If the free market had been invented rather than simply coming about, the inventor would have deserved every Nobel Prize in economics and every Nobel Peace Prize. The free market has made well over one quarter of the world’s population fabulously wealthy and elements of the free market have reduced the number of people in extreme poverty to a record low.
Relatively free trade is one of the factors in this growth of wealth. It has led to an increasingly extensive international division of labor that causes people in each country to produce goods and services for which they have a cost advantage and buy goods and services for which they have a cost disadvantage. But, especially for large, highly populated countries like the United States, free trade is not as important as other components of economic freedom such as protection of property rights, absence of price controls, relatively free labor markets, restraints on government spending, and relatively low marginal tax rates.
I have been gratified by the large number of economists across the political spectrum who have come out strongly against higher US tariffs. But it’s disappointing that too few have been as forthright on other components of economic freedom that, as a whole, are more important for US growth than free trade. One US restriction that’s particularly destructive is on housing construction.
Free markets: the facts
One of my favorite lines from Hoover senior fellow Thomas Sowell, when he was accused of having faith in the free market, was, “I don’t have faith in the market; I have evidence about the market.”
A brief review of the evidence is in order.
Consider the rich countries, which are mostly in North America, Europe, and Japan. I’ll focus on the United States, the country I know best. Even people in the bottom quintile of households have wealth that would have made the richest man in France in the 1780s, Louis XVI, envious. Almost all have televisions and, even more important, running water and toilets; they have better diets; and they have better health care. Life expectancy now is about double what it was then.
Moreover, we don’t need to compare our situation today with that of people over two centuries ago. Relatively free markets have led to steady improvements decade by decade. Here’s what I wrote in my review of The Myth of American Inequality, by Phil Gramm, Robert Ekelund, and John Early:
Gramm et al. note that while using the CPI [Consumer Price Index] shows a measly 8.7 percent growth in real wages between 1967 and 2017, using a measure that corrects for substitution bias and for improvements in the quality of goods and services yields the conclusion that real wage rates over those fifty years rose by a whopping 74.0 percent. Over that same period, using the CPI shows that real median household income rose by 33.5 percent, but using a price index that accounts for substitution and quality improvements shows the increase to be 93.3 percent.
The divide
I noticed the divide between economists’ thinking on free trade and their thinking about other components of freedom early in my economics education. In 1971–72, after having graduated as a math major in 1970, I took advanced undergraduate courses in economics at the University of Western Ontario (now called, simply, Western University.)
In “Hooked on Economics,” which was Chapter Two of my 2001 book, The Joy of Freedom: An Economist’s Odyssey, I wrote of my time at Western:
The first lesson I learned was that the rules for the debate between freedom and government intervention varied from one economic subdiscipline to another. Take international trade. My professor, J. Clark Leith, appeared to be a complete free trader, as were the other trade economists in a school that was thought of as having the strongest international trade group in Canada, a country known for producing economists who are strong in trade. In a large part of the course, Leith considered the various arguments that had been made for tariffs rather than free trade. In each case, he would lay out the argument clearly and then show the problems: Imposing tariffs would cause other countries’ governments to retaliate with tariffs of their own; in rare circumstances, tariffs could benefit a country, but the information a government needed to set tariffs at the “right” level was information it was unlikely to have; governments with the power to set tariffs would abuse it because the government officials involved didn’t have the right incentives. These were not just Leith’s views but were—and are—the dominant views of international trade economists around the world. An international trade economist who advocates tariffs or import quotas is about as rare as a whooping crane.
But when I went to my class on welfare economics, I learned that the rules are different. The professor, Charles Plourde, spent lecture after lecture carefully going through the literature on “market failure.” He taught us that the free market is efficient if a number of very stringent conditions hold. But if these conditions don’t hold, he said, then all bets are off. One possible cause of such market failure was “externalities.”
Delving into the issue of externalities more would take me too far afield from my main point. My main point is this: if you look at the arguments that most economists make for free trade across borders, you will find that these same economists are often AWOL when they should be making similar arguments against other restrictions.
Paul Krugman’s insight
Before economist Paul Krugman started writing regular columns for the New York Times, he often wrote articles and books full of economic insights. One such book was his 1992 book, The Age of Diminished Expectations. One passage was such a well-written and succinct economic analysis that, when I sent letters to economists asking them to write articles for what became my Fortune Encyclopedia of Economics, I enclosed the passage as a model of good economic writing. I won’t quote the whole thing, but here’s a key part of the passage:
Suppose that the tariff rates [set by all countries] were only 50 percent, leading to a 30 percent fall in world trade. Then 3 percent of the goods originally used would be replaced with domestic substitutes, costing at most 50 percent more. If the typical domestic substitute costs 25 percent more [remember that his 50 percent is an upper bound], then the cost of the trade conflict is 0.75 percent of world income (25 percent x 3 percent = 0.75 percent.)
As Krugman notes, that cost would be bad but not catastrophic.
Krugman recently ended his time as a New York Times columnist and has moved over to the Substack world. Many of his frequent posts on Substack are about President Trump’s tariffs. In each case, he excoriates Trump, something that he apparently loves to do, but also, in doing so, makes a solid case against Trump’s tariffs.
What gives? This is not hypocrisy on Krugman’s part. Except for a relatively short period in the 1980s, Krugman always saw tariffs as, on net, destructive. The difference is in tone. Krugman had a relaxed tone in criticizing tariffs before Trump came along. My educated guess is that he brings more fervor to the anti-tariff cause because it allows him to do something he itches to do: attack Donald Trump.
There are worse things
Are there other government policies that cause huge losses to the economy? Yes, there are, and they have to do with violations of property rights. Exhibit A is the state and local government restrictions on building housing. Here’s what I wrote in my review of Bryan Caplan’s graphic novel Build, Baby, Build:
A conservative estimate, states Caplan, again backing it up with data in the footnotes, is that housing deregulation would reduce the cost of housing by approximately 50 percent. Because housing costs are about 20 percent of the average American household’s budget, the cost of living would be 90 percent of what it is now, which means that the standard of living would increase by 11 percent (100 divided by 90 = 1.11.)
Notice that their 11 percent increase in the standard of living is more than 14 times Krugman’s estimated loss from stiff 50 percent tariffs.
When I started to write this article, I was ready to blame Krugman for not discussing this far more important economic restriction. Then I did some research. Research is most useful when it changes your mind, and my research did change my mind. It turns out that Krugman has been very good at laying out the large costs to the economy of making housing artificially expensive. Caplan, in Build, Baby, Build, quotes the following from Krugman:
High housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs, and other policies constrict housing on both coasts.
Krugman also notes, “Meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.”
Many economists, to their credit, criticize these restrictions on building. But they are, on average, less outspoken against these incredibly destructive restrictions than they are against the less damaging restrictions on international trade.
Conclusion
Tariffs are destructive, and it’s great that economists have been so outspoken in their opposition to high tariffs. Restrictions on housing do much greater damage. They are pricing a large swath of millennials out of the housing market. Economists know why. Those economists who oppose tariffs, which is almost all of them, should be even more vociferous in their opposition to restrictions on housing.
