EconLog
Bryan Caplan and David Henderson

George Hilton, RIP

David Henderson

On August 4, while I was on my vacation, my beloved transportation economics professor, George Hilton, died. Co-blogger Art Carden has rightly singled out one of his best articles in a post earlier today.

Here are some of my reminiscences of that colorful character.

I arrived at UCLA in September 1972 to pursue a Ph.D. in economics. We were advised generally not to do an overload but to focus on taking the classes that would be tested in the core exam. My fellow Canadian, Harry Watson, and I were in a hurry and wanted to take not only the core exam the next May but also a field exam in a specialty. I chose Industrial Organization (IO) and had the benefit of taking Sam Peltzman's 2-course sequence in IO. Harry took monetary theory.

But somehow we had heard about George Hilton. We learned very quickly, from body language and comments by other faculty, that he was not thought of as a star, but he had impressed Harry and me. If I recall correctly, our first encounter with him was that fall when he gave a seminar to faculty and Ph.D. students on his work on what a waste government spending on subways, including the recently built BART in San Francisco, was. He had a lot of funny lines delivered in his deadpan style, and Harry and I laughed uproariously. At times, we seemed to be the only ones laughing, which bothered us not at all. On that basis, and moving even further against our advisors' advice not to overload, we decided to take his transportation economics course, taught one night a week in the winter quarter. I remember going to class a number of evenings (Tuesday, I believe) and learning the truth about whether it rains in southern California.

The course was pitched to grad students and undergrad economics majors. So there were a lot of words and numbers, but few graphs and no equations. This meant that Harry and I had a comparative disadvantage: the undergrads were as good at memorizing as we were. Indeed, it's possible that we had an absolute disadvantage. I remember coming to class for the midterm and proudly asking two young attractive co-eds how many pounds of manure and urine a horse in NYC dropped daily, figuring I would stump them. "10.5," they chanted in unison, and I knew I was in trouble.

But so what? We learned a ton. We learned that even the proponents of BART in San Francisco, MARTA in Atlanta, and the METRO in Washington, D.C. were claiming that their subways would divert only about two years of secular growth in commuter traffic. We learned that streetcars in New York City saved New York from a huge and growing pollution problem--check out the 10.5 pounds above and do some multiplication. We learned that the Interstate Commerce Commission cartelized trucking. We learned that the Civil Aeronautics Board cartelized airlines. It's also from George that we got a positive view of work by the left-wing historian Gabriel Kolko, who himself died recently.

And all with that hilarious style and his classic expressions. Old horses that hauled cars were "fully depreciated." His comment on the banking cartel in Canada (he alleged) and the over expansion it had led to: "They have banks like we have gas stations." The issue of the Journal of Law and Economics that Art refers to was months late because the editors were behind. So, while Hilton covered the article in class, he didn't have a journal to send us to. He referred to co-author Ross Eckert of USC as going out in the hall every day to look for the mailman's delivery of the Journal. In a side discussion of drug legalization, Hilton said, "Of course, some people would be addicted. I'm addicted to Baskin-Robbins Thirty-One Flavor." On long-term consequences of drugs, he pointed out that one of main consequences of heroin use was constipation. My friend Harry remembers him saying that heroin sellers ought to be free to sell heroin in vending machines.

Harry and I lapped all this up, laughing uproariously when George belted these things out. I think I sensed in his eyes a twinkle of appreciation of our appreciation.

Another one I remember is George's comment when Harry and I expressed surprise that he ate Chinese food five times a week: "Chinese people eat Chinese food every day."

One evening George showed up a few minutes late for class. He explained that he had learned earlier that his mother had been hit by a car. When we asked him the next week how his mother was doing, he answered, deadpan: "Both the doctor and the lawyer are happy."

George was a real character--and a real economist.

CATEGORIES: Obituaries , Regulation

   


In response to my recent blogging about Uber and Lyft, Daniel Klein sent me this paper (gated by JSTOR) by Ross Eckert and the recently-deceased George Hilton.

It's a fascinating story of rent-seeking special interests (electric streetcar and railway companies) seeking to maintain regulatory insulation from competition and maintain a "level playing field" as they were obligated to help pay, in some places, for things like street lighting and road paving.

If you have access to JSTOR, it's well worth your time. The same arguments people are offering for "why we need to regulate Uber and Lyft" are the same arguments people used to shut down municipal jitney services a century ago. As they say, those who don't know history are doomed to repeat it. Many cities are on the cusp of repeating the early 20th century's mistakes.

Of course, there's still a knotty problem here. How do we help ensure that firms aren't subsidizing their competitors? If I were a streetcar company paying to pave and light the streets, I'd be a little upset that my competitors didn't have to play by the same rules, just as a brick-and-mortar restaurant might be upset if they had to pay licensing fees and submit to regular health inspections while the food truck just down the block isn't regulated in the same way.

So what can we do about it? I have a few ideas, but I'm interested in your answers first.


   


The Case Against Education's chapter on the selfish return to education runs over sixty pages.  Since I suspect that even eager readers may skim all the tables, I end with practical advice in plain English.  Note: Nothing in this section hinges on signaling, because signaling reduces education's social return but not its selfish (or "private") return.


Practical Guidance for Prudent Students

Teachers hate when students groan, "Can't you just tell us the answer?"  For academics, a short, sweet solution is indecent unless clothed in a thorough explanation.  For educational decisions, however, the stakes are so high that I'm willing to be indecent. 

But first, a caveat.  Since my calculations include non-monetary values, my advice is stronger than it sounds.  If I opine, "Type X students shouldn't go to college," I'm not saying that "Type X students shouldn't go to college unless they really like school."  I'm saying "Type X students shouldn't go to college even if they do really like school."  Buying a beach house on the verge of collapse is ill-advised, even if you love the ocean and can't afford better. 

Broad-stroke advice rubs many people the wrong way.  The world is full of chance, and every individual is unique.  Still, using these banal facts to avoid giving definite counsel is a cop-out.  Although no strategy is foolproof, and every generalization has exceptions,  some educational strategies really are better than others.  Here they are.

Go to high school unless you're a terrible student.  High school is a good deal for students of almost every description.  On the first day of high school, Excellent, Good, Fair, and even Poor Students can count on a Degree Return of at least 5%.  Since Poor Students by definition fit the profile of the typical dropout, the decision to drop out is typically a mistake.  The key insight: Uncredentialed, inexperienced, full-time workers earn low salaries, so teens can afford to bet on their own academic success even if they usually fail.

The high school payoff remains healthy even in bleak scenarios.  While school is less fruitful for confirmed bachelors, Poor Students, and people who hate sitting in class, a male Poor Student who rules out marriage and hates school has a Degree Return of 4%.  Should anyone skip high school in favor of a low-skilled job?  Yes.  Almost a quarter of us are worse than Poor Students.  If you're in the bottom 10-15% of the academic pecking order, your graduation odds are so slim that you should quit school and start work.  And whatever you do, don't bother with a GED.  It may sound like a good middle way, but in practice, its main function is to tell employers, "I have the brains but not the grit to finish high school."

Go to college only if you're a strong student or special case.  College is a a good deal for Excellent and Good Students who follow two simple rules.  First, pick a "real" major.  STEM is obviously "real"; so are economics, business, and even political science.  Second, go to a respected public school.  It probably won't charge list price, and even if it does, you usually get your money's worth.  If you stray far from these rules, you're likely to get burned.  Even Excellent Students should think twice before paying list price for private school or pursuing a fine arts degree.  Does Gothic architecture or a career in the arts really mean the world to you? 

For weaker students, college is normally a bad deal.  If you're a Fair Student, go only if you're a special case.  Will you major in something like engineering?  Did an elite school miraculously offer you a cushy scholarship?  Are you a women who firmly plans to marry?  Then despite your spotty academic record, college may be for you.  Otherwise, skip college and get a job.  Poor Students, finally, should not go to college, period.  Filling their heads with hope because a Nobelist once got a bad grade is irresponsible.  Statistically speaking, the "easy" majors Poor Students have a prayer of surviving aren't worth the seven odd years they need to finish. 

Don't get a master degree unless the stars align.  On the day they start a master's degree, even Excellent Students can expect a lousy Degree Return of 2.6%.  You should enroll, then, only if you have a great reason - or several good reasons - to believe you'll beat the odds.  

For starters, your academic ability needs to be better than Excellent.  Failure in graduate programs is so prevalent that only the top 5-10% of the population can confidently expect to cross the finish line.  Field also matters enormously.  While data on graduate earnings by subject are scarce, there can be little doubt that engineering, computer science, and economics have far higher returns than fine arts, education, and anthropology.  The latter degrees only make sense if compared to your fellow masters students, you're a gushing fan of your subject.   For women, finally, marital plans are also crucial.  As long as she's an Excellent Student, the master's is very good deal for the woman who marries, but a lousy deal for the woman who stays single. 


My counsel rubs many the wrong way.  Some dismiss it as "elitist," "philistine," or "sexist."  The correct label is candid.  It's not my fault the rewards of education hinge on graduation.  It's not my fault graduation hinges on past academic performance.  It's not my fault fine arts degrees pay so poorly.  It's not my fault married women profit far more from education than single women.  I am only a messenger.  My job is to honestly report the facts, especially unwelcome facts of great practical importance.

The most common visceral reaction to my advice, however, is to accuse me of hypocrisy.  "Sure, he advises other people's kids to think twice before they go to college.  But he'd never say that to his own kids."  They don't know me.  I advise my kids the same way I advise anyone else: Tailoring my message to the student.  I learn their academic track record, motivation, intended field of study, gender, marital plans, and so on.  Then I tell them how various educational paths typically pan out for people who fit their profile.  This is no reason to shoot the messenger - or the messenger's children.  My first two sons are outstanding students interested in economics, so of course I'll urge college.  My younger two have yet to start school, so the jury is still out.  If either turns out to be a C student, I will gently but emphatically advise them to find a job right after high school. 

Finally, none of my recommendations assumes that human beings base their educational decisions on careful calculations of the return to education.  Quite the opposite.  If human beings based their educational decisions on careful calculations of the return to education, they wouldn't need my advice because they'd already be following it!  My assumption, rather, is that our educational decisions are deeply corrupted by ignorance, inexperience, conformity, and pride.  My goal is save readers time, money, and grief by rooting out - or at least curbing - this pervasive corruption.

Update: Implied urban legend about Einstein's academic record fixed.  Thanks!


   


When supply is demand

Scott Sumner

In order to do good economic analysis, it is important to distinguish between supply and demand shocks. Commenter SG pointed me to this curious post by Paul Krugman:

For those new to or confused by the term, secular stagnation is the claim that underlying changes in the economy, such as slowing growth in the working-age population, have made episodes like the past five years in Europe and the US, and the last 20 years in Japan, likely to happen often. That is, we will often find ourselves facing persistent shortfalls of demand, which can't be overcome even with near-zero interest rates.

Secular stagnation is not the same thing as the argument, associated in particular with Bob Gordon (who's also in the book), that the growth of economic potential is slowing, although slowing potential might contribute to secular stagnation by reducing investment demand. It's a demand-side, not a supply-side concept. And it has some seriously unconventional implications for policy.


SG wondered why slowing population growth is not an adverse supply shock. Of course it is an adverse supply shock, more specifically it causes the vertical LRAS curve to shift right more slowly, or even move to the left.

Krugman's a smart economist, and certainly knows this. So why does he consider it a demand shock? Because under certain policy regimes an adverse supply shock can shift AD to the left. If you are foolishly targeting interest rates, as the Keynesians advocate, then a reduction in population growth will cause the Wicksellian equilibrium interest rate to fall relative to the target interest rate, and this will depress NGDP growth. If you are foolishly targeting a monetary aggregate, as older monetarists suggest, it will reduce NGDP by reducing velocity (due to lower nominal interest rates.) If you are foolishly targeting inflation, as the Germans advocate, then an adverse AS shock forces the central bank to tighten money and reduce AD.

On the other hand if you sensibly target NGDP, as market monetarists advocate, then a supply shock such as slower population growth will not impact AD at all. With sound monetary policies all of macroeconomics becomes much easier to understand. The book Krugman touts in his post is full of arguments that are almost incomprehensible, because you can't tell whether the author is talking about a supply-side problem that cannot be addressed with monetary stimulus, or a demand-side problem that is nothing more than monetary policy failure.

In a world of NGDP targeting, level targeting, internet macroeconomics debates would be 100 times more transparent. People would stop talking past each other. The relevant concepts would be clear.

PS. I have a related post at MoneyIllusion.


   


Paul Krugman writes:

the attack on Obamacare depended almost entirely on lies, and those lies are becoming unsustainable now that the law is actually working. No, there aren't any death panels; no, huge numbers of Americans aren't losing coverage or finding their health costs soaring; no, jobs aren't being killed in vast numbers. A few relatively affluent, healthy people are paying more for coverage; a few high-income taxpayers are paying more in taxes; a much larger number of Americans are getting coverage that was previously unavailable and/or unaffordable; and most people are seeing no difference at all, except that they no longer have to fear what happens if they lose their current coverage. [emphasis mine]

and:
Many of us argued all along that the right's chance to kill reform would vanish once the program was actually in place; the horror stories only worked as long as the truth wasn't visible. And that's what seems to be happening.

This is from "Beyond the Lies," August 19, 2014.

In other words, the whole idea of "death panels," panels that would say no to certain medical procedures for people on Medicare, is, according to Paul Krugman, a horror story.

By the way, this is not my view: I think it makes sense for Medicare to say no to paying for various procedures as long as the government leaves people free to spend their own money. In other words, I do advocate "death panels," properly understood. And I don't see them as horrible.

And guess who agrees with me, or at least, who agreed with me in 2013. That's right. In a speech in a Washington synagogue, Krugman advocated death panels. (See here, from about 2:04 to about 2:23.)


   


Have you seen this sign in your doctor's office? It reads, "One problem per visit, please." An editorial in the Canadian Medical Association Journal says this sign is popping up in the offices of some family physicians.
This is from W. Gifford-Jones, M.D., "It's only one problem, but it's a big one," Winnipeg Free Press, January 17, 2009.

I was in Winnipeg last week to interview my first mentor, Clancy Smith. He mentioned that it is increasingly common for doctors to have signs in their waiting room telling patients that they are allowed to mention only one ailment per visit. Clancy said that he had heard of one sign that told patients that if they mentioned more than one, the appointment would be ended immediately. I told my wife about it, who found the link above.

Why does this happen? The government has a fee schedule that pays doctors for specific problems handled. I'm guessing that if they have a patient for an appointment, the doctor can name only one problem on the form that generates the payment.

For my chapter on Canada's rationing by waiting, see David R. Henderson, "The Inefficiency of Health Care Rationing--and a Solution," in Steven Globerman, ed., Reducing Waiting Times for Health Care: What Canada Can Learn from Theory and International Experience.

UPDATE: A message from a doctor friend causes me to think that I didn't make my point clearly. My point is that doctors can charge for only one thing and, therefore, want the patient to make multiple appointments to maximize charges.


   


Suppose you have a ne'er-do-well cousin.  A long-term alcoholic and drug addict, he's been arrested about thirty times - though never convicted of a felony.  One day he comes to your door, and tells you a largely accurate history of his troubled life, from childhood to the present.  He admits that many of his troubles are his own fault, and accepts responsibility for them.

Then, he hits you up for money - as he's done many times before.

How do you react?  If you're like most people, you'll feel a blend of frustration, impatience, and pity.  Sure, he came from a broken home.  Sure, he's had bad luck.  But if these were his only problems, he'd wouldn't need your help.  And you've helped him so many times already.  Looking at your cousin fills you with sadness, but the thought of bailing him out for the umpteenth time fills you with disgust.

Trapped between your conflicting negative emotions, you hesitate long enough for a nosy neighbor to wander over and ask, "What wrong?"  Before you can stop him, your cousin repeats his story.  The nosy neighbor's face turns red with anger - at you.  He reads you the riot act.  "How can you be so lacking in empathy?!" he asks.  "You were born on third base, yet you fault your cousin for failing to hit a home run!  You sicken me."

Should you help your cousin?  Reasonable people are likely to disagree.  But whatever you'd decide, your nosy neighbor is plainly and completely out of line.  Yes, there are some plausible reasons to say yes to your cousin.  But there are also plenty of plausible reasons to say no! 

It's tempting to ask your neighbor to show some empathy for your awkward position.  But what's awful about Mr. Nosy is that he fails to show you something more basic: tolerance.  Instead of preaching at you, your neighbor should admit that there are decent arguments on both sides, and butt out.

At the individual level, I doubt many people will dispute my perspective.  Why bring it up?  Because in his recent piece on poverty, Nicholas Kristof perfectly plays the part of society's nosy neighbor.  After acknowledging the connection between poverty and bad choices, Kristof lashes out at people who oppose a renewed war on poverty for their lack of empathy:
Too often wealthy people born on third base blithely criticize the poor for failing to hit home runs. The advantaged sometimes perceive empathy as a sign of muddle-headed weakness, rather than as a marker of civilization.
And:

This crisis in working-class America doesn't get the attention it deserves, perhaps because most of us in the chattering class aren't a part of it.

There are steps that could help, including a higher minimum wage, early childhood programs, and a focus on education as an escalator to opportunity. But the essential starting point is empathy.

If you had a ne'er-do-well cousin, I'm almost sure Kristof would be a tolerant man.  He'd acknowledge the moral complexity of the situation.  He'd admit that you might be right to refuse your cousin.  Whatever you decided, he'd keep his opinion to himself unless you explicitly requested his counsel.  My question: Why can't he be equally tolerant of people who say that "the crisis in working-class America" is not their fault and not their problem?  


   


Walmart to the Rescue

David Henderson

While away on my vacation in Canada, I missed this story about Walmart and health care. Here's an excerpt:

After years of "Will they or won't they?" discussion, Walmart is making its long-awaited move into delivering primary care: The retailer has quietly opened a half-dozen primary care clinics across South Carolina and Texas, and plans to launch six more before January.

But didn't Wal-Mart already have a presence in health care? Yes, the article explains, but his goes further:
So why fuss over a handful of new clinics?

Because unlike those retail clinics -- which Walmart hosts through leases with local hospitals, resulting in mixed success -- these new clinics are fully owned by the company and branded explicitly as one-stop shops for primary care.
Because the clinics will be open longer and later than competitors: 12 hours per day during the week and another 8-plus hours per day on weekends.


Notice also that one thing South Carolina and Texas have in common is that neither has expanded Medicaid coverage as the ObamaCare law tried to make them do until the Supreme Court put a stop to it:
"Both Texas and South Carolina have primary care access problems, [but] interestingly, the access problem is specifically related to cost," she [Alicia Daugherty] says. "And neither state is expanding Medicaid, so both will continue to have a group of uninsured who will prioritize cost when seeking care. Obviously, both also have high rates of obesity, smoking, chronic conditions, and poverty."

I often hesitate to make predictions, but here's one: the wait at Walmart will be substantially shorter than the wait that Medicaid patients have in those same states.

This will be interesting.


   


Our Poverty and Theirs

Bryan Caplan
I regularly praise Nicholas Kristof's courageous essay on Third World poverty.  While First World immigration policies and Third World economic policies cause enormous harm, the global poor exacerbate their woes with grotesquely irresponsible behavior.  Kristof:
[I]f the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children's prospects would be transformed...

...Here in this Congolese village of Mont-Belo, we met a bright fourth grader, Jovali Obamza, who is about to be expelled from school because his family is three months behind in paying fees...

...The dad, Georges Obamza, who weaves straw stools that he sells for $1 each, is unmistakably very poor. He said that the family is eight months behind on its $6-a-month rent and is in danger of being evicted, with nowhere to go.

The Obamzas have no mosquito net, even though they have already lost two of their eight children to malaria. They say they just can't afford the $6 cost of a net. Nor can they afford the $2.50-a-month tuition for each of their three school-age kids.

"It's hard to get the money to send the kids to school," Mr. Obamza explained, a bit embarrassed...

In addition, Mr. Obamza goes drinking several times a week at a village bar, spending about $1 an evening on moonshine... almost as much as the family rent and school fees combined.

I asked Mr. Obamza why he prioritizes alcohol over educating his kids. He looked pained.

Other villagers said that Mr. Obamza drinks less than the average man in the village...

I was disappointed, then, to learn that Kristof's view of American poverty is rather fatalistic:

One delusion common among America's successful people is that they triumphed just because of hard work and intelligence.

In fact, their big break came when they were conceived in middle-class American families...

Kristof is far more forgiving of Rick Goff of Oregon than Georges Obamza of Congo:

Rick acknowledges his vices and accepts responsibility for plenty of mistakes: He smoked, drank too much for a time and abused drugs. He sometimes hung out with shady people, and he says he has been arrested about 30 times but never convicted of a felony. Some of his arrests were for trying to help other people, especially to protect women, by using his fists against bullies...

A generation or two ago, Rick might have ended up with a stable family and in a well-paid union job, creating incentives for prudent behavior. Those jobs have evaporated, sometimes creating a vortex of hopelessness that leads to poor choices and becomes self-fulfilling.

There has been considerable progress in material standards over the decades. When I was a kid, there were still occasional neighbors living in shacks without electricity or plumbing, and that's no longer the case. But the drug, incarceration, job and family instability problems seem worse.

Why can't people like Rick escape from poverty through old-fashioned puritanism?  Kristof just changes the subject: 

Obviously, some people born into poverty manage to escape, and bravo to them. That tends to be easier when the constraint is just a low income, as opposed to other pathologies such as alcoholic, drug-addicted or indifferent parents or a neighborhood dominated by gangs...

Yes, these men sometimes make bad choices. But just as wealthy Americans inherit opportunity, working-class men inherit adversity.

The knee-jerk response is to demand consistency: Either blame the poor - Americans and African - for their bad choices.  Or excuse the poor - Americans and African - on account of their bad upbringing. 

But the mere demand for consistency ignores a key fact: From cradle to tomb, Africans endure far harsher conditions than Americans.  Poor Africans grow up physically malnourished.  They have little exposure to sober bourgeois habits - even in school.  Once they enter the labor market, their prospects are grim unless they somehow escape to the First World.  Poor Americans, in contrast, are almost never hungry.  Their teachers expose them to the bourgeois way of life.  And in the labor market, poor Americans earn incomes that poor African migrants bet their lives to enjoy.

Even if you maintain that African and American poverty are both forgivable, then, you should still concede that African poverty is more forgivable than American poverty.  While the African poor could sharply improve their lives with better choices, even perfect choices are not a reliable way for them to escape poverty.  Poor Americans, in contrast, can reliably avoid poverty with basic prudence: finish high school, work full-time, delay child-bearing, and stay sober.  "I couldn't escape poverty even if I tried" has to be more forgivable than "I could have escaped poverty if I tried, but I sadly wasn't raised to try."

P.S. Critics often ask me, "Who cares who's to blame for poverty?  How does that help us fix the problem?"  My deep response is to reject their moral monomania.  Questions of moral blame are intrinsically interesting and important even if better answers won't help us 'solve problems.'" 

My direct response, though, is two-fold.  At minimum, blame provides a compelling criterion for the rationing of limited charity.  If we can only help 100,000 people, we should prioritize the morally blameless, and put unrepentant libertines at the bottom of the list. 

In addition, though, blame helps us correctly identify "problems."  If your suffering is entirely your own fault, the main "problem" is not your suffering.  The main problem is that the guiltless may feel guilty for failing to help you.  Thus, if a woman catches her husband cheating and resolves to divorce him, the morally relevant danger isn't that the husband will feel sad, but that the wife will feel sorry for him.  If your habitual drunkenness destroys your family and career, the morally relevant danger isn't that total strangers fail to help you, but that the fallout of your vices will weigh on the consciences of innocent passersby.


   


A very brief Twitter exchange from last week:

I was jesting, but only sort of. As a friend has suggested, Birmingham's push for the Democratic National Convention is probably part of a larger strategy to convince area voters that we could get such "big time" events if we only had a domed stadium (my explanation for why Birmingham shouldn't build one is here).

If the city is going to spend $250,000 to stimulate the local economy--or to try to bring in a Big Fish project like the DNC--I wonder if they couldn't spend the money better. Why might scattering one million quarters around town be a better idea?

The amounts are small enough that it won't encourage a ton of rent-seeking, particularly by people with a very high opportunity cost of their time. If it's not announced, it likely won't encourage people to spend a lot of time hunting for quarters. There are likely to be salutary distributional consequences, as well. I'm less likely to bend down and pick up a quarter than I am to bend down and pick up ten bucks. It is more likely to be worth a poor person's time to bend down and pick up the change.

By that token, if it is announced, it might produce the salutary effect of putting more eyes on the streets. Could we expect lower crime rates?

It might also encourage the city's homeless population to spend more time scavenging and less time asking people in Five Points and other parts of town for change.

If we want to get all Keynesian, quarters are pretty easy to spend.

So I'll put it to the readers. Suppose you have to use $250,000 of taxpayer money to stimulate the local economy. Tax refunds aren't an option. How do you do it?


   


Standard monetary theory says that changes in the money supply and prices are neutral under certain circumstances, such as in the very long run, and also after monetary reforms where all contracts are automatically adjusted to the change in the money supply. In the short run, monetary inflation may have real effects, partly due to the fact that nominal hourly wages are sticky. If workers have money illusion they may confuse nominal and real wage changes.

How about grade inflation? Does that show a similar pattern? Here is C.W. at Free Exchange:

Some colleges have pursued anti-inflation policies of which Paul Volcker would be proud. In 2004 administrators at Wellesley College, a prestigious, women's-only university, mandated that in introductory and intermediate courses (with at least ten students) the average grade could not exceed a B-plus, equal to a grade-point average of 3.33. Three economists look at the impact.

Only courses in high-grading departments in the humanities and social sciences needed to change grading practices: science subjects were unaffected by the policy. That gave the economists a good "control", allowing for a meaningful analysis of the policy.

What happened? Previously generous departments became more tightfisted. Students were 14% points less likely to get an A in the treated departments (though they were no more likely to get a C-minus or below). Lots more Bs were given.


OK, so Wellesley adopted a contractionary, or "tight grade policy." And grade deflation set in for some departments. Before considering the results, let's consider what might have happened. One possibility is that the policy had no real effects. People saw through the lower grades and realized that Wellesley students were doing just as well, it's just that standards had tightened up. Students in the 85th percentile would be perceived as doing just as well, despite lower nominal grades. In fact, that's what I would have expected to happen. But I was wrong:

More interestingly, the cap changed students' course choices. For courses in the treated departments, enrollment fell by about 19%. Students were 30% less likely to major in one of these courses.
So Wellesley's tight grade policy created a depression in the humanities industries departments, just as a "grade illusion" proponent might expect.

I suppose there will be some crazy Austrian readers who complain that I've got it all wrong. It's not the depression that's the problem, it's the preceding humanities boom. The grade deflation is merely wringing the excesses out of the economy academy. The Economist continues:

These results are positive and other universities can learn from them. Before the policy the difference between the profligate and the parsimonious departments could exceed 0.6 grade points. The hope of higher grades could have encouraged some students, who would really have preferred to study sciences, to move to humanities. But by grading more uniformly, Wellesley removed this perverse incentive. Universities should take note and encourage their students to study what they find intrinsically rewarding; not what will give them bloated grades.
OK, so the Austrians are right in this case. But I still think they are wrong about 2006-09.

PS. And I still think if grade inflation were tackled on a nationwide basis the effects would be neutral. But who really knows?


   


Causation

David Henderson

Which cause should we focus on?

One of my favorite editorial writers for the Wall Street Journal, Mary O'Grady, writes (in "A Terrorist Big Fish Gets Away" in the August 11 print edition):

America's voracious appetite for illegal drugs has allowed violent political actors to create powerful transnational criminal organizations.

That statement is true but potentially misleading.

Notice that the subject of the sentence is "America's voracious appetite for illegal drugs." This is the cause. But what if Americans had that same voracious appetite for those drugs but the drugs were legal? Then, as Mary well knows because she has written some excellent editorials on the subject, that appetite would not "create powerful transnational criminal organizations."

So what would I want her to focus on as the relevant cause of the criminal organizations? The illegality of the drugs. Here's my rewrite:

Because the U.S. government has made many drugs illegal but Americans still want those drugs, organized criminals provide them.


   


Here is The Economist:

IF ABENOMICS means anything, it is the promise of the prime minister, Shinzo Abe, to restore healthy economic growth to Japan and end years of deflation. To that end the central bank, sloughing off its traditional caution, has flooded the economy with money and encouraged the yen to slide. Mr Abe has wooed investors with a resolutely upbeat message about Japan's prospects. As a consequence, the stockmarket is up by three-fifths since Mr Abe came to office in late 2012, and even property prices in Tokyo are rising after years in the doldrums. . . .

On the one hand, the labour market is tight to bursting. That is partly because of strong demand for workers in, for instance, construction. But it is also because the population is shrinking fast. The number of Japanese is predicted to fall from 127m today to under 90m by 2060. Every year the working-age population falls by about 1m. Today unemployment stands at just 3.7% (dream on, Spain).

Yet despite a tight labour market, real wages continue to tumble (see chart). In May they fell by 3.8% compared with a year earlier--the steepest decline in years. That is despite the government's use of moral suasion to get companies to hike basic pay in annual wage negotiations with unions this spring. Officials marched into boardrooms to demand higher pay for workers.
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That reminds me of when the New York Times ran a headline saying prison populations were soaring "despite" a fall in the crime rate. Market monetarists would say there is no "conundrum" to be explained. Tight labor markets do not cause rising wages---the relationship between wages and employment depends on whether the economy is hit by a demand shock or a supply shock.

In this case, the BOJ did some monetary stimulus in 2013. This caused Japanese prices to start rising. Since nominal wages are sticky in the short run, rising prices led to lower real wages. Real GDP rose and unemployment declined.

Of course if you look at the world through Keynesian glasses then this all seems very confusing. Many economists have trouble understanding why prices rose rapidly in the US during 1933, "despite" high unemployment.

It's also important to note that one should not make the opposite error, assuming that low real wages will always be associated with a strong labor market. In 1974, real wages in the US fell due to an adverse supply shock. And the unemployment rate rose sharply.

Never reason from a price (or wage) change. First ask what caused the price to change. Then it will all make sense.


   


I'm reading Liberalism. The Life of an Idea by Edmund Fawcett. I like the idea behind the book, which is providing a history of classical liberalism through vignettes of its great champions, but I have some problems with the underlying notion of liberalism. The authors considers "liberalism" very broadly, in its laissez faire and in its anti-market variety: by doing so, he inevitably waters it downs.

Fawcett does a good service by rediscovering names such as the great Richard Cobden, or Eugen Richter, or Paul Leroy Beaulieu, who are almost forgotten by the general public.

In one chapter, he deals with Marshall and Walras, presenting the latter as a champion of "free trade and free competition." I was rather surprised that he doesn't mention Vilfredo Pareto, Walras' successor in Lausanne. Pareto was far more of a libertarian, deeply influenced as he was in his youth by Frédéric Bastiat and Herbert Spencer.

In discussing the extensions of suffrage and thus "liberal democracy," Fawcett refers to Robert Michels, a German sociologist (although he taught economics) who ended up living and teaching in Italy. However, he doesn't mention either Pareto or Gaetano Mosca, both of whom equally contributed to elite theory more than Michels himself.

Fawcett doesn't want to make of liberalism an exclusively Anglo-Saxon story, and devotes much attention to German and French thinkers.

Italy was never home to a great classical liberal political movement, but had many remarkable classical liberal thinkers. To mention but a few, in the 19th century Francesco Ferrara was a major economic theorist, and the staunchest libertarian. Father Antonio Rosmini illuminated the intertwined relationship between liberty and property. Between the two centuries, Pareto wasn't the only important economist Italy housed. The Italians (from Maffeo Pantaleoni and Ugo Mazzola to Amilcare Puviani and Achille Loria) studied public finance in depth, perhaps because of the ever perilous conditions of Italian public finances. Some of these authors foreshadowed public choice and were well-known to the late James M. Buchanan.

In the 20th century, Luigi Einaudi was a very prolific and wise writer (now Palgrave is meritoriously publishing a few of his essays). Historian Guglielmo Ferrero has written a remarkable trilogy on political power and legitimacy. Legal scholar Bruno Leoni added much to an "Austrian" understanding of legal institution (see this beautiful article by Todd Zywicki at libertylawsite.org).

In more recent years, Sergio Ricossa, perhaps the only Italian economist who had some sympathy for Hayek and the Austrian school in the post WWII period, wrote a splendid essay on Keynes, Marx and "the end of economics", that would deserve to be more widely known.

Not for a nationalistic fetish, but it is somehow sad that all these great people are largely forgotten in the public conversation in the English language. Perhaps some initiative to revive the interest in their work is worth thinking about. Suggestions welcomed.

CATEGORIES: Book Club

   


I've gotten better about this in recent years, but earlier today I was sitting in an airport with no cash. That's normally not a problem as I use credit cards for almost everything, but it does become a problem where I'm in a situation where cash tipping is appropriate. I fished four quarters out of my briefcase, and while it will do tipping with change is almost an imposition as much as it's a tip.

This got me thinking: how much easier would life be if I could just tip with Bitcoin or Dogecoin or another cryptocurrency simply by tapping someone's phone or by scanning a QR code on their nametag or by combining the two with a fist bump or something? Or what if I could do something like that with US dollars using PayPal or a Square or something?

Might this be one of the main ways cryptocurrencies gain wider acceptance? Or would it only work as a patch until it became much easier to do it with USD or Euros or another major currency?

Here's a Quartz article on tipping with cryptocurrencies. Here's a January article I wrote on Bitcoin for DepositAccounts.com.

Here's one potential salutary effect that could make great dissertation fodder for an aspiring health economist: lower disease transmission. Currency is notoriously filthy, and making transfers purely electronically would make the world cleaner and less germed-up than it is today.

CATEGORIES: Alternative Economics

   


Here's Tyler Cowen commenting on ECB policy options for addressing lowflation:

2. Nominal gdp targeting. In general I like this idea, but which ngdp gets targeted? Eurozone ngdp, presumably. But when you have multiple countries, individual countries can end up with insufficient nominal gdp even if the eurozone meets a well-specified target overall. (Given independent bank regulators, debt structures, fiscal authorities and the like, I view this as more serious than say the 50 U.S. states, which have a higher level of integration, most of all at the policy level.) How much of a guarantee is there that Portugal would reap expansionary benefits, given the private credit contraction in that country? The potential clustering of ngdp growth in some parts of the eurozone is another way of stating why the currency union wasn't a good idea in the first place. This is still much better than doing nothing, but as a monetary policy rule ngdp seems better designed for the single-country case.

A few comments:

1. The "which NGDP gets targeted" question is easy--you definitely target the overall eurozone. As an analogy, no one would advocate having the Fed target the NGDP of a particular group of states.

2. Of course that leads to the optimal currency zone problem, and I agree with Tyler that the eurozone is not an optimal currency zone. But it's also worth emphasizing that roughly 80% of the eurozone crisis is caused by insanely low NGDP growth overall (tight money) and 20% is caused by the one-size-fits-all problem.

3. Tyler's last sentence is true but perhaps slightly misleading. Yes, NGDP works less well in a multiple country setting, but that's probably equally true of inflation targeting. An NGDP target would have produced far superior policy during 2008-2014 than an inflation target. So the fact that the Europeans foolishly adopted a multiple country currency zone is actually an argument in favor of NGDP targeting.

3. A new and different inflation target. My current wish would be a new ECB mandate specifying a minimum core inflation rate of three percent for each of the largest countries in the eurozone, say France, Germany, Italy, and Spain. If any of these four countries seemed to be coming in under three percent inflation, the ECB would have to do more. And if need be, you could extend this rule through to more countries, with Malta and Cyprus probably at the end of that list.

Sumnerians should note this also might be the best way to actually meet an operational ngdp target for a fair number of eurozone countries. Note that I accept many of Scott's critiques of inflation rate targeting, at least on a theoretical level. The (only?) advantage of this policy is that citizens would know what it means. They would know they hate it, in the same way that say Americans hate higher gas prices. They would know this is a higher inflation policy and the ECB would know it could not spin it any other way. A fair amount of inflation and thus monetary stimulus would in fact result.

I strongly disagree with this. I can't emphasize enough that the average voter doesn't understand inflation targeting. They don't even have a clue. They think it has something to do with central banks trying to help shoppers by holding down the rate of inflation. Voters don't really understand monetary policy at all, indeed probably fewer than 5% even know what it is. (And no, "having something to do with controlling interest rates" is not an answer that shows they understand what it is.) Because they don't know what monetary policy is, it's best to think of public opinion in terms of outcomes. Europeans would prefer monetary policies that don't create depressions and banking crises and high unemployment to policies that do create depressions and banking crises and high unemployment, even if the latter case led to a 4% inflation rate, such as what we experienced during the last 5 years of Paul Volcker. When voters don't understand the issues, then it's best to think of them as simply wanting good outcomes. That's all. I refuse to believe that voters actually want outcomes that lead to a poor economy. Do European 60 year olds want policies where none of their 30 year old children can find jobs? Ask them that specific question; don't ask them about "inflation," with no distinction being made between supply-side inflation that lowers aggregate real incomes and demand-side inflation that raises overall aggregate real incomes. Even the Japanese elderly voted for Abe!

If you don't believe me, describe the actual, true, honest-to-God, "public opinion" if polls showed the following:

1. 90% oppose having the Fed try to raise inflation.
2. 90% support Fed policies that will lead to higher levels of incomes for Americans.

Say both polls are accurate. Then what is the "true" stance of public opinion? More or less monetary stimulus? The polls are about as meaningful as asking Americans if they agree with the Copenhagen interpretation of QM or the Many Worlds interpretation.

BTW, when ascertaining public opinion on something like a gas tax, it is important to include the counterfactual. Is it an alternative tax such as a higher income tax? Is it a cut in Medicare or Social Security? No repair of potholes? Tax increases NEVER happen in a vacuum. If you replaced the current US government with a set of ordinary private citizens, and then showed them the budget and asked them what to do, they would enact all sorts of policies that public opinion polls supposedly show that ordinary people oppose. I recall when the older Bush was President, polls showed that two thirds opposed his Medicare "cuts," but other polls showed that nearly 99% thought he was increasing Medicare spending too rapidly (when the polls discussed hypothetical options for percentage increases in Medicare spending.) So what did people actually believe?

There is no such thing as public opinion, just election outcomes.


   


Last night, I ended up spending an undue amount of time following the #Ferguson feed on Twitter and watching insanity unfold in real time. Here are a couple of papers I've written that might be relevant:

1. "Inputs and Institutions as Conservative Elements." Published version here, ungated and old SSRN version here.

Abstract:

This essay examines economic stagnation by extending the argument that capital goods and "conservative elements" to the analysis of social capital and institutions in the post-Reconstruction South. It is argued that the structure of social capital that developed in the South was inappropriate to the formal institutions that emerged as a result of the Civil War and Reconstruction. The tensions between institutions and social capital are examined in the context of racist lynching.

2. "The Political Economy of the Reconstruction Era's Race Riots." Published. Accepted version. 2010 WP version that's basically a different paper.

Abstract:

This paper analyzes the political economy of the Reconstruction Era's (1865-1877) race riots through the economic logic of rules. The central argument is that the race riots were not an inevitable outcome at the end of the Civil War, but instead occurred because of the absence of effective rules to raise the cost of engaging in violence. We offer a general framework of 'rule stickiness' to analyze the process of rule reform. This framework offers insight into the conditions influencing the enforcement costs of formal rules, as well as the likelihood of third-party enforcers effectively monitoring and punishing rule breakers. The Memphis race riot of 1866 is provided as a case study to illuminate the explanatory power of the theoretical framework.

Please email me if you would like PDFs of the published versions, and I'll be happy to send them to you.

CATEGORIES: Economic History

   


Here's Jonathan Chait:

And Reason's poll does yield many findings that align millennials more closely with right-wing economic thought than with left-wing economic thought. It does so through the use of crafted language. As noted above, Pew's poll asks a basic smaller-government-fewer-services/bigger-government-more-services question, finding millennial voters far to the left of older segments of the electorate. Reason asks the same question. But it also asks another version of this question, where respondents are asked if they want bigger government with high taxes or smaller government with low taxes. As often happens in polling, the change in wording produces a dramatically different answer, increasing the small-government share from 43 percent to 57 percent.
I can imagine three types of polls on big government:

1. Do you favor really high taxes?
2. Do you believe the government should provide lots of services?
3. Do you favor lots of government services paid for with high taxes?

The first would have clear conservative bias, and get an anti-government result. The second would have liberal bias, and get a pro-government result.

The third option seems the fairest. Of course if you simply ask people if they want lots of free goodies, they are going to say "yes." And if you ask them if they want to pay lots of taxes they will say "no."

And yet somehow Chait regards a relatively honest poll question, pointing out both sides of the "big government" question (tax and spend) is obviously biased, and simply asking people if they want lots of freebies is a fair question. Can someone explain Chait's reasoning to me?

CATEGORIES: Political Economy

   


I generally agree with Bryan that pacifism and appeasement are greatly under-rated in everyday life and especially in international affairs.

While I'm not sure machismo is the fundamental argument against pacifism and appeasement, I'm sure it plays a large role. In honor cultures, you're to do what your role demands, consequences be damned.

This scene from Gone With the Wind is one of my favorites, and I think it illustrates Bryan's point nicely.

CATEGORIES: moral reasoning

   


This will likely be my final post about Daniel Okrent's excellent book The Last Call: The Rise and Fall of Prohibition. This one, appropriately enough, is about the fall and some of the factors that led to it. There's a huge difference in the public reaction to alcohol Prohibition then and drug prohibition now. And the difference makes me somewhat pessimistic.

Okrent tells about prominent newspapers such as the Chicago Tribune running editorials going after the extreme practices of Prohibition enforcers. One editorial highlighted the "terroristic enforcement methods" of customs agents. Another told of a 12-year-old girl being sentenced to 30 days in prison for carrying a quart of liquor across a street in Greenville, South Carolina.

Here's another highlight about Tribune coverage:

An incident that took place just forty miles west of Chicago provoked the Tribune's editors to indulge in an orgy of coverage that in its frequency, its prominence, and its amplitude suggested that Armageddon was at hand. In the town of Aurora, local officers handed the Tribune (and the dozens of papers nationwide that glommed on to the episode) a story it rode for months. [DRH comment: bless them.] In the "peaceful green valley of the Fox River," the Tribune sighed, Mrs. Lillian DeKing "lay bleeding to death in the kitchen of her home." She had been shot "over a few bottles of liquor in the DeKing basement," the paper added. If her husband was a small-time bootlegger, his were hardly the sort of crimes that should bring to the family doorstep "six officers of the law, armed with sawed off shotguns, pistols, machine guns, bulletproof vests, and tear bombs."

Today, by contrast, when SWAT teams are sometimes called in just to serve warrants, such excessive methods are hardly questioned by editorial writers of major newspapers and, even if questioned, do not lead to a long series of editorials. Many people think of Radley Balko as being heroic--and he is--for exposing such methods. The good news is that he now writes regularly for the Washington Post. The bad news is that he is rare whereas in the late 1929s, people doing such exposes were much more common.

Here's more on the Tribune's coverage of the DeKing incident:

The paper capped its coverage with the creation of that tried and true guarantor of public sympathy, a fund for the education of twelve-year-old Gerald DeKing. Not only had little Gerald witnessed the tragic events, he had heroically grabbed his father's revolver and returned fire, hitting a deputy sheriff in the leg. Concerned Chicagoans responded to the Tribune's organ music, and the paper saluted them by publishing their names and the sums they had donated.

Tried and true? Really? If a newspaper today wrote about a kid shooting at a cop with a revolver, would people really be so quick to take the kid's side? Indeed, would there be an alive 12-year-old kid to write about?

There's a huge difference between then and now. I'm not sure about all the reasons. Here are my four, in no particular order:
1. The federalization of enforcement. A big factor in this was the federal Law Enforcement Assistance Administration, begun in 1968, the first major move after World War II, I believe, in which the feds started subsidizing local police in a major way. This subsidization, with the related attenuation of powers of locals to control their police, continues.
2. The para-militarization of police. Part of this is due to #1 above.
3. The fact that a huge percent of people had been regular drinkers just 10 years earlier. (The events above happened in 1929.) They didn't see themselves as criminals and so they sympathized with others whom they didn't see as criminals either.
4. The numbing out of Americans. We are inured to police brutality because it has happened for so long. Put a frog in a pot of hot water vs. put a frog in cold water and warm it gradually, etc. (Please don't bother commenting that this frog analogy is completely fictitious. I know that. I'm making a point about people, not frogs.)


   


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