March 23, 2017Henderson on the John Batchelor Show
March 23, 2017Good Manners vs. Political Correctness
March 23, 2017Robert Frost and liberalism
March 23, 2017Social Science, Statistics, and the Garden of the Forking Paths
March 22, 2017Tyler Cowen is a Semi-Persuasive Futurist
March 22, 2017Is Immigration a Basic Human Right? Full Video
March 21, 2017Interest on reserves and stock prices in 2008
March 21, 2017Pacifism in Hell's Angels
March 20, 2017Thoughts on the Republican Health Insurance Reform
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Bryan Caplan, David Henderson, Alberto Mingardi, and Scott Sumner, with guest blogger Emily Skarbek, blog on issues and insights in economics.
MARCH 23, 2017
MARCH 23, 2017
My first face-to-face encounter with political correctness came in 1989. All undergrads in my dorm at UC Berkeley were strongly urged to attend the all-important DARE meeting. Not DARE as in "Drug Abuse Resistance Education" but DARE as in "Diversity Awareness through Resources and Education." I had disdain for this simple-minded leftist propaganda then, and the recent return of political correctness seems even worse.
These days, however, I'm also often appalled by the opponents of political correctness. I'm appalled by their innumeracy. In a vast world, daily "newsworthy" outrages show next to nothing about the severity of a problem. I'm appalled by their self-pity. Political correctness is annoying, but the world is packed with far more serious ills. Most of all, though, I'm appalled by their antinomianism, better known as "trolling." Loudly saying disgusting things you probably don't even believe in order to enrage "Social Justice Warriors" further impedes the search for truth - and makes your targets look decent by comparison.
Against both political correctness and the trolling it inspires, I propose an old-fashioned remedy: good manners. Everyone should feel comfortable speaking their minds - as long as they're polite. In slogan form: It's not what you say; it's how you say it.
Every child knows the basics of politeness. Talk nicely. Don't yell. Don't call names. Listen and respond to what people literally say. Don't personally insult people. Don't take generalizations personally. If someone's meaning is unclear, don't put words his mouth; ask him to clarify. And of course, don't escalate. If someone's impolite, the polite response is to end the conversation, not respond in kind.
Isn't this just "tone policing"? Sure. People can and should comport themselves like ladies and gentlemen. You can fairly criticize Social Justice Warriors for one-sided tone policing - their failure to police their own tone. And you can fairly criticize them for acting as if there's no polite way to reject their views. But proper tone policing is what makes conversation productive and pleasant. (And of course, the more pleasant conversation is, the more we're likely to constructively converse).
Aren't some positions inherently impolite? Maybe, but they're so rare we needn't worry about them. If someone says, "Your whole family should be murdered," they almost always say so impolitely. To put it mildly. But there are clear exceptions. It's not impolite to simply be a utilitarian, and in the right kind of trolley problem, utilitarianism implies murderous answers. While I'm not a Peter Singer fan, he seems polite to me.
But isn't trolling fun? For some people, it obviously is. But trolling is still very bad. If someone trolls you, you should just politely end the conversation and find someone worth talking to.
MARCH 23, 2017
Robert Frost once said:
A liberal is a man too broadminded to take his own side in a quarrel.This seems very clever to me---I wonder what other people think.
1. He may not be using the term "liberal" to refer to left-wingers, but rather seems to be referring back to the original meaning of the term. In that case, I would consider myself to be a liberal.
2. Most of these sorts of pithy definitions are going to be unacceptable to one side of the political spectrum or the other. But I wonder if this is an exception. To me, Frost's definition seems like a compliment. I'd guess that non-liberals like Donald Trump might view it as an insult.
Over at TheMoneyIllusion, I recently suggested that if I were a Supreme Court justice, I would not take the "libertarian" position on cases. I would not rule various laws "unconstitutional" just because I thought they were unwise examples of government interventionism. Indeed judges should never let their personal political views color their legal decisions.
Some commenters thought I was being naive. Actually, I understand that very few people, indeed very few sitting judges, are able to completely put aside their personal biases. I was describing an ideal. In the very rare cases where someone does have the proper judicial temperament, political views don't matter. It's unfortunate that we must talk about liberal judges and conservative judges; we should be talking about good and bad judges. After all, we don't talk about liberal plumbers and conservative plumbers.
Let me also use this definition to explain what I see as the difference between being liberal and being left wing. On a wide range of issues, including foreign policy, trade, entitlements and infrastructure spending, Trump's views might be characterized as being to the left of George W. Bush's views. But if we use Frost's definition of "liberal", then I'd claim that Bush was more liberal than Trump. Indeed Trump might be the least liberal major American politician in my lifetime. I've never seen another politician put so much emphasis on "our side" winning. President Bush was passionately devoted to the cause of treating AIDS in Africa. Trump's probably not opposed to the goal, but it certainly doesn't fit neatly into his real passion---making America great again. (Indeed Bush may have done more for Africa than any other President, including Obama.)
Frost's comment seems to me to have two important implications:
1. The welfare of each and every person is just as important as your own welfare. Maybe not as important to you (in an emotional sense), but you should be aware that it is just as important in the general scheme of things.
2. Process is important. People (including judges) should not cheat on the process in order to achieve the result that they personally prefer.
It seems to me that the first implication leads to utilitarianism, whereas the second implication leads to a specific version of utilitarianism called "rules utilitarianism".
Society should use a rules-based approach to resolving issues (courts, elections, contracts, property rights, etc.) Voters should cast their ballot with an eye toward maximizing the welfare of society as a whole, not just the welfare of themselves and their families.
It does no good to point out that this is all very utopian. Of course the real world always falls far short of perfection. The more interesting question is whether progress is possible. Is Denmark more liberal than Sicily? Is Denmark in 2017 more liberal than Denmark in 1317? I believe the answer to both questions is yes, which means that I believe human progress is possible.
PS. In a fight between the faculty and the administration over abolishing tenure, I would have sided with the administration, even as a tenured faculty member.
PPS. When I was growing up, I often helped my dad on construction, but I was pretty klutzy. My dad was a small businessman, another profession I was ill suited for. I can only recall one time when my dad said I'd be good at some job. When I was a teenager, he once told me that I'd be a good judge. I wonder how many kids are told by their dad that they'd be a good judge?
CATEGORIES: moral reasoning
MARCH 23, 2017
EconTalk host Russ Roberts has made no secret of his misgivings about high-level statistical analysis. So it's no surprise that his skepticism is brought to bear in his interview this week with Columbia University's Andrew Gelman. However, Roberts magnanimously starts the conversation by wondering aloud whether he's gone too far in his skepticism. Maybe there are indeed things we can learn, and that we could not learn otherwise, via data analysis.
Gelman, a statistician, suggests that reliance on statistical significance is answering the wrong question...There is an extended discussion on the extent to which "p-hacking" is a problem in statistical research, as well as a fascinating thread on the prevalence of "priming." (At the end of the conversation, Roberts refers to Brian Nosek's replication project as "God's work.")
The real point of the conversation to me, though, are the big questions raised. Roberts, about half-way through, genuinely asks, "So, now what?" Are we to discard all data analyses and resort once again to pure theory? Can statistical analyses ever avoid becoming ideological cudgels employed to beat down one's opponents? Should we reconsider the place of social science in policy altogether? What about what we consider to be social science? Is it enough to rely on your "gut" and be honest about it, as Roberts suggests?
These are just some of the questions I'm left thinking about after this week's conversation. I'm not really comforted by Gelman's contention that things would be better if only people had a better understanding of what statistical significance does (and does not) convey. I'm even less optimistic that more social scientists will go Gelman's route and endeavor to better integrate theory into their data modeling. But I always aspire to be proven wrong...
MARCH 22, 2017
My review of Tyler Cowen's latest book, The Complacent Class, is now out in the pages of Regulation. It's titled "Tyler Cowen: Semi-Persuasive Futurist."
This excerpt gives a flavor of what I liked and disliked:
Cowen nails the causes and effects of high housing costs. He points out that restrictions on building have driven housing prices sky high in many major cities, especially in coastal California and the Northeast. Somewhat disappointingly, although Cowen's claims are generally well-cited, he doesn't mention the path-breaking work by Harvard economist Edward Glaeser and Wharton economist Joseph Gyourko, which shows the high prices are indeed due to a scarcity of building permits rather than a scarcity of land. (See "Zoning's Steep Price," Regulation, Fall 2002.) However, Cowen goes beyond that fact to make another important point: those high housing costs have discouraged movement by workers to those cities and have kept them in lower-productivity jobs elsewhere. The overall negative effect on productivity and output is huge. He cites a 2015 National Bureau of Economic Research paper by University of Chicago economist Chang-Tai Hsieh and University of California, Berkeley economist Enrico Moretti, who find that lowering regulatory constraints in those cities to the level of regulation in the median-regulated city in the United States "would expand [these high-cost cities'] work force and increase U.S. GDP by 9.5%."
I was surprised by how lukewarm he was on gains from outsourcing. Here's that segment:
Economists, caring as they do about overall economic well-being, tend to applaud free trade even when firms reduce labor costs by outsourcing. But Cowen is amazingly lukewarm on the gains from outsourcing. Cost-cutting developments, he writes, "build America's productive future less than coming up with neat and new ways of doing things, such as harnessing electricity, developing antibiotics, or inventing automobiles." But whether that's true depends on the degree of cost cutting. And what if American firms developed antibiotics by outsourcing to lower-cost outfits in, say, India? He sees outsourcing as "a way of keeping the status quo in place--for some, that is--at lower cost to owners of capital and privileged workers who have kept their incumbent status." Actually, that's not true. By definition, outsourcing improves on the status quo.
And he and I seem to disagree a lot about which requires more resources for government: war or peace:
Cowen worries, quite rightly, about the increasing percent of the federal government's budget that is likely to be spent on three programs: Medicare, Medicaid, and Social Security. One reason for his worry, though, is that when a problem arises somewhere in the world--for example, "military crises in the Baltics and the South China Sea at the same time"--the American government "probably would need more resources" to deal with it. Nowhere in the book does he even hint that maybe the U.S. government having more resources helped lead to some of the problems in the world. If the U.S. government hadn't had the slack to invade Iraq in 2003, for example, that country would almost certainly be in better shape than it's in, and the Islamic State would not even exist. The Islamic State is an outgrowth of al Qaeda in Iraq, which itself didn't exist until the Iraqi occupation had been going on for a year and half. "Ultimately peace and stability must be paid for," he writes (italics in original) "with real resources, with tax revenue." Something closer to the opposite is the truth: war must be paid for. So avoiding war and letting countries around the world deal with their own conflicts rather than interfering in them is more likely to create peace for us and is certainly likely to allow deficit reductions and even tax cuts. And maybe even a little less domestic surveillance.
Finally, note that he and I have very different views about whether it's good or bad that people distrust government so much now. See my reference to the FBI.
CATEGORIES: Books: Reviews and Suggested Readings
MARCH 22, 2017
MARCH 21, 2017
I did a recent post criticizing Bernanke's defense of paying interest on reserves. This policy was introduced in October 2008, and even the Fed viewed the policy as contractionary in intent. Indeed Susan Woodward and Robert Hall called the Fed's explanation a "confession of the contractionary effect of the reserve interest policy". The term 'confession' is rather telling, as it implicitly pushes back against the widespread view that the Fed was doing all it could in 2008 to stimulate the economy. Today I'd like to discuss the market view of IOR.
Back in 2010, Louis Woodhill suggested that the Fed announcement of interest on reserves, as well as two subsequent increases in IOR, had a very negative effect on the stock market:
A valid way to gauge whether events are "good" or "bad" for the economy is to look at the stock market's reaction to them. The day that Lehman Brothers collapsed, the S&P 500 went down 4.71%. Three days later (i.e., at the fourth market close after the event), the S&P 500 was down by a total of 3.61% from its pre-Lehman close.
I have some serious doubts about Woodhill's way of doing event studies, particularly the four-day windows for each shock. But before getting into interpretation, let's do some math:
1. If we take the three negative IOR shocks cited by Woodhill, and look at the four-day windows that he describes, the declines in the S&P500 are 17.22%, 11.11%, and 8.60%. That adds up to 36.93% decline. But there is a compounding factor that (I think) reduces the total declines to about 32.75% (someone tell me if my math is wrong.) The intuition is that two consecutive 10% drops at up to 19%, not 20%.
2. Of course 2008 was a catastrophic years for the stock market, as this is when the Great Recession got going. The total decline in the S&P500 from December 31, 2007 to December 31, 2008 was 38.5%.
3. Thus the overwhelming majority of the stock market decline of 2008 took place in twelve trading days, immediately following three contractionary IOR announcements, and only a small part of the decline occurred during the other roughly 240 trading days.
What can we make of all this? Let me start by criticizing Woodhill, then defend him, and then give you my own view.
Let's start with the four-day windows. In an event study, a one-day window would be more appropriate. Why should the market reaction have taken four days? That time frame seems cherry-picked. Yes, even the single day drops were pretty large, much larger than a normal single day movement in the S&P500. But this was a very tumultuous period for the economy and the stock market, and large daily moves were pretty common in late 2008. So this is not statistically significant.
If I were to defend Woodhill I'd point to the fact that interest on reserves was a new and unfamiliar policy. It was not well understood by the markets. Indeed it wasn't even well understood by the Fed (which is why adjustments had to be made in October 22 and November 5, to make the policy more effective.) The Fed certainly wasn't loudly publicizing the fact that it was contractionary, you had to read the fine print. Perhaps the markets noticed the effects of IOR were contractionary. Thus over a period of several days they noticed monetary conditions tightening as banks were less anxious to move excess reserves out into the real economy, given that they were now earning more interest on excess reserves.
And yes, 2008 was a very volatile period for stocks, but a pretty big share of that volatility came in the twelve trading days cited above, when most of the total decline of 2008 occurred. So IOR may well have caused some of that volatility.
On the technical question of event studies, my views are somewhere in between, but a bit closer to those of Woodhill's critics. I'm not comfortable with the four-day windows on stock prices. I also recognize the extreme volatility of stock prices in 2008, having seen the same thing in my study of the Great Depression.
However I still put some weight on Woodhill's argument. In the 1930s, some of the very biggest stock price movements occurred immediately after monetary shocks. Thus the largest 2 day stock rally in American history occurred right after Hoover announced a change in gold policy that would lead to 1932's QE policy, and the next day Congress signaled its approval. There are too many such "coincidences" to be dismissed.
And suppose you are one of the Fed people who think that IOR helped the Fed to achieve its 2008 policy objectives. The fact that almost the entire stock market crash of 2008 occurred in just a few days after these three IOR announcements certainly doesn't give much reason to think IOR helped the economy.
For what's it's worth, I think there's about a 10% chance that Woodhill is basically right, in the sense that at least half of that 32.75% stock decline was linked to tighter money, particularly IOR. But that's still really bad news for IOR! Suppose you were told that some foreign policy move would lead to a 10% chance of a nuclear exchange with North Korea---would you be reassured that 10% is a low probability?
The Great Recession is the economic equivalent of a major foreign policy disaster. If there's even a 10% chance of IOR having caused this disaster, that's really bad.
I also think there's about a 50% chance that at least half of the stock declines over the three one-day windows were due to IOR. This is partly because in later years we saw IOR (including negative IOR) clearly impacting stock prices in various countries. And even those three one-day windows add up to a bit over 15%, or slightly less with compounding. That's still huge! How would you feel if the Dow fell 3000 points in the next three days?
So even in a world where Woodhill is only half right, or even 25% right, he's still basically right. Interest on reserves was a huge policy mistake. And I think there's at least an even chance that he is at least 25% right.
Update: Commenter "dlr" presents some very powerful counter-evidence against this post:
Like you, I believe that monetary policy was the most proximate cause of the 2008 crash. But I think this theory about IOR is way more unlikely than you do, and I would give less than a 1% chance that this data-mined version of an "event study" accurately portrays the information available from markets.
MARCH 21, 2017
Until recently, I only knew Howard Hughes' World War I saga Hell's Angels (1930) second-hand, from Martin Scorsese's Hughes biopic, The Aviator. I was amazed when I finally watched Hughes' classic. The special effects are stunning even by modern standards. And the Pre-Code script is too good to be true.
On the surface, the audience is supposed to detest the selfish, unscrupulous Monte Rutledge, the "bad brother" of protagonist Roy Rutledge. But as in Milton's Paradise Lost, the author plainly has great sympathy for the devil. The best scene must have shocked World War I veterans around the world. When Monte feigns illness to avoid combat, a fellow pilot angrily declares, "He's yellow and we all know it." Then Monte pulls off the mask:
That's a lie! I'm not yellow. I can see things as they are, that's all. I'm sick of this rotten business.Critics routinely dismiss pacifists as "cowards." But as I've said before:
Given the unpopularity of pacifism - and the extreme unlikelihood that your pacifism tips the scales against war - this is plainly false. A real coward would enthusiastically parrot whatever the people around him want to hear.
MARCH 20, 2017
I've held back on commenting in a big-picture sense on the Republicans' plan for repealing and replacing Obamacare. I've found comments by Megan McArdle, Peter Suderman, co-blogger Scott Sumner, and Steven Landsburg, among others, useful. They've tended to focus on many of the negative aspects of the plan.
I asked my health analyst friend Merrill Matthews of the Texas-based Institute for Policy Innovation what he thinks, and he sent me links to four of his pieces on the plan. They are here, here, here, and here. I notice from his bio that he has a 6th degree black belt in Tae Kwon Do, so I will be careful in my criticisms, if any.
Seriously, though, I tend to agree with Merrill. As I wrote over 20 years ago, the combination of guaranteed issue and community rating, a key feature of Obamacare, leads to the destruction of insurance markets. No one would advocate forcing insurance companies to issue house insurance policies to people whose houses are burning, at premiums equal to those paid by others whose houses aren't burning. And the twin requirements would cause more and more people to refrain from buying insurance until their houses are on fire. Insurance companies, knowing this, would charge astronomically high premiums.
As Merrill Matthews points out, the Republicans had a good plan for getting rid of guaranteed issue, but caved:
But in the past week or two, Republicans apparently abandoned actuarial principles--just as Obamacare did. Under their new plan, if a person wants to buy coverage in the individual market during an open enrollment period, insurers have a 12-month "look back." If the person has been uninsured more than 63 days in that period, the insurer will charge the applicant 30 percent more than the standard premium for the next 12 months. Apparently, that 30 percent increase will happen even if the applicant is perfectly healthy.
One thing I would like to see more discussion of in the commentary is how/whether we could adopt some of the best elements of Singapore's plan. No, it would not pass a libertarian test, but it would pass an incentive test. Co-blogger Bryan Caplan has written here, here, and here about what is so good about Singapore's system. When I covered Bryan's pieces in my fall economics class, two of my students were from Singapore. They emphasized that virtually everyone, rich or poor, has skin in the game, that is, pays something for any given health care service.
MARCH 20, 2017
Here's my opening statement from Thursday's debate. Enjoy.
There are many complaints about governments, but the harshest is, "This government grossly violates human rights." The background assumption is that human beings have rights that everyone - including governments - is morally obliged to respect. When looking at the grossest violators - Nazi Germany, the Soviet Union, Maoist China - almost no one denies the validity of the idea of human rights. But then you have to wonder: Do the governments we know, accept, and even love have clean hands? Or do they violate human rights, too?
To answer, we normally apply a simple test: If an individual treated other people the same way the government does, would he clearly be a horrible criminal? If an individual deliberately kills innocent people, he's a murderer; if an individual imprisons innocent people, he's a kidnapper. A government that does the same violates basic human rights - and it can't justify its actions by calling innocent people "criminals." If someone is peacefully living his life, he's innocent - whatever the government says.
What does this have to do with immigration? Lots. Since we're in San Diego, we've seen illegal immigrants. What are the vast majority of them doing? Working for willing employers. Renting apartments from willing landlords. Buying stuff from willing merchants. Sending money home to their families. Maybe even sitting next to you in class. They sure look innocent - even admirable. But the U.S. government can and does forcibly arrest and exile them to the Third World. Why can't they all just come legally? Because exile is the default; they're all exiled unless the U.S. government makes a rare exception. This is far less bad than killing or imprisoning them, but it sure looks like a severe human rights violation. If the U.S. government forbade you to live and work here, wouldn't that be a severe violation of your human rights?
You could reasonably object that human rights are not absolute. While there's a strong moral presumption against killing, imprisoning, or exiling innocent people, it's okay to do so if the overall consequences of respecting human rights are clearly awful. The main problem with this objection is that when social scientists measure the overall consequences of immigration, they're not clearly awful. In fact, the overall consequences look totally awesome. Most notably, standard economic estimates say that letting all the world's talent flow to wherever it's most productive would roughly DOUBLE global prosperity. That's an extra $75 TRILLION of extra wealth per year. How is this possible? Because even the world's lowest-skill workers produce far more in the First World than they do at home. Even if all other fears about immigration were bulletproof - which they aren't - they're dwarfed by this gargantuan economic gain. This isn't trickle-down economics; it's Niagara Falls economics.
To effectively defend immigration restrictions, then, saying "Human rights are not absolute" is insufficient. You need to flatly deny that immigration is a human right - to say that while the illegal immigrants you meet on the street may look innocent, they're actually guilty as hell. The most popular argument analogizes illegal immigrants to trespassers. No one has any right to be here without government permission; it's our country, so we set the rules.
The obvious problem with this position is that it justifies a vast range of blatant human rights abuses. If it's our country and we set the rules, why can't we exile citizens, too? Why can't we imprison people for saying the wrong thing, practicing the wrong religion, or having kids without government permission? Saying, "That won't happen," dodges the question: If the U.S. government did this to you, would it be violating your human rights or not?
Prof. Wellman offers a more sophisticated version of this story. He defends immigration restrictions for "legitimate states" only, on the grounds that immigration restrictions are vital for "freedom of association." Unfortunately, we have two conflicting freedoms of association. I want to be free to associate with foreigners; lots of foreigners want to associate with me. Immigration restrictions deny us this freedom in the name of all the Americans who don't want my associates breathing American air.
Who should prevail? In his work, Wellman concedes a crucial premise, freely admitting that the popular notion that we all consent to government is a "fiction," and that "the coercion states invariably employ is nonconsensual and, as such, is extremely difficult to justify." We don't really face a choice between two freedoms of association, but between freedom for real associations we choose to join and freedom for fictional "associations" we're forced to join. Unless the overall consequences are clearly awful, the fictional ones should lose. Freedom of association is only for free associations.
My critics often tease me, "Should everyone on Earth be free to immigrate into Bryan's house?" Their point: Treating immigration as a human right is utopian nonsense. My reply: There are three competing moral positions on immigration.
Far from being utopian,
saying "Immigration is a human right" is just the moderate, common-sense
position that when natives and foreigners voluntarily interact, strangers are morally
obliged to leave them alone unless the overall consequences are clearly awful. Even if the
stranger happens to be the government - and the government happens to be popular.
CATEGORIES: Economic Philosophy
MARCH 19, 2017
One often comes across articles that suggest Japan faces "headwinds" of a falling population. This is supposed to contribute to falling aggregate demand and deflation. That may be true, but if so it's almost certainly not for the reason that many people assume.
One of the best examples of a falling population occurred in Europe between 1345 and 1400, when the population may have fallen in half (I'm not sure how accurate the data is.) There is some evidence that the effect of the Black Death was actually inflationary, especially for wages:
But the Black Death had other economic effects. Although the rise in real wages after the plague was not as dramatic as many assume, it was persistent, as this graph from Gregory Clark (who looks at England) illustrates:This is exactly what I would have expected. A plague does not reduce "M" in the famous equation of exchange. It might reduce velocity, but over a period of many decades I doubt it would have much impact on the speed at which medieval people spent money. If MV doesn't decline, then that means there is no impact on aggregate demand. Since the Black Death would clearly reduce real output (Y) we can infer that it probably raised prices.
Many people get confused on this point, because they wrongly visualize "aggregate demand" in terms of "lots of people going shopping". That is, they think of AD as a real concept, when it is in fact a nominal concept. The most explosive growth in aggregate demand in recent decades occurred in Zimbabwe during 2008, yet there weren't all that many Zimbabweans at the shopping malls---it was mostly inflation.
TOKYO--A labor shortage is helping Japan's temporary and part-time workers win greater pay increases than its full-timers, a reversal that adds to signs of gains by lower-wage workers globally. . . .
I'm not sure what to make of that, as those wage increases are not all that impressive. But the basic point is correct. Other things equal, a falling population would lead to rising wages. Why then does Japan usually have such weak wage increases? Because other things are not equal---Japan has an extremely tight monetary policy, leading to slow NGDP growth.
Another mistake is to assume that a falling population leads to weak AD because there is less "need" for goods. In fact, needs are limitless. Here's a FT article discussing Japan's housing market:
You could pity the Japanese house. Its average lifespan is only 26 years. Or, you could revel in a culture of exuberant renewal that has made the Japanese house the crucible of contemporary architectural experimentation.
That's almost as many as the 1.108 million homes built in America that year. If I had not read that FT article, I might have guessed that the US built 10 times as many homes as in Japan. After all, our population is still growing at a decent clip while theirs is falling rapidly. So on a per capita basis I'd expect far more home construction US as compared to Japan. Add in the fact that we have almost three times as many people, and you'd expect dramatically higher home construction here than in Japan, perhaps an order of magnitude higher.
The high level of Japanese housing construction makes sense if you think in terms of wants being unlimited. Japan has no problem coming up with lifestyles that people aspire to; it's just a question of whether the central bank will produce enough NGDP growth to make those dreams come true.
MARCH 17, 2017
I've devoted much of my life to promoting market-based approaches to monetary policy. To better understand the idea, let's start by assuming the goal is simply a stable price level. Since the value of base money is the inverse of the price level, there are two ways that the price level can be stabilized.
1. Give market participants an incentive to move the supply of base money to the level expected to promote stable prices.
2. Give market participants an incentive to move the demand for base money to the level expected to promote stable prices.
I believe supply of money approach was first advocated by Earl Thompson in 1982. Thompson's (never published) paper is one of the 5 most important macro papers of the past 100 years, and almost no one has heard of it.
I've also done work in this area, as have a number of other researchers including David Glasner, Kevin Dowd, Robert Hetzel and Bill Woolsey. John Cochrane advocated something similar in 2010.
Robert Hall pioneered the second (demand for money) approach in 1983 (in the Journal of Monetary Economics). In Hall's proposal, bank reserves earn interest, and the interest rate is indexed to the price level. This means that the demand for bank reserves rises when banks expect inflation, and falls when banks expect deflation. Because rising money demand is deflationary, and vice versa, these shifts in money demand will automatically tend to stabilize the price level.
Cloud Yip has a series of interviews called "Where is the General Theory of the 21st Century?" In the comment section of a recent post where I criticized interest on reserves, Cloud directed me to a very interesting interview of Ricardo Reis, and suggested that I focus on this passage:
Q: In brief terms, how can the proposed payment on reserve process help central banks achieve the targeted price level?
The last paragraph makes the outcome seem a bit more tautological than it actually is, but Reis is basically right. This sort of system would automatically stabilize the expected future price level. You could replace the FOMC with a computer. Unless I'm mistaken, this is essentially Hall's 1983 proposal.
You could also think of it as being sort of like the gold standard, except for two differences:
1. Instead of dollars being redeemable into 1/35 oz. of gold, they are redeemable into a fixed basket of goods and services.
2. The redemption applies to bank reserves, and guarantees that one dollar in reserves can be redeemed a year from today for enough dollars to buy one plus the real interest rate worth of goods and services.
Thus if the real interest rate today is 3% (say on one year TIPS), and if prices were to rise 1% above target over the next year, holders of reserves would receive 4% interest on their deposits at the Fed.
Of course if people expected prices to rise 1%, then the expected return on reserves would exceed the return on TIPS, the demand for reserves would rise, and this would automatically restrain the rise in prices.
Today, only banks can deposit money at the Fed, but if we are serious about this system then it makes sense to allow the general public to also have deposits at the Fed. The more the merrier when it comes to the "wisdom of crowds".
I still slightly prefer the supply of money approach pioneered by Thompson, because the zero interest rate lower bound (which might be more like minus 1%) can create problems for monetary policies that rely on adjusting the interest rate on reserves, rather than the quantity of reserves. Even so, I'd strongly support Reis's proposal as a sort of second best option, as long as the policy goal was shifted from a stable price level to a gradually rising NGDP.
Both of these market-based approaches to policy, the Thompson supply of money approach and the Hall demand approach have survived on the fringes of macroeconomics for many decades. Every so often an elite mainstream economist like Reis or Cochrane rediscovers the idea. I believe that we are about 10 years away from this approach going mainstream, and becoming an important part of macroeconomics.
PS. Here is a Tyler Cowen post on the colorful Earl Thompson, and here is his picture:
MARCH 16, 2017
by G. Patrick Lynch
In an essay published in 1978 the late economist Paul Heyne grappled with the place of ethics in economics. Long before scholars such as Deirdre McCloskey had taken it upon themselves to try and awaken the economics profession to the colorless and barren depiction of human life they were presenting and in some ways promoting, Heyne noted that "Economists are accused of doing economics on the basis of analytical preconceptions that cause them to count as solutions what their critics perceive as problems that prevent them from even seeing certain social relationships as in any sense problematic." (from "Economics and Ethics: The Problem of Dialogue," in Are Economists Basically Immoral? Available in the Online Library of Liberty.)
Perhaps no recent critic has taken the economics profession to task quite as publicly as Pope Francis in his recent encyclical "Laudato Si," which received a lot of attention from journalists, environmentalists and social justice advocates when it was published last year. In this week's edition of EconTalk, host Russ Roberts and Wake Forest economist Robert Whaples discuss the Pope's work with more sophistication and care than the average economist, but one can still wonder whether members of the economics profession can ever fully divorce themselves from the perspective of utility maximization, a topic they discuss during the podcast.
To my way of thinking the discussion over "Laudato Si" shows how Catholic thinking, like economics, is divided into macro and micro level concerns. Roberts and Whaples obviously have a lot of aggregate level data to support the notion that much of the empirics in the encyclical are not nearly rich enough to address issues as broad as environmental degradation, economic development, the morality of markets, and ultimately the nature of the good life. And from a micro perspective as they point out, people do tend to act in ways that generally, although not always, enhance their material well-being. However "Laudato Si" challenges these simplistic notions of whether growth alone is sufficient to provide for human flourishing, although it might be close to necessary, and how individuals at the micro level view work as self-affirming and relationships that are non-economic as more fundamental and profound than are market interactions.
Roberts and Whaples speculate that the Pope's dim view of capitalism might be motivated by his upbringing in Argentina with an unhappy father who Whaples describes as an "overworked accountant". Of course it's doubtless true that we are all influenced to some degree by our upbringings. However, the important question here seems to me to be what are the limits of material wealth? Or perhaps more pointedly, can "more" be bad for humanity? The two discuss the question superficially when it comes to their experiences teaching undergraduates and thinking about utility maximization, but it's a bit surprising that Roberts in particular did not refer to one of his heroes, Adam Smith.
Smith famously noted that commercial society produced lots and lots of stuff, but he had various concerns about how markets and exchange might have spill-over effects to society at large as wealth grew and influenced the incentives of markets participants. The corresponding changes were not merely relevant in markets; Smith also speculated that as wealth increased individuals would potentially lose their "martial virtues" (Book V of the Wealth of Nations) which could affect the support of classical republicanism among members of the community.
It is still important to realize here how sensitive Roberts and Whaples are in taking the encyclical's concerns in some respects quite seriously. First off, they note quite rightly, that the tendency among economists to simply accept the fact that the death of small producers as markets grow is a good thing. Net sum it probably is, but when one focuses on the poor, particularly the poorly educated and unskilled poor in parts of the world that are not easily connected to the global market, one has to acknowledge the importance of supporting the few opportunities that exist for those individuals or providing those individuals with help when market "disruptions" leave them without the means to work. Here the emphasis in the encyclical on "micro" forces is stronger. Individuals suffer during transitional periods. Additionally, the Pope's support for work as a key component to leading a full and productive life receives ample attention during the podcast and is a key element to understanding how human nature is best served by social and economic institutions.
Another key element in Heyne's essay was the difficulties that lay on the path towards scientism that economics had chosen. Setting aside for a moment the very complicated question of whether or not any social science can achieve the lofty standards applied to science in say chemistry or physics, the deeper challenge that "Laudato Si" seems to be raising is what the costs of employing such an approach have when human life always raises moral questions that need answering.
Finally, much as been made about the encyclical's emphasis on environmental concerns. Whaples himself teaches environmental economics and therefore has great sympathy for the state of the planet and ways to coordinate economic activity with preserving the condition of the earth. However, it is important to recognize, as they both do, that viewing growth as the single greatest risk to the environment is simply wrong. Whaples cites the so-called "environmental Kuznets curve" as just one example in which making human life materially richer has had a positive impact on environmental quality in many places.
Looking at a map of say Zimbabwe, where economic growth is stunted and backwards and property rights not respected, we can see the consequences of deforestation and wide spread environmental degradation. No one points to Cuba or the former Soviet Union as examples of good stewards of the environment. Here the encyclical needed more emphasis on alternative viewpoints and data to make a better case of how economic freedom and progress are frequently friends of the environment and planet, and could very well make a growing population, a key point for the Roman Catholic Church, more feasible and sustainable for all.
MARCH 15, 2017
One of the big findings in the recent Congressional Budget Office (CBO) report on the Republican health proposal is that by 2018, about 14 million people who would have had health insurance will lose it.
That sounds bad, right? But here's the interesting paragraph from the CBO's summary:
CBO and JCT estimate that, in 2018, 14 million more people would be uninsured under the legislation than under current law. Most of that increase would stem from repealing the penalties associated with the individual mandate. Some of those people would choose not to have insurance because they chose to be covered by insurance under current law only to avoid paying the penalties, and some people would forgo insurance in response to higher premiums.
In the body of the report, the CBO writes:
In 2018, by CBO and JCT's estimates, about 14 million more people would be uninsured, relative to the number under current law. That increase would consist of about 6 million fewer people with coverage obtained in the nongroup market, roughly 5 million fewer people with coverage under Medicaid, and about 2 million fewer people with employment-based coverage. In 2019, the number of uninsured would grow to 16 million people because of further reductions in Medicaid and nongroup coverage. Most of the reductions in coverage in 2018 and 2019 would stem from repealing the penalties
That seems a little unclear. If most of the reductions in coverage stem from repealing the penalties associated with the individual mandate, why would some of these people forgo insurance in response to the higher premiums? If higher premiums will be what discourages them from buying health insurance, then what does the repeal of the mandate have to do with it? Maybe the CBO has in mind that some people find the lower premiums attractive and would buy it even without the mandate, but that with higher premiums, the only way they would buy it is if there is a mandate. That seems like the most likely explanation.
In any case, notice that presumably a few million of the 14 million who would lose health insurance are people who would want to lose health insurance even if the premiums weren't higher. So for people who value the well-being of those people, this counts as a win, not a loss. Of course, you need to count their well-being from their viewpoint, not as a paternalist.
MARCH 14, 2017
A recent Vox post asked 17 experts for their views on the risks posed by artificial intelligence. Bryan Caplan was grouped with those who views might be described as more complacent, or perhaps less complacent, depending on whether you define "complacency" as not worried about AI, or as opposed to letting AI transform our society.
AI is no more scary than the human beings behind it, because AI, like domesticated animals, is designed to serve the interests of the creators. AI in North Korean hands is scary in the same way that long-range missiles in North Korean hands are scary. But that's it. Terminator scenarios where AI turns on mankind are just paranoid. -- Bryan Caplan, economics professor, George Mason UniversityI'm not sure how I should feel about this comment. Let's start with the first sentence, suggesting that AI is no worse that the humans behind it. So how bad are humans? It turns out that some humans are extremely bad. One terrorist known as the Unabomber thought that the Industrial Revolution was a mistake. He was captured, but might a similar human pop up in the age of AI? Imagine someone who thought humans were a threat to the natural environment.
The second sentence compares AI to long-range [presumably nuclear] missiles. I find those to be sort of scary, but I am much more frightened of nukes being put inside a bale of marijuana and smuggled into New York. How good are we at stopping drugs from coming into the country?
The second sentence does offer one reassurance, that missiles are controlled by governments. Even very bad governments such as the North Korean leadership can be deterred by the threat of retaliation.
But that makes me even more frightened of AI! A future Unabomber who wants to save the world by getting rid of mankind could be (in his own mind) a well-intentioned extremist, willing to sacrifice his life for the animal kingdom. Deterrence won't stop him.
So what is the plan here? Is use of AI to be restricted to governments only?
Or is it assumed that AI will never, ever develop to the point where it could be used as a WMD?
And how good is the track record of scientists telling us that something isn't possible? A while back a professor who teaches biotech told me that the cloning of humans is completely impossible---it will never happen---because we are far too complex. Within 2 years a sheep had already been cloned.
David Deutsch is one of my favorite scientists. In 1985 he came up with the idea of quantum computers. But he also doubted that they could be manufactured:
"I OCCASIONALLY go down and look at the experiments being done in the basement of the Clarendon Lab, and it's incredible." David Deutsch, of the University of Oxford, is the sort of theoretical physicist who comes up with ideas that shock and confound his experimentalist colleagues--and then seems rather endearingly shocked and confounded by what they are doing. "Last year I saw their ion-trap experiment, where they were experimenting on a single calcium atom," he says. "The idea of not just accessing but manipulating it, in incredibly subtle ways, is something I totally assumed would never happen. Now they do it routinely."
And here's something even more amazing. The Economist's cover story is on the booming field of quantum computing.
And here's something even more astounding. Humans don't even know how these machines will work. For instance, Deutsch says:
"If it works, it works in a completely different way that cannot be expressed classically. This is a fundamentally new way of harnessing nature. To me, it's secondary how fast it is."
One theory is that machines that fit on the top of a table will manipulate more states than there are atoms in this universe by accessing zillions of alternative universes that we can't see, and another theory says this will all be done within our cozy little universe. And scientists have no idea which view is correct! (I'm with Deutsch--many worlds.) Imagine if scientists were not able to explain how your car moved? Or to take a scarier analogy, suppose scientists in 1945 had no idea whether the first atomic bomb would destroy a building, a city, or the entire planet?
Just to be clear, I don't think quantum computers pose any sort of threat; I'm far too ignorant to make that judgment. What does worry me is that journalists can put together a long list of really smart people who are not worried about AI, and another list of really smart people who see it as an existential threat. That reminds me of economics, where you can find a long list of experts on both sides of raising the minimum wage, or adopting a border tax/subsidy or cutting the budget deficit. I know enough about my field to understand that this divergence reflects the fact that we simply don't know enough to know who's right. If that's equally true of existential threats looming in the field of AI, then I'm very worried.
AI proponents should not worry about convincing ignorant people like me that AI is not a threat. Rather they should focus on convincing Stephen Hawking, Elon Musk, Bill Gates, Nick Bostrom and all the other experts who do think it is a potential threat. I'm not going to be reassured until those guys are reassured.
I may know absolutely nothing about AI, but I know enough about human beings to know what it means for experts in a field to be sharply divided over an issue.
PS. Please don't take this post as representing opposition to AI. Rather I'm arguing that we should take the threat seriously. How we react to that information is another question---one I'm not competent to answer.
PPS. Commenters wishing to convince me that AI is not a threat should also indicate why your argument is not convincing to people much better informed than me. Otherwise, well . . . it's sort of like this . . .
MARCH 13, 2017
On the way home from work this evening, I heard an incorrect statement of the latest CBO report's findings on the Republican-proposed health care bill. (I'll have more to say about the bill in a future post; I'm still digesting the opinions of others who seem to have looked at it more closely than I have.)
The CNN news report stated that the CBO estimated that the bill would save $337 billion over the 2017-2026 period. A quick check of the CBO report shows that the CBO was as misleading as CNN. Here's the CBO:
CBO and JCT [Joint Committee on Taxation] estimate that enacting the legislation would reduce federal deficits by $337 billion over the 2017-2026 period. That total consists of $323 billion in on-budget savings and $13 billion in off-budget savings. Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion.
Notice that the CBO, like CNN, counts $337 billion, not only as a cumulative deficit reduction, which it is, but also as a "savings."
But then the CBO goes on to say:
The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act's (ACA's) subsidies for nongroup health insurance. The largest costs would come from repealing many of the changes the ACA made to the Internal Revenue Code--including an increase in the Hospital Insurance payroll tax rate for high-income taxpayers, a surtax on those taxpayers' net investment income, and annual fees imposed on health insurers--and from the establishment of a new tax credit for health insurance.
So the largest "costs" come from a reduction in taxes. Admittedly, $361 billion of this tax cut is a new tax credit. Tax credits are, in many ways, like subsidies. So the actual tax cut is not as big as it looks.
Let's assume the CBO's numbers are correct. Then the saving is not $337 billion, but, rather, $1.2 trillion. (I'm accepting, which I really shouldn't, the bad CBO habit of treating a dollar in 2017 the same as a dollar in 2026. For this to be true, nominal interest rates would have to be zero. They aren't. They're low, but they're not that low.)
So what's true is that the proposal would save $1.2 trillion, that $0.9 trillion of this saving would go to a tax cut, and that $0.3 trillion of this saving would go to reduce the cumulative deficit. A $0.9 trillion tax cut is not a cost, although, as noted above, one could count $361 billion of this tax cut as a cost because a tax credit is like a subsidy.
MARCH 13, 2017
In July 1933, Roosevelt issued an executive order that effectively forced firms to raise nominal hourly wages by 20% in just two months. In the previous 4 months, industrial production had risen by 57%, three times faster than in any other 4-month period in US history. It looked like we would get a rapid recovery from the Depression due to the stimulative effects of dollar devaluation. Unfortunately, the NIRA wage policy aborted the recovery and industrial production began falling. It would not regain July 1933 levels for another 2 years, after the May 1935 Supreme Court decision ruling the NIRA unconstitutional.
Here's the abstract of a new paper by Jérémie Cohen-Setton (Peterson Institute for International Economics), Joshua K. Hausman (University of Michigan), and Johannes F. Wieland (University of California, San Diego):
The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a medium scale, multi-sector model calibrated to match our cross-sectional estimates. We conclude that the new Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.In the US, the wage shock was implemented by reducing the work week from 48 hours to 40 hours, without any change in weekly wages. This boosted hourly wages by 20%. The French version was even more extreme, they reduced the work week to 40 hours while increasing weekly wages by 7% to 15%.
In their opening paragraph they point out that this study has important policy implications for Europe:
The output effects of supply-side policies in depressed economies are controversial. Much of the debate has focused on the U.S. New Deal's supply-side elements, in particular the National Industrial Recovery Act (NIRA).1 Standard new Keynesian models used for policy analysis imply that the NIRA ought to have been expansionary given economic conditions during the Great Depression (Eggertsson, 2012), but many economists have suggested otherwise (Friedman and Schwartz, 1963; Bordo, Erceg, and Evans, 2000; Cole and Ohanian, 2004). More recently, this debate has resurfaced in the context of whether structural reforms would be helpful or harmful for the Eurozone periphery (e.g., Bundick, 2014; Eggertsson, Ferrero, and Raffo, 2014; Fernández-Villaverde, Guerrón-Quintana, and Rubio-Ramírez, 2014; Lo and Rogoff, 2015).The basic problem with the New Keynesian model is that they use the wrong indicator of nominal (demand) shocks. In the NK model, higher inflation is expansionary. But of course that's reasoning from a price change. It's expansionary when caused by an increase in AD (say due to expansionary monetary policy), but contractionary when caused by a decrease in AS (say due to legal mandates forcing wages higher.)
The correct nominal indictor is NGDP growth. An increase in NGDP growth is always consistent with higher AD, and vice versa. If the Keynesians would replace inflation with NGDP growth in their models, they would avoid disastrous policies such as the NIRA, and its French equivalent.
This is just one of the reasons why the market monetarist model is superior to the NK model.
HT: Kurt Schuler
PS. People interested in this subject might want to check out my book on the Great Depression:
MARCH 12, 2017
George Mason University economist Dan Klein has a fun paper, about to be published in the Independent Review, titled "The Joys of Yiddish and Economics."
In The Joys of Yiddish, Rosten's method is to introduce each Yiddish term, define it, and provide a story to illustrate it. Many of the stories occur in a setting of work and trade, and many illustrate economic ideas. Besides illustrating ideas of textbook economics, they often illustrate the rich vitality of economic life beyond the textbook.
I had known, from reading Two Lucky People, that Leo Rosten was a friend of Milton and Rose Friedman. I hadn't known that in the 1930s, he had attended a class taught by Friedrich Hayek at the London School of Economics.
The whole thing, which is short, is worth reading. My favorite is this one, my own version of which I've used countless times when discussing price controls but hadn't known it was from Rosten:
Here's my version (and the point I made with it), from my Mercatus study titled The U.S. Postwar Miracle:
Prices, which had been repressed by these controls, shot up. Between mid-June and mid- July, food prices rose by 12.9 percent and meat prices rose by 29.6 percent. Of course, these do not represent real price increases because price controls on meat and other foods had caused shortages. Indeed, a butcher joke makes the point that it's small comfort to have "cheap" meat (or indeed any other good) when the very fact that it's cheap is what makes it unavailable:
CATEGORIES: Price Controls
MARCH 11, 2017
In the long run trade must balance, in the sense that imports must ultimately be paid for with exports---plus interest. Thus if we buy a billion dollars in laptops from China, we might pay for those goods by exporting $1.5 billion in Boeing jets in the year 2030.
But this true fact leads many economists to falsely assume that a country cannot run measured trade deficits forever. In previous posts I like to cite the case of Australia, which sells condos and vacations to Asians in payment for cars and TVs. The Australian government will report a trade deficit year after year, which never seems to go away. But that's misleading. Overall trade in goods, services and assets may be balanced; it's just that those condos are not counted as exports of "goods".
Tyler Cowen recently quoted Jason Furman and Olivier Blanchard:
Net revenues from border adjustment taxes and subsidies will be positive so long as the United States runs a trade deficit. But if foreign debt is not to explode, trade deficits must eventually be offset by trade surpluses in the future. Net revenues that are positive today will eventually have to turn negative. Indeed, any positive net revenues today must be offset by an equal discounted value of negative net revenues in the future.This is flat out wrong, and it's not even debatable. The official trade deficit does not measure the increase in net indebtedness; as a result the measured U.S. trade deficit can (and likely will) go on indefinitely.
A common mistake made by famous economists is to confuse statistical measures such as "the trade deficit" or "CPI inflation" with the theoretical concept that economists use in their models. In terms of pure economic theory, the US sale of a LA house to a Chinese investor is just as much an "export" as the sale of a mobile home that is actually shipped overseas. But one is counted as an export and one is not.
You might think that this is mere semantics---who cares how these terms are defined? But this confusion leads to important errors in policy evaluation, such as the incorrect assumption that the proposed border tax/subsidy would be neutral towards trade. That might be true if all imports were taxed and all exports were subsidized. But that's not what's being proposed. When a British tourist visits Disney World in Orlando, the spending is a US service export. But that service export will not be subsidized. When a Chinese buyer purchases a home in California the "export" of the home will not be subsidized. The real strength of the US economy is in the export of services and assets, which are largely ignored under this system.
It is one of the most profound consequences of China's growing wealth: Chinese investment in U.S. real estate has exploded, particularly in California and New York. Chinese nationals are now the biggest foreign buyers of American homes, purchasing at least $93 billion worth of home in the past five years, including $28.6 billion in 2015 alone. Commercial property purchases have surged as well, to $8.5 billion last year, a 15-fold increase from 2010. And, at nearly $208 billion, China is the biggest foreign holder of U.S.-government-backed residential mortgage bonds.
This error leads some economists to confuse a theoretically neutral border tax that applies to all imports and exports, with the one actually being proposed, which would tax imports far more than it subsidized exports, and hence would end up being at least somewhat protectionist.
This does not mean that the tax reform proposal that the GOP is putting together is necessarily a bad idea---the proposal does have a number of good features, such as expensing investment and equal treatment of debt and equity. But we need to be aware of what is being proposed. As far as I can tell the plan is at least slightly protectionist.
CATEGORIES: International Macroeconomics: Exchange Rates, International Debt, etc. , International Trade , Tax Reform
MARCH 10, 2017
I take a skeptical view in an article for Politico.eu: I don't think transfers will automatically produce economic convergence. My point is based on the Italian experience, which I summarise this way:
Since its unification in the nineteenth century, Italy has had a common currency and fiscal transfers from north to south. And yet, the different parts of the country have grown at very different rates.
The piece is here.
I fear the "fiscal union" has became some sort of a mantra. There is a surprising consensus among European intellectuals that the Eurozone's problems are easily solved, on paper, if only nation states were not standing in the way. That is, more European centralisation would do it. I find this a disturbing shortcut. By saying that we need "more Europe", people avoid the far more interesting question: what kind of Europe do we need?
CATEGORIES: Eurozone crisis
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