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David R. Henderson

The Federal Funds Target

David Henderson

When I posted last week about monetary economist Bill Poole's incorrect claim that the Fed Reserve sets the Federal Funds rate, a number of commenters objected that my claim was trivial. Most argued that Poole's usage was close enough to being correct because the Fed can so accurately hit its target.

My good friend and monetary economist Jeff Hummel has sent me the graph below. He writes:

The solid blue line is the Fed funds target for the period covered; the asterisks are the effective Fed funds rate for each day; but that is only a weighted average of all Fed funds transactions for the day, the dispersion of which is shown by the vertical black lines. And this is when the Fed is doing a good job of hitting its target.


CATEGORIES: Monetary Policy

Scott Sumner

The new left

Scott Sumner

If you have been paying attention to the debate over public policy, you may have noticed that the GOP has moved even further to the right in recent decades, and the (formerly more moderate) Democrats have moved even more dramatically to the left. For example, in a recent Slate post, Jordan Weissmann discusses a fascinating new paper on Obamacare:

In a working paper released earlier this month, economists Gregory Colman and Dhaval Dave conclude that thanks to Obamacare's coverage rules, young adults are now less likely to work but a bit more personally content, as they spend more time with friends, in school, and searching for (presumably) fulfilling employment. They might be a little lazier. But that's not necessarily such a bad thing.
So we supply-siders are right. In the past, progressives used to vehemently deny that social programs made people lazy. How do progressives like Weissmann react to this new study confirming supply-side claims?
Which is more important? The answer is going to hinge on what you think the point of public policy is. If you believe the government's one and only goal should be to encourage GDP growth for the sake of GDP growth, then any change that encourages fewer people to work is probably going to rub you the wrong way. But if you think the most important aim of government is to help people lead happy, healthy, satisfied lives, then giving them the option to laze around or figure out their lives without having to worry about a devastating hospital bill is probably the way to go.
Oh, so that's what's at stake. Which do you support, more GDP or happier people? Yes, it's possible that the policy may be beneficial; almost anything is possible. But what market failure is causing young people to want to work too hard? What market failure requires taxes or subsidies to reduce work effort? I imagine that the beneficiaries of government largess are made better off by the program, but is that now the criterion for success? Nothing about secondary effects on taxpayers?

I can think of many market failures that currently encourage young people to work too little, such as taxes on labor. There are also huge subsidies to college education, which leads to lots of individually beneficial but socially wasteful schooling. My daughter had to give up a part time job she enjoyed because of the absurd amount of homework in obscure trivia that was given to her by her (public) high school. In contrast, I can't think of many market failures causing people to want to work too much, although the tax bias favoring employer-provided health care might be one.

And does Weissmann plan to be consistent in this market failure argument? If people work too hard, and would be happier to have more time in non-market activities, does that count against programs like government funded child-care, which will promote work among young mothers, leaving them less time to spend with their children? How about the Earned Income Tax Credit? Or do progressives now support any and all programs that benefit sympathetic groups, regardless of whether they reduce or exacerbate hypothetical market failures?

In one sense the new "liberalism" is an improvement. The old argument that social programs didn't make people lazier really insulted our intelligence. So I salute the intellectual honesty of researchers like Colman and Dave.

Full disclosure: Dhaval Dave is my colleague, and probably the smartest professor at Bentley University. I hope it goes without saying that this post is criticizing the second quoted paragraph of Weissmann, not the Colman/Dave paper. I agree with their claim that recipients of subsidies are probably better off.

Happy Thanksgiving

David R. Henderson

False Externalities

David Henderson
However, increased consumption among youths leads to negative externalities. Raising the share of adults registered as medical marijuana patients by one percentage point increases the prevalence of recent marijuana use among adolescents and young adults by 5-6% and generates negative externalities in the form of increased traffic fatalities (7%) and alcohol poisoning deaths (4%).
This is from the abstract of "The Kids Aren't Alright but Older Adults are Just Fine: Effect of Marijuana Market Growth on Substance Use and Abuse," by Rosanna Smart, a Ph.D. student in economics at UCLA.

In case you think there is no connection between the first sentence and the second, there is. In the paper for which this is the abstract, she does claim that people who use marijuana and then cause traffic accidents and/or die from alcohol poisoning are creating a negative externality.

Let's consider the two alleged externalities in turn.

First, traffic accidents and fatalities. There certainly is a strong case to be made that people who use marijuana and then cause traffic accidents and fatalities are creating a negative externality. But the case must be made that the accidents hurt other people, damage other people's property, or kill other people. She does not do that. Moreover, she does not appear to put any weight on the distinction between killing oneself and killing others. If I, through some foolish act, kill myself but don't damage anyone else's property or injure or kill anyone else, I have not created a negative externality.

Second, alcohol poisoning. Here the reasoning is even more straightforward. If using marijuana causes me to die from alcohol poisoning, presumably because marijuana and alcohol are complements, I have not created a negative externality. I have done something destructive to myself, but there is no negative externality.

I looked elsewhere in Ms. Smart's paper for some hint that she was aware that she needed to make a case for her externality claim. This, on page 18, is the closest she came:

If individuals are rational and fully anticipate the potential negative consequences of marijuana consumption on future utility, then any increase in use induced by medical marijuana availability increases consumer welfare (Becker and Murphy, 1988). If, however, individuals underestimate the potential negative consequences (e.g., risk of dependence) or make mistakes in their consumption choices triggered by environmental cues, this increased marijuana use may decrease social welfare (Laibson, 1997; Bernheim and Rangel, 2004). Consumption by children is often assumed to be suboptimal prima facie, as reflected by the range of policies designed to guide their consumption decisions (e.g., the minimum legal drinking age, compulsory schooling laws, and debt contract age limits). Under any theory of individual decision-making, if marijuana use generates negative externalities, then the socially optimal level of consumption is below the individually optimal level of consumption achieved under a free market regime.

In other words, she jumps from entirely plausible claim that young people may make bad decisions that are not in their long-run self interest to the non sequitur that those decisions create negative externalities. But recall that a negative externality is a cost imposed on someone else. If I kill myself, I kill my self.

HT to Tyler Cowen.

CATEGORIES: Political Economy

In the past I've been critical of Paul Krugman's approach to austerity and business cycles. For instance, he argued that austerity in the UK led to slow growth in real GDP. I countered that RGDP is not the right variable for business cycle analysis; you need to look at employment (relative to trend.) The British economy did quite well in terms of job creation after the Cameron government took office, and the low RGDP growth was due to abysmal productivity numbers. But there is no mechanism in the Keynesian model by which austerity can reduce GDP without reducing jobs. Instead, supply-side factors seemed to explain Britain's poor productivity numbers.

Regardless of who was right in that particular case, Krugman has now come around to my view that employment figures are more meaningful than RGDP in business cycle analysis. Here are his recent comments on Ireland and Iceland:

It's true that Irish GDP per capita (in this case using GNI doesn't make much difference) recovered to its pre-crisis level only a bit later than Iceland's. But that's not the only indicator, and it's one that is arguably distorted by the nature of the Irish export sector, which held up fairly well and is highly capital-intensive (think pharmaceuticals) -- that is, it contributes a lot to GDP but employs very few people.

If you look at employment instead, as in the chart, Iceland did far better than Ireland; and Icelandic unemployment similarly shows a much more favorable picture. Less formally, everyone I know who tracked both countries has the sense that the human toll in Iceland was much less than it was in Ireland.

I think this is exactly right, and am very happy to see Krugman making this sort of analysis. In Britain, output from oil and high-end finance dropped sharply, "but employs very few people." It also helps explain why Abenomics has been a big success (in monetary policy terms, not the other two "arrows".) Since the beginning of 2013, employment relative to trend in Japan has done far better than RGDP.

Let me try to head off a few possible comments:

1. Yes, I sometimes refer to RGDP data. In some cases, such as the famous 2013 "test" of market monetarism, it's because I want to evaluate the test using the metric that Keynesians were focusing on at the time. But market monetarism also passed the 2013 austerity test with flying colors if you focus on employment rather than RGDP.

2. Yes, RGDP matters for living standards. But there is more to life that RGDP/person. During the Great Depression of the 1930s, RGDP/person in the US was not particularly low by developed country standards, but people were suffering. In the deep 2009 recession, RGDP/person in the US, RGDP/person exceeded the levels observed in Europe at the peak of a boom. Indeed if RGDP/person in the US were to fall to German levels it would be one of the great economic catastrophes in all of American history. But not because German living standards are low (they are very high), rather because 20% of Americans would be jobless.

3. Some people are surprised to hear that I am just as dismissive of RGDP as someone like Arnold Kling, given that I often talk about NGDP. But despite the similarity of names, NGDP has absolutely nothing to do with RGDP; they are completely unrelated in a conceptual sense, although obviously correlated in a statistical sense (in the US, not Zimbabwe). Here's what RGDP looks like:

Screen Shot 2015-11-27 at 1.40.56 PM.png
In contrast, this is what NGDP looks like:

Screen Shot 2015-11-27 at 1.42.23 PM.png
The most useful way of thinking about NGDP is as the value of a dollar. Thus 1/NGDP is the share of total output that can be bought with a single dollar. It's a way of thinking about monetary policy. It only matters for employment crises and financial crises because so many labor and debt contracts are priced in dollars, not tons of steel. Hence it really is appropriate to obsess over NGDP, even as we ignore RGDP

PS. Krugman also thinks nominal wage stickiness is a factor in unemployment. Now if he were to switch from inflation to NGDP growth as the relevant demand shock indicator, he'd be using the three components of the musical chairs model (sticky nominal wages, NGDP, and employment.)

HT: TravisV

David R. Henderson


David Henderson

In my Executive MBA economics class a little over a week ago, I presented the following definition of a negative externality:

A cost borne by someone who is not party to the decision that caused the cost.

Then I asked the students for examples of negative externalities. One tried and true example in the textbook, The Economic Way of Thinking, by Heyne, Boettke, and Prychitko, is air pollution. I was ready to go with that if the students didn't come up with anything. They typically do, though, and so I didn't have to wait long.

One student raised her hand and I called on her. She gave the example of a school board of a government school district that had voted for large pensions for teachers, pensions that would be paid for by taxpayers rather than by the board members themselves.

I could have hugged her.

So often we economics professors stick to the kinds of externality examples we were taught when we learned economics. And that was my mindset that morning. But there's a sea of examples of externalities, typically negative, created by government officials. She put her finger on one.

I wrote about Harold Demsetz's example earlier here.

Update: Glen Whitman has written about this here.

Scott Sumner

Ram on overconfidence

Scott Sumner

A commenter named Ram left a brilliant comment over at TheMoneyIllusion. Here it is (emphasis added):

I'd contend that the main problem in America is that the public, including its highly educated members, is social-scientifically ignorant. Most people I talk to about policy do not even realize that there is anything non-trivial about policy analysis. They want the government to make sure that four phases of rigorously designed RCTs be performed before drugs are made available to the public, for fear of unintended consequences of intervening on a complex system like the human body, yet they think they understand the consequences of highly complex interventions on human societies by introspection alone. Not only do they think they understand the consequences of alternative policy choices, but they're so confident that their understanding is right and that its truth is so obvious that the only explanation for disagreement is evil intentions. When I point out that on virtually every policy issue, at least somewhat compelling arguments for many conflicting points of view have been made by relevant experts, people usually react in disbelief or denial, or immediately retreat to questioning the motives of these experts ("of course they say that, they're on the payroll of Big Business" or whatever). These patterns of speech and behavior are uniformly distributed across the political spectrum, even if intelligence and knowledge of well-established facts is not. Even many experts in particular areas of social science evince no awareness of the lack of expert consensus on almost anything in their field, and give the impression of unanimity to an unknowing public.

My guess is that if you were to convince a supposedly non-utilitarian person that their (e.g.) deontological prescriptions might have terrible consequences, then they would revisit them. Anti-consequentialism is easy to maintain so long as you believe the consequences of your proposals are desirable, but most would fold if convinced otherwise. The real problem is convincing anyone, which involves first convincing them they don't already know the answers, which involves getting them to disassociate with their political allies enough to think critically, which involves upending a defining feature of their identity.

Imagine how different the world would look if, in order to secure the most votes, politicians had to say "you know, I don't really know the best way to deal with this problem. My educated guess, based on consultations with experts, is that we should try X, but the truth is no one knows if it will be a change for the better. Consequently we will undertake a small scale experiment, designed to maximize our understanding of the consequence of X. Should it succeed we will scale up and perform follow up studies. Should it fail we will scale it back." Seems to me we will never get there till the public becomes cognizant of and concerned about its own policy ignorance. The details of moral philosophy will be easy to reason over once we've managed that much.

Happy Thanksgiving

CATEGORIES: Economic Philosophy

Economist Noah Smith has a recent article titled "Most of What You Learned in Econ 101 Is Wrong." He doesn't actually make the case that would support that title. But he also probably didn't choose the title. However, he did choose this statement:

But [N. Gregory] Mankiw's book, like every introductory econ textbook I know of, has a big problem. Most of what's in it is probably wrong.

Here's what's striking. In an article that purports to show that Mankiw is wrong on many issues, he doesn't point out how he's wrong on ANY issues.

Moreover, he doesn't even try. At no point in his piece, does Smith ever relate anything he says to specific things that Mankiw claimed.

Of course, it's possible that Smith doesn't think he needs to do so because he takes as given that his audience knows what's in Mankiw's text.

So let's look at that. On the minimum wage, Smith writes:

For example, Econ 101 theory tells us that minimum wage policies should have a harmful impact on employment. Basic supply and demand analysis says that in a free market, wages adjust so that everyone who wants a job has a job -- supply matches demand. Less productive workers earn less, but they are still employed. If you set a price floor -- a lower limit on what employers are allowed to pay -- then it will suddenly become un-economical for companies to retain all the workers whose productivity is lower than that price floor. In other words, minimum wage hikes should quickly put a bunch of low-wage workers out of a job.

And Smith gives his criticism in the next paragraph:
That's theory. Reality, it turns out, is very different. In the last two decades, empirical economists have looked at a large number of minimum wage hikes, and concluded that in most cases, the immediate effect on employment is very small. It's only in the long run that minimum wages might start to make a big difference.

In other words, in most cases there is a small, presumably negative, effect on employment. And presumably in the other cases there is a large effect. How, exactly, does this contradict the claims that Mankiw makes and that many of us teach in our equivalents of Econ 101? It doesn't.

Now it is true that in the 5th edition (2009) of his text, Mankiw writes:

Although there is some debate about how much the minimum wage affects unemployment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment [by] between 1 and 3 percent.

In light of the more recent studies that Smith is referring to, Mankiw might need to soften that statement. But he need not change his conclusion that the minimum wage puts some teenagers out of work. So Smith, in an article purporting to disagree with Mankiw on this, finds himself agreeing.

The other issue on which Smith takes issue with how Econ 101 is taught--or is it Mankiw's text?--is on welfare. Smith writes:

Another example is welfare. Econ 101 theory tells us that welfare gives people an incentive not to work. If you subsidize leisure, simple theory says you will get more of it.

What's Smith's objection? He writes:
But recent empirical studies have shown that such effects are usually very small. Occasionally, welfare programs even make people work more. For example, a study in Uganda found that grants for poor people looking to improve their skills resulted in people working much more than before.

But here he's attacking a straw man. Economists who have claimed that welfare discourages work have generally had in mind welfare programs that impose a very high implicit marginal tax rate because the people on welfare lose a lot of their welfare payments when they work more. Go to the link he cites and you find that the kind of welfare he's talking about that economists have studied is typically in the form of unrestricted cash grants that, presumably they don't lose if they work more. That means that the welfare programs do not, repeat do not, subsidize leisure. That certainly doesn't contradict the standard exposition in Econ 101 or the exposition in Mankiw's text. Mankiw discusses a hypothetical welfare program in which the government guarantees an annual income of $15,000 and then takes away one dollar of welfare for every dollar earned. He writes:
The incentive effects of the this policy are obvious: Any person who would make under $15,000 by working has little incentive to find and keep a job.

Why? Mankiw explains:
In effect the government taxes 100 percent of additional earnings.

Do the studies the linked article that Smith cites contradict this? No. In fact, here's what the linked article states:
There's no doubt that poorly designed social programs can deter work. Aid to Families With Dependent Children, the pre-welfare reform welfare program, was found to decrease hours worked by 10 to 50 percent among recipients; that likely has something to do with the fact that AFDC benefits were taken away at a rate of 100 percent, so every dollar earned on the job was a dollar not received from AFDC. Who would work under that condition? [italics in original]


HT to Don Boudreaux.

David R. Henderson

Giving Thanks

David Henderson

Here's a Thanksgiving message from my 2001 book, The Joy of Freedom: An Economist's Odyssey, from a chapter titled "The Joy of Capitalism."

I pointed out in Chapter 1 that British author Thomas Carlyle called economics "the dismal science" because the free-market economists around him were strongly opposed to slavery. For me, economics is the joyous science. I started off believing in economic freedom (sometimes called capitalism) as a moral imperative, as something that should exist because it is the only system in which people deal with each other on the basis of choice rather than on the basis of force. But the more I learned about economics, the more I saw that economic freedom was also enormously practical, that it delivered the goods better than any other system, and not just better, but incredibly better.

Capitalism's incredible productivity wasn't so easy for me to appreciate when I was in my teens and my early 20s. This was so for two reasons. First, starting at age 16, I was on my own financially and lived on a shoestring budget until I got my first full-time academic job as an assistant professor at age 24. Second, and more important, I was incredibly ignorant of economic history. Most of the history I learned in school was of the "who fought what war when and for what four reasons" variety. I learned very little about the day-to-day lives of ordinary people centuries ago.

In the last 20 years, though, I have found it easier and easier to appreciate capitalism. That's in part because my income, adjusted for inflation, has risen a lot. But it's also because the awesome technological revolution that has been going on around us has increased virtually everyone's real income--even those people whose incomes, adjusted for the government's faulty inflation measure, have been stagnant.

Think of what we can do nowadays, even those of us with modest incomes. If we miss a movie when it's in the theatres, we don't have to wait, the way we used to, until either it comes around again (unlikely) or is shown, years later, on TV, interrupted by ads and missing some of the best parts courtesy of network "censors." Instead, we can see the uncut version at our convenience on a video recorder that costs less than the earnings from three days of work at the minimum wage. We can rent the movie for a price that is often less than half of what we would have had to pay to see it on the big screen. I know we often take this for granted. One of the joys of capitalism is that we can take its awesome productivity for granted. But it's good, every once in a while, to have some wonder about the many things that are wonderful. A lot of "wonder robbers" out there think it's not "cool" to have wonder. But don't ever let anyone rob you of your sense of wonder. If you've already lost it, here's your chance to reclaim it.

Happy Thanksgiving to you all.

Benny Lava sent me an article discussing the German opposition to Mario Draghi's proposed monetary stimulus:

But on Monday, Lautenschlaeger broke with normal etiquette to publicly criticize this stance, saying that ever looser monetary policy had its limits and that money printing had yet to stabilize sinking price inflation, its formal goal.

"I don't see any reason for further monetary policy measures, especially not for an extension of the (asset) purchase program," she said, ten days ahead of a meeting at which policymakers will set the ECB's course.

"It buys time but does not heal the structural causes of a slack economic recovery... We should give the numerous and massive monetary policy efforts time to take full effect."

Suppose you tried to illustrate Lautenschlaeger's concerns using as AS/AD model. The most straightforward approach would be to shift the AS curve to the left. But this would cause higher inflation, whereas the eurozone is facing excessively low inflation, and is trying to bring inflation up to its 1.9% target.

One could argue that structural problems might also interact with monetary policy, indirectly leading to tighter money and a drop in AD. But the Germans insist that money is easy. And if money were tight, then you'd want monetary policy to offset that tightness, and prevent AD from declining in response to a fall in AS. If Lautenschlaeger believes structural problems are causing low inflation, then the solution is more monetary stimulus. To summarize, a casual look at the AS/AD model suggests that the Germans have no plausible explanation for why the eurozone faces sub-par inflation rates.

The Fed is currently wrestling with the issue of when to raise rates. Janet Yellen and Stanley Fischer are both fans of the Phillips Curve, which predicts that inflation will rise as the economy reaches full employment. I'm much less confident. Consider the following:

Fed policymakers say confidence that inflation will rebound should be enough to pull the trigger on rates for the first time, most likely at their Dec. 15-16 meeting. The second move may need more proof that prices are in fact rising, so its timing will offer a better clue to how the tightening cycle will unfold.

It may also show to what extent the Fed still relies on the theory of an unemployment-inflation trade-off commonly known as the Phillips curve.

"You hear arguments inside and outside the (Fed's policy) committee that in this circumstance you should just look at inflation by itself," Bullard, who will vote on rates next year, said. "Maybe it is the appropriate thing to do in this environment,(but)if we are really going to give up on the Phillips Curve at the heart of central banking that would be a major change," he told Reuters from his St. Louis office.

There are two ways of thinking about Bullard's comments. But first let's think about how central banks should view the Phillips Curve, which is the idea that inflation is a procyclical variable, rising during booms and falling during recessions. If we refer back to the AS/AD model, it's easy to see that the Phillips Curve is only correct when the economy is being buffeted by AD shocks. When there are AS shocks, then the inflation rate is countercyclical. But here's the irony---the Fed is supposed to try to prevent AD shocks, and can't do anything about AS shocks. So if the Fed is doing its job, then the Phillips Curve model will be wrong. And not just slightly wrong, but the opposite of the truth. If they are using the Phillips Curve to predict the economy, then they are using a model that can only predict accurately when monetary policy is inept.

So does that mean that Bullard is wrong? Not necessarily, and that's because there are actually several issues the Fed needs to address---the business cycle and also the trend rate of inflation. Perhaps Bullard is implying that if the Fed were not to raise interest rates, then AD would rise, causing both output and inflation to accelerate. That would be a procyclical inflation rate, which violates the Fed's dual mandate. Fed policy is supposed to make inflation countercyclical.

So then maybe the Fed should raise rates to keep inflation below 2% during the coming boom, so that the Fed can run inflation over 2% during the next recession. That would be consistent with their mandate. But there's just one problem; the Fed doesn't have a system in place to produce higher inflation during recessions. During the previous recession, inflation fell to zero, and there's no reason to suppose inflation won't fall again during the next recession. In that case, if the Fed tolerates sub-2% inflation during the coming boom, and inflation falls during the next recession, then their long run 2% inflation target will lose credibility.

I see this as the biggest dilemma facing the Fed. The policy that will smooth the cycle right now, and would be appropriate if the Fed were doing NGDP targeting at 3%, is tighter money. But this would also cause them to miss their inflation target in the long run, if inflation goes back to being procyclical in the next recession.

That's why I keep saying the real issue is not whether the Fed does or doesn't raise rates in December, but rather whether the Fed is able to finally come up with a way of meeting their inflation/employment dual mandate, which requires a countercyclical inflation rate.

PS. Some people are confused as to why the dual mandate requires a countercyclical inflation rate. To see why, first imagine a single mandate, with inflation stabilized at 2% year after year, regardless of unemployment. That's a sort of benchmark. Then ask how things would be different if the Fed also cared about stabilizing unemployment. In that case, policy would be a bit more expansionary during periods of high unemployment, and vice versa. This monetary policy would be a bit more countercyclical than a straight up inflation targeting single mandate, and hence inflation will also be a bit more countercyclical than under simple inflation targeting. Since inflation is 100% acyclical under pure inflation targeting, making it somewhat more countercyclical in a relative sense, also makes it countercyclical in an absolute sense.

The Fed does set the federal-funds rate--the overnight interest banks charge to lend to each other--and surely affects the timing of rate changes, but not the longer-run level.
This is the second sentence of an op/ed in this morning's Wall Street Journal by William Poole, currently a senior fellow at the Cato Institute and formerly president and CEO of the Federal Reserve Bank of St. Louis. The article is titled "Don't Blame the Fed for Low Rates."

Poole is an excellent monetary economist, but this is just wrong. Indeed, his own sentence shows that it's wrong. If, as he correctly notes, the federal-funds rate is the interest rate that banks charge in their loans to each other, how could the Fed possibly set it? Moreover, not only does the Fed not set that rate, but also the Fed is not even a participant--as lender or borrower--in the federal-funds market. The most the Fed can do is influence the federal-funds rate indirectly, mainly by using open market operations. But it does not set the rate.

CATEGORIES: Monetary Policy

David R. Henderson

Douglass North, RIP

David Henderson

My Hoover colleague Doug North died yesterday at age 95. Here's his bio in The Concise Encyclopedia of Economics.

And here's a statement issued by the Hoover Institution:


Tuesday, November 24, 2015

STANFORD, CA: "Today we mourn the loss of a great friend and economist, Douglass North. A recipient of the Nobel Memorial Prize in Economic Sciences, Doug is credited with transforming [the study of] economic development in the United States and Europe in connection with the industrial revolution. Our thoughts and condolences are with Doug's family and friends during this difficult time."


Douglass C. North was the Hoover Institution's Bartlett Burnap Senior Fellow with his areas of research including property rights, transaction costs, economic organization in history, theory of the state, free rider problem, ideology, growth of government, economic and social change, and a theory of institutional change.

North received the Nobel Prize in economics in 1993. He was elected a fellow of the British Academy in July 1996 and was installed as the Spencer T. Olin Professor in Arts and Sciences at Washington University in Saint Louis in October 1996. He was appointed Luce Professor of Law and Liberty in the Department of Economics at Washington University in the fall of 1983 and was director of the Center in Political Economy from December 1984 through June 1990. In April 1985, he was appointed editor of the Cambridge series of books and monographs on The Political Economy of Institutions and Decisions.

North's appointments at Washington University in Saint Louis follow thirty-two years at the University of Washington at Seattle, where he was director of the Institute for Economic Research for five years and chairman for twelve years. He was the Peterkin Professor of Political Economics at Rice University in the fall of 1979, Pitt Professor at Cambridge University in England in 1981-82, and a visiting fellow of the center for Advanced Studies in the Behavioral Sciences at Stanford University in 1987-88. He was editor of the Journal of Economic History for five years and president of the Economic History Association in 1972. He was a twenty-year member of the Board of Directors of the National Bureau of Economic Research until 1986.

In 1987, he was elected to the American Academy of Arts and Sciences. He has lectured at most major American and European universities and many Asian universities. He is the author of more than fifty articles and eight books. North received his BA in 1942 and his PhD in 1952 from the University of California at Berkeley. He also served as a US Merchant Marine from 1942 to 1946 and was an instructor in celo-navigation from 1944 to 1946.

Incidentally, he told me once that when he was a child he visited Herbert Hoover in the White House.

CATEGORIES: Obituaries

This post may upset some people, but I am simply trying to describe the world as it is, not as I would wish it to be. I recently spoke with Ryan Hart, who is researching the legal status of Fed policy. That got me thinking about the Fed's mandate, and whether it is legally enforceable.

The Fed is an independent agency, but not as independent as some other agencies. For instance, the Fed chair can be fired without cause, and that's not true of some other agency heads. But in other respects, the Fed seems to be "above the law" in a way that is almost unique in the American system, at least as far as I know. (Please correct me if I am wrong.)

When agencies like the EPA decide on a new policy, such as calling CO2 a form of pollution, the decision often ends up in the courts. But that's not true of Fed monetary policy decisions. Why not? My theory is that this seeming immunity from legal oversight is a product of the Fed's strange history. It was not created to do what it currently does, which is target inflation.

Broadly speaking, Fed history can be divided up into three periods:

1. 1914-68: A gold price peg (actually two pegs).

2. 1968-81: The Great Inflation

3. 1982-present: Inflation targeting

Under the gold standard, a central bank is unable to target inflation at 2%, at least for any extended period of time. When the Fed was created, no one imagined that they would engage in inflation targeting. Thus no thought was given to a Fed mandate to stabilize the macroeconomy, although lawmakers certainly hoped that the lender of last resort provision would reduce banking instability.

During the 1970s, the Fed did have the power to control inflation. So why didn't they? Their failure was due to the fact that the Fed, as well as most outside economists, didn't realize that they could control inflation. Milton Friedman understood, but many Keynesians, even highly distinguished Keynesians, blamed inflation on everything except monetary policy---labor unions, budget deficits, oil shocks, even crop failures in the Soviet Union. Today these theories seem silly, but they were taken very seriously at the time. For some reason, almost no one connected the post-1965 orgy of money printing with the mid-1960s upswing in inflation:

Screen Shot 2015-11-24 at 10.00.52 AM.png
In order to understand the Fed's "dual mandate" you need to understand the time period in which it was enacted. In 1977, Congress gave the Fed a mandate for stable prices, high employment and moderate long-term interest rates. But Congress was not giving the Fed a target, they were essentially saying; "It would be nice if we lived in a world of stable prices and high employment; in the off chance that there is anything you guys at the Fed can do to make it happen, please do so." I don't think anyone in Congress seriously thought the Fed could just pick an inflation rate, like 2%, out of thin air and target it.

How did the Fed react after being given the mandate for "stable prices"? Here's how:

Year---CPI Inflation


Prices rose 60% in 5 years. Unemployment also rose in 1980, and longer-term interest rates hit an all time record of around 15% in 1981. I think it's safe to say that these numbers are not what Congress had in mind. But no legal action was taken against the Fed, and indeed the Fed was not even blamed for the inflation. Again, the mandate was not viewed as a Fed target, and when the Fed sharply cut interest rates in the summer of 1980, despite 13% inflation, it was obvious to everyone that they were not targeting 2% inflation, and few people cared. (BTW, Paul Volcker did that insane easy money policy in mid-1980.) So if the courts were ever going to adjudicate a case against the Fed using the "original intent" approach, the Fed would win in a heartbeat. There was obviously no Congressional intent for the Fed to stop inflation.

Of course the Fed eventually did begin targeting inflation, at around 2% since 1990. But this was not because of the Congressional mandate, which as we saw the Fed ignored in 1980, but rather because they began to understand the ideas of Milton Friedman---persistent inflation is always and everywhere a monetary phenomenon. When the Fed succeeded, outside observers were stunned, flabbergasted. Almost no one had thought this was possible. Alan Greenspan (who liked to speak in cryptic ways) was viewed as some sort of a magician, a "maestro." John McCain suggested that if Greenspan died his body ought to be propped up and kept in place, as in the film Weekend at Bernie's.

Of course all this was wrong; keeping inflation close to 2% is easy, and other central banks also succeeded. Today many economists (including me) are horrified by the Fed missing on the low side by 1%, an accuracy that would have been viewed as mind-bogglingly impressive in the 1970s.

Because outsiders were impressed by the Fed's success in controlling inflation, the Fed rose even further above the law. Now any outsider who wanted to tinker with the Fed was seen as a crackpot, and the Fed became a sort of mysterious temple, which is far above politics.

So that's how we got to where we are today. Yes, in theory the Fed has a "mandate." But in practice the Fed can do whatever it thinks best (obviously within reason) and no one will stop them. In practice, the Fed tends to adhere closely to the consensus view of mainstream macroeconomists, so any court case against the Fed would face the uphill battle, with the economics profession closing ranks around the Fed, perhaps even testifying in their favor. Lots of luck winning that sort of case in Federal court. Do you know any Federal judges that want to go down in history for having caused a Great Depression, or Great Inflation? Neither do I.

PS. This post describes the Fed's role on monetary policy; nothing I said applies to banking regulation, which is much more political.

David R. Henderson

More Data or Less?

David Henderson

My friend and Hoover colleague John Cochrane has signed a letter to four members of Congress that calls on Congress to spend more money on getting better economic data. John argues at his blog:

Few public goods are as cheap or important as good economic data. Much of our national policy discussion is based on government-collected data. Changes in inequality, wage growth or stagnation, employment and unemployment, growth, inflation... none of these are readily visible walking down the street.

Free, openly accessible, well-documented data, allowing comparisons over long periods of time, such as provided by the Bureau of Labor Statistics, is especially valuable.

That's all true. But the big question is: how will these data be used?

Another Hoover friend and colleague, Alvin Rabushka, writes:

What are economists likely to do with better data if their letter succeeds?

My guess is to advocate more funding to fight poverty, not more efficient use of existing appropriations.

More government funding to support greater participation in labor markets, not removing regulations, high taxes, and other impediments to labor market participation.

More stimulus to increase GDP, not less government interference in the economy.

More redistribution to reduce income inequality.

Here's someone else at Hoover who seems to agree, at least in part, with Alvin. In a moving story about a business hounded out of existence by government regulation, he writes:
The anecdote has two larger implications, in my view. First, many people including myself have a sense that this kind of regulatory persecution is harming economic growth. But there are no good estimates of the total number of companies put out of business, jobs destroyed, investment made worthless by regulatory persecution, or, even harder, projects not started from fear of such persecution. For the moment, we can only collect anecdotes, which is why I pass this one on. But the measurement question is vital. Inequality is only a big policy issue because we have statistics on it.

Here, this Hoover colleague makes a case both for more data, presumably collected by government, and, given his views on inequality, less government data. Who is this Hoover colleague? The above mentioned John Cochrane.

Despite much gruesome Schadenfreude on Twitter, I stand by the terms of my 10:1 bet that no European country that was not Communist in 1988 will have a civil war resulting in 10,000 or more fatalities by December 31, 2045.  While I am microscopically less sure than I was when I made the bet, I left myself a comfortable margin of error.  The dust will settle, and the center will hold.

If you think that makes me a dogmatic fool, accept my terms and await my inevitable impoverishment and humiliation.  And no, Francois Hollande's statement that "France is at war" doesn't prove me wrong.  I bet on numbers - not rhetoric - for a reason. 

I am markedly more worried that I will lose my related bet with Raphael Franck that "The total number of deaths in France from riots and terrorism will be less than 500 between May 28, 2008 and May 28, 2018."  But I still think my odds of winning are 80%, down from the 93% or so I initially believed.

I never mean to be insensitive, but if we abandon numeracy, the terrorists win.

I was talking on the phone Saturday with a friend who called to wish me happy birthday on my 65th birthday. (See what I did there? :-)) This friend is a doctor, not an economist, but I think he would have been a first-rate economist. He's a fan of Econlog.

I told him that, contrary to my usual practice, I planned not to work on Saturday. That got us talking about work and enjoying work. I quoted an economist friend of mine, Tom Nagle, who is also a fan of Econlog, who said some years ago: "I know many people who love their job. I know of no one who loves his job on the margin." That made sense to me.

I then told him about quoting Tom Nagle's line to Dwight Lee once, who, quick as a flash, shot back, "Of course people don't love their jobs on the margin. If they did, they would be out of equilibrium."

In other words, if you love that marginal hour of work, you're getting two returns from it: (1) the income and the (2) intense pleasure. Then the utility from the income plus the utility from the intense pleasure is highly likely to exceed your opportunity cost. You're out of equilibrium. So you will work longer. QED.

My friend replied: "I love economics."

There are few student species more nakedly ambitious, focused, and future-oriented than the average Harvard law student. Having likely spent his undergraduate years planning admissions maximization strategies, he now has the Holy Grail almost within his grasp. Let him but graduate with a Harvard J.D. and he will face a wealth of job offers from prestigious law firms, government agencies, judicial clerkships, and businesses.
This is the opening paragraph of Heather MacDonald's "Don't Bet on the Harvard Law School 'Hate Crime.'"

She then writes:

Yet according to student activists, as well as the media and Harvard law school dean Martha Minow, an as yet unknown Harvard law student has risked destroying everything he has so assiduously worked for in order to commit a childish act of defacement ready-made for labelling as a racial hate crime. On Thursday morning, black tape was found on the portraits of black professors in a Harvard law school building. The tape had allegedly been used previously to cover up the Harvard seal in its various iterations across campus in protest against the seal's supposed racist connotations. The discovery of the taped portraits triggered the inevitable protests and a meeting with Dean Minow, who announced that racism is a "serious problem" at the Harvard law school and at Harvard University. The incident will be leveraged into the usual demands for an even larger and more useless diversity bureaucracy.

Perhaps there exists a Harvard law student so unable to control his impulses, or so clueless about today's political environment, that he is willing to risk being expelled and banished from every high-powered job that would otherwise be available to him, simply in order to engage in a juvenile prank. But I am not betting on it. Don't expect Harvard to disclose the outcome of its investigations into this latest "hate crime," just as the UCLA law school never disclosed the outcome of its investigations into its own alleged hate crime a year ago.

Ms. MacDonald is thinking like an economist--using reasoning about incentives to make a judgement call. Of course, it's possible that a student with a huge stream of income in front of him/her could make such a bad decision. But it seems unlikely.

Her reasoning reminds me of a conversation that I had with a colleague, Gregg Jarrell, when I was on the faculty at the University of Rochester in the late 1970s. We were talking about a recent baseball game in which a batter had hit a long ball and the umpires had trouble deciding which side of the foul pole the ball had gone on. I forgot what call they made, but Gregg pointed out that the pitchers in the bull pen were in a much better position to tell. Of course, they were all biased and so an umpire could hardly ask them what they thought. But Gregg pointed out that the ump would not need to ask--he could just look at their behavior. When they saw the ball coming their way, they were all looking at it. When it went by the foul pole, they all immediately went back to their conversation, with no show of emotion. Bottom line: foul ball. This was another instance of using economics to make a judgement call. The umps didn't do it, but they could have.

Here's my April, 2007 op-ed on voter irrationality that never found a home.

"Power to the people" - war protestors have been saying it for decades.   The more you study public opinion, though, the more peculiar this slogan seems.  When fighting started in Iraq, the American public backed the war by three-to-one.  So in all honesty, isn't it "the people" who got us where we are today?

True, some support stemmed from our leaders' deceptive advertising.  But we can still fault the public for being gullible; this is hardly the first time our leaders have bent the truth to enter a war.  In any case, leaders don't have to lie to get the public behind them.  Almost every war begins with strong public support.  Public opinion researchers call this the "rally-round-the-flag" effect.  Strange as it sounds, simply entering a war makes the war popular - for a while.

Who am I to second-guess public opinion?  Fortunately, I don't have to.  Another well-established pattern is that, given time, the public second-guesses itself.  The rally-round-the-flag effect doesn't last forever.  As political scientist John Mueller documents, after a year or so of foreseeable troubles, public support for wars steadily drops.  The remarkable fact about the Iraq war is that it already unpopular, even though, by the standards of Korea or Vietnam, casualties remain low.

Now think about the incentives that the public gives its leaders.  The rally-round-the-flag effect means that, for any semi-plausible war, decision-makers can count on a burst of popular support.  It also means that Doubting Thomases who express reservations at the outset of a conflict are risking their careers.  In short, public opinion gives leaders an incentive to start wars, cross their fingers, and hope things work out - and skeptics an incentive to keep their criticism to themselves until it is too late to do much good.

It gets worse.  If you give the public a year, some casualties, and some scandals - all of which are practically inevitable - public support drops off.  But this hardly compensates for earlier bad incentives.  Before the majority grows disillusioned, the politicians who planned the war have frequently been reelected.  Yes, the swing in public opinion gives opponents - and even friends - of the current regime incentives to reverse course.  But public opinion gives them these incentives whether or not continued support for the war has become the lesser evil.  Would-be critics who were cowed by public opinion during the early phase of the war now have an incentive to pander - to paint withdrawal as a virtual free lunch.

Considering the incentives that politicians face, we should be grateful that fiascos like the Iraq war are so rare.  Leaders could  be a lot less responsible without forfeiting public support.  If the public greeted plans for war with hard questions instead of flag-waving, politicians would be a lot more cautious - and we would be a lot less likely to get in over our heads.

In the eyes of some observers, admittedly, the main thing to be cautious of is caution itself.  Dangerous times call for decisive action.  As Kennedy advisor Dean Acheson once told a skeptical professor: "You think the President should be warned. You're wrong.  The President should be given confidence."

If the rally-round-the-flag effect lasted forever, the Achesons of the world might be right.  I'm skeptical, but it's possible.  Given the way that public opinion works, though, intelligent hawks ought to think again.  Last year, Rumsfeld warned against "the dangers of giving the enemy the false impression that Americans cannot stomach a tough fight."  The study of public opinion suggests that this is exactly the impression the Iraq War is likely to leave. 

Next time around, intelligent hawks need to ask themselves: "Does it really serve the national interest to take advantage of the rally-round-the-flag effect to start a war, if public opinion will reverse long before the war can be won?"  It's a democracy, after all; once public opinion reverses, policy will not be far behind.

During the 2008 election, candidates are sure to tell us a great deal about "what the American people want."  Every candidate proudly claims to have a hand on the pulse of the nation.  But in truth, it is pretty easy to find out what Americans want.  A vast quantity of high-quality public opinion data on virtually every political topic is only a mouse click away.  If the candidates cared about good policy half as much as they care about getting elected, they would ask a different - and harder  - question: "Do the policies that the American people want actually make sense?" 

Bryan Caplan is an Associate Professor of Economics at George Mason University, and the author of The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton University Press).

Megan McArdle has written an excellent, pithy post titled "How to Win Friends and Influence Refugee Policy." I won't summarize it here because it's so good and, as I said, pithy, that it repays your small effort in reading it.

Instead, I want to make a more general point. Although her explicit topic is how to change people's minds so that they're more open to admitting refugees from Syria, her points are more general. Most of them apply whether you're discussing refugee policy, the minimum wage, foreign policy, or, pretty much, anything else.

A few fantastic lines:

The number of people who have ever been convinced to do the right thing because they were mocked as racists, idiots or bed-wetting pansies can be counted on the fingers of your nearest snake.

And the more general point is that you never persuade people by mocking them, even if you don't call them racists, nor should you. I learned this as a teacher. The first time I ever mocked a student--this was after over 15 years of teaching--was in about 1993. It got a good laugh from the rest of the class--and the student I mocked closed down for the next 2 weeks. That was also the last time I ever did it. And, by the way, I remember pretty much exactly what the student said and pretty much exactly what I said that got a laugh. That's how memorable my learning experience was.
"I don't understand how anyone can oppose admitting Syrian refugees! America is a nation of immigrants!" This kind of statement conveys layers of meaning. The first layer is the literal meaning of the words: I lack the knowledge to figure this out. But the second, intended meaning is the opposite: I am so vastly superior that I cannot even imagine the cognitive errors or moral turpitude that could lead someone to such obviously wrong conclusions. And yet the takeaway when I hear someone say this is a third meaning: I lack the empathy, moral imagination or analytical skills to attempt even a basic understanding of the people who disagree with me. In short, this argument says: "I'm stupid."

I have often faced a similar version in talking to people who disagree with me, about whatever topic. The person will say "I don't understand" and then go on to state my position, usually badly, and not understand why I have it. My first step is to say "You don't understand and you want to understand?" That way it opens it up a little.
It took me years of writing on the Internet to learn what is nearly an iron law of commentary: The better your message makes you feel about yourself, the less likely it is that you are convincing anyone else. The messages that make you feel great about yourself (and of course, your like-minded friends) are the ones that suggest you're a moral giant striding boldly across the landscape, wielding your inescapable ethical logic. The messages that work are the ones that try to understand what the other side is thinking, on the assumption that they are no better or worse than you. So if you are actually trying to help the Syrian refugees, rather than marinate in your own sensation of overwhelming virtue, you should avoid these tactics.

Actually, this is one I learned in my late teens from watching my mentor Clancy Smith argue with people. He would often not even get to the argument. He would simply ask questions to make sure he completely understood the objections of the (typically) socialist person he was talking to. It was wonderful to watch, and not mainly because it often caused the other person to squirm, but mainly because it often caused the other person to think "Why do I believe what I believe?"

A young libertarian friend whom I got to know personally when he was an undergrad who had lined me up for a speech at his college came on Facebook the other day to tell his friends that he was about to have a drink with someone who was on the other side of an important policy issue from him. He asked his friends what he should ask this person. I noticed a lot of them not even answering their friend's question but, instead, telling him what he should tell him. I wrote:

After first finding out what his particular views are (because some Greenpeace people probably differ from other Greenpeace people), ask him: "Do you remember a time when you didn't have these views? If so, what new thought did you or what incident happened that caused you to change your views?" And then bite your tongue. Let him answer and don't correct, criticize, or argue.

I would add one more point that I think is implicit in Megan's excellent article: Your own moral outrage at whatever you have heard is not always a reliable guide to the truth.

It seems as though the major central banks are beginning to rethink their assumptions. Here's an ECB official:

Monetary policy risks becoming ineffective in a world where growth is sluggish, economies are deeply interconnected and interest rates are already near zero, a top European Central Bank policy maker said on Saturday.

Speaking at the University of California Berkeley, ECB executive board member Benoit Coeure called for academics and policy makers to address issues at the root of a global economic malaise, singling out the euro zone's inability to revive domestic demand.

"The capacity of the global economy to generate growth is under question," Coeure said in remarks prepared for a speech.

"In a global zero lower bound environment, surplus countries hold world output down."

But then why did the ECB raise rates twice in 2011? And here's a top Fed official:

The U.S. Federal Reserve and other global central banks may need to consider new tools in a world of permanently lower interest rates, including keeping big balance sheets or using negative interest rates to combat shocks, a top Fed official said on Saturday.

With the so-called natural interest rate in the United States now near zero, and equilibrium rates in other countries around the world also lower than in the past, central banks have "significantly less room to maneuver" in the face of recessions, San Francisco Fed President John Williams said at a conference at University of California Berkeley's Clausen Center.

Everyone seems to assume that the zero lower bound is the key problem. But how do we know this? Has the lower bound ever been tested? Not as far as I know.

In standard new Keynesian models, bank reserves and Treasury securities become almost perfect substitutes at the zero bound. And the key assumption is that it's not possible to pay negative interest on bank reserves. Except that it is possible, indeed it's been done.

When economists are confronted with this fact, they point out that commercial bank deposits at the Fed and vault cash are near perfect substitutes, and thus negative interest on reserves would merely cause the money to move out of the central bank and into vault cash. However this doesn't really resolve the issue, as it's certainly technically feasible to pay negative interest on vault cash.

Indeed it's technically possible to pay strongly negative interest on bank reserves, including vault cash. How negative? There is no lower bound.

When economists are confronted with this fact they suggest that sharply negative interest rates on reserves would depress bank deposit rates so low (so far negative) that the public would pull money out of the banking system, and hold it as currency.

That is certainly true, but the important question is how much? Today, banks in the US hold nearly $3 trillion in reserves; what if all of that went into circulation? How about $10 trillion, or $15 trillion? Maybe nothing would happen, it would all go under mattresses, or into safety deposit boxes. On the other hand maybe it would create a Latin American-style hyperinflation. We simply don't know. (I bet on hyperinflation, if the currency stock exceeds $10 trillion.)

I understand all this, but here's what I don't understand---why the lack of curiosity? You are in a prison cell. The door to your cell might be locked, or it might be unlocked. You don't know. But wouldn't you be curious? Wouldn't you try to open the door to see if you could freely walk out into the sunshine? Or would you just sit there, day after day, year after year, wondering? Is it locked?

The world's central banks have chosen to just sit there, wondering. They haven't tried lowering IOR so far negative that all of the bloated base money floods out into cash held by the public. They aren't curious. Nor are academic economists. Why not?

In 2009 the Fed claimed to be worried about the effect of negative IOR on money market funds. At the time, I argued that that worry was preposterous. Now the Fed seems to have conceded that negative IOR is an option---even Janet Yellen has discussed the possibility. That's progress. But we still don't see any central bank fully exploring the possibilities of negative IOR. And that's a puzzle. Although I suppose it's no more of a puzzle than the Fed's reluctance to cut rates to zero in September, October and November 2008. I thought Ben Bernanke's memoir would resolve that mystery, but all we got was an admission that the Fed had erred in not cutting rates after Lehman failed. Yeah, I'd say so, but why is an institution full of such smart people so obviously inept in a crisis? Another mystery.

HT: TravisV, Dajeeps


Tyler Cowen has posted the video and transcript of his interview with famous investor Cliff Asness. Here are some highlights from the transcript, with my occasional comments.

On future returns:

Asness: So you invest half your money in stocks, half your money in bonds. Historically, you've made about five percent over inflation. We think it's priced now, at this level, to make about 2.5 percent over inflation.

Of all the things he said, this is most relevant to me as an investor.

On high-frequency traders:

I think the world has gotten more just and fair. I'm going to say something potentially controversial. Something that is often attacked, the high frequency trading, has made the world more just and fair, particularly for small investors.
High frequency traders have -- I watched the Republican debates last night, so I know to change the topic to something I'm comfortable with. They do a lot of different things, but the core trading strategy is just to do the other side of whatever you want to do.
So, if you want to trade, sell X, they'll buy it from you. They charge a little thing called the bid‑ask spread. They will buy it from you for a little less than they'll sell it to you for. It's very competitive. They fight with each other to do your trade, so they can't just charge any bid‑ask spread they want.
They get attacked because they charge a bid‑ask spread, and when you ask them to do a lot, they start moving the prices, because they're getting scared you might know something they don't know.
But we've always had to trade with someone else. We've always needed market makers out there. It used to be much more expensive. Worse bid‑ask spreads, worse execution, particularly for the small person.
There is some controversy with high frequency. I mean small investors, not literally small people. You know that, right?
For very large investors, you're trading very large amounts of money. I believe high frequency has made our trading costs cheaper, but there's at least an argument for the other side. Some will say, market impact. The price moving on you when you try to execute and buy or sell a lot of a stock is bigger now. I don't think so, but that's a fair argument.

On Ayn Rand:
COWEN: What's her most underappreciated side or aspect or angle?
ASNESS: Again, I'm going to try to flip it around. I don't think she was as anti-helping people as she sometimes comes off. If you read her talk about it she certainly -- I disagree with her on this, by the way -- she didn't consider charity a primary virtue. But she didn't have a problem with it whatsoever. She considered the individual sovereign and "if that's important to you, do it."
I think it's a larger virtue. Benevolence, charity is one of the things in her world -- and my favorite thing, which you didn't ask about her, is "you own your own life." It's one line. I'm in love with that.
But the idea of a virtue being the desire to help other people -- not someone forcing you to, which she was dead set against, but wanting to help other people -- I disagree with her on. But I think people come off and think that she's snarlingly against it. I don't think she was for it enough, but I think she was rather passive and said it.
If you care about it, she talked about examples -- giving up your own life to save someone else. If you value that person more than yourself, it's rational. Do it. So I don't think she was quite as nasty about that. Nastier than I think she should have been, but not quite as nasty.
And she could have used an editor. I admit that.
COWEN: Absolutely.
ASNESS: Come on. Come on. That speech -- oh my Lord.

I agree strongly. I think benevolence and that someone who is not benevolent has something missing. As Asness says, Ayn Rand was more benevolent than people gave her credit for, but she taught people not to regard benevolence as an important virtue. And, of course, that speech, oh my Lord.

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