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Spain voted on Sunday in a number of administrative jurisdictions. These were local elections, so one should not underestimate the local peculiarities that may have influenced the outcome. However, the big news is that the Popular (Christian-Democrats) and the Socialist Parties, gained respectively 27% and 25% of the votes in the national projection. This is not quite a debacle, but certainly something is changing in Spain, which has long been basically a two party system.

The newcomers are the centrists of Ciudadanos and Podemos, a strong thriving neo-Marxist party. Ciudadanos gained 6% of the votes nationally, which suggests that it might turn out to be the kingmaker in the coming national elections. There is no national projection for Podemos, because it decided to run with local coalitions and not under its own flag alone.

The BBC confidently states that "Spain enters a new political era". Their correspondent emphasized the anti-austerity nature of the vote and came to suggest that the fact that Barcelona went for Podemos suggests "many people in Barcelona care more about social policy than Catalan nationalist ambitions". Xavier Sala-i-Martin has retweeted a tweet which argues for the opposite view, taking into account all the municipal elections in Catalunya.

The Popular Party officials make the point that their party is still the first one at the national level, even though it lost more than two million votes from the previous municipal elections (in Spanish). El PaƬs stresses the need for a generational change of leadership in the Popular Party. Rajoy has been around for quite a while indeed: he began his political career in 1981; he was already a Minister in the Nineties, he lost elections in 2004 and 2008 to Zapatero, and won in 2011. Can he accept the idea of a change of leadership now? It doesn't seem very likely.

What many commentators are suggesting is that the balance of power is moving left. In actual fact, Podemos appear to be more "political" than other protest movements (such as the Five Star Movement in Italy), in the sense that they have already declared their willingness to enter into coalition with the more moderate socialists, whenever possible. They are strongly rooted in the left, so this is somehow a natural move. I'd be very happy for that, if I were a supporter of the socialist party, because this increases the likelihood of a coalition led by the PSOE in the next national elections, scheduled for September.

Particularly when assessing local elections, if you do not know very well the local environment you risk misinterpreting the signals.

The European elites (bureaucracy and incumbent politicians in member states) have an obvious incentive to preserve the status quo. Naturally they look with apprehension at signs of political instability and look for ways to balance them: their effort to stay put, as anything else, can have consequences that go far beyond their intentions. So, if it is highly probable that this election will be understood as a wake up call by folks in Brussels, how will it be interpreted?

Niall Ferguson commented on the recent British elections as the end of "Krugmania" in the UK. There will be many that will interpret the failure of Rajoy exactly in the opposite direction, calling for more "flexibility" and less emphasis on fiscal consolidation. This is very relevant, as the push comes to shove in Greece.

But there is another possible interpretation. People may recognize that the electoral appeal of parties like Podemos is greatly increased by complacency towards Athens. After all, if the Greeks can get away with whatever, why should not the Spanish too go for their version of Tsipras and Varoufakis?

So, getting tougher on Greece may actually remind Spanish voters that there are indeed no free lunches, not even in the European Union. Draghi's recent speech on the need for credible structural reform may somehow point in that direction.

I would bet that the first interpretation (it is time to stop with "austerity", whatever it is) will gain traction in the next few days. However, I am not sure it is good news for the future of the Eurozone.

CATEGORIES: Eurozone crisis


Bryan Caplan

Get Over Yourself

Bryan Caplan
I don't worry much about what other people think about me.  My detractors attribute this to a severe case of Asperger's, but I've got a competing two-part story. 

Part 1: We live in an evolutionarily novel anonymous society, so most people's opinions of me - good or ill - are inert.  As long as I please key actors in my immediate social network, I do fine.  Tyler Cowen's pro-Caplan stance has changed my life far more than the negative opinions of hundreds of my classmates.

Part 2: In any case, most humans are too self-obsessed to heed my eccentricities.  As I often say, "We'd worry far less about what other people thought about us if we realized how little they think about us at all."  In hindsight, the vast majority of the "hundreds of classmates" who seemed to dislike me were barely aware I was alive.

Part 1 seems indisputable, but Part 2's more in doubt.  Last week, though, I stumbled across a mid-sized psychological literature on the "Spotlight Effect" - and learned the research is strongly on my side.  Gilovich, Medvee, and Savitsky's seminal "The Spotlight Effect in Social Judgment" (Journal of Personality and Social Psychology 2000) snaps together three experiments to show that individuals underestimate their social invisibility:
The research presented here supports our contention that people tend to believe that they stand out in the eyes of others, both positively and negatively, more than they actually do. Participants in Study 1 who were asked to don an embarrassing T-shirt overestimated the number of observers who noted that it was the singer Barry Manilow pictured on the shirt. Participants in Study 2 who were asked to wear T-shirts bearing the images of figures of their own choosing from popular culture likewise overestimated the number of observers who noted the individuals depicted on their shirts. Contributors to a group discussion in Study 3 thought their minor gaffes and positive contributions to the session stood out more to their fellow discussants than they actually did. It thus appears that people overestimate the extent to which others are attentive to the details of their actions and appearance. People seem to believe that the social spotlight shines more brightly on
them than it truly does.
Fun corollaries:
if people overestimate the extent to which others are attentive to their momentary actions and appearance, it stands to reason that they will also overestimate the extent to which others are likely to notice the variability in their behavior and appearance over time. Perhaps the best example of this phenomenon is reflected in the widespread fear of having a "bad hair day." Clearly, the fear of having such an affliction is not simply that one's hair can be recalcitrant and that rogue strands of hair can sprout in the most unfortunate places--it is that other people will notice any such aberrations that arise. But the research on the spotlight effect suggests that this concern may be often overblown. The variability that an individual readily perceives in his or her own appearance is likely to be lost on most observers. To others, one's putative bad hair days may be indistinguishable from the good. This phenomenon is hardly limited to physical appearance, of course. Academics, who frequently deliver the same lecture numerous times, are often surprised to find that marked fluctuations in their own assessment of their performance (whether they "nailed" or "bombed" a talk) are not met by corresponding fluctuations in their audiences' reactions. The variability that one so readily sees in oneself--and expects others to see as well-- often goes largely unnoticed.
Followup evidence has been supportive, though note that much of it was conducted by the authors of the original research.  

Parting question: How famous do you have to get before the social spotlight becomes brighter than you imagine?  As far as I can tell, 10,000 Twitter followers isn't even close.


Dan Klein, with whom I've been arguing about designer babies lately, recently suggested that I post about an article I wrote for Reason 26 years ago: Henderson's Law of Heroic Movies.

The Introduction

"David, I rented a movie for tonight that looks interesting but I'm riot sure you'll like it. It's called The Milagro Beanfield War. Robert Redford directed it, and I think it's left-wing and antibusiness."
"Really?" I asked my wife, Rena. 'What is it about?"
"It's about these poor Chicano farmers in New Mexico or somewhere who steal water from a big business to irrigate their beans. The movie treats them as heroes."
"I bet they don't steal it," I beamed confidently. "I'll bet you that they just reclaim it after the big business, with the government's help, had already grabbed their water."
Rena looked at me skeptically. Why was I so sure? Because of Henderson's Law of Heroic Movies.

Henderson's Law of Heroic Movies: Antibusiness movies that have heroes are always based on, or consistent with, a libertarian premise.

I explain why I think the law is true and then consider a hypothetical case to win over skeptics:

Skeptical? Then consider. Which plot would stir the juices of American moviegoers: one where the hero stole money from a corporation that succeeded by being honest with people, or one where the hero stole money from a corporation that had been cheating people? To ask the question is to answer it. The second movie is the only possible contender.

Many "laws" have exceptions and so I consider the movies that seem as if they might be exceptions and show why they are not.

At the time I wrote this piece, I couldn't think of any exceptions. But writing down in print what had been in my head for a few years caused me to pay attention from then on to see if I could find exceptions. That, by the way, is a huge benefit of writing something you think rather than letting it play around in your head and never subjecting it to your own, or others' scrutiny.

In these last 26 years, I have found one fairly clear exception to Henderson's Law. There are probably more.

The exception? Philadelphia. If you click on the link, be prepared for multiple spoilers.

CATEGORIES: Economics and Culture


I don't recall many articles written by neoconservatives discussing how certain aspects of modern global instability might have been caused by US intervention. Perhaps that's because they favor intervention.

I don't recall reading many articles written by progressives discussing how American socioeconomic problems might have been caused by the side effects of well-intentioned public policies. Perhaps that's because progressives favor well-intentioned public policies.

And I don't recall many articles written by mainstream economists discussing whether (in retrospect) Fed monetary policies in 2008 worsened the Great Recession.

Nick Rowe has an excellent new blog post that quotes from Brad DeLong. Here's Nick quoting Brad (and fixing an apparent typo):

"The non-lunatic right holds that market economies are indeed macroeconomically unstable but they can be balanced by minimal interventions in aggregate variables: that is, by assigning the central bank the [task] of controlling the money supply in order to make Say's Law true in practice even though it is false in theory." [He actually says "cost", not "task", but I think that was a typo.]:
It's clear to me that most economists look at things the way that DeLong does; the economy is unstable and the Fed may or may not choose to try to reduce that instability. Very few think in terms of the Fed causing the instability.

Just think about 2008 for a moment. Mainstream macro theory says that central banks basically control aggregate demand. That's their job. The nudge AD up and down in order to hit their inflation and employment objectives. When AD is stable, enormous amounts of praise are given to central bankers. Alan Greenspan is a "maestro".

When AD falls at the sharpest rate since the 1930s, you'd expect lots of economists to write articles evaluating monetary policy. After all, interest rates were above zero during 2008, so the zero bound constraint is not an "excuse." You might expect a lot of that sort of research, but you'd be wrong. Although macroeconomists give the Fed credit for smoothing AD prior to 2008, and for giving us 2% inflation (on average) since 1990, they do not blame the Fed when things go wrong.

But it's even worse than that, not only don't they blame the Fed; they don't even do studies to investigate if mistakes might have been made. You'd think the huge drop in NGDP in 2008-09 might have led economists to be at least a tad curious as to whether, in retrospect, monetary policy was too tight in 2008. But you'd be wrong. They are not at all curious (with a few exceptions like Robert Hetzel, and of course the tiny band of market monetarists.) Economists are so sure that this gigantic AD failure could not possibly have been caused by overly tight monetary policy that they don't even investigate, even though their models imply that the central bank controls AD, and even though they credit the central bank when AD does well. I find this very curious, and very revealing.

Nick Rowe points out that DeLong's claim isn't just wrong, it's unintelligible. There is no such thing as a central bank deciding to "do nothing".

Government-owned central banks exist, and so we cannot not have a macroeconomic policy. The non-lunatic right (like the non-lunatic left) must try its best to answer the second question: what macroeconomic policy would be best? It gets us precisely nowhere to say that central banks should "do nothing", because there are 1,001 different ways of "doing nothing". Does it mean doing nothing with the stock of base money, the target rate of interest, the price of gold, or what?

From this perspective, "are market economies macroeconomically unstable?" is a stupid question to ask. (No disrespect to those who ask that question; I myself used to think it was the most important question in macroeconomics, until a few years ago, when it slowly dawned on me it was a stupid question.)

Central banks steer AD. That's what they do. It's bizarre to ask whether in an emergency central banks should steer AD. They do it all the time. It's like asking whether a person should be assigned the duty of steering a ship during stormy weather. Yes, but ships should also be steered during non-storms. Of course there are also sorts of side questions that are interesting. Should the wheel be lashed to an ENE heading? Can they overcome the force of wind and waves? In monetary policy one might ask whether there should be target rules, instrument rules, bureaucratic steering, market steering, etc., etc.

I have a hard time understanding the views of conventional macroeconomists, unless I assume they suffer from profound confusion about distinctions between "errors of omission" and "errors of commission" that are philosophically unsupportable in the arena of monetary policy. If this sort of philosophical confusion does not exist, then what explains the apathy? Why don't economists want to study monetary policy in 2008, with an eye on the question of; "Could the Fed had adopted a different stance of monetary policy, and achieved a better path of AD in 2008-09?"

Indeed I'd go even further. Why doesn't the Fed produce an annual report telling us whether, in retrospect, the previous year's policy stance was too easy, too tight, or about right? It seems bizarre to engage in this very important policy, without consistently reviewing one's previous decisions. And please don't tell me that I am naive about the selfish motives of powerful institutions, as this oversight is equally apparent among non-Fed economists. Indeed Robert Hetzel works for the Fed!

Some will ask, "What makes you think the Fed could have influenced AD during the 2008 hurricane?" Umm, how about the Fed itself? Throughout 2008 it told us that it believed its policies would affect AD. It told us that it didn't cut its target rate in September 2008 because of worry about high inflation (we were in the early stages of a sharp deflation at the time.) Or maybe the markets, which reacted very strongly to unexpected monetary policy decisions during 2007-09. Or maybe it's macroeconomic theory, which does not say that monetary policy stops influencing AD when there is financial market stress. Or maybe it's economic history, which showed a 57% rise in industrial production and sharp inflation in the 4 months after March 1933, despite the worst financial crisis in US history. All due to easier money.

And what makes you think they couldn't have done better. Gut instinct?

So other that monetary policymakers, financial markets, monetary theory and monetary history, I guess there's no reason to investigate this issue. Nothing to see here folks, move right along.


David R. Henderson

John Nash, RIP

David Henderson

The famous game theorist John Nash and his wife Alicia were killed in a traffic accident yesterday in New Jersey. He was 86.

I met him and had lunch with him when he came to speak at the Naval Postgraduate School in Monterey a few years ago.

The movie about him, A Beautiful Mind, is very misleading, but Sylvia Nasar's book by the same title seems highly accurate.

Here's his bio in The Concise Encyclopedia of Economics.

An excerpt from that bio:

A simple example of a Nash equilibrium is the prisoners' dilemma. Another example is the location problem. Imagine that Budweiser and Miller are trying to decide where to place their beer stands on a beach that is perfectly straight. Assume also that sunbathers are located an equal distance from each other and that they want to minimize the distance they walk to get a beer. Where, then, should Bud locate if Miller has not yet chosen its location? If Bud locates one-quarter of the way along the beach, then Miller can locate next to Bud and have three-quarters of the market. Bud knows this and thus concludes that the best location is right in the middle of the beach. Miller locates just slightly to one side or the other. Neither Bud nor Miller can improve its position by choosing an alternate location. This is a Nash equilibrium.

HT to Michael Munger.

CATEGORIES: Obituaries


David R. Henderson

Should We Fear Progress?

David Henderson

As I mentioned in a comment on Bryan Caplan's response to Dan Klein, the further I get away from Dan Klein's piece on "designer babies," the less persuaded I am. That glide path has continued.

Virtually all of Dan Klein's objection was based on the idea of comparison with the past.

This paragraph from his post sums up his objection:

Designer babies would attenuate coherence with the past: One hundred years hence, people would say, "When you watch him on the old videos, he may not look like much, but back in the old times, Mike Tyson was considered a pretty menacing fighter." People in the new times would not know our sense of standard. And they would have difficulty knowing it. Everything preceding the break, from Achilles to Rafael Nadal, would be foreign and unintelligible.

We're not even sure that's true, given the trickiness of genetic engineering. But let's say it were true. Is that a problem?

Actually, although Bryan Caplan stated his objections to this point very well, another commenter on Dan's post stated the basic objection even more succinctly.

Katie wrote:

So the cons are that everyone would be so amazing that they wouldn't appreciate how less amazing people were in the past?

One thing I can think of is similar -- with the advent of vaccines, people don't even remember how bad diseases were, and therefore may sometimes not have their kids vaccinated. Do I wish that vaccines never happened because now people don't have an appreciation of historical disease outbreaks? NO! I'm happy most of them aren't dead.

Or think of it another way. Think about a technology that has come along that has not made babies stronger, more competent, or whatever, but has made our lives much easier. That also would attenuate coherence with the past. I'll give an example that I often used when I gave talks about the IT revolution in the late 1990s and early 2000s.
When I was a teenager in the 1960s, long-distance phone calls were very expensive. As a result, they were very rare. When we got one in our household, everyone got quiet so that my mother or father could listen carefully. In fact, I remember one such phone call in about 1964. My father said, "Shhhh" and we shushed. We learned that my great aunt in Peoria had died. Now, when we get long-distance phone calls, we often hang up on the caller.

In Dan's terms, the change in phone call technology with the resulting greater than 95% reduction in price "would attenuate coherence with the past." In my terms, it doesn't attenuate coherence with the past. It just makes me greatly appreciate the present.

Or take cell phones. When I used to land at an airport in another city and have a friend pick me up, we had to make sure in advance exactly where to meet. If he got stuck in traffic or if my plane landed late, that was a problem. The usual way to handle it would be for me to find a pay phone (remember those?) and call his home and hope there was someone there whom he could call when he found a pay phone. I need not tell you how we do it now. I don't miss those days at all. And, by the way, technological change plus deregulation have caused airline fares to fall (although not lately) making my flights much more frequent.

Or, fill in the blanks. Think of your own example of a technology that makes the past look unimpressive because it makes your life so much easier now.

Coherence or attenuation of coherence with the past just doesn't do it.

CATEGORIES: Economic Philosophy


David R. Henderson

A Note on Johann Hari

David Henderson

In yesterday's post on drug addiction, I referenced work by British journalist Johann Hari. I knew nothing about his background. A regular reader of Econlog contacted me to tell me that in his past he committed plagiarism and has admitted doing so. I don't think this necessarily undercuts his point and neither, apparently, does the reader who contacted me. Nor does it undercut my point about Portugal.

The reader, Matthew Moore, pointed out Hari's unpleasant past and thought I should be aware of it. For that I thank Matt publicly and I thanked him privately.

Another reader, Tim Worstall, contacted me to tell me about Stanton Peele and has already blogged about Hari here. Thanks to Tim for this reference.

Also, commenter Current pointed this out in the comments on yesterday's post.

My apologies to Stanton Peele for not referencing his work.

CATEGORIES: Regulation


In 2009, Glenn Greenwald wrote, for the Cato Institute, a study of the effects of drug decriminalization in Portugal. Among his findings were that drug usage actually decreased among various populations.

Greenwald writes:

In fact, for those two critical groups of youth (13-15 years and 16-18 years), prevalence rates have declined for virtually every substance since decriminalization (see Figures 4 and 5).

For some older age groups (beginning with 19- to 24-year-olds), there has been a slight to mild increase in drug usage, generally from 2001 to 2006, including a small rise in the use of psychoactive substances for the 15-24 age group, and a more substantial increase in the same age group for illicit substances generally.

I was quite surprised.

The decrease among the very young did not completely surprise me. When I give talks on the drug war, I point out that there are two contrary effects on drug usage of reducing the penalties for using illegal drugs. The reduced penalties cause the price to be lower, thus moving people down a given demand curve and increasing the amount consumed. But the simply fact of decriminalization makes illegal drugs less of a "forbidden fruit," causing a downward shift in the demand curve. I point out that we don't know a priori which effect dominates, but that my gut feel is that the price effect dominates, leading to more consumption. I do point out, though, that the forbidden fruit effect is likely to be stronger for younger people and I illustrate by singing a few bars from a song my mother taught me about not putting "beans in my ears." That is why Greenwald's data showing that usage by the young declined is not totally surprising.

But the fact that usage increased only a little among 19 to 24 year olds did surprise me. I would have expected a much bigger effect of price.

I should note that I'm using the word "price" in a more-inclusive way than the usual. The price includes not just the cash outlay per unit but also the legal risk that comes with buying and using. Decriminalization would cause this legal risk to fall substantially, thus reducing the price.

But what if much of illegal drug use is a response to isolation? Then imposing harsh penalties can actually shift the demand curve higher because criminalization results in isolation. In that case, decriminalization would shift the demand curve lower not just for the youngest but for everyone.

That's the point of a recent article at the Huffington Post. Of course the author does not put it in terms of demand curves and movements along demand curves. But that's what's going on.

An excerpt from Johann Hari, "The Likely Cause of Addiction Has Been Discovered, and It Is Not What You Think:"

One of the ways this theory [that drugs cause addiction] was first established is through rat experiments--ones that were injected into the American psyche in the 1980s, in a famous advert by the Partnership for a Drug-Free America. You may remember it. The experiment is simple. Put a rat in a cage, alone, with two water bottles. One is just water. The other is water laced with heroin or cocaine. Almost every time you run this experiment, the rat will become obsessed with the drugged water, and keep coming back for more and more, until it kills itself.

The advert explains: "Only one drug is so addictive, nine out of ten laboratory rats will use it. And use it. And use it. Until dead. It's called cocaine. And it can do the same thing to you."

But in the 1970s, a professor of Psychology in Vancouver called Bruce Alexander noticed something odd about this experiment. The rat is put in the cage all alone. It has nothing to do but take the drugs. What would happen, he wondered, if we tried this differently? So Professor Alexander built Rat Park. It is a lush cage where the rats would have colored balls and the best rat-food and tunnels to scamper down and plenty of friends: everything a rat about town could want. What, Alexander wanted to know, will happen then?

In Rat Park, all the rats obviously tried both water bottles, because they didn't know what was in them. But what happened next was startling.

The rats with good lives didn't like the drugged water. They mostly shunned it, consuming less than a quarter of the drugs the isolated rats used. None of them died. While all the rats who were alone and unhappy became heavy users, none of the rats who had a happy environment did.

OK, so that was about rats. What about humans? Hari continues:
At first, I thought this was merely a quirk of rats, until I discovered that there was--at the same time as the Rat Park experiment--a helpful human equivalent taking place. It was called the Vietnam War. Time magazine reported using heroin was "as common as chewing gum" among U.S. soldiers, and there is solid evidence to back this up: some 20 percent of U.S. soldiers had become addicted to heroin there, according to a study published in the Archives of General Psychiatry. Many people were understandably terrified; they believed a huge number of addicts were about to head home when the war ended.

But in fact some 95 percent of the addicted soldiers--according to the same study--simply stopped. Very few had rehab. They shifted from a terrifying cage back to a pleasant one, so didn't want the drug any more.

The bottom line: Legalizing drugs could well reduce the demand for all age groups. The Portuguese puzzle is not so puzzling.

HT to Todd Zywicki.

CATEGORIES: Regulation


All transactions are two-sided. However in most cases the market for the object being sold is impacted much more strongly than the market for the object being purchased. If a huge new silver mine started selling silver on the open market, the impact on silver prices would be dramatically larger than the impact on the market for whatever they receive in exchange, unless they engaged in some sort of barter. The same is true of sales of Boeing airliners. Boeing's sales have a big impact on the airplane market, but not much impact on the market for whatever asset is used to buy their jets (say money or bonds.)

From January 2002 to January 2006, the US had a big housing boom (some call it a bubble, I don't.) During this period the Fed steadily increased the money supply, boosting the monetary base by over $9 billion per quarter, a total increase of $149 billion over 16 quarters. And the economy was smaller then, so that would be equivalent to an increase of $12 to $14 billion per quarter today. These injections (OMPs) were used to buy securities---mostly Treasury securities.

To really understand monetary policy you need to think about what makes the Fed unique. Here's another entity that is buying lots of bonds:

The tech giant reported record profits last quarter of $18 billion - the most of any S&P 500 company ever. Apple's blowout quarter single-handedly pushed overall S&P 500 earnings growth into positive territory after the company reported Tuesday night. As of then, without Apple, earnings were projected to contract 0.5%, according to FactSet. . . .

Also standing at record levels: Apple's cash and marketable securities. That figure ballooned to $178 billion last quarter, up from $155 billion in the prior period.

So Apple is probably buying up even more securities than the Fed did during the housing boom, even as a share of GDP. And of course Apple is hardly unique; lots of other companies buy bonds, and countries such as China and Japan have accumulated far more securities than even Apple.

Because the global debt market is enormous, and because many types of debt instruments are close substitutes, Apple's purchases are not very important. A giant silver mine, or Boeing, or Apple, is important because of what they sell, not what they buy. They have enough market power to influence the price of what they sell, but not enough to significantly influence the value of most securities. (Obviously this would not hold if they accumulated just a few thinly traded stocks.)

And the same is true of the Fed. But wait (you must be thinking) don't Fed OMPs of Treasury debt cause debt prices to rise? Not always, massive debt purchases in the 1960s and 1970s caused bond prices to fall sharply. But yes, in many cases it is true that Fed OMPs do cause bond prices to rise. However that's not mainly because of what the Fed is buying, it's because of what they are selling. Even when central banks used to buy gold instead of Treasury bonds, interest rates tended to fall immediately after monetary injections, due to the liquidity effect. Until prices adjust, interest rates must fall until the public is willing to hold the larger cash balances. So the direct interest rate effect of Fed bond purchases is trivial, just as the interest rate effect of Apple's bond purchases is trivial. It's the money injections that matter, and interest rates may rise or fall on those injections, depending on whether the liquidity or Fisher effects dominate.

Does this change at the zero bound? Perhaps, but not necessarily in the way that you'd assume. Over the past 6 years the Fed bought far more debt than did the ECB, and that's why longer-term risk free interest rates are higher in in the US than the eurozone. The Fed policy led to faster NGDP growth in the US than the eurozone.

Central banks are unique because of what they sell---they have a monopoly on base money production---not because of what they buy. There's a reason it's called "monetary policy" and not credit policy.

PS. It's possible that the huge Potosi silver mine depressed the value of money in the 1500s, but that's because in those days silver was money. It's the supply and demand for the medium of account that matters; what they buy with the new money is of trivial importance (unless it's something with a much more thinly traded market than bonds.)

PPS. When the financial press says "cash and securities" I believe the term 'cash' generally refers to short-term debt such as T-bills, not actual currency. Someone please correct me if I am wrong about Apple's "cash hoard".



Bob Murphy has done a huge service by laying out clearly the economic reasoning behind my conclusions (here and here) that: (1) you can't make interpersonal utility comparisons and (2) utility is ordinal, not cardinal.

His piece is not long and I recommend it to anyone who is interested in the discussion.

This paragraph sums up his point:

In the present blog post I'll hit the key points in this dispute. To cut to the chase, I agree with David R. Henderson: The way economists use the term, "utility" is an ordinal concept, which expresses a subjective ranking, not an objective measurement. Therefore it makes no sense to say Jim gets more or fewer utils than Sally. Furthermore, the work of von Neumann and Morgenstern does not alter this basic fact: Whether we "believe in" cardinal utility has nothing to do with their demonstrations.

I will add one thing. In the various comments that people on my posts wrote, I got the impression that they think I'm making the point about interpersonal utility comparisons because I oppose government taking wealth from wealthy people and giving it to poor people. But that's not why. I see this as a purely technical issue in economics, an issue that one should get right regardless of one's views on forced distribution.

A little history here about the evolution of my views. I oppose government taking from the wealthy and giving to the poor unless the wealthy people first took it from the poor people. It's also true that when, as an undergrad, I first read the point about not being able to make interpersonal utility comparisons, I was excited because it helped me make the case against forced distribution. (I don't call it "redistribution" because to do so is to assume that someone "distributed" wealth in the first place. When Dwight Lee wrote the article "Redistribution" for my Encyclopedia, I persuaded him that therefore we needed to put the the word in quotes. You can see that in the print version but not in the on-line version.) But one of the goals of my professor Ben Klein at UCLA was to "knock my libertarianism out of me." (Those are my words, not his, but I think he would agree that that is what he was doing.) It wasn't that he necessarily wanted me to be less libertarian. It's that he wanted me always to distinguish between my libertarian views and technical economics and he wanted me, further, to enjoy technical economics separately from whatever conclusions it led to. He succeeded. That's why I hate bad arguments for my libertarian policy conclusions as much as I hate bad arguments for statist policy conclusions.

Bob Murphy also made that point well with this comment on my first post about Tyler Cowen's post:

If a certain physicist thought Einstein was wrong and that you could easily go faster than light, it would be weird if he said on his pop blog, "You can't sustain a solar system polity with rockets going five times faster than light, because eventually the fuel costs will be astronomical," without at least giving a nod to the fact that many of his colleagues would think he is speaking nonsense.

CATEGORIES: Microeconomics


Two strangely divergent reactions:

1. When economists discuss worst-case macroeconomic scenarios, they often say stuff like, "Head for your bunker," "Dig a hole and jump in," and "Hopefully you've been hoarding canned goods."

2. When foreign policy experts discuss worst-case war foreign policy scenarios, they don't.  In fact, they're likely to segue into sermons about courage, defying evil, and Churchill's "never surrender" speech.

The strangeness, in case it's not obvious, is that even another Great Depression would have a minimal body count, while a pint-sized nuclear war would kill millions.  In the broad scheme of things, economic crises are disappointments, while wars are disasters

Sure, you can use cost-benefit analysis to show that the Great Recession had a much higher social cost than a small war.  But if distribution ever matters, it matters in war.  Suppose a million Americans die in a nuclear inferno.  With standard value of life numbers, that's a loss of $7 trillion - well below most estimates of the cost of the Great Recession.  But who can doubt that a million violent deaths would have been far more tragic than the Great Recession, because the million victims lose everything they have.  To quote Eastwood in Unforgiven, "It's a hell of a thing, killing a man. Take away all he's got and all he's ever gonna have."

Yes, I know that talk of bunkers, holes, and canned goods is intended as dark humor.  But the humor spreads confusion nonetheless.  If you live in the First World, economic crises are only a First World Problem.  Major wars are macabre no matter where they happen.

CATEGORIES: Cost-benefit Analysis


David Friedman writes in a comment on my post on interpersonal utility comparisons:

Von Neuman [sic] showed how to cardinalize utility most of a century ago, so your statement that utility is ordinal not cardinal is long out of date.

I'm always willing to be told that I'm out of date on something. Getting up to date is, after all, one of the main ways we learn.

I'm highly skeptical about David's claim, though. For one thing, you would think that if Von Neumann showed this over half a century ago, my professors at UCLA, especially people like Armen Alchian and Jack Hirshleifer, would have known about it. I don't recall that they contradicted Paul Samuelson on this.

Robert Murphy e-mailed and told me that I'm right on this. When I asked for a reference, he cited William J. Baumol, "The Cardinal Which is Ordinal," The Economic Journal, Vol. 68, No. 272 (Dec., 1958), pp. 665-672. I will read it later, but meanwhile here's the last sentence from the first paragraph of Bill Baumol's article:

I shall show, in fact, that in the neoclassicist's sense, the N-M [Neumann-Morgenstern] index turns out to be just an ordinal measure. [Italics added]

Robert Murphy also writes:
Yes, there is an element of truth in von Neumann-Morgenstern utility functions being unique only up to a positive affine transformation (as opposed to a monotonic transformation on general utility functions), and that's why D. Friedman et al. are saying vNM "proved" cardinal utility exists. But it really doesn't. I even had my game theory prof at NYU confirm my interpretation back in grad school.

When I asked him the name of his game theory prof, he told me it was Efe Ok.

CATEGORIES: Microeconomics


Aggregate demand is fundamentally a monetary concept, linked to each country's monetary unit. Only in a few cases, such as the eurozone, does it make sense to talk about aggregate demand as a regional concept. Indeed in the eurozone, aggregate demand is only useful as a regional aggregate; it makes little sense to talk about "AD in Germany" or "AD in Greece."

Many economists are confused about AD, and treat it as a real concept. Thus Keynesians often point to slow real GDP growth in places like Britain as evidence that "demand" is inadequate. But that's reasoning from a quantity change. If the aggregate supply curve shifts to the left, then real GDP will fall. But obviously that's not a decline in "aggregate demand."

Here's a Reuters article discussing the views of Raghuram Rajan:

"The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector," Rajan told an audience of economists and investors in New York.

"I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it," he added. "We are thereby also creating financial sector risks for when unconventional policies end."

. . .

Rajan, a former IMF chief economist, said that since "the spectre of deflation haunts central bankers," it is no wonder that developed countries do not want to settle for low growth "even if that is indeed their economy's potential."

Still they should not ignore their responsibilities to developing economies, he said, adding the IMF should be the arbiter of whether accommodative policies are "in- or out-of-bounds."

Rajan seems to imply there is such a thing as global AD, that it's a pie that countries can take a larger piece of by engaging in beggar-thy-neighbor policies, such as monetary stimulus. This is almost entirely wrong. There is no such thing as global AD, and monetary stimulus either enlarges global output (it's not a zero sum game) or has no effect, and merely results in domestic inflation, with no change in the real exchange rate. Either way, monetary expansion in country X is never going to steal jobs from country Y. And when those economies are artificially depressed by a combination of low NGDP and sticky wages, then the rest of the world benefits from monetary stimulus that boosts output closer to the natural rate. It's a win-win policy, not a beggar-thy-neighbor policy.

But once again, I can't emphasize enough that there is no such thing as global AD. If you read that phrase in the linked article and thought it meant something, then you need to go back to your old college EC102 textbook. Do you see that price level variable on the vertical axis of the AS/AD diagram? There's also no global price level, or global inflation rate. There is no such thing as global aggregate demand.

CATEGORIES: Macroeconomics



If you could change the K-12 curriculum in one small way, what would you change?  My pick: Unlock the school library.  By this I mean...

1. Give kids the option of hanging out at the library during every break period. 

2. Give kids the option of hanging out the library in lieu of electives.

My elementary, junior high, and high schools all had marvelous libraries.  But they were virtually always closed to the student body.  You couldn't go during recess or lunch.  And you certainly couldn't say, "Instead of taking music/dance/art/P.E./woodshop, I'll read in the library."  Virtually the only time I entered a school library was when an entire class went as part of an assignment.

Unlocking the school library requires almost no resources.  Simply:

1. Send one or two unskilled but mature workers to watch over the students.

2. Exile students who bother other students from the library.  If you can't treat your fellow bookworms decently, you're sentenced to regular classes.

The benefits are twofold. 

Intellectually, unlocking the library gives students much-needed time to explore their interests and satisfy their curiosity.  You really learn a lot by reading

Socially, unlocking the library allows students to escape pointless classes, boring teachers, and obnoxious peers.  It also gives kids a chance to exercise independence and self-control.

After the novelty wears off, I expect many kids will get bored at the library.  That's fine: Send them back to regular classes.  But many other kids - especially nerdy kids - will seize the day.  They'll finally have a sanctuary from the daily indignities of K-12 education - and a chance to learn what they want when they want.  When I was a kid, unlocking the school library would have been heaven on earth.

Most educators and parents will scoff at my proposal.  Why?  At root, they like the idea of bossing kids around.  They're so determined to make every child dance - yes, literally dance - that they're afraid to even give them the option of quietly reading in the library instead.  Adults claim they're controlling children for their own good.  I doubt it.  As a child, I noticed that adults seemed more focused on their own egos than students' well-being - and my experiences as an adult and a parent strongly support my youthful cynicism. 

Challenge to educators and parent: Prove me wrong.  If you care about the children as much as you claim, you should at least experiment with my proposal.  Instead of dismissing it out of hand, try unlocking the library on a small scale and see what happens. 


One of the things we are most sure of in economics is that you can't compare utility, marginal or otherwise, across individuals. Utility is ordinal, not cardinal.

Which is why I don't understand Tyler Cowen's post this morning. He leads off fine, writing:

1. You cannot build and sustain a polity on the idea of redistributing wealth to take advantage of differences in the marginal utility of money across varying wealth classes.

He's right. You can't. But the reason you can't is that you can't measure differences in the marginal utility of money across people. Why? Go back to my second introductory sentence: Utility is ordinal, not cardinal. So there's no such thing as a "difference" to measure.

But that's not Tyler's reasoning. He writes:

2. The ideas you can sustain a polity around often contradict the notion of socially arbitraging MU differences to try to boost total utility.

This makes sense only if you can measure differences, which makes sense only if there are differences to measure. There aren't. If you doubt that, ask yourself this: what's the difference between 1st and 4th?

CATEGORIES: Economic Philosophy


When I advocate a (progressive) consumption tax to replace our current income tax system, some commenters reply that wealth provides benefits beyond consumption, such as peace of mind and security. I think that's true, but to me it seems to be an argument for making the consumption tax progressive, not switching to a tax on capital income or wealth.

It's important to keep in mind that (correctly measured) wealth is the present value of all future consumption by you, your heirs, and anyone you donate money to. If you tax all consumption at a 50% rate, then you've essentially put a one time 50% tax on wealth. Actual real world proposals for wealth taxes have something else in mind, an annual levy that implicitly taxes people at a higher rate when they spend their wealth in the future, as compared to spending their wealth today.

Here's another way of thinking about this point. Two people with identical wage income can allocate consumption over their lives in different ways (including deferring some consumption to their heirs.) When you decide to defer consumption to the future, there are both benefits and costs. The benefit is the option value of deferred consumption; it allows you to change your mind if an emergency comes up, requiring an unexpected change in plans. That's an advantage. On the other hand most of us prefer a bird in the hand to two in the bush. We are impatient. That's one reason why savers have traditionally been rewarded with interest; it's a form of compensation for saving. All of those things get factored into the market interest rate, which reflects the relative price of current and future consumption.

Now assume a 50% consumption tax. Anytime you save $100, you don't really have $100 available for emergencies, you have $50 available for after tax purchases. You are able to buy $50 worth of goods when you decide to spend the $100. That means the 50% consumption tax has cut your economic security in half, as compared to the no tax case. So it's not really correct to say that consumption taxes don't address the security and peace of mind conferred by great wealth.

On closer inspection, I find that almost all the arguments against consumption taxes are actually arguments in favor of progressive taxes. It is extremely hard for most people to think about taxes without getting drawn into the progressivity debate, even though there are many other issues such as efficiency and horizontal equity. (Horizontal equity means that two people with equal lifetime resources should pay an equal tax rate.)

For any income tax regime, there is a consumption tax regime of equal progressivity. Unfortunately that equally progressive regime will look much less progressive. This is one of the biggest barriers to tax reform. Democrats don't want a reform that looks more regressive, and to make the system look as progressive as our current system the top rates on the consumption tax would have to be too high for the GOP to stomach. Hence we don't do win-win tax reform, which would benefit both Democrats and Republicans, mostly because of cognitive illusions. Coincidently that's why we don't have sound monetary policy---cognitive illusions.

And let's not even talk about trade.

PS. This post is a sort of reply to Frances Woolley.

CATEGORIES: Tax Reform , Taxation


David R. Henderson

Great Rules for Discussion

David Henderson

I've been reading more about the "Deflategate" case than I ever would have imagined. It's not because I'm a Patriots fan or a Patriots hater. I'm neither. It's not because I'm a football fan. I'm not really; I don't tend to watch whole football games until the playoffs and the NBA and especially the Golden State Warriors are what I'm passionate about.

But I do have a passion here: it's a passionate that animates me in all parts of my life. It's the passion for justice and fair play.

I started out sure that the Patriots "did it": that is, that they cheated by having under inflated footballs. So my passion for fair play caused me to think the Patriots should be penalized. Now, having read some of the comments on the Wells report, even comments by people with no dog in the hunt, I'm not nearly as sure. And it does look as if the Wells report is one-sided. So now my passion is for Tom Brady to win his appeal and I think it's appalling that Roger Goodell, whatever his legal rights, is setting himself up as the person to hear the appeal.

So, I've been following the discussions and I came across this informative discussion between lawyer Stephanie Stradley and blogger Zach Abramowitz. I recommend reading it, if you're interested in the issue.

What does any of this have to do with Econlog? Here's what: some markers that Ms. Stradley laid down for fruitful discussion. Here's what caught my eye after some of the commenters got into the name calling, which, besides being fruitless, is incredibly boring and also causes the name callers to lose credibility quickly:

Stephanie Stradley: Personally, I prefer when comments talk about the topic and not attack or neener neener each other. That's how I conduct things on my own blog, and it just makes for better conversation. Can I ask a favor and have everybody just talk what their viewpoint is, add links if you want, and just discuss this. I really do like to learn things, challenge my thinking with relevant blog comments.

Rich Champ: Well Steph...the thing is that it's really hard to argue against ignorance in a nice way because they don't get it then either. The other part of it is that sometimes you have to punch the bully in the nose.

Stephanie Stradley: Nah. It is easy to do that. It's preferred on emotional topics Typically, the most persuasive writing is straightforward and doesn't get overly personal. Really, please debate arguments not people.

"Nah, it's easy to do that." I love it.

By the way, her insisting on civility reminds me of this article I wrote some years ago about a discussion I had with a local politician.


I'm delighted that Dan Klein is engaging my defense of designer babies.  Here's my reply, point-by-point.  Dan's in blockquotes, I'm not.
The idea that technology will enable designer babies fills me with apprehension. My apprehension over designer babies would be great even on two unrealistic assumptions: (1) That the government never got involved in it (specifically, never made use of it or influenced the use of it), and (2) That the technological development did not lead to reductions in liberty, reductions prompted by results of the development.

Designer babies would attenuate coherence with the past: One hundred years hence, people would say, "When you watch him on the old videos, he may not look like much, but back in the old times, Mike Tyson was considered a pretty menacing fighter." People in the new times would not know our sense of standard. And they would have difficulty knowing it. Everything preceding the break, from Achilles to Rafael Nadal, would be foreign and unintelligible.

You could say exactly the same about all the economic growth that happened since 1900.  It has undeniably and dramatically "attenuated coherence with the past."  I'm tempted to say "So what?," but what I really think is, "Good riddance."  The world's improved beyond anything my great-grandparents could have imagined.  I hope my ancestors would have had the good sense and benevolence to be happy for me.  I'm happy for my super-descendents already.

People would lose a sense of historical coherence, a very important dimension in human meaning. But even within their time, across arenas, people would lose a sense of standard.
I'm a lifelong history buff.  The main thing I learn from history is that the past was awful, and the present far from satisfactory.  A future society of designer babies should be more able to appreciate this lesson because they'll be beyond so many of our failures. 

In any case, most people currently have almost no sense of "historical coherence," so they won't be losing much. 
People would diversify in extremes, to the point of regarding those in other arenas of activity (the musicians, the athletes, the scholars, the thinkers) almost as separate species, literally a specialized breed, and be little able and little interested in trying to relate to them. "Am I supposed to applaud?" "Am I supposed to try to remember his name?"
We're already grateful for the amazing fruits of specialization that we already enjoy.  I see no reason not to embrace further specialization. 

Whatever sense of standard people did have, they would expect it to dissolve quickly. So the breakdown in historical coherence would be in relation to both the past and the future. Every generation would bring drastic changes in standards, changes that were unforeseen and yet unsurprising.

Again, this applies equally to rapid economic growth.  Think about the breakdown of "historical coherence" between Maoist communes in 1960 and modern China.  Good riddance.

I've used examples from sports, but I think the troubles pretty well carry over to broader areas of life, including even wisdom and virtue. A main point of Polanyi's book The Study of Man is that reverence, that necessary instrument for perceiving greatness, is especially applicable in the pursuit of wisdom and virtue. Those, too, might have some genetic basis. But whereas we would still know which ball players hit the most home runs, here we might have even greater difficulty recognizing the standouts. And inasmuch as we did recognize the standouts, or thought we did, we might regard them as we regard the new home run champions: more as a specialized breed than as exemplars. Would I ever have bothered to dwell in Michael Polanyi's thought if I knew he were a designer baby?

The Dan Klein I know would focus on the quality of Polanyi's arguments, not his origin story.  That's what we should all do.

Adam Smith held that all moral approval relates to a sympathy; the sympathy ratifies or underwrites the approval. Suppose, on Smith's authority, that the principle is sound. It would be just as sound in a world of designer babies. But in such a world, the sympathies themselves would be terribly attenuated, and hence also the moral approvals underwritten. I think our moral confusion would grow more confused; I suspect that the result would be moral and spiritual life that is shallower, not deeper.

Dan, do you really think parents are going to select against genes for sympathy?  That's very hard to believe.  Kindness is one of the main things parents try to instill in their kids.  If anything, we should expect designer babies to feel more sympathy, not less.

Now, here are some reasons why the two assumptions are not realistic (and why my apprehensions are greater still): If political disposition in an individual has some genetic basis, then, just as governments got involved in schooling, governments would likely get involved in designing babies.
Possibly, but I'm not worried.  In Western societies, controlling reproductive choice is widely seen as totalitarian.  Who today does not recoil in the face of the Supreme Court's notorious 1927 decision to allow mandatory sterilization?  I am however worried that Western societies will deprive individuals of the right to use reproductive technology as they see fit, preemptively killing off an promising source of human progress.
As for other repercussions on liberty, consider these: (1) Designer babies would devastate social coherence, connectedness, and personal meaning as generated by voluntary, non-governmental affairs, and consequently, in demanding them, people will look ever more to governmentalization;
I can imagine designer babies would lead to marginally worse outcomes along these lines.  But why on earth would you expect designer babies to "devastate" anything? 

Though to be honest, I hope Dan's right.  In my view, existing levels of "social coherence" and "connectedness" are dangerously high, the cause of most of man's inhumanity to man.  See Dan's great work on "the people's romance." 
(2) If designing your baby is expensive, "the rich get richer" and "level the playing field" will be louder than ever.
The same goes for any high-cost novelty.  Fortunately, the market usually outmaneuvers populist bellyaching long enough to turn novel luxuries into affordable conveniences.
Liberalism brought rapid cultural change (see the first of the two trends I present in this 17-min video.) I detect, especially in libertarians, a denial regarding the downside of rapid change - and I mean a downside even apart from resultant greater governmentalization.

But don't get me wrong about libertarians; they are not unique in letting their ideological commitments distort their interpretations and judgments.

Count me a libertarian "denier."  Downsides notwithstanding, technological and economic progress are great.  To even selectively rebut the massive presumption in favor of progress you need to point to something like Hiroshima in 1945, not intangible worries about historical coherence.


David R. Henderson


David Henderson

Bill Gates stated yesterday:

The highest economic growth decade was the 1960s. Income tax rates were 90 percent.

He stated this on CNN's Fareed Zakaria GPS.

Politifact's Punditfact decided to check the truth of Gates's statement. To their credit, they did point out that for the last 6 years of the 1960s, the top tax rate was not 90 percent. Instead it ranged between 70 percent and 77 percent.

Also, to their credit, Punditfact briefly covers the controversy about the connection between tax rates and economic growth. Here's the skeptical quote about tax cuts:

A more sober analysis comes from William Gale at the Brookings Institution and Andrew Samwick at Dartmouth College and the National Bureau of Economic Analysis. In a 2014 article, the two economists found that "U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates."

Punditfact also gives the "other side:"
But there are studies that reach other conclusions. Two economists at the University of California-Berkeley, Christina Romer and Dave Romer, broke down tax changes based on the driving purpose behind them. For example, it is very different if taxes were cut because the economy hit the skids, rather than wanting to shrink the size of government by curtailing revenues. Romer and Romer -- they're married -- figured that separating the reasons for tax changes allowed them to factor in a number of outside conditions that determined the impact of the policy shifts.

Their key finding?

"Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent," they wrote. (Christina Romer is former chair of President Barack Obama's Council of Economic Advisers.)

Punditfact's conclusion, which they label "Our Ruling":
Gates said that in the 1960s, high taxes, 90 percent, and high economic growth came at the same time. The underlying reasons are complicated, but the numbers largely bear out. On average, annual growth was about 4.3 percent for the decade, higher than any other post-World War II period. Gates was a bit off in talking about a 90 percent tax rate. During the 1960s, the marginal rate fell for a time to 70 percent.

Gates did not go so far as to say that higher taxes bring higher growth. And for good reason. The connection between taxes and growth is quite tricky.

We rate this claim Mostly True.

Punditfact bothered to check average growth rates of GDP by decade. Punditfact also checked top tax rates during the 1960s and found the split noted above. They found Gates's claim about tax rates being 90 percent in the 1960s to be false (if I were to put in in their terms, I would say "Mostly False" because tax rates were below 90 percent for over half the decade.)

But then that raises an obvious point that inquiring minds would want to know. Given that top tax rates were substantially lower in the last 6 years of the 1960s than in the first 4 years, was there a difference in the growth rate of real GDP?

There was.

Here are the growth rates of real GDP from 1960 to 1963, the 4 years in the 1960s when the top tax rate was 91 percent:
1960: 2.5
1961: 2.3
1962: 6.1
1963: 4.4

Average growth rate (arithmetic, not geometric): 3.825 percent.
Average growth rate (geometric): 3.8 percent.

1964: 5.8
1965: 6.4
1966: 6.5
1967: 2.5
1968: 4.8
1969: 3.1

Average growth rate (arithmetic, not geometric): 4.8 percent.
Average growth rate (geometric): 4.8 percent.

In other words, the annual growth rate averaged a whopping one percentage point higher during the six years of the decade that had top tax rates substantially below 91 percent.

But you read that here, not at Punditfact.


Imagine living in a country where the top 30% of the population had roughly 25 times as much wealth per person as the bottom 30% of the population. That seems pretty unequal, doesn't it? Now suppose the same statistics applied, but every person at any given age had exactly the same wealth. All 18 year olds had the same wealth as other members of their cohort, as did all 60 year olds. But 18 year olds had much less wealth than 60 year olds. Now how would you feel about the data? Does that sort of society seem highly unequal? Not to me, indeed in a sense there'd be no inequality at all; each person would experience the exact same wealth trajectory over the course of their life.

Of course we don't live in that sort of society, there are large differences in wealth at any given age. But even if we did have that sort of equality, the aggregate wealth data would look shockingly unequal. Here's some Census data for the US, showing that the median person in the over 55 age group holds about 25 times as much wealth as in the 18 to 35 group:

Screen Shot 2015-05-17 at 1.16.26 PM.png
So could we solve this measurement problem by getting wealth inequality data for each age cohort? Not even close, because wealth is a poor measure of economic well-being. Suppose you had two people who each earned $100,000/year in wage income. Over the course of their life they both eventually spent all of their wealth on consumption goods. Both ended up with an identical level of total consumption, in present value terms. But one person spent all his money as it was earned, and then relied on Social Security, while the other saved 1/2 of his wage income, spending much more in his later years. By age 65 the thrifty guy might have several million dollars in wealth, while the other guy had almost nothing, even though (by assumption) they were equally well off in economic terms, they simply had different preferences as to when to spend their money.

I was recently at a NGDP conference in West Virginia, and noticed this in the local paper's advice column:

Dear Dave, My wife and I have just started getting on track with our money. We have $2,000 in savings, and the only debt we have is our house and two cars. I work in the oil and gas industry and make about $180,000 a year, but things are pretty volatile right now. We're upside down on both vehicles, and we owe $39,000 on one and about $48,000 on the other. Under the circumstances, should we go ahead and build a fully funded emergency fund or work on paying off the cars? Kendall

Dear Kendall,
Are you kidding me? Sell the cars, dude!

You need to go to Kelly Blue Book's website right now, and find out what your cars are really worth. Then, put them on the market as a private sale. You'll get thousands more selling them that way than you will at a dealership. You'll have to talk to a local credit union or bank for a small loan to cover the difference, plus a little bit more so you guys can get a couple of little beaters to drive for a while.

I'm going to go out on a limb and guess there aren't very many similar letters in China. Like the advice columnist "Dave", I have a temperament that makes it easy to save. But as a libertarian I favor allowing people like Kendall to spend their money when and how they wish. The only qualification is that I think people should be forced to save enough to cover the things that society would otherwise have to pay (basic retirement, medical, etc.) If we believe that people should be free to choose when to spend their wealth, we will end up with far more wealth inequality than if we try to force everyone to consume the "right amount" of each year's income. But I don't see how that sort of wealth inequality could be considered a problem.

Inevitably some will misconstrue what I am saying here. Just to be clear, even accounting for all the factors I mentioned (age, saving preferences, etc) there is still lots more inequality due to big differences in lifetime earnings (or inherited wealth.) So this post is not trying to suggest that inequality is not a problem. Rather I'm suggesting that if inequality is a problem, we would not be able to know that from the wealth inequality data that is presented in the media. And that's because even if wealth inequality were not a problem at all, the actual inequality of wealth would look shocking large, with 100 to 1 disparities easily accounted for by nothing more than differences in age and saving propensities. The only data that truly gets at the inequality question is consumption inequality, which is very rarely discussed in the media.



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