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Law Professor Andrzej Rapaczynski argues that federalization of Europe would reduce government inefficiency.

Indeed, the creation of a European federal government and the elimination of national intermediaries would probably lead to the greatest liberalization of the economy (and society as a whole) in Europe's entire history. Look at America in 1787: creation of the federal government swept away the balkanized system of pre-revolutionary colonies, ushering in an era of entrepreneurial expansion across the entire American Continent.

The simple fact is that Europe as a whole is too diverse to be captured by the economic and political interest groups that now dominate national states. It is only as an additional level of government that the EU appears onerous and bureaucratic. If it were to displace national governments, its burden would be weightless in comparison to what exists today.

One problem with that analysis. As another law professor is fond of pointing out, the governments of Europe's national states are democratically elected. The Eurocrats are much less accountable to the people, which makes them far more dangerous.

Discussion Question. Do you agree with Rapaczynski that the Constitution of 1787 "swept away the balkanized system of pre-revolutionary colonies"?

If you're looking for a solid, mainstream economist's treatment of globalization, I recommend this article by Timothy Taylor.

If a national economy reduces its trade barriers but is otherwise a hostile environment for economic growth, globalization will accomplish little or may even be economically harmful. On the other hand, a nation that aggressively pursues other elements of growth, but practices benign neglect of its trade policy, might do just fine.

Indeed, one might argue that globalization accompanies economic growth in large part because it is often a proxy for a nation’s openness to the production methods, management, and social institutions that lead to economic growth. Opponents of globalization often like to blame it for a nation’s economic woes, as it is easier to point the finger at unpopular targets like multinational firms than to take on the tough spadework of institutional and economic reform in low-income or low-growth economies. While the poorest people in the world suffer grievously from many ills, an excessive connectedness to global markets is not one of them.

Discussion Question. I have never seen an anti-globalization argument that reflected awareness of economic thinking. Is there any valid counter-argument to the views represented by Taylor?

As Glenn would say, My Techcentralstation column is up.

It's true that economists have trouble with the views of many environmentalists. But this just reflects our frustration with the ecologists' use of the most naive and inappropriate economic models and assumptions in their forecasts and policy prescriptions.

In contrast, Bjorn Lomborg's The Skeptical Environmentalist is distinctive because it takes into account reasonable economic modeling.

Discussion Question. Why do questions of economics and the environment overlap?

Virginia Postrel's New York Times column looks at a study of the causes of high property values.

In Los Angeles, for instance, going from a quarter-acre to a half-acre lot for the same house costs about $2.60 a square foot, or roughly $28,000. But a quarter-acre lot with a house on it, minus the cost of the house, comes to almost 12 times that — $30.44 a square foot, or about $331,000.

The difference represents the value of the right to build. Going from a quarter-acre lot to a half-acre lot in Los Angeles does not give you the right to build a second house.

The difference between the land prices is the implicit cost of all the local land-use controls, from zoning to the time it takes to get a permit. Some regulations simply raise the cost of building by slowing down the process. Others limit density, making it illegal to subdivide expensive land.

Postrel ties the restrictions on building to political values. She suggests that in communities dominated by liberals, who support government intervention, there will be land use restrictions that raise the cost of a house.

Discussion Question. How could the extent of government land-use regulation affect the elasticity of supply of housing, and how would this affect the price of housing?

Brad DeLong discusses a form of the Liquidity Trap (look for 2002-03-26), in which the monetary authority becomes hamstrung by the inability to drive the short-term interest rate below zero.

Suppose, for example, that the Federal Reserve sets the Federal Funds rate at 3% per year, and that there is a term premium of 3%, a risk and default premium of 3%, and an inflation rate of 2%. Then the real interest rate that matters for business investment is 7%--3% plus 3% plus 3% minus 2%. Now suppose that the Federal Reserve staff appear, and say that their studies suggest that full employment requires a real interest rate of 3%. Then--with an inflation rate of 2%--the Federal Reserve is out of luck: It cannot drive the nominal interest rate on Federal Funds below zero, and so it cannot drive the real interest rate relevant for businesses below 4%--3% plus 3% minus 2%.

Supply-side economists want the Fed to set a target for inflation of zero, but without risking deflation. What DeLong is saying is that this may be impossible, because at zero inflation you are likely to fall into the liquidity trap, at which point deflation indeed is a risk. Therefore, he argues, it is safer to set a target for inflation that is somewhere above zero (he suggests 4 percent).

DeLong quotes from Federal Reserve meeting minutes that in the liquidity trap there are "unconventional policies" that might be tried. For example, the Fed could buy long-term bonds.

Discussion Question. What other "unconventional policies" might be tried in a liquidity trap?

In the December 2001 Journal of Economic Literature, which I just received in the mail, Christopher Woodruff wrote a less-than-glowing review of Hernando de Soto's The Mystery of Capital. De Soto's shtick is that developing countries could give their citizens liquid assets by granting squatters title to the land and shanties that they now occupy.

But it is unfortunate that he did not consider the evidence and experience on previous attempts at land titling...

De Soto's own experience in Peru suggests that land titling by itself is not likely to have much effect.

Woodruff played it safe by placing this review in an academic journal. I had the temerity to put my review on Amazon.com, and I got nailed for it. So far, it has received 25 "not helpful" votes, with only 15 "helpful" votes. What that means is that De Soto's partisans are quite riled up by my failure to support their hero. It also tells you that the community feedback process on Amazon creates large disincentives for people to write negative reviews.

Discussion Question. What other factors tend to bias the ratings on Amazon?

The biggest believer in economic growth is not an economist. He is inventor Ray Kurzweil, author of The Age of Spiritual Machines. I have written skeptically about his work, but I find it provocative and worth considering. In a recent online interview, Kurzweil says,

the knowledge component of products and services is asymptoting towards 100 percent. By the time we get to 2030 it will be basically 100 percent. With a combination of nanotechnology and artificial intelligence, we'll be able to create virtually any physical product and meet all of our material needs.

So much for the environmentalist doomsday, in which we run out of everything.

Discussion Question. Kurzweil sees no limits to the potential increase in computer intelligence, with machines exceeding the intelligence of humans some time in the middle of this century. What might prevent this from happening?

I was not aware that Russian had adopted a flat income tax of 13 percent, until I read this article by Daniel Mitchell.

According to preliminary figures, inflation-adjusted tax revenues climbed by 28% last year. This proves the class-warfare artists in Washington completely wrong when they argue that tax revenues would fall and the rich would get a big tax cut if America adopted such a system.

As usual, the supply-side rhetoric gets a bit out of hand. I can understand in Russia that a cut in tax rates easily could be offset by an increase in tax compliance. In the United States, where the rate of voluntary compliance is high to begin with, it is considerably less likely that we would see an increase in revenues resulting from a decrease in tax rates.

Discussion Question. The complexity of the tax code in the United States often is blamed on special interests. Campaign finance reform is supposed to reduce the influence of special interests. Is it reasonable to expect to see a simpler tax code?

Megan McArdle discusses international aspects of what I call asymptotically free goods. These are goods where the cost is all in up-front research and creativity, with little or no marginal cost of production and distribution. She points out that countries that regulate prices of such goods can take advantage of countries that do not.

That’s right -- right here in the good old USA. You’re paying through the nose for your blood pressure meds so that the French can have cheap Viagra.

By allowing drug manufacturers here to charge more than marginal cost, we enable the manufacturers to fund new research and provide them with an incentive to discover new drugs. Foreign countries regulate the price of drugs, so they get to enjoy the benefits without paying for the research.

I have suggested an alternative way to pay for drug research, that would not involve monopoly drug patents. That is, have the government and/or groups of consumers offer large cash prizes for drug discovery. However, if only the U.S. offered prizes, then other countries would still be "free riders" in the sense that Megan describes.

Discussion Question. Under the current system, suppose that arbitrageurs buy prescription drugs overseas at regulated prices and sell them in the U.S. What will be the long-run impact on drug research?

Brad DeLong has a nice, subtle riff on the topic of what sorts of macroeconomic adjustments will be needed when the world finally gets tired of funding our trade deficit. As Glenn Reynolds would say, you should read the whole thing. (Follow the link, and look for the date 2002-03-18). One paragraph says,

Meanwhile--as long as the U.S. foreign debt is made up of foreign equity investments and foreign dollar-denominated securities--a large-scale dollar depreciation is not primarily our problem,* it's primarily their problem. It lowers American's terms of trade, yes, but the fall in the value of the dollar boosts the competitiveness of export industries. More important, it writes down the value of the external debt, and it does so smoothly and automatically. Thus the "surplus" countries have a much greater stake and incentive to balance up than America does to balance down (and Alan Greenspan has gotten quite attached to a sub-six percent unemployment rate).

The first point in that paragraph is that the United States differs from other countries with large external debts (think of Argentina) in that our debts are not denominated in foreign currency. Thus, when our currency collapses, our debt is not repriced upward, which would lead to bankruptcy. Instead, a collapse in our currency will be to "write down" our debt from the perspective of overseas holders.

The second point is that an alternative to a collapse of the dollar would be for European and Asian countries to their own expand domestic demand. That way, they could maintain full employment while reducing their trade surpluses. This is what DeLong means by "balancing up." Otherwise, if the U.S. is forced to "balance down" by cutting imports, foreign economies will run horrendous recessions.

Discussion Question. Many economists have pointed out that the U.S. role in the world economy is the "consumer of last resort," meaning that our trade deficits maintain employment throughout the world. Why is it so difficult for other countries to generate sufficient demand to avoid the need for this consumer of last resort?