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David R. Henderson  

James Buchanan's Work

David Henderson

There's a lot of buzz on the Internet lately (see here for my recent commentary on Sam Tanenhaus's review) about the recent book by Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America. MacLean sees economist James M. Buchanan as the key figure in the rise of the "radical right." One of the things that those of us who know Buchanan's work well have been saying, on Facebook and elsewhere, is that Ms. MacLean doesn't seem to know his work well. Which is a pity because she presumably spent at least months and probably years researching his work.

If only there were a way for people to read some of Jim's many books without having to spend a small fortune.

Fortunately, there is. Liberty Fund has made many of his books available electronically for free. See here, browse through, and enjoy reading the works of this remarkable man.

HT2 Art Carden.

P.S. For a quick look at who James Buchanan was, see my brief bio of him in The Concise Encyclopedia of Economics.

David R. Henderson  

Both Sides Gain from Exchange

David Henderson

My friend and blogging competitor Don Boudreaux writes:

You say that China's agreement to buy more beef from America is "a big win for us." Well, these beef exports from the U.S. are mostly a win for the Chinese people. From the perspective of us Americans, the beef that we export is a cost. That beef is part of what we give up in exchange for whatever it is we'll import with the earnings that we receive on the beef sales. Our true benefit from this trade deal is chiefly in the additional Chinese chickens that we'll now be allowed to import. Yet that's a benefit that we could have - and should have - enjoyed even without Beijing's agreement to let the Chinese people enjoy greater access to American beef.

It's true that the beef exports are a win for the Chinese people. But I don't think we have fine enough tools to know whether most of the benefits are to Chinese people or most are to U.S. beef producers.

Imagine that the Chinese have very close substitutes for our beef at comparable prices. Then their being allowed to buy U.S. beef benefits them but not by a lot. Their gain is called consumer surplus. Imagine (probably contrary to fact) that U.S. beef producers have few options for selling their beef to people other than the Chinese. Then the U.S. beef producers' gain, called producer surplus, is quite large.

I have no prior view on which is larger. I do know, though, that both sides gain from exchange and so when they're allowed to exchange more due to a reduction in the Chinese government's barrier to exchange, that's a win for both sides. So it's not out of line for the person he's responding to to celebrate the win for the U.S. producers..

CATEGORIES: International Trade

The three concepts mentioned in the title of the post are completely unrelated to each other. So unrelated that the subjects ought not even be taught in the same course. The nominal exchange rate is a monetary concept. Real exchange rates belong in course on the real side of macro, perhaps including public finance. And protectionism belongs in a (micro) trade course.

The nominal exchange rate is the relative price of two monies. It's determined by the monetary policies of the two countries in question. It plays no role in trade.

Protectionism is a set of policies (such as tariffs and quotas) that drives a wedge between domestic and foreign prices. Protectionist policies reduce both imports and exports. They might also slightly affect the current account balance, but that's a second order effect.

Real exchange rates influence the trade balance. When there is a change in either domestic saving or domestic investment, the real exchange rate must adjust to produce an equivalent change in the current account balance. A policy aimed at a bigger current account surplus is not "protectionist", as it does not generally reduce imports and exports, nor does it drive a wedge between domestic and foreign prices. It affects the gap between imports and exports. Here are some policies that can lead to a lower real exchange rate and a bigger current account surplus:

1. The central bank can accumulate lots of foreign assets, increasing national saving.

2. The government can run a budget surplus.

3. The government can create a sovereign wealth fund.

4. The government can encourage private savings, via a pay as you go retirement system.

[Update: I meant fully funded pension system, not pay as you go.]

5. The government can switch from an income tax to a consumption tax.

None of these are protectionist. A low real exchange rate is sometimes called a "competitive advantage", although the concept has absolutely nothing to do with either competition or advantages. It's simply a reflection of an imbalance between domestic saving and domestic investment. These imbalances also occur within countries, and no one ever worries about regional "deficits". But for some odd reason at the national level they become a cause for concern. Some of this is based on the mercantilist fallacy that exports are good and imports are bad.

Here's David Glasner:

Currency manipulation has become a favorite bugbear of critics of both monetary policy and trade policy. Some claim that countries depress their exchange rates to give their exporters an unfair advantage in foreign markets and to insulate their domestic producers from foreign competition. Others claim that using monetary policy as a way to stimulate aggregate demand is necessarily a form of currency manipulation, because monetary expansion causes the currency whose supply is being expanded to depreciate against other currencies, making monetary expansion, ipso facto, a form of currency manipulation.

As I have already explained in a number of posts (e.g., here, here, and here) a theoretically respectable case can be made for the possibility that currency manipulation can be used as a form of covert protectionism without imposing either tariffs, quotas or obviously protectionist measures to favor the producers of one country against their foreign competitors.

I disagree with this. There is no theoretically respectable case for the argument that currency manipulation can be used as protectionism. But I would go much further; there is no intellectually respectable definition of currency manipulation.

And the most egregious recent example of currency manipulation was undertaken by the Chinese central bank when it effectively pegged the yuan to the dollar at a fixed rate. Keeping its exchange rate fixed against the dollar was precisely the offense that the currency-manipulation police accused the Chinese of committing.
Because currency manipulation does not exist as a coherent concept, I don't see any evidence that the Chinese did it. But if I am wrong and it does exist, then it surely refers to the real exchange rate, not the nominal rate. Thus the fact that the nominal value of the Chinese yuan was pegged for a period of time has no relevance to whether the currency was being "manipulated". The real value of the yuan was appreciating.

The dollar was pegged to gold from 1879 to 1933, and yet I don't think the US government was "manipulating" the exchange rate. And if it was, it was not by fixing the gold price peg, it would have been by depreciating the real value of the dollar via policies that increased national saving, or reduced national investment, in order to run a current account surplus. In my view it is misleading to call policies that promote national saving "currency manipulation", and even more so to put that label on just a subset of pro-saving policies.

If economists want to use the term 'currency manipulation', then they first need to define the term. I have not seen any definitions that make any sense.

Here's China's real exchange rate, which has been appreciating over time.

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David R. Henderson  

Is America in Retreat?

David Henderson


This evening Johan Norberg, who, with Free to Choose Media, put together a one-hour video on foreign policy, will be presenting a segment of the video at the Commonwealth Club. There will be a panel discussion after. I will be one of the panelists.

The gist of the video is that the U.S. government is in retreat from commitments around the world and shouldn't be.

Here are the details:

Location: 555 Post St., San Francisco
Time: 5:45 p.m. check-in, 6:30-8:15 p.m. film screening and discussion

This link gives the fees for non-members.

My one big disagreement with Ed Glaeser's great piece on housing deregulation is when he says:
Reforming local land use controls is one of those rare areas in which the libertarian and the progressive agree. The current system restricts the freedom of the property owner, and also makes life harder for poorer Americans. The politics of zoning reform may be hard, but our land use regulations are badly in need of rethinking.
Actually, there are four other big areas where the two ideologies converge. 

1. Immigration.  Immigration restrictions deprive billions of basic liberties, impoverish the world, and do so on the backs of the global poor, most of whom are non-white.

2. Occupational licensing.  Licensing laws bar tens of millions of people from switching to more lucrative and socially valuable occupations, all to benefit richer insiders at the expense of poorer outsiders.

3. War, especially the War on Terror.  Since 2002, the U.S. has literally spent trillions fighting the quantitatively tiny problem of terrorism by waging non-stop wars in the Middle East.  We don't know what the Middle East would have looked like if the U.S. had stayed out, but it's hard to believe it would be worse.  And there's no end in sight.

4. The criminal justice system, especially the War on Drugs.  Hundreds of thousands of non-violent people, disproportionately poor and non-white, are in prison.  Why?  To stop willing consumers from doing what they want with their own bodies.

These four issues are so massive, you'd expect a staunch progressive/libertarian alliance would have been forged long ago.  But of course it hasn't.  Why not?  Some progressives flatly disagree with one or more of these policies; see Bernie contra open borders.  But the bigger stumbling block is that progressives place far lower priority on these issues than libertarians.  That includes war, unless the Republicans hold the White House

Why not?  I regretfully invoke my Simplistic Theory of Left and Right.  The heart of the left isn't helping the poor, or reducing inequality, or even minority rights.  The heart of the left is being anti-market.  With some honorable exceptions, very few leftists are capable of being excited about deregulation of any kind.  And even the leftists who do get excited about well-targeted deregulation get far more excited about stamping out the hydra-headed evils of market.

Can we make parallel accusations against libertarians?  Sure.  The second half of my Simplistic Theory says: The heart of the right is being anti-left.  Since most libertarians loosely identify with the right, stubbornly focusing on housing, immigration, licensing, peace, and criminal justice is dry.  Though these five areas are plausibly the biggest and most harmful abridgements of human freedom on Earth, it's more exciting for libertarians to dwell on symbolic issues that drive the left to apoplexy.

Prove me wrong, kids.  Prove me wrong.

David R. Henderson  

Tanenhaus on James Buchanan

David Henderson


I have just read the first serious book review I've seen of historian Nancy MacLean's hatchet job book on James Buchanan, Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America. It's by Sam Tanenhaus.

He is, by and large, sympathetic with MacLean's strong claims about the role of James Buchanan in the rise of the radical right. Those of us who knew him well are more skeptical, partly because he was so bookish, so into thinking about fundamental ideas about governments and societies, and not really up to date on this or that political skirmish or current politician.

In any case, parts of the Sam Tanenhaus piece read as if Tanenhuas is writing for an audience that knows little economics and little U.S. history and is, therefore, credulous. Or it's possible it's Tanenhaus himself who's ignorant and credulous. I don't know. Three passages stand out.

Buchanan played a part, MacLean writes, by teaming up with another new University of Virginia hire, G. Warren Nutter (who was later a close adviser to Barry Goldwater), on an influential paper. In it they argued that the crux of the desegregation problem was that "state run" schools had become a "monopoly," which could be broken by privatization. If authorities sold off school buildings and equipment, and limited their own involvement in education to setting minimum standards, then all different kinds of schools might blossom. Each parent "would cast his vote in the marketplace and have it count." The argument impressed Friedman, who a few years earlier had published his own critique of "government schools," saying that "the denationalization of education would widen the range of choice available to parents."

Far-fetched though these schemes were, they gave ammunition to southern policy makers looking to mount the nonracial case for maintaining Jim Crow in a new form. Friedman himself left race completely out of it. Buchanan did too at first, telling skeptical colleagues in the North that the "transcendent issue" had nothing to do with race; it came down to the question of "whether the federal government shall dictate the solutions." But in their paper (initially a document submitted to a Virginia education commission and soon published in a Richmond newspaper), Buchanan and Nutter were more direct, stating their belief that "every individual should be free to associate with persons of his own choosing"--the sanitized phrasing of segregationists.

See what Tanenhaus does here? He starts out by laying out Buchanan's pretty good argument against government monopoly. But then he says that southern politicians could use this argument to mount the nonracial case for maintaining Jim Crow. I'm not sure how. If people could choose their own schools, then Jim Crow would crumble. The essence of Jim Crow was lack of choice. See Loving v. Virginia.

Tanenhaus continues. Buchanan left out race too "at first." So then a reader would think that Buchanan later introduced race, right? Let's see.

Buchanan and Nutter stated their belief that "every individual should be free to associate with persons of his own choosing." Tanenhaus says that this was the sanitized phrasing of segregationists. Possibly. I don't know. But it's also the phrasing of people who opposed Jim Crow laws, which forbade certain forms of freedom of association. One would think that if Tanenhuas wants to make his case that Buchanan favored segregation, he would come up with direct quotes to make it. It appears that he can't. So he uses a quote making the case against segregation and claims that it's really a disguised case for desegregation.

For Buchanan, the trouble now went beyond the government. The enemy was the public itself, expressed through the tyranny of majority rule: The have-nots preyed on the rich, egged on by the new elite--labor bosses, benevolent corporations, and pandering politicians--who fell over themselves promising more and more.

This is a roughly accurate view of Buchanan's thoughts on democracy, although I don't recall Buchanan talking about benevolent corporations--maybe he did. But there's one jarring line that shows Tanenhaus's ignorance of Buchanan's views. It's this one: "The have-nots preyed on the rich." Any guesses as to who advocated that the government "prey on the rich" by imposing a 100% marginal tax rate on the value of all estates over $500,000 in 1975 dollars (or one million--I've forgotten which)? Hint: his initials are JMB. That's right: James M. Buchanan. He advocated that at a Liberty Fund conference I attended with him in June 1975 in Athens, Ohio.
His view of Social Security--a "Ponzi scheme"--is shared by privatizers like Paul Ryan.

True, but Tanenhaus might be surprised by someone else who explicitly labeled Social Security a "Ponzi game" and celebrated it for that reason: Paul A. Samuelson.

Tanenhaus, to his credit, is pretty much on target with his description of public choice.

This was not a new argument, but Buchanan gave it fresh rigor in his theory of "public choice," set forth in his pioneering book, The Calculus of Consent (1962), written with Gordon Tullock. Governments, they argued, were being assessed in the wrong way. The error was a legacy of New Deal thinking, which glorified elected officials and career bureaucrats as disinterested servants of the public good, despite the obvious coercive effects of the programs they put into place. Why not instead see politicians and government administrators as self-interested players in the marketplace, trying to "maximize their utility"--that is, win the next election or enlarge their department's budget?

This idea turned the whole notion of a beneficent government, and of programs and policies designed more or less selflessly, into a kind of fairy tale expertly woven by politicians and their flacks. Not that politicians were evil. They were looking out for themselves, as most of us do. The difference was in the damage they did. After all, the high-priced programs they devised were paid for by taxes wrested from defenseless citizens, who were given little or no effective choice in the matter. It was licensed theft, reinforced by the steep gradations in income-tax rates.

Actually, this is a pretty decent, if simplified, view of public choice. The one part that is off is the implication that the idea that government is beneficent began with New Deal thinking. It's much older than that. Has Tanenhaus read James Madison? Or Adam Smith? And he does well at saying that the damage when government looks out for itself is way greater than when private individuals do it. Look at the well over one-million people killed in Vietnam war and millions displaced due in part to LBJ's narrow motives.

Bryan Caplan  

Build, Baby, Build

Bryan Caplan
Ed Glaeser makes the case for housing deregulation for Brookings:

Housing advocates often discuss affordability, which is defined by linking the cost of living to incomes. But the regulatory approach on housing should compare housing prices to the Minimum Profitable Construction Cost, or MPPC. An unfettered construction market won't magically reduce the price of purchasing lumber or plumbing. The best price outcome possible, without subsidies, is that prices hew more closely to the physical cost of building.

In a recent paper with Joseph Gyourko, we characterize the distribution of  prices relative to Minimum Profitable Construction Costs across the U.S... We base our estimates on an "economy" quality home, and assume that builders in an unregulated market should expect to earn 17 percent over this purely physical cost of construction, which would have to cover other soft costs of construction including land assembly.

We then compare these construction costs with the distribution of self-assessed housing values in the American Housing Survey. The distribution of price to MPPC ratios shows a nation of extremes.  Fully, 40 percent of the American Housing Survey homes are valued at 75 percent or less of their Minimum Profitable Production Cost... Another 33 percent of homes are valued at between 75 percent and 125 percent of construction costs.


But most productive parts of America are unaffordable. The National Association of Realtors data shows median sales prices over $1,000,000 in the San Jose metropolitan area and over $500,000 in Los Angeles. One tenth of American homes in 2013 were valued at more than double Minimum Profitable Production Costs, and assuredly the share is much higher today. In 2005, at the height of the boom, almost 30 percent of American homes were valued at more than twice production costs. 

We should blame the government, especially local government:

How do we know that high housing costs have anything to do with artificial restrictions on supply? Perhaps the most compelling argument uses the tools of Economics 101. If demand alone drove prices, then we should expect to see places that have high costs also have high levels of construction.

The reverse is true.  Places that are expensive don't build a lot and places that build a lot aren't expensive. San Francisco and urban Honolulu have the highest ratios of prices to construction costs in our data, and these areas permitted little housing between 2000 and 2013. In our sample, Las Vegas was the biggest builder and it emerged from the crisis with home values far below construction costs.

The top alternate theory is wrong:

The primary alternative to the view that regulation is responsible for limiting supply and boosting prices is that some areas have a natural shortage of land.

Albert Saiz's (2011) work on geography and housing supply shows that where geography, like water and hills, constrains building, prices are higher.   He also finds that measures of housing regulation predict less building and higher prices.

But lack of land can't be the whole story. Many expensive parts of America, like Middlesex County Massachusetts, have modest density levels and low levels of construction. Other areas, like Harris County, Texas, have higher density levels, higher construction rates and lower prices...

If land scarcity was the whole story, then we should expect houses on large lots to be extremely expensive in America's high priced metropolitan areas. Yet typically, the willingness to pay for an extra acre of land is low, even in high cost areas. We should also expect apartments to cost roughly the cost of adding an extra story to a high-rise building, since growing up doesn't require more land. Typically, Manhattan apartments are sold for far more than the engineering cost of growing up, which implies the power of regulatory constraints (Glaeser, Gyourko and Saks, 2005).

Which regulations are doing the damage?  It's complicated:

Naturally, there are also a host of papers, including Glaeser and Ward (2009), showing the correlation between different types of rules and either reductions in new construction or increases in prices or both. The problem with empirical work any particular land use control is that there are so many ways to say no to new construction. Since the rules usually go together, it is almost impossible to identify the impact of any particular land use control. Moreover, eliminating one rule is unlikely to make much difference, since anti-growth communities would easily find ways to block construction in other ways.

Functionalists are wrong, as usual:

Empirically, there is also little evidence that these land use controls correct for real externalities. For example, if people really value the lower density levels that land use controls create, then we should expect to see much higher prices in communities with lower density levels, holding distance to the city center fixed. We do not (Glaeser and War, 2010). Our attempt to assess the total externalities generated by building in Manhattan found that they were tiny relative to the implicit tax on building created by land use controls (Glaeser, Gyourko and Saks, 2005).

What's to be done?  State governments are our least-desperate hope:

The right strategy is to start in the middle. States do have the ability to rewrite local land use powers, and state leaders are more likely to perceive the downsides of over regulating new construction. Some state policies, like Masschusetts Chapter 40B, 40R and 40S, explicitly attempt to check local land use controls. In New Jersey, the state Supreme Court fought against restrictive local zoning rules in the Mount Laurel decision.  If states do want to reform local land use controls, they might start with a serious cost benefit analysis and then require localities to refrain from any new regulations without first performing cost-benefit analyses of their own.

It will be a great day when constructing new housing regulations is as big a bureaucratic nightmare as constructing new housing is now!

This article caught my eye:

When online retail giant Inc. announced last Friday that it would purchase Whole Foods Market Inc., a plunge in retail and grocery stocks reinforced the disinflationary tone set by three straight months of disappointing data on consumer prices. It's an example of the technological forces that are increasing competition and further limiting companies' ability to pass on higher wage costs to customers.

"That normally indicates that somebody thinks that they are not going to be earning as much as they were," Federal Reserve Bank of Chicago President Charles Evans said of the market reaction to the deal while speaking with reporters Monday evening after a speech in New York.

"For me, it just seems like technology keeps moving, it's disruptive, and it's showing up in places where -- probably nobody thought too much three years ago about Amazon merging with Whole Foods," he said.

Evans, a voter on the Federal Open Market Committee this year who supported its decision to raise interest rates last week, says he is less confident than most of his colleagues that inflation will soon rise to their 2 percent target.

A big reason for his ambivalence: Deflationary competitive pressures could have become more important for the overall trend in prices than the so-called Phillips Curve relationship, which links inflation to the state of the labor market. That model, coined almost 60 years ago, is the basis for the Fed's outlook for continued gradual rate increases.

I'm a bit confused by this. I certainly agree that there are good reasons to question the Phillips Curve model, for standard "never reason from a price change" reasons. The Phillips Curve only works if changes in inflation are driven by AD shocks, not aggregate supply shocks. In that sense I agree with Evans.

But what is the nature of these mysterious AS shocks? Evans points to technology and competition, but these are forces that would cause the long run AS curve to shift to the right more rapidly. In other words, these are factors that would lead to a higher trend rate of growth in real GDP. The most noteworthy aspect of our modern economy, however, is slowing trend RGDP growth. Instead, it seems that wage moderation has shifted the SRAS curve to the right, producing a steady decline in the unemployment rate. The economy is not growing very fast at all, and what growth is occurring (roughly 2%) appears to be well above the long run trend rate, as the unemployment rate can't keep falling forever.

I'm not saying that he is wrong about Amazon, or even retailing as a whole. But when you look at the data it's clear that technology is not having much impact on overall real GDP growth.

And even if you argue that we aren't measuring growth properly, and the actual RGDP is higher because we miss all the goodies provided for free on the internet, it still doesn't solve the puzzle. The puzzle is the low rate of reported inflation. If real growth is higher than the official figures suggest, then inflation is even lower.

And this leads us to the point where macroeconomic discussions ought to start---with NGDP growth. The real issue for monetary policymakers is not inflation and/or RGDP growth, it's NGDP growth. The only way to have low inflation despite low RGDP growth is if the Fed has such a tight monetary policy that NGDP growth remains slow. And that's exactly what they've done since 2009. If you produce 4% NGDP growth year after year after year, then why be surprised that inflation remains low? Why look for explanations having to do with "technology" or "competition" if the answer is right there in front of your eyes---NGDP.

If the Fed starts delivering 11% NGDP growth, as in the 1970s, and we still have sub-2% inflation, then we can start worrying that technology is holding down inflation. But in that case we'd have no reason to worry about the low inflation "problem", as RGDP growth would be 9%. Which is just another stating a point I repeatedly emphasize; inflation doesn't matter, it's NGDP growth that matters.

HT: John Hall

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Bryan Caplan  

Positive-Sum Diversity

Bryan Caplan
My last post pointed out a fundamental distinction between effects of diversity on trust and effects of demography on trust:
If, as in Putnam's original story, diversity per se were really bad for growth, segregation would sharply raise average trust.  Indeed, segregating two communities could conceivably raise trust in both communities.  This is what makes diversity a special social variable.  If diversity in and of itself has bad effects, so does integration - regardless of the characteristics of the mingling populations.  If the effects of diversity are demographic effects in disguise, however, integration has distributional effects, but is zero-sum overall.
Is there any way diversity could end up being a social positive, rather than merely zero-sum?  Sure.  The top mechanism to consider:

Standard economic theory says that good things have decreasing marginal utility and bad things have increasing marginal disutility.  Doubling the quantity of food less than doubles the social value of food.  Doubling the quantity of pollution more than doubles the social harm of pollution.  Now suppose you can either have a segregated society, where half the population has 25% trust and half has 75%, or an integrated society, where the whole population has 50%.  While average trust is the same in both scenarios, the social effects of trust should be, on net, better in the integrated society.  Why?  Because the net benefits of moving from 50% to 75% trust will, by standard economic logic, be smaller than the net benefits of moving from 25% to 50% trust. 

One variant on this story: Innovation itself might vary non-linearly with trust.  Very low trust might choke off innovation entirely, while moderate trust provides a solid foundation for dynamism.  Returning to the 25%/75% scenario, homogeneity allows growth only in the high-trust enclave, while diversity allows growth in both.

Are such effects genuine?  Unfortunately, I've seen few papers that test for non-linear benefits of trust, except for this paper finding negative marginal effects of high trust on GDP per capita.*  Anything I've missed?

* Nor should we forget the historic crimes that homogeneous societies like Germany and Japan have inflicted on out-groups and dissidents. 

Bryan Caplan  

Special Diversity

Bryan Caplan
When Robert Putnam runs a proper statistical horserace, one of his favorite predictors of trust - diversity - barely matters.  To recap:

putnam.jpgNow a diversity skeptic could look at Putnam's results and say: "Fine, diversity per se is no big deal.  But Putnam does show that blacks and Hispanics have low trust.  And that's controlling for household income, the area's poverty rate, and Spanish prevalence, all of which further depress trust.  The presence of blacks and Hispanics is truly terrible."

The easiest reply is: "You're right qualitatively, but not quantitatively."  The whole point of a regression is to measure the size of effects, not just their directions - and the size of demographic effects is modest.  Suppose the black share rises from 5% to 55%, the poverty rate rises from 10% to 40%, and average household income falls from $75k to $25k.  This drastic demographic shift reduces Putnam's predicted trust by .31*.50 + .66*.5 + .5*.14 = .56.  Is that massive?  No, because Putnam measures trust on a 4-point scale.  .56 is less than 20% of size of the trust spectrum - noticeable, but hardly the end of the world.

But there's a subtler reply.  Namely: The effect of demographics on trust is zero-sum.  If low-trust people move into a high-trust area, the change is bad for the incumbents but good for the entrants.  Calling black migration "bad for trust" is just NIMBYism: keeping low trust away from you doesn't make society's trust higher.

Isn't this always true?  No.  If, as in Putnam's original story, diversity per se were really bad for growth, segregation would sharply raise average trust.  Indeed, segregating two communities could conceivably raise trust in both communities.  This is what makes diversity a special social variable.  If diversity in and of itself has bad effects, so does integration - regardless of the characteristics of the mingling populations.  If the effects of diversity are demographic effects in disguise, however, integration has distributional effects, but is zero-sum overall.

In a sense, then, Putnam was right to focus on diversity, because diversity is conceptually special.  In the real world, arguments about diversity usually boil down to identity politics: Diversity is bad if it hurts my group, good if it helps my group.  In theory, however, you could have an anti-diversity universalist - someone who thinks that society as a whole will be better off if people stick to their own kind.  Putnam's empirics suggest that anti-diversity universalists are rare for a reason: The numbers just don't add up.

Last week, Grenfell Tower in North Kensington, London went up in flames. At least 58 people died, including two young Italian architects. In my own country, therefore, the story was quickly picked up in the media - and it is a tremendously sad one. The young couple called their respective families when the fire began and assured them of their safety, but eventually the young woman, Gloria, when she understood she was about to die, called her mother to thank her for all she did for her in her 27 years of life. This is heart-breaking.

If you're human at all, you can't but feel sympathy for the casualties of such a disastrous event, for their family, and for the other tenants who saw their holdings destroyed. Several crowdfunding campaigns are being set up to provide these people with much needed help.

Politics is a quintessentially human activity, but sometimes may well be dehumanising. Galvanised by recent elections, the British left is trying to exploit the fire politically. A Labour MP, Clive Lewis, tweeted: "Burn Neoliberalism, not people". His understanding of neoliberalism is quite limited. (For example, he tweets about a "Montepellier set", thinking, I suppose, of the Mont Pelerin Society.)

Economist Mariana Mazzucato didn't miss a chance to play her part: "Grenfell Tower = microcosm of 3 very bad economic ideas 1. De-regulation; 2. Outsourcing (public service for private profit); 3. Austerity".

I confess that, while I fancy myself having at least a broad understanding of what people mean when they say "neoliberalism," I don't know enough about Grenfell Tower to express more than grief on the subject. Be aware, therefore, that what follows is based on Wikipedia, articles I've read in these last few days, and conversations with British friends.

I will try to read Mariana Mazzucato charitably. Grenfell Tower is in fact an example of social housing: it is owned by the Kensington and Chelsea London Borough Council. The building was managed by a tenant management organisation, Kensington and Chelsea TMO. Their own website explains the structure and nature of such an organisation. The building was thus owned by the Council, which refurbished it in 2012. One residents' group had issued multiple warnings about the safety of the building.

I think Mazzucato wants to say that: (a) Thatcherite deregulation weakened safety and fire regulation (a point made also by London mayor Sadiq Khan); (b) organisations like Kensington and Chelsea TMO weaken political oversight over buildings like this; and (c) austerity forced the council to go for a less expensive renovation plan rather than for the more expensive one.

These criticisms only seem to be appropriate.

First, deregulation is hardly such a widespread phenomenon as socialists believe. It is one thing to say that British fire regulations are "old" or "inadequate" and quite another to maintain that the British government actually deregulated in this case. This would be news to me. It is safe to assume, I'd maintain, that newer (say: 1990s and 2000s) buildings in London are safer than those built in the 1960s and 1970s. Better standards have emerged. I don't know if this happened because of regulation or because of technological advances. But either way it seems to be incompatible with the idea that developers have been given a blank cheque to build unsafe buildings. On top of that, rule-making involves making trade-offs. Megan McArdle has pointed out that while "People who died in the Grenfell fire might be alive today if regulators had required sprinkler systems," "it's possible that by allowing large residential buildings to operate without sprinkler systems, the British government has prevented untold thousands of people from being driven into homelessness by higher housing costs." Her piece is thoughtful and well worth reading.

Second, I suppose that a council could take one of these two routes: create a specific body to manage properties or manage them by committees and subcommittees. This is the same rationale by which public corporations and independent agencies are created by Parliaments. Is there evidence that the latter are better managers than the first? I can hardly see that.

Third, austerity. Government is enjoined to spend less, and thereby jeopardises its citizens. I don't know the details of the renovation of Grenfell Tower. Probably Mazzucato has a deeper knowledge than I have. But governments and local councils deal with scarce resources too, just like like private individuals. As in her work on The Entrepreneurial State, Mazzucato seems to believe that having a bottomless pocket makes government the kind of investors we need - for fostering innovation, entrepreneurship, growth, and now, even safety. But whenever you are choosing between projects, budgetary considerations enter the picture, even if you're the most social democratic-minded of mayors. On top of that, if we see a general tendency in government, it is not to spend less for realising a certain project than the private sector would. Big checks from governments are also tainted with the shadow of corruption, which means private interests interfering and lobbying to get hold of them. This is not a phenomenon that is inversely correlated with the size of government, though I'm afraid Mazzucato may genuinely think, contrary to theory and fact, that the bigger the government, the less corrupt it is. For this reason, of course, she doesn't even consider the possibility that there might be problems inherent in public property that misalign the interests of tenants and owners even more so than with private ownership.

I think that ideally in moments like this we should be silent, honor the memory of those who died, and simply be human. But the acrobatic building of a narrative by which anything bad that happens in this world is due to "neoliberalism" doesn't stop for anything, including tragedy. For that reason, sadly, I feel the need to opine also.

Scott Sumner  

Immigration and growth

Scott Sumner

There are some indications that the immigration crackdown may slow economic growth:

AUSTIN, Texas (AP) -- Though construction is in high demand in Texas' booming capital city, Oscar Martinez's drywall company is suddenly struggling.

One-third of the approximately 20 employees Martinez uses to build new homes and commercial spaces have recently fled the state, spooked by a combination of a federal immigration crackdown by the Trump administration and a tough anti-"sanctuary cities" law approved last month by Texas' Republican-controlled Legislature.

"I took a big hit since my workers started hearing crazy stories about being deported, and they panicked," said Martinez, who relies on immigrants in the U.S. illegally for labor and has failed to find replacements for the physically grueling, precise work.

"The Americans I hire can't last in this job more than half a day," Martinez said.

And it's not just about the quantity of workers, immigration also boosts the quality of the workforce:

JOSÉ ROMMEL UMANO, who is originally from the Philippines, moved to New York last autumn. He came on a family-reunification visa and joined his wife, who had been living in America for some time. This is a typical tale: America gives more weight to close family members when considering immigration applications than some other rich countries do. More surprising is that Mr Rommel Umano arrived with a master's degree from the University of Tokyo and 20 years of experience as an architect in Japan. Yet this, it turns out, is typical too. Nearly half of all immigrants who arrived between 2011 and 2015 were college-educated. . . .

The result is that America has switched from importing people who are, on average, less educated than the natives to people who are better schooled.

For the past several years I've argued that 1.2% is the new trend rate of growth in real GDP. I see no reason to change that forecast.

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David R. Henderson  

A Father's Day Tribute

David Henderson

This tribute is to one of the two people without whom I wouldn't be a father: my daughter. (The other, of course, is my wife.)

A little over a year ago, on Mother's Day, my wife and I drove to San Francisco to have lunch with my daughter. She had just finished being on a jury for a one or two-week-long (I've forgotten which) trial. That was her first time.

I was impressed about everything she told us: how she didn't lie to get out of the jury, how she paid close attention to what was going on, and how, as instructed, she didn't talk about the case to friends or us during the trial. But two other things most impress me.

One was her keen powers of observation about an economic issue. This is what made me think that she would have been a natural in economics. She pointed out that when the jury pool was reduced from over 100 to 24, the person with the least amount of formal education was someone with an associate's degree. Everyone else had at least a bachelor's degree and many had graduate degrees, either Masters' or professional degrees. "What's that telling you?" she asked me, grinning as we were debriefing her. "That they were highly formally educated," I answered. "No," she said, "that's true, but it's telling you how expensive housing is in San Francisco. The high price of housing is pricing out people who are less formally educated, and we are the ones left." (Or words to that effect.)

The other thing that impressed me was the question she had the judge ask the defendant. He was a race-car driver clocked at 73 mph on a 35 mph road through Golden Gate Park. The police chased him and the big issue was whether, as they said, he tried to get away or, as he said, his car malfunctioned. There was pretty good evidence that it was the former, but Karen, my daughter, kept an open mind. The jury was allowed to write out questions and hold them up so the bailiff could pick them up and take them to the judge. The judge would then decide whether the questions were legitimate. All of Karen's questions passed muster. Here was the killer question, which came after it was revealed that the driver's friend had picked his car up the next day from the lot where it has been impounded:

Didn't you fear that the car might still malfunction and that, therefore, your friend might be in danger?

The defendant's answer: No.

That, plus the other evidence, cinched it for Karen to vote Guilty.

There's one other thing that impressed me about Karen and the other 11 jurors. Their straw vote at the outset showed unanimity but they spent a whole day making sure. One of their biggest concerns was this: Given that the guy was a race-car driver and there were no drugs or alcohol involved, was he really that much of a danger? I asked her if it would have helped her and some of the other jurors if they had been able to know the penalty the judge was likely to give. She said yes. But she followed the rules and didn't independently research the penalty.

By the way, the simple fact that she was on the jury is a great counterexample to a claim that co-blogger Bryan Caplan made in an otherwise excellent interview. At the 1:45 point of this interview, in making the case for private arbitration, a case that I entirely agree with, Bryan dumps on the jury system by saying that the 12 jurors are "too dumb to get out of jury duty." As my daughter's experience shows, there are some people who are probably smart enough to get out of jury duty but don't.

CATEGORIES: Law and Economics

This is from a Jeff Madrick article on poverty in America, in the New York Review of Books:

The poverty rate has been as low as 11.1 percent, in the 1970s; it rose under Ronald Reagan to approximately 15 percent and then fell to about 13 percent before rising again, then fell again under Bill Clinton to 11.3 percent before rising in the 2000s.
I see this all the time, and I find it really annoying. In a very technical sense this is true, but I'm going to present more complete data, and you tell me whether it's misleading.

The poverty rate was 11.6% when Carter took office in 1977. The poverty rate rose to 14% in 1981, when Reagan took office. The poverty rate fell to 12.8% in 1989, when Reagan left office.

So how can the NYR of Books say "it rose under Reagan to approximately 15 percent"? That's because in Reagan's second year there was a very serious recession, and the poverty rate reached 15%. But the NYR of Books creates the impression that it rose during the 8 years that Reagan was in office, which is simply not true. Poverty fell under Reagan. it was Jimmy Carter who presided over a surge in poverty.

Of course there are lots of ways to massage the data, such as adjusting for changes in the business cycle, as well as inflation. As a general rule, poverty increases during presidencies when the economy deteriorates (Carter, Bush I, Bush II) and declines during presidencies where the economy improves (Reagan, Clinton, Obama). Unfortunately, Jeff Madrick seems to have an agenda, which requires his readers to believe that poverty increased under Reagan.

One other point. Yesterday, David Henderson quoted from a book by Peter Schuck. Here is one bit that caught my attention:

If we include noncash government benefits such as food and housing, if we take account of the Earned Income Tax Credit, and if we use a more realistic measure of inflation than the Consumer Price Index, then we would conclude that the 2013 poverty rate was not the reported 14.5%, but, rather, 4.8%.
Over the course of 61 years, I've run into a surprisingly large number of people who earn income on the fringes of the economy, doing various odd jobs. They are often paid in cash. Many of these people probably had very low "official incomes" being reported to the government. Thus I suspect that if you included money earned in the underground economy, the poverty rate would be far lower than even 4.8%.

The point of this exercise is not to suggest that there is not a lot of poverty in America, in a relative sense. I am not trying to minimize the problem. I'm quite happy with people claiming that 15% of Americans are poor if they mean, "incomes that the average upper middle class person views as low". Thus people in New York or LA who make 20% or 30% above the official poverty line are probably viewed as "poor" by the average well paid professional. That's a valid opinion.

Rather my claim is that absolute poverty, not having enough income for food, clothing, and some form of shelter, has decreased sharply in America, even as relative poverty may reasonably be said to have stayed around 10% to 15%, or perhaps even edged up a bit.

Here is the official poverty rate data:

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In Milton Friedman on Freedom, editors Robert Leeson and Charles G. Palm, both of the Hoover Institution, have put together many of Friedman's most important articles and chapters that make his case for freedom. (Disclosure: I was a friend of both Milton and Rose Friedman and am a research fellow with the Hoover Institution, where Friedman was a senior fellow from 1977 to his death in 2006.)

The book is well worth reading. There is often overlap between sections so that you will read the same data or important facts three or four times in working through the chapters. Some might find this annoying; others might find that the repetition reinforces the message. In this book, you will see Friedman making mainly a consequentialist case for freedom--it works so well, giving us prosperity--even though he takes pains to point out that his case is a philosophical one based on moral relativism. Friedman is at his strongest when he draws on his economic and statistical skills. He is at his weakest in making his philosophical case.

This is from "Crusader for Liberty," Regulation, Summer 2017, my review of Milton Friedman on Freedom.

As you'll see from the review I liked it a lot. I did get one surprise, though. I hadn't known to what extent Milton based his case for freedom on moral relativism. He doesn't write it just once. It comes up a few times in the book. I wrote:

What is Milton Friedman's basic argument for freedom? One might think that, given his emphasis on freedom's consequences, his case is a combination of consequentialism--free markets do so well for us--and one of the standard libertarian moral arguments against the initiation of force. But at various points in the book, Friedman takes pains to say that his case for freedom is not about consequences at all but, rather, is based on our ignorance about what is moral. In a 1974 Reason interview reprinted in the book, Friedman says that if we knew for sure what sin is, then, if we saw someone sinning, we ourselves would be sinners if we didn't forcibly prevent him from sinning. He asks, "[H]ow can you allow a man the freedom to sin?" He answers his own question: "The only answer I can give is that I cannot be absolutely certain that I know what is sin." In a 1991 article, "Say 'No' to Intolerance," Friedman repeats that argument.

I thought I knew Friedman's thinking very well, but, I confess, I hadn't known how strongly he believed this argument. I'm not a professional philosopher, but I suspect that philosophers could find large weaknesses in his argument. One weakness is that if we can't know what sin is, then we don't know what constitutes right and wrong. And if we don't know that, how can we say that it's wrong for the government to use force to prevent people from doing what some people regard as sinning?

David R. Henderson  

Henderson Review of Schuck

David Henderson


Three years ago in this magazine, I praised Peter Schuck's Why Government Fails So Often, calling it one of the most important books of 2014. Based on that book, I had high expectations for his latest, One Nation Undecided: Clear Thinking about Five Hard Issues That Divide Us. Though not quite as good as his 2014 book, One Nation Undecided is, nevertheless, quite good. The book gives detailed background on the facts and analysis of five controversial U.S. issues: poverty, immigration, campaign finance, affirmative action, and religious exemptions from government policies. Whatever your views on these issues, it's important to know the facts. Reading his book carefully made me, a policy wonk, realize how little I knew about four of them and that I didn't know quite as much as I thought I knew about the fifth, immigration.

In Why Government Fails, Schuck laid out in exquisite detail the ways that government fails, which led me to wonder why he considers himself a moderate rather than a libertarian or classical liberal. The fact that he's not a libertarian shows throughout his latest book. He seems overly confident about government officials' ability and willingness to craft effective policies on the five issues he addresses in this book. That being said, Schuck generally lays out the tradeoffs clearly, and sometimes both his reasoning and his conclusions will hearten a libertarian.

To his great credit, Schuck almost never pulls his punches and virtually never fights dirty. Moreover, even if all Schuck presented were the facts, a public discussion informed by those facts would be head and shoulders above what we hear and read in most forums.

This is from my recently published book review "Great Background on Controversial Issues," Regulation, Summer 2017.

An excerpt on poverty:

Of the five issues he discusses, Schuck, the Simeon E. Baldwin Professor of Law Emeritus at Yale University, devotes the most space to U.S. poverty. He points out that many important social changes since 1965 distort "and vastly overstate" the current poverty rate in America. If we include noncash government benefits such as food and housing, if we take account of the Earned Income Tax Credit, and if we use a more realistic measure of inflation than the Consumer Price Index, then we would conclude that the 2013 poverty rate was not the reported 14.5%, but, rather, 4.8%. Moreover, he notes, the official double-digit poverty rate treats cohabiting couples differently than married ones. Treating them the same "would lower the poverty rate even more."

Also, I point out in the review that in my views on immigration, I, a pro-immigration economist and an immigrant, am closer to the 19th-century Know-Nothings than I had thought, although for somewhat different reasons than theirs.

Robert Putnam, famed author of Bowling Alone, has spent much of his career regretfully publicizing the dangers of diversity.  His most famous claim, of course, is that "social capital" - usually operationalized as "trust" - is vital for a good society.  And though he's a liberal in good standing, he urges us to face facts: diversity - especially ethnic diversity - is very bad for trust.  As Putnam's 2006 Johan Skytte Prize Lecture summarizes:
Diversity does not produce 'bad race relations' or ethnically-defined group hostility, our findings suggest. Rather, inhabitants of diverse communities tend to withdraw from collective life, to distrust their neighbours, regardless of the colour of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more , but have less faith that they can actually make a difference, and to huddle unhappily in front of the television. Note that this pattern encompasses attitudes and behavior, bridging and bonding social capital, public and private connections. Diversity, at least in the short run, seems to bring out the turtle in all of us.
What's impressive about Putnam's piece, however, is that he takes the danger of spurious correlation so seriously:
[T]he diverse communities in our study are clearly distinctive in many other ways apart from their ethnic composition. Diverse communities tend to be larger, more mobile, less egalitarian, more crime-ridden and so on. Moreover, individuals who live in ethnically diverse places are different in many ways from people who live in homogeneous areas. They tend to be poorer, less educated, less likely to own their home, less likely to speak English and so on. In order to exclude the possibility that the seeming 'effect' of diversity is spurious, we must control, statistically speaking, for many other factors.
Indeed.  And here is what Putnam finds when he uses multiple regression to predict individuals' trust on a 4-point scale.

putnam.jpgPutnam's measure of diversity - the Census tract Herfindahl Index of Ethnic Homogeneity - is in bold.  It's the sum of the squares of each group's population shares, so it theoretically ranges - note the reverse coding! - from 0 (infinite diversity) to 1 (zero diversity).  But since Putnam only sub-divides the population into four groups - Hispanic, non-Hispanic white, non-Hispanic black, and Asian - his diversity measure can't fall below 4*.25^2=.25. 

Now imagine we move from a world with zero diversity to the maximum diversity.  According to Putnam's results, how much will this reduce trust?  .18*.75=.14.  Is that a lot?  No way.  Remember, he's using a 4-point scale.  And since the current national Herfindahl Index of Ethnic Homogeneity is about .46, moving from the diversity of today to maximum diversity reduces predicted trust by a microscopic .18*.21=.04.  "Diverse" communities have low trust, but the reason isn't that diversity hurts trust; it's that non-whites - especially blacks and Hispanics - have low trust.

What's especially striking, though, is that Putnam finds several variables that strongly predict trust that almost no one discusses.  Look at the effect of home-ownership.  Not only do home-owners average .25 higher trust; there's also a -.14 coefficient on "Census Tract Percent Renters."  Net effect of moving from 0% to 100% home ownership: .39.  Holding all else constant, citizenship is good for trust: a mere .06 for the individual, but a solid .21 for the community.  Net effect of moving from 0% to 100% citizenship: .27.  There are also big effects of crime, population density, and commuting time.  Geographic mobility, strangely, seems to reduce individual trust but raise social trust.

The latter variables don't just matter more than trust; they're also much more policy-relevant.  Reducing diversity is very hard; indeed, without massive human rights violations, it's almost impossible.  Home ownership, in contrast, can be fostered with not only tax incentives (the standard way), but housing deregulation (the wise way).  Population density, similarly, can be reduced by deregulating development of surburban and rural land.  Commuting time can be slashed with better public transit (the standard way) or congestion pricing (the wise way).  Better policing and law enforcement - not to mention thoughtful decriminalization - all reduce crime rates.  And if we take the estimated benefits of citizenship at face value, it can be raised to 100% with the stroke of an amnesty pen.

Putnam's numerous alt-right fans seem to relish his anti-diversity claims because he lends an air of respectability to their misanthropy.  But if you read Putnam's whole article, it's hard to detect any ill will.  Why then would he so grossly overstate the dangers of diversity?  My best story is just confirmation bias.  Early on in his research, Putnam found strong univariate links between diversity and trust.  When better methods show that this relationship matters slightly, Putnam - like most human beings - treats this as a vindication of his initial claims.  But if all you knew were Putnam's final results from Table 3, you'd never reach Putnam's anti-diversity conclusion.  Diversity's so unimportant for trust, you might not mention it at all.

Not quite there yet, but getting very close. Let's take a look at his new Financial Times piece:

Many of my friends have recently issued a statement asserting that the Fed should change its inflation target. I suspect, for reasons I will write about in the next few days, that moving away from inflation targeting to something like nominal gross domestic product level targeting would be a better idea. But I believe this issue is logically subsequent to the question of how policy should be made in the near term with the given 2 per cent inflation target.
Favoring NGDP targeting doesn't make you a market monetarist, but it's a good start. You also need to believe that market forecasts are better guides to policy than the Fed's own internal model:
The Fed is not credible with the markets at this point. Its dots plots predict four rate increases over the next 18 months compared with the markets' expectation of less than two. Table 1 shows the Fed has been highly unrealistic in its forecasts for several years now
OK, market forecasts of interest rates are nice, but MMs view interest rates as an unreliable indicator of policy. We want market forecasts of macroeconomic aggregates.

Summers continues:

The truth is that markets do not share the Fed's view that inflation acceleration is a major risk. Indeed, they do not believe the Fed will attain its 2 percent inflation target for a long time to come. Table 2 shows than neither inflation indexed bonds nor the swap market expect the Fed to hit its 2 per cent personal consumption expenditure (PCE) inflation goal in the foreseeable future.
So Larry Summers shares our preference for relying on the judgment of markets rather than bureaucrats.

To be sure, Summers falls a bit short of being a true, card-carrying market monetarist. Here he confuses positive analysis with normative analysis:

Second, the Fed regularly proclaims that it has a symmetric commitment to its 2 per cent inflation target. Recoveries do not last forever and when recession comes inflation declines. . . . Accordingly, policy should be set with a view to achieving modestly above-target inflation, perhaps 2.3 or even 2.5 per cent, during a boom with the expectation that it will decline during the next recession. A higher inflation target would entail easier policy than is now envisioned.
I hope you see the problem here. Summers is right that inflation usually declines during recessions. That's a positive statement. But he also favors NGDP targeting, which implies that monetary policy should be conducted in such a way as to produce above average inflation during recessions and below average inflation during booms. Indeed, I'm quite confident that during the next recession Summers will be calling for above 2% inflation, on standard NGDP targeting grounds.

So Larry Summers has not quite gotten beyond the hawk/dove trap. He's still a dove. True enlightenment occurs when one realizes that policymakers should be neither hawks nor doves, but rather should follow a rules-based approach.

Still, I'm very pleased to see NGDP targeting, as well as the idea of using market signals to guide policy, making continued inroads. When I started this crusade in the 1980s, there were only a tiny number of fellow travelers.

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HT: Julius Probst


Why isn't the gold standard more popular with current-day economists? Milton Friedman once hypothesized that monetary economists are loath to criticize central banks because central banks are by far their largest employer. Providing some evidence for the hypothesis, I have elsewhere suggested that career incentives give monetary economists a status-quo bias. Most understandably focus their expertise on serving the current regime and disregard alternative regimes that would dispense with their services. They face negative payoffs to considering whether the current regime is the best monetary regime.

Here I want to propose an alternative hypothesis, which complements rather than replaces the employment-incentive hypothesis. I propose that many mainstream economists today instinctively oppose the idea of the self-regulating gold standard because they have been trained as social engineers. They consider the aim of scientific economics, as of engineering, to be prediction and control of phenomena (not just explanation). They are experts, and an automatically self-governing gold standard does not make use of their expertise. They prefer a regime that values them. They avert their eyes from the possibility that they are trying to optimize a Ptolemaic system, and so prefer not to study its alternatives.

This is from "Experts and the Gold Standard," an excellent piece at Alt-M by George Mason University economist Lawrence H. White. I recommend the whole thing. Make sure you look at his evidence on the performance of the classical gold standard alongside the evidence on the performance of central banking.

Larry quotes an astounding statement by Federal Reserve Vice Chairman Stanley Fischer:

Emphasis on a single rule as the basis for monetary policy implies that the truth has been found, despite the record over time of major shifts in monetary policy -- from the gold standard, to the Bretton Woods fixed but changeable exchange rate rule, to Keynesian approaches, to monetary targeting, to the modern frameworks of inflation targeting and the dual mandate of the Fed, and more. We should not make our monetary policy decisions based on that assumption. Rather, we need our policymakers to be continually on the lookout for structural changes in the economy and for disturbances to the economy that come from hitherto unexpected sources.

Read Larry's great critique of this statement. One excerpt from that critique:
Contrary to Fischer, there is no good reason to presume that expert-guided monetary regimes get progressively better over time, because there is no filter for replacing mistaken experts with better experts. We have no test of the successful exercise of expertise in monetary policy (meaning, superiority at correctly diagnosing and treating exogenous monetary disturbances, while avoiding the introduction of money-supply disturbances) apart from ex post evaluation of performance. The Fed's performance does not show continuous improvement. As previously noted, it doesn't even show improvement over the pre-Fed regime in the US.

Bryan Caplan  

What a Bet Shows

Bryan Caplan
Whenever I win a bet, critics rush to say, "This doesn't prove you know better than me."  They're right: Bets "prove" nothing.  But that's a silly standard.  For empirical questions, definitive proof is unavailable, so we have to settle for degrees of probability.

By this reasonable measure, how probative are bets?  Taken individually, most bets are only marginally so.  Even if one side offers 1000:1 odds and loses, this might only show that the loser was a fool to offer such great odds, not that his position on the underlying issue is flat wrong.

When we move from solitary bets to betting records, however, bets are telling indeed.  A guy who wins one bet could easily have gotten lucky.  But someone who wins 10 out of 10 bets - or, in my case, 14 out of 14 bets - almost certainly has superior knowledge and judgment.  This is especially true if someone lives the Bettors' Oath by credibly promising to bet on (or retract) any public statement.  A bet is a lot like a tennis match: one victory slightly raises the probability that the winner is the superior player, but it's entirely possible that he just got lucky.  A betting record, in contrast, is a lot like a tennis ranking; people who win consistently against any challenger do so by skill, not luck.

After losing our unemployment bet, Tyler Cowen objected that betting:
...produces a celebratory mindset in the victor.  That lowers the quality of dialogue and also introspection, just as political campaigns lower the quality of various ideas -- too much emphasis on the candidates and the competition.
Tyler's gets very close to the truth, but misses the most important lesson.  Namely: In a busy world, ranking people by accuracy is not only helpful in the search for truth, but vital.  No one has time to listen to more than a fraction of the armies of talking heads, or the memory to recall more than a fraction of their arguments.  If we want to know the future as well as we're able, we need to identify people with good judgment - and ignore people with bad judgment.  The first step, of course, is to unfollow pundits who refuse to put their money their mouths are.  We should take them as seriously as self-proclaimed tennis "champions" who've never publicly played a match.

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