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Thoughts on my latest debate:

1. Hans von Spakovsky was the most lawyerly opponent I've ever debated.  His first (and second) approach to almost any issue was simply to describe the law.  In most cases, he didn't even defend its wisdom or justice.  Instead, he simply exhorted people to obey the law or convince Congress to change it.

2. Still, after a great deal of legal description, von Spakovsky finally shared his actual view: low-skilled immigration should be sharply reduced in favor of high-skilled immigration.  When asked about refugees, he refrained from calling for outright cuts in the quota; instead, he maintained that existing numbers are roughly the most we are capable of handling.

3. The debate was explicitly about Trump's views on immigration, and von Spakovsky has pretty close ties to the administration.  But von Spakovsky said almost nothing about Trump or his policies - and studiously failed to defend the president I repeatedly called "intellectually lazy and irrational."  Perhaps he respects Trump so deeply that he considered my claims unworthy of a response.  Or perhaps - like many elite Republicans - he avoided the topic because he is well-aware of Trump's glaring epistemic shortcomings.

4. The most engaging part of the debate, at least for me, began when my opponent spontaneously described his traffic tickets.  This seems to show that - contrary to his grandiose claims about its sanctity - he's often not ashamed to break the law.  In other words, he's an normal American driver.  You could argue that traffic laws are uniquely bad, but that's silly.  They plausibly protect other human beings from dangerous driving - and compliance is usually only a minor inconvenience.  Why, then, would it be wrong to break immigration laws - which immensely harm would-be immigrants at great economic cost to natives?  If anything, we should enforce traffic laws far more strictly than immigration laws.

5. During Q&A, Reason's Shikha Dalmia amplified my point by referencing the slogan that Americans commit three felonies a day.  Von Spakovsky did not dispute her claim, but drew a strong distinction between natives' accidental law-breaking and illegal immigrants' deliberate law-breaking - an odd retreat for such a lawyerly thinker.  When I pointed out that natives often knowingly break the law, my opponent declined to call for a strict crack-down on said scofflaws.

6. I repeatedly pointed out that governments selectively enforce laws all the time.  Indeed, they have no choice; there aren't enough resources in the world to enforce all the laws we have.  Furthermore, governments often officially announce their enforcement policies, so people know what to expect.  Given this, I don't even see what the legal objection to DACA or DAPA is supposed to be.

7. I argued that Trump's travel ban bears little connection to the problems he claims to be worried about.  Saudi Arabia isn't on the list, even though 15 of the 19 9/11 attackers were Saudi.  Von Spakovsky dismissed my claim by by providing details about how the administration formulated its new policy.  He even urged listeners to go to the White House webpage.  This morning, I took his advice.  A typical passage:
The Secretary of Homeland Security assesses that the following countries continue to have "inadequate" identity-management protocols, information-sharing practices, and risk factors, with respect to the baseline described in subsection (c) of this section, such that entry restrictions and limitations are recommended:  Chad, Iran, Libya, North Korea, Syria, Venezuela, and Yemen.  The Secretary of Homeland Security also assesses that Iraq did not meet the baseline, but that entry restrictions and limitations under a Presidential proclamation are not warranted.
I am perfectly happy to admit that there is a bureaucratic process at work.  There always is.  But if an intellectually lazy, irrational president wants X, are his functionaries going to tell him he's wrong or unfair?  Of course not.  Instead, they'll go through a flurry of procedure to get the "right" answer.  That's how committees work: Busywork + Legalese = Foregone Conclusion.

8. My opponent strongly rejected any keyhole solutions for alleged downsides of low-skilled immigration.  But other than appealing to the value of equality, I detected no concrete objection.

9. I am a weird human being, but I am self-aware.  This routinely leads me to wonder how other people perceive me.  Von Spakovsky was very polite to me both publicly and privately, but he must think there's something very wrong with me.  What exactly would that be?  Partly, I'm an Ivory Tower professor who doesn't understand - or just can't accept - how the "real world" works.  Partly, I'm out of touch with America.  He didn't seem to mistake me for a bog-standard leftist, which was nice.  On reflection, I'm probably far worse in his eyes than he ever realized.  But seeing yourself through the eyes of another is no mean feat.

10. Did either of us change anyone's mind?  I suspect I persuaded a few people to rethink the sanctity of the law.  Von Spakovsky, for his part, might have spurred a few people to read some laws for themselves instead of accepting media summaries of them.  But overall, I'm afraid even the short-run effect on people's thinking was minimal.  Changing minds on this issue is going to require a lot more than a debate.

11. Still, as far as intellectual experiences go, the debate was a far better than a protest

Many people have pointed out that the Catalonian secession can trigger an economic shock. The Catalonians say they want to stay in the European Union and keep the euro, but they can't do so. If they secede, they'll need to enter again the EU (and the euro) as an independent state. And Spain would likely veto them out of the EU.

FT columnist Wolfgang Münchau wrote that "Catalan breakaway would make Brexit look like a cake walk", arguing that the main argument against Catalan independence is thus economic.

It may be a matter of words, but I thought that the problem was not "economic." Small states, if they're open economies, can survive and prosper in an era of globalisation. A more extended division of labour doesn't imply political unification, all the more so in an age when transferring information and traveling have never been faster and cheaper.

Rather the problem is political: that is, the European Union doesn't allow for an ordered exercise of the right of self determination. You can consider this inevitable, if you think the EU is nothing but a cartel of states. But it is certainly in striking contrast with that principle of subsidiarity often hailed by the European founding fathers. Or at least so I've argued in a letter to the Financial Times:

Secession from Spain would trigger exit from both the EU and the euro, which may account for a global economic shock. In fact, the Catalans do not want to leave the euro or the single market: only Spain. And yet they'll be forced out of European institutions because the latter are tailored around member nation states.

When you're forced to do something you do not want to, it's not economics, it's politics. And, indeed, the main argument Mr Münchau refers to is not economic, but political. In a globalised world, smaller political units do not need to fear isolation as long as they are open economies. Smaller states are less likely to be tempted by protectionism as its cost will be higher for them.

The problem the Catalans are facing lies with the legal infrastructure of the EU. Though the EU's founding fathers preached the principle of subsidiarity, they didn't allow room for the principle of self-determination of peoples in the treaties. Perhaps it is the political problem that should be tackled, establishing ordered ways of exercising the principle of self-determination at least within the EU.

CATEGORIES: Eurozone crisis

David R. Henderson  

Two Texas Talks

David Henderson

I'll be giving in two talks in Texas this week.

Southern Methodist University, Dallas
Sponsor: O'Neil Center for Global Markets & Freedom
Topic: How Economists Helped End the Draft
Time: Wednesday, 6:00 to 7:00 p.m. (Reception to follow)
Place: Ernst & Young Gallery (Room 220 of the Fincher Building)

Baylor University, Waco
Sponsor: Baugh Center for Entrepreneurship & Free Enterprise
Hankamer School of Business
Topic: Economic Inequality: Popular Misconceptions and Important Facts
Time: Thursday, 4:00 to 5:15 p.m. (refreshments provided)
Place: Hankamer School of Business, Foster 240

If you come, please come up afterwards and introduce yourself.

CATEGORIES: Upcoming Events

Scott Sumner  

Rethinking Macroeconomics

Scott Sumner

I recently attended a conference at the Peterson Institute on "Rethinking Macroeconomics", which mostly meant returning macro to its Keynesian roots. Readers may know that I have a contrarian take on the crisis---I believe it occurred because macroeconomists did not take macro theory seriously enough. We do not need to rethink macro by adding in fiscal policy or paying more attention to the financial sector, rather we need to impress upon the world's central banks the importance of doing whatever it takes to keep aggregate demand growing at an adequate level. The major central banks (except in Australia) did not do that in 2008 (for many different reasons) and hence we had the Great Recession.

Screen Shot 2017-10-16 at 12.53.33 PM.png
I don't get invited to many left-of-center conferences, for some reason I'm more likely to get invitations from groups like Cato, AEI, Heritage, etc. Thus I thought it might be interesting to provide a few impressions:

1. At an intellectual level the conference was very impressive---there were many brilliant economists presenting and also in the audience. The overall impression was of a center-left perspective, but hardly monolithic. After Alan Auerbach presented a paper on fiscal policy, several panel members (including Robert Rubin) expressed skepticism---viewing the problems we face as mostly supply-side.

2. I sometimes had a sort of "Paul Krugman reaction", as the general discussion seemed more grounded in reality than at a right-of-center macro conference. Most speakers seemed very aware of the importance of shortfalls in AD during the Great Recession, a basic understanding that I often feel is missing on the right.

3. On the negative side, I was extremely disappointed by some of the comments on monetary policy. In response to calls for a higher inflation target to avoid the zero bound problem, Jeremy Stein of Harvard University asked something to the effect "What makes you think the Fed can achieve higher inflation?" (Recall that Stein was recently a member of the Federal Reserve Board.) I was pleased to see Olivier Blanchard respond that there is no doubt that we can achieve 4% inflation, or indeed any trend inflation rate we want. But then Larry Summers also suggested that he shared Stein's doubts (albeit to a lesser extent.)

I kept thinking to myself: Why do you guys think the Fed is currently engaged in steadily raising the fed funds target? What do you think the Fed is trying to achieve? How can a top Fed official not think the Fed could raise its inflation target during a period when we aren't even at the zero bound? Why has the US averaged 2% inflation since 1990---is it just a miracle? When Summers came out for NGDP targeting I briefly wondered whether I'd made a mistake in favoring Yellen for Fed chair, but this comment reconfirmed my initial preference.

4. While the left is ahead of the right in their understanding of the importance of demand shocks, they lag far behind in understanding the importance of more subtle forces shaping the economy. Thus they are even less likely than the right to blame the Fed for destabilizing aggregate demand, and they almost entirely ignored the problem of moral hazard in a panel on the financial system. On the left there's a reflex to always seek solutions in more government (financial regulation, fiscal policy, etc.), not in removing government policies that cause problems (moral hazard, unstable monetary policy.) Unfortunately the solutions offered by the left do not address the root causes of economic crises, and hence are likely to be ineffective. Banks will eventually find their way around any regulations enacted to limit their risk taking. Fiscal policy has been repeatedly shown to be largely ineffective. (Remember the 2013 recession trigger by "austerity"? Me neither.)

5. Larry Summers dominated the conference due to a combination of his force of personality and his intellectual brilliance. (That's right, I don't judge intellects based on whether they agree with me.) At one point he was asked what he'd do if put in charge of the Fed. Although Summers had expressed support for a higher inflation target, he was surprisingly cautious in response to this question. He pointed out that it was the job of intellectuals in academia to throw out provocative ideas worth considering, and the job of top policymakers to enact policies based on well-established economic principles. He indicated that he wasn't sure whether it would make sense to use a lot of political capital trying to move the entire Federal Reserve System over to his preferred policy. (This is based on my memory, and may not be precisely correct.)

Summers' comment made me think back to lots of debates I'd had in various comment sections, where I defended Bernanke for trying to nudge the Fed in the right direction. Summers' remarks make me even more confident that I was correct, as if even an "alpha male" like Summers thinks he'd have trouble moving the Fed to his preferred policy regime, imagine the challenge facing a more mild-mannered, consensus-seeking personality like Bernanke (or me!). Summers has worked in the Treasury, and knows how difficult it is to enact policy changes in the real world.

6. When I proposed negative interest on reserves back in January 2009, the idea was widely ridiculed in my comment section. I recall reporters from the Financial Times suggesting that the policy would actually be contractionary. (They looked at monetary policy from the false "finance perspective", not the true "monetarist perspective".
Indeed the success of negative IOR helps to confirm the truth of monetarism). On one panel Mario Draghi indicated that negative IOR had indeed been effective, had failed to produce market distortions such as disruption to MMMFs, and had also failed to reduce bank profitability. (Note that an expanding economy is good for banks.) I was very pleased to see that my proposal had worked out so well.

7. Greg Ip from the WSJ asked a really interesting question. He pointed out that many of the factors cited by Larry Summers in his "secular stagnation" hypothesis also might serve to make recessions much less likely in the future. Previous recessions often occurred either when there had been an inflation overshoot (i.e. 1970 or 1981), or (perhaps) when investment has become excessive (think tech in 2000 or housing in 2006.) But under secular stagnation there are no inflation overshoots, and we also don't see high levels of investment. (Don't be fooled by recently recovering home prices; actual construction of homes remains severely depressed relative to the long run average.) I'm already on record predicting that this will end up being the longest expansion in US history, and Ip's question made me even more confident in that prediction.

Some people responded by pointing to past "this time is different" predictions (i.e. 1929, 1966, 2006), which ended up being overly optimistic. But I don't think that sort of cynicism is an adequate response to Ip, especially in a world where Australia has not had a recession in 26 years.

PS. Even though Adam Posen's views are far to the left of mine, I'd like to thank him for inviting me and for hosting an extremely high quality conference. This site has links to videos of the various panels, so you can check the accuracy of my memory.

Last Friday, I debated Heritage's Hans von Spakovsky on "Does Trump's Immigration Agenda Harm Democracy?"  The resolution was unusual for me in three ways:

1. I usually try to stick to timeless issues.  For this debate, I had to discuss and analyze current events in detail.

2. We were originally going to discuss Trump's immigration policies, but it's not clear that he'll manage to dramatically change immigration policy.  That's why we switched to his immigration agenda - i.e., the policies Trump would like to impose.

3. Since I put no intrinsic value on democracy, I'd rather argue that immigration policies are harmful, rather than "harmful for democracy."  But I think I learned a good deal from sticking to the agreed topic.  Hopefully you'll agree!

Does Trump's Immigration Agenda Harm Democracy?

Let's start with the big question: What does it mean to "harm democracy"?  It's tempting to cynically say:  "harms democracy" equals "clashes with my favorite policies" or even "fails to give power to my party."  But if you get some distance, there are plenty of plausible standards against which to judge democratic performance.  Above all:

1. In a healthy democracy, leaders calmly assess the evidence before forming a plan to solve social problems.  They consider costs as well as benefits. 

2. In a healthy democracy, leaders seek objective estimates of policies' actual effects, even if they don't like the answers.  For example, if they're setting the minimum wage, they'll want sober estimates of the effect of a $1/hour increase on the number of workers hired. 

3. In a healthy democracy, leaders defuse popular prejudices instead of pandering to them.  If the majority wrongly believes leeches cure cancer, leaders don't advocate a $100B National Leech Fund.  Instead, they politely but firmly refuse to waste of taxpayer money.

These standards aren't Democratic or Republican, liberal or conservative.  They're common sense and common decency. 


Now, you might say, "Common sense and common decency aren't so common."  Or even: "I don't know any leaders of either party who live up to these standards.  Successful politicians are experts at winning and retaining power, not carefully crafting wise policy.  And the way to win and retain power is to tell voters what they want to hear, whether it's true or not." 


If that's your reaction, I completely agree.  I have a whole book - called The Myth of the Rational Voter: Why Democracies Choose Bad Policies - on the shortcomings of democracy.  But the fact that politicians routinely harm democracy hardly implies they're all equally harmful.  And of course, politicians could be better on some issues than others.  So how does Donald Trump's approach to immigration policy measure up?


1. In the real world, politicians rarely calmly assess evidence before offering solutions.  If you know a politicians' ideology, you can generally predict what he's going to say about even the most complex issues.  And immigration is an especially emotional issue.  Even so, Trump's statements about immigration are unusually intellectually lazy and irrational.  Consider some of his main public reflections on the topic.


a. He's claimed there are 30-34 million illegal immigrants in the U.S. - roughly triple the number virtually any quant accepts.  When asked for a source, he said, "I am hearing it from other people, and I have seen it written in various newspapers. The truth is the government has no idea how many illegals are here."


b. "The Mexican Government is forcing their most unwanted people into the United States."  Evidence for this strange conspiracy theory?  None.  And: "Likewise, tremendous infectious disease is pouring across the border." 


c. "I will build a great wall -- and nobody builds walls better than me, believe me -  and I'll build them very inexpensively. I will build a great, great wall on our southern border, and I will make Mexico pay for that wall. Mark my words."


d. On deportations: "We're rounding 'em up in a very humane way, in a very nice way. And they're going to be happy because they want to be legalized. And, by the way, I know it doesn't sound nice. But not everything is nice."


Hasn't Trump also made numerous seemingly incompatible statements about immigration?  Sure.  Which proves my point: he's so intellectually lazy and irrational he can't keep his own story straight.


2. Trump's low-quality thinking might be forgivable if his conclusion about immigration were, by coincidence, roughly accurate.  But they're not.  Careful scholars have been studying immigration for decades.  Here are their top discoveries.


a. Contrary to Trump's many claims about the economic damage of immigration, the overall economic benefits of immigration are enormous.  The idea is simple: Immigrants normally move from countries where wages are low to countries where wages are high.  Why do employers them pay so much more in rich countries than in poor countries?  Because foreign workers are much more productive in rich countries than they are in their home countries.  A Mexican farmers can grow a lot more here than he can in Mexico.  When he does so, the immigrant isn't merely enriching himself.  He enriches everyone who eats.  Immigration's gains are so vast that researchers estimate that - in a world where anyone could work anywhere - global production would roughly DOUBLE.


b. Trump has blamed immigration for seriously harming native workers.  Scholarly estimates, however, generally say that Americans workers are, on balance, richer because of immigration.  Basic point: Immigrants who sell what you sell hurt you, but immigrants who sell what you buy help you.  Since immigration raises total production, gains naturally tend to outweigh losses.  There is debate about immigration's effects on wages and employment of native high school dropouts.  But even estimates of these losses are low.


c. Trump has also argued that immigrants are a clear fiscal burden on native taxpayers.  This goes against the latest National Academy of Sciences report, which finds a long-run average net gain of $58,000 per immigrant.  There does seem to be a net fiscal burden of high school dropout immigrants, especially older high school dropouts.  But even they're a much better fiscal deal than native-born dropouts, because their home countries pay for their education.


d. Trump's claims about immigrant crime have been widely-quoted.  But specialists in immigrant crime almost universally find immigrants have lower crime rates than natives - about one-third lower in recent data. 


3. Is Trump's immigration agenda at least sincere?  Let's look at the problems he says he want to solve and the solutions he proposes to solve them - and see how well they fit together.  If Trump really thought "[T]remendous infectious disease is pouring across the border" with Mexico, you'd expect him to instruct the Centers for Disease Control to prioritize this problem, or impose new health restrictions at the Mexican borders.  He hasn't; in fact, it seems like he's forgotten he ever mentioned Mexican epidemics.  Similarly, if Trump were really worried about Muslim terrorists, he would presumably want to extend his high-profile executive order to Saudi Arabia.  After all, 15 of the 19 9/11 attackers were Saudi.  But, no.  The heart of Trump's immigration strategy is to pander to popular prejudices against foreigners, then loudly call for some kind of action.  It's the Activist's Fallacy: "Something must be done.  This is something.  Therefore, this must be done."


But you don't have to believe me.  You can also see what Trump says when he thinks voters aren't watching.  The transcript of Trump's conversation with Mexican President Nieto was leaked a few months ago.  Trump speaking: "Because you and I are both at a point now where we are both saying we are not to pay for the wall. From a political standpoint, that is what we will say. We cannot say that anymore because if you are going to say that Mexico is not going to pay for the wall, then I do not want to meet with you guys anymore because I cannot live with that. I am willing to say that we will work it out, but that means it will come out in the wash and that is okay. But you cannot say anymore that the United States is going to pay for the wall. I am just going to say that we are working it out. Believe it or not, this is the least important thing that we are talking about, but politically this might be the most important talk about." 


In short, Trump doesn't really care if Mexico will pay for the wall, but he really cares if Americans believe Mexico will pay for the wall. 


Which brings me to the one good thing I have to say about Trump's immigration agenda: He's unlikely to actually accomplish much of it.  While he presents himself as a great negotiator, he's primarily an entertainer.  When he endorsed the RAISE Act - which really would greatly reduce immigration - even fellow Republican politicians showed little interest.  So Trump got bored and moved on to the next exciting scene on his Presidential Reality Show. 

But aren't other politicians bad, too?  Of course.  Demagoguery is a key ingredient of any politicians' path to power - and scapegoating foreigners is classic demagoguery.  But Trump has taken anti-foreign demagoguery to a new level - or at least a local maximum.  If he had his way, we'd lose most of the tremendous social gains of immigration we've enjoyed over the last fifty years.  And his problem is not that he's made subtle errors.  Trump's problem is that he emoting, not thinking - like a kid who tries to solve algebra problems by asking, "How do x and y make me feel?"  Our problem is that instead of giving him an F, we've made him president.

David R. Henderson  

Fred McChesney RIP

David Henderson


Law and economics scholar Fred McChesney died last Thursday at age 68. He was a first-rate scholar, a wonderful friend, and an engaging conversationalist. I'm so glad that he called me up when he was in Monterey a couple of years ago. I went to his hotel and had a great visit with him and his lady friend. I remember feeding the parking meter for an hour, thinking that would be enough, and then finding the conversation so interesting and fun that I went out after an hour and a quarter and fed it for another hour.

Here's a great write up of some of his accomplishments.

Fred wrote the antitrust article for The Concise Encyclopedia of Economics. Out of the over 160 entries, it is one of my 20 favorite pieces. It covers a lot of territory succinctly while still giving the essential economic analysis on each issue.

He also wrote 10 articles for the Econlib Feature Article series. My favorite two are "Armen Alchian: An Economist-Lion in Winter" and "Smoke and Errors."

Here's a great paragraph from "Armen Alchian: An Economist-Lion in Winter":

Perhaps no other economist of our time has given as much attention to costs as has Armen Alchian. He discovered, while working at the RAND Corporation after the war, that military engineers and economists disagreed over the efficient ways to produce armaments because their concepts of cost were quite different.6 Engineers registered cost as a function of total output, and so saw costs as generally declining. But to economists, the costs associated with different levels of output depend on the rate at which they are produced: Producing the same volume but in a shorter period of time would be more expensive, ceteris paribus. Moreover, once one recognized the importance of time for reckoning cost, one had also to take into account the present value of the outlays required to produce, outlays that would vary depending on the timing of production. All of this Alchian explained in one of his most important articles.

Here are two great paragraphs from "Smoke and Errors":

In short, good old-fashioned rent seeking accounts for the rise of public fire-fighting. It explains as well the survival of an entity that, more and more, is losing its raison d'être. Modern building materials are relatively fire-proof, while clothing and other fabrics are flame-retardant. Municipal codes increasingly require sprinkler systems, smoke detectors and other devices to reduce the incidence and costs of fire. So today's fireman has much less to do. The number of home and building fires has plunged 40 percent in the past two decades.

With fewer fires to fight, one would expect to find fewer fire-fighters--in a private firm, anyway. But not in a public agency. Despite the 40-percent decline in fires, in the past twenty years the number of paid city fire-fighters has increased by 20 percent. Only in government firms does employment go up as demand and output decline.

HT2 Tyler Cowen.

CATEGORIES: Obituaries

It is of great comfort to us who share an antiquarian passion for the history of political thought that fundamental questions such as, "What is the state?" invariably come to the surface. But sometimes you get the impression that new interpretations focus more on the 'political' than on the 'thought'. 

I'm referring to a long opinion piece published by Yoram Hazony in The Wall Street Journal. From his byline we know that Mr Hazony, President of the Jerusalem-based Herzl Institute, is publishing a book entitled The Virtue of Nationalism.
dusty book.jpg

His article's political goal is clear: he wants to argue that Donald Trump's blend of conservatism is in line with an old tradition that goes back to Edmund Burke. Trump is thus implicitly considered the torch-bearer of a system of ideas that value the nation-state as providing the soil which allowed Western liberty to flourish. From this comes skepticism towards exporting such values in different cultures and a similar anxiety for opening the door to immigrants that come from illiberal cultures.

But leaving aside what President Trump stands for, or rather represents, Mr Hazony's story is quite problematic.

 He thinks that "Classical liberalism ... offers ground for imposing a single doctrine on all nations for their own good. It provides an ideological basis for an American universal dominion." So, for Mr Hazony it was "liberal abstractions", based upon John Locke's ideas that matured into contemporary neo-conservatism.

Note that for Mr Hazony classical liberalism is "rationalist". I'm not so sure that Locke can be considered a "constructivist", but it is hard to assume that David Hume and Adam Smith were not central to the original arc of liberalism--that is, classical liberalism. Moreover, it could be argued that Burke himself had strong (classical) liberal leanings. On issue after issue, his tendency was usually liberal.

Mr Hazony seems to ignore the extent to which the modern libertarian movement, in the United States, tends to favour anti-interventionism and how skeptical prominent libertarians were of exporting democracy, let alone neo-conservatism itself. 

He quotes from Mises's 1927 pamphlet "Liberalism" to argue that classical liberals are actually internationalist advocates of world government. So writes Hazony:

Ludwig von Mises thus advocates a 'world super-state really deserving of the name,' which will arise if we 'succeed in creating throughout the world . . . nothing less than unqualified, unconditional acceptance of liberalism. Liberal thinking must permeate all nations, liberal principles must pervade all political institutions.
Let's read the quotation in its entirety:

To be sure, the League does hold out, even though very cautiously and with many reservations, the prospect of some future boundary adjustments to do justice to the demands of some nations and parts of nations. It also promises--again very cautiously and qualifiedly--protection to national minorities. This permits us to hope that from these extremely inadequate beginnings a world superstate really deserving of the name may some day be able to develop that would be capable of assuring the nations the peace that they require. But this question will not be decided at Geneva in the sessions of the present League, and certainly not in the parliaments of the individual countries that comprise it. For the problem involved is not at all a matter of organization or of the technique of international government, but the greatest ideological question that mankind has ever faced. It is a question of whether we shall succeed in creating throughout the world a frame of mind without which all agreements for the preservation of peace and all the proceedings of courts of arbitration will remain, at the crucial moment, only worthless scraps of paper. This frame of mind can be nothing less than the unqualified, unconditional acceptance of liberalism. Liberal thinking must permeate all nations, liberal principles must pervade all political institutions, if the prerequisites of peace are to be created and the causes of war eliminated. As long as nations cling to protective tariffs, immigration barriers, compulsory education, interventionism, and etatism, new conflicts capable of breaking out at any time into open warfare will continually arise to plague mankind.

Mises was actually criticising the international body of the time (the League of Nations), but expressed hope for "a frame of mind" that looks to see individual rights protected, not just within one's country but also abroad. I agree that Mises's use of the word 'superstate' is unfortunate, but it is clear that all he is pointing toward is a liberal sensibility that traverses national boundaries. 

The passage is part of the book's section on "a liberal foreign policy". Chapter 3 of that section is a remarkable collection of caveats, against allegedly peace-creating policies that could backfire (from "standardised" education to the creation of "economic areas"). Indeed, Mises thinks that "a world order must be established in which nations and national groups are so satisfied with living conditions that they will not feel impelled to resort to the desperate expedient of war". Such a humanitarian attitude, which is indeed part of the classical liberal legacy, was all the more cogent after the disastrous experience of World War I. Mises was not so eager to buy into "the virtues of nationalism" as he saw Europe on fire because of it - and understood that may happen again, as unfortunately it did.

Can Mises be considered a champion of exporting democracy? "The unqualified, unconditional acceptance of liberalism" was for Mises a cultural goal, not a strategy to be pursued at gunpoint.

When it comes to the issue of national identity, the second chapter in that very section of the book is devoted to the principle of self-determination.

The drift of Mises's discussion is the aim to dilute conflicts and allow for peaceful coexistence. There was no thirst for American 'hegemony': but the idea that people, by having fruitful commercial relationships, will eventually sheathe their swords. Such vision can perhaps be considered naive, but it certainly cannot be considered propaganda for world government.

Mises's liberal vision included the idea of "multi-national" states: states within which multiple national identities coexist, like they did in Europe for centuries before the idea "one state, one nation" became hegemonic. 

Was this nostalgia for the old Habsburg empire? Well, perhaps it was. 

Let's look at conservatives for a minute.  Think about Europe. Those "empirical" conservatives Mr Hazony purportedly admires couldn't be enthusiastic about national identities which were very recent artifacts--in some respects themselves products of constructivist rationalism. Didn't the Congress of Vienna after all have an "anti-national" character? Weren't European conservatives favouring empires or, yes, the "empirical" history of territorial divisions and royal dynasties as principles of legitimization deeply opposed to then emerging idea of the "nation"?

I'll read Mr Hazony's book, about which now I'm truly curious. But on these matters, so far my recommendation would be to go back to good ol' Lord Acton.

CATEGORIES: Economic Philosophy

David R. Henderson  

Hassett on Tax Cuts and Growth

David Henderson

On October 5, Kevin Hassett, the new chairman of President Trump's Council of Economic Advisers, gave an excellent talk at the Tax Policy Center. The topic was taxes and economic growth. The transcript of the talk is here. The video is here.

In the talk, Kevin gave some estimates of the effects of cuts in marginal personal and corporate income tax rates on growth. Drawing on the literature, he came up with substantial estimates of both.

A few excerpts follow.

First, his own background on this issue:

Perhaps the reason I hold these beliefs is that I started graduate school back in 1984, and was taking Alan Auerbach's public finance class when the 1986 Tax Act was enacted. At the time, I began working on how the 1986 reforms would affect business capital spending. The literature surprisingly found little effects of tax policy on the economy, often suggesting that tax and interest rate variables did not drive capital spending. But Alan and I noticed something funny in the data. Politicians tended to pass Investment Tax Credits in recessions, then let them expire when the recession was over. Thus it appeared that the economy partly drove tax policy, even if to [sic] tax policy also affects the economy. However, because recessions induced tax-cuts, any analysis of how tax cuts affected the economy would need to separate this out to not wrongly conclude that tax cuts caused recessions. When Alan and I discovered a way to overcome this problem, we found very large effects of tax policy on investment behavior. Since then, there has been a veritable scientific revolution of papers that use different methods to identify tax effects, and like our first study, they have found again, and again and again, that tax policy is a major driver of economic growth, if one does the science correctly.

His summary of the literature:
I don't have time to go into the scientific methodology in great detail, but have done so in more detail in a number of recent review articles. But for thinking about the broad-brush growth impact of the President's proposals, a number of recent papers published in top journals provide a guide to the possible scale of the growth effects. Romer and Romer (2010), utilize narrative history to separate out tax changes with motivations unlikely to be driven by the business cycle; they estimate that a 1 percentage point reduction in the total tax share of GDP increases GDP by 1 percent on impact, and by between 2.5 and 3 percent over three years. Cloyne (2013) and Hayo and Uhl (2014) apply the same approach using data from the United Kingdom and Germany, and obtain almost identical estimates. Other authors, such as Mertens and Ravn (2013), have extended this work with more sophisticated methods and find that a 1 percentage point reduction in the average personal income tax rate raises real GDP per capita by 1.4 percent in the first quarter, and by up to 1.8 percent after one year. They further find that a 1 percentage point cut in the average corporate income tax rate raises real GDP per capita by 0.4 percent in the first quarter, and by 0.6 percent after a full year. Using a similar approach, Mertens and Olea (2017) find that in the first two years following a tax decrease of 1 percent, GDP is expected to be higher by about 1 percentage point.

Applying the estimates from the literature to Trump's proposed cuts:
Applying these estimates to the proposed reduction in the statutory corporate income tax rate from 35 to 20 percent and the simultaneous introduction of full expensing requires calculating the effect these changes would have on federal tax liabilities, which will depend on the bill's final details. But just to illustrate the scale of these effects, a rough preliminary estimate of the combined revenue effect of the corporate tax proposal, combined with these macro elasticity estimates, implies that tax cuts of this scale would lift GDP per capita by approximately 4 percent over the first year. Although there are a number of reasons to expect that the actual impact of the reform would be much smaller than that, including the fact that we are currently near full employment, the potential for a significant growth effect is still very reasonable and empirically valid. (emphasis mine)

The effect of the current high corporate tax rates in the United States on transfer pricing and, therefore, on the current account deficit:
The authors correct for this mismeasurement by "reweighting" the amount of consolidated firm profit that should be attributed to the U.S. under a method of formulary apportionment. Under this method, the total worldwide earnings of a multinational firm are attributed to locations based upon apportionment factors that aim to capture the true location of economic activity. The authors use equally weighted labor compensation and sales to unaffiliated parties as proxies for economic activity. Applying the formulary adjustment to all U.S. multinational firms and aggregating to the national level, the authors calculate that in 2012, about $280 billion would be reattributed to the U.S. Given that the trade deficit was equal to about $540 billion, this reattribution would have reduced the trade deficit by over half in 2012.

Extrapolating the 2012 findings to subsequent years shows that transfer pricing continues to account for at least half of the trade deficit over 2013-2016. Here is where it gets interesting. There is also a literature that looks at the relationship between tax rates and transfer pricing. That literature implies that a corporate tax cut to 20 percent would dramatically reduce the trade deficit and increase GDP accordingly. Note that this effect happens totally within the current account (for those into NIPA accounting), and thus should be thought of as a change that would be part of a static score. The growth effects mentioned in previous paragraphs would be additive to this.

The amazingly high estimate of the effect of the proposed tax cuts on workers' real income:
Based on the scientific evidence, to me at least, it therefore seems prudent to adopt these reforms. Over the course of the Obama administration, U.S. corporate profits rose by a healthy 11 percent per year. But workers' pay didn't keep pace, and median wage growth was a paltry 0.6 percent per year. This disconnect between profits and wages is a radical departure from previous economic norms. Workers used to get a 1.1 percent raise for a 1 percent increase in corporate profits. Now the pass-through to workers is closer to 0.4 percent. Why did it change so much? Because the profits are offshore, benefiting other nations' workers. In 2016, U.S. firms kept 71 percent of foreign-earned profits abroad. What would happen if they didn't do that? A simple back-of-the envelope calculation suggests U.S. workers in 2016 would have received a raise of nearly 1 percent. What if these firms didn't do that for the next 8 years? The median U.S. household would get a $4,000 real income raise.

Or, look at it another way, we know from several studies that high corporate tax rates serve to depress the wages of workers over the long-run, through a combination of disincentives to bring profits home to invest, and a reduced impetus for domestic investment in general. Those effects are felt across the income distribution, resulting in lower wages for higher- and lower-skilled workers alike. For the median household in the U.S., a top corporate marginal rate cut from 35 to 20 percent would boost wage growth almost four-fold -- from the current 0.6 percent per year to as much as 2 percent, providing up to $7000 of additional income. It's time for a bipartisan consensus to use tax policy to fix wage growth.

Kevin's theoretical argument is strong--lower tax rates on accumulation of capital lead to more capital, and more capital per worker leads to higher marginal product of labor, which implies higher real wages. I was a little surprised by how high the magnitudes were, but he did draw on the literature to come up with his estimates.

In the discussion afterward, Scott Hodge, the head of the Tax Foundation, asked Kevin whether he didn't think the tax cuts were too tilted toward high-income people.That question might have made sense before Kevin's talk, but it didn't make sense after. Kevin's point, which he said a number of times in various ways in the talk, is that changes in tax rates have real effects and not just on the amount of tax people pay. Possibly Hodge was just giving Kevin a slow pitch so that Kevin could emphasize the point of his talk.

HT2 Greg Mankiw.

I've occasionally done blog posts explaining how it's possible to prevent recessions from occurring, even after they have begun. That's because a recession is dated from the point where output starts falling, but it's not considered a recession unless the decline persists for a considerable period of time. This is one reason why economists are so poor at predicting recessions. During the past three recessions, a consensus of economists failed to predict the recession until it was well underway.

It occurred to me that I failed to provide an example of a recession that was prevented after it had already began. Today I will do so.

In 1966 the Fed tightened monetary policy to slow inflation, which had recently been increasing. As a result, industrial production fell by 1.9% between October 1966 and July 1967.

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But that's much less than the nearly 8% decline observed during the 1970 recession, which was itself fairly mild. We had no recession in 1967 because the Fed sensed a slowdown, and eased policy in the spring of 1967. Because of this action, unemployment merely nudged up from 3.6% in November 1966 to 4% in October 1967, before renewing its long decline.

Now let's look at industrial production during late 2007 and early 2008:

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After peaking in November 2007, industrial production fell by only 2.2% over the next 7 months. Then after June 2008, output fell sharply, and by June 2009 was more than 17.3% below pre-recession levels. June 2008 is considered a recession period whereas July 1967 is not, primarily on the basis of what happened later.

Unlike in 1967, the Fed decided not to ease monetary policy in the middle of 2008, despite growing signs of recession. Indeed policy was actually tightened sharply, as the fed funds target was held at 2% from April to October, despite a rapidly falling natural rate of interest. If the Fed had eased aggressively in June 2008, then they might have entirely prevented a recession that technically began in December 2007. It wasn't too late!

The decline in output from late 2007 to June 2008 was too small to constitute a recession. Yes, the NBER eventually declared that the recession began in December 2007, but there would have been no recession to date in the first place if industrial production had risen in the second half of 2008, as it did in the second half of 1967. (I would add that the post-Lehman crisis might also have been milder, indeed Lehman might not have even failed.)

Ironically, the Fed made the wrong call in both 1967 and 2008. In 1967 the Fed should have allowed a (very mild) recession to occur, in order to prevent the "Great Inflation" of 1966-81 from occurring. That inflation did far more damage than a rise in unemployment to, say, 5% in late 1967. Indeed, a mild recession in 1967 might have made the 1970 recession unnecessary. In contrast, the Fed should have prevented the 2008 recession.

In 1967, the Fed was too worried about unemployment and not worried enough about inflation, whereas the reverse was true in 2008. The solution is to ignore both inflation and unemployment, and focus on keeping NGDP growing at a stable rate.

Even at the low point of the second quarter of 1967, 12-month NGDP growth was running at over 5.4%. There was no reason at all for the Fed to ease monetary policy. By the 3rd quarter of 1968, 12-month NGDP growth had soared to 9.9%---the Great Inflation of 1966-81 was underway. Now look at NGDP growth in early 2008:

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In the second quarter of 2008, the 12-month NGDP growth rate was only 2.7%. Admittedly this data was not yet available to Fed officials in June 2008, but even the first quarter data showed only a 3.05% NGDP growth rate---far below trend.

So why did the Fed (passively) tighten policy in mid-2008, by keeping rates at 2% as the natural rate of interest plunged sharply lower? In a word, inflation. An economic boom in developing countries such as China pushed global oil prices to a peak of $146/barrel in mid-2008. In the US, 12-month (PCE) inflation rose to a peak of 4.2% in July 2008, far above the Fed's 2% target. (CPI inflation reached 5.5%). Even though the Fed was aware that oil prices were distorting the data, they were so frightened of losing credibility on inflation that they allowed monetary policy to tighten sharply.

The Fed should have focused on NGDP growth, which was falling to dangerously low levels. As long as NGDP growth is kept at a modest level, any rise in inflation due to soaring oil prices will be transitory. Indeed by the end of 2008, the 12-month PCE inflation rate had plunged to below 0.4%, far below the Fed's target. So one of the many causes of the Great Recession was the focus on inflation, when the Fed should have actually been focusing on NGDP growth. Indeed this mistake is now so obvious that it goes a long way toward explaining the rapid increase in support for NGDP targeting.

PS. I am indebted to Robert Hetzel for educating me on the situation in 1967. However he is not to blame for any mistakes in this post.

PPS. I recently read a very interesting Time magazine article from December 1965, entitled. "We are all Keynesians now". It's amazing how confident people were back then that we had it all figured out.

I am currently in DC attending a star-studded macroeconomic policy conference at the Peterson Institute. Today's participants included Bernanke, Summers, Blanchard, Draghi, Fischer, and many other eminent economists. Bernanke's paper was by far the most interesting, especially his proposal for addressing the zero bound problem:

So, to be concrete, at some moment when the economy is away from the ZLB, suppose the Fed were to make an announcement like the following:

(1) The FOMC has determined that it will retain its inflation-targeting framework, with a symmetric inflation target of 2 percent. The FOMC will continue to pursue its balanced approach to price stability and maximum employment, meaning in particular, that the speed at which the FOMC aims to return inflation to target will depend on the state of the labor market and the outlook for the economy.

(2) However, the FOMC recognizes that, at times, the zero lower bound on the federal funds rate may prevent it from reaching its inflation and employment goals, even with the use of unconventional monetary tools. The Committee agrees that, in future situations in which the funds rate is at or near zero, a necessary condition for raising the funds rate will be that average inflation since the date at which the funds rate first hit zero be at least 2 percent. Beyond this necessary condition, in deciding whether to raise the funds rate from zero, the Committee will consider the outlook for the labor market and whether the return of inflation to target appears sustainable.

Of course I'd prefer NGDP level targeting, partly for reasons outlined in this post. But Bernanke's proposal would still be a dramatic improvement over current policy. More importantly, this is something that is much more politically feasible than any other proposal that I've seen. It actually makes the long run future price level more predictable than under current policy, which conservatives should love. It makes policy more expansionary at the zero bound, which liberals should love. It also eliminates the need to offset under and overshoots of inflation when not at the zero bound, which should assuage the fears of those who oppose traditional forms of level targeting. Indeed I think Bernanke's proposal is now the odds on favorite to be official Fed policy the next time the US hits the zero bound. Most people at the Fed understand that something like this is needed at the zero bound, and Bernanke's proposal could be sold to Congress as being fully consistent with the Fed's 2% inflation target.

You might assume that under Bernanke's proposal we'd still be at the zero bound, because we are still far below the 2% trend line from 2008. Not necessarily:

Note though, that if this policy rule had been in place prior to 2008, and if it had been understood and anticipated by markets, then longer-term yields would likely have been lower and the effective degree of policy accommodation during the past decade might have been significantly greater. In that counterfactual world, inflation might have been higher and the average-inflation criterion might have already been met. This is because the Fed would have already communicated their intention to be more accommodative going into the ZLB episode.
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A Protectionist Utopia?

Contributing Guest

by Pierre Lemieux

If everybody were protected as a producer, nobody would be "protected" as a consumer.

utopia.jpg My previous post argued against the "populist argument" claiming that free trade destroys jobs and thus cannot be beneficial to consumers who have lost their jobs and incomes. The basic answer is that trade does not destroy jobs and, in fact, has little to do with employment.

One could object that this answer does not cover the whole populist argument (as a few commentators did). The broader question may be: Couldn't the individual, who is generally both a producer and a consumer, benefit from price competition on what he buys and, at the same time, get protection against competition in what he produces? Couldn't individuals get both competitive consumer prices and secure jobs against the choices of other consumers (who destroy jobs by switching suppliers)?

The short answer is no. Such a utopian system is impossible. It is impossible for all individuals to simultaneously benefit from price competition as consumers and, as producers, from protection against competition. Price competition requires that firms and workers compete for their markets and their jobs. This competition for the patronage of consumers implies continuous disruption of production. A totally protectionist world cannot enjoy competitive prices because, by definition, people are banned from buying at the lowest prices that can be quoted on the market. If everybody were protected as a producer, nobody would be "protected" as a consumer.

What is feasible, however, is for some groups of individuals to be granted special protectionist measures in their interest while they are still allowed to import what they want without protectionist barriers. This is what special interests obtain. An American sugar producer or solar panel manufacturer is protected by special quotas or tariffs against foreign competitors, but he is still allowed (to a large extent) to make world producers compete for the other goods he consumes, such as cars from Canada or flat screens from Mexico.

We can complicate the argument but it won't change water into wine. One way to make apparent economic sense of the populist argument is to observe that free international trade will not literally benefit all individuals: just as in the case of domestic trade and competition, some individuals will be economically harmed. In other words, more free trade is optimal in the Marshallian sense (maximizing net benefits across all individuals as benefit-cost analysis tries to do), but it is not Pareto-optimal (it is not generally true that it harms nobody at all). Moving from protectionism to free trade is likely to harm some individuals. Most critical comments on my previous posts seemed to take that stand.

This is true enough, but the same reasoning indicates that protectionism is not Paareto-optimal either, for a move towards more protectionism will also harm some individuals. New tariffs on washing machines, as Whirlpool is requesting, harm households. Quotas on sugar harm not only consumers who like sugar, but also the domestic manufacturers of sweets, who have to compete against foreign manufacturers with access to cheaper sugar. And so forth. (The economics student will have noted that, to use the economic concepts correctly, I should have said that a move towards protectionism is not more a "Pareto improvement" than a move towards free trade, but this does not change the argument.)

Moreover, as noted above, protectionism is not even optimal in the Marshallian sense, because more goods and services become available under free trade. In non-technical jargon, the difference between free trade and protectionism is that the former promotes general prosperity, while restrictions to exchange reduce opportunities as the history of underdevelopment suggests.

That free international trade benefits most people, that it increases general prosperity, can be grasped with a reductio ad absurdum. If protectionism were good between countries, it would also be good between states, regions, towns, etc. It would be worth protecting California against Mississippi, if only because wages are 39% lower in Mississippi than in California. "If it could save only one job..." is as bad an argument against international competition as against domestic competition. Protectionist measures do favor some individuals, but it is at the high cost of reducing opportunities for most individuals. And even those who seem to benefit from protectionism, or their children, are likely to lose out in the long run.

Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email:

CATEGORIES: International Trade

Tyler Cowen recently linked to an interesting paper by Emi Nakamura and Jon Steinsson, which discusses the problem of identification in macroeconomics. One section looks at what we know about the monetary policy transmission mechanism:

What is the most convincing evidence we have for monetary non-neutrality? When we have asked prominent macroeconomists this question, the most common answers have been: Friedman and Schwartz (1963), the Volcker disinflation, and Mussa (1986). . . .

The fact that monetary economists point to these three pieces of evidence as most convincing is interesting and informative regarding the types of empirical methods that are influential in macroeconomics. Two of these three pieces of evidence are large historical events typically cited without reference to modern econometric analysis: the Great Depression and the Volcker disinflation. The third is essentially an example of discontinuity-based identification. Conspicuous by its absence is any mention of evidence from Vector Autoregressions (VARs) even though such methods have dominated the empirical literature for quite some time. Clearly, there is a disconnect between what monetary economists find most convincing and what many of them do in their own research.

Recall my recent post where I argued that economics PhD students need to spend more time studying monetary history and less time on highly technical models.

Some readers may be familiar with Friedman and Schwartz, and also the Volcker example, but not the Mussa study. Mussa showed that the real exchange rate became far more volatile after the Bretton Woods fixed exchange rate regime was abandoned. Here's a graph of monthly changes in the US/German real exchange rate:

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You might think it's no big deal that exchange rates becomes more volatile after the end of Bretton Woods---after all, Bretton Woods was a fixed exchange rate regime. Actually, it's a huge deal, as you'd expect the real exchange rate to be unaffected by a purely monetary change, like switching from a fixed to a floating exchange rate regime. (BTW, this claim has nothing to do with the concept of purchasing power parity--real exchange rates should not become more volatile regardless of whether PPP holds or not.)

So why do real exchange rates clearly become more volatile when you move to a floating exchange rate regime? The most likely explanation involves sticky wages and prices. Under a fixed exchange rate system, a change in the real exchange rate requires a change in the relative price levels. If prices are sticky, then the price level will respond slowly to a shock that impacts the equilibrium real exchange rate. Monthly changes in the real exchange rate will be small, because monthly changes in the nominal exchange rate are zero, and monthly changes in the price level are small (sticky prices.) By definition, the change in the real exchange rate is the change in the nominal exchange rate plus the change in the relative price levels.

After Bretton Woods was ended, nominal exchange rates became highly volatile. Prices remained sticky, so the nominal volatility turned into real exchange rate volatility.

Why is this powerful argument for monetary non-neutrality so important? Because it doesn't just relate to real exchange rates, it also means that Fed policy can affect other real variables, such as real GDP, real interest rates, and real wages.

In the long run, money is roughly (not precisely) neutral. That means that printing money is not a path to prosperity for a country like India. But money is non-neutral in the short run, which means that printing money can boost real incomes when output is below potential.

It occurred to me after I wrote this that my statement about PPP might have confused people. If PPP holds, the real exchange rate is always precisely one, under both fixed and floating rates. If it does not hold, and if money is neutral, then volatility of real exchange rates doesn't change when you move from fixed to floating rates.


The Cato Institute, the Fraser Institute, and more than 70 think tanks around the world have published the latest edition of Economic Freedom of the World. It's by James Gwartney, Robert Lawson, and Joshua Hall, with the assistance of Ryan Murphy, and contributions from Rosemarie Fike, Richard J. Grant, Fred McMahon, Indra de Soysa, Krishna Chaitanya Vadlamannati. They publish an update every year.

The authors and researchers look at five categories to judge the degree of economic freedom in 159 countries and territories. The latest data are from 2015.

Check this link from the Fraser Institute to see the top 10 countries.

Canada and the United States are tied for number 11 at a score of 7.94 out of 10. That's bad news for Canada; last year it was #5 with a score of 7.98, admittedly a small decline. It's good news for the United States; last year is was 7.75. That seems like a large increase relative to my casual look at the United States. Where does the 0.19 increase come from?

Here are the categories and scores. The scale goes from 1 to 10. The data below are from the 2016 and 2017 reports, which means they are data from 2014 and 2015 respectively.

Size of government: Stayed constant at 6.4.
Legal system and property rights: Rose slightly from 7.1 to 7.2.
Sound money: Rose from 9.4 to 9.8.
Freedom to trade internationally: Fell slightly from 7.6 to 7.5.
Regulation: Rose from 8.3 to 8.8.

Under the Regulation category, there are 3 sub-categories. Here they are with the scores.
Credit market regulation: Rose from 9.0 to 9.3.
Labor market regulation: Rose from 9.2 to 9.3.
Business regulation: Rose a lot from 6.6 to 7.7.

Bryan Caplan  

Me in Michigan

Bryan Caplan
I'm speaking twice on immigration in Michigan this week.

1. I'm lecturing on "Trillion-Dollar Bills on the Sidewalk" at Michigan State on Thursday, October 12, at 7 PM.

2. I'm debating Hans von Spakovsky of the Heritage Foundation on "America First: Does Trump's Immigration Agenda Harm America?" at the University of Michigan on Friday, October 13, at 7 PM.

If you're there, please introduce yourself after the talk. :-)

David R. Henderson  

Henderson on Thaler's Nobel

David Henderson


My piece on Richard Thaler appeared in the Wall Street Journal, electronic edition Monday evening and print edition on Tuesday. The Journal titled it "This Year's Nobel Economist Makes Sense of Irrationality."

This one took way less time to research because I've followed his work for decades--we were young assistant professors together at the University of Rochester in the mid-1970s--and have written about it over the last 9 years. I don't always agree with him but I think he showed a lot of courage in pursuing his passion when economists around him at the U. of R. were pretty hostile. I wasn't hostile, just skeptical. I'm less skeptical now about his insights.

Where we part company is that he hasn't taken advantage of the low-hanging fruit to the extent he can: applying his model of humans to government officials.

Here are the last two paragraphs of my article:

In Mr. Thaler's influential 2008 book "Nudge," written with Harvard law professor Cass Sunstein, he advocated "libertarian paternalism"--having government set default rules but allowing people to opt out at low cost. One example is making helmets mandatory for motorcyclists. The libertarian twist? Messrs. Thaler and Sunstein tout writer John Tierney's idea to let daredevils opt out by taking an extra driving course and showing proof of health insurance.

Mr. Thaler has yet to apply in a serious way his theory of irrationality to government officials. Their bad decisions are even worse because citizens bear most of the costs. It would be great if Mr. Thaler explored this area more. Someone should nudge him.

By the way, I thought co-blogger Scott Sumner's criticism earlier today was brilliant. Specifically, Scott wrote:
I had thought that the point of behavioral finance was to try to identify areas where the publics' intuition is in some sense "wrong" and design public policies to nudge them in the right direction. In that case, shouldn't we be encouraging price gouging, not discouraging it? Especially with public policy. Perhaps President Trump could "name and shame" companies that run out of essential supplies because of an unwillingness to price gouging. (Yes, not likely, I'm just trying to show the logical implications of behavioral economics.)

My manners have actually improved with age, but last night, maybe because I was tired after getting up at 2 a.m. PDT earlier that day, I displayed zero manners. I should have thanked Alex Tabarrok. In recent years, he has been willing to take a quick look at the draft of my WSJ piece and give me comments, with a turnaround of about half an hour. He did that yet again this year. I used two of his four critical comments.
Also, I should thank my lovely wife, Rena Henderson. She's a professional editor and she also turned it around within half an hour. She made one major suggestion that I didn't take. So that's my responsibility.

As a University of Chicago alum, it's always nice to see the UC pick up another Nobel Prize in economics.

Economists are often accused of engaging in empty theorizing, but Thaler has developed useful ideas, such as methods by which the public can be "nudged" into boosting their saving rate. Some of these have been successfully implemented.

Alex Tabarrok and Tyler Cowen have nice summaries of some of his contributions, and this comment by Tyler brought a smile to my face:

Perhaps unknown to many, Thaler's most heavily cited piece is on whether the stock market overreacts. He says yes this is possible for psychological reasons, and this article also uncovered some of the key evidence in favor of the now-vanquished "January effect" in stock returns, namely that for a while the market did very very well in the month of January. (Once discovered the effect went away.)
Went away? Well that's one way of putting it. Imagine a study in psychology, perhaps one of those where they prime people with shocking pictures, and see how it affects their behavior. Then imagine a number of follow up studies that fail to replicate the original study. (This inability to replicate happens all the time in the social sciences.) Would we say the effect "went away"? So why do we show such respect to the study of anomalies in finance?

Behavioral economics is not my area, so perhaps someone can help me with the following remark by Tyler:

Very lately Thaler on Twitter has been making some critical remarks about price gouging, suggesting we also must take into account what customers perceive as fair.
I had thought that the point of behavioral finance was to try to identify areas where the publics' intuition is in some sense "wrong" and design public policies to nudge them in the right direction. In that case, shouldn't we be encouraging price gouging, not discouraging it? Especially with public policy. Perhaps President Trump could "name and shame" companies that run out of essential supplies because of an unwillingness to price gouge. (Yes, not likely, I'm just trying to show the logical implications of behavioral economics.)

Note that this is a separate point from whether firms themselves ought to take into account public perceptions---I agree that there are cases where firms may decide it's wise to avoid price gouging for reasons of public relations. But that's different from endorsing laws that restrict price gouging. Don Boudreaux and David Henderson recently made related criticisms.

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Bryan Caplan  

Hume on Pessimistic Bias

Bryan Caplan
A nice quote on pessimistic bias during the reign of King James I from Hume's History of England:
Every session of parliament, during this reign, we meet with grievous lamentations concerning the decay of trade and the growth of popery: Such violent propensity have men to complain of the present times, and to entertain discontent against their fortune and condition. The king himself was deceived by these popular complaints, and was at a loss to account for the total want of money, which he heard so much exaggerated. It may, however, be affirmed, that, during no preceding period of English history, was there a more sensible encrease, than during the reign of this monarch, of all the advantages which distinguish a flourishing people. Not only the peace which he maintained, was favourable to industry and commerce: His turn of mind inclined him to promote the peaceful arts: And trade being as yet in its infancy, all additions to it must have been the more evident to every eye, which was not blinded by melancholy prejudices.
HT: Dan Klein

Alberto Mingardi  

A very bad book

Alberto Mingardi

Re-Thinking Capitalism.png On our sister website, the Online Library of Law and Liberty, I've reviewed a very bad book, "Re-thinking Capitalism" edited by Michael Jacobs and Mariana Mazzucato. Here's the key-bit:

Rethinking Capitalism is but the latest example of a notable stream of literature blaming capitalism for not accommodating the desires of its authors as quickly and comprehensively as they would like. Make no mistake, though, it is in its own way an important work. Arguments such as the ones I've explored won't convince an educated layman who comes to the book with no predisposition on the matter. But they are a formidable device to strengthen the convictions of those who already support big government. They would have us believe that the state is good in precisely those circumstances where even most interventionists have typically accepted that it is not: in prompting innovation.

The fact that markets produce innovation, and government doesn't, is often considered such a truism that it is not even worth restating the case. Thanks to Mazzucato's indefatigable proselytising for the "entrepreneurial state", some people are now starting to challenge this apparent truism, building on the supposed evidence of US military spending translating into technological breakthroughs, which are then exploited by free enterprises years later. It is a bit surprising to hear the left going for guns instead of butter, but this is a growing trend. As I argue in the review, I think this is by and large based on a view of the economy which over-emphasizes the producers' side and doesn't grasp the importance of consumers' feedback for transforming new technologies into "stuff" which is of use for a vast number of people.

David R. Henderson  

Richard Thaler Wins Nobel Prize

David Henderson

My former colleague, Richard Thaler, at the University of Rochester has won the Nobel Prize in Economics this morning.

I'll be writing my regular bio for The Wall Street Journal today, which we'll post here when complete.

CATEGORIES: Economic Philosophy

In a speech delivered before the Yale Socialist Club a decade after his return to New Haven, [Irving Fisher] related this minor incident of his stay in Santa Barbara:

Discovering that the man who came to massage him was a Socialist and believed that "interest is the basis of capitalism and is robbery," my father determined to make the most of his pedagogical opportunity.

To the question, "How much do I owe you" the masseur replied, "Thirty dollars."

"Very well. I will give you a note payable a hundred years hence. I suppose you have no objections to taking this note without any interest. At the end of that time you, or perhaps your grandchildren, can redeem it."

"But I cannot afford to wait that long."

"I thought that you said that interest was robbery. If interest is robbery, you ought to be willing to wait indefinitely for the money. If you were willing to wait ten years, how much would you require?"

"Well, I would have to get more than thirty dollars."

With a gleam of triumph, Father thrust home. "That is interest."

This is from Irving Norton Fisher, My Father Irving Fisher (New York: Comet, 1956), p. 77.

The passage appeared under the heading "Explaining Interest" on the back cover of the December 1994, Volume 102, No. 6 issue of the Journal of Political Economy.

CATEGORIES: Economic Education , Finance

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