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In 2014, French economist Jean Tirole, chairman of the Toulouse School of Economics and the Institute for Advanced Study in Toulouse, won the Nobel Prize in Economics. Although he is well known within the increasingly technical economics profession, Tirole is not well known to non-economists. This 500-plus-page tome is an effort to change that. Written for a general audience, it covers a wide range of issues, including those on which he has published professionally and those on which he has not but still has much to say. The topics include the effects of free trade, French unemployment, the role of the state, financial bubbles, the Greek economic crisis, and regulation of industries.

It's hard to generalize about Tirole's views. On the one hand, he understands the powerful role of incentives, understands why free trade is good for a country, thinks through the unintended consequences of legislation and regulation, and understands that the political system is filled with perverse incentives. On the other hand, he favors some highly intrusive regulations in the labor market, has too much confidence in the ability of economists and governments to improve on free markets, misunderstands how to judge the tightness or looseness of monetary policy, misstates the nature of externalities, and doesn't seem to understand adverse selection in insurance markets.


These are the opening two paragraphs from David R. Henderson, "A Mixed Bag," Regulation, Winter 2017/2018. His book is titled Economics for the Common Good. Here's the whole review. (Scroll way down, almost to the end.)

Three paragraphs on some of my favorite parts of the book:

To illustrate how thinking about incentives and unintended consequences can help inform good policy, Tirole considers a hypothetical case in which a nongovernmental organization (NGO) "confiscates ivory from traffickers who kill endangered elephants for their tusks." The NGO can either destroy the ivory or sell it. Tirole points out that most people would advocate destroying the ivory. But he urges the reader to think further. Destroying the ivory means that the supply of ivory is lower than otherwise, making the price higher than otherwise. How does a higher price affect the incentives of poachers? That's right: it causes them to kill more elephants. Another example, which many economics professors use in class, is the perverse effects of price ceilings. Not only do they cause shortages, but also, as a result of these shortages, people line up to purchase the scarce provisions and thus waste time in queues. The time spent in queues wipes out the financial gain to consumers from the lower price, while also hurting the suppliers. No one wins and wealth is destroyed.

Tirole, like most economists, is strongly pro-free trade. He argues that French consumers gain from freer trade in two ways: free trade exposes French monopolies and oligopolies to competition; and goods imported from low-wage countries are cheaper. On the former, Tirole notes, "Renault and Peugeot-Citroen sharply increased their efficiency" in response to car imports from Japan. He estimates that the monthly gain from free trade per French household is between 100 and 300 Euros. That translates to an annual gain per household ranging from $1,400 to $4,200.

Incidentally, when economists refer to economics as "the dismal science," they almost always get the origin of that term wrong. Tirole gets it right. He explains that Thomas Carlyle, in an 1849 publication calling for bringing back slavery, called economics the dismal science because the economists of the time strongly opposed slavery. The economists who dominated in 1849, although Tirole doesn't mention this, were strongly pro-free market.


I wrote the Wall Street Journal piece on him, published the day after he won.




Currently, the U.S. federal government spends about $2.4 trillion per year--about 12% of GDP--on entitlement programs. This amounts to $7,500 per person annually. Only 48% of this spending goes to people officially classified as poor. The federal government provides more than $50,000 per year in Social Security and Medicare benefits to retired middle-income couples. And this is at a time when almost half of households headed by people under age 65 have incomes less than $50,000.

How did we get to this fiscal state? When did Congress's irresponsibility with entitlement spending begin? When the federal government ran budget surpluses, how did that affect Congress's decisions about entitlements? What president in the 20th century made a heroic effort to restrain entitlement spending and then, later, created the largest and most expensive such program in the century? What Republican president helped increase Social Security benefits by a double-digit percent? Finally, is there a way to rein in such spending in the future without kicking up such strong opposition that the restraints will be undone? Hoover Institution economist John F. Cogan answers these questions and more in his fact-filled, carefully researched book, The High Cost of Good Intentions. (Disclosure: John Cogan and I are colleagues at the Hoover Institution.)


These are the opening two paragraphs of my review of John Cogan's book. The review is in the latest issue of Regulation.

Although I liked the book overall a lot, I did have a couple of criticisms, as is my wont. Here's one:

Only one major reform [of Social Security] occurred on the spending side: a gradual increase in the age at which one could receive full benefits, from 65 to 67 by the year 2027. But this reform was not one proposed by the Greenspan Commission. Instead it was the handiwork of Jake Pickle, a Democratic congressman from Texas, whose mentor, interestingly, had been LBJ. Cogan mentions the age increase but does not specify Pickle's role or the fact that the Greenspan Commission had recommended no such age increase. He does point out, though, that "remarkably, the slowly increasing retirement age since 2000 has occurred with little or no controversy."




Natural experiments in economics don't occur very often, at least not big ones of the sort that interest macroeconomists like me. But today we had not one but three big natural experiments. One is already concluded; the other two will play out over the next few months and years.

Experiment #1. Does the powerful real estate lobby have enough political power to prevent Congress from taking away the mortgage interest deduction from the vast majority of taxpayers? Most people previously assumed the answer was yes. But today we found out the answer is no. Under the new tax bill very few taxpayers will deduct mortgage interest.

Experiment #2. Does the mortgage interest deduction play a big role in supporting the price of residential real estate? I suspect the answer is no, but we'll know for sure within a few months.

Experiment #3. Do state income tax rate differentials play a big role in interstate migration? I've argued that state income taxes play a bigger role than many progressives assume, but the effect seems to be declining over time as the younger generation cares more about non-material amenities, rather than material goods like a big house and an expensive car.

I'll watch this one with great interest. Two things to look for:

a. Is there migration from New York and Connecticut to Florida's Gold Coast, or from California to places like Las Vegas, Seattle and Austin?

b. Do politicians in high tax states panic and cut the top rate, in order to hold on to the goose that lays the golden egg?

Both will be fascinating to watch. Kansas was not a test of supply-side economics. This really is a test of supply-side economics.

A few initial reactions:

The good:

1. Smaller marriage penalty.
2. No corporate AMT, and far fewer affected by the personal income tax AMT (which now will be restricted to married couples with incomes over one million (singles over $500,000). That's not very many people. Of course it was stupid not just to eliminate it entirely, and make up the revenue with a tiny boost in the top rate.
3. A limit of $10,000 on SALT deductions. Basically this means that high income people get no deduction for state income taxes, as their property tax will use up most if not all of the $10,000. A huge blow to blue states. (Wait, I'm in California now! Oh well . . . .)
4. Lower marginal tax rates for most people. My family's MTR will fall from 33% to 24%, although of course I'll lose some of that in the limit on SALT deductions.
5. Much higher standard deduction---perhaps the single best change. Far fewer people will itemize.
6. No more health insurance mandate. But I'd label this an incomplete because the GOP will then have to fix Obamacare, and we don't yet know how.
7. Death tax exemption was doubled to $22 million for families. At least my daughter won't have to worry about that one!
8. Corporate rate cut from 35% to 21%
9. Investments can be written off immediately, instead of the complicated and pointless depreciation schedule.
10. Some limits placed on (big) business interest deductibility. I don't know the details on this one yet.

There are probably other good provisions that I don't know about yet---did the go after business lunches? (One of the most outrageous tax breaks)

The bad:

1. Nothing done about health insurance deductibility, the single worst aspect of the tax code. Indeed health expenses are now slightly easier to deduct, but only in 2018. Why? This one is a massive disappointment. Perhaps doctors are more politically powerful than realtors?
2. The 529 education savings account program expanded to cover K-12. This is actually not that bad, but I don't like loopholes.
3. Carried interest loophole maintained? Not certain if I have this one right.
4. Small businesses can deduct interest on loans. Why do we tax equity-financed investments at higher rates than debt-financed investments?
5. Marriage penalty is smaller, but still there. Why?
6. Deductions for quasi-government bonds that finance private activities are maintained.
7. Tax cut will cause the budget deficit to expand sharply---we'll pay a price for this fiscal irresponsibility down the road.
8. Many of the good provisions expire after a few years.

Neutral:

1. Child tax credit increased. I generally don't like loopholes, but this one is pretty simple to handle, and does provide some needed tax relief to lower income families.
2. Deduction for pass-through business. Don't know enough to comment. Could be justified as providing backdoor relief for taxes on investment income, but will rules to prevent wage income diversion add too much to complexity? I don't know.
3. Corporate territorial system. Don't know enough to comment, but we were an outlier with the previous system.

I don't have much to say about the distributional impact, as I don't trust any of the estimates. Distributional effects are an order of magnitude less important than efficiency effects.

Why didn't blue state Republicans object more to the SALT deduction limit? They were bought off with a reduction in the top rate from 43.4% to 40.8% (wrongly reported by the media as 39.6% to 37%) It seems like blue state Republicans care more about affluent Republicans than they do about the states they live in. After all, the cut in the top rate won't in any way discourage people from moving out of New York and California, rather it will simply prevent wealthy taxpayers from being noticeably worse off.

In other words, individual Orange County professionals (my neighbors) will be fine. The state government of California may not be fine.




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As noted in my previous post, I was discussion leader at a recent colloquium on moving towards a cashless or less-cash society. Here are some quotes from Rogoff, followed by questions I asked.

Rogoff:

Certainly, a lot of the angst over electronic currency comes from deeply rooted fears of digital theft and paralysis after a major power outage.

He goes on to say why he thinks this won't be a big problem.

What about a long emergency? Rogoff writes:

In a sufficiently prolonged emergency when there is no longer any way to recharge cell phones and supplies of small bills are depleted, the government can air-drop currency for temporary use, redeemable for electronic currency after the crisis.

I asked:
(i) Has any government ever air-dropped currency? If so, how well did that work out?
(ii) Can the government be trusted to do this well and at the right time?

One monetary economist answered the first question: if I recall correctly, the only case he knew of where a government air-dropped currency was the British government air-dropping counterfeit Germany currency in Germany.

CATEGORIES: Monetary Policy , Money



by Pierre Lemieux

In order to be useful...a free trade agreement must further free trade more than it restricts it through international standards and regulatory harmonization.
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The current renegotiation of the North American Free Trade Agreement (NAFTA) raises two sorts of questions. First, is NAFTA a free trade agreement? Will it be a free trade agreement after it is renegotiated? Second, do we need free trade agreements to have free trade? (Addressing the second question may answer some of the reader comments on my recent post about comparative advantage.) I am using "free trade agreements" loosely to include all forms of reciprocity, that is, situations where one country opens its borders to another one only if the latter reciprocates.

On the first set of questions, NAFTA has reduced barriers and increased trade among the three partner countries - the United States, Canada, and Mexico. US exports to NAFTA countries have increased from about 2% of GDP to more than 2.5%. In a regional or plurilateral trade agreement (as opposed to a world treaty like the ones administered by the World Trade Organization), a trade diversion effect (diverting trade from other countries) can reduce or eliminate the trade creation effect, but this is less likely in NAFTA's continental-wide trade.

A revamped NAFTA may not deserve the label of free trade - for example, if its regulatory content is expanded through labor, environmental, gender, or other sorts of standards. The Canadian government is pushing in that direction, and the US government agrees at least for the labor and environmental standards. I'll come back to this issue later.

The second line of questioning is, why pursue reciprocity when we can have unilateral free trade instead, that is, when any government can open its country to trade without waiting for others to reciprocate? This question is especially relevant in view of Douglas Irwin's new book (Clashing over Commerce: A History of Trade Policy), which suggests that for two centuries and a half, American trade policy has oscillated between protectionism and reciprocity, ignoring the option of unilateral free trade.

Unilateral free trade provides a large part of the benefits of free trade, although we should note that the welfare economics of free trade is trickier than it looks at first sight. The only thing we can safely say is that, for any participating country, the monetary benefits of free trade are nearly always greater than its costs. We can translate this, a bit loosely, into the statement that most individuals benefit from free trade. If a foreign country is protectionist, the government of your own country only compounds your problems by adopting protectionism too. As economist Joan Robinson suggested in her Essays in the Theory of Employment (1947), protectionist retaliation looks like the decision "to dump rocks into our harbors because other nations have rocky coasts." One's own government's trade policy should not depend on the restrictions that foreign countries impose on their own citizens.

It is always useful to remember that, from the viewpoint of a country (this collectivist way of speaking being just a shortcut), imports are the benefits, and exports are the cost, not the other way around. James Mill, the 19th-century economist who was also the father of John Stuart, correctly wrote in his Elements of Political Economy:

The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given. When one country exchanges ... the whole of its advantage consists in the commodities imported. It benefits by importation, and by nothing else. ... That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commodities. They are benefited, therefore, not by what they give away; that it would be absurd to say; but by what they receive.

For a country - that is, for most of its residents - unilateral free trade provides not only part of the benefits of reciprocal trade, but probably most of them. Look at this from the perspective of a protectionist country P exporting to a unilateral-free-trading country U. A country can only export to the extent that it imports an equivalent volume of goods and services, at least over a certain time period, directly or indirectly. If P exports to U, the latter needs P's currency (call it $P) to pay. U can obtain $Ps by exporting to P. Or else U must export to a third country that has some $Ps because it has itself exported to P. Thus the protectionist country ends up importing as much as it exports. The same conclusion obtains if P accepts U's currency ($U) for its exports, for what will P do with its $Us? And using foreign currency for foreign investment amounts to future imports. As Jean-Baptiste Say put it, "nothing can be bought from strangers, except with native products."

The most famous example of unilateral free trade was Britain's abolition of the Corn Laws in 1846. Another example is Hong Kong, which has had unilateral free trade in merchandise (goods) since the mid-19th century, although this freedom did not extend to importing services such as telecommunications, air transport, and banking.

Partial examples of unilateral free trade can be found in the spontaneous reduction, and sometimes elimination, of specific tariffs by many governments, as Doug Irwin points out in Free Trade Under Fire. In 2010, the average applied tariff among WTO countries was 3.7% compared to an average bound rate of 9.9% - "bound" meaning capped by WTO rules. The typical government voluntarily imposed lower tariff rates than it could legally have imposed.

Does not that imply that free trade agreements are useless (as I once myself believed)? Last month, I raised the issue during a short presentation at a Mont Hamilton Society luncheon. I was not surprised that at least one libertarian participant sided with my former self.

I now think that free trade agreements are not necessarily useless for the very reason why Donald Trump defends the opposite position. Free trade agreements "tie our hands," he complained in a speech in Asia. Indeed, they prevent national governments from yielding to the pressures of their own producers against their own consumers. It is more difficult for a national government to jettison trade freedom if international agreements need to be revoked. In other words, free trade agreements are welcome precisely as a means to tie the hands of our own Leviathan.

Trade agreements are especially useful to restrain Leviathan if public opinion is not enamored with unilateral free trade. For sure, trade agreements cannot forever resist adverse public opinion or demagogical propaganda. But they can hopefully hold the tide until people come to their senses.

In order to be useful, though, a free trade agreement must further free trade more than it restricts it through international standards and regulatory harmonization. It must not be an instrument for state cartels to restrict the liberty of their own subjects. It is in this perspective that we should evaluate "free trade" agreements - now called "partnerships" without the "free trade" as Doug Irwin perceptively observes in Clashing over Commerce.

Which brings me back to NAFTA. A rather free-trade NAFTA is good. One marred by stifling regulation and harmonization would not be.

CATEGORIES: International Trade



Cash also plays a role in the illegal immigration problem that bedevils countries like the United States. It is incredible that some politicians talk seriously about building huge border fences, yet no one seems to realize that a far more humane and effective approach would be to make it difficult for U.S. employers to use cash to pay ineligible workers off the books and often below the minimum wage. Jobs are the big magnet that drives the whole process.
This is from the introduction to Kenneth S. Rogoff, The Curse of Cash. Rogoff is a prominent economics professor at Harvard University and former chief economist at the International Monetary Fund.

At a recent Liberty Fund conference in San Antonio where I was the discussion leader, and where chapters from Rogoff constituted 30% to 40% of the readings, I highlighted Rogoff's thoughts on immigration. I had missed this passage above until my friend Jeff Hummel pointed it out.

Here, though, are the parts I did highlight in the discussion questions I suggested. They cover the same territory:

Whatever one's position on legal immigration, few would argue with the proposition that under normal circumstances, countries have a sovereign right to control their borders and to determine their immigration policy. The issue is becoming increasingly prominent across advanced economies. Some US politicians are proposing extreme measures, such as building a giant razor wire fence across the US-Mexican border, much as Hungary has done and other European countries are considering. Yet there seems to be precious little awareness of how much more difficult and risky it would be for employers to routinely hire illegal workers if they could not pay in cash, and how phasing out paper currency might prove a far more effective remedy than the alternatives being considered.

To be clear, I strongly favor allowing increased legal migration into advanced economies. Any economist who takes income and wealth inequality seriously realizes that, despite the enormous progress of the past three decades, differences across countries simply swamp the within-country inequality that Thomas Piketty and others worry about. The 2015 Nobel Prize winner Angus Deaton, author of the 2013 book The Great Escape, has forcefully made this point. International migration from poor countries to advanced ones create massive welfare gains for the immigrants. The issue is likely to become an even more important humanitarian concern if, as likely seems the case, climate change makes some parts of the world that are now densely populated uninhabitable. One can hope that enabling countries to better control their borders might lead to a more rational debate on immigration policy, though I admit that might be optimistic.

Rather than ask the question I asked the participants, I'll lay out the tension between these two passages.

On the one hand, Rogoff favors the right of the U.S. government to decide who enters and who stays. On the other hand, he favors more legal immigration and makes the case for it beautifully and succinctly. But he wants to cut down on illegal immigration and sees the elimination of $100 and $50 (and possibly $20) bills as an effective way to do so.

Here's the problem. If Rogoff is right that eliminating these high-denomination bills will substantially reduce illegal immigration, then his policy will also substantially reduce the "massive welfare gains for immigrants." The only situation under which the massive welfare gains would continue is if legal immigration increased a lot. He and I can both hope that we would have a more rational debate on immigration policy that would lead to, say, an additional one million or two million people a year allowed to immigrate to the United States. But Rogoff admits that that is optimistic.

So, realistically, where are we? Either the U.S. government does not eliminate high-denomination bills and that facilitates illegal immigration along with the huge gains to immigrants from being able to work at higher-wage jobs or the U.S. government does ban those bills and those massive gains become smaller. Much as Rogoff might hope for more legal immigration, it's clear that if choosing between the two alternatives I have laid out, he would choose the one that reduces those gains and, therefore, preserves some of the massive inequalities.




I think it was Baron Nathan Rothschild who used to answer the question "how did you get rich?" with "I always sell too soon". That may not apply to Bitcoin early adopters, who are the subject of a fascinating piece by Brian Doherty. Doherty has long been a most passionate and capable historian of the libertarian movement (read his Radicals for Capitalism) and here he is writing perhaps a new chapter.

blockchain.jpg We will see with time how what has been hailed as Bitcoin's institutionalisation, the fact that now you can trade futures on Bitcoin, will impact the prize. So far, a Doherty writes, the impression is that "you will always regret using Bitcoin". The price has been and is quite volatile but you just have to think about this year's performance (basically, it grew twenty times) to understand the reasons for regret.

Will it go on? Is there a genuine demand for Bitcoin, as millennials--and, indeed, the rest of us--will grow more and more impatient with a financial system that seems difficult if not arcane compared with the heftiness of the Amazons and Ubers of this world? Or is it just a mania? Libertarians and nerds tend to go for the first, members of the financial establishment for the second. This is indeed one of those cases in which all actors seem to follow their script meticulously.

Doherty's piece has reminded me of Michael Lewis's The Big Short. Lewis wanted to tell the story of odd people who, being somehow outsiders to the financial system, understood the housing bubble ahead of anybody else (see Arnold Kling on the point). I think that this gets a bit lost in the movie adaptation, but it struck me when I read the book. "The Big Short" is a plea to diversity, diversity of backgrounds, of methods, of views, which is essential for the process of price discovery to happen. Cryptocurrencies were a product of this diversity, well before the financial sector awoke to them. They were conceived, and used, and promoted by outsiders who knew more math than economics and whose economics, when they had one, seemed to be of the Austrian blend.

In the last few months, I have asked myself a number of times why in the world I didn't buy Bitcoins when they were launched: I should have been enthusiastic about the idea, and I knew people who dealt in that trade. But I didn't. Doherty's piece healed my wounds by telling me I was hardly alone.

The article is instructive and well written. Read the whole thing.

CATEGORIES: Finance



Tyler Cowen has an excellent new video out that looks at four schools of thought in business cycle theory, with application to the Great Recession. I agree with most of the specifics in the video, but differ in how to interpret the bigger picture. I'll try to explain why.

Tyler starts with the metaphor of 4 blind men trying to understand the nature of an elephant, each touching a different part of the beast. The implication is that each of these four perspectives offers something useful, and we should not confine our view to just one perspective. The wise man takes an eclectic view of things.

I see the video as mixing up very different types of disagreement. Consider his description of the 4 views:

1. Keynesian: Focus on shortfall in aggregate demand, look at C+I+G factors.

2. Monetarist: Also look at AD, but see unstable monetary policy as the root cause.

3. Real Business Cycle: Slowing productivity growth before the 2008 recession helps explain the instability of AD. Taxes and subsidies slowed the recovery.

4. Austrian: Government programs encouraged home lending, led to malinvestment. Fed policy was too stimulative before the recession.

To some extent, I agree with all four views. And yet I think monetarism is true and Keynesianism, RBC and Austrianism are false. So here's how I look at things:

1. One split is between nominal and real theories of the business cycle. I believe the AS/AD model is true. This model suggests that both nominal (AD) and real (AS) factors play a role in the cycle. I believe AD shocks are the biggest factor in the US, and AS shocks are the biggest factor in Venezuela. But each play a role in both countries.

2. What do RBC proponents believe? Some RBC models do incorporate sticky prices. But I recall Bennett McCallum arguing that if real business cycle theory was not a denial of the importance of nominal shocks, then it's hard to see how it's a distinctive theory at all. After all, even in textbook Keynesian AS/AD models you see AS shocks playing a role.

Furthermore, prominent RBC theorists often tend to scoff at claims that high unemployment is caused by a lack of AD, and point to factors such as government programs and regulations that create a disincentive to work.

Tyler suggests that slowing productivity growth in some way have contributed to a slowdown in AD during the Great Recession. I think that's true, although I see the mechanism in a way that may differ from his view. I believe slowing productivity growth lowered the equilibrium interest rate. The Fed tried to keep up by lowering actual rates, but did not do so rapidly enough, and money became tighter. So I don't see that as evidence in support of hard-core RBC theory, in which AD shocks are not very important because wages and prices are pretty flexible. Again, not all RBC proponents take that extreme view, but it's the only thing really distinctive about the theory. Otherwise it's two blind men both touching the trunk of the elephant, and assigning different names to the same appendage.

So this is why I believe that while slowing productivity growth played a modest role in throwing monetary policy off course, and government programs like 99 week extended unemployment benefits slightly raised the natural rate of unemployment during the recovery, the RBC model is fundamentally wrong. It's simply not a useful model. It adds nothing useful to AS/AD analysis. We already knew that both real and nominal shocks matter---the RBC proponents differ in incorrectly exaggerating how much they matter.

3. Let's put aside the nominal/real argument, and think about different nominal theories. The Keynesians are right that a lack of AD led to the Great Recession. But that doesn't make the Keynesian theory true. The real question is: What caused AD to fall sharply. The Keynesian model suggests that the problem is the inherent instability of capitalism, especially the propensity to invest. That may be a useful theory under the gold standard, where the money supply can be thought of as stable. But it's not a useful theory under a fiat money system with monetary offset. The Fed is supposed to offset shocks to velocity, and in the vast majority of cases it does so.

After the Soviet Union collapsed there was an increasing demand for US currency notes. If the Fed had failed to accommodate that demand then money would have become tighter, triggering a depression. No one would have blamed Russian hoarding of US dollars, nor should they have done so. The Fed would be expected to meet that extra demand for liquidity. Similarly, they should have met the extra demand for liquidity after the housing bubble burst, but instead they did just the opposite during mid-2007 to mid-2008.

The Keynesian model is wrong under a fiat money system, because the cause of recessions is unstable monetary policy, not the inherent instability of capitalism. And that's true even though the Keynesians are right about declining AD being the proximate cause of the recession, and even about some of the factors that caused monetary policy to be thrown off course, such as a decline in housing investment after the "bubble" burst.

I think Tyler is wrong in claiming that each view offers something valuable. Either their views overlap (the importance of AD shocks), or their views directly contradict and can't both be right (i.e. the cause of falling AD was the inherent instability of capitalism, vs. the view that the cause was bad monetary policy.)

4. The one area where I slightly disagree with Tyler is his claim that the Austrians de-emphasize AD, and prefer to let the market sort things out on its own. Maybe that's correct, but I have trouble seeing how. If Austrians believe that excessively expansionary Fed policy led to an unsustainable boom with lots of bad investment, then they clearly believe it's not enough to let the market sort things out, you need a stable monetary regime. (Which may or may not involve the Fed.) That's actually similar to the monetarist view.

And of course many monetarists agree with the Austrians that government credit policies aimed at promoting housing were very misguided. I believe that Austrianism is wrong as a business cycle theory because the issues they point to (while correct) don't seem powerful enough to cause a sizable recession.

To summarize, I don't like the way the video contrasts one wise man with four blind men (not surprisingly, as I am one of the blind men.) I believe it's possible to believe strongly in one view (monetarism in my case) while being completely aware of the other perspectives, and even agreeing that these factors play a role in the economy.

My reasons for rejecting these alternative views differ from one case to another. In the case of Austrianism and RBC theory, I believe the factors cited are simply too weak to explain the Great Recession. They are grabbing the elephant's tail, not its body. In the case of Keynesianism, I see the theory as being non-useful, because while it correctly notes the importance of AD deficiency, it doesn't correctly diagnose the reason for that deficiency--unstable monetary policy.

BTW, there is no such thing as passive and active monetary policies. Policies that are passive in one dimension (say interest rates) are active in another (say money supply.) So I'm not saying the Fed should have rescued the economy, I'm saying they should have refrained from destabilizing the economy.

PS. Once again, I was given a supporting role in the video:

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PPS. My pants don't seem particularly stylish. I'd also like to point out that Milton Friedman was about 5'2", whereas I am close to 6'4". As far as intellectual stature . . . well that's a different story.

HT: Pat Horan and Vaidas Urba




Reagan was worried that Americans were losing their love of liberty.  Here's my depressing talk arguing that Americans love liberty as a vague platitude, but are deeply statist on almost all particulars.

I am only a messenger.




David R. Henderson  

Eugene Volokh on Everything

David Henderson

Nick Gillespie has a good interview with Eugene Volokh of the famed law blog The Volokh Conspiracy.

Among the most interesting highlights are his discussion of the cake baker and anti-discrimination laws. Volokh makes the important distinction between whether a law is right by libertarian, that is, pro-freedom, standards and whether a law is constitutional. He points out that the constitutional screen for laws has wider holes in it that the libertarian screen. (These are my words for his thoughts.) I need to keep reminding myself that. Of course, as a legal scholar who teaches, I assume, constitutional law, his instinct is always to go to whether the law is constitutional, not whether the law is right.

I wish Nick Gillespie or whoever wrote up the brief intro had kept that in mind. The writeup says:

In a wide-ranging interview about The Volokh Conspiracy, Volokh discussed the site's aims, why he thinks the government is sometimes right to force business owners to serve customers they don't like

But Volokh didn't even address the issue of whether it's right. His argument was solely about whether the constitution allows such laws, not about whether the government is right in having such laws.

The other most interesting parts, near the end, are on what he sees as Trump's largely first-rate picks for federal judges and his point that the Supreme Court does not have as much effect on policy as many people think.

CATEGORIES: Free Markets , Liberty



At first glance, the title of this post seems strange. How could hiring Jews be evidence of anti-Semitism? And yet that is where we are. I got a late start this morning and made the mistake, while on my exercise bike, of turning on Megyn Kelly's new show on NBC. Apparently, Alabama Republican candidate for U.S. Senate Roy Moore had been accused of anti-Semitism. Kelly showed a clip of his wife defending him in which she pointed out that they had hired a Jewish lawyer. Kelly then asked a Roy Moore supporter, with a somber tone, whether he could understand how that statement by Moore's wife could upset some people; presumably she had Jews in mind. I thought the Roy Moore supporter deflected the issue nicely by pointing out that some people will get offended by anything.

But I would have preferred a more direct response. It would have gone something like this:

No, I don't see why it would upset people. What evidence would we look for it we were trying to figure out whether someone was anti-Semitic? One major piece of evidence would be whether they associate with Jews. Assuming Roy Moore's wife told the truth, the evidence here is that he does associate with at least one Jew. That may not be enough evidence to persuade people who think he's anti-Semitic. But it's some evidence and it goes in the right direction.

In a broader sense, think about one reason people care so much about whether others are anti-Semitic, anti-black, or anti-gay. If you look at the discussion when I talk about freedom of association, you can't help but conclude that one major reason is their fear, possibly justified, that those who are anti-Semitic, anti-black, or anti-gay will refuse to hire or do business with, Jews, black people, or gays, respectively.

CATEGORIES: moral reasoning



by Pierre Lemieux

The basic reason why there is no such thing as "the will of the people" is that there is no people to have a will.

man in the moon.jpg
I don't know enough about the Middle East and foreign policy to take a position on the propriety of moving the United States embassy to Jerusalem. I now admit that, contrary to what I once thought, foreign policy - relations with foreign Leviathans - is a distinct and justifiable field of analysis and government action.

I am still seduced by Lysander Spooner's stirring words on this general topic, but I don't think they are the final word. Yet, if the Supreme Court, in District of Columbia v. Heller, could cite Spooner on slavery and the right to keep and bear arms, I must be allowed to quote him on foreign affairs:

On general principles of law and reason, the treaties, so called, which purport to be entered into with other nations, by certain persons calling themselves ambassadors, secretaries, presidents, and senators of the United States, in the name, and on behalf, of "the people of the United States," are of no validity. These so-called ambassadors, secretaries, presidents, and senators, who claim to be the agents of "the people of the United States," for making these treaties, can show no open, written, or other authentic evidence that either the whole "people of the United States," or any other open, avowed, responsible body of men, calling themselves by that name, ever authorized these pretended ambassadors and others to make treaties in the name of, or binding upon anyone of, "the people of the United States." Neither can they show any open, written, or other authentic evidence that either the whole "people of the United States," or any other open, avowed, responsible body of men, calling themselves by that name, ever authorized these pretended ambassadors, secretaries, and others, in their name and behalf, to recognize certain other persons, calling themselves emperors, kings, queens, and the like, as the rightful rulers, sovereigns, masters, or representatives of the different peoples whom they assume to govern, to represent, and to bind. The "nations," as they are called, with whom our pretended ambassadors, secretaries, presidents and senators profess to make treaties, are as much myths as our own. ... Our pretended treaties, then, being made with no legitimate or bona fide nations, or representatives of nations, and being made, on our part, by persons who have no legitimate authority to act for us, have intrinsically no more validity than a pretended treaty made by the Man in the Moon with the king of the Pleiades.

As an economist and a student of politics, however, I can say something about the "will of the people" that Ambassador Nikki Haley invoked in her United Nations speech on the embassy decision. She said:

President Trump finally made the decision to no longer deny the will of the American people.

She made other statements conveying the idea that "the people" has an easily ascertainable meaning:


  • The Jewish people are a patient people.

  • The American people are less patient.

  • The American people have overwhelmingly supported that position...

This last statement and the plural verb in all three suggest that "the people" may perhaps be conceived in an individualist, as opposed to collectivist, way; I know Americans who are patient, others who are not. But "the will of the people," an expression that has proved a convenient excuse for despotic revolutionaries, is pushing the envelope too far. Even Jean-Jacques Rousseau used "the general will" (la volonté générale) more often than "the will of the people."

The basic reason why there is no such thing as "the will of the people" is that there is no people to have a will. The people is made of separate individuals who each has his own individual will. Indeed, Americans are divided on Middle East policy. And there is no way to aggregate these individual wills into a single social will except if all individuals are identical or if (as is the case in reality) some impose their wills on others or vote results cycle in an inconsistent way. Regarding inconsistency, opinion polls found that 81% of Americans think that the U.S government should keep or expand its commitment to Israel, while 39% think that it should decrease its military presence in, or completely withdraw from, the Middle East, and 64% that military aid to Israel should be decreased or stopped altogether.

A second reason is that the individuals who make up "the people" have precious little idea of what they are supposed to "have overwhelmingly supported." A voter has no incentive to learn about complex issues because his single vote can have no influence. A March 2016 Gallup poll asked Americans about the proposal to "recognize Jerusalem as the capital of Israel and move the U.S. Embassy to Jerusalem from Tel Aviv." Twenty-four percent agreed, 20% disagreed, and a full 56% admitted they "didn't know enough to say." The general lack of knowledge on international issues is well-known.

Two recent books, one by political scientists Christopher Achen and Larry Bartels, and the other one by philosopher Jason Brennan, provide data and perspective on voters' ignorance and their behavior as "the people." For example, Achen and Bartels provide statistical evidence that in 1916, voters punished Woodrow Wilson (the incumbent presidential candidate) in the New Jersey beach counties where shark attacks had recently occurred. Similarly, evidence shows that voters regularly punish incumbents for recent droughts or floods.

Finally, consider that when at most two-thirds of citizens participate in an election (it was 61.4% in the 2016 presidential election) and split their votes roughly equally, the winner incarnating "the will of the people" is supported by one-third of the electorate.

There are good arguments for democracy, provided that its power is limited. But democracy does not represent or create anything like a "will of the people."




Alberto Mingardi  

The sad paradox of free markets

Alberto Mingardi

In a really interesting post on on zoning and congestion pricing, John Cochrane nails it:

The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.
main street.jpg
Most people indeed are very shrewd consumers and hefty producers, but they seldom derive, from their own ability as market actors, any general idea about the relationship between government and the private sector. More often than not people would advocate strong regulations to "protect" customers, even though they themselves feel they would not quite need any similar rule and act responsibly besides. We are as good at "using" the market as we are naturals at calling to patronise our fellow men and women. At some point, this latter feature of human nature shall jeopardise the first. Cochrane put it elegantly and succinctly. A sentence to ponder.




In an article in which he makes a number of good points, on net defending a baker's decision not to bake a cake for a celebration that the baker objects to on religious grounds, Andrew Sullivan writes:

And it is a hard case constitutionally. It pits religious and artistic freedom against civil equality and nondiscrimination. Anyone on either side who claims this is an easy call are [sic] fanatics of one kind or other.

I think laws against discrimination are wrong, based on my belief in freedom of association. I've written about that many times on EconLog and so I won't repeat the arguments here. I'll simply cite a post in which I took on Michael Munger's opposition to freedom of association.

So Sullivan would call me a fanatic. Oh, well.

CATEGORIES: Liberty



David R. Henderson  

A Man Called Ove

David Henderson

I rarely recommend movies on EconLog but this is an exception. My wife and I saw A Man Called Ove last night and loved it. I would give it a 9 on a scale of 1 to 10. It's a familiar story line: a gruff old man (actually younger than me, though) who has a grudge against the world loosens up in response to a family with 2 delightful young daughters who move in next to him. But what makes it special are three things:
1. It isn't at all maudlin.
2. There are so many interesting twists in the plot and in the way his history is revealed, many of which caught me by surprise.
3. Finally, the reason I'm posting on EconLog, which is a site in which a major theme is liberty: the bureaucrats who messed with his life earlier and try to mess with his neighbor's life, and, in the last 20 minutes, the action they take against a state-enabled for-profit meddler. He calls them "white shirts." Related to this, somewhat earlier in the movie, the way he takes private action at his own expense to make a job work for someone who is handicapped.

Please, if you comment, either don't give spoilers or, if you give them, put a big warning in capital letters.




For the past nine years I've been promoting market monetarist ideas in the blogosphere. How important is NGDP targeting to the MM agenda? Much less important than many people assume.

Kurt Schuler left the following comment in response to my previous post:

Nominal GDP targeting has not yet been implemented anywhere. Accordingly, you have the luxury of comparing an untested policy whose defects (if any) have not yet been revealed in practice with well-tested policies whose defects are a matter of record. Advocates of inflation targeting were in the same position when it was first widely discussed. Then it was implemented, and after some years of apparent success came the Great Recession. If you are plan to advocate nominal GDP targeting in your book, you should specify what results (if any) would lead you to revise your favorable opinion of it.
Let's suppose I switched my view away from NGDP targeting, and moved toward the Fed's current "dual mandate" approach, which aims at 2% inflation and high employment. What then? How much would change?

The first thing I'd do is create a single variable that incorporates both of the policy goals in the Fed's dual mandate. After all, the Fed can only hit one target at a time. That variable could be set up in a wide variety of ways, but here's one very simple example:

AD = PCE inflation plus employment gap.

Where the employment gap is defined as the percentage difference between actual employment and the Fed's best estimate of the natural rate of employment.

Thus if inflation were 2.7% and employment were 1% above the natural rate, then the AD variable would come it at plus 3.7%.

Next I would have the Fed try to target AD at 2%, that is, I'd have them set policy at a level where expected future inflation plus the employment gap equaled 2%.

Here I'd like to emphasize that there are many other ways of doing this. For instance, you could put a coefficient of 0.5 on the employment gap, not 1.0 as in the example above. Indeed there is a whole class of dual mandate targets, which share certain common characteristics. I don't currently have strong views as to which one is best.

So let's suppose the Fed sets up the formula, and then I blindly adopt it. What then? How much does that change my blogging over the past 9 years?

Hardly at all; these formulas are different from NGDP growth, but not radically different. In either case, money was far too tight during late 2008, and in subsequent years. In either case the Fed was failing to target the forecast. We didn't have a Great Recession because the Fed was targeting inflation and employment instead of NGDP; we had a Great Recession because the Fed was setting policy far too tight to hit its own inflation and employment composite goal.

If you compare NGDP targeting to the ECB's single inflation mandate, then the differences are a bit larger. But even in that case, ECB policy has often been too tight to hit their 1.9% inflation target. (But not in 2011, when inflation targeting really was a big problem.)

Don't get me wrong, I definitely believe that NGDP targeting is superior to the Fed's flexible inflation targeting. But that's not the core problem here, the core problems are:

1. Failure to target the forecast
2. Failure to rely on market forecasts
3. Failure to do level targeting (at least at the zero bound, as recently recommended by Bernanke.)

What would make me change my mind about NGDP targeting? I suppose if it were adopted and employment became more unstable (than under recent policy) then this would tend to refute the notion that NGDP targeting is superior to the Fed's current policy. How much data would we need? That's a judgment call, which would actually involve two variables---the number of years operating under the new system, and the extent to which employment became more unstable. The greater the increase in employment instability, the more quickly NGDP targeting would be discredited. I can't give you an exact number, like most things in economics it's a matter of degree. (Or you might use Bayesian terminology and talk about changing probabilities of NGDP targeting being superior.)

As far as the use of futures targeting, a refutation would occur if NGDP futures targeting resulted in actual NGDP become more unstable.

PS. Eliezer Yudkowsky left a very interesting comment after my previous post. (A rare comment that I had to read multiple times to fully absorb.)

CATEGORIES: Macroeconomics , Money



Bryan Caplan  

My Excerpt in The Atlantic

Bryan Caplan
I'm on vacation, but I'm delighted to announce that an excerpt from The Case Against Education has just appeared in the latest issue of The Atlantic.  Enjoy!




The important effect of incentives on allocation over time.

One of the differences between the House and Senate versions of the tax cut is whether the corporate tax rate falls in 2018 (House) or 2019 (Senate.) It might look as though it's no big deal. It might well be a big deal, partly economically and, deriving from the economics, partly politically.

You're someone deciding whether to start a new business that you think will make money the first year. Under the House version, the corporate tax rate falls to 20 percent in 2018. So if that provision is kept, you know you'll pay the corporate tax rate of 20 percent on your profits. But if the Senate version is kept, you'll pay, the first year, at 35 percent.

Hmmm. What to do if the Senate version is kept? Wait to invest until 2019. So, to whatever extent the tax cut does increase economic growth, some of that growth will wait until 2019. Why does that matter politically? The midterm elections.




Scott Sumner  

What's my core message?

Scott Sumner

I am currently working on the final chapter of a book manuscript, tentatively entitled "The Money Illusion: Market Monetarism and the Great Recession." I am trying to identify my core message. What is the essence of my critique of mainstream macroeconomics? And why should anyone believe me? I'll offer a few thoughts, but I'd be very interested in your outside perspective. BTW, one thing is very clear to me----NGDP targeting is not at all a part of my core message, it's totally compatible with mainstream macro.

It seems to me that market monetarism has two components, the market part and the monetarism part. In my view, monetarism is the school of thought that says shifts in the supply and demand for money drive the most important macro phenomena, including key nominal variables like inflation and NGDP growth, as well as business cycle movements in RGDP and unemployment.

More importantly, monetarism argues that other schools of thought reify various contingent epiphenomena, confusing side effects with core mechanisms. Thus non-monetarists are inclined to look at phenomena like inflation through the lens of changes in interest rates, bank credit, and/or the Phillips Curve.

To a monetarist, those epiphenomena are the side effects of changes in the supply and demand for money, in an economy with sticky wages and prices. But they are not the core mechanism. Increases in the money supply and/or decreases in money demand are inflationary even if they don't move interest rates at all, and even if they don't result in product or labor market tightness. In two recent posts, I explain this idea with a parable of an island economy lacking a financial system, where prices are flexible and the economy is always at full employment.

So that's the core of the "monetarism" part of market monetarism. But what about the "market" part of the theory? I believe that the flaw in modern macro is that the efficient markets hypothesis is not deeply embedded into all of our models. Thus when there is a policy initiative such as QE, mainstream economists take a "wait and see" attitude. They say that after observing a year or two of macro data, we will have a better idea as to the policy's effectiveness. A market monetarist says that within 5 minutes we'll know everything that we will ever know about the effectiveness of the policy move. Inflation, RGDP and NGDP futures will immediately adjust to reflect the optimal forecast of the effect of the policy initiative. If those markets don't exist, then other proxies such as TIPS spreads, exchange rates, commodity prices and stock prices will tell us all that we can know about the effectiveness of the policy. The future performance of the economy will be affected by that policy, but also a myriad of other factors. Waiting and observing the future course of events won't tell us anything that we don't already know.

Market monetarists see market driven regimes for "targeting the forecast" as a sort of "end of (macroeconomic) history". They are the final stage in the long process of discovering an optimal policy rule. How can any policy ever be better than "the policy stance expected to reach the policy goal?" And how can any macro model's forecast ever reliably beat the market forecast? Not occasionally, but reliably.

And of course we argue that market forecasts of the goal variable are the most useful measure of the stance of monetary policy. Other economists look at a wide variety of epiphenomena, especially interest rates. But the response of interest rates is dependent on any number of contingent factors, and can't possible serve as a reliable indicator of easy and tight money. In the end, the only useful definition of easy and tight money is relative to the policy stance expected to achieve the policy goal---is money too easy or too tight? And again, it's market expectations that will ultimately provide the optimal forecast.

Armed with this market monetarist perspective, we re-interpret macroeconomic history, trying to zero in on the core mechanism, and not be distracted by the various side effects of monetary shocks. What are some of those distracting side effects?

1. Changes in interest rates (due to sticky prices)

3. Shocks to the financial system (due to sticky nominal debt.)

4. Shocks to the labor market (due to sticky nominal hourly wages.)

These side effects are important, but the core message of MM is that these side effects are just that, side effects. They do not drive the process. That's why one can find examples of inflation that cannot be explained by conventional models. A good example is 1933-34, when (wholesale) prices rose by 20% after a monetary shock that produced almost no change in either interest rates or the money supply. Instead, a sharp devaluation in the dollar dramatically reduced money demand (by increasing the future expected money supply), creating rapid inflation despite 25% unemployment, and despite much of the banking system being shutdown.

So why should anyone believe MMs like me? After all, from a perspective of 64,000 feet up I'm an almost complete nobody, who spent his career teaching at an average business school. What distinguishes me from 100 other monetary ranks, all making grand claims to have reinvented macro, attached to policy nostrums that can supposedly cure all our ills?

When I was a teenager I was impressed by bold, heterodox thinkers. "Yeah, how could those pyramids have been built without the assistance of aliens from outer space." As an adult, I've come to appreciate the efficiency of intellectual markets. It's very unlikely that any heterodox thinker that I read about will actually have offered an alternative theory that will survive the test of time. Objectively speaking, I'm far more likely to be just another monetary crank, not the savior of macroeconomics.

I'm not sure I have a good answer to this dilemma. I suppose I could point out that there was a period when quite a bit of praise was lavished on my blogging (here, here, here and here), by reporters and other bloggers. They seemed to think that the way things were playing out somehow validated the arguments I had been making. But that success occurred at a pretty modest level; I certainly didn't convince the overall profession. In the end, all I can do is view myself as one tiny component of the "wisdom of crowds". Yes, markets are efficient, but only because each trader is willing to take a fresh independent look at the situation, and do their best to make accurate forecasts. And yes, the market for ideas does tend toward efficiency in the long run, but only because intellectuals are willing to continually probe weaknesses in existing theory, and seek better ones.

Robin Hanson and Scott Alexander recently reviewed a new book by Eliezer Yudkowsky, which wrestles with exactly this question. I haven't read the book yet, but was intrigued by Scott's summary of one of Eliezer's examples:

Eliezer spent a few years criticizing the Bank of Japan's macroeconomic policies, which he thought were stupid and costing Japan trillions of dollars in lost economic growth. Everyone told Eliezer he couldn't be right, because he was an amateur disagreeing with professionals. But after a few years, the Bank of Japan switched to Eliezer's preferred policies, the Japanese economy instantly improved, and now the consensus position is that the original policies were deeply flawed in exactly the way Eliezer thought they were. Doesn't that mean Japan left a trillion-dollar bill on the ground by refusing to implement policies that even an amateur could see were correct?
Of course other people that I view as monetary cranks, such as the MMTers, also see events confirming their worldviews. But I believe the following Alexander observation offers a bit of evidence beyond "he said, she said":
Why was Eliezer able to out-predict the Bank of Japan? Because the Bank's policies were set by a couple of Japanese central bankers who had no particular incentive to get things right, and no particular incentive to listen to smarter people correcting them. Eliezer wasn't alone in his prediction - he says that Japanese stocks were priced in ways that suggested most investors realized the Bank's policies were bad. Most of the smart people with skin in the game had come to the same realization Eliezer had.
If I have the serene confidence of a monetary crank, or a religious nut, it is founded on one bedrock principle---it's really hard to get rich. And it's hard to get rich because markets are pretty efficient. If markets reacted the wrong way to economic news, then it would be easy to profit on that market flaw. But it isn't.

At its core, market monetarism is about the view that the best estimate of the way that the world works is roughly the way that the markets believe it works. The specifics will always be a work in progress. Market participants will continually discover new perspectives on the economy, and incorporate those perspectives into their mental model of the economy. I hope that future market monetarists disprove some of my claims, and come up with better versions of the theory. Maybe they'll discover that markets believe that fiscal stimulus is effective.

However the basic MM framework for thinking about the economy is likely to survive:

1. Shocks to the supply and demand for money drive the nominal aggregates.

2. Unexpected movements in the nominal aggregates drive fluctuations in real output and employment. They also contribute to financial instability.

3. The market forecast of key macro variables provides the optimal way of understanding what's going on with the economy, predicting its future course, evaluating the stance of monetary policy, and indeed setting the policy instruments.

To be persuasive, a monetary crank needs to explain not just why they are right, but why the mainstream is wrong. I have tried to do this in dozens of posts, all under the theme of "cognitive illusions". The mainstream has incorrect views of the operation of the macroeconomy, because MM is counterintuitive and the mainstream view is intuitive. It seems like Fed changes in interest rates are the "real thing" and not just an epiphenomenon. It seems like the theory of "supply and demand" predicts that an overheating economy would cause inflation, even though it does nothing of the sort. (Excess demand occurs when prices are held too low; it is not a theory of why prices change.)

There's no objective reason to rely on the pronouncement of an intellectual mediocrity like me. I was just lucky, with a set of research interests the dovetailed almost perfectly with what was needed to make sense out of the 2008 crisis. But Eliezer Yudkowsky is another story. He is a formidable intellect who took a fresh look at all the arguments, and ended up in the market monetarist camp. If he and I ever diverge on some core epistemological point, by all means believe him, not me.

PS. If you follow the 4 links above, you'll find that all my good press occurred on September 13 and 14, 2012. That was right after the Fed announced monetary stimulus measures to offset the impact of the fiscal austerity expected in 2013. More than 350 Keynesians predicted the fiscal austerity would significantly slow growth. We said it would not. And bloggers like Paul Krugman and Mike Konczal said this policy experiment would be a test of market monetarism.

We won. Surely that counts for something?

Has it really been 5 years? As Springsteen would say, all I'm left with is boring stories of glory days. And the feeling that I got far too much credit, especially relative to other MMs.

CATEGORIES: Macroeconomics , Money



cityhill.gifWhile wrapping up my graphic novel, I wound up reading Ronald Reagan's famous Farewell Address - his "Shining City on a Hill" speech.  Given my broader views, I obviously have some objections.  But I was amazed to read an actual presidential speech where I agreed with entire paragraphs.  Here's the abridged speech, with my commentary.  Reagan's in blockquotes, I'm not.

My fellow Americans:

This is the 34th time I'll speak to you from the Oval Office and the last. We've been together 8 years now, and soon it'll be time for me to go. But before I do, I wanted to share some thoughts, some of which I've been saving for a long time.

[...]

You know, down the hall and up the stairs from this office is the part of the White House where the President and his family live. There are a few favorite windows I have up there that I like to stand and look out of early in the morning...

I've been thinking a bit at that window. I've been reflecting on what the past 8 years have meant and mean. And the image that comes to mind like a refrain is a nautical one--a small story about a big ship, and a refugee, and a sailor. It was back in the early eighties, at the height of the boat people... As the refugees made their way through the choppy seas, one spied the sailor on deck, and stood up, and called out to him. He yelled, "Hello, American sailor. Hello, freedom man."

Notice that Reagan is reflexively pro-refugee.  He doesn't wonder if the refugee is a Communist spy, warn that he's likely to go on welfare, or fret about a "clash of civilizations." 

A small moment with a big meaning, a moment the sailor, who wrote it in a letter, couldn't get out of his mind. And, when I saw it, neither could I. Because that's what it was to be an American in the 1980's. We stood, again, for freedom. I know we always have, but in the past few years the world again--and in a way, we ourselves--rediscovered it.

If you're inclined to treat Reagan's praise of "freedom" as platitudinous, read on.

It's been quite a journey this decade, and we held together through some stormy seas. And at the end, together, we are reaching our destination.

The fact is, from Grenada to the Washington and Moscow summits, from the recession of '81 to '82, to the expansion that began in late '82 and continues to this day, we've made a difference. The way I see it, there were two great triumphs, two things that I'm proudest of. One is the economic recovery, in which the people of America created--and filled--19 million new jobs. The other is the recovery of our morale. America is respected again in the world and looked to for leadership.

[...]

Well, back in 1980, when I was running for President, it was all so different. Some pundits said our programs would result in catastrophe. Our views on foreign affairs would cause war. Our plans for the economy would cause inflation to soar and bring about economic collapse. I even remember one highly respected economist saying, back in 1982, that "The engines of economic growth have shut down here, and they're likely to stay that way for years to come." Well, he and the other opinion leaders were wrong. The fact is, what they called "radical" was really "right." What they called "dangerous" was just "desperately needed."

On the economy: It's always good to see the "This time, the recession is permanent" crowd served a good helping of crow. 

On foreign policy: Growing up in the 80s, many people took Reagan's warmonger status for granted.  But it's striking how few people the U.S. military killed on his watch.  Perhaps he moved the world a lot closer to nuclear war, but got lucky with Gorbachev; I honestly don't know.

And in all of that time I won a nickname, "The Great Communicator." But I never thought it was my style or the words I used that made a difference: it was the content... They called it the Reagan revolution. Well, I'll accept that, but for me it always seemed more like the great rediscovery, a rediscovery of our values and our common sense.

Common sense told us that when you put a big tax on something, the people will produce less of it. So, we cut the people's tax rates, and the people produced more than ever before... We're exporting more than ever because American industry became more competitive and at the same time, we summoned the national will to knock down protectionist walls abroad instead of erecting them at home.

Reagan conveniently overlooks the general fact that U.S. recessions always end, whether taxes happen to be high or low.  At the time, many economists lamented his betrayal of free trade principles for the auto industry, but perhaps Reagan's general picture is still accurate.

Common sense also told us that to preserve the peace, we'd have to become strong again after years of weakness and confusion. So, we rebuilt our defenses, and this New Year we toasted the new peacefulness around the globe. Not only have the superpowers actually begun to reduce their stockpiles of nuclear weapons--and hope for even more progress is bright--but the regional conflicts that rack the globe are also beginning to cease. The Persian Gulf is no longer a war zone. The Soviets are leaving Afghanistan. The Vietnamese are preparing to pull out of Cambodia, and an American-mediated accord will soon send 50,000 Cuban troops home from Angola.

What common sense really says is that military buildups are a big gamble.  Maybe you'll scare your enemies into submission.  Maybe you're provoke them into war.  But later in the speech, Reagan seems to admit that he got really lucky.

The lesson of all this was, of course, that because we're a great nation, our challenges seem complex. It will always be this way. But as long as we remember our first principles and believe in ourselves, the future will always be ours. And something else we learned: Once you begin a great movement, there's no telling where it will end. We meant to change a nation, and instead, we changed a world.

Countries across the globe are turning to free markets and free speech and turning away from the ideologies of the past. For them, the great rediscovery of the 1980's has been that, lo and behold, the moral way of government is the practical way of government: Democracy, the profoundly good, is also the profoundly productive.

Long-run Economic Freedom of the World scores bear Reagan out on economic freedom.  I'm pretty sure the same goes for global free speech, but I can't readily find measures that go back to the 80s. 

[...]

Ours was the first revolution in the history of mankind that truly reversed the course of government, and with three little words: "We the People." "We the People" tell the government what to do; it doesn't tell us. "We the People" are the driver; the government is the car. And we decide where it should go, and by what route, and how fast. Almost all the world's constitutions are documents in which governments tell the people what their privileges are. Our Constitution is a document in which "We the People" tell the government what it is allowed to do. "We the People" are free. This belief has been the underlying basis for everything I've tried to do these past 8 years.

But back in the 1960's, when I began, it seemed to me that we'd begun reversing the order of things--that through more and more rules and regulations and confiscatory taxes, the government was taking more of our money, more of our options, and more of our freedom. I went into politics in part to put up my hand and say, "Stop." I was a citizen politician, and it seemed the right thing for a citizen to do.

I think we have stopped a lot of what needed stopping. And I hope we have once again reminded people that man is not free unless government is limited. There's a clear cause and effect here that is as neat and predictable as a law of physics: As government expands, liberty contracts.

Reagan indulges in the standard American conflation of freedom and democracy, but he errs in the right direction, slighting democracy to the profit of freedom.

Nothing is less free than pure communism-and yet we have, the past few years, forged a satisfying new closeness with the Soviet Union. I've been asked if this isn't a gamble, and my answer is no because we're basing our actions not on words but deeds. The detente of the 1970's was based not on actions but promises. They'd promise to treat their own people and the people of the world better. But the gulag was still the gulag, and the state was still expansionist, and they still waged proxy wars in Africa, Asia, and Latin America.

Well, this time, so far, it's different. President Gorbachev has brought about some internal democratic reforms and begun the withdrawal from Afghanistan. He has also freed prisoners whose names I've given him every time we've met.

[...]

We must keep up our guard, but we must also continue to work together to lessen and eliminate tension and mistrust. My view is that President Gorbachev is different from previous Soviet leaders. I think he knows some of the things wrong with his society and is trying to fix them. We wish him well. And we'll continue to work to make sure that the Soviet Union that eventually emerges from this process is a less threatening one. What it all boils down to is this: I want the new closeness to continue. And it will, as long as we make it clear that we will continue to act in a certain way as long as they continue to act in a helpful manner. If and when they don't, at first pull your punches. If they persist, pull the plug. It's still trust but verify. It's still play, but cut the cards. It's still watch closely. And don't be afraid to see what you see.

Notice that Reagan doesn't even claim that he somehow induced the Soviets to put a reformer in charge.  They just happened to do so on Reagan's watch.  And once Gorbachev was in power, what difference did Reagan's military buildup really make?  Indeed, one of the few things that might have stalled Gorbachev's reforms is if Reagan failed to gamble on peace.

[...]

Finally, there is a great tradition of warnings in Presidential farewells, and I've got one that's been on my mind for some time. But oddly enough it starts with one of the things I'm proudest of in the past 8 years: the resurgence of national pride that I called the new patriotism. This national feeling is good, but it won't count for much, and it won't last unless it's grounded in thoughtfulness and knowledge.

An informed patriotism is what we want. And are we doing a good enough job teaching our children what America is and what she represents in the long history of the world? Those of us who are over 35 or so years of age grew up in a different America. We were taught, very directly, what it means to be an American. And we absorbed, almost in the air, a love of country and an appreciation of its institutions..

But now, we're about to enter the nineties, and some things have changed. Younger parents aren't sure that an unambivalent appreciation of America is the right thing to teach modern children. And as for those who create the popular culture, well-grounded patriotism is no longer the style. Our spirit is back, but we haven't reinstitutionalized it. We've got to do a better job of getting across that America is freedom - freedom of speech, freedom of religion, freedom of enterprise. And freedom is special and rare. It's fragile; it needs production [protection].

[...]

And let me offer lesson number one about America: All great change in America begins at the dinner table. So, tomorrow night in the kitchen I hope the talking begins. And children, if your parents haven't been teaching you what it means to be an American, let 'em know and nail 'em on it. That would be a very American thing to do.

I'm tempted to say, "America's children clearly failed."  But from all the data I've seen, Reagan was just romanticizing earlier generations of Americans.  Freedom of speech, freedom of religion, and freedom of enterprise have long enjoyed widespread lip service.  But the more specific the question, the more statist Americans look.

And that's about all I have to say tonight, except for one thing. The past few days when I've been at that window upstairs, I've thought a bit of the "shining city upon a hill." The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free.

Bad though poetic example.  In fact, the Pilgrims established a brutal theocracy in Plymouth Colony: "There were several crimes that carried the death penalty: treason, murder, witchcraft, arson, sodomy, rape, bestiality, adultery, and cursing or smiting one's parents." 

I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it, and see it still.

Amazingly, this passage all but demands open borders.  "And if there had to be city walls..." strongly suggest a longing for no walls at all.  Doors "open to anyone with the will and heart to get here" is hard to interpret as anything but support for migrational laissez-faire.  And the phrase "teeming with people of all kinds living in harmony and peace" reveals tremendous optimism about the likely effects of even extreme cultural and ethnic diversity.

And how stands the city on this winter night? More prosperous, more secure, and happier than it was 8 years ago. But more than that: After 200 years, two centuries, she still stands strong and true on the granite ridge, and her glow has held steady no matter what storm. And she's still a beacon, still a magnet for all who must have freedom, for all the pilgrims from all the lost places who are hurtling through the darkness, toward home.

Or in modern parlance, #RefugeesWelcome.

Back in 1993, one of my friends opined, "Reagan talked the talk, but didn't walk the walk."  Given public opinion, I'm shocked that he even talked the talk.  Indeed, I'm amazed that any politician with such a non-Neurotic persona was even able to beat Carter or Mondale.

P.S. Reagan's Farewell Address was written by Peggy Noonan, whom I've criticized elsewhere.





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