Bryan Caplan and David Henderson

Quantum finance

Scott Sumner

The New York Review of Books has a very interesting interview of George Soros. At one point he is asked about the recent revolution in the Ukraine. Here is part of his response, and then a follow-up question:

[Soros] Contrary to all rational expectations, a group of citizens armed with not much more than sticks and shields made of cardboard boxes and metal garbage can lids overwhelmed a police force firing live ammunition. There were many casualties, but the citizens prevailed. It was a veritable miracle.

Schmitz: How could such a thing happen? How do you explain it?

Soros: It fits right into my human uncertainty principle, but it also reveals a remarkable similarity between human affairs and quantum physics of which I was previously unaware. According to Max Planck, among others, subatomic phenomena have a dual character: they can manifest themselves as particles or waves. Something similar applies to human beings: they are partly freestanding individuals or particles and partly components of larger entities that behave like waves. The impact they make on reality depends on which alternative dominates their behavior. There are potential tipping points from one alternative to the other but it is uncertain when they will occur and the uncertainty can be resolved only in retrospect.

On February 20 a tipping point was reached when the people on Maidan Square were so determined to defend Ukraine that they forgot about their individual mortality. What gave their suicidal stand historic significance is that it succeeded.

I was intrigued by the quantum mechanics analogy. At the same time I wasn't entirely convinced. I'm certainly no expert on quantum superposition, but I believe the claim is that something exists in two states simultaneously. The idea is so paradoxical that some physicists believe the universe splits in two when an observation is made. Rather than being random, we can say that both outcomes happen deterministically, but in different universes. (Please correct me if this is wrong.)

I don't find it all that paradoxical that people sometimes behave like individuals and at other times behave like members of a mob. But I do find the Efficient Markets Hypothesis to be somewhat paradoxical. This hypothesis says that individual traders cannot know more than the market, and hence deviations of assets prices from trend are essentially unforecastable. Consider the following example:

A very knowledgeable trader walks onto the floor of a market where gold is actively traded. To make things simple, let's assume that there is no risk premium, and that the futures price equal the expected future spot price. Suppose October 2014 gold futures are trading at $1300, but this very smart trader believes that gold will be trading at $1360 in October. Is this information valuable?

In one sense the answer is no. The market forecast is freely available, and is much more reliable. But in another sense the answer is yes. If the trader decides to act on his knowledge, the market will become even more efficient. The market price will immediately represent a more accurate forecast of the expected future spot price.

The average opinion of traders is dumb; the average of their opinions is brilliant. (Have I used 'average' the same way both times?)

Alternatively, let's suppose markets are efficient. What makes them efficient? Lots of traders who dig up information on the value of gold. And why do they do that? Because they believe markets are inefficient.

One of my favorite examples is the joke about the two university of Chicago professors walking along a sidewalk. One says "Look, a $100 bill." The other replies, " That's not possible, someone would have picked it up already." When I tell my students the joke, I ask them whether it is a pro-EMH joke or an anti-EMH joke. But here's the problem, I'm not quite sure myself. Consider the following two interpretations:

A. The EMH represents Truth with a capital T. In that case the joke seems to be mocking those who believe in the EMH.

B. The EMH is a highly useful theory. For philosophical pragmatists it doesn't get any better than that. In that case the joke seems to be supportive of the EMH.

I prefer B. I don't know about you, but I often see money lying on the sidewalk. But it's always coins or small bills. Not once in my life have I seen a $100 bill. And now the EMH tells me why I shouldn't waste my time walking around fruitlessly hoping I'll find a $100 bill down there. I should look up at the birds and the trees and the clouds. I should enjoy life.

But then who will pick up the $100 bills? Two groups of people. Those who foolishly think they will be able to find them if they look hard enough. (Oddly, some of those foolish people will find them.) And those who know it's a very long shot but enjoy treasure hunting. Or enjoy looking at sidewalks. Some of them will also be successful. Especially those who know where to look---like very early in the morning outside an expensive nightclub. Or in an area where there are lots of drug deals. There are enough people like that to keep sidewalks cleared of $100s.

I enjoy collecting old prints. And because I enjoy doing so, I help to keep the old print market efficient. But not sidewalks, and not stock markets. Someone else will have to do those jobs.

PS. I recommend the Soros interview---most of it is much better than the passage I quoted.



I'm a Liberal

David Henderson

When I figured out my basic political beliefs at ages 17 and 18, I didn't know the term for them. Katherine George, a left-wing sociology professor at the University of Winnipeg with whom I was arguing, called me a libertarian. That was in the summer of 1968 and it was the first time I had ever heard that word.

"A what?" I asked, confused.

"A libertarian," she answered.

"What's that?" I asked.

"You know, it's those people who ran the student newspaper last year: Dennis Owens, Clancy Smith."

"I didn't know," I said, "but I'll be sure to look them up."

"S**t," she said.

So I did look them up and quickly became involved with the University of Winnipeg libertarians. The above-mentioned Clancy Smith, whom his Kelvin High School classmate, Neil Young, had in mind when he wrote "Nowadays Clancy Can't Even Sing," became my mentor.

It was Clancy who taught me that no, the libertarian tradition doesn't begin with Ayn Rand but goes back to the classical liberals of the 18th and 19th centuries. In fact, said Clancy, they didn't call themselves classical liberals. They were, simply, liberals.

Now George Mason University economics professor Dan Klein, working with Kevin Frei, has undertaken a project to reclaim the term "liberal." He has produced a statement that many economists and others have signed. I go back and forth about this project. Dan wants to do it and I want to help him and I believe in it, which is why I signed. I also wonder if the project is Sisyphean.

But I've bet wrong on Dan before. When he wanted to meet in St. Louis eleven years ago this month to discuss his idea for a journal that would contain articles critical of articles in other journals, I planned to go there and say, "Dan, don't do it." Because of a family crisis that came up at the last minute, I cancelled. Of course, he did do it. And the result is one of my favorite journals: Econ Journal Watch.


This Tuesday, Reason is hosting a DC debate on "Should America Open Its Borders?"  Cato's Alex Nowrasteh and I say yes; the Center for Immigration Studies' Mark Krikorian says no.

The Center for Immigration Studies' masthead reads, "Low-Immigration, Pro-Immigrant."  I've dissected this before, but here's a further thought.  Imagine telling your spouse, "I love your mother, but I want her to visit as rarely as possible."  Can you even say it aloud without laughing?  What you really mean is, "Your mother's insufferable, but as long as she's here, I'll try to be nice to her."

That's what the CIS slogan amounts to: Immigrants are insufferable, but as long as they're here, we'll try to be nice to them.


Europe vs Uber

Alberto Mingardi

Uber is having a hard time in Europe. The San Francisco company has started its operations in quite a few cities now. This fact has raised protest by taxi-drivers (as any other human being, they do not like new competitors). Their remonstrances are likely to find a friendly ear: very often local decision makers can easily find some local regulations that Uber violates just by the virtue of existing. The discipline of taxi and black cars is, after all, the fruit of many successful years of restricting access to this trade. To allow for MORE competition, norms should be changed.
In Brussels the App has been banned, and it may be in Berlin too, where, as the Associated Press reports, "the head of the Berlin Taxi Association convinced a local court that the company's service breaks the law". European Commissioner Neelie Kroes has lamented that the Brussels ban is "not about protecting or helping passengers - it's about protecting a taxi cartel". She does not seem to realize that the taxi cartel is a product of specific norms all over Europe, not the result of unfettered capitalism: to be serious on the matter, she should advocate these rules to be revised.
But let's put politics aside. It's noteworthy that, on the other hand, a new rather interesting App has just been put on the market, in Berlin:

The latest Berlin-based start-up app idea has taken the online dating principle to the sex industry., launched on April 1, allows prostitutes to upload profiles of themselves that potential clients nearby can browse.
Clients can search for male or female "Pepprs," and adjust their filters for special services and body type. They can then send an enquiry and make a date.
The prostitutes do not pay to put their profiles online, while clients pay the website a €5 or €10 booking fee.

The principle isn't much different than Uber's: the app connects supply and demand, even though - if I understand correctly - "Pepprs" do not intermediate the payment from the buyer to the seller.
Some may comment that it is a rather strange country, one in which the same technology could be legally applied to picking up prostitutes but not for black cars' pick-ups. I'd say that it is quite understandable, that an industry less affected by government intervention is more welcoming to innovation.

CATEGORIES: Eurozone crisis


This is another installment in my posts on my visit to the San Francisco Fed on April 9.

My talk was in the afternoon, but I always like to see the talks that precede mine so that I can get a feel for the audience--what they know and don't know, what they're thinking about, etc. The first talk was in the morning. It was titled "The Economic Outlook" and was by Glenn Rudebusch, Executive Vice President and Director of Research at the San Francisco Fed.

My big impression was how Keynesian he was/is. A large part of his focus was on household spending, auto and truck sales, home sales, and home building. There wasn't even one slide, in his 18 slides, about investment. (Of course, to some extent, housing and car and truck sales are investment. Maybe that's what he would argue.)

Of course, whether you think that's sensible will depend on whether you think the Keynesian model is basically right and also on whether the focus should be on the short-run (consumption) or the long run (investment).

But I was surprised that he made a basic economic error, one that I would expect my students not to make after we've gone over it in class. After showing a slide on sales of existing homes--it showed a big drop in the last few months--he referred to this as "housing demand." But it's not housing demand, nor is it housing supply. The only thing that a figure on home sales tell us is how many homes were sold. The drop could be due to a drop in demand. One could even argue that it's likely due to a drop in demand. But it also could be due to a drop in supply. At most, it's an equilibrium quantity determined by the intersection of supply and demand.

I've even seen one sharp petroleum economist from the American Petroleum Institute make the same mistake: he presented data on consumption and referred to it as "oil demand."

CATEGORIES: Macroeconomics


Tourists Welcome

Bryan Caplan
Almost everyone wants to heavily restrict immigration.  Foreigners will take our jobs, go on welfare, poison our culture, and vote for socialism.  But there's one kind of foreigner almost every country welcomes: tourists.  Sure, locals gripe about their cluelessness and clownishness.  But almost no one wants to shoo tourists away.

Yes, visas and other regulations on tourism are well-established.  Their chief rationale, however, is to prevent tourists from mutating into immigrants.  From the State Department:
The required presumption under U.S. law is that every visitor visa applicant is an intending immigrant until they demonstrate otherwise. Therefore, applicants for visitor visas must overcome this presumption by demonstrating:

• That the purpose of their trip is to enter the United States temporarily for business or pleasure;
• That they plan to remain for a specific, limited period;
• Evidence of funds to cover expenses in the United States;
• That they have a residence outside the United States as well as other binding ties that will ensure their departure from the U.S. at the end of the visit.
Requiring "evidence of funds to cover expenses" seems designed to prevent tourists from going on welfare or begging in the streets.  All the other requirements, though, ultimately reflect a single goal: preventing foreigners from getting U.S. jobs.  As long as they run around spending money on hotels, restaurants, and Disneyland, great!  But we don't want them to take jobs and start producing stuff for us.

The populist view, as you're well-aware, is that immigrant workers are "taking jobs" that rightfully belong to natives.  But you could just as easily accuse tourists of "taking stuff" - hotel rooms, restaurant meals, Disneyland tickets - that rightfully belong to natives.  Selling stuff to foreigners is mutually beneficial?  Then why isn't producing stuff for natives mutually beneficial, too?

To explain this odd double standard, I once again accuse misanthropy.  We readily welcome foreign money.  Money, after all, can be exchanged for goods and services.  But foreign people?  Of what possible use are they?  Just think of all the bad things a person might conceivably do or be.  Shudder. 

An economist might claim that the very fact that an immigrant lands a paying job is a strong sign that they're useful to somebody.  He could even insist that immigration drastically raises foreigners' wages by drastically raising their productivity.  But that's just market fundamentalism.  Move along, nothing to see here...


Answer: No.

But it has become increasingly common for people, even otherwise numerate analysts, to write as if it can.

Consider a recent instance. In the Spring 2014 issue of Regulation, Sam Batkins and Mitch Boynton discuss a case in which an estimate of a regulatory cost fell from $672 million to $89 million. That's a drop of 87 percent.

But that's not what they wrote. They call this "a 750 percent drop in costs." How did they get that? It looks as if they take the drop as a percent, not of the number from which it dropped, but of the number to which it dropped. The drop was $583 million. That's 655 percent of the number it dropped to. Then, for some reason, they add another approximately 100 percentage points.


TravisV sent me to the following graph of industrial production:

Screen Shot 2014-04-17 at 8.21.15 AM.png
That looks like good news. To see why it is bad news, we need to take a brief digression. The recent recession has been rather unusual. RGDP fell sharply between 2008 and 2009, and since bottoming out in mid-2009 has grown at about 2.4% annually, which is below the 3% trend line of the past 100 years. This has led many to conclude that the economy is not recovering at all.

A counterargument is that the unemployment rate has fallen from a peak of 10% to the current 6.7%, and in my view it will fall even further over the next year or two. A counter counterargument is that the employment/population ratio fell sharply in the recession, and has not been recovering. A counter counter counterargument is that this partly represents boomer retirement, as the over 55 year old category is where all the recent population growth has been occurring. This is from a recent Joe Weisenthal post:

Screen Shot 2014-04-17 at 8.30.28 AM.png
The counter counter counter counterargument is that labor force participation has even fallen in the 25-54 demographic. This could go on forever---labor force data will never resolve anything.

Here's what we need to figure out, is the recovery cyclical or is it secular growth? Suppose it was secular growth, what would it look like? In my view we'd expect roughly 2% to 3% growth in the major components of GDP, as output remained cyclically depressed, but grew at the trend rate (so that the recession wasn't becoming worse.)

Now suppose the secular growth rate had slowed to say 1%, and the economy was briskly recovering toward that new trend line. What then? In that case I'd expect very rapid growth in highly cyclical sectors, and very slow growth in non-cyclical sectors.
Now let's return to industrial production. This sector (mostly manufacturing but also mining and utilities) is always much more cyclical than RGDP. Whereas RGDP fell about 4.3% peak to trough, IP plunged 16.9%. Since the trough in early 2009, IP is up 23.3% (although the low base in 2009 means we've barely passed the previous 2007 peak.)

That might sound like good news---the economy is recovering! But it's actually bad news. If the economy is recovering then the trend rate of growth must be much less than the anemic 2.4% rate we've seen over the past 4.5 years. I'd guess that 1% to 1.5% is the "new normal." And not just in the US, but also in other (non-Obama ruled) developing countries, with the possible exception of high-immigration places like Australia and Singapore.

I also wondered where the IP trend line is. The trend growth from the early 2000 peak to the late 2007 peak was 1% annual growth in IP. But this might underestimate trend, as the 2000 boom was an IP-heavy business investment boom, whereas 2007 was more of a housing boom. Even so, manufacturing is a falling share of GDP, so if overall RGDP trend growth is only 1% to 1.5%, I'd guess IP trend growth rate is also pretty low. We are only 2.5% above the November 2007 peak, but IP is up 1.9% in just 2 months. If it keeps growing at 4%/year or so, we'll quickly close the gap. Believe it or not the US economy will be "recovered" by late next year.

Bonus forecast--the unemployment rate will fall several ticks in April.

Also note that if I'm right about the recovery, it supports the argument that low interest rates are the "new normal." Short-term rates will rise at some point, but to 2% to 3%, not the usual 5%

CATEGORIES: Macroeconomics


I've Won My TARP Bet

Bryan Caplan
Back in 2008, I noted an obscure TARP provision:


Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt. (emphasis mine)

In response, I publicly offered the following bet:
If the Director of the OMB's 2013 report says that a shortfall exists, I win.  Otherwise, I lose.  The stakes: I will make up to five $100 bets at even odds.
The OMB's 2013 report is now in.  You can download all 510 pages here, then turn to page 39:
As of December 31, 2011, total repayments and income on TARP investments were approximately $318 billion, which is 77 percent of the $414 billion in total disbursements to date. The projected total lifetime deficit impact of TARP programmatic costs, reflecting recent activity and revised subsidy estimates based on market data as of November 30, 2011, is now estimated at $67.8 billion.

This is actually more pessimistic than the OMB's previous update, which also had me on track to win:
Compared to the 2012 MSR estimate of $46.8 billion, the estimated deficit impact of TARP increased by $21 billion. This increase was largely attributable to the lower valuation of the AIG and GM common stock held by Treasury.
If you don't wish to download a 510-page pdf, try the CBO's 8-page summary of the OMB report, combined with the CBO's slightly different (but still negative) estimates of TARP's budgetary costs. 

TARP was passed on October 3, 2008.  Since the CBO's report is dated May 23, 2013, you could argue that I am declaring victory a few months prematurely.  However, the CBO report also explains that this is the 2013 TARP report:
Originally, the law required OMB and CBO to submit semiannual reports. That provision was changed by Public Law 112-204 to an annual reporting requirement. OMB's most recent report on the TARP was submitted on April 10, 2013.
None of TARP's cheerleaders accepted my bet, even though their announced beliefs seemingly implied that betting me would be taking candy from a baby.  As far as I can tell, the only people who clearly accepted my bet were EconLog readers Michael K and Rick StewartSteve Roth somewhat ambiguously accepted, so I leave payment to his conscience.

HT: Philip Wallach at Brookings for reminding me about the bet.

Update: All three of my partners have arranged for payment.  EconLog is an clearly an honorable corner of cyberspace.

CATEGORIES: Economic Methods , Finance


On a flight home from Las Vegas last night, I found the April 14 issue of Time magazine. I hadn't read it in years. On the last page was a feature called "10 Questions." They were 10 questions to "activist, atheist and best-selling author Barbara Ehrenreich." Interestingly, they left out any mention, in their adjectives, of her political views. She's quite far left.

So, given that I'm a big believer in economic freedom, you might think that I would disagree with her about her answer in income inequality, right? WRONG. I TOTALLY agreed with her.

Here was the question: "If I could give you one power, one wish, what would you do to lessen income inequality?"

Before I give her answer, stop and think what you would expect it to be. Guaranteed annual income financed by an increase in the top marginal federal income tax rate to 60 percent or higher? More welfare programs?

Seriously, think about it before you read her actual answer.

Here's her actual answer:

Stop all the ways that money is being taken from the poor. I mean, you can just spiral down so fast into poverty. You have a broken headlight, you get stopped. That fine is going to be greater than the cost of a new headlight. You don't have money to pay the fine, you're looking at an arrest warrant--and down you go.

Think about that: the one most-important step Barbara Ehrenreich would take to lesson income inequality is to have the government stop hassling poor people.

I agree.


Tyler Cowen directed me to a long interview of Larry Summers. I have two general impressions after listening to the interview:

1. Larry Summers seems brilliant.
2. I disagree with him on just about everything.

That got me wondering why I disagree with someone whose opinions seem sensible. Let's see if we can find a pattern:

1. He says financial excesses led to the Great Depression. I say just the opposite--the Depression was caused by tight money, and the later financial crises were an effect.

2. Summers says the slow RGDP growth in Britain indicates that austerity failed. I don't think RGDP tells us much about the impact of austerity, as fiscal policy directly impacts NGDP, and the split between RGDP and prices reflects supply-side factors.

3. Summers thinks excess saving leads to low AD and secular stagnation. I think secular stagnation (for supply-side reasons) leads to low interest rates, and in some countries these low rates push monetary policy in an excessively contractionary direction.

4. He thinks JFK airport is a disgrace, and this shows we need more public investment. I think JFK airport is a disgrace, and this shows we need more private investment (after privatizing JFK, LaGuardia, and Newark airports).

5. He thinks low interest rates (from easy money) leads to financial bubbles, and thus favors fiscal stimulus. I see little evidence (theoretical or empirical) linking low rates with financial instability. I think our financial system has been better behaved in recent years (at zero rates) than back in 2005 and 2006 when rates were much higher.

6. He thinks capital income should be taxed more heavily. I oppose all taxes on capital income.

7. He thinks growing inequality is a major issue in the modern world. I see growing equality as the most important trend since 1980.

8. He worries about current account deficits and I don't.

That's just a small sample; I disagreed with almost everything he said for over an hour. And there are many other differences that were not in the talk:

9. He favors discretionary monetary policy; I favor rules.

10. He judges the stance of monetary policy by looking at interest rates, I look at NGDP.

This is clearly not the place to determine who's right. Obviously I think I'm right and just as obviously my opinion has zero value. Rather I'd like to figure out why we can't agree on anything.

Here's one hypothesis. I take all the counterintuitive aspects of economic theory very seriously, whereas Summers is more influenced by "framing effects." He has a more common sense view of the world. Back in the 1990s when it looked like the "Washington Consensus" was roughly correct, Summers seemed like a neoliberal. So did Paul Krugman. Now Krugman says reality has a liberal bias. I'd say left-leaning liberalism is the natural position of a utilitarian with a common sense view of the world. I'm a right wing liberal because I have a counterintuitive view of the world:

1. The Great Depression looks like it was caused by financial turmoil, but looks can be deceiving.

2. Since the ultimate goal of fiscal stimulus is faster growing RGDP, that variable seems a natural way to measure the impact of fiscal stimulus, but it isn't. NGDP measures aggregate demand.

3. It seems obvious that saving would reduce AD, but it doesn't. Monetary policy determines AD. It seems plausible that low spending could explain a low trend rate of growth, but it doesn't. Supply-side factors explain the low trend rate of growth.

4. It seems obvious to an American (not a European) that the government should own airports. Summers is an American.

5. It seems obvious that low rates would encourage speculation and financial excess, leading to bubbles. But the EMH says bubbles don't exist.

6. It seems obvious that all forms of income should be treated equal, but public finance theory says that taxing capital income is taxing the same labor income twice.

7. It seems obvious that inequality is increasing, but the data says that global inequality is decreasing.

8. It seems obvious that trade deficits would hurt an economy, but economic theory says they don't.

9. It seems obvious that central banks should make a decision in the year 2014 that is best for the economy in 2014 and in the near future--i.e. discretion. But theory says we need policy rules using a timeless perspective.

10. It seems obvious that low interest rates mean easy money, but theory and evidence suggest they more often reflect low inflation and/or a weak economy.

To be sure, there are good counterarguments for much of what I said. You can construct models that differ from the standard models on CA deficits or capital income taxation. That's not my point. The people that Larry Summers interacts with (like President Obama) know nothing of those models. Most idealistic people from outside the field of economics will think Summers is right and I'm wrong. Even President Bush supported a demand-side tax rebate (in 2008) to juice the economy. I'll have the support of selfish rich people who don't want to pay taxes on capital income because they are greedy. Yuck.

It really is a miracle that Milton Friedman was so persuasive. I don't know how he did it.

CATEGORIES: Economic Philosophy


A friend tells you, "I'm thinking of starting a restaurant.  Advise me."  You know that about 60% of new restaurants fail in their first three years - and have no reason to think that your friend would be anything other than average.  How should your knowledge affect your advice? 

You could say, "Open the restaurant and work like mad, because the odds are against you."  Slogan: Try Harder.

Or you could say, "Don't open the restaurant, because the odds are against you."  Slogan: Do Something Easier.

Neither recommendation is crazy.  But as the probability of failure rises, the case for Do Something Easier gets stronger and stronger.  Why tell your friend to work his fingers to the bone when he's probably going to fail anyway? 

This is especially true on the plausible assumption that people are more likely to heed advice about one-time discrete decisions than day-to-day continuous decisions.  Saying "Marry her" is more likely to sway behavior than "Be good to your wife every day" - and saying "Do Something Easier" is more likely to sway behavior than "Try Harder."

Why then are advisers so reluctant to say "Do Something Easier"?  Because Try Harder sounds better - and most advisers would rather sound good than genuinely help their advisees.

This analysis clearly applies to starting a business or choosing an occupation.  But it works equally well for educational decisions.  Suppose a kid at the 30th percentile of the high school distribution asks you if he should go to college.  You know that kids at the 30th percentile have a dismal dropout rate.  Should you respond with Try Harder or Do Something Easier?

In our society, "Try Harder" is the socially acceptable - nay, socially mandatory! - slogan.  Don't tell kids to give up on their dreams; tell them to work for their dreams.  On reflection, though, this just exposes advisers' vanity: They'd rather sound helpful than be helpful.  Do you really imagine that chanting "Try Harder" will induce weak students to devote themselves to their studies, day in, day out?  No?  Then urging weak students to "Try Harder" barely differs from "Make an expensive investment that will fail at its normal high rate." 

To be fair, most weak students will ignore you even if you urge them to Do Something Easier.  But some will probably listen to you - and refrain from making a very bad bet. 

What about the tiny minority of weak students who would have blossomed in college?  Obsession with this group is the height of pious folly.  Suppose you convince a lot of people to stop buying lottery tickets.  Should you lose sleep over the likelihood that - but for your advice - one of your advisees would have won the jackpot?  Of course not.  "Advice that works on average" is also known as "good advice."

Say it with me: Risk of failure is a reason not to try.  Not a decisive reason, but a reason nonetheless - and the higher the risk of failure, the stronger the reason.  True, if you have no alternatives, you may as well try your best and hope for the best.  But would-be restaurant owners and would-be students always have alternatives.  And as long as you have alternatives, willingness to Do Something Easier in the face of crummy odds is not cowardice.  It is good economics - and common sense.


At the IEA blog, Kristian Niemietz points out that expenditure surveys fail to detect most of the tobacco sales visible in national product accounts
For most goods, the two show broadly the same pattern: with small errors, what people profess to buy grosses up to what is really being sold in the country. But tobacco is a big exception. Less then half of the recorded cigarette purchases shows up in the Living Cost and Food Survey. In the US equivalent, the ratio is not even 40%.
Why is tobacco dark matterSocial Desirability Bias!

The mismatch between what smokers say in surveys and what they do in practice is a classic example of the difference between "stated preferences" and "revealed preferences". Social engineers love stated preferences. Opponents of big supermarkets, too, always have a survey at hand, indicating that the vast majority of residents in their areas would never set foot in a discounter. But once it is there, it flourishes.

There is nothing schizophrenic about this behaviour. When asked whether you would shop in a big supermarket in your area, of course you respond something like "No! Small, local shops are much more charming and personal" - because that is the socially acceptable thing to say. When you smoke, saying that you want to quit makes you at least a repentant sinner.

Now ask yourself: Is voting more like a national product account - or a consumer expenditure survey?


Martin Luther King's "Letter from a Birmingham Jail" defends an odd position: You may morally break an unjust law IF you make no effort to evade the legal punishment for the unjust law you break.
In no sense do I advocate evading or defying the law, as would the rabid segregationist. That would lead to anarchy. One who breaks an unjust law must do so openly, lovingly, and with a willingness to accept the penalty. I submit that an individual who breaks a law that conscience tells him is unjust, and who willingly accepts the penalty of imprisonment in order to arouse the conscience of the community over its injustice, is in reality expressing the highest respect for law.
The obvious question: If the law is unjust, doesn't consenting to punishment simply compound the injustice?  The subtler challenge: "Evading" or "defying" just laws could easily lead to "anarchy" in a pejorative sense.  But why on earth is King so pessimistic about the social effects of "evasion" or "defiance" of unjust laws?  Indeed, if the laws are really so awful, you'd expect every violation to make the world a little bit better.

Perhaps King's underlying story is a variant of the Noble Lie.  Something along the lines of:

1. People often mistakenly think that a law is unjust.

2. If people feel free to evade or defy laws they think are unjust, they will break many just laws, with awful consequences.

3. However, if people feel obliged to accept the legal punishments for breaking all laws regardless of their justice, they will reflect seriously on the justice of the law, drastically reducing their chance of mistakenly breaking an unjust law.

4. Therefore, it is good if people don't feel free to evade or defy laws they deem unjust.

Assuming I have successfully reverse engineered King's underlying position, it has two major flaws. 

First, it neglects a simple alternative to promoting the Noble Lie that evading or defying unjust laws is wrong.  Namely: Promoting the Noble Truth that people should painstakingly investigate the justice of a law before breaking it. 

Second, this story neglects the very existence of moderately virtuous people who are willing to resist unjust laws if and only if the personal cost is low.  If such people feel free to evade or defy unjust laws, they'll break them, making the world more just.  However, if they don't feel free to evade or defy unjust laws, they'll obey them, preserving the injustice of the status quo.

Philosopher Michael Huemer's new essay on jury nullification presents a more compelling position on civil disobedience: Don't merely feel free to break unjust laws; strive to prevent their enforcement.  He begins with one of his trademark hypotheticals.
Imagine that you are walking down a public street with flamboyantly-dressed friend, when you are accosted by a gang of gaybashing hoodlums. The leader of the gang asks you whether your friend is gay. You have three alternatives: you may answer yes, refuse to answer, or answer no. You are convinced that either of the first two choices will result in a beating for your friend. However, you also know that your friend is in fact gay. Therefore, how should you respond?

This is hardly an ethical dilemma. Clearly, you should answer no. No person with a reasonable and mature moral sense will have difficulty with this case. Granted, it is usually wrong to lie, but the importance of avoiding inaccurate statements pales in comparison to the importance of avoiding serious and unjust injury for your friend. The case illustrates a simple and uncontroversial ethical principle: it is prima facie wrong to cause another person to suffer serious undeserved harms. This is true even when the harm would be directly inflicted not by oneself but by a third party.
Huemer's point obviously still applies if the hoodlums directly interrogate the gay man.  Lying is usually wrong, but not when your audience plans to savagely beat you for telling the truth.  Even a juror who explicitly promises to enforce the letter of the law can rightfully renege:
Three ethical principles governing the obligation of promises seem relevant here. To begin with, it is normally permissible to break a promise when necessary to prevent serious and undeserved harms to another person. For instance, suppose you have promised to pick a friend up from the airport, but on the way, you encounter an injured accident victim in need of medical assistance. It would be permissible, if not obligatory, to assist the accident victim, even though doing so will prevent you from picking up your friend. And this is true regardless of whether your friend will be understanding about your failure to pick him up.

Second, a promise prompted by a threat of unjust coercion is typically not ethically binding. If a gunman threatens to shoot you unless you promise to pay him $1,000, that promise will have no moral force. Thus, if you escape the gunman after making the promise, you have no moral obligation at all to deliver $1000 to him. The same goes for unjust threats against third parties: if a gunman threatens to shoot your neighbor unless you promise to pay $1,000 to the gunman, that promise, too, is invalid. If the neighbor escapes after you have made the promise, you have no obligation at all to hand over the money.

Third, even when a promise is initially valid, it is permissible to break the promise if doing so is necessary to forestall a threat of unjust harm from the person to whom the promise was made. The promisee in such a case has no valid complaint, since it is his own threatened unjust behavior that makes it necessary to break the promise. For example,
suppose I have voluntarily promised to lend you my rifle next weekend. Before the week-end arrives, you credibly inform me that you intend to use the rifle to murder several people. In this case, I should not still lend you the rifle. It is not merely that my prima facie
obligation to keep the promise is outweighed by the need to prevent several murders. Rather, your threat of unjust harm completely cancels any obligation I would have had to keep my promise to you.
Returning to the gaybashing hypothetical:
Imagine that the gang leader not only asks whether your friend is gay but also asks you to swear that your answer on this point will be truthful. You reasonably believe that refusal to swear will result in a beating for your friend. This case is scarcely more difficult than the original case. Clearly, you should swear to tell the truth and then immediately lie to the gang. In doing so, you do not wrong the gaybashing gang or anyone else. The gang would have no valid complaint against you for your breaking of your promise, since it is their own unjust coercive threat that forced you both to make the promise and to break it.
What about the specter of "anarchy" - the fear that people will cavalierly dismiss as "unjust" any law that frustrates their desires?  Huemer finds this a poor argument against jury nullification.
Suppose you are on a jury in a trial in which the defendant is accused of violating an unjust law, and you are considering a nullification vote. Your motivation is not racist, and you know that it isn't. You know that your motivation is the injustice of the law. It is difficult to see how the fact that some racist juries have voted to acquit defendants who should have been punished negates the very strong reason that you have, in this case, to acquit the defendant. The fact that others have done A for bad reasons does not make it wrong for one to do A for good reasons.

Consider again the example of the gang of hoodlums. Suppose that you are just about to lie to the gang, when it occurs to you that many people have lied for bad reasons. In fact, surely there have been more cases of corrupt lying in human history than there have of morally justified lying. It would be absurd to suggest that this historical fact somehow negates the reason that you have for lying in this case, or that you are morally bound to always tell the truth merely because more lies have been harmful than have been beneficial.
Huemer's critique readily extends to civil disobedience more generally.  The fact that people often break just laws is a lame argument for obeying unjust laws.  The proper remedy for abuse is greater investment in moral reasoning, not blind obedience to unjust laws or masochistic submission to unwarranted legal punishment.  King was right to oppose blind obedience.  But his advocacy of masochistic submission to unjust punishment is barely better.


In the past 10 years Germany as gone from being the "sick man of Europe" to the star of the eurozone. This partly reflects the strong job creation that preceded the recession, perhaps due to the labor market reforms of 2003. However the post-2007 performance is even more amazing. There was almost no increase in unemployment during the recession, and the unemployment rate has fallen to relatively low levels during the recovery. Here's some data for the US and Germany between the last quarter of 2007 and the last quarter of 2013:

Country ------- United States - Germany

Real GDP growth: +6.3% /// +4.0%

Nom. GDP growth: +16.3% /// +12.8%

Un. rate change: +2.2% /// -3.2%

Employ. change: -0.7% /// +6.0%

Total labor comp: +12.2% /// +19.2%

Labor comp./GDP: -3.6% /// +5.7%

Ave. weekly hrs: -0.4% /// -1.1%

[Update: Marcus Nunes pointed out that NGDP growth for the US was misreported in the original post.]

Let's start with the two GDP numbers. The US did a couple points better, but we also had modestly higher growth in our working age population. The US population age 16 to 64 grew by 3.2%, while the German working age population declined a few tenths of a percent (quarterly data is not available.) Thus in per capita terms Germany did 1 or 2 points better. But the real action lies elsewhere.

Initially I thought that the sharp fall in the German unemployment rate might have reflected falling German productivity and slow population growth. But that doesn't explain the NGDP figures. Germany actually created far more jobs than America, despite lower NGDP growth.

The next step is to look at compensation per worker. I couldn't find hourly compensation data for Germany (outside manufacturing) but if one compares total compensation to total employment it looks like compensation in Germany rose by just over 12% per worker. The US figures appear to be just under 13% per worker. So it does not look like the German employment miracle was caused by low wages.

So what is the explanation then? As far as I can tell, the only plausible explanation (at least in an accounting sense) is a breakdown in my "musical chairs model." In this model the level of hours worked reflects the interaction of NGDP and (sticky) nominal wages. It is assumed that total labor compensation is a stable fraction of NGDP. Arnold Kling found this assumption so reasonable that he once called the model an "identity."

In this case, however, the share of income going to labor behaved very differently in Germany and America. Let's start with Germany. If NGDP rose by only 12.8%, and compensation per employee rose nearly as much, then how could employment have increased substantially? The answer is simple. Workers grabbed an extra 5.7% of national income (up from 48.7% to 51.5%.) That roughly explains the 6% rise in total employment in Germany.

In the US, NGDP grew a bit faster than compensation per employee. Thus one might have expected a small increase in total employment. Instead employment actually fell by 0.7%, as workers grabbed a 3.6% smaller share of NGDP (from 54.5% to 52.5%.)

Are there any lessons here? Yes, but not the ones you might imagine. The "solution" is not to try to increase the share of national income going to workers. Why not? Because the most likely methods (higher minimum wages, stronger unions, etc) are also likely to boost compensation per employee. So any gains flowing from labor receiving a higher share of NGDP will be offset by losses in jobs from higher wage rates.

Instead, the lesson is that NGDP in America should have grown faster than 14.2% 16.3% over those 6 years. A few years back Bill Woolsey recommended reducing the trend rate of NGDP growth from 5% to 3%, in order to stabilize prices. But even Woolsey's proposal (viewed as being quite conservative at the time) would have meant considerably more than 14.2% 16.3% NGDP growth over 6 years. Had his proposal been followed, unemployment in America today would likely be closer to 5%.

In Germany, the 6% rise in employment was partly reflected in a lower unemployment rate, and partly in a higher labor force participation rate. The labor market reforms encouraged the creation of many low wage jobs (Germany has no minimum wage) and helped low income workers with wage subsidies. It is interesting that the one shining labor market success of the 21th century occurred in a "social market economy" like Germany. Even more interesting is the fact that this approach (enacted by the Social Democrats) has almost no support among American progressives, who tend to prefer the more rigid southern European labor model.

Is it possible that (paradoxically) the flexible-wage German model actually boosted the share of income going to labor? Yes, but it's equally possible the increase occurred for some unrelated reason. In any case, the focus should be on jobs, jobs, jobs, not the share of income going to labor. To get there you need stable growth in NGDP (or total labor comp.), no artificial wage floors, and generous subsidies for low wage workers. It's a pity that there is no one touting that model anymore. Even the Germans have decided to abandon the labor market reforms of 2003 and adopt a minimum wage.

Indeed even Hong Kong now has a minimum wage. America recently increased the minimum wage by 40%, and there are calls for another 40% increase--at a time of slow NGDP growth and high unemployment.


Ramblings on Piketty

Alberto Mingardi

I've finally received my copy of Capital in the Twenty-First Century, Thomas Piketty's magnum opus that has already risen to the status of a cult book for the political left. It is a good rule never to comment on a book you haven't read cover to cover. I'm not going to stick with this rule, this time, for two reasons. First of all, I am not up to comment competently on the book, neither now nor when I'll put it down: I simply lack both the statistical training and the economic knowledge that is needed to tackle the many arguments made by Piketty. I hope somebody writes a good review of the book. Paul Krugman wrote a long and enthusiastic one, but my ideal candidate would be Deirdre McCloskey. Second, I find Piketty's book a most intriguing read (I'm reading the English translation, and I find it extremely well written: clear and evocative at a time), and every page prompts comments, reflections, and occasional outrage.
However, there are a couple of comments I'd like to share.

First, the author maintains that inequality is the central issue of the political debate. He writes:

(...) the distribution of wealth is too important an issue to be left to economists, sociologists, historians and philosophers. It is of interest to everyone, and that is a good thing. The concrete, physical reality of inequality is visible to the naked eye and naturally inspires sharp but contradictory political judgments. Peasant and noble, worker and factory owner, waiter and banker: each has his or her own unique vantage point and sees important aspects of how other people live and what relations of power and domination exist between social groups, and these observation shape each person's judgment of what is and is not just.

Piketty maintains that "social science research on the distribution of wealth was for a long time based on a relatively limited set of firmly established facts together with a wide variety of purely theoretical speculations", and he wants to fill in with some better grounded information. Fair enough, but is it really true that the distribution of wealth is the central problem we confront, as we enter the public debate? I mean, couldn't it just be that some of us do not care about inequalities? I know somebody may reply that indeed, there are people that do not care about inequalities: the rich. But why should the drive towards a more equal distribution of wealth be the central question for all those interested in politics? Surely inequalities are often visible to "the naked eye": but so are, for example, asymmetries in the distribution of not wealth, but power. We live in societies that are centered around stable power asymmetries: and yet we tend to make fun of those that would like to equalize the power of men over men, as most people think that anarchists rightly belong to the periphery of the learned debate.(*)

Piketty's book is being praised for its scientific worth, but also because he argues that

Since the 1970s, income inequality has increased significantly in the rich countries, especially the United States, where the concentration of income on the first decade of the twenty-first century regained - indeed, slightly exceeded - the level attained in the second decade of the previous century.

Well, I am surely totally mistaken, but isn't this a wonderful argument for not caring that much about inequalities per se (vis-à-vis, for example, inequalities as the result of perverse incentives, exploitation, legal privilege or political intrigues)? Piketty reminds his readers of the poverty and destitution experienced by the masses in the 19th century, painting a Dickensian picture of those times. Whatever we may think of bankers' bonuses, is today's situation, in the Western world, really comparable?

(*) Piketty asks "how would one arrange the division between capital and labor" in "an ideal society" (emphasis added). He maintains that "political economy ought to study scientifically, or, at any rate rationally, systematically, and methodically, the ideal role of the state in the economic and social organization of a country" (emphasis added). He seems to believe this to be a rather uncontroversial statement. Is it really?



My San Francisco Fed Talk

David Henderson

Last Wednesday I gave a talk at the San Francisco Federal Reserve Bank. The event was the "2014 Conference of Twelfth District Directors."

I was one of three presenters. See here for the other two. The session was on "Bubbles" and my talk was titled "Bubbles, Information, and the Fatal Conceit." In my talk, I reviewed the evidence of Peter Garber and the later evidence of the late Earl Thompson, which showed that the apparent tulip bubble in Holland in the 1630s was actually not a bubble: the prices reflected market fundamentals. I also pointed out how badly one would have done if one had followed the implicit advice of Robert Shiller in March 2010, which was not to buy stocks. Based on the S&P 500 index, one would have foregone compounded annual returns of 13.1 percent, and that's not including dividends.

I segued from that to the information problem as laid out by Hayek in "The Use of Knowledge in Society" and then to my 5th Pillar of Economic Wisdom: Information is valuable and costly, and most information that's valuable is inherently decentralized. I then gave three good things that happened on September 11, 2001--the emptying of the World Trade Center of people despite the official advice to stay put, so that the death toll was under 3,000 rather than the originally feared 20,000, the passengers' actions on United #93, and the landing of almost 3,000 planes safely within an hour of the order to land--as applications of that pillar. I briefly got into lessons not learned from 9/11. Some of that is here.

Then to Adam Smith on central planning, talking about the man of system in The Theory of Moral Sentiments.

Then I asked, "Is Monetary Policy an Exception?" I asked the audience, "Is planning the money supply easier than planning the steel industry or the auto industry?" I reminded the audience of Ben Bernanke's famous confession to Milton Friedman and Anna J. Schwartz at Milton's 90th birthday party: "I would like to stay to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." That was an expensive way to learn the lesson, I pointed out, and moreover, under the Fed, the dollar has lost over 95 percent of its value.

My last two slides contained excerpts from "The New Central Planning," Wall Street Journal, March 28, 2013, Jeff Hummel's excellent review of Ben Bernanke's book. The first quote was:

Yet he [Bernanke] hardly discusses the quantity of money in circulation or the Fed's effect on it. The omission reflects the fact that Mr. Bernanke has dramatically altered the nature of central banking. Under his management, the Fed now tries to determine to which sectors the economy's savings flow, and monetary policy has become solely about setting interest rates.

The second quote was:
Milton Friedman correctly insisted that the role of central banks was to merely control the total money supply and permit markets to allocate credit. Mr. Bernanke clearly rejects this view, and this finally is the underlying story of his lectures, reflected in his focus on interest rates as the sole indicator of monetary policy, his targeted but sterilized bailouts, his paying interest on reserves, his expanding Fed assets to include mortgage-backed securities, and his efforts to manipulate the yield curve on Treasurys. In short, under Ben Bernanke central banking is becoming the new central planning.

I never said that we should "end the Fed," but I think it was clear to over 80 percent of the audience that that's where my argument would lead.

Given the audience--SF Fed economists and other employees and directors and former directors of the Federal Reserve 12th District, I thought the reception to my talk was quite good. I doubt that I changed many minds. But I also think that I gave a number of people there some things to think about. My guess is that the vast majority of them had never seen the issue of a central bank as an issue of central economic planning. My guess also is that over 50 percent of them had never seen Ben Bernanke's admission.

Afterwards, John Williams, the President and CEO of the Fed, came up and told me that this was the 6th year they've had an afternoon panel at their annual conference and that my talk was the first one that was so critical of the Fed.

I have other impressions of the Fed, of John Williams's talk that morning, and of Glenn Rudebusch's talk that morning, but I'll share those in a later post.


In The Economic Naturalist, Robert Frank remarks:

Psychologist Tom Gilovich has suggested that someone who wants to accept a hypothesis tends to ask, "Can I believe it?"  In contrast, someone who wants to reject it tends to ask, "Must I believe it?"

I immediately thought of Gilovich's insight while reading Scott Keyes' op-ed on divorce in the Washington Post.

"Can I believe it?":

No-fault divorce has been a success. A 2003 Stanford University study detailed the benefits in states that had legalized such divorces: Domestic violence dropped by a third in just 10 years, the number of husbands convicted of murdering their wives fell by 10 percent, and the number of women committing suicide declined between 11 and 19 percent. A recent report from Maria Shriver and the Center for American Progress found that only 28 percent of divorced women said they wished they'd stayed married.

"Must I believe it?":

While some studies show that children of divorced parents do experience worse life outcomes -- including diminished math and social skills, a higher chance of dropping out of school, poorer health, and a greater likelihood of divorce themselves -- Stanford sociologist Michael Rosenfeld points out that there is no way to test definitively whether children of divorced parents were already more likely to experience such outcomes. And as Stephanie Coontz, a historian and the author of "Marriage, a History," explains, what's most critical is the high-conflict environment that kids grew up in before their parents separated.

<sarcasm>How fortunate that there is a "way to test definitively" whether domestic violence and female suicide would have fallen if divorce laws hadn't been liberalized!</sarcasm>

"Must I believe it?" continued:

Would making divorce less accessible encourage partners to stay together, as conservatives hope? Probably not. Waiting periods and mandatory classes "add a new frustration to already frustrated lives," Rosenfeld notes. In other words, a cooling-off period isn't cooling anybody off.

"Can I believe it?" continued:

More problematic, these roadblocks "could easily exacerbate the situation and harm kids," Coontz says, noting that divorcees are "more likely to parent amicably if they haven't been locked into a long separation process."

Keyes' double standard vexes me even though I think (a) government should play no role in marriage, and (b) twin and adoption evidence shows little or no effect of divorce on kids' adult outcomes.  All of the following still remain highly plausible:

a. There are a lot of so-so marriages.

b. The cost of divorce affects the divorce rate for couples in so-so marriages.

c. Most kids of couples in so-so marriages strongly prefer for their families to stay together.

Oh, and if liberalized divorce has been so great, why did this happen?  Don't tell me what you can believe.  Don't tell me what you must believe.  Just tell me what makes sense to you.


In recent history, the UK has liberalized its rules concerning the hours that pubs can operate. For example, the Licensing Act of 1988 expanded Sunday hours and no longer required pubs to close for two and a half hours in the afternoon. In 2005, the law in England and Wales was further liberalized such that pubs could remain open until 5 am instead of closing at 11 pm. An article in the latest issue of the Journal of Health Economics claims that the 2005 liberalization of pub hours actually decreased the number of traffic accidents.

Theoretically, extended pub hours could either increase or decrease traffic accidents. Obviously, if people drink at a steady rate, they will usually become more intoxicated as the night progresses; extending pub hours could lead to more dangerous drivers. However, there are other ways that extended pub hours might plausibly reduce accidents. Without early pub closings, fewer pub patrons would make an additional drive to a second drinking location -- such as to a party at a friend's house. A later pub closing might also cause drinkers to drive home during hours with fewer cars are on the road.

Proponents of liberalized pub hours saw other benefits:

The initial government White Paper, Time for Reform ..., contended that the uniform and early closing hour meant "that large numbers of drinkers come out onto the streets late at night at the same time causing disorder." It also contended that early closing caused a "beat the clock" game that encouraged binge drinking. Famously, MP Jane Griffiths is quoted claiming that "The effect of compulsory closure has been for people to drink 'against the clock', with whole generations of young people learning to drink as much as possible in a short space of time ..., Most of these young people are drunker than they would be if they drank at their own pace..."

During the time period under study, Great Britain saw generally declining traffic accidents and fatalities. For example, from 2000 to 2005, traffic fatalities and serious injuries fell from 41,000 to 32,000. The paper isolates the impact of the law from long run traffic trends by comparing England and Wales to Scotland -- the 2005 changes did not impact Scotland. The reduction in traffic accidents for England and Wales are plausibly related to the change in pub hours because the largest reductions occurred during weekend nights and early mornings. The impact on young drinkers was particularly strong. Accidents involving young people on Friday and Saturday nights decreased by an estimated 32.5 percent.

CATEGORIES: Regulation


Donald Boudreaux takes on one of Robert Reich's recent arguments for the minimum wage. Reich writes:

A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices. But because the higher minimum will also attract more workers into the job market, employers will have more choice of whom to hire, and thereby have more reliable employees -- resulting in lower turnover costs and higher productivity.

Boudreaux responds:
Reich is correct that businesses are in intense competition for consumers. What he misses, however, is the fact that, precisely because of this intense competition, businesses have none of the excess profits that Reich presumes will be tapped into to pay the higher mandated wages.

. . . Intense competition eliminates excess profits; with no excess profits firms cannot, contra Reich, simply pay workers higher wages. Firms instead must respond to a higher minimum wage by some combination of hiring fewer low-skilled workers, working their remaining low-skilled workers harder and reducing these workers' non-wage pay, and charging higher prices for their outputs.

I would also add that it's strange that businesses that are in "intense competition" have not apparently, according to Reich, figured out that they can get lower turnover and higher productivity by themselves raising their wages.

But put that aside. Here's what I wonder:

How would Reich draw the supply and demand curves to get the result that prices of the firms' goods and services would not rise?

Also, note something else in Reich's statement above. He writes:

But because the higher minimum will also attract more workers into the job market, employers will have more choice of whom to hire,

I think he's right. With employers being more choosy, some employees get left behind. And who are they? The ones who are least productive. Reich has made a substantial concession, whether or not he realizes it.


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