Bryan Caplan and David Henderson

The world is a pretty complex and mesmerizing place, and people (and firms) do a lot of things that are, at first glance, hard to understand.

Consider airlines. I've heard on numerous occasions complaints about how major carriers board their planes inefficiently: by using alternative loading and unloading schemes, they can turn flights around more quickly and earn more money by operating more flights.

And to be sure, turnaround time is important. However, it isn't everything. In the last few years, airlines have aggressively unbundled a lot of what they offer. On many carriers, you have to pay to check bags unless you have elite status or a special credit card. Flyers with elite status get preferred boarding and seating. There are a lot of ways in which flying as an elite differs from flying as a non-elite traveler.

This, I think, explains a lot of the differences. Business travelers and frequent flyers pay the bills, and competition for their loyalty is pretty fierce. I didn't realize just how great elite status was until I achieved it. I get to breeze through check-in (and security at some airports), I have virtually guaranteed overhead space that comes with priority boarding, and I can get some work done between when I board and when the door closes. These added layers of convenience make it a lot easier to pick my preferred airline, even if I have to pay a few dollars out-of-pocket on a trip for which I'm being reimbursed.

I haven't studied airlines in detail, but my impression is that the major carriers are serving a different market than the discounters.* Hence, we see these fairly substantial differences. Am I right, or am I missing something?

*-When we moved back to Birmingham, I was excited to be back in a Southwest Airlines-served city. Delta and others usually offer more convenient schedules and are extremely competitive on price. I recall reading in the SWA magazine when I was in grad school that they see themselves as substitutes for driving.

CATEGORIES: Microeconomics


Sometimes I argue that nominal GDP is like Coke, it's the "real thing." By that I mean it's a well-defined concept, the dollar value of all output of final goods and services. Of course I exaggerate, there are some conceptual problems in how to define NGDP. But real GDP has all those problems, and much deeper ones.

Some government statistics define real GDP as "volume" of output. But that's nonsense; it would put a country in the midst of heavy industrialization (like China) far ahead of a high tech society like ours. The next defense of real GDP is the price index, but how is that to be measured? The change in the price of a given basket of goods? But which basket, and how to we address new goods, and changes in quality? There are no good answers to these questions, which is why no one agrees as to whether US living standards have stagnated since 1970, or risen rapidly (as I claim.) On the other hand, we all pretty much agree as to what has happened to NGDP since 1970.

But there is another sense where real GDP really is very much real, and NGDP isn't. RGDP is something that can be pictured in one's mind---"the economy." You can picture all those factories churning out cars, all those homes housing people, all those barbers cutting hair. But NGDP can't really be pictured. Don't believe me? Try to picture the explosive growth in Zimbabwe's NGDP during the early 2000s in your mind's eye. My claim is that either you cannot, or you end up picturing bushels of worthless currency. And that's because NGDP is essentially a monetary concept, not real.

By analogy, if Switzerland had used gold as its money, its NGDP would have plunged much lower since the early 2000s, although it would have rebounded somewhat in the last couple years. But that fact would tell us nothing about the Swiss economy we picture in our mind's eye. It tells us about the international market for gold, where prices soared in relative terms, then fell back somewhat.

In a recent comment section there was skepticism about my claim that a couple of small interest rate increases in 2011 could have plunged the eurozone into another recession, associated with a sharp slowdown in NGDP growth. There are two problems with that criticism:

1. I don't actually believe the higher interest rates were the best way of describing the problem. I prefer "tight money" and just threw out the interest rate increases as a "concrete step" for what Nick Rowe calls the "people of the concrete steppes." Interest rates are not a good indicator of the stance of monetary policy, and eurozone money was much tighter than the increase from 1% to 1.5% would have suggested.

2. The other problem with the skepticism is the implicit assumption that NGDP is some vast thing, and that a central bank would have trouble nudging it this way or that. No, real GDP is a vast thing, and as I said can be pictured in one's mind's eye. NGDP is a tiny thing, no larger than a dollar bill. Suppose the Fed depreciates the one-dollar bills that it has a monopoly on producing, from 1/17,000,000,000,000th of a year's output, to 1/18,000,000,000,000th of a year's output. Then they've just boosted NGDP from $17 trillion to $18 trillion.

I think the problem is that people think of the central bank as being like a tugboat, slightly nudging a huge ocean liner this way and that. This sort of analogy would be sort of OK (although not perfect) for central banks trying to influence real GDP. They can do so in the short run, to some extent. But when we shift over to NGDP the analogy completely breaks down. Now the central bank is no longer the tugboat trying to nudge the ocean liner, it is the ocean liner itself. It steers the nominal economy.

The path of NGDP is monetary policy. Through errors of omission or commission, the ECB has created the path of NGDP that we observe since 2007.

Do those shifts in NGDP also cause the truly vast real GDP to move around? Most conventional Keynesians and monetarists (and Austrians?) would say yes, but only in the short run. This is usually attributed to sticky wages and prices (or perhaps misperceptions.)


Economics makes many things funnier.  But econ's comedic value-added for the final scene of The Warriors (1979) is truly rich.  The first 15 seconds have the big unintended joke, but don't stop there.


Ebola Bet

Bryan Caplan
Mainstream scientists assure us that Ebola poses very little threat to Americans; unless you're a health worker who cares for the infected, Ebola is almost impossible to catch in a rich, modern society.  Yet many populists and borderline conspiracy theorists are convinced that the experts are seriously understating the danger.  In their contrarian opinion, we desperately need to close the border now.

Fortunately, this is an easy argument to put to a bet.  My tentative offer: $100 says that less than 300 people will die of Ebola within the fifty United States by January 1, 2018.  I'm willing to switch to "Unless the U.S. changes its Ebola-related policies, $100 says that less than 300 people will die of Ebola within the fifty United States by January 1, 2018," but then we'd have to carefully define what policy changes count.

I will make this bet with up to five individuals with sufficient reputation to make payment likely if they lose.  I'm also happy to entertain alternative bets.  Propose them in the comments or email me directly.


Given existing border controls, mild measures to prevent serious contagious disease seem morally acceptable.  Yet the best choice, in my view, remains fully open borders - tear down the walls and make travel between countries as free as travel within countries. 

Appearances withstanding, there is no contradiction between these views.  As I explained a while back, fixed costs imply a straightforward consequentialist case for extremism:

But what if there is a fixed cost of having a carbon tax in the first place? For example, the net expected benefits could be:

-$1,000,000 + $10,000,000*p [where p=P(Al Gore is right)]

The $1,000,000 might be the overhead of the carbon tax collectors, or the costs of every tax-payer who has to fill out a carbon tax form, or what have you. Given this fixed cost, for p<.1, the net expected benefits of a carbon tax are negative. On efficiency grounds, Arnold would be correct to council inaction until p exceeds that threshold.

Every micro textbook tells us that when the price of a good gets so low that firms can't recoup their fixed costs, it makes sense to simply close up shop - or not open in the first place. The same goes for government programs.

Thus, even a consequentialist could consistently favor marginally expanding a program yet prefer the program's utter abolition: Marginal benefits can exceed marginal costs even though total costs exceed total benefits.  On the more reasonable view that government action is only justified if its benefits heavily exceed its costs, the path from fixed costs to abolition is even smoother. 

Are the fixed costs of borders really that high?  Absolutely.  Picture what a pain it would be to erect and navigate checkpoints at every border of every U.S. state.  Imagine what even token internal restrictions would do to U.S. commerce, travel, jobs, and housing markets.  If these checkpoints were already in place, telling border guards to screen for Ebola might be reasonable.  But erecting internal checkpoints to slightly reduce the risk of Ebola is crazy.  And if this judgment is obviously right for internal borders, why is it obviously wrong for external borders?


More excerpts from my recently published review of Thomas Piketty's Capital in the Twenty-First Century.

For those who are worried about growing wealth inequality because their own wealth is not growing, there is a simple solution: save more and invest in stock market index funds. And, to the extent possible, do so with tax-favored 401(k) and 403(b) plans and Individual Retirement Accounts (Roth or non-Roth.) When a friend who studies saving patterns of various ethnic groups in America visited me some years ago, I told him that my wife and I normally save between 15 and 20 percent of our before-tax income. His eyes grew wide. "You're Korean," he said, jokingly. Of course, hitting that saving rate meant that we didn't go to Europe or Asia, didn't buy $40,000 cars or $200 shoes, didn't buy expensive clothes, and didn't drink alcohol when we went to restaurants. What a tough life!

Piketty does not give any space in his tome to making that point. He writes as if he is the central planner making decisions from the top down and essentially disregards the fact that people are individuals who want to deal with their individual situations.

But even as central planner, Piketty fails. The driver of his model is his strongly held assumption that the rate of return on stocks will substantially exceed the growth rate of the economy and the growth rate of real wages. Under Social Security, your benefits will grow at no more than the growth rate of real wages because your benefits are paid by Social Security taxes on current workers. So, wouldn't it make sense to let people invest their Social Security taxes in stocks rather than get only the low rate of return that they get now? Piketty says no. He makes one good argument for this, one I myself have made: the transition problem out of the Social Security Ponzi scheme is wicked. But his other argument is that investing in stocks is "a roll of the dice." What happened to his confidence about the rate of return on stocks?

Given his emphasis on--and distaste for--inequality and his conclusion that owners of capital will get an increasing share of an economy's output, it is not surprising that Piketty favors much higher taxes on wealthy people. He argues briefly that the optimal top income tax rate in richer countries is "probably above 80 percent." He claims that such a rate on incomes above $500,000 or $1 million "will not bring the government much in the way of revenue"--I agree--but will drastically reduce the pay of high-paid people. He also suggests an annual "global tax on capital," with rates that would rise with wealth. "One might imagine," he writes, "a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 million and 5 million, and 2 percent above 5 million." One might imagine many things: I take it, as virtually every reviewer pro or con has, that Piketty is not just "imagining" those taxes, but actually advocating them. He adds that "one might prefer" a stiff annual tax of "5 or 10 percent on assets above 1 billion euros."

But if there is anything we know in economics, it is that incentives matter. An annual tax on capital will reduce the incentive to create capital. With less capital than otherwise, the marginal product of workers will be lower than otherwise. Bottom line: Piketty's proposed tax on capital would hurt labor.

Next: More on how Piketty handles this incentive problem--and Robert Solow's thoughts on the matter.


I have not posted on that sweet man, Leonard Liggio, who died this week. It's partly because co-blogger Alberto Mingardi already has and partly because, while thinking about what to say, I came across a video by Tom Palmer. The content and the tone are so beautiful that there is no reason for me to say more. It's a little longer than the usual Friday Night Video I post. When that happens, I often give highlights. But the whole thing is a highlight. This is posted with Cato's permission.

CATEGORIES: Obituaries


[mild spoilers]

Here's a great scene from Wes Anderson's The Grand Budapest Hotel.  Gustave, manager of the Grand Budapest Hotel, has just escaped from prison after being framed for murder.  Zero, an immigrant who works as the hotel's lobby boy, helped Gustave escape, but forgot to bring his employer's favorite cologne.

Gustave: I suppose this is to be expected back in... Where do you come from again?

Zero: Aq Salim al-Jabat.

Gustave: Precisely. I suppose this is to be expected back in Aq Salim al-Jabat where one's prized possessions are a stack of filthy carpets and a starving goat, and one sleeps behind a tent flap and survives on wild dates and scarabs. But it's not how I trained you. What on God's earth possessed you to leave the homeland where you obviously belong and travel unspeakable distances to become a penniless immigrant in a refined, highly-cultivated society that, quite frankly, could've gotten along very well without you?

Zero: The war. 

Gustave: Say again? 

Zero: Well, you see, my father was murdered and the rest of my family were executed by firing squad. Our village was burned to the ground and those who managed to survive were forced to flee. I left because of the war.

Gustave: I see. So you're, actually, really more of a refugee, in that sense? Truly. Well, I suppose I'd better take back everything I just said. What a bloody idiot I am. Pathetic fool. Goddamn, selfish bastard. This is disgraceful, and it's beneath the standards of the Grand Budapest. I apologize on behalf of the hotel. 

Zero: It's not your fault. You were just upset I forgot the perfume. 

Gustave: Don't make excuses for me. I owe you my life. You are my dear friend and protege and I'm very proud of you. You must know that. I'm so sorry, Zero.

Zero: We're brothers.

In my dreams, this is the apology the current proponents of immigration restrictions will one day make.  But I'll settle for open borders sans apology.


Housing and poverty

Scott Sumner

The traditional definition of poverty in America has been criticized for ignoring factors such as government benefit programs and regional variation in the cost of living. Now the Census Bureau has released new estimates of poverty, which account for various types of benefit programs and cost of living differences. For some states the figures are about the same, whereas for others they are substantially different. Here are a few examples:

State -- Original poverty rate -- Adjusted poverty rate

California ------ 16.0% ----------- 23.4%

Massachusetts 11.5% ------------ 13.8%

New York ----- 16.0% ----------- 17.5%

Texas --------- 17.2% ----------- 15.9%

In the unadjusted figures, Texas looks the worst of these 4. The adjusted figure for Texas is exactly equal to the national average, but I'll argue that in fact it's far better than the national average, which partly explains why so many people are moving to Texas.

Let's compare Texas to California, which comes in dead last in the adjusted figures. Both states are "majority-minority," with non-Hispanic whites being less than 50% of the population. Both states have huge Hispanic minorities. The main difference between the two is that in Texas blacks are the second largest minority group by a wide margin, while in California it's Asians, with blacks a distant third. Because Asians tend to earn more than blacks, just looking at demographics you'd predict Texas to have more poverty. Instead it has far less.

If you are liberal the news gets worse. California has one of the most generous welfare states in the country, and Texas has one of the stingiest. And yet Texas has far less poverty.

Indeed if you adjusted for demographics, I'd guess Texas actually has less poverty than the US as a whole, and probably even less than heavily white Massachusetts.

So what explains the Texas success in race-adjusted poverty rates? There are probably many factors, but the housing market is almost certainly the biggest difference from California. Housing regulations (often enacted by well-intentioned liberals) are one of the biggest causes of poverty in America. And these regulations don't just hurt progressive areas. Elsewhere I've argued that the biggest problem with otherwise free market Hong Kong is the restrictive building regulations, which keep housing prices absurdly high. I don't have any data for Hong Kong, but I'd guess that much of the poverty level consumption in that city is due to the high housing prices, caused by restrictive housing regulations.

In the modern developed world most people have enough to eat (partly due to food stamps.) Indeed obesity is now a problem among the poor. Clothing is now really cheap, as are many basic home appliances like TVs and washers. There's free public education and Medicaid. The main cause of poverty is housing costs, and more specifically restrictive zoning laws that make it hard to build. Fix that and you fix much of the problem---focus on welfare, minimum wages, etc., and you are likely to be disappointed.


Ebola and Open Borders

Bryan Caplan
Opponents of immigration almost instantly latched onto Ebola (see here, here and here for starters).  Isn't this horrific disease the "killer argument" showing that open borders is a naively deadly proposal?  The Center for Immigration Studies' Mark Krikorian swiftly coined the Twitter hashtag #LibertariansForEbola to drive the argument home.

Some libertarians downplay the risk of Ebola, even comparing it to statistically microscopic dangers like terrorism.  While I agree that Americans now overestimate their risk of Ebola infection, this plague nevertheless deserves our full attention.  Throughout history, contagious disease has killed billions.  Even today, contagious disease causes 16% of all global deaths.  Contagious disease is at least a thousand times as deadly as terrorism.  And as I have said many times, the moral presumption in favor of open borders is only that - a presumption.  If open borders in the face of Ebola had awful overall consequences, and there were no cheaper and more humane remedy than immigration restrictions, some restrictions would be morally justified and I would support them.  The key question, then, is: Would open borders in the face of Ebola have awful consequences?

From a long-term perspective, the effect of open borders on Ebola is anything but awful.  Open borders is the greatest remedy for poverty ever discovered.  Ebola is a classic disease of poverty - highly contagious in a poor society, but only slightly contagious in a rich society.  In poor societies, untrained laymen unsanitarily care for the severely ill, dispose of the dead, and prepare meat.  In rich societies, specialized experts perform all these tasks.  And as the World Health Organization explains, unsanitary treatment of the living, the dead, and meat account for almost all Ebola contagion.  If you want to eliminate serious contagious diseases like Ebola during the next few decades, open borders is probably the best way to do it.

From a short-term perspective, however, the effects of open borders on Ebola are admittedly less clear.  Risks are miniscule under current U.S. conditions.  The only at-risk population inside the U.S. seems to be health workers who care for Ebola patients.  Even the Texas family who lived with Liberian Ebola victim Thomas Duncan look fine; they're nearly out of quarantine.  

Under full open borders, however, West Africans could enter the U.S. as easily as Virginians enter Maryland.  There is every reason to think that hundreds of thousands of people from Liberia, Guinea, and Sierra Leone would jump at the opportunity.  And while most would be healthy, a sizable minority would be infected - possibly so many that existing U.S. health facilities would be unable to safely isolate them.  Health workers' risk of catching Ebola from their patients amplifies this scarcity - for every doctor or nurse who catches Ebola, how many others will refuse to expose themselves to the disease?

Fortunately, only mild departures from full open borders are necessary to avert this scary scenario.  The obvious keyhole solution: Instead of freely admitting everyone from affected countries, freely admit everyone from affected countries who provides a clean bill of health and accepts a standard 21-day quarantine.  

On balance, then, horrible contagious diseases like Ebola make open borders look better, not worse.   In the short-run, token restrictions are enough to prevent spreading Ebola from the Third World to the First.  And in the long-run, open borders is the quickest, surest way to make diseases of poverty history.

Parting thought for all you citizenists out there: As long as the Third World remains poor, it will remain fertile breeding ground for horrible contagious diseases.  Some of these diseases are likely to be far more contagious than Ebola - too contagious for the most draconian border controls to keep out.  A re-run of the 1918 flu would kill two million Americans.  Eradicating poverty in the Third World is therefore clearly in the interests of your countrymen, present and future.  If you've got a quicker cure for Third World poverty than open borders, I'd like to hear it.


A Stigler Story

David Henderson

And now for something completely different.

I ended my Wall Street Journal piece on Jean Tirole with the following paragraph:

If George Stigler were alive today, he would probably recognize, in Jean Tirole, a kindred spirit. In 1950 Stigler advocated breaking up U.S. Steel. In his 1988 memoirs he confessed, "I now marvel at my confidence at that time in discussing the proper way to run a steel company." Mr. Tirole seems to share Stigler's humility.

But a longtime friend emailed me the following:
I got a good laugh out of the statement that Tirole was a "kindred spirit" of fellow Nobelist George Stigler in that he shared "Stigler's humility." Huh? We both knew him: George Stigler shared Obama's humility. Yeah, he admitted error, but (a) only long after he had made it and its nefarious effects had long since been felt, and (b) in out-of-the-way places like his autobiography where almost no one would see them. Milton was humble, Armen was humble, George was not humble.

I agree, but I note that the humble part of Stigler that I had in mind was his humility about using the government to restructure companies.

I almost e-mailed my friend with one of my favorite stories about Stigler's lack of humility, but I decided it would be a good blog post instead. A couple of weeks ago, at a conference at Hoover in honor of the late Gary Becker, I shared the story with Gary's widow, Guity Nashat, who has a great sense of humor. She got a kick out of it. I hope you do too.

A friend of mine who was a young researcher in Stigler's Center for the Study of the Economy and the State in the late 1970s had his boss over for dinner one night. Stigler pontificated on various issues and people. One of the people he mentioned was Alan Greenspan. "It is a little known fact," said Stigler, "that Alan Greenspan has a brother." One fact, not only little known but actually not known at all to Stigler, was that my friend's wife, when she had met him 5 years earlier, had been dating Alan Greenspan. She knew not only Alan but also his mother. She replied, "Yes, George, it's so little known that even Alan's mother doesn't know it."

CATEGORIES: Economic Philosophy


Writing at (for whom I am also a contributor), William Pentland discusses Lockheed Martin's alleged breakthroughs in fusion technology. We've heard "fusion is just around the corner!" for a very long time now, but as Tyler Cowen notes, this time oil prices are down (albeit not necessarily as a result of this).

What else should we observe if we're less than a decade away from essentially unlimited, pollution-free energy? For starters, it might be the time to sell not just oil, but also land in and bonds of oil-producing countries. If this seriously dents climate change, maybe Miami real estate will be a better long-term investment. What else?


Here are some things that seem very likely:

1. The global stock/oil/bond yield plunge is at least partly due to expectations of slower nominal GDP growth. I know of no other economic news could explain a sudden decline of this magnitude. One plausible theory is that investors are losing confidence in the ECB, and/or the slowdown in China.

2. With the S&P now trading around 1800, a recession in the US next year seems very unlikely, albeit slightly more likely than a month ago. More likely the Fed will once again be wrong about its 3% growth forecast for "next year" for the umpteenth consecutive time.

3. Global policymakers like Janet Yellen and Mario Draghi would be able to make far more informed decisions if we knew what was happened to expectations of future aggregate demand. But because they are not willing to spend 2 million dollars setting up a highly liquid NGDP futures market, we do not have that information.

4. Monetary policy in all the major economies has tightened somewhat in the past month. However the degree of tightening may well be less than many people assume. Again, we simply don't know, but could easily find out if we wanted to. Nobody (including the economics profession) seems to care.

Last year I was sharply criticized by many individuals for my belief that QE had not significantly depressed interest rates. They pointed to evidence that rumors of ending QE had raised bond yields. We now have pretty conclusive evidence that I was right and they were wrong. Here's one common mistake they made:

a. We did have some pretty clear evidence that at least some of the rate increases were due to rumors of tapering. But only a small portion, not a significant portion. The rate increases occurred gradually throughout the year. Late in the year tapering was unexpectedly delayed, and bond yields fell only modestly. That was the first piece of evidence that I was right. They should have fallen sharply (if my critics were right), as the Fed restored the previous market expectations about tapering. Then German yields fell to levels far below American yields, without QE in Europe. Another piece of evidence my critics were wrong.

b. My critics missed the fact that while tapering rumors were clearly raising bond yields on a few specific days, most of the increase during 2013 was spread gradually throughout the year, and was reflecting much stronger than expected growth in the US (and elsewhere) in the second half of 2013.

c. Who was right? We now have a pretty definitive answer. Bond yields have plunged dramatically lower this year despite no "news" on tapering. Instead it reflects slowing expected global growth, just as market monetarists claimed. Most of the so-called "tapering" increases in bond yields during 2013 have been unwound.

The mistake people made was a common one, and had two parts. They forgot that more than one factor can explain a price change, and that a price change in a given day that is clearly linked to a particular news item does not imply that all the price changes that year are also linked to that news. We now know what we should have know all along, macroeconomic expectations are the dominant factor driving nominal bond yields. And keep in mind that global band markets are closely linked, so real interest rates in the US reflect not just US economic activity, but global growth as well.

The common (right wing) argument that QE was "artificially" holding down interest rates has now been blown out of the water, although anyone who looked at David Beckworth's posts on this topic would have reached that realization several years ago.

PS. Thirty year TIPS spreads are at 2.03%. That sounds well anchored, but the Fed is actually targeting 2% PCE inflation, which is equivalent to about 2.4% CPI inflation. (The TIPS are based on the CPI, and hence TIPS spreads are usually significantly above 2%.) So long term inflation expectations do seem to be falling, and are now well below the Fed's target. I think this reflects a modest loss of credibility, due to fear the Fed can't handle a low rate environment with their interest targeting tools. But in fairness, they still have much more credibility than the ECB, at least for the next few years.

Ten year TIPS spreads are at 1.88%

PPS. People who have been hawkish since 2008, warning that QE would cause high inflation, really need to throw in the towel. Always remember; good economists don't make forecasts, they infer market forecasts.


Prosecuting Truancy

Bryan Caplan
How are compulsory attendance laws actually enforced?  A preliminary search turned up some surprising claims, especially this:
Truancy charges can result in large fines, jail time, and a criminal record for students in Texas--one of only two states (along with Wyoming) that prosecute truancy as a crime in adult courts. Adult courts do not provide the same protections as civil juvenile courts, including a right to appointed counsel.

Texas adult courts pursued about 113,000 truancy cases against Texas children ages 12-17 in FY 2012-- more than double the number of truancy cases prosecuted that year in the other 49 states combined.

Dallas County operates the largest truancy court system in Texas. Almost three-quarters of the courts' budget is supported by truancy fines assessed students and parents. In FY 2012, Dallas Country truancy courts collected $2.9 million in fines, according to county reports.

Last year alone, Dallas County truancy courts prosecuted over 36,000 truancy cases--more than any other Texas county and nearly three times more than Harris County, home to the state's largest school district (Houston ISD).
Yes, these claims come from a legal complaint filed against some Texas school districts.  But since these are narrowly legal claims rather than statistical inference, I'm inclined to trust them.  Anyone know more?  What's going on in other states?  Please show your work.


Leonard Liggio RIP

Alberto Mingardi

The name of Leonard Liggio won't say much to non libertarians: but it means a lot to the insiders of the libertarian movement. Leonard, who passed away yesterday, was a great and benevolent figure in this movement of ours. He stood out because he was different than many of his fellow intellectuals.

How? In what sense? Leonard was not a particularly accomplished writer. He wrote little, as opposed to his life-long friend Murray Rothbard, who wrote enough for an entire generation of scholars. Among Leonard's contributions, a great article on Charles Dunoyer, and another one on Richard Cantillon stand out. He also co-authored an article on Bruno Leoni's Freedom and the Law, with Tom Palmer.

The names of Dunoyer, Cantillon and Leoni may suggest that Leonard was quite interested in classical liberalism as a global enterprise, rather than an exclusively Anglo-Saxon adventure. Though he may not have been very prolific, Leonard nudged many other scholars to work on these and other, often forgotten authors. In the late 70s - early 80s, it was Leonard who was responsible for reintroducing French libertarians to Frederic Bastiat, for example, presenting him as the most likely patron saint for the cause of liberty in their country. He never tired of suggesting new readings and books to his friends: either in person or by e-mail.

Leonard was himself a sort of humane, smiling version of Wikipedia. He had a profound understanding of the history of political thought, rooted in an extremely detailed knowledge of the history of political facts. He entered the libertarian movement in his youth and never got out. He lectured extensively all over the world, knew the movement deep down to the youngest research assistant in the most remote university who showed the vaguest interest in libertarianism, and contributed greatly to nurture new ideas and help younger scholars. I did have a brief internship at the then-Atlas Economic Research Foundation, some fourteen years ago (wow! time flies). Leonard's personal history made him a rather intimidating figure to a kid obsessed with contemporary libertarianism such I was. And yet he was always the gentlest of persons, and every morning took care of distributing newspaper clippings and photocopies to the staff, interns included. He always remembered where you were coming from, and what you cared about, and selected "food for thought" accordingly.

Why was Leonard different from most of us? His prodigious memory is not, I think, the reason. Neither is the astonishing fact he could sleep through a lecture and listen to it at the same time, making the most apropos comment as he apparently just woke up. I think the right answer was provided by Pete Boettke in a Facebook comment. Writes Pete:

he was involved in every organization in the modern libertarian movement and that means also all the oversized egos and all the wrangling for position and control, and yet Leonard was never bitter. He simply moved on. I am sure he had a sense of disappointment and perhaps even injustice, but in my 25+ years of knowing him he never expressed resentment or bitterness with the turn of events. I think his personal example is a very important one to admire and copy. Being bitter is not that way to advance the ideas of true and radical liberalism. That is one of the thoughts that popped into my head in thinking about this great man --- he was always a cheerful warrior for the cause of liberty.

Intellectuals are very often, and almost by definition, "me!me!me!" persons. Leonard wasn't. He put the values he believed in and cherished--the ideas of liberty--above any stupid ego play. But, furthermore, he also really cared about other people. He didn't dream of having disciples, he didn't want to make converts, he was a truly radical libertarian that never rejoiced in sectarianism. He did care to help youngsters to grow their own way, by pursuing those very ideas he held dear. This is the reason why he is and will be so sorely missed by all those had the privilege of crossing his path.

CATEGORIES: Obituaries


In her chapter on crime in The Social Benefits of Education (Behrman and Stacey, eds., 1997), Ann Dryden Witte provides an argument against private education likely to win many economists' immediate assent:
Consider a world in which there were no public interventions aimed at socializing children.  In such a world, each family would decide how much to educate its children in the rules of the game and how much to supervise its children's behavior.  In making these decisions, the family would consider the socializing influence of education as it affects the family itself (e.g. better-behaved or more future-oriented children).  But it would be unlikely to give sufficient consideration to the benefit to the community as a whole of having young people who obey the rules of the game.  As a result, children would probably be undersocialized.
A few years later, my friend David Balan formalized this argument.  My reaction, however, remains the same: The facts don't fit.  As my referee report on Balan's original article explained:
Is there any empirical evidence that graduates of private schools exhibit lower levels of morality than graduates of public schools? I would suspect the opposite, though admittedly there is a selection problem. But that selection problem itself cuts against the thesis, for it suggests that parents who send their children to private school DO want to inculcate morality. One plausible explanation is that the externalities of morality are largely infra-marginal.
Balan's piece focused on anti-rent-seeking socialization, but the same holds for crime, teen pregnancy, work ethic, and much more: If anything, private schools place more emphasis on good conduct, not less.  You might think that public schools would at least place more emphasis on patriotism and civics, but even that's far from clear.  How often do religious schools even mention he potential conflict between piety and nationalism, much less urge students to make their faith their primary allegiance?  As far as I can tell, most religious schools try to instill love of God and Country, not denigrate the latter passion at the expense of the former.

You could respond, "Before the 1960s, American public schools placed far more emphasis on socialization."  This is plausible, but note: The famous relevant Supreme Court cases expelled God from public schools, but never lifted a finger against the secular religion of American Democracy.  During the heyday of public school socialization, public schools looked more like religious schools, not less.


In this TED talk, Myriam Sidibe discusses the public health effects of hand-washing. She makes an interesting and important claim: a lot of families in India have soap, but they use it to wash clothes, bathe, and wash dishes because they view soap as a precious commodity.

This increases my confidence that Bryan is exactly right: we're neglecting the obvious: do we get more bang for our buck by redistributing wealth, training public health workers, or by encouraging the economic growth that will give people the incomes they need to buy more soap and install indoor plumbing (here's a brief primer on the equal marginal principle to illustrate the trade-offs)?



Around the same time, Canada cut government expenditure by 18.9% without social turmoil - and without greatly reducing health, justice, or housing programmes. They did this while maintaining tax levies, so the result was a reduced public deficit and falling public debt. Spending that could not be clearly justified in terms of the resulting service to the public was pruned. Subsidies for entrepreneurial projects and privatisation facilitated the elimination of one in six positions in the civil service. Indeed the sort of government reorganisation undertaken in Canada could only be dreamed of in France with its often nightmarish collection of laws and fiscal regulations. The Canadians have a single service for the calculation and collection of taxes and a one-stop-shop for government-business relations.
This is from Jean Tirole, "Four Principles For an Effective State," which was originally published in 2007. HT to Alex Tabarrok of Marginal Revolution.

For more on Canada's budget cuts, see my "Canada's Budget Triumph," 2010.

And this:

Hours after he won the economics Nobel Prize, Tirole said he felt "sad" the French economy was experiencing difficulties despite having "a lot of assets".

"We haven't succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on," he said in telephone interview from the French city of Toulouse, where he teaches.

France is plagued by record unemployment and Tirole described the French job market as "catastrophic" earlier on Monday, arguing that the excessive protection for employees had frozen the country's job market.

"We haven't succeeded also in downsizing the state, which is an issue because we have a social model that I approve of - I'm very much in favour of this social model - but it won't be sustainable if the state is too big," he added.

Tirole remarked that northern European countries, as well as Canada and Australia, had proven you could keep a welfare social model with smaller government. In contrast, he said France's "big state" threatened its social policies because there will not be "enough money to pay for it in the long run".

From "Economics Nobel laureate tells France to 'Downsize the state'."

HT to Patrick R. Sullivan.

CATEGORIES: Fiscal Policy , Labor Market


Henderson on Tirole

David Henderson
But they do not commit the mistake of thinking that regulators are necessarily better than firms in setting prices. Consider the recent issue of interchange fees (IF) in payment-card associations like Visa and MasterCard. Many regulators have advocated government regulation of such fees. But in 2003, Messrs. Rochet and Tirole wrote that "given the [economics] profession's current state of knowledge, there is no reason to believe that the IFs chosen by an association are systematically too high or too low, as compared with socially optimal levels." In other words: Back off. Interestingly, the article from which I'm quoting was not among the 159 articles referenced by the Nobel Committee.
This is my favorite paragraph from my piece, "The Economic Nuances of the Latest Nobel Laureate," published in print today, and electronically last night, in the Wall Street Journal.

Here's my second favorite:

From the late 1960s to the early 1980s, the field of industrial organization was dominated by the Chicago School, where four of the major players were the late George Stigler (who was awarded the Nobel in 1982), his colleagues Sam Peltzman and the late Yale Brozen, and UCLA economist Harold Demsetz. They argued that even though most industries do not fit the economists' model of "perfect competition" in which no firm has the power to set a price, the real world was plenty competitive. Firms compete by cutting costs, by cutting price and by innovating. These economists' understanding of the ubiquity of competition led them to be skeptical about much of antitrust law and most government regulation.

Some background. Every Columbus Day (apologies to co-blogger Bryan Caplan), I set my alarm for 4:00 a.m. and get up and watch the live announcement of the Nobel Prize winner. Then I think through his/her (don't forget Ostrom) work and look at the materials the Nobel Committee has on its site. I decide by 4:45 a.m. whether I know enough to write a piece for the Journal and have it to them by 11:00 a.m. Usually the answer is yes.

This year, it was harder. The Nobel guy making the presentation emphasized Jean Tirole's work on reining in large firms. A friend who noticed that I was on Facebook messaged me to say that if I was doing the piece this year, he had some thoughts to share on on Tirole's work in which Tirole comes off as a central planner. After reading both Tyler Cowen's and Alex Tabarrok's excellent posts on Tirole, I decided that I didn't know enough about Tirole to write the piece. Here's how I decide: the bar for me to write a negative piece is higher than the bar for me to write a positive piece. If I'm criticizing someone on "his day," I'd better know the work pretty thoroughly. That's why I didn't write the piece on Amartya Sen when he won. I had never been impressed by his work, and my piece would have been very critical; but I thought I might have left something positive and important out.

I called Alex and discussed the idea, and told him that if he wanted, I would bow out and recommend him. Alex didn't feel comfortable enough either. I then called my editor at the Journal and told him my thinking. His thinking was similar to mine: if you're going to say it was a bad pick, you had better really know the work.

Two minutes after I called my Journal editor, Alex sent me a 2003 article by Tirole and Jean-Charles Rochet that turned around my thinking on Tirole. It's the one I quote in my Journal piece. I looked back at everything I had seen that morning and realized that it was the Nobel Committee, with its emphasis on reining in big business, that had colored my view of Tirole. That wasn't fair to Tirole. But it also gave me my angle: contrast Tirole's cautiousness with the Committee's aggressiveness. I e-mailed the two Journal editors I was dealing with, titling the e-mail "HALT." I made my case. The Journal accepted.

By 9:30 a.m., I had the piece done and sent it to Alex Tabarrok and Lynne Kiesling for comments. Alex had two suggestions, one of which I used, and Lynne liked it. I also sent it to the friend who had seen Tirole as a central planner. We had talked on the phone while I was writing and he was starting to realize that he hadn't been reading Tirole directly but, instead, had read people who ran with Tirole and used it to advocate aggressive regulation. I pruned it a little and sent it to the Journal at 10:30 a.m.

The Journal got the edit to me by 1:00 p.m. with some changes and queries that were easy to deal with. Just before approving, I heard from the friend who had thought Tirole advocated aggressively regulating IFs. He had run my idea by a colleague who knew Tirole's work better. His colleague confirmed my view: people were using Tirole's work to advocate aggressive regulation, but Tirole was much more cautious. I approved the article.

CATEGORIES: Regulation


Do bad times make us less smart? It sometimes seems that way. When times are good, people dispassionately explain how you don't want to overreact to plagues with draconian policies like quarantines, especially if the disease is not highly contagious. During a plague the reptilian brain takes over, and xenophobia becomes highly personal.

During the 1990s the economics profession seemed pretty smart. They had abandoned ideas like bailouts and fiscal stimulus to create jobs, and understood that monetary policy could and should steer the nominal economy. Liquidity traps were only a problem for the stodgy, uncreative Bank of Japan. There didn't seem to be much difference between top-notch economists such as Greg Mankiw (dismissing the idea that across-the-board tax cuts would boost revenue) and Paul Krugman (defending the exploitation of cheap third world labor.) To be fair, I have no reason to assume either individual has altered their specific views on those two issues. But no one can deny things look very different in the 2010s.

[Update: Commenter Vivian pointed out that at least Mankiw has not changed his views.]

I saw a recent example of the effect of growing pessimism in this story discussing Mario Draghi:

President Mario Draghi said expanding the European Central Bank's balance sheet is the last monetary tool left to revive inflation although there is no target for how much it might be increased.

"It's very difficult for me to give you an exact figure at this point in time," Draghi told reporters in Washington today during the annual meeting of the International Monetary Fund. "I gave you a kind of ballpark figure, say about the size the balance sheet had at the start of 2012."

To be fair, this statement might be defensible if you define "tool" very narrowly. All the ECB can really do is reduce the demand for base money (negative interest on bank reserves) or increase the supply of bank reserves (QE.) But I don't think that's how the markets would interpret Draghi; they'd assume he was saying the ECB is almost out of ammunition. This isn't just wrong, it's crazy. The ECB is the monopoly producer of a fiat currency. They can debase it any time they wish. And I'm not just talking about unlimited QE. Switching from inflation targeting to a 1.8% growth rate price level target would be hugely expansionary, far more so than an extra trillion euros of QE. And completely within the ECB's mandate.

Perhaps Draghi knows all that, but is expressing frustration that the powers that be won't allow the ECB to do what is necessary. Either way, this is scary for the markets. To eurozone stock investors it doesn't much matter whether the ECB "can't" or "won't" do what's necessary---either fear drives eurozone equity prices lower. In the world of money, speech is policy. Tighter money in this case. Here's a recent news video:

Pisani: Stocks drop after Draghi's sour speech CNBC's Bob Pisani reports ECB President Mario Draghi's comments on rates drove down trading in Europe.
Notice that while we don't know whether Draghi thought it was a matter of "can't" or "won't," the markets do know. If it was "can't" there would have been no market reaction. Why should stocks fall on public information? Only "won't" is "news."

Because we lack a NGDP futures market, I don't know what any of this means for the US. TIPS spreads in the US have recently fallen, but that might reflect lower commodity prices due to slowing growth overseas. Stocks have fallen, but much less sharply than in Germany. And don't forget that more than 46% of S&P500 earnings come from overseas profits. If I had to guess I'd wager than NGDP expectations have fallen in the US, but only slightly.

So far. . . .


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