July 20, 2017Sudan Sanctions and My Neighbor's Cat
July 20, 2017How Conscious Is Your Robot?
July 20, 2017Getting Around Economic Sanctions in Sudan
July 19, 2017De-Identifying Race and Ethnicity Reduces Bias
July 19, 2017Germany is not the problem
July 18, 2017Murder: A Socratic Dialogue
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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 20, 2017
Diplomats here expect Washington to drop sanctions in the fall, as planned during the final days of the Obama administration, not least because they failed to achieve some key goals.
This is from "Sudan Gets Down to Business in the Face of Sanctions and Strife," by Matina Stevis, Wall Street Journal, July 18, 2017.
I posted about it earlier today.
But the quote above is about another aspect that I've written about with respect to other sanctions. Here's what I wrote in "Why Economic Sanctions Don't Work," Hoover Digest, October 30, 1998:
When I was a kid, the boy next door once played a nasty trick on my brother Paul: our neighbor held his cat in his arms, brought it within a few inches of Paul's face, and pulled its tail. The suddenly angry cat bit Paul's face. My brother and I were upset; the cat, we thought, should have bitten the perpetrator's face. I think of that incident whenever I hear people call for economic sanctions against a whole country.
I went on to say:
What do people in embargoed countries do when they find out that foreign governments threaten their survival? They want to do what the cat wouldn't do: bite the hand or face of the perpetrator. In fact, I can think of no case in history where as a result of sanctions imposed by government A on people in country B, country B's people overthrew their own government. It's the stuff of novels, and not very good novels.
JULY 20, 2017
Now that I've studied the article that inspired Robin's recent bet, I'm completely flabbergasted by his reaction. Here's the key figure in the original paper, showing how respondents ranked the mentality of thirteen characters.
The Experience factor explains 88% of the variance; Agency comes in a remote second, with 8% of the variance. And on the Experience factor, the robot is virtually at 0. Apparently most people (correctly, in my view) don't think he's conscious at all.
Yet here's how Robin reads the results. He's in blockquotes; my commentary isn't.
I'm also pretty sure that while the "robot" in the study was rated low on experience, that was because it was rated low on capacities like for pain, pleasure, rage, desire, and personality.He wasn't just rated "low." He was rated near-zero.
Ems, being more articulate and expressive than most humans, could quickly convince most biological humans that they act very much like creatures with such capacities.How badly would the robot's mentality scores have to be to make Robin say the opposite?
You might claim that humans will all insist on rating anything not made of biochemicals as all very low on all such capacities, but that is not what we see in the above survey...Actually, every living character made out of biochemicals scored at the mid-point or higher on Experience. Respondents rated a dead body higher in Experience than a functioning robot. A dead body! The only creature in the robot's league was God himself, who is also generally not supposed to be made out of biochemicals.
P.S. At this point, I would be willing to bet that if the same study were re-done with an "em" character added, the em would score less than .6 on the Experience factor on a 0-1 scale. Note: .5 is roughly the score of a fetus or someone in a permanent vegetative state. Per my original reservations, however, I would not bet more than $500 at even odds. Robin doesn't care for this bet, but so far we haven't been able to work out anything mutually acceptable.
JULY 20, 2017
When I started the Ph.D. economics program at UCLA in September 1972, one of the first things we graduate students heard that we should be doing different in our daily lives was to subscribe to the Wall Street Journal. If I recall correctly, Ben Klein recommended it in a class he taught (that I wasn't taking at the time) and the recommendation filtered back to me.
Gulp. I was from a small town, population under 2,000, in rural Manitoba, and the largest city I had lived in was Winnipeg. The term "Wall Street" was intimidating. Would I be able to understand it? Harry Watson, my roommate who had come down from Canada with me to go to graduate school, and I split the cost of the subscription and found ourselves reading and enjoying it daily. I laughed at my earlier fear that I wouldn't understand it.
My favorite kind of Wall Street Journal article was not on the op/ed page but in the economic news section. It was typically a well-researched story by a careful journalist who managed, without hitting you over the head, to lay out the economics--the incentives, the unintended consequences, the ways of adjusting to various laws and regulations, etc.
I don't see many of those kinds of articles in the news section of the Journal any more. But today I saw one. It's by Matina Stevis and it's titled "Sudan Gets Down to Business in the Face of Sanctions and Strife." Stevis does a great job of laying out how people get around various restrictions on trade that the U.S. government has been instrumental in imposing.
One of the opening paragraphs:
The financial isolation--along with the strategically important country's designation as a terror sponsor and the International Criminal Court's pursuit of longtime President Omar al-Bashir for war crimes--has fostered a special kind of business acumen in executive suites and sand-caked streets: forcing businesses in this former colonial outpost to snare alternative sources of finance, sidestep trade barriers and find creative ways to import consumer goods.
Here's why it's hard to finance trade:
A $8.9 billion fine against French lender BNP Paribas in 2015 after it admitted violating sanctions, sent a chilling message to major financial institutions. Correspondent banks, financial institutions that were intermediaries between Sudan and the rest of the world, pulled out soon after, rendering trade finance virtually impossible, according to the IMF.
This leads to the problem and the incentive to find a way around:
There are no international automated-teller machines and debit-card payments are impossible, but that hasn't deterred would-be entrepreneurs.
What's one workaround?
Ahmed Abdalla, a cybersecurity expert by day at African mobile giant MTN, is working on a mobile-payments platform, SIM Pay, which uses prepaid mobile-phone airtime to allow people to transact across the country.
JULY 19, 2017
But not in the way you might expect.
What we found is that de-identifying applications at the shortlisting stage of recruitment does not appear to assist in promoting diversity in hiring. In fact, in the trial we found that overall, APS [Australian Public Service] officers generally discriminated in favour of female and minority candidates. This suggests that the APS has been successful to some degree in efforts to promote awareness and support for diversity among senior staff. It also means that introducing de-identification of applications in such a context may have the unintended consequence of decreasing the number of female and minority candidates shortlisted for senior APS positions, setting back efforts to promote more diversity at the senior management levels in the public service.
This is from "Going blind to see more clearly: unconscious bias in Australian Public Service shortlisting processes," June, 2017. The study was written by Behavioural Economics Team of the Australian Government (BETA).
HT2 Scott Alexander.
CATEGORIES: Unintended Consequences
JULY 19, 2017
The Economist is probably the best magazine in the world, but a recent cover story on "The German problem" is just appalling:
For a large economy at full employment to run a current-account surplus in excess of 8% of GDP puts unreasonable strain on the global trading system. To offset such surpluses and sustain enough aggregate demand to keep people in work, the rest of the world must borrow and spend with equal abandon. In some countries, notably Italy, Greece and Spain, persistent deficits eventually led to crises. Their subsequent shift towards surplus came at a heavy cost. The enduring savings glut in northern Europe has made the adjustment needlessly painful. In the high-inflation 1970s and 1980s Germany's penchant for high saving was a stabilising force. Now it is a drag on global growth and a target for protectionists such as Mr Trump.There are so many misleading statements here that one hardly knows where to begin:
1. The Economist confuses trade and aggregate demand, which are entirely unrelated issues. People do not need to "borrow and spend with . . . abandon" to insure an adequate level of aggregate demand, rather they need a sensible monetary policy.
2. We know that Italy, Greece, and Spain were not "forced" to run large deficits by Germany, because Italy and Spain have sizable surpluses, and Greece's current account is roughly balanced. That would not be possible if the German surplus forced these three countries to run deficits. It's true that these countries currently have a shortfall of AD and high unemployment, but that's due to a combination of the ECB's tight money policy and very rigid labor market regulations, not Germany's trade policy.
3. It's true that at a global level a German CA surplus must be offset by an equal deficit elsewhere. But the German economy is only a very small percentage of the global economy, so a Germany CA surplus of 8% of GDP implies a "rest of world" deficit of far less than 1% of GDP.
4. As a practical matter, one can see the German surplus as being offset by the even larger US CA deficit. But obviously this US deficit does not create an AD problem in the US, as the Fed is currently involved in raising interest rates to prevent AD from rising too rapidly! The rest of the world (not the US and not Germany) is currently running a large CA surplus. So Germany certainly does not force the rest of world (excluding the US) to run a deficit.
5. Some argue that current account deficits are problems even if they don't depress AD. Perhaps the US current account deficit has led to de-industrialization. If so, that must have happened before 1987, as the US deficit has not increased at all over the past three decades, so it can't have contributed to recent de-industrialization. It's a bit over 2% of GDP, even less than in 1987.
7. The Economist makes the common error of confusing CA deficits with net borrowing. The German CA surplus in no way "forces" other countries to borrow more. It's up to each individual, business and government to decide how much they want to borrow. Even in a world with zero debt, there would be large and persistent CA imbalances as assets are bought and sold across borders. The Economist is simply wrong, CA balances and net borrowing are completely separate issues.
Their entire cover story seems based on the worst elements of Keynes's General Theory, where he speculates that the mercantilists might have a point. These ideas were wrong in the 1930s, and they are still wrong. Unfortunately this sort of article gives aid and comfort to protectionists like Donald Trump, Steve Bannon and Peter Navarro, and that's the last thing the world needs right now.
Germany is not the problem; it's the solution. More countries should emulate Germany's labor market reforms and its high savings rate. If we all did so, the world would be much better off.
PS. Tomorrow I say goodbye to Boston and leave for Southern California by car. While I'm getting my kicks on Rte. 66, blogging will be spotty.
JULY 18, 2017
Glaucon: Have you heard the news, Socrates? A scimitar-wielding Persian maniac just cut down three Corinthians in cold blood.
Socrates: A ghastly crime. But why are you telling me?
Glaucon: Because it just happened!
Socrates: So I gathered.
Glaucon: In Corinth! That's only fifty miles away.
Socrates: Should we get inside and bar the door?
Glaucon: [squinting] No. The Persian was killed moments after the attack.
Socrates: Then I repeat: Why are you telling me?
Glaucon: [upset] Because I assumed you would care about the victims!
Socrates: Well, I care a little bit. But I didn't personally know them.
Glaucon: [outraged] You're barely human, Socrates. Everyone else is outraged by this Persian crime. You should be too!
Socrates: Perhaps you're right. But one thing puzzles me.
Glaucon: [calming down] Namely?
Socrates: My friend Pythagoras has calculated the number of innocent people murdered on an average day. Do you know how many that is?
Socrates: Fifty. And the minimum number of recorded daily victims is five.
Glaucon: What a hellish world we live in!
Socrates: Perhaps. Now that you know this, I have to ask: Do you plan to be outraged every day for the rest of your life?
Glaucon: [taken aback] Well, those numbers are pretty bad, but...
Socrates: But what?
Glaucon: Well, life is for the living. I'm not going to be angry and miserable every day just because vile crimes are happening somewhere on Earth. It's a big place, you know.
Socrates: Very wise. But then why did you say I was "barely human" for having the same reaction when you told me about the tragedy in Corinth?
Glaucon: [renewed outrage] That's completely different.
Socrates: Really? Please help me understand how.
Glaucon: Well, we're talking about innocent... [fumbling] What I mean is, it just hap... [dumb-founded]
Socrates: You were going to remind me that the crime is fresh, and the victims were innocent. But you stopped short, because you realized that this is true every day.
Glaucon: [irritated] Yes.
Socrates: Did you think I should be upset simply because our community is temporarily fixated on this specific crime?
Glaucon: No, that would be pretty stupid.
Socrates: And shallow and disingenuous. So I ask you again: Why am I supposed to be distraught about the tragedy in Corinth?
Glaucon: [long pause] Because they victims were fellow Greeks!
Socrates: According to Pythagoras, three Greeks are murdered on an average day. The tragedy of Corinth therefore brings us to our daily average. Do you plan to be angry and miserable every day the number of Greeks murdered equals or exceeds the long-run average?
Glaucon: You're missing the point. The Corinthians were murdered by a treacherous Persian!
Socrates: Ah, I overlooked that critical distinction. So what should outrage us is not murder in general, or murder of Greeks by fellow Greeks, but only murder of Greeks by Persians?
Glaucon: [touchy] Do you think it's funny when a Persian maniac butchers a child with his scimitar?
Socrates: Not in the slightest. But how is that worse than when a Greek maniac murders a child?
Glaucon: Well, maybe it's not worse. But we can do something about the Persian maniacs.
Socrates: We can "do something" about murderers of any nationality, can we not?
Glaucon: [exasperated] Sure. But we can do a lot more about the Persians.
Socrates: Are would-be Persian murderers more easily deterred by punishment?
Glaucon: Probably less, actually.
Socrates: Then what do you mean when you say we can "do a lot more about them"?
Glaucon: Well, if there weren't any Persians here, they wouldn't be able to murder any of us.
Socrates: True enough. So to end Persian murder, we should murder every Persian in Greece?
Glaucon: That's barbarous! No, we should just keep Persians out of Greece.
Socrates: We should exile a vast group for the crimes of a few?
Glaucon: I don't know why you call it "exile." The Persians can stay in Persia.
Socrates: What about Spartans? They're only 10% of the population of Greece, but they commit half the murders.
Socrates: If the Persians should stay in Persia, should the Spartans stay in Sparta?
Glaucon: What a horrible thing to say! Spartans are fellow Greeks!
Socrates: So we shouldn't exile all Spartans for the crimes of a few Spartans?
Glaucon: Absolutely not.
Socrates: But are not the Persians fellow human beings?
Glaucon: I suppose.
Socrates: Why then isn't it just as horrible to advocate collective punishment against Persians as against Spartans?
Glaucon: What part of "Spartans are fellow Greeks" don't you understand?
Socrates: These Spartans seem rather troublesome. Could we just declare they're not Greek anymore, then exile them?
Glaucon: That would be a monstrous injustice.
Socrates: Indeed it would be. But the reason is not that they're fellow Greeks. Who counts as "Greek" is a matter of convention, not justice.
Glaucon: Then why would it be a monstrous injustice?
Socrates: Because Spartans, like Persians, are fellow human beings deserving of just treatment. And that, my dear Glaucon, is no convention.
JULY 18, 2017
I was on an email discussion this morning with some free-market economists and some economically literate fans of free markets. One of them surprised me with this statement:
I always tell my students the Henry Ford $5 a day story in 1914, a great example of management looking out for labor and a "win win" formula for success. It stopped Marxism's two big arguments: that capitalists exploit workers and that capitalism alienates workers, forcing them to produce products they can't afford themselves. But when Ford overnight raised workers pay to $5 a day, it was the first big example of sharing the profits -- and Ford workers could buy Model T's for the first time, thus destroying the Marxist argument of alienation.
There's nothing necessarily incorrect in his actual statement above. But there is something misleading. It may well be the case that Ford workers could buy Model Ts for the first time because of the increased wages, but he makes it sound as if that was Henry Ford's motive. That's unlikely to have been Ford's motive because the number of Ford workers was probably well under 1% of the number of potential buyers. Would it really make sense to pay more than necessary to get workers so that your number of potential buyers can increase slightly, especially when the downside is that with the higher wages come higher costs and your larger potential market is likely to shrink?
I think it was a fortunate accident that Ford's workers were able to buy Fords. The reason I've read for Ford's success is that Ford was plagued with high turnover and high absenteeism and paying above market reduced turnover and absenteeism substantially. One can imagine this being particularly important in a relatively new industry and certainly an industry with a relatively new production method--the assembly line--because there was probably a bigger gain than normal from keeping people on the job who gradually got very good at it.
If you still think the "pay them more so they can buy the product" argument makes sense, then consider what Henry Hazlitt wrote on this issue in his 1946 classic, Economics in One Lesson:
Some sponsors of the theory seem to imply that the workers in each industry should receive enough to buy back the particular product they make. But they surely cannot mean that the makers of cheap dresses should get enough to buy back cheap dresses and the makers of mink coats enough to buy back mink coats; or that the men in the Ford plant should receive enough to buy Fords and the men in the Cadillac plant enough to buy Cadillacs.
So a question for the person I quoted above, based on Hazlitt's quote, is this: Were Cadillac workers more alienated than Ford workers?
A few years ago, I used Hazlitt as a supplement to my main text and we covered this chapter. Remember that my students are largely military officers and disproportionately Naval officers. One U.S. Navy student had a great example to make Hazlitt's point. He pointed out it's not a good idea to pay workers making aircraft carriers high enough wages that each of them could buy an aircraft carrier.
Here's an earlier discussion of the issue.
JULY 17, 2017
One of the things that I think affects people's view about the Trump administration vis a vis Russia is their view of Russia. In a recent article, my friend Steve Chapman, columnist at the Chicago Tribune, writes:
If this was not collusion between the Trump campaign and the Russian government, it was a conscious attempt at collusion with a hostile government on the part of the candidate's son. No wonder Donald Jr. lied about it until his emails were exposed.
So Steve sees the Russian government as hostile. Hostile to whom? He doesn't say, but it seems from context that he means that it's hostile to Americans. Interestingly, he didn't provide even a lick of evidence for that claim.
Usually the term is used to refer to a government that is at war with, or has threatened war with, the United States. The Russian government has done no such thing and, in fact, President Trump and Vladimir Putin have discussed working together to settle things in Syria. That's not what we would normally think of governments doing when they're hostile to each other. (I don't defend their actions. I would have Trump--and Putin--stay the heck out of the Middle East altogether.)
What about spying? Certainly, the Russian government has many spies here. Does one government spying on another mean the spying government is hostile? If so, then one would have to refer to Israel's government as one that is hostile to the United States. I think that misuses language.
Of course the Russian government is hostile to its own citizens in many ways, and the U.S. government is hostile to its own citizens in many ways. Have you been in a TSA line lately? No, this is not "equivalence." It's a simple statement of fact. Would I rather face the U.S. government's hostility to me as a U.S. citizen than the Russian government's hostility to me if I were a Russian citizen? Of course. Which has nothing to do with my point.
Two people I admired greatly, George Orwell and Thomas Szasz, emphasized that words matter. We should use our words carefully. Calling Russia hostile without providing strong evidence does not advance any rational discussion.
CATEGORIES: Foreign Policy
JULY 17, 2017
A couple of years ago I linked to a good post by Mike Rappaport on Games of Thrones and styles of leadership. Now I've run into this article by Robert Coville at CapX. It is very good indeed and gives a non-cynical interpretation of Martin's stories.
For Coville, the gist of the series resides in a couple of dialogues between Tyrion and Varys, one and the other the most politically savvy - but, at times, the most Machiavellian - of Martin's characters. He argues that
Martin's real preference, I would argue, is revealed in another on-the-nose conversation between Varys and Tyrion (taken from the TV series, admittedly, rather than the books).
Both Tyrion and Varys are political realists, who have been close enough to sovereign and powerful men to see how human and, indeed, selfish they are. But they both join the cause of young Daeneris Targaryen not only because she has, er, dragons, nor because her dynasty has a claim to legitimacy much stronger than others, but because they see her as a champion of good government, understood as moderate government, moderate in the sense of self-limiting when it comes to what the powerful can actually do to anybody else.
If the series evolves like Coville argues, it could turn out to be about capable political operators turning to the service of leaders they consider the best not for their career, but for the land and the people.
This may sound naive, but anybody who either read or watched Game of Thrones knows that Martin is not naive indeed. He doesn't spare any of the cruelty and pettiness of politics. I think somehow this apparent inconsistency is familiar to many of us who follow political matters closely. We know that self-interest and political incentives are the almost infallible umpires of the great trends in politics. But any of us can also name quite a few people who, though being fully aware of the problems and shortcomings of playing politics, are nonetheless trying to go against the grain and to what they sincerely believe it is the good thing. Martin, an arch-realist, suggests that the very same people who played safe and cynical can, under different circumstances, become forward-looking and generous. Let's put it in different terms: perhaps the more you see how arbitrary and capricious government can be, the more you long for limited government. I don't know if, whenever Game of Thrones ends, this will emerge as one of its messages. But it will be interesting if it does.
JULY 17, 2017
After discussing a ten-year-old paper on empirical philosophy of mind, Robin proposes a remarkable bet:
I'm also pretty sure that while the "robot" in the study was rated low on experience, that was because it was rated low on capacities like for pain, pleasure, rage, desire, and personality. Ems, being more articulate and expressive than most humans, could quickly convince most biological humans that they act very much like creatures with such capacities. You might claim that humans will all insist on rating anything not made of biochemicals as all very low on all such capacities, but that is not what we see in the above survey, nor what we see in how people react to fictional robot characters, such as from Westworld or Battlestar Galactica. When such characters act very much like creatures with these key capacities, they are seen as creatures that we should avoid hurting. I offer to bet $10,000 at even odds that this is what we will see in an extended survey like the one above that includes such characters. (emphasis mine)Since Robin repeatedly mentioned my criticism of his work in this post, I sense this bet is aimed at me. While I commend him on his willingness to bet such a large sum, I decline. Why?
1. First and foremost, I don't put much stock in any one academic paper, especially on a weird topic. Indeed, if the topic is weird enough, I expect the self-selection of the researchers will be severe, so I'd put little stock in the totality of their results.
2. Robin's interpretation of the paper he discusses is unconvincing to me, so I don't see much connection between the bet he proposes and his views on how humans would treat ems. How so? Unfortunately, we have so little common ground here I'd have to go through the post line-by-line just to get started.
3. Even if you could get people to say that "Ems are as human as you or me" on a survey, that's probably a "far" answer that wouldn't predict much about concrete behavior. Most people who verbally endorse vegetarianism don't actually practice it. The same would hold for ems to an even stronger degree.
What would I bet on? I bet that no country on Earth with a current population over 10M grants will grant any AI the right to unilaterally quit its job. I also bet that the United States will not extend the 13th Amendment to AIs. (I'd make similar bets for other countries with analogous legal rules). Over what time frame? In principle, I'd be happy betting over a century, but as a practical matter, there's no convenient way to implement that. So I suggest a bet where Robin pays me now, and I owe him if any of this comes to pass while we're both still alive. I'm happy to raise the odds to compensate for the relatively short time frame.
JULY 16, 2017
In January 2008, the US economy had fallen into recession and Ben Bernanke was already supportive of fiscal stimulus:
Ben S. Bernanke, chairman of the Federal Reserve, has told lawmakers that he can support tax cuts or spending measures to stimulate the economy, even if they increase the budget deficit, provided the measures are quick and temporary.
Question: If Fed officials think the economy needs fiscal stimulus, why not instead adopt a more expansionary monetary policy?
By August 2008, the unemployment rate had soared to 6.1%, up 1.7% from the 4.4% low of the previous expansion. Since record keeping began in the 1940s, the unemployment rate has never risen by more than 0.8% without a recession. Not once. And it was already up 1.7 percentage points, a clear indication of recession. Indeed by August the recession was already almost as bad as the 1980 recession where unemployment rose by a total of 2.1%.
The Fed knew all this when they met on September 16th, and they also knew that Lehman had failed, that AIG was failing, that Fannie and Freddie were in such dire straights that they had to be taken over by the Federal government. So how did the Fed respond to this crisis? Before I tell you let me point out that if you ask 200 economists, 90% will tell you that they were "doing all they could". In fact, the Fed did nothing at all. They sat around the table cracking jokes and warning of inflation if policy got too expansionary. They did not cut interest rates (from 2.0%). Then in early October they adopted interest on reserves in order to raise interest rates---with the intention of tightening monetary policy. Marcus Nunes provides some excerpts from the infamous September meeting in the comment section of my previous post:
By late October the entire global economy was in free fall. The US stock market had crashed and commodity prices were plunging. Indeed almost all asset classes were plunging, except the US dollar, which was appreciating strongly on the Fed's tight money policy.
On October 20, Ben Bernanke was asked if the US economy was in recession:
Pressed to say whether he thought the economy was in a recession, Bernanke refused to say. "We are in a serious slowdown in the economy, which has very significant consequences for the public, and whether it's called a recession or not is of no consequence."But that caution did not stop him from again calling for fiscal stimulus:
WASHINGTON (MarketWatch) -- Another shot of fiscal stimulus may be needed now to help the U.S. economy recover from what could be a drawn-out slowdown, Federal Reserve Chairman Ben Bernanke said Monday.
I guess "monetary policy can't fix the economy by itself" if the Fed isn't even trying.
To summarize, in both January and September the economy was doing so poorly that fiscal stimulus was called for. But when the Fed considered whether it should do anything at the pivotal September meeting, all we got were some lame jokes.
And even when the Fed finally got around to cutting rates, the cuts were far too timid. At no time during the Great Recession was the Fed doing it all it could.
PS. The October 20 piece also has an unfortunate example of Bernanke "reasoning from a price change":
He said that household-purchasing power should be boosted by the recent declines in prices of oil and other commodities, calling the trend a "bright spot."Commodity prices were plunging precisely because the global economy was in free fall. Hardly a bright spot.
PS. Don't read this post as being about Bernanke, almost the entire economics profession (including the FOMC) was basically on board with what the Fed was doing, or not doing.
JULY 14, 2017
Nancy MacLean's book Democracy in Chains (Viking 2017, henceforth "DIC") informs a surprised academic public to whom such a thought never would have occurred without her creativity that the late James M. Buchanan has throughout his academic career been the intellectual master-mind of a stealth plan to subvert American democracy. The Nobel committee and all friends of Buchanan must be grateful that Ms. MacLean could overcome the restraints of ordinary decency to make her way into the private study of James M. Buchanan shortly after his death. To her knowing eye "the papers revealed ... that Buchanan had realized the value of stealth long ago, while still trying to influence Virginia politicians" (DIC, XX) and induced billionaire Charles Koch to do likewise with the "movement" he funded.
Professor MacLean goes on (same page): "The irony haunted me as I systematically worked my way through the piles of papers in Buchanan's personal office and then moved on to the cabinets filled with documents that revealed virtually every step in the evolution of his ideas and associations. I was able to do so because Koch's team had since moved on to a vast new command-and-control facility at George Mason called the Mercatus Center, leaving Buchanan house largely untended. Future-oriented, Koch's men ... gave no thought to the fate of the historical trail they left unguarded. And thus, a movement that prided itself, even congratulated itself, on its ability to carry out a revolution below the radar of prying eyes (especially those of reporters) had failed to lock one crucial door: the front door to a house that let an academic archive rat like me, operating on a vague hunch, into the mind of the man who started it all." (CIC, XX-XXI)
Nancy MacLean herself notes the complete lack of professional archive work on Buchanan's personal letters and files. But why then did she not register the fact that she was not dealing with "documented documents," which necessarily must undermine the credibility of her own work unless she can provide some reliable documentation? In keeping with her own style we must wonder whether she pinched documents and made unauthorized photo copies. Perhaps she could share them with the rest of us. If so, her house of cards would collapse immediately.
JULY 14, 2017
A deep, historical study of public choice would be welcome, and Buchanan's role in the development of the thought and organizational infrastructure of the right has generally been overlooked. Unfortunately, the book [by Nancy MacLean] is an example of precisely the kind of work on the right that we do not need, and the intellectuals of the left who have praised it are doing their side no favors.This is from Henry Farrell and Steven Teles, "Even the intellectual left is drawn to conspiracy theories about the right. Resist them." Vox, July 14, 2017.
Farrell is definitely a man of the left and this whole article is refreshing and well worth reading.
MacLean is undoubtedly correct that the ideas of Buchanan, an economist who taught at George Mason University, and his acolytes are important. Their writings reshaped the way we think about regulation, governments, and markets. For example, public choice economists have argued that many US Department of Agriculture rules for food are intended not to protect consumers, but to protect influential businesses from smaller competitors that have difficulty in complying with these standards. Public choice suggests that regulatory agencies are often "captured" by narrow interests, and that the best solution is often to minimize government bureaucrats' ability to regulate.
By the way, at a forum at the San Francisco Fed in March 1981, two of the main speakers were Robert Hall and the late James Tobin. The discussion was of Reagan's first budget, which had just been released. Tobin, also a man of the left, had criticized many of Reagan's proposed cuts and said that Reagan should have proposed other cuts instead. In Q&A, I asked him what he wanted to cut. The main one he highlighted was farm subsidies.
One final excerpt:
Those on the left might be inclined to think that the libertarian and conservative critics of the book are lashing out, or overemphasizing a few errors, because MacLean has revealed the dark side of one of their heroes and the unsavory modern history of their movement. Or alternatively, as MacLean has publicly claimed is the case, one might see this criticism as a counter-campaign by "Koch operatives" aimed at discrediting her. Yet while we do not share Buchanan's ideology -- and we would love to read a trenchant critical account of the origins of public choice -- we think the broad thrust of the criticism is right. MacLean is not only wrong in detail but mistaken in the fundamentals of her account.
FYI, here is an earlier blog post in which Farrell and I had a reasonably civil disagreement.
CATEGORIES: Public Choice Theory
JULY 14, 2017
David Levey directed me to a post by Douglas Campbell describing the climate of opinion within the Fed during the Great Recession:
Even as the economy was tanking in 2008 and 2009, Bell writes that "Warsh adopted a skeptical and increasingly oppositional posture. He doubted the Fed could do much good without creating much bigger problems."
Imagine you are Ben Bernanke, trying to prevent another Great Depression. In 2009, Obama picks Tarullo to fill one of the empty seats at the board. You expect an ally, and instead you get someone who supports the ultra-reactionary polices of Trichet, who tightened policy in 2011 (not 2010), driving the eurozone into a double-dip recession.
Even Fed chairs must, to some extent, go with the flow. The following is very revealing, as it tells us that the prevailing view back then was hawkish:
In 2011, I also had a conversation with Ben Bernanke. I saw as soon as I began talking to him that he figured I would criticize him for QE, or inciting hyperinflation with all this money printing. He was actually surprised when I asked him why he wasn't doing more, given that core inflation at the time was running around 1.4%.One person can only do so much, particularly when the prevailing opinion is going in the opposite direction.
Over the past 8 years I've been arguing that the economics profession as a whole caused the Great Recession. We let down the public, forgetting everything we have been teaching our students for decades---don't let NGDP crash, and if it does do everything humanly possible to get it restored ASAP. It wasn't just Tarullo, we as a profession failed the public.
JULY 13, 2017
The consensus in Iqaluit seems to be that everyone with a credit card has an Amazon Prime membership. That's because people can often find groceries cheaper online than in local stores, despite government food subsidy programs.
This is from Sara Frizzell, "Amazon Prime does more for northern food security than federal subsidies, say Iqaluit residents," CBC News, July 10, 2017.
This reminds me of a line that George Stigler used in a famous article titled "The Intellectual and the Marketplace":
Sears, Roebuck and Company and Montgomery Ward made a good deal of money in the process of improving our rural marketing structure, but I am convinced that they did more for the poor farmers of America than the sum total of the federal agricultural support programs of the last five decades.
I used this quote in my bio of Stigler.
See here for a slightly different version of the quote.
Stigler was such a master of the pithy one or two liner that I included a special section, titled "Straight Talk from Stigler," in his biography in The Concise Encyclopedia of Economics. And I had trouble narrowing it down to 5 such quotes.
JULY 13, 2017
I highly recommended Carlton Hayes' A Generation of Materialism, 1871-1900. It chronicles a great tragedy. During this period, the economic, technological, and scientific fruits of the Enlightenment reached historic highs. But intellectual appreciation of the Enlightenment rapidly drowned beneath the twin waves of nationalism and socialism - paving the way for World War I, Communism, Nazism, World War II, and the Cold War. This would have been pathetic enough if wise intellectuals were overpowered by the benighted masses. But with few exceptions, contemporary intellectuals led the attack on the Enlightenment - or, more precisely, pretended it never happened. Though Hayes is basically a Wilsonian progressive, his story has an intensely Randian feel.
A Generation of Materialism is sweeping in scope, but the chapter on imperialism was one of my favorites. Here's one eye-opening passage on the history of imperialism:
[T]he immediately preceding era of Liberal ascendancy, say from the 1840's into the 1870's, had witnessed a marked decline of European imperialism. There had been, to be sure, some spasmodic additions to British India, some scattered efforts of Napoleon III to resuscitate a colonial empire for France, some continuing Russian expansion in central and northeastern Asia. Although China and Japan had been forcefully opened to European (and American) trade, the opening had been for practically everybody on free and equal terms and had been unattended by any considerable expropriation of territory. The surviving farflung British Empire had ceased to be an exclusive preserve for British merchants since the 1840's, and in 1861 France had freely admitted to her colonies the commerce of all nations. In 1870-1871 European colonialism appeared to be approaching its nadir. Gladstone was prime minister of Great Britain, and he was notoriously a "Little Englander." The provisional French government so slightly esteemed the colonies it had inherited that it offered them all to Bismarck at the end of the Franco-Prussian War if only he would spare Alsace-Lorraine.How different the 20th century might have been if Bismarck had accepted that offer!
I first read Hayes in high school, learning European history from his delightful Political and Social History of Modern Europe. In hindsight, he's a precocious proponent of behavioral political economy. Behold:
The actual course of empire - the order in which distant areas were appropriated by European powers - was determined less by design than by chance. Murder of a missionary or trader and consequent forceful intervention might occur anywhere. In some instances, curiously frequent in Moslem countries, native rulers practically invited intervention by living far beyond their means and contracting debts which they were unable to repay... For example, the Khedive Ismail of Egypt, a squat red-bearded gentleman with a passion for ostentation and the externals of European culture, spent half a billion dollars in the twelve years after his accession in 1863, running up the Egyptian public debt from 16 million to 342 million and continuing to borrow money from European bankers at ever more onerous rates... In 1876 he sold his shares of the Suez Canal Company stock to England, and consented to joint supervision of his finances by representatives of England, France, Italy, and Austria... No doubt bankers and investors egged on both the khedive to spend and the English government to collect, but a less prodigal khedive, and one more intelligently concerned with the welfare of his subjects, might have staved off foreign rule. The contemporary Mikado of Japan did.If you want to know what an erudite, opinionated historian thought in 1941 about the period from 1871-1900, this is the book for you!
CATEGORIES: Behavioral Economics and Rationality , Books: Reviews and Suggested Readings , Economic History , Political Economy
JULY 13, 2017
I was saddened to hear that Liu Xiaobo passed away today. He fought for classical liberal principles in China, and was imprisoned for his efforts. In 2010 he was awarded the Nobel Peace prize. Here are a few of the economic policy ideas in "Charter 08" (most of the document focuses on human rights and the rule of law):
8. Rural-Urban Equality. The two-tier household registry system must be abolished. This system favors urban residents and harms rural residents. We should establish instead a system that gives every citizen the same constitutional rights and the same freedom to choose where to live.
JULY 12, 2017
The most interesting (to me) discussion was on black markets, and the most interesting input was by Milton Friedman.
Friedman: On the one hand, on the moral side, the black market is reprehensible. It involves disrespect for the law, disobedience, illegality, and so on. But, from the coldly economic point of view, my own feeling is that the black market has been a very good thing for France. It has prevented disorganization. It has helped to keep the inflation from leading to a complete stoppage of production all over the place.
Cobban: I suppose that I am naturally law-abiding, but it seems to me that are you giving with one hand what you are taking away with the other. I do not like this implied economic approval of the black market and I must say that it seems to me like curing a disease by a stimulant which consists of small doses of a strong poison.
Friedman: It is not approving the black market; it is saying that it may be the lesser of bad things. The government attempt to regulate prices and to ration by direct controls would have led, if it could have been enforced in France, to a very much lower pace of recovery than had been possible through the stimulus in considerable measure because of the black market. Do not forget that some of the biggest operators on the black market in France are the nationalized government industries.
This episode reminds me of two stories Milton told at George Stigler's memorial service at Hoover in 1992, both of which involved price controls and rationing after World War II. One was about France; the other about Britain.
Milton told it a little differently in his Mont Pelerin tribute to George. I'll quote from that and then add the part I remember from the Hoover version.
Here's the Mont Pelerin version:
We went over [to Europe for the first Mont Pelerin Society meeting in Switzerland, before the Society had been named] on Cunard's Queen Elizabeth (the first, of course, not the elegant QEII), refitted from its wartime service. (That was long before trans-Atlantic travel by air had become commonplace though George did return by plane.) We disembarked at Southampton and proceeded to London where we stayed for several days. Britain was still in a sad way two years after the war. Food was rationed and poor (when George gave some paid lectures at the London School of Economics a year later, he commented in a letter, "So here I am losing weight and gaining pounds"). Price, wage, and exchange controls were extensive and rigid, and appeared to be widely accepted and respected. There doubtless were black markets but they were small and well hidden.
The Hoover piece I remember was about France. Stigler had come across France and a fellow economist asked him "How did you deal with rationing?" Stigler responded, "There was rationing?"
Note: The picture above is of Milton and George circa 1972. It was on the 1972 Economics brochure I got in the mail in February 1972 when I was accepted into the U. of C. Ph.D. program.
UPDATE: Hoover archivist Paige Davenport has directed me to Milton's Mont Pelerin speech, referenced above, here.
CATEGORIES: Price Controls
JULY 12, 2017
My home state of Virginia does not have a Romeo and Juliet law. If an 18-year-old and a 17-year-old have consensual sex, the 18-year old is guilty of statutory rape. As a result, I can easily see parents of teenage boys in Virginia feeling great apprehension. Could their sons do hard time - and endure a lifetime stigma as a sex offender - for engaging in utterly normal adolescent behavior?
Legally, the answer seems to be yes. But what's scary about bad laws is not that they exist, but how they're enforced. There's no point losing sleep over dead letters. So how often does Virginia actually punish youths for statutory rape? This official 2014 report report on crime in Virginia is most illuminating. Key facts:
1. For all of 2014, the total number of minors arrested for statutory rape in Virginia was: 6. Two were 16 years old; the rest were 17 years old.
2. For all of 2014, the total number of non-minors arrested for statutory rape in Virginia was: 104. Of these, 11 were 18 years old, 16 were 19 years old, and 26 were 20 years old. Arrests then sharply fall off.
3. 108 out of the 110 people arrested for statutory rape were male.
Is this number high or low? Well, Virginia has roughly 150,000 males aged 15-20. If you think that just 1% of them committed statutory rape under Virginia law, that's only a 4% probability of even being arrested. I couldn't find any statistics on prosecutions or convictions, but I'd be surprised if more than a quarter of arrests led to conviction. And if you think the prevalence of statutory rape is higher - say a violation rate of 5% for males aged 15-20 - that means a conviction risk of 0.2%.
Should Virginia have a Romeo and Juliet law? Sure. Are young men unjustly arrested and jailed? A few. But is the nightmare scenario a good reason to keep parents of young men awake at night? Not really. As the literature on availability bias teaches us, the human mind seriously overestimates the frequency of vivid events. While parents of teens face many challenges, they should never forget their most powerful ally in the fight against paranoia: numeracy.
JULY 12, 2017
Politico claims that Gary Cohn is likely to be appointed chair of the Federal Reserve. I have very mixed feelings about this choice. Let's start with the choice itself, separate from the administration that is expected to nominate him.
I feel the same way about appointing Cohn to be Fed chair as I would to his appointment to be Chief Justice of the Supreme Court. He seems like an extremely competent person, and a quick learner. He probably would not embarrass himself in either role. But he's neither a legal export nor an expert on monetary policy. And those positions are best filled by people with expertise in the extremely complex areas they oversee.
In the last 8 years I've interacted with a very large number of people, in all sorts of venues, who think they understand monetary policy, in all sorts of venues. Thinking you understand monetary policy and actually understanding it are two very different things. I see this kind of pick as part of the broader move toward anti-intellectualism, which is especially pronounced in the GOP.
Nonetheless, I would not have any major problems with the Cohn pick in the abstract. What makes me worry about this pick is that Gary Cohn cannot be viewed in isolation. He is the most important policymaker in the Trump administration, and to say that this administration lacks sensitivity to the importance of the separation of powers among various breaches of government would be an understatement. Other presidents have done similar things, but in recent decades we've been moving away from a highly politicized Fed. This would be a huge step backwards. Let's hope this proposal is received the same way FDR's "court packing" scheme was greeted. Let's hope that principled conservatives say this is a bridge too far.
The last thing we need right now is a Fed trying to "juice" the economy to get Trump re-elected.
PS. I recall a number of commenters that predicted Trump would pick a hawkish Republican economist. I was skeptical. Now it looks like he'll pick a dovish Democratic non-economist.
PPS. Remember this guy? (And yes, the 1970 slump was necessary. It was caused by the previous overly expansionary policy.)
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