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Michael Darda pointed me to the following statement from Larry Summers (in reply to Ben Bernanke):

Successful policy approaches to a global tendency towards excess saving and stagnation will involve not only stimulating public and private investment but will also involve encouraging countries with excess saving to reduce their saving or increase their investment. Policies that seek to stimulate demand through exchange rate changes are a zero-sum game, as demand gained in one place will be lost in another. Secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon.
The middle sentence sure looks like reasoning from a price change. Whether currency depreciation is a zero sum game depends entirely on the reason why the currency depreciated. In fairness to Summers, he probably had in mind currency depreciation caused by non-monetary factors. In that case, it may well be a zero sum game.

Nonetheless, I'm not willing to entirely overlook the problem here, for two reasons:

1. The examples of currency depreciation that are currently on everyone's mind are the recent sharp declines in the yen and the euro. In both cases, expansionary monetary policy almost certainly played a major role. One reason we know this is that the respective exchange rates tended to depreciate on statements made by monetary policy officials, and were often accompanied by new policies such as aggressive QE. All you have to do is look at the reaction of global equity markets to realize that monetary stimulus by major economic powers is very much a positive sum game, at least when the global economy is depressed.

2. Summers referred to "policies that seek to stimulate demand through exchange rate changes," which almost all readers would naturally assume applies to monetary policy. Furthermore, this claim occurs in a post that insists that fiscal stimulus is the only solution to "secular stagnation." And of course (like most progressives) when Summers talks about fiscal stimulus, he doesn't have in mind tax cuts to generate growth in the private sector.

When viewed in context, I would guess that about 99% of readers would have assumed that Summers claim applied not just to non-monetary currency depreciation (say due to more government saving) but also to the recent currency depreciation that occurred in Japan and the Eurozone.

Either Larry Summers is mistakenly reasoning from a price change, or he is not doing a very good job in communicating his actual views.

PS. What if Summers claimed monetary stimulus was ineffective due to the zero interest rate bound? In that case monetary stimulus would also fail to depreciate a currency. And that's pretty clearly not the case with the yen and the euro.



Alberto Mingardi

The socialism of the Incas

Alberto Mingardi

Before the Mont Pelerin Society's meeting in Lima, Peru, beautifully organized by Enrique Ghersi, I took three days off and visited Cuzco and Machu Picchu. As a matter of fact, I highly recommend the trip--though I'd suggest you take more than three days, as these are phenomenal places, well worthy of a longer stay.

Before taking my trip, I didn't know anything about the Incas. But my tour guides (I had three: one for Cuzco, one for Ollantaytambo--my favourite spot--and one for Machu Picchu) were very generous with information, including on the Incas' political arrangements.

It is difficult not to be impressed by the Incas' engineering successes, and one wonders how many human lives these places should have cost. Building entire cities on mountain sides is not an easy job.

All the tour guides made a point of telling the other tourists and me that the Incas' society did not know private property, nor greed.

I ran across an interesting book by Louis Baudin, "A Socialist Empire. The Incas of Peru", that Ludwig von Mises very much liked, so much so that he wrote the preface to the English translation published by the Volker Fund. It is indeed a remarkable book.

My tour guides maintained that everybody, in the Inca times, worked "for the community", so class divisions didn't matter at all: the best and brightest were chosen to lead, the others were to supply manual labour, and everybody was happy because everything was "for the good of the community". This seems to be what impressed them the most. The guides (all Peruvians) were quite fond of the notion of the Incas being a remarkably 'horizontal' society, in which people contributed to the common good due to their civic spirit and not because they were coerced by an all-powerful leadership.

Baudin has an interesting explanation of the Incas' socialism being a mixture of historically evolved communal agriculture, and top-down socialism that took over later in time ("we must envisage the Indian tribes as forming a series of communities upon which the Incas imposed the framework of a socialist organization"). For this reason, his work seems to support my tour guides' enthusiasm, as he writes that "the empire presented the curious spectacle of a civilization that remained hostile to the division of labor." Lower class people were encouraged to be versatile, so to say.

But Baudin emphasizes the great gulf that existed between the elites and common people. He considered the Inca empire "a socialism that would have leveled existence to a complete and suffocating uniformity had it not been for an elite (...) Equality, in Peru, existed only between individuals of the same social rank; it was the military system of equality among soldiers."

That is:

the categories of the population were kept clearly separated, and differences in education and mode of life corresponded to differences in social rank. In all domains of existence a precisely defined hierarchy held parallel sway. Power always came from above, and the members of the ruling class were educated to exercise it for the greatest good of all. It was on these fruitful principles that the fortunes of the empire were built.

I shall say I was impressed by how all our different tour guides showed, or pretended to show, the same longing for the Inca times. They were very fond of explaining to us that when the Incas were buried in the mountains, with some small items with them, these latter need to be understood as tributes to the mountain, not companions for the after life. The lack of property rights, they say, extended to small personal belongings.

It is amazing how immortal the utopia of a property-less society seems to be. But it is rare to see it proudly pushed to personal objects and not *only* the means of production. I suppose this should produce unhappiness: which I suppose my guides would have agreed upon, if they only were to imagine themselves being forbidden to own books, or to choose their own clothes so as to dress as they like best.



David R. Henderson

I'm a Full Professor!

David Henderson

Last summer, after 22 years as a tenured Associate Professor, I decided to come up for promotion to Full Professor. I did so partly at the urging of three colleagues in the Graduate School of Business and Public Policy, where I'm "lodged," and partly at the urging of two full professors in a different part of the campus.

Normally, the Naval Postgraduate School announces the results for tenure and promotion on April 1. Given the significance of that day, my wife suggested that I should hope the school announced that I didn't get promoted.

Fortunately, the letter telling me that I am promoted (which I received yesterday) was dated today, March 31. I'm happy. I don't feel the relief that I felt in April 1992, when I learned that I had been granted tenure. I had thought I wasn't nervous about it, but when I found out, I immediately went home early, told my wife, and then yawned the stress out of my body for about half an hour. This time, I simply called her and then went in and taught my first class. I haven't yawned a lot of tension out; I simply feel a quiet satisfaction.

CATEGORIES: Labor Market


As the Iron Curtain crumbled, people often joked, "Marxism is dead everywhere - except American universities."  The stereotype of the Marxist professor runs deep.  But is this stereotype grounded in statistical fact?  Here are the results from a 2006 nationally representative survey of American professors.  The survey asked if the professor considered himself "radical," "political activist," or "Marxist."  Survey says:


Overall, Marxism is a tiny minority faith.  Just 3% of professors accept the label.  The share rises to 5% in the humanities.  The shocker, though, is that as recently as 2006, about 18% of social scientists self-identified as Marxists. 

Neil Gross and Solon Simmons, the authors of the study, hasten to say, "Move along, nothing to see here."
[S]elf-identified Marxists are rare in academe today. The highest proportion of Marxist academics can be found in the social sciences, and there they represent less than 18 percent of all professors (among the social science fields for which we can issue discipline-specific estimates, sociology contains the most Marxists, at 25.5 percent).
In contrast, I urge you to rubberneck.  If 18% of biologists believed in creationism, that would be a big deal.  Why?  Because creationism is nonsense.  Similarly, if 18% of social scientists believe in Marxism, that too is a big deal.  Why?  Because Marxism is nonsense.  Furthermore, if 18% of a discipline fully embrace a body of nonsense, there is also probably a large bloc of nonsense sympathizers - people who won't swallow the nonsense whole, but nevertheless see great value in it.  Suppose, plausibly, that there is one fellow traveler for every true believer.  That would bring the share of abject intellectual corruption to fully 35% - and 51% in sociology.

I suspect that Marxists' share has fallen since 2006.  But it makes me wonder: When precisely did American academia hit "peak Marxism" - and how high was the peak?


The Guardian has a long piece on Lee Kuan Yew, with the following subtitle:

The founding prime minister of an independent Singapore, he sought to encourage prosperity through ensuring a dominant role for the state
The article also contains this:
The first 10 years after the expulsion from Malaysia saw Lee forge the society that is modern Singapore. It could have been done differently. Colonial Hong Kong, so similar in many ways, prospered as well without the guidance of a "philosopher king" or a "Moses", as Lee was to be later described. Nonetheless, Lee was very much in charge of the new Singapore and thus deserves the credit, and the blame.

The ingredients included a dominant role for the state. This combined aspects of social democracy, for example in major efforts to improve health and public housing, with "the mandarins know best" attitudes to social and economic activity.

What can we conclude from all this?

1. Hong Kong "prospered as well" as Singapore, without a "philosopher king" like Lee.
2. Lee deserves credit for Singapore's prosperity.
3. Lee believed that Singapore would prosper if the state was given a dominant role, and was well run.

This doesn't make much sense, unless you interpret the Guardian piece as a veiled comment on UK politics. Right now the Conservatives are in power in Britain, and are trying to reduce the size of the British state from 40% of GDP before the recession, (and at least 46% during the recession) to about 36% by 2018. Many critics on the left are critical of this policy.

Now suppose you write for the (center-left) Guardian, and favor a larger state. What aspect of Lee's policy would you emphasize? First you have to figure out if Singapore is a success or not. For instance, when people on the left talk about China they call it a state-led economy when discussing its 10% growth rate over 3 decades, and a capitalist country when discussing environmental degradation and worker exploitation. Singapore is generally viewed as being a success, so a left-leaning journalist would want to emphasize that the government plays a "dominant" role in the economy (as if there are any developed countries where the government does not play a dominant role).

Even though the article is exceedingly long, they do NOT find room to mention that Singapore is #2 on just about every global ranking of "economic freedom." Nor do they find room to mention that the ratio of government spending to GDP in Singapore (17.6%) is the lowest of any developed economy, even lower than Hong Kong.

Let's test this hypothesis by looking at a different British newspaper---The Economist. Unlike the Guardian, the (center-right) Economist supports the Conservative policy of shrinking the state:

FROM the howling on the opposition benches as George Osborne delivered his sixth budget speech on March 18th, you would think the British state had been ground to a husk over his five-year chancellorship. It was a familiar chorus. The notion that the coalition government's spending cuts are an ideologically driven wrecking job, spreading anguish to which the Conservative chancellor is icily indifferent, has sustained the Labour Party since its 2010 fall. Hospitals, schools, local government--in their constituencies Labour MPs swear to rescue them all from "Tory cuts". In Birmingham, the Labour MP Liam Byrne has accused the government of trying to "destroy" Britain's second city--which is a bit rich considering it was he, as an outgoing Treasury minister, who left the note by which 13 years of New Labour government became instantly defined: "There is no money."

Yet something odd is going on. After one of the biggest fiscal squeezes in post-war Britain, which has seen a million public-sector jobs cut, Britons tell pollsters they have never been happier with public services.

And now let's see how the Economist describes Singapore's success under Lee:

Why did Singapore become an economic success?

First, its strategic location and natural harbour helped. . . .

Second, under Mr Lee, Singapore welcomed foreign trade and investment. Multinationals found Singapore a natural hub and were encouraged to expand and prosper.

Third, the government was kept small, efficient and honest--qualities absent in most of Singapore's neighbours. It regularly tops surveys for the ease of doing business.

No mention at all of the "dominant" role played by the state. Instead Singapore is described as a capitalist haven, with very small government.

I happen to think the Economist's description is more accurate, but economies are so complex that it's easy to see how opinions would differ. It depends which aspect of the economy you wish to emphasize. Like the Economist, I favor small government. So it's also hard for me to be completely objective. All I can really say is that people should think for themselves, be very skeptical, look at hidden agendas, and check out the data on their own. Don't rely on the specific data points spoon fed to you in a journalistic piece with a political agenda lurking in the background. And be even more skeptical of articles that lack data, and merely tell you their overall impression of the state's role in the economy.

Interesting fact: Singapore was part of Malaysia until it was kicked out in 1965. If you use PPP GDP estimates for 2015 from the Economist, you find that "old Malaysia" (including Singapore) has an estimated GDP per capita of $35,242, which is above Spain and Italy and below Britain and France. I think it's fair to say that not many people would have predicted that in 1964. Indeed with the possible exception of Mr. Lee, perhaps no one. But then no one would have pegged South Korea at $36,520 either. Of course South Korea's success is even more astounding, and is due to:

A. Its open, export-oriented capitalistic economy
B. Its import substitution, state-led development model

Depends which paper you read.


Last summer, I highlighted famous Canadian whisky producer Sam Bronfman's claim that the greatest invention in history is interest. I then posted on how to get rich slowly and drew strongly on the idea of compound interest. Of course, I take the principle to mean compound dividends also; that is, investing in stocks and then reinvesting the dividends in more stocks.

In pretty much every economics course I teach, I love teaching the idea of compound interest. I often tell a personal story to illustrate, and some good news happened a year ago that now allows me to give a very different punch line.

In the summer of 1975, when I was just about to move to the University of Rochester as a newly minted assistant professor in the Graduate School of Management (now the Simon School), a friend wanted to borrow $79, $75 for general expenses and $4 to send a UPS package. I was strapped for funds, not yet having received my first pay check from the U. of R. But he really needed it and told me that when he got back to Missouri, he would immediately send me the $79. I lent him the money.

I never heard from him again. I called him a few times but never got a return call. I gave up.

So that story has been a great one to tell because each year I told it, the amount that he owed me increased. In 2014, for instance, the amount he owed me, assuming an average interest rate of 5%, which is conservative (remember the high single-digit and sometimes double-digit rates from 1975 through the early 1990s), was $530. At a more-reasonable rate of 6%, it was $767. I think I could even reasonably argue for 7%.

So laying this out in class was a fun exercise. I started out with "What if he contacted me now and offered to pay me the $79? What's wrong with that?" Of course, the students got it. What's wrong is that it ignored compound interest. Indeed, it ignored interest altogether.

Then, about a year ago, I was on the phone with a long-time friend. We happened to be talking about friends in the past and he mentioned John, the guy who owed me. Then he told me that John and he are still in touch and John lives in Kansas City. I told my friend that I don't have the warm fuzzies for John because he reneged on a deal. My friend asked more and I told him. "I know John pretty well," he said, "and I'll tell him that he still owes you. I'll give him your phone number, if that's alright."

That was alright. So a few days later, I got a call from John in Kansas City. He felt bad about what he had done and offered to make amends. So I told him my calculations at 5% and 6%. Guess which one he chose. A few days later, a check showed up. Now my story has a happy ending.



Bryan Caplan

How to Fix Seminars

Bryan Caplan
I'm sick of academic seminars.  Even if the presenter has a good paper and speaks well, the audience ruins things.  How?  Two minutes into any talk, the fruitless interruptions begin.  Half the time, they're premature quality control: "Are you going to deal with ability bias?"  "Uh, yes.  On the next slide."  The other half the time, they're bizarre pet peeves.  "How does this relate to sequential equilibrium?"  "Uh, it doesn't.  It's an empirical paper."  "Yes, but that reminds me of something Rudi Dornbusch once said.  Now I'm going to talk for four minutes."

Once fruitless interruptions begin, there's no such thing as winning.  There are only different degrees of losing.  Even if you limit each question to a single minute of time, your ideas lose their flow.  A well-planned talk handles complexities in logical order, allowing relative novices to follow your reasoning.  Premature quality control smashes that order to pieces, leaving novices confused and experts bored.  And after three pet peeve questions, the audience struggles to remember the topic of the talk - never mind its thesis.

Can't speakers deflect the pointless interruptions to make the talk train run on time?  It's tough.  You can't just say, "Please, only good questions."  And once you take one silly question, every other squeaky wheel feels entitled to put in his two cents.  "Hey, my question's clearly better than the last guy's!"  As a speaker, then, you have to choose between offending a fifth of the audience or boring the entirety.  Professionally speaking, the former is the greater danger.

Still, I come to fix seminars, not to abolish them.  My colleague Dan Klein inspired the following alternate rules:

1. Split the talk into two parts.  Part 1 is the first two-thirds of the allotted time.  Part 2 is the last third of the allotted time.

2. During Part 1, the audience may not ask any questions.  No exceptions.

3. However, the speaker retains the option to ask the audience questions during Part 1.  If the speaker sees a lot of confused faces, he can query, "Are you familiar with the efficiency case for Pigovian taxation?" and adjust his presentation accordingly.

4. The speaker scrupulously ends Part 1 on time, then turns the rest of the talk over for questions. 

Step 4 has two main advantages over the standard method. 

First, it's easier for the speaker to filter out bad questions.  Since there is a dedicated question period, multiple people will normally raise their hands.  If an audience member asks bad questions, the speaker can call on other people first.  If an audience member asks too many questions, the speaker can gently say, "Someone who hasn't already asked a question..."

Second, the question pool will generally be better.  Once the audience understands your point, they can ask questions about the overall thesis rather than Slide 3.  Quality control questions now serve their legitimate function: If you missed your opportunity to address a tricky point during Part 1, audience members can correct your oversight in Part 2. The pet peeves still make a spectacle of themselves, but at least the audience walks away knowing your thesis. 

A few months ago, I saw Dan Klein use a similar format, though he made Part 1 shorter and Part 2 longer.  This Wednesday, I tried it at the Public Choice Seminar.  It could easily have been the best academic seminar I've ever done.  The approach makes so much sense, it makes me wonder if the standard approach is ever better.

My best guess: The standard approach might be better for graduate students.  Suppose you're a public speaking novice.  Interruptions are an opportunity to improve your performance in real time.  Toastmasters clubs, for example, appoint an "Ah-Counter" to clap whenever the speaker says "ah" or "um."  Alternately, suppose you know less about your topic than several experts in the audience.  Their interruptions are an opportunity to prevent you from derailing your own talk with errors and irrelevancies.  The background assumption here, though, is that the speaker and the audience both constructively treat the seminar as training.  Shredding graduate students helps no one.

Comments on my seminar system are good, but field experiments are better.  Have I piqued your interest?  Try my approach and tell me how it works.

CATEGORIES: Economic Education


The prudent man, claims Roberts, does not smoke, is "physically active and keeps his weight under control," and "works hard and avoids debt." On debt, I must part company. It was by taking on what seemed like a massive debt at the time--1986--that my wife and I managed to buy a house in coastal California. I doubt that Roberts would have criticized our decision even prospectively. So I think he must mean something like "avoids too much debt" or "consistently spends beyond his means." Being just is relatively easy to understand: don't cheat. It's important, note both Roberts and Smith, not to cheat in even little ways. If we do, there will be, writes Smith, "no enormity so gross of which we may not be capable."

Beneficence is harder to define. The rules of beneficence are, according to Smith, "loose, vague, and indeterminate." Some aspects of beneficence, writes Roberts, are "friendship, humanity, hospitality [and] generosity." He discusses his challenges in following these rules while raising four children. One beneficent rule he created was always to take his daughter's or son's hand when offered. A rule I created for myself before my daughter was a year old was, when she asked me to play with her or do anything with her, to say yes at least 90 percent of the time.

This is from "Adam Smith's Guide to Living," my review of Russ Roberts's latest book, How Adam Smith Can Change Your Life.

I mentioned one of the main things I learned from the book--Roberts's "Iron Law of You"--in an earlier post.


Scott Sumner

What's new since 1982?

Scott Sumner

When I moved to Boston in 1982, no one talked about the declining share of national income going to labor. Or increasing income inequality. Now these are the hottest topics in economics. Much of the discussion seems to implicitly suggest that there is some sort of "mystery" to be explained. Perhaps corporations are getting better at lobbying in Washington. Or maybe there is cultural change that makes CEOs bolder in demanding high pay.

I find those sorts of explanations to be unsatisfactory. Too vague. Let's go back to my move to Boston. The city I moved to in 1982 was radically different from the Boston of today, even though superficially it doesn't look all that much different. It has not gone through the sort of radical physical transformation that you see in places like Shanghai, or even Austin, Texas. But nonetheless Boston is radically different, and has changed in ways that seem to correspond quite closely to the growing inequality in America.

I'm going to suggest that maybe there is no big mystery to explain. I won't present any new ideas, but rather bundle together some innovative work done by others. It seems to me that the economy has changed in such a way that it would be surprising if the labor share of income had not fallen. Indeed perhaps the real surprise is that the ratio has not fallen by even more.

I believe that major societal changes don't just happen randomly, they have causes. Here are three reasons that others have pointed to:

1. The growing importance of rents in residential real estate.
2. The vast upsurge in the share of corporate assets that are "intangible."
3. The huge growth in the complexity of regulation, which favors large firms.

Kevin Erdmann did some very important posts on the share of income going to capital, which haven't gotten anywhere near the attention they deserve. Here are a few excerpts, but read his whole series of posts:

We start with Profit (the blue line at the bottom). I have extended the time frame further back. The green line represents all returns to corporate capital, both to debt and equity. The debt portion peaked in the early 1980's when corporate leverage was at its highest. When we make this correction, we find that corporate returns to capital have been flat for 40 or 50 years. If we add in proprietors' income, we find that returns to capital have been flat or declining for a century. From 1929 to about 1985, there was a trend of profit claims moving from proprietors to creditors. From 1985 to the present, there was a trend of profit claims moving from creditors to equity owners. But, there is no trend of increasing total returns to capital over the past 30 years.
So in recent decades the rising equity income is offset by falling interest income, leaving total income to the corporate sector fairly stable, as a share of GDP. But then why is labor losing out? It turns out that more income is going to the residential real estate industry, but it's implicit income from rents:
First, this is a little tricky, because 60% of American households own their homes. So, in effect, this is a measure of rent we are paying ourselves. Or, put differently, this is a measure of the income share we capture because home ownership tends to provide excess returns.

The trend in Compensation has dropped from about 57% in 1970 to about 53% - a 4% drop. But, the trend in Rent + Compensation has dropped from about 59% to 57%. Rental income explains about half the drop in Compensation Share, and in fact, accounts for more than all of the drop in Compensation Share since the previous low point in 2006.

To the extent that Rental Income supplements Compensation, this income is probably distributed mostly to middle and upper-middle class households. So, both the level and the distribution of household Compensation Share are probably helped by reducing excess returns to Rental Income.

Boston has extremely tight regulations on building, and a strong high tech economy. Put the two together and you have extremely high rents. And it wasn't like that when I moved to Boston in 1982. They had lost a lot of their older industries, and people were moving away to the Sunbelt. Rents were not all that high.

What about corporations? We all know that the capital-intensive businesses of yesteryear like GM and US steel are an increasingly small share of the US economy. But until I saw this post by Justin Fox I had no idea how dramatic the transformation had been since 1975:

Screen Shot 2015-03-24 at 6.19.07 PM.png
The rise of companies like Apple, Facebook and Uber affect the economy in two ways. Intellectual property rights create more monopoly power than manufacturers of TVs and refrigerators had back in the 1960s, and this boosts corporate profits. In addition, the individuals with the creative ideas and/or the financiers who picked the winners in the high tech race can make much larger personal incomes than a CEO at an appliance maker in the 1960s. How hard is it to figure out how to make washing machines? How hard is it to figure out the next WhatsApp? These are totally different skills.

However, I'd guess that it's not just about high tech. We've also seen companies like Starbucks do increasingly well against the local corner coffee shop. There could be lots of reasons for this, but one might be the rapid growth in regulations. When regulations are highly complex, there are enormous economies of scale in dealing with the complexities. This favors larger firms. And as this article at Free Exchange points out, anything that favors the growth of larger firms tends to increase inequality:

The standard explanation says that technology plays a big role: modern economies require more skilled workers, raising the pay premium they can demand. A new paper* by Holger Mueller, Elena Simintzi and Paige Ouimet adds a new and intriguing wrinkle to this: the rising size of the average firm. Economists have long recognised that economies of scale allow workers at bigger firms to be more productive than those at smaller ones. That, in turn, allows the bigger firms to pay higher wages. This should not, in theory, cause a rise in inequality. If the chief executive and cleaner at a larger firm are both paid 10% more than their counterparts at a small firm, the ratio between their wages--and thus the overall level of inequality--should remain the same.

But the paper shows that the benefits of scale are not shared equally among all workers. Using data on wages at British firms, they divide workers into nine groups according to how skilled they are. Over time, they find that the proportional difference in wages between the groups grows as firms get bigger. This trend is driven entirely by a rising gap between wages at the top compared with the middle and bottom of the distribution. As the authors note, this is very similar to the trend in income inequality in America and Britain as a whole since the 1990s, when pay for low and median earners began to stagnate (see chart).

What do all three of these explanations have in common? Regulations. Building restrictions are increasing rental income as a share of national income. Intellectual property rights are barriers to entry that tend to create a winner-take-all situation (although other factors like network effects also play a role). And other types of regulations (financial, human resources, etc.) are especially burdensome for small firms, and this favors the growth of inequality-intensive large firms.

All of these changes have hit Boston in a big way since 1982. Boston has itself become more unequal, and it's also moved further ahead of the American average income. Building restrictions here are almost comically excessive (which means that living standards aren't that high, despite the high incomes). Industry is dominated by knowledge-intensive sectors.

I would not argue that these forces explain everything about inequality. My first full-time job at St. Bonaventure (assistant professor) paid $19,300 in 1981. I'd guess that was less that autoworkers made back then. Today econ professors start at almost $100,000 at some schools, whereas newly hired autoworkers are forced to accept much lower pay than the more senior members of the UAW. Technology and trade have widened the gap between blue-collar workers and professionals. But two of the types of inequality that are most frequently discussed are very much impacted by these trends; the falling share of national income going to labor, and the rising share of labor income going to the top 1%.

Given the three factors cited above, the only mystery I can see is why the inequality hasn't gotten even greater.

Update: I forget to mention Matt Rognlie's excellent work in this area. He makes some of the same points about rental income that Erdmann made.

Update#2: I also forget to mention Scott Winship.

CATEGORIES: Income Distribution


David R. Henderson

He Had Me at Page One

David Henderson
"I've always had trouble succeeding along traditional Bush family lines." So writes Jonathan Bush on p. 1 of his book, Where Does It Hurt? With that one sentence, he had me. Bush is a nephew of George H. W. Bush and a cousin of George W. Bush. I'm not a fan of politicians and those two, especially George W., rank low on my list. So when a Bush tries to make it in the private sector rather than in the government, I'm already somewhat of a fan.
This is the opening paragraph of "You Had Me at Page One," my review of Where Does It Hurt? by Jonathan Bush with Stephen Baker.

I became aware of this book by reading Arnold Kling's review in September. I think it's fair to say that Arnold liked the book. I almost loved the book. As I pointed out in my review, Bush wimps out near the end. But along the way, he and his co-author have magnificent insights.

Another excerpt from my review:

They bring a deep appreciation of the entrepreneur to their analysis of health care. "Entrepreneur" and "health care" in the same sentence? Really?

Yes, really. They write, "From an entrepreneur's point of view, there's something highly appealing, almost intoxicating, about waste and dysfunction in the industry." They continue, "Those who can dig down through the morass of rules, paperwork, and bureaucratic obstacles can find new markets." That last sentence got me thinking back to Austrian economist Israel Kirzner's discussions of "entrepreneurial alertness."

In this digging, Bush does not disappoint. In chapter after chapter, he and Baker not only show how dysfunctional the health care system is, but also discuss ways that entrepreneurs can make it better. For example, after noting that a magnetic resonance imaging (MRI) scan at Massachusetts General Hospital would be billed at $5,315 to an insured patient, Bush runs the numbers and concludes that a business that did three images an hour and was open 12 hours a day could charge $99 per MRI and make huge profits.

And check out this excerpt about his simile for government:
Bush got to see the ugliness of government up close. A single detail in a law, he writes, "can throw lives or entire companies into a tailspin." In one of the most memorable lines in the book, he writes, "Government is like a giant with an Uzi."


David R. Henderson

Richer than Rockefeller?

David Henderson

This is the longest time I've gone without posting, other than when I'm on vacation at my cottage in Canada in August. I was traveling and my computer was being repaired after I got back.

I gave a talk at UNC Wilmington on Monday night. The talk was titled "Seven Myths about Free Markets." One of the myths is that with free markets, the rich get richer and the poor get poorer. I pointed out that it's half right: the reality is that with free markets, the rich get richer and the poor get richer.

I then walked them through, Don Boudreaux and Brad DeLong style, the number of labor hours a worker would have to work to buy various things now vs. 1975 (Boudreaux and his Sears catalog) and vs. 1895 (Brad DeLong and his 1895 Montgomery Ward catalog.)

I then asked them who the richest man in America was a century ago. One person yelled out "Andrew Carnegie." "Too long ago," I said. A few other people yelled out "Rockefeller." "Right," I said.

Then I said:

Think about what you have that Rockefeller didn't. He couldn't watch TV, play video games, surf the Internet, or send e-mail. During the summer, he didn't have air conditioning. For most of his life, he couldn't travel by airplane. He didn't even have a 1G cell phone. [Here I held up my cell phone.] And here's the big one. If he got sick, he couldn't use many medicines, including penicillin. [This is adapted from Greg Mankiw's economics textbook.]

To drive that last point home, I noted that while Calvin Coolidge was president, his son, after developing a blister while playing tennis, died, and that would be extremely unlikely to happen today because now virtually every American has access to antibiotics.

Then I said:

So imagine that you could choose to be you today or John D. Rockefeller a century ago. Raise your hand if you would prefer to be Rockefeller.

In an audience of about 350 people, about 35 raised their hands. Then I said:
Raise your hand if you would prefer to be you today.

Over 200 people raised their hands. There were probably about 60 or 70 non-voters. I told them that when we got to Q&A, I might ask people who voted to be Rockefeller what their reasoning was.

We got to Q&A and I remembered to ask. I first asked a young black man at the front of the room why he had voted to "be Rockefeller." He said that if he were, he would get the respect of his family and of people around him.

I then asked a young white man further back and he said that he would have the best of everything. Just to clarify, I said, "You mean that you would have the best of everything then even though most of it is lousy compared to today, right?" "Yes," he said, laughing.

I found these responses interesting, which is why I'm sharing them. In the comments I get on Econlog when I write about inequality, there are always a few people who emphasize that relative situation is more important than absolute situation, and here were two people who agreed.


Alberto Mingardi

Truly Notable and Quotable

Alberto Mingardi

The Wall Street Journal often provides its readers with eye-opening arguments in the "Notable and Quotable" column hosted in its editorial page.

On March 13, the WSJ quoted William Baumol, Robert Litan, and Carl Schramm, "Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity". The argument won't sound new to EconLog readers, but it is quite well and succinctly put:

The most astonishing thing about the extraordinary outpouring of growth and innovation that the United States and other economies have achieved over the past two centuries is that it does not astonish us. Throughout most of human history, life expectancy was about half what it now is, or even less. We could not record voices or speech, so no one knows how Shakespeare sounded or how "to be or not to be" was pronounced. The streets of the greatest cities were dark every night. No one traveled on land faster than a horse could gallop. The Battle of New Orleans took place after the peace treaty had been signed in Europe because General Andrew Jackson had no way of knowing this. In Europe, famines were expected about once a decade and the streets would be littered with corpses, and in American homes, every winter the ink in the inkwells froze.

Good Cap Bad Cap.jpg

CATEGORIES: Entrepreneurialism


Bryan Caplan

Plug-and-Play People

Bryan Caplan
One common complaint about proponents of open borders is that we picture human beings as interchangeable parts.  If an American can do X, so can a Haitian.  Why can't the open borders crowd see the obvious truth that people are not "plug-and-play" - that you can't jumble different kinds of people and expect them to function well together?

My instinctive reaction is to appeal to Econ 1 and basic facts. 

The Econ 1: If people of different nationalities worked poorly together, employers would account for this fact in their hiring decisions.  An employer with a 100% native-born American workforce would look at immigrant applicants and silently note, "Oil and water don't mix."  Or perhaps he'd think, "Americans and high-caste Indians work well together, but Americans and Indian untouchables don't."  Then he'd hire on the basis of these ugly truths, while paying lip service to equal opportunity and the brotherhood of man.  As a result, immigrants - or at least the "wrong kind of immigrants" - would discover that migrating for better jobs is a waste of time.  Jobs are better in the First World, but you have to be First-World-compatible to land one. 

The basic facts: This manifestly is not how labor markets work.  As the opponents of immigration loudly complain, First World employers hire immigrants all the time.  They eagerly hire legal immigrants - and as long as the law is laxly enforced, they furtively hire illegal immigrants.  Even when the law criminalizes non-discrimination, plenty of First World employers look over their shoulders, shrug, mutter "Money's money" and break the law.  Doesn't this show that workers ultimately are plug-and-play?

Yet on reflection, my instinctive reaction misses much of the magic of the market.  If you've ever been a boss, you know that getting human beings of the same culture to effectively cooperate together is like pulling teeth.  Indeed, it's like pulling shark teeth that never stop growing back.  The more different the members of your team are, the greater the miscommunication and strife. 

How then do firms manage to function?  The social intelligence of the leadership.  Good managers know in their bones that diverse human beings aren't built for close cooperation.  Rather than throw their hands up in despair, however, good managers rise to the challenge.  True to their job description, managers manage their workers, forging them into effective teams despite their disparate abilities, personalities, and backgrounds.  It's an uphill battle, and you have to keep running just to stay in place.  But good managers kindle the fire of teamwork, then keep the fire burning day in, day out.

The critics of immigration are right to insist that people aren't plug-and-play.  Cultural diversity definitely makes teamwork harder.  Unlike the critics of immigration, however, businesses around the world treat this fact not as a plague, but a profit opportunity.  Sure, some stodgy entrepreneurs mutter defeatist cliches about oil and water and keep hiring within their tribes.  But more visionary entrepreneurs rise to the challenge of diversity every day.  That's why even the most unskilled and culturally alien workers rightly believe that the streets of the First World are paved with gold.  Given half a chance, socially adept businesspeople rush to do the paving.

But isn't the workplace a relatively favorable environment for diversity?  No; the opposite is true.  Stores gladly open their doors to the general public because almost any human being with money to spend is a lovely customer.  As long as the customers don't bite each other, the more the merrier.  Landlords are a little more selective, but not much: If your credit's good and you keep the noise down to a dull roar, they'll rent to you. 

Employers, in contrast, hire with trepidation.  They know that co-workers need to cooperate like the fingers of a hand.  One bad worker makes a whole firm look bad.  One bad worker can ruin a whole day's work.  One bad worker can make ten good workers quit in frustration.  Outside of the army, no voluntary endeavor in modern adult life is more regimented than the workplace.  Yet by the power of social intelligence, business managers make diversity run smoothly, laughing all the way to the bank.

Where does politics fit in?  It's a lingering concern, but vastly overrated.  Most immigrants are even more politically apathetic than natives.  They vote at sharply lower rates.  And when they arrive in a vast new land, most of their old grievances become irrelevant overnight: Once they arrive in the U.S., Serbs and Croats, Hutus and Tutsis, even Israelis and Palestinians let bygones be bygones.  Political plug-and-play is unnecessary because few immigrants want to play politics in the first place.


I think we all agree that private property rights are an important feature of capitalism. But what is "property"? It increasingly seems like the answer is just about everything:

Taylor Swift Trademarks 'This Sick Beat' and Other Catchphrases

Thinking about selling T-shirts with "This Sick Beat" or "Party Like Its 1989" emblazoned on the front? Well, think again, because the only person who can legally do so now is Taylor Swift.

The pop superstar has trademarked the aforementioned phrases, as well as "Cause We Never Go Out of Style," "Could Show You Incredible Things" and "Nice to Meet You, Where You Been?" - which all pertain to her wildly successful album "1989." And the trademark isn't just restricted to T-shirts.

If you had the idea of printing any of these words on key chains, soaps, jewelry, guitar straps, namely, anything that can be embossed or engraved, get those dollar signs out of your eyes and shake it off, because T-Swizzle is reaping all of the benefits from now on.

The media tells us that the Obama administration is trying to get Asian countries to buy into a tighter set of intellectual property rights protections because . . . well I'm not quite sure why. Perhaps because President Obama does not believe that Taylor Swift is rich enough. If every Asian teenager gave just 10 cents to Taylor, it would add up to . . . quite a bit of money I'd imagine.

More seriously, the usual argument is that IP is a way of encouraging new inventions. Yes, Prince had already invented "Party Like its 1999." And the Smashing Pumpkins have "1979." But neither made the real conceptual breakthrough to: "Party Like Its 1989."

A few years ago someone told me I should trademark; "Never reason from a price change." I thought he was joking. Now I'm not so sure. I guess when I can no longer tell the difference between The Onion and the "real" news media, it's probably time for me to retire.

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Bryan Caplan

When Orwell Met Aumann

Bryan Caplan
Cowen and Hanson's "Are Disagreements Honest?" summarizes the theoretical case against "agreeing to disagree."
Yet according to well-known theory, such honest disagreement is impossible. Robert Aumann (1976) first developed general results about the irrationality of "agreeing to disagree." He showed that if two or more Bayesians would believe the same thing given the same information (i.e., have "common priors"), and if they are mutually aware of each other's opinions (i.e., have "common knowledge"), then those individuals cannot knowingly disagree. Merely knowing someone else's opinion provides a powerful summary of everything that person knows, powerful enough to eliminate any differences of opinion due to differing information.

Aumann's impossibility result required many strong assumptions, and so it seemed to have little empirical relevance. But further research has found that similar results hold when many of Aumann's assumptions are relaxed to be more empirically relevant. His results are robust because they are based on the simple idea that when seeking to estimate the truth, you should realize you might be wrong; others may well know things that you do not.
It's hard to find real human beings who reason this way.  What about fictional characters?  One suddenly came to mind tonight: Winston Smith from George Orwell's 1984.  Smith is admirably meta-rational while brilliant Thought Policeman O'Brien intellectually bullies him.
O'Brien was a being in all ways larger than himself. There was no idea that he had ever had, or could have, that O'Brien had not long ago known, examined, and rejected. His mind CONTAINED Winston's mind. But in that case how could it be true that O'Brien was mad? It must be he, Winston, who was mad.
As far as I understand, Aumann's theorem only applies if both Smith and O'Brien are meta-rational.  Otherwise, Smith is epistemically selling himself short.  And the very fact that O'Brien combines intellectual argument with physical torture conveys extra negative information about O'Brien's credibility.  What's striking, though, isn't that Smith takes Aumannian reasoning too far, but that he applies this reasoning in the first place.


Stanley Fischer is one of the world's most thoughtful monetary economists. And now he is also vice chairman of the Federal Reserve Board. He recently gave a speech on monetary policy, which as you'd expect contained many wise observations. However I was also deeply troubled by some of his comments:

The Federal Reserve responded aggressively to the crisis.4 By the end of 2008, the Federal Open Market Committee (FOMC) had reduced the target federal funds rate from 5-1/4 percent to, effectively, zero. The Fed also acted forcefully as the lender of last resort--in its traditional role of providing short-term liquidity to depository institutions, and also by providing liquidity directly to borrowers and investors in key credit markets.5

In addition, the worldwide scope of the crisis called for concerted international action. Because of the global nature of dollar funding markets, the Fed authorized dollar liquidity swap lines with major central banks, beginning in December 2007. In October 2008, central bankers coordinated reductions in policy rates and the Group of Seven agreed to use all available tools to prevent the failure of systemically important financial institutions.6 The next month, the Group of Twenty announced a broad common strategy, including fiscal expansion.

These steps likely prevented a second Great Depression, but they were not sufficient to avoid a severe global contraction.

The Fed takes credit for good macroeconomic outcomes when aggregate demand grows at a smooth rate, producing low inflation and stable growth. So why shouldn't it be blamed for periods where AD is highly erratic? In the 1930s and the 1970s the Fed denied responsibility for highly unstable movements in AD. Today even the Fed admits it was to blame for those two episodes. But why does it take so long?

The key monetary policy mistakes were made in 2008, when we were not even at the zero bound. Why can't the Fed just admit that monetary policy was far too tight, and that this tight money policy greatly worsened the fall in AD? Why no soul-searching?

Going forward, there is every reason to believe we'll again hit the zero bound in the next recession. Is the Fed prepared? What does this sound like?

For over six years, the federal funds rate has, effectively, been zero. However it is widely expected that the rate will lift off before the end of this year, as the normalization of monetary policy gets underway.

The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. The extraordinary monetary policy accommodation that the Federal Reserve has undertaken in response to the crisis has contributed importantly to the economic recovery, though the recovery has taken longer than we expected. The unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed's target of 2 percent. Beginning the normalization of policy will be a significant step toward the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools.

I see absolutely no justification for this optimistic scenario. The Fed's belief (hope?) that inflation will soon normalize is based on macro models that have repeatedly proven to be inadequate over the past 6 years. And there is no reason to assume that interest rates will rise to a level that allows monetary policy to respond to recessionary shocks "without recourse to unconventional tools." BTW, part of the problem here is that the Fed views printing money as "unconventional," whereas it is actually normal monetary policy. Control of the monetary base is what the Fed does. It's how they control AD.

There are a number of effective methods of controlling AD when rates are at zero:

1. NGDP targeting, level targeting.

2. Price level targeting.

3. "Whatever it takes" QE, enough to target the forecast.

4. Negative IOR

The Fed has adopted none of these techniques, and seems unaware that anything is wrong, that its "conventional" techniques simply won't work in the 21st century.

I was also concerned by this suggestion of mission creep:

As discussed in the FOMC's statement titled Policy Normalization Principles and Plans, which was published following the September 2014 FOMC meeting, we will use the rate of interest on excess reserves (IOER) as our primary tool to control the federal funds rate.16 We also plan to use an overnight reverse repurchase agreement (ON RRP) facility, as needed. In an ON RRP operation, counterparties may invest funds with the Fed at a given rate, possibly subject to a cap on the aggregate amount invested. Because ON RRP counterparties include many money market participants that are not eligible to receive IOER, the facility can be a powerful tool for controlling money market interest rates. Indeed, testing to date by the New York Fed suggests that ON RRP operations have generally established a soft floor for such rates.17

However, an ON RRP program also has certain risks. For example, a large and persistent program could have unanticipated and adverse effects on the structure of money markets. In addition, in times of stress, demand for the safety and liquidity of ON RRPs with the central bank might increase sharply, potentially exacerbating disruptive flight-to-quality flows.18 To mitigate these risks, the FOMC has agreed that it will use an ON RRP facility only to the extent necessary and will phase it out when it is no longer needed.

In addition, the Fed has been discussing and testing other supplementary tools, such as term reverse repurchase agreements and term deposits, and can use these tools as needed to help support money market rates.

The Fed does not need additional tools; they need to use their already adequate tools more effectively. They do not need to put more emphasis on controlling interest rates; they need to instead let the markets determine interest rates. The Fed's job is to stabilize the monetary system.

Many readers will inevitably view this post as being hopelessly naive. They'll say the Fed caters to special interest groups, and doesn't care what academics thinks. All I can say is that you are wrong. Back in 1980 you would have ridiculed academic suggestions that the Fed adopt inflation targeting. You would have said political pressure made that impossible, that the Fed was biased towards inflation to bail out this group or that, or perhaps to create jobs. And of course you would have been wrong. The Fed did decide to target inflation, and succeeded in bringing it down to an average of 2% since 1990. That doesn't happen by accident, it happens because the Fed takes the best ideas from the world of monetary research, and adopts them. It happened before and it WILL happen again. That's why I keep blogging.

HT: Jim Glass

CATEGORIES: Monetary Policy


I never got around to reading the previous editions of Robert Shiller's Irrational Exurberance, but I've finished reading the new third edition cover-to-cover.


Rather than review the whole book, consider the single most convincing figure.  At first glance, it's easy to miss the point.

Shiller begins with an obvious observation: "The dividend value is extremely steady and trend-like, partly because the calculations for present value use data over a range far into the future and partly because dividends have not moved very dramatically."

So what?  Here's what:
[S]tock prices appear too volatile to be considered in accord with efficient markets.  Assuming that stock prices are supposed to be an optimal predictor of the dividend present value, then they should not jump around erratically if the true fundamental value is growing along a smooth trend.
The next three sentences are truly profound:
Only if the public could predict the future perfectly should the price be as volatile as the present value, and in that case it should match up perfectly with the present value.  If the public cannot predict well, then the forecast should move around a lot less than the present value.  But that's not what we see in Figure 11.2. [emphasis mine]
By analogy, suppose you graphed actual temperature against predicted temperature.  Which should be more volatile?  Actual temperature, of course.  Predicted temperature should be heavily based on long-run average temperatures, which don't jump around much.  (Indeed, if you look more than ten days into the future, weather sites often just report historic means, putting zero weight on current weather).  Actual temperatures, however, are routinely surprising. 

Now ask yourself: In Shiller's figure, which line is analogous to actual temperature?  Actual present values of dividends, of course.  Then which line is analogous to predicted temperature?  Observed stock prices - the market's best guess of the present value of dividends.  Yet contrary to the basic logic of forecasting, the latter is jumpy even though the former is steady. 

This is a classic case of, "If you're not confused, you don't understand what's going on."  Shiller's attempts to resolve these puzzles leave me dissatisfied, but kudos to him for opening my eyes to the enormity of the oddity.


Scott Sumner

Hard Asia, Soft Europe

Scott Sumner

Former Singapore Prime Minister Lee Kuan Yew died today. He was famous for being dismissive of "soft" European welfare states. But was Lee as important as most friends and foes assume? I'm not sure; the other two small Chinese tiger economies (Hong Kong and Taiwan) also did very well. Perhaps his greatest impact was making Singapore more neat and tidy, not richer.

Many intellectuals view the US model as a sort of outlier, less soft than the European model. They talk as if the US is the only developed country that still doesn't have a big welfare state, and that still uses the death penalty. This discussion merely illustrates the ignorance, or should I say eurocentrism, of many western intellectuals. Here I'd like to suggest that the actual split is between Western Europe and East Asia with the immigrant societies being somewhere in between. I'll look mostly at developed countries, adding China for the sake of comparison.

Let's start with the death penalty. With some quick research I think I established that among developed East Asia only Hong Kong has abolished the death penalty. All the rest still have it. Western Europe has completely abolished the death penalty, whereas the immigrant countries have mostly abolished the death penalty (it still exists in parts of the US, and is on the books in Israel (although not currently used.)

Now let's look at which countries have a "get a job" attitude toward the unemployed. I'll use two metrics: government spending as a share of GDP, and the unemployment rate. My hypothesis is that the softer countries will spend more money on social programs, and end up with higher unemployment rates by making the condition less painful. Obviously government spending goes well beyond social programs, but in the modern world the two are highly correlated.

Country Gov./GDP Unemployment rate

China 28.4% 4.1%
Hong Kong 18.2% 3.3%
Japan 39.8% 3.4%
Malaysia 27.6% 3.0%
Singapore 17.6% 1.9%
South Korea 21.3% 2.7%
Taiwan 19.3% 4.2%

And here are the immigrant societies:

Australia 37.6% 6.4%
Canada 44.0% 6.5%
Chile 24.3% 6.1%
Israel 40.3% 5.9%
New Zealand 34.8% 5.6%
USA 36.9% 5.5%

Note that the US is a fairly typical immigrant society.

Europe has too many to list individually, but here are a few data points. The EU unemployment rate is 9.9%, far higher than the other two regions. If you focus just on Western Europe, only Ireland and Switzerland have government spending below 40% of GDP, and Austria, Belgium, Denmark, Finland, France, Italy and Sweden exceed 52% of GDP. Most of the rest are above Canadian levels, the biggest spender of the immigrant societies.

So my hypothesis is that the immigrant societies are a bit tougher than Western Europe. Perhaps this reflects cultural differences in the sort of people who migrated vs. those who stayed home. But it could also reflect lots of other factors. In the US the legacy of slavery plays a role, with the South being "tougher" than the rest of the country. Israel obviously has a very special history, while Chile is the richest of the Latin America group. I included Chile for comparison purposes, not because it "fit" particularly well. Ditto for Malaysia, which has a PPP per capita GDP around $26,000, and thus is a borderline developed country. China was included because I believe it will eventually become developed, and its size makes it important.

My other claim is that East Asia is much tougher than Europe. That "reframes" the US, which now looks "normal" on issues like the death penalty and the size of the welfare state. It is Europe and East Asia that are the extremes. The perception that the US is an extreme case may come from the fast that Western intellectuals simply don't take East Asia seriously. They tend to think in terms of crude caricatures:

Critics mock Singapore for being like North Korea or as "Disneyland with the death penalty", as William Gibson described it in 1993.

I don't recall the exact quote, but the great Simon Leys once suggested that 5000 years of Chinese history could be divided up into two types of periods.

A. Times when the status of the Chinese masses was little better than slaves.

B. Periods of turmoil, when the Chinese masses yearned for period A.

Singapore is changing, and will continue to change. But even so, it's not hard to see why many Chinese might see "Disneyland with the death penalty" as a positive first step.

So is toughness good or bad? Like many Econlog readers, I tend to have libertarian views, although I'm more moderate than some. So I view toughness as a mixed bag. I don't like the illiberal attitudes often associated with toughness, but do like the small government policies. For me the ideal setup is closer to Australia, or Washington (state)---fairly liberal on social issues, but opposed to high taxes. For international readers, Washington is the only liberal American state with no state income tax, and it has legalized pot and physician assisted suicide. Australia has a small government by western standards, and has legalized prostitution.

And in neither place is it illegal to chew gum.

PS. I am well aware of the fact that within regions like Europe the unemployment rate does not always correlate well with the size of government; there are many other factors involved. But I do think the three regional differences in unemployment are interesting, and these differences were there even before the Great Recession. Europe has had high unemployment for many decades. Indeed from soon after the time they created their huge welfare states.

PPS. The unemployment numbers would have looked quite different in 2009, but I'm more interested in the "natural rates of unemployment."

Update: Today I have my first opinion piece in the New York Times, on the strong dollar.



Bryan Caplan

Perfect Pedagogy

Bryan Caplan
When you were taught about perfect competition, what was the underlying interpretation of the model?

1. The model is a good approximation: Markets in the real world work about as well - and in roughly the same way - as the perfectly competitive model says.  Regulation is therefore generally counter-productive.

2. The model is a foil: Markets only work well if the model's numerous extreme assumptions hold, so markets in the real world are at best so-so.  Regulation is therefore generally beneficial, or even necessary.

3. The model is a special case: Markets work well when its assumptions hold, but the various forms of "imperfect" competition work well when the perfectly competitive assumptions are violated.  Regulation - including regulation to make actual markets better match the perfectly competitive assumptions - is therefore generally counter-productive.

Take lectures, assigned readings, and homework into account when you answer.  Please state the best of these three response options in the first sentence of your comment before elaborating or proposing alternative interpretations. 

Bonus: If you've ever taught the perfectly competitive model, what underlying interpretation did you convey to your students?


This Wednesday I'm presenting my preliminary work on "The Selfish and Social Returns to Education" here at the Fairfax campus of GMU.  Open to the public. 

Location: Carow Hall

Time: Lunch at 11:45, Talk from 12:00-1:15

I'm trying out a new system (inspired in part by Dan Klein) where I talk without interruption for the first 50 minutes, then take all questions during the remaining 25 minutes.  This handles the aggravating tendency of the audience to interrupt the flow of the talk for questions that the speaker planned to address in due time.

Hope to see you there! 


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