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  • 1
    object(stdClass)#14586 (59) {
      ["id"]=>
      string(4) "6170"
      ["title"]=>
      string(55) "Sabotaging the Competition: A Home Construction Example"
      ["alias"]=>
      string(54) "sabotaging-the-competition-a-home-construction-example"
      ["introtext"]=>
      string(305) "

    Why are monopolies bad? In a standard intro-econ textbook, the problem of monopolies is that because of the lack of competition, they can reduce output from what it would otherwise be, jack up prices, and thus earn higher profits.

    " ["fulltext"]=> string(14057) "

    Some books also mention that monopolies may have less incentive for quality or innovation--again, because of a lack of competition.

    James A. Schmitz, Jr.  at the Federal Reserve Bank of Minneapolis refers to this standard intro-econ model as a "toothless" monopoly, because in that model, all the monopoly firm can do is raise prices. He argues that it doesn't capture what bothers most people about monopoly. There's also also a concern that monopolies take actions to take action to sabotage and even destroy their rivals--especially the rivals who might have provide low-cost competition. Moreover, monopolies may form concentrations of power with other monopolies or with with political allies to accomplish this goal, and in this way corrupt institutions of law and politics as well. 

    Schmitz is in the middle of a substantial research project that encompasses both the intellectual history of these two views of monopoly and also a set of concrete examples. As a work-in-progress, he has posted "Monopolies Inflict Great Harm on Low- and Middle-Income Americans"(Federal Reserve Bank of Minneapolis, Staff Report No. 601, May 2020), which is nearly 400 pages long but described as the "first essay" in a collection of essays to be produced in the next year or two. It can usefully be  read as a preliminary overview of an ongoing research project. 

    However, it's worth noting that Schmitz doesn't focus on the conventional everyday meaning of "monopoly"--that is, a super-big company that dominates sales within its market. Instead, he referring to "monopoly power" in a way that refers to when a group (not just a single large firm) acts restrict competition. Thus, his main examples are where existing producers have exerted political power to sabotage lower-cost competitors, including residential construction, credit cards, legal services, repair services, dentistry, hearing aids, eye care, and others.  

    Here, I'll just focus on sketching his discussion of residential construction. Schmitz writes: "The most extensively used technology, by far, is often called the stick-built technology because sticks (two by fours) visually dominate the construction sites. This technology has been used for centuries. Homes are built outside, with a highly labor-intensive technology. It also requires highly-skilled-labor. The other technology is factory-production of homes. This technology substitutes capital for labor and also semi-skilled workers for highly skilled workers."

    There has been a battle going back about a century between stick-built technology and factory technology for residential construction.  Schmitz traces the early legal conflicts back to the late 1910s. Here's a summary comment from Thurman Arnold, who was Assistant Attorney General for Antitrust in the 1930s, in a 1947 article. 

    When Arnold left the DOJ, he did not stop challenging monopolies in traditional construction. He did not stop trying to protect producers of factory-built homes. In “Why We Have a Housing Mess,” Arnold (1947) began with a picture of a homeless Pacific War veteran, with his wife and five children, sitting on the street with their belongings (see Figure 2). The caption said: “This Pacific War veteran and his family are homeless because we have let rackets, chiseling and labor feather-bedding block the production of low-cost houses.” Arnold began his text this way: “Why can’t we have houses like Fords [i.e., automobiles]? For a long time, we have been hearing about mass production of marvelously efficient postwar dream houses, all manufactured in one place and distributed like Fords. Yet nothing is happening. The low-cost mass production house has bogged down. Why? The answer is this: When Henry Ford went into the automobile business, he had only one organization to fight [an organization with a patent] . . . But when a Henry Ford of housing tries to get into the market with a dream house for the future, he doesn’t find just one organization blocking him. Lined up against him are a staggering series of restraints and private protective tariffs."

     
    Sabotaging the Competition

    Essentially, Arnold and other (including a substantial multi-author research project at the University of Chicago in the late 1940s) claimed that while no one explicitly passed rules to make factory-built housing illegal, building codes were carefully written in a way which had that effect. 

    Some standard issues were that local building codes were different everywhere, which was fine for local stick-built construction firms, but posed a problem for a factory producer hoping to ship everywhere. There was often a distinction in building codes about living in "trailers" or in permanent structures, in which a "double-wide" home brought to the site in two parts was treated as a "trailer," even when it was installed permanently on-site and looked much the same as a stick-built home of similar size. 

    In the 1960s, economic pressure had gathered for factory-built homes, which are typically much cheaper on a per-foot basis. But in the 1970s, regulators pushed back hard, with the the newly-created US Department of Housing and Urban Development playing a big role. Here are some snippets from how Schmitz tells the story. 

    Many housing industry observers noted that stick-builders were facing such threats from factory-built home producers in the 1960s. Though they did not have direct measures of productivity, they compared the costs and prices of new, site-built homes to the costs and prices of other consumer durables. Alexander Pike (1967), an architect, compared the prices of new homes and the prices of new cars from the 1920s. Though he did not have productivity statistics, his point was clear: the productivity of construction badly lagged that of the car industry. At roughly the same time, the research department of Morgan Guaranty Trust Company (1969) wrote about this productivity divergence when discussing the potential for industrialized housing ... in “Factory-Built Houses: Solution for the Shelter Shortage?” They noted the serious problems facing the stick built industry as its productivity lagged. They showed that, over the period 1948-68, the prices of consumer durables rose roughly 22 percent, while residential construction costs rose roughly 100 percent.

    Modular construction for single-family homes took off in the 1960s. Schmitz cites statistics that they "increased from roughly 100,000 units to 600,000 units" annually. "The share of factory production of single-family residential homes began growing in the mid 1950s, rising from about 10 percent of home production to nearly 60 percent of home production by the beginning of the 1970s (where total home production equals stick-built production plus factory production)."

    But the stick-built industry, assisted by local and federal regulators, pushed back: 

    While the sabotage of factory housing has been going on for 100 years, there was a dramatic surge in the ferocity of this sabotage in the middle 1970s. During this period, laws were passed, and regulations implemented, that sent the factory-built housing industry into a tailspin. These regulations, and additional harmful ones introduced since the 1970s, remain on the books and mean the industry is a shell of its former self. When this new sabotage was unleashed in the middle 1970s, the producers of factory homes were well aware of it, of course. They fought the HUD and NAHB monopolies to reverse the sabotage but lost the fight. Today the members of the factory-built housing industry are unaware of this history.

    As Schmitz documents, the pushback came in many forms, including regulations and subsidies. As one  example: Who knows how high the factory share would have risen if new sabotage of factory production would not have commenced in 1968. At that time, a national subsidy program was started

    for households buying stick-built homes (see below). Under these programs, households purchased 430,000 stick-built homes (per year) in the early 1970s." There have been court battles, and the "is it a trailer, is it a house" battle has been refought many times. For example, there is often a rule that a manufactured home must be built on a permanent and unremovable chassis--like a trailer--even though that's not what many customers would want. 

    For those with at taste for irony, there were also complaints from stick-built construction firms that manufactured housing was "unfair competition" because it could be built so much less expensively. Schmitz cites estimates from the US Census Bureau in 2007 that manufactured homes are one-third the price per square foot. One suspects that if manufactured housing was encouraged and allowed to flourish, the cost advantage from economies of scale would only increase. 

    The US economy is widely acknowledged to have a shortage of affordable housing. It has also for a century has monopolizing, competition-reducing forces that have favored more expensive stick-built housing and sabotaged the economic prospects of manufactured housing. As Schmitz points out, whatever defense one wishes to offer for these kinds of competition-restricting rules, the unavoidable fact is that the costs of the rule are carried by those of low and middle income levels, who would benefit most from lower prices. 

    For readers who are interested in antitrust discussions as they apply to the FAGA companies (Facebook, Amazon, Google, and Apple), here are a couple of earlier posts that offer a starting point. 

    A version of this article first appeared on Conversable Economist

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    Sabotaging the Competition: A Home Construction Example

    Timothy Taylor
  • 2
    object(stdClass)#14583 (59) {
      ["id"]=>
      string(4) "6145"
      ["title"]=>
      string(40) "Fiscal Federalism: An International View"
      ["alias"]=>
      string(39) "fiscal-federalism-an-international-view"
      ["introtext"]=>
      string(243) "

    What is the appropriate balance of taxes and spending between the central government of a country and the subcentral governments--in the US, state and local government?

    " ["fulltext"]=> string(10210) "

    Countries vary, and there's no one-size-fits-all mode. But Kass Forman, Sean Dougherty, and Hansjörg Blöchliger provide an overview of how countries differ and some standard tradeoffs to consider in "Synthesising Good Practices in Fiscal Federalism Key recommendations from 15 years of country surveys" (OECD Economic Policy Paper #28, April 2020).   

    Here are a couple of figures to give some background on the underlying issues. On this figure, the horizontal axis is the share of spending done by subcentral governments, while the vertical axis is the share of taxes collected by subcentral governments. Being on the 45-degree line line would mean that these were the same. However, every country falls below the 45-degree line, which means that for every country, some of the revenues spent by subcentral governments are collected by the central government. 

     

    Its interesting to note the different models of fiscal federalism that prevail in various countries. At the far right, Canada is clearly an outlier, with nearly 70% of all government spending happening at the subnational level, and half of all taxes collected at the subnational level. Other countries where about half or more of government spending happens at the subnational level include the US, Sweden, Switzerland (CHE) and Denmark. 

    Mexico is an interesting case where 40% of government spending happens at the subnational level, but tax revenues collected at that level are very low. Germany (DEU) and Israel are countries with a substantial level of subnational spending that is also nearly matched by the level of subnational taxes--and thus a relatively low redistribution of revenue from central to subcentral governments. Many countries huddled in the bottom left of the figure are low both subnational spending and subnational taxes. 

    Here's a figure showing the change in these patterns across countries from 1995-2017. 

     

    The crossing point of the horizontal and the vertical lines means relatively little change: for example, the US had a small rise in the share of spending happening at the subnational level and a small drop in the share of revenues raised at the subnational level. 

    Some countries with a big rise in the share of spending happening at the subnational level include Spain (ESP), Belgium, and Sweden. Some countries with a big rise in the share of subnational taxes collected include Spain, Belgium, and Italy. Clearly, Spain stands out as a country that has been decentralizing both government revenue and spending. Conversely, Denmark (DNK) stands out as a country that has been decentralizing government spending, but centralizing the collection of tax revenue. Hungary and Netherlands stand out as countries that have moved toward centralizing their spending, and Hungary in particular seems to be both increasing subnational taxes while decreasing subnational spending. 

    What are the key tradeoffs here?  Forman, Dougherty, and Blöchliger write (citations omitted): 

    Fiscal federalism refers to the distribution of taxation and spending powers across levels of government. Through decentralisation, governments can bring public services closer to households and firms, allowing better adaptation to local preferences. However, decentralisation can also make intergovernmental fiscal frameworks more complex and risk reinforcing interregional inequality unless properly designed. Accordingly, several important trade-offs emerge from the devolution of tax and spending powers. ... 

    For example:  

    [D]ecentralised fiscal frameworks allow for catering to local preferences and needs, while more centralised frameworks help reap the benefits of scale. Another key trade-off derives from the effect of decentralisation on the cost of information to different levels of government. While greater decentralisation implies that sub-national governments can access more information about the needs of a constituency at lower cost, it simultaneously increases the informational distance between central and sub-national government. In turn, this may make information more costly from the perspective of the central government, impeding its co-ordination and monitoring functions.

    Decentralisation could also engender a costly misalignment of incentives. For example, a “common pool” problem may arise when decentralisation narrows the sub-national revenue base and raises the vertical fiscal gap. In this case, the necessary reliance on revenue sharing with central government to ensure SCG [subcentral government] fiscal capacity may also distort the cost/benefit analysis of sub-national governments—particularly in situations where an SCG realises a payoff without bearing the entirety of the associated cost. Rigid arrangements that entrench fiscal dependence on the central government may drive SCGs to manipulate tax-sharing agreements in order to increase their share while undermining their motivation to cultivate the local tax base. Therefore, the possible efficiency and equity gains from decentralisation are closely linked to mitigating the pitfalls of poorly designed revenue sharing.

    What does this mean in practical terms? Their survey of the cross-country research has a number of intriguing findings: 

    OECD research has found a broadly positive relationship between revenue decentralisation and growth, with spending decentralisation demonstrating a weaker effect ...

    [D]ecentralisation appears to reduce the gap between high and middle-income households but may leave low incomes behind, especially where jurisdictions have large tax autonomy ...

    In healthcare, research suggests costs fall and life expectancy rises with moderate decentralisation, but the opposite effects hold once decentralisation becomes excessive (Dougherty et al., 2019[11]). With respect to educational attainment, Lastra-Anadón and Mukherjee (2019[27]) find that a 10 percentage point increase in the sub-national revenue share improves PISA scores by 6 percentage points ...

    Decentralisation has also been linked to greater public investment, with a 10% point increase in decentralisation (as measured by both SCG spending and revenue share of government total) “lifting the share of public investment in total government spending from around 3% to more than 4% on average”. The investment driven by decentralisation appears to accrue principally to soft infrastructure, that is human capital as measured by education.

    In the US version of fiscal federalism, states and local governments face constraints on their borrowing, while the federal government does not. In the case of disruptions from a national recession or pandemic, when a surge of government borrowing is needed, as in the case of a pandemic, it will thus be natural for subnational governments to turn to the US federal government for support. However, it's worth remembering that in more normal times, having state and local governments bear a substantial responsibility for their there own tax and sending levels can have real benefits for accountability and government services. 

    A version of this article first appeared on Conversable Economist.  

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    Fiscal Federalism: An International View

    Timothy Taylor
  • 3
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    Irwin Stelzer and Jeffrey Gedmin have a wide-ranging interview with Lawrence Summers in The American Interest (May 22, 2020, "How to Fix Globalization—for Detroit, Not Davos").

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    As always, Summers is his habitually and incorrigibly interesting and provocative self. Here re a few of many quotable remarks. 

    China

    In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency. Going forward we will need more emphasis on “just in case” even at some cost in terms of “just in time.” More broadly our economic strategy will need to put less emphasis on short-term commercial advantage and pay more attention to long-run strategic advantage. ...

    At the broadest level, we need to craft a relationship with China from the principles of mutual respect and strategic reassurance, with rather less of the feigned affection that there has been in the past. We are not partners. We are not really friends. We are entities that find ourselves on the same small lifeboat in turbulent waters a long way from shore. We need to be pulling in unison if things are to work for either of us. If we can respect each other’s roles, respect our very substantial differences, confine our spheres of negotiation to those areas that are most important for cooperation, and represent the most fundamental interests of our societies, we can have a more successful co-evolution that we have had in recent years. ...

    Attitudes on Globalization

    Someone put it to me this way: First, we said that you are going to lose your job, but it was okay because when you got your new one, you were going to have higher wages thanks to lower prices because of international trade. Then we said that your company was going to move your job overseas, but it was really necessary because if we didn’t do that, then your company was going to be less competitive. Now we’re saying that we have to cut the taxes on those companies and cut the calculus class from your kid’s high school, because otherwise we won’t be able to attract companies to the United States, and you have to pay higher taxes and live with fewer services. At a certain point, people say, “This whole global thing doesn’t work for me,” and they have a point.

    So we need a global agenda that is about broad popular interests rather than about corporate freedom—that is, cooperation to assure that government purposes can be served and that global threats can be met. If we have an agenda like that, we can rebuild a constituency for global dialogue.

    Government Debt

    The deepest truth about debt is that you can’t evaluate borrowing without knowing what it’s going to be used for. Borrowing to invest in ways that earn a higher return than the cost of borrowing, and provide the wherewithal for debt service with an excess leftover, is generally a good and sustainable thing. Borrowing to finance consumption, leaving no return to cover debt service, is generally an unsustainable and problematic thing. ...

    I think we need to be very careful, with respect to the expectation that we now seem to be setting of having government cover all the losses associated with the COVID period. For the life of me, I cannot understand why grants should have been made to airlines to enable them to continue to function, rather than allowing their share values to be further depressed, and allowing those who would earn substantial premiums by taking risk on airline bonds to do so, accepting the consequences of an investment gone wrong.

    Looking towards an economy that is going to be very different than the one we had before COVID, we cannot aspire to maintain every job or every enterprise with a compensation program indefinitely. So as I look at the 30 percent of GDP deficit that we are running in Quarters Three and Four of Fiscal 2020, I don’t think that can be sustained over a multi-year period.

    Enforcing Existing Tax Laws for Those With High Incomes

    We could raise well over a trillion dollars over the next decade by simply enforcing the tax law that we have against people with high incomes. Natasha Sarin and I made this case and generated a revenue estimate some time ago. If we just restored the IRS to its previous size, judged relatively to the economy; if we moved past the massive injustice represented by the fact that you’re more likely to get audited if you receive the earned income tax credit (EITC) than if you earn $300,000 a year or more; if we made plausible use of information technology and the IRS got to where the credit card companies were 20 years ago, in terms of information technology-matching; and if we required of those who make shelter investments the kind of regular reporting that we require of cleaning women, we would raise, by my estimate, over a trillion dollars [over ten years]. Former IRS Commissioner Charles Rossotti, who knows more about it than I do, thinks the figure is closer to $2 trillion. That’s where we should start.

    Coronavirus Priorities

    The real crime is not that we miscalibrated on some economic versus public health trade-off. The real crime is that we have not succeeded in generating far greater quantities of testing, far greater mechanisms for those 40 million unemployed people to do contract tracing, far more availability of well-fitting, comfortable, and safe masks, and that we’re under-investing in the development of new therapeutics and vaccines.

    When something costs $10 to $15 billion a day, you need to make decisions in new ways. We should not be waiting to see which of two tests works best. We should be producing both of them. We should not wait for vaccines to be proven before we start producing them. We should be producing all the plausible candidates. Remember, one week earlier in moving through this is worth a hundred billion dollars: two months’ worth of the annual defense budget.

    A version of this article first appeared on Conversable Economist.

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    Interview with Larry Summers: China, Debt, Pandemic, and More

    Timothy Taylor
  • 4
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      ["title"]=>
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      string(348) "

    David A. Price interviews Joshua Angrist in Econ Focus (First Quarter 2020, Federal Reserve Bank of Richmond, pp. 18-22).

    " ["fulltext"]=> string(9408) "

    Angrist is well-known for his creativity and diligence in thinking about research design: that is, don't just start by looking at a bunch of correlations between variables, but instead think about what you might be able to infer about causality from looking at the data in a specific way. A substantial share of his recent research has focused on education policy, and that's the main focus of the interview as well.

    To get a sense of what "research design" means in this area,  consider some examples. Imagine that you want to know if a student does better from attending a public charter school. If the school is oversubscribed and holds a lottery (as often happens), then you can compare those attending the charter with those who applied but were not chosen in the lottery. Does being surrounded by high-quality peers help your education? You can look at students who were accepted to institutions like Harvard and MIT but chose not to attend, and compare them with the students that were accepted and did choose to attend. Of course, these kinds of comparisons have to be done with appropriate statistical consideration. But their results are much more plausibly interpreted as causal, not just as a set of correlations. Here are some comments from Angrist in the interview that caught my eye.

    Peer Effects in High School? 

    I think people are easily fooled by peer effects. Parag, Atila Abdulkadiroglu, and I call it "the elite illusion." We made that the title of a paper. I think it's a pervasive phenomenon. You look at the Boston Latin School, or if you live in Northern Virginia, there's Thomas Jefferson High School for Science and Technology. And in New York, you have Brooklyn Tech and Bronx Science and Stuyvesant.

    And so people say, "Look at those awesome children, look how well they did." Well, they wouldn't get into the selective school if they weren't awesome, but that's distinct from the question of whether there's a causal effect. When you actually drill down and do a credible comparison of students who are just above and just below the cutoff, you find out that elite performance is indeed illusory, an artifact of selection. The kids who go to those schools do well because they were already doing well when they got in, but there's no effect from exposure to higher-achieving peers.

    How Much Does Attending a Selective College Matter? 

    I teach undergrad and grad econometrics, and one of my favorite examples for teaching regression is a paper by Alan Krueger and Stacy Dale that looks at the effects of going to a more selective college. It turns out that if you got into MIT or Harvard, it actually doesn't matter where you go. Alan and Stacy showed that in two very clever, well-controlled studies. And Jack Mountjoy, in a paper with Brent Hickman, just replicated that for a much larger sample. There isn't any earnings advantage from going to a more selective school once you control for the selection bias. So there's also an elite illusion at the college level, which I think is more important to upper-income families, because they're desperate for their kids to go to the top schools. So desperate, in fact, that a few commit criminal fraud to get their kids into more selective schools.

    Charter Schools and Takeovers

    The most common charter model is what we call a startup — somebody decides they want to start a charter school and admits kids by lottery. But an alternative model is the takeover. Every state has an accountability system with standards that require schools to meet certain criteria. When they fail to meet these standards, they're at risk of intervention by the state. Some states, including Massachusetts, have an intervention that involves the public school essentially being taken over by an outside operator. Boston had takeovers. And New Orleans is actually an all-charter district now, but it moved to that as individual schools were being taken over by charter operators.

    That's good for research, because you can look at schools that are struggling just as much but are not taken over or are not yet taken over and use them as a counterfactual. The reason that's important is that people say kids who apply to the startups are self-selected and so they're sort of primed to gain from the charter treatment. But the way the takeover model works in Boston and New Orleans is that the outside operator inherits not only the building, but also the existing enrollment. So they can't cherry-pick applicants. What we show is that successful charter management organizations that run successful startups also succeed in takeover scenarios.

    Angrist has developed the knack of looking for these ways of interpreting a given data set, sometimes called "natural experiments." For those trying to find such examples as a basis for their own research, he says: 

    One thing I learned is that empiricists should work on stuff that's nearby. Then you can have some visibility into what's unique and try to get on to projects that other people can't do. This is particularly true for empiricists who are working outside the United States. There's a temptation to just mimic whatever the Americans and British are doing. I think a better strategy is to say, "Well, what's special and interesting about where I am?"

    Finally, as a bit of a side note, I was intrigued by Angrist's neutral-to-negative take on the potential for machine learning in econometrics:

    I just wrote a paper about machine learning applications in labor economics with my former student Brigham Frandsen. Machine learning is a good example of a kind of empiricism that's running way ahead of theory. We have a fairly negative take on it. We show that a lot of machine learning tools that are very popular now, both in economics and in the wider world of data science, don't translate well to econometric applications and that some of our stalwarts — regression and two-stage least squares — are better. But that's an area of ongoing research, and it's rapidly evolving. There are plenty of questions there. Some of them are theoretical, and I won't be answering those questions, but some are practical: whether there's any value added from this new toolkit. So far, I'm skeptical.

    Josh has written for the Journal of Economic Perspectives a few times. Interested readers might want to follow up with:

    A version of this article first appeared on Conversable Economist.

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    Interview with Joshua Angrist: Education Policy and Causality Questions

    Timothy Taylor
  • 5
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    The promise of freedom without responsibility is, in reality, slavery without escape. We think we do what we want when, in reality, we do what we are told.

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    There Is No Equality Without Economic Freedom

    An interventionist government’s promise of equality is the recipe for stagnation because governments can only equalize down. They can only make the rich poorer, never the poor richer, thus weakening everyone.

    Defending free will, individual initiative, and freedom does not mean that we disregard society. Society is a conscious, personal choice by which we bring together our individual needs and purposes, driven by personal initiative, and choose to invest in a way to improve our lives. This ultimately delivers better results for the vast majority.

    Society doesn’t strive to make people the same, requiring us to surrender our individual rights. Society is not created to make everyone equal, but to make each of us able to achieve our individual best.

    Society and free will are not enemies. Society and absolute power are.

    A version of this article first appeared here

     

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    There Is No Equality Without Economic Freedom

    Daniel Lacalle

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