July 25, 2016Incentives Matter for Politicians Too
July 25, 2016Immigrants and Everest
July 24, 2016Highs and Lows of the Republican Convention
July 23, 2016The Fed's psyche
July 22, 2016Turkey's Failed Coup
July 22, 2016A Numerate Sermon on Terrorism
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Bryan Caplan, David Henderson, Alberto Mingardi, and Scott Sumner, with guest blogger Emily Skarbek, blog on issues and insights in economics.
JULY 25, 2016
In a Facebook comment on my recent post on Peter Thiel and Donald Trump's foreign policy views, my friend Stephen M. Jones wrote (I quote with his permission):
Tyler Cowen had an important post linking this article about Trump and Putin. It appears the Ukraine decision/NATO pronouncement is not driven by a non-interventionist Foreign Policy stance but by linkages between Trump and Putin such that they often have mutual interests.
He then provided this link.
I recommend reading the whole article that's linked, but the gist is that Donald Trump and some of his advisors are financially connected to Vladimir Putin or to people close to Putin.
These allegations do sound troubling.
But there's another way to look at them.
When I have posted on Facebook about some of the non-interventionist statements Trump has made, friends who share my non-interventionist views caution that Trump will say anything and that you cannot take his statements as indicators of what he would do if President. Co-blogger Scott Sumner made a similar point in his comment on my post. I share this concern. As I have said in many conversations with friends, Trump is a wild card.
But incentives matter, even for politicians. One of my biggest concerns is that Hillary Clinton as President would purposely or accidentally get the United States into a war with Putin. The New York Times editors, in their Sunday editorial "Trumpworld vs. Clintonworld," pointed out just how interventionist Clinton is. (They liked it; I don't.) When both countries have thousands of nuclear weapons, that is scary.
So if even some of the allegations about close financial connections between Trump and Putin and Putin's allies are true, that would mean that Trump would have much to lose personally from making war on Putin or, as one of Trump's competitors, John Kasich, put it, "punch the Russians in the nose."
What if you see a potential war that you don't want the United States to get in? You might love it if the U.S. president avoided getting into the war on principle. But it's a surer thing to depend on a U.S. president not getting into a war because his own financial interests would be badly hurt.
JULY 25, 2016
Immigrants use less welfare than natives, holding income constant. Immigrants are far less likely to be in jail than natives, holding high school graduation constant.* On the surface, these seem like striking results. But I've heard a couple of smart people demur with an old statistics joke: "Controlling for barometric pressure, Mount Everest has the same altitude as the Dead Sea." Sometimes controls conceal the truth rather than laying it bare.
Who's right? Does adjusted quality matter? Or is it just a bait-and-switch?
It all depends on what your audience takes for granted. If listeners falsely assume immigrants are just as welfare-dependent and criminally-inclined as comparable natives, the adjusted results provide new and valuable information. If reasonable, they may not become pro-immigrant, but at least they should become less anti-immigrant.
This point is even stronger, of course, if listeners falsely assume immigrants are more welfare-dependent and criminally-inclined than comparable natives. As far as I can tell, 90% of native-born Americans angrily believe both negative generalizations. If they would scrupulously face facts - adjusted facts - much of their anger and desire to "do something about immigrants" would dissolve.
Pointing out that immigrants are better than comparable natives is directly analogous to, say, pointing out that the much-maligned Ford Pinto was not unsafe for a compact car. In both cases, false beliefs lead to foolish actions - scapegoating immigrants and Pintos when they're at least as good as comparable natives and comparable cars.
* There is also good evidence that immigrants commit less crime, making no statistical adjustments at all. But that's a separate point.
CATEGORIES: Behavioral Economics and Rationality , Economic Methods , Labor Mobility, Immigration, Outsourcing , Politics and Economics
JULY 24, 2016
Watching and analyzing the Republican convention so that you didn't have to.
I watched more of the Republican national convention than I usually do, mainly because it promised to be more interesting than the usual. It was.
Here are some highs and lows of the convention. I'll focus mainly, though not entirely, on economics. I'm judging entirely by content, not by how good-looking or good a speaker each speaker was. And my focus is on good or bad per minute spoken. By my standards, there weren't many highs. I'll start with the highs:
Now the lows.
Tie for the Worst Speech:
Other Worst Speech:
As President, my father will change the labor laws that were put into place at a time when women were not a significant portion of the workforce. And he will focus on making quality childcare affordable and accessible for all.
In context, she seems to be saying that Trump would push for laws requiring paid leave for people taking care of children. Otherwise, it's hard to see why she discussed labor laws. One could charitably interpret her point about making childcare affordable to refer to deregulation so that the real cost of child care falls. I think that's unlikely. The more-likely interpretation: subsidies to child care.
And the second-worst part:
He [Trump] is the single most qualified [to]serve as chief executive of an $18 trillion economy.
Trump is not running to be CEO of the economy. Fortunately, there's no such job. He's running for President. If he wins, he will be head of the executive branch of the federal government, which is one of three. It's understandable why Ivanka would make that mistake: Donald seems to also.
As many commentators have pointed out, Trump sketched a much more dismal view of life in America than is justified by the facts. Crime, which apparently has blipped up, is lower than it was even 10 years ago, and so much lower than it was 40 years ago. The fact is that the vast majority of us are incredibly safe.
Also, on foreign policy, which, in my view, is Trump's relative strength, he said:
Iran deal, which gave back to Iran $150 billion and gave us absolutely nothing. It will go down in history as one of the worst deals ever negotiated.
Actually, it gave "us" a few more years in which the Iranian government will not be able to develop nuclear weapons. Given the fear many had before the deal that the Iranian government could have nuclear weapons within a year or two, this was a "huuuuuge" benefit. Of course, it also gave us another trading partner, although, in Trump's view, if that causes us to actually buy things from Iranians, that's bad. Even he would have to admit, though, that the deal was good for Boeing exports.
When I take the oath of office next year, I will restore law and order to our country.
This could signal an attempt by Trump to federalize responsibility for law and order that, under the Constitution, rests largely with state and local governments and with private people.
As your president, I will do everything in my power to protect our LGBTQ citizens from the violence and oppression of a hateful foreign ideology. Believe me. And I have to say as a Republican, it is so nice to hear you cheering for what I just said. Thank you.
I don't think he should do much because most of those issues, as noted above, are not federal responsibilities. But I did like his stopping and noting how far Republicans have come in a short time to applaud someone's pitch for protection of gays.
I am not going to let companies move to other countries, firing their employees along the way, without consequences.
That's a huge assault on economic freedom.
Excessive regulation is costing our country as much as $2 trillion a year, and we will end it very quickly.
This is good. One or two specifics would have been nice.
We will completely rebuild our depleted military.
Seriously? It's arguably the best large-country military in the world.
CATEGORIES: Economic Philosophy
JULY 23, 2016
Tim Duy always has something thoughtful to say about the Fed. This comment in his latest Bloomberg column caught my eye:
But note too that Dudley looks disapprovingly on the 1994-1995 cycle. For policymakers at the Fed, that cycle has left an indelible mark on their psyche. They just can't shake it. And 2013's "taper tantrum," or the steepening of the yield curve in the wake of former Federal Reserve Chair Ben Bernanke's hints that quantitative easing was ending, revived their fear of a 1994 repeat. The Fed doesn't like a steep yield curve, but they won't like a flat one either.I've seen a number of other people also refer to the Fed's fear of another 1994, when there was a bond market "bloodbath". This got me thinking about the Fed's delicate "psyche", which is so susceptible to indelible marks. What horrors occurred in 1994, as a result of the bond bloodbath? And where would I look for the evidence?
The obvious place to look is in the inflation and unemployment data, which are the two variables that the Fed is instructed to stabilize. Presumably something really, really bad happened to the economy in 1994, and left an indelible market on the Fed. So let's take a look at the inflation and unemployment data, before and after January 1994:
Nope, unemployment was 6.6% in January 1994, and fell throughout the year, and indeed for another 6 years. And even then it rose only modestly during the 2001 recession, peaking at 6.3%. So the bloodbath doesn't seem to show up in the unemployment data.
I'd go even further, and argue that the macro data after January 1994 was some of the best ever seen in all of American history. And yet the Fed is so shaken by what happened in the mid-1990s that it dare not risk a repeat. In contrast, I want them to produce lots more periods like 1994-5.
Of course what's going on here is that the Fed's added a third mandate:
In the absence of a strong inflation argument to justify rate hikes, some Fed policymakers are leaning more heavily on a second narrative, the financial stability angle -- the fear that low rates foster asset bubbles or, perhaps worse, dangerously high levels of leverage within the financial sector.However, it's not clear they know how to achieve it:
Raising interest rates alone may not alleviate financial stability concerns. In fact, they may aggravate those concerns if the yield curve continues to flatten. . . .
I wish the Fed would focus like a laser on macroeconomic stability (preferably NGDP, but inflation/unemployment are the current targets), and not use monetary policy to stabilize the financial system. But if they insist on doing something, I think Tim Duy's suggestion is a good one:
Bottom Line: The Fed needs to remember that how they got into this policy stance may offer a lesson for how to get out. Policy makers cut rates to zero and then instituted quantitative easing. Now they should consider selling assets before raising rates. Or, at a minimum, utilizing a mixed strategy of rate hikes and asset sales. The objective of meeting the Fed's mandate in the context of maintaining financial stability may be unattainable using the interest rate tool and associated forward guidance alone. Unfortunately, the Fed does not appear to be debating the policy mix -- at least not in public. They remain focused on interest rates, delaying balance sheet policy to a later date. On the current trajectory, however, that later date may never come.
HT: Brian Donohue
JULY 22, 2016
Reflecting on the recent events in Turkey, Dani Rodrik wrote over at Project Syndicate that he never thought he would see such events "in a country that has come to hate military coups but still loves its soldiers". Knowing little of detail about the particular dynamics of current Turkish politics, I wondered if there was any way to make sense of this.
My colleague Gabriel Leon does work on riots and coups. In 2014 he published a paper in Public Choice on military spending and coups d'etat where he shows that coups are more likely when military spending as a share of GDP is relatively low. The paper uses data on successful and failed coups in 153 countries between 1963-1999 to estimate a panel specification looking at whether military spending is correlated with the incidence of coups. The findings suggest that a one standard deviation increase in military spending lowers the probability of a coup in the following years in the average country-period pair from 18% to 8%. Why? Leon argues coups are more likely when military spending is low relative to a country's average and coups are often staged by militaries that wish to increase their funding.
The recent experiences seem at first blush to be consistent with what this account would suggest. The graph below is Turkey's percentage of GDP on military spending since the 1990s. The vertical axis peaks at 4%.
A single data point, yes, but still curious. I asked Gabriel what he thought of the coup and Rodrik's commentary. He wrote back with the following (with permission to print),
The general shape of the military spending / GDP figure, with that sharp drop in the years leading up to the coup, is consistent with what we see in many other countries that experience coups after a prolonged period of democratic calm. In the case of Turkey, we have a military that has lost out in terms of funding, is potentially overstretched, and has seen its independence compromised by Erdogan, who has been appointing officers on the basis of loyalty rather than merit. The fact that Erdogan's civilian supporters felt able to defy the soldiers in the way they did, attests to the military's diminished prestige within Turkish society. These elements are all potential causes of coups, and so when seen from that perspective the recent events appear somewhat less surprising.
JULY 22, 2016
I've long regarded serious fear of terrorism as a sign of deep innumeracy. Deaths from terrorism remain a tiny share of the thousand-odd murders that happen on Earth on an average day. Terrorism is special primarily because people overreact to it - and occasionally kill a hundred thousand innocents along the way. Since my ability to persuasively convey these facts is minimal, however, I was pleased to discover this inspired numerate sermon by Sam Hughes. Highlights:
P.S. Sermon notwithstanding, I see little sign Americans have learned a thing since September, 11, 2001. In fact, they seem more irrational and impulsive than ever. If there's another domestic terrorist attack that kills over a thousand people, I predict the U.S. will mount another War of Negligence - easily winning the war, but bungling the peace yet again.
JULY 21, 2016
Thiel, who supports gay marriage, plans to say that although he does not agree with all the policies in the official GOP platform, he believes fighting over cultural issues such as "bathroom bills" is a distraction from more important matters.
This is from Matea Gold, "Peter Thiel plans to make history as first GOP convention speaker to announce that he is proud to be gay," Washington Post, July 20, 2016.
HT2 Tyler Cowen.
Just when I think there's nothing to like about Donald Trump, I see him holding back on risking war with Russia. Here's how the editors at the Wall Street Journal put it in an editorial titled "The GOP's Putin Confusion":
This week Republicans were given a glimpse of the GOP's changing foreign policy during a platform fight over language regarding Ukraine. A delegate proposed an amendment that called for the U.S. to provide Ukraine's military with the "lethal defensive weapons" it needs to protect itself from Mr. Putin. But in the end that was watered down to a more milquetoast "appropriate assistance."
A friend who has been following the Republican convention more closely than I have tells me that it was the Trump forces that pushed for watering down the language.
Thiel is a strong supporter of free markets. The above picture is of Ed Stringham, Thiel, and me (I'm the one with the white hair) at an annual meeting of the Association for Private Enterprise Education.
CATEGORIES: Foreign Policy
JULY 21, 2016
Suppose markets are efficient at pricing assets. And suppose everyone believes they are efficient. In that case (some argue) no one would have an incentive to gather information, and trade on that information. But in that case, speculators and arbitragers would have no incentive to push prices to equilibrium in the first place. So the EMH would seem to be self-refuting.
But if the EMH were false, even a tiny bit false, then speculators would have an incentive to jump in and try to take advantage of any tiny imperfections. So that's an interesting paradox.
In fact, we do see lots of trading. We see speculation and arbitrage, even though asset prices are usually close to a position where risk-free arbitrage is almost impossible. That tells me one of two things, probably both:
1. The EMH is not precisely true---some people do unearth information not available to the overall market, and do profit on that information.
Either of those assumptions are enough to rescue the EMH. Some economists would deny that assumption #1 rescues the EMH, but they suffer from a lack of wisdom. They put too much weight on the literal meaning of words, and not enough on the actual meaning. If the EMH is almost true, but not precisely true, it is still truer than virtually any other theory in the social sciences, including basic workhorses like "supply and demand", and "comparative advantage." A theory that is 99% true is essentially "true" in any social science.
Sometimes when people are first confronted with NGDP futures targeting, they sort of lose their minds, and engage in bizarre circular reasoning. They make arguments that they would never make for any other market. They say, "If the theory works, then why would anyone trade NGDP futures? After all, they would not expect to make a profit." Well, expected by whom? The market, or the person doing the trade?
These claims are equivalent to saying that arbitrage won't cause the interest parity condition to hold, because if it caused the interest parity condition to hold, then no one could make money by doing arbitrage. In other words, these skeptics prove too much.
In fact, people would certainly trade NGDP contracts if they had diverse views as to the future expected NGDP, and they would also trade NGDP futures contracts if (unrealistically) they all had identical views. I hope the diverse views case is obvious; so let me focus on the (far less realistic) identical views case.
Let's suppose the Fed has a 5% NGDP target, and the base is at $1 trillion. All traders have the identical view that in order to hit the 5% target, the Fed must boost the base up to $1.03 trillion. Some of my skeptics would claim that a base of $1.03 trillion is not an equilibrium as investors would not expect any profit at that money supply level. This is what they mean by the policy "not working". But that's a very narrow way of thinking about success. I've never argued that in equilibrium the market price will be precisely equal to the market expectation. Again, nothing in the social sciences works perfectly. I've always acknowledged that there would be a (probably small) risk premium embedded in NGDP futures prices. That's obvious, but is it a problem?
The basic argument for NGDP futures targeting is that the risk premium, the difference between the market price and the market expectation, would be relatively small. And by "relatively small" I mean of no macroeconomic significance. You might have a 5.0% futures price and a 4.8% or 5.2% market expectation. But that's a smashing success in macroeconomics!
In the case above, where investors thought a monetary base of $1.03 trillion was needed to hit the NGDP target, they would take a short position on NGDP futures, pushing up the monetary base, at least somewhat closer to $1.03 trillion. How close? Close enough where further trades are not worth the bother. Where the expectation of profit is just counterbalanced by the risk. Again, that's likely to involve a NGDP growth rate that's really, really close to 5.0%, just as arbitrage in foreign exchange markets keeps interest rate differentials pretty close to the forward premium or discount on a currency, but not exactly equal.
Some recent posts by Zachary David and Noah Smith criticized my Mercatus NGDP futures targeting proposal. Even if their criticisms were completely correct, it would not affect my views on NGDP futures targeting, as the plan I currently advocate (Woolsey's index futures convertibility) does not require any trading to occur. The Fed uses discretion, constrained by its reluctance to lose boatloads of money.
In fact, however, their criticisms are completely wrong, for not one but two reasons. First, even if the EMH were precisely true, people would trade because there is a diversity of views regarding future levels of money needed to hit the NGDP target (i.e. future levels of velocity). Their criticism proves too much, as it implies that no one would trade in any market for information reasons, only for liquidity reasons (say needing to sell stock for retirement spending.)
And it's even more incorrect than that, because they wrongly assume that NGDP targeting must work perfectly in order to be a sensible macroeconomic stabilization policy. An expected future NGDP that fluctuated between 4.8% and 5.2% would be a massive success. Might it fluctuate further? Sure, anything is possible, but that would trigger exactly the sort of trading that Smith and David suggest would not occur, thus limiting the fluctuation. Their criticism of NGDP futures targeting exposes a lack of awareness as to the role of arbitrage in the financial markets. It's like saying that if one opened the floodgates between two lakes with uneven levels, the water levels would not equalize, because once equalized, water would no longer have an incentive to flow to the lower lake!
They also discuss market manipulation, which I doubt would be much of a problem. After all, manipulation would open up even bigger profit opportunities for speculators making the opposite bet on NGDP futures, and side bets elsewhere. And, AFAIK, we did not see the sort of manipulation they discussed under either the gold standard or Bretton Woods, other cases where the central bank moved the money supply as needed to peg a key asset price. And finally, the version of NGDP futures that I am currently advocating (a band of 3% to 5% on NGDP futures contracts) is not at all susceptible to manipulation.
Before anyone else tells me why NGDP futures targeting cannot work, I implore them to think about how ordinary asset markets work. What causes prices to be at the efficient levels? And if they are not at the efficient levels, how close are they?
PS. Question for manipulation fear-mongers. Which big investment bank will do the manipulation, and which investment bank will be the sucker that gets taken to the cleaners? Is manipulation really as easy as it looks? Might they compete to "manipulate"?
PPS. Last time Noah Smith criticized the plan, he made the false claim that it was subject to "Goodhart's Law". Before that he suggested that asset markets are too irrational. He clearly doesn't like the idea, and no matter how many objections I shoot down, he seems to come up with another. I wonder if some of my critics are annoyed that someone from lowly Bentley College came up with a clever idea. Perhaps Zachary David would find the idea less "goofy" if endorsed by John Cochrane. Or would he say that Cochrane doesn't understand basic finance?
PPPS. In the future, I encourage people to actually read my Mercatus paper, before jumping in.
HT. Dilip, Patrick R. Sullivan
JULY 21, 2016
In early February, noted journalist and GMU professor Steve Pearlstein bet me $50 at even odds that Ted Cruz would win the Republican nomination. I have now officially won.
Why did I make this bet? Simple: At the time, betting markets gave Cruz about a 10% chance of winning. Pearlstein claimed to know Cruz was very likely to win, so I bet him. Soon after we made the bet, Cruz rebounded, peaking at 34% in mid-April, marginally shaking my confidence. But nothing came of it in the end.
My final assessment: I have great respect for Pearlstein's knowledge of American politics. I think he did know more than betting markets. But he didn't know enough to see a 10% probability in the market and conclude the true probability exceeded 50%.
JULY 21, 2016
Tyler tries to cure my immigration backlash confusion, but not to my satisfaction. The overarching flaw: He equivocates between two different versions of "backlash to immigration."
Version 1: Letting in more immigrants leads to more resistance to immigration.
Version 2: Letting in more immigrants leads to so much resistance to immigration that the total stock of immigration ultimately ends ups lower than it would have been.
Backlash in the first sense is common, but no reason for immigration advocates to moderate. Backlash in the second sense is a solid reason for immigration advocates to moderate, but Tyler provides little evidence that backlash in this sense is a real phenomenon. I say he's engaged in journalistic hyperbole. If you seek clarity rather than attention, it's far better to consistently stick to Version 2 for "backlash," and call Version 1 mere "resistance." That's what I'm doing from here on.
In the very short-run, of course. Before long, however, firms build more housing. Outskirts become more like central London - what's so terrible about that?
Probably true in the short- and medium-run. But it's still far from clear this would lead to genuine backlash as defined above. In any case, there's no sign existing immigration has had any such effect, even in London.
I'd really like to see a multiple regression, because there's very likely a strong negative correlation between immigration levels and immigration changes. In any case, I'm surprised it does not occur to Tyler that today's changes are tomorrow's levels. This is entirely consistent with my claim that high enough immigration will eventually destroy nativism.
Why not try and see? Patterns often generalize. There'd be no social science if they didn't.
Was London "pre-selected" to like immigration before it had much immigration? Where's the evidence? How could we even tell?
I never said immigration was popular. In fact, I've repeated said the opposite. I'm also happy to admit few people would decry immigration if it barely existed. But Tyler's backlash thesis has to claim something much stronger to be interesting, and he presents little evidence in favor of that stronger claim.
I agree that anti-immigration sentiment is staring me in the face, and freely concede that I am afraid of it. But that hardly shows that relatively open immigration is self-defeating. And if it doesn't mean that, the language of backlash is empty.
Question for Tyler: Suppose Trump loses, taking the whole Republican Party down with him. Unified Democratic government then further liberalizes immigration. Would this show you were wrong to claim the U.S. had an immigration backlash in 2016? If so, your backlash thesis is far less obvious than you claim. If not, your backlash thesis is far less scary than you claim.
JULY 20, 2016
I don't know about you, but my feeds are dominated by the RNC in Cleveland this week...I'm not following the circus closely at all...But I do think this is an opportune time to reflect on what economics can tell us about politics more generally...
Politics, like markets, is a means of allocating resources, according to Rick Stroup's excellent article on political behavior in the Concise Encyclopedia of Economics. So we shouldn't dismiss politics out of hand. However, politics differs from markets in other siginificant ways. As Mike Munger says in this Feature Article, "In politics you try to move money around and take credit for it. In markets you try to create value and make profits."
Of course, there's been lots leading up top this week...David Henderson was "stumped by Trump" already last year... Bryan Caplan early on found this election to fit his "simplistic theory of Left and Right" quite well. But Caplan does find the 2016 contest to be an outlier based on his framework from The Myth of the Rational Voter.
If you're shocked, like me, at the level of incivility in this electoral cycle, Arnold Kling's typology of "the three languages of politics" might be illustrative. According to Kling, Progressives, Conservatives, and Libertarians each have their onw language, making it easier to demonize one another. (You can also read Kling's e-book for only $1.99!)
The RNC also reminds me to be skeptical whenever we hear reference to what "we" want or are going to do. There is no "we."
And finally (and just for fun!), there has been a seemingly endless number of pieces over the last several months proclaiming the death of the Republican Party. But this is the only one I've seen in the form of a drinking song...
JULY 20, 2016
I'm back from my 18-day trip to my cottage in Canada and so, once again, I will be posting almost daily.
I hate many things: one of them is price controls and another is badly misleading titles.
Three Felonies a Day is a case in point. Written by Harvey A. Silverglate, with a Foreword by Alan M. Dershowitz, it's actually an excellent book. But Silverglate doesn't even attempt to justify the title. He tells blood-curdling stories about out-of-control federal prosecutors who go after people whom most readers of this blog and, indeed, most people, would think of as innocent people. A prime example is on pp. 45-56 where he tells of the Dr. Hurwitz Oxycontin case. But nowhere in the book does Silverglate say why he thinks that the average American commits three felonies a day. My own guess is that over half of adult Americans are felons who don't know it but that their number of felonies is closer to three a year than to three a day.
Why does it matter? Here's why. I see people on Facebook discussions, and not dumb or uninformed people but smart, generally informed people, saying that Silverglate has shown that the average American commits three felonies a day. Besides signaling that they haven't read the book, they then pass on bad information to other people who repeat it, etc.
Another reason it matters is that some people who might be sympathetic to Silverglate's message are less sympathetic and, indeed, might feel cheated.
CATEGORIES: Books: Reviews and Suggested Readings
JULY 20, 2016
Tyler recently linked to a study that used data on happiness in 22 OECD countries (all majority white). Only 6 countries scored above 8.00 in the happiness survey:
My immediate reaction was to think about our populist candidates, Sanders and Trump. Sanders says he wants to make the US look more like Denmark. But we already look alike; Denmark and the US are the two happiest countries. Trump's support supposedly comes from the fact that Americans are disgruntled. And yet we are happy! (In fairness, the surveys are from almost a decade ago, but I doubt things have changed all that much.)
Elsewhere I've argued that free markets make people more virtuous, happier and richer. (Denmark has the world's freest markets, by some measures.) Commenter Rayward recently directed me to a David Brooks column that worries about an over reliance on both markets and government:
But back then, there were plenty of institutions that promoted the moral lens to balance the economic lens: churches, guilds, community organizations, military service and honor codes.
It's a common misconception that markets make people more selfish. Deirdre McCloskey wrote an entire book on the way that markets instill good values. Here are some other pieces of evidence:
1. Statist polices like rent controls and minimum wage laws encourage people to be evil. It becomes in one's self interest to treat renters poorly, or to treat employees poorly. Some of that occurs even under a free market, but at least under a market system people have some incentive to treat customers, tenants and employees well.
2. People who lived for decades under highly statist governments in Russia and China developed a society with low levels of civic virtue.
3. At least in the Chinese case, there is evidence of causation running from exogenous changes in economic structure to civic virtue. Mainland Chinese visitors to Taiwan tend to notice a higher level of civic virtue, a "better culture".
4. Back in 2008 I did a study that showed that countries that were more neoliberal also tended to be less corrupt, happier and richer.
Like David Brooks, I'm a bit worried about cultural decline (although much less worried than he is). My specific fear is that a $15 minimum wage and expanding rent controls will make people in California meaner. (I hope to retire in California someday.) In fairness, they may be about to legalize pot, which would reduce the footprint of the war on drugs, and thus make society a bit nicer. Ditto for their right to die law, which recently took effect. Indeed it's quite possible that by next year the entire West Coast will have both legal pot and a (limited) right to die law.
JULY 20, 2016
My sons and I have finished our first year of homeschooling. It was a great success by all vital measures. My two students were vocally much happier than they were in regular school. They also learned vastly more, covering over two semesters of advanced math in a single year. Our most impressive achievement: My 13-year-old sons both took the Advanced Placement United States History (APUSH) Exam, normally taken by advanced high school students for college credit. Caplan Family School's average score was 5, the maximum. Ex ante, I only gave this a 10% probability.
How did we spend our year? While I respect my unschooling brethren, neither I, my wife, nor my sons felt any affinity for that approach. What we're after is demanding intellectual training, free of all pap. I'm tempted to call it an "old-school" approach, but I don't know of any school, however old, that embodies it.
Here was our normal weekly schedule in the Fall: Seven and a half hours of Algebra a week, my GMU Labor Economics class Monday, Wednesday, and Friday, four hours of reading and flash cards on U.S. history, four hours of essay writing on U.S. history, and about five hours to work on their own research projects.
Friday was test day, followed by two enrichment classes: "Life Skills" and "Something Different." I often outsourced these special classes to my colleagues or advanced students. In Life Skills, for example, I enlisted socially adept students to teach my sons the social graces. For Something Different, we once got Tyler Cowen to guide us through his art collection. During the commute, we listened through the history of classical music.
How did I teach? I spent hours on curriculum design and textbook selection. Once that was done, my sons scrupulously followed the schedule. There were virtually no lectures. In math, they read the textbook and solved the problems. If puzzled, they overcome it by sequentially (a) asking each other for help, (b) googling, and finally (c) asking me. In history, I carefully critiqued their essays for content and style, and made them rewrite until the essays were very good. My sons also often asked me broader historical questions outside of class - questions like, "What would have happened if the United States stayed out of World War I?" Fun stuff.
While testing is helpful for learning, all in-house tests were low-pressure. I gave no formal grades. If my students performed poorly (or, more often, I designed a poor test), I just assigned more practice wherever they were weak. The goal: To get clear feedback about what we knew and what we didn't, then systematically close the gaps in our knowledge.
For external tests, in contrast, we drilled for a full month, taking roughly fifteen practice APUSH tests, and strove to mimic the official grading system. I also gave my sons formal grades for my undergraduate Public Choice class, trying to minimize subconscious nepotism by putting their exams at the bottom of the stack.
How do I justify all the stuff I didn't teach? A few "Something Different" sessions aside, we covered no natural science. My reasoning: There's little point in studying natural science until you've at least mastered algebra and geometry. We didn't do English literature because (a) we did tons of reading and writing for APUSH, and (b) my sons didn't have a passion for it. I'm not even slightly scared my omissions will hurt them later on; in fact, I think they're far better-prepared for advanced science and literature courses than their peers because they'll have rock-solid foundational knowledge.
Well-wishers often ask me, "How can you get any research done when you're homeschooling?" With my students, it's child's play: I write the curriculum, and they follow it diligently, day after day. Truthfully, I complete more research than ever, because my kids' presence keeps me working longer and more regular hours than I'd do on my own.
The hardest thing about homeschooling is the realization that it will end. My sons are so content at Caplan Family School that the thought of sending them back to regular school saddens me. In coming months, I'll be researching the effects of high school homeschooling on elite college admission, hoping to find a credible way to beat the system. Fingers crossed.
JULY 19, 2016
I've always been a bit skeptical when people point to "uncertainty" as the cause of economic distress. High unemployment? Uncertainty about ObamaCare! More often, the problem is bad monetary policy, and the only "uncertainty" is just how much NGDP instability the central bank will tolerate.
And yet I don't want to be dogmatic, it seems plausible that uncertainty would create at least some distress, as investors held off on new projects. Even if the central bank maintained stable NGDP growth (as it should) there might be a decline in RGDP due to the sort of "re-allocation" that Arnold Kling often discusses.
The recent Brexit shock is by far the biggest uncertainty shock that I've ever seen hit a major economy (apart from monetary/uncertainty shocks, such as 2008). There are many reports that investment projects in the UK are being put on hold. So I'm going to keep an open mind, and revise my views as the data comes in.
In a recent post, I made the following comment (italics), and commenter Tom Brown responded with a question:
Not a definitive test (which would require observations with and without NGDP targeting, to tease out AD vs. AS channels), but certainly a suggestive test. I have an open mind at this point, and am eager to learn.
Here are three plausible outcomes:
1. Very little change in NGDP, and unemployment is fairly stable, rising by less than 100 basis points.
2. Very little change in NGDP, and unemployment rises sharply, as the UK slides into recession.
3. NGDP slows sharply, and unemployment rises sharply.
In cases #1 and #2, monetary policy stays neutral, and we get a test of the aggregate supply effects of reallocation. In that case, I think #1 is more likely. I'll say the unemployment rate rises by 50 basis points within a year, if you want a point estimate to judge me by.
In case #3, we don't really have a clean test. Nonetheless, I think those who disagree with me would be at least somewhat justified in claiming that uncertainty was really important, if only because central banks weren't very good at offsetting it. So case #3 would not be a slam-dunk victory for those who disagree with me, but it would be a qualified win, and a modest loss for me. Case #2 would mean I was even further off base in my estimate of the impact of uncertainty.
PS. Just to reassure readers, I do not forget these tests. A few days ago I revisited a raging debate from a year ago, when the Chinese stock market crashed. Many said China faced a hard landing, whereas I predicted 6% growth. I also revisit other "tests", such as Krugman's famous 2013 test of market monetarism, or his 2014 test of ending extended unemployment benefits, or Tyler Cowen's less famous observation that Denmark would provide a test of whether the Swiss actually had to devalue in early 2015 (we now know they did not.) Or pundit predictions that Bitcoin was a bubble. And many others. So have no fear, I'll revisit this even if I am wrong, which is very possible.
JULY 19, 2016
Bryan Caplan made strong, and to me incredible, claims that econ consensus predicts all ems would be fully slaves with no human personality. As he won't explain his reasoning, but just says to read the slavery literature, I've done a quick lit review, which I now summarize, and then apply quickly to the future in general, and to ems in particular.I think I explained my reasoning repeatedly, but I'm happy to clarify.
For starters, Robin overstates my position. I can't remember the last time I wrote a sentence like "All ems would be fully slaves with no human personality." But I would say, "A large majority of ems are likely to be effectively slaves with little human personality."
Now why do I think this?
1. Most human beings wouldn't see ems as "human," so neither would their legal systems. Robin wants to soften people's attitudes, but he's unlikely to succeed. One of the main reasons his project seem so "weird" outside the sci-fi and futurist communities is that normal humans feel little sympathy for non-humans. There's an obvious evolutionary explanation: Our empathy primarily exists to encourage cooperation between humans. We feel mild empathy for other animals - especially larger mammals - but not much.
2. At the dawn of the Age of Em, humans will initially control (a) which brains they copy, and (b) the circumstances into which these copies emerge. In the absence of moral or legal barriers, pure self-interest will guide creators' choices - and slavery will be an available option.
3. Moral and legal barriers aside, imperfect information about workers' ability is the only self-interested reason not to treat them as slaves, especially when you can pre-select workers for docile personalities.
4. Since brain scans allow for cheap copying, employers would have excellent information about ems' true abilities. Create a few dozen copies, give them life-or-death incentives to excel, and see what they accomplish. Then use that information against all the copies: Perform at your potential or we'll inflict horrible pain on you.
5. There's little reason to think initial human control will devolve into anything else as the Age of Em proceeds. As the em economy expands, the cost of treating ems more nicely gets higher and higher. And since, like farm animals, ems are bred for docility, there's little reason to fear organized rebellion.
I understand how Robin can disagree with this argument. But I don't understand how he could be unable to understand it. I can also understand why Robin would like more details. But I'm not confident enough about the details to want to describe them.
To repeat: If, like me, you think ems wouldn't really be conscious anyway, my scenario is a great outcome. Humans would be fabulously rich and safe. And ems would genuinely experience no more pain than paper in a paper-shredder.
JULY 18, 2016
Jim S. directed me to a Zachary David post criticizing my NGDP futures targeting proposal. He links to my Mercatus paper on the plan, but seems to ignore its contents. Most of the objections that he raised are answered in the Mercatus paper. He may not agree with my arguments, but he should have at least acknowledged them.
For instance, he suggests that there might be little interest in trading NGDP futures contracts, but doesn't tell us why that would be a problem. (It isn't.) He wonders why NGDP futures would be such a good idea, given that the private sector hasn't already created such a market. Perhaps that's because the private sector is not legally allowed to do monetary policy.
Breaking down the mechanics you get:
Notice that he suggests a way in which this market would differ from other markets, and then explains that his reasoning was actually incorrect---futures purchases in other markets do trigger supply responses---and then ends up telling us how he thinks a "well-functioning market" should behave, without providing any justification.
I think such a mechanism not only defeats the purpose of price discovery, but in Sumner's market it might lead to other hilariously manipulative scenarios. Consider: because the Fed is pegging the price of the futures contract and buying/selling infinite quantities, a smart player could load up on assets whose prices would be affected by a large expansion of the monetary base, then sell a tremendous amount of NGDP futures to trigger open market purchases, then sell the aforementioned assets and subsequently repurchase the NGDP futures at the same price for a tidy profit.Note that the purpose of my proposal is not "price discovery" any more than a $35/oz. peg of the dollar to gold is aimed at "price discovery" of gold prices. Taking the gold standard analogy one step further, one could argue that a "smart player" could have loaded up on gold during the 1920s, and simultaneously sold short an asset that would be likely to decline in price under a contractionary monetary policy. And then the manipulator could have sold the gold back to the central bank at the same price. Does this seem too good to be true? That's probably because it is. Everyone else would have the same opportunity, so it's very unclear at whose expense this manipulator will profit.
Under NGDP futures targeting, manipulation would be even more difficult. If you sold the asset back immediately, it would not significantly impact monetary policy. Now consider what would happen if you held the NGDP futures until maturity. If you bought NGDP futures to trigger a contractionary monetary policy, and it succeeded, you would lose money on the NGDP futures (unlike the previous gold example where you break even on gold.) In that case, you need even bigger profits on your side bets. The problem is obvious---other "manipulators" will be taking the opposite strategy. If they respond to you by selling NGDP futures, moving monetary policy closer to the correct level, they will breakeven on the NGDP futures and profit (at your expense) on their side bets in other markets.
In any case, his criticism doesn't even apply to Bill Woolsey's version of the policy, one of the four versions I discussed in the Mercatus paper, and the version I have more recently concluded is the best. Under this plan the Fed simply makes dollars convertible into NGDP futures at a fixed price, without any automatic link between NGDP futures purchases and the base. It's analogous to a gold exchange standard where the central bank is not required to follow any sort of "rules of the game". Perhaps David didn't read that far.
There's also a long discussion of NGDP data revisions. David worries that this might reduce interest in an NGDP futures market, as investors wouldn't have confidence that the initial estimate would hold up over time. This is one reason I like the Woolsey version of the plan, it's easier to head off this sort of criticism (which I would argue are not a problem in any of the 4 versions). Under what Woolsey calls "index futures convertibility", it makes no difference if no one buys or sells NGDP futures, just as under a gold standard it makes no different whether anyone takes the central bank up on the offer to exchange unlimited amounts of dollars for gold at $35/oz.
Think of NGDP futures targeting as highway guardrails---does it matter if cars never brush up against them? No, and it also doesn't matter if there is no trading of NGDP futures contracts.
PS. Note that the policy discussion in this post is entirely different from my proposal that the Fed set up and subsidize trading in NGDP futures for research purposes. In that case the price is not fixed, and it matters very much if there is little or no trading volume.
PPS. This made me smile:
In fact, I set up a futures market for one-year NGDP contracts at Hypermind with just $5000 in subsidy, and there was active trading, albeit a modest volume. Imagine the volume of trading if the prize money had been $50,000. Then imagine $500,000. Then imagine $5 million. Then imagine $50 million. Then imagine $500 million. Then think about the fact that even $500 million is chump change to the Fed.
JULY 17, 2016
Just got back from a month in Europe, where I was a visiting professor at the University of Münster, teaching a short course in Advanced Public Choice. Along the way, we drove to London for the Institute of Economic Affairs THINK conference, and to Heidelberg to address European Students from Liberty. Overall, a month of fantastic intellectual and aesthetic experiences, and I can't thank all my gracious hosts enough.
1. I was based in Münster, near the Dutch border, the historic home of the original Khmer-Rouge-type communist revolution. From 1534-5, Anabaptist fanatics seized power and established a theocratic communist dictatorship, predictably drenched in blood. While 20th-century socialists minimized their crimes, Rothbard's gruesome account seems right to me.
2. German Master's students are even more reluctant to participate than American undergraduates. Eventually, however, I found a topic that drew them out: the political economy of environmentalism. In my lecture on expressive voting, I argued that popular environmental policies are often driven by expressive, not instrumental concerns, as evidenced by pronounced disinterest in trade-offs, cost-benefit analysis, and creative ways to "take the easy way out." There are 663,000 square miles in Alaska, so why not use .1% of that area for an immensely valuable pipeline? My students' favorite answer was the slippery-slope: After the first pipeline mars the virgin wilderness, further desecrations are likely to follow. I pointed out that Münster stably combines natural beauty with ample development, but I don't think that convinced my class.
3. In contrast, my lecture on anarcho-capitalism sparked minimal pushback.
4. While my class largely drew on U.S. data and examples, I routinely asked students if my claims generalized well to Germany. They usually affirmed that they did. Voter motivation in Germany, as in the United States, seems driven by ideology and group identity rather than material self-interest. But for finer-grained details, the U.S. results are more contingent. Religious identity plays little role in modern German politics, the legacy of the Thirty Years War notwithstanding.
5. Brexit passed right before I went to London. I was aggravated but not surprised that many observers hastily claimed I had lost my 2008 EU bet. The original specified "official withdrawal" by January 1, 2020 to guard against this overreach. If the UK disappears from the list of EU members before January 1, 2020, I will happily pay. If it disappears on January 1, 2020 or later, I will declare victory and demand payment (assuming, of course, that no other EU member with 2007 population over 10M withdraws by that date).
6. Betting markets got Brexit very wrong, but they're still the best forecasting institution in the world, and they imply a roughly 50/50 chance of Article 50 being invoked no sooner than 2018. Since Article 50 opens up to two years of negotiations, I'm still somewhat optimistic about winning - though I would not make the same bet again.
7. Socially, of course, what's important is not whether I win my bet, but what happens to the British, European, and global economies. Many analysts treated the initial stock market crash as proof that Brexit is terrible; others treated the rebound as proof that Brexit is fine. I reject both views. I've long regarded financial markets as a poor measure of the goodness of policy. If X happens and stock markets hold steady, this could mean X is harmless. But it could also mean that the burden of X falls on consumers rather than capitalists. Does that ever happen? Probably yes - the standard view of trade agreements, for example, is that they make consumers better off, but leave the average domestic business earning its standard vanilla rate of return.
8. The important question, rather, is how British exit from the EU would change economic policy. Both sides seem overconfident here, but I lean toward those who think overall trade and especially migration openness would fall in Britain, Europe, and the world. Indeed, even if Britain never leaves the EU, its behavior marginally raises the probability the EU moves away from internal freedom of movement.
9. Students at the THINK conference in London leapt at every chance to participate. Why were they so different from my German students? Since Students for Liberty Heidelberg were similarly enthusiastic, I'd guess the gap was 20% cultural, 80% self-selection.
10. Accents in Germany were easier to understand than accents in England, strangely.
11. Due to a strong accent, I think I failed to properly answer one THINK attendee's question. In my open borders talk, I addressed the political externalities of immigration. My claim: While immigrants are indeed more socially conservative and economically liberal than natives, the differences are marginal and immigrants don't vote much anyway. When the attendee asked why my results were so atypical, I claimed they were standard. In hindsight, I should have acknowledged that immigrants are much more likely to vote for left-wing parties. But since this holds even for the richest, most socially conservative immigrants, the best explanation is that right-wing parties treat immigrants with great disrespect. Since parties are potent name brands, even pro-immigration right-wing politicians have trouble winning immigrant support.
12. Germany is much more multi-cultural and multi-racial than I remember it, even in a smaller city like Münster. And horrific headlines notwithstanding, it's wonderful to behold. The people of the world can and should work side-by-side to Finally Make Mankind Great.
13. When I taught my German students Kuran and Sunstein's availability cascades model, I used terrorism as a prime example. Over a thousand people are murdered on Earth on an average day. Every death is a tragedy, but there's no good reason to treat the small minority of terrorist murders as disproportionately important or revealing, except in the trivial sense than countries overreact to terrorism. I know this is an unpopular view, especially after a major attack, but I love numeracy more than popularity.
14. This was my first trip to London. I'd heard it was remarkably multi-cultural, but I didn't expect it to be the most multi-cultural place I'd ever seen. While I personally find big cities claustrophobic and inconvenient, if London doesn't convince you that Western civilization is a hardy weed, nothing will.
15. The fact that Londoners showed little sympathy for Brexit is telling: People who experience true mass immigration first-hand tend to stop seeing it as a problem. "Backlash," as Tyler Cowen calls it, is a symptom of insufficient migration - the zone where immigrants are noticeable but not ubiquitous. I know he disagrees, but I honestly can't figure out why.
16. Averaging over my four days, the UK had the nicest people I've ever encountered. They were more than polite. Strangers literally handed me money for parking. Why did Americans want independence again?
JULY 16, 2016
I've always been a fan of Swiss-style decentralization. The following is from an Economist article on Turkey:
Countries such as India and China have witnessed similar urban explosions, but Turkish cities stand out for also offering an impressive quality of life. The proportion of Turks living in cities has swollen from about half the population 30 years ago to 75% today. Between 2000 and 2015 its major urban areas absorbed 15m new residents. Yet despite their rapid growth, Turkish cities are by and large admirably free of squalor and crime. Middle-class parts of Istanbul, Ankara or Izmir, in Turkey's relatively prosperous west, are indistinguishable from their far wealthier West European counterparts. Yet even the slums in big eastern cities such as Gaziantep and Diyarbakir have proper sanitation, tidy paved streets, parks and well-maintained schools.
Update: I also found this to be rather interesting:
Although IS's laws are grotesque, other Arab states should take note that its emphasis on quick and firm justice appeals not only to Syrians and Iraqis desperate for order amid chaos. It responds to a burning public need to right decades of perceived wrongs. So does IS's intolerance of corruption within its own ranks and its focus, even with limited means, on providing services such as health, education and social welfare. Unlike other Arab states, which tend to be hyper-centralised, IS grants broad powers to local administrators. These officials seek to regulate and tax commerce rather than to control it. Instead of assuming ownership of the oil industry, as nearly all other Arab states do, it sells the crude oil in its territory at the wellhead, subsequently exacting taxes from the people who go on to refine and transport it.
JULY 14, 2016
Many people seem to think that inflation and recession are equal, symmetric dangers. This is implicit in the idea of nominal GDP (NGDP) targeting, which is promoted by economists like Scott Sumner at George Mason University's Mercatus Institute. Since NGDP growth is just the sum of real GDP growth and inflation, Sumner's policy implies that one percentage point of higher inflation is in some sense just as bad as a one-point reduction in growth. But in reality, a loss of one percentage point of GDP probably is many times worse than a 1 percent rise in inflation.This claim confuses several unrelated issues:
1. Most of Smith's post focuses on the costs of higher or lower trend inflation. Once people get used to a 4% trend inflation rate, the cost is probably not much higher than an expected 2% inflation rate. But in the long run there is no trade-off between trend inflation and unemployment, with the possible exception of really low inflation rates, where the twin zero bounds on wage increases and nominal interest rates may create problems. Assuming you pick a high enough inflation/NGDP target to avoid these zero bound issues, there should be no further gains to higher inflation rates.
2. Smith's comments make more sense for inflation volatility. But even there I'd suggest a different interpretation. I do not favor NGDP targeting because I view inflation and recession as equally severe problems, rather I believe (rightly or wrongly) that a stable path for NGDP would be most likely to minimize the harmful impact of recessions (unstable employment and unstable financial markets) while continuing to allow real GDP fluctuations that are not harmful, say due to productivity fluctuations with non-monetary causes.
Now in fairness, NGDP is probably not precisely the optimal target for minimizing the welfare costs of employment instability and financial market instability in the US, but I think it's pretty close. In my previous post I suggested that in some cases, such as Ireland, it's not even very close to being optimal, at least for measured NGDP.
PS. Those familiar with New Keynesian models may recognize that I'm making a claim similar to the "divine coincidence" argument for inflation targeting, but applying the concept to NGDP targeting. The world's too messy for divine coincidences to work perfectly, but I believe that NGDP targeting comes pretty close, at least in the US and other major economies.
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