports.  Trump also claims (though he surely knows better) that China would pay for his high tariffs on imports from China.

A tariff, of course, is a tax the US levies at our borders on goods we import from abroad. It’s paid in the first instance by the American importers. Like any other tax, it is added to the price of selling these imports to the American public. It’s very purpose is to reduce domestic demand for such imports in order to encourage (more expensive and less efficient) domestic production of such goods. Please, let’s not stop technical progress and the higher income it enables.