Bryan Caplan, David Henderson, Alberto Mingardi, and Scott Sumner, with guest blogger Emily Skarbek, blog on issues and insights in economics.
JANUARY 4, 2017
In a recent post over at TheMoneyIllusion, I criticized the attitude of liberals and conservatives toward the poor. Conservatives often seem to blame the victim, whereas liberals tend to romanticize victims, absolving them of any role in their plight. I find this sort of "mood affiliation" to be unhelpful, and instead prefer to take an unemotional utilitarian perspective. Regardless of who is to "blame", what is the best way to improve the situation?
In my moneyillusion post, I criticized some conservatives for having a double standard, romanticizing the plight of the white working class in a way that was similar to how liberals would romanticize the plight of minorities:
This new conservatism romanticizes the white working class. These conservatives used to mock bleeding heart liberals who claimed that minorities were "the victims of an unjust society". They pointed out that poor people often made poor life choices. The new conservatives now claim that the white working class is not composed of people who made poor life choices--i.e., not studying hard in school or choosing to use opioids--but rather they are the "victims of neoliberal economic policies". (Somehow they overlook the fact that the working class in countries that did not embrace neoliberal policies is doing even worse--logic is not their strong point.) The new bleeding heart conservatives engage in the same sort of romanticization of victims for which they used to mock the progressives.
One commenter misunderstood me, and thought I was calling for "blaming the victims":
Scott, semi-serious tangent: you mentioned that you never got picked for basketball, have no talent for even catching the ball, and that it's "unfair" you were born that way. (I know it's a joke, I'm not that much of a killjoy).
In an earlier post, you criticized the white underclass for making bad decisions like not studying and abusing drugs. But isn't it possible that they're just like you: born into circumstances where they lack the required capacity (e.g. facility to manipulate verbal & numerical info) to be anything but ZMP-workers?
Actually I did not criticize the white underclass, although I can see how people might have read it that way. After all, the victims and villains approach to social issues is so deeply embedded in our society that it's difficult to even imagine a third approach---such as utilitarianism. So it was natural to assume I accepted the "devil's advocate" statements about the underclass provided in my post. (I was trying to suggest that conservatives would have been expected to scold the victims, based on their view of minorities.)
At a philosophical level, I believe that incentives have a major effect on the decisions that people make, but I also reject the existence of free will. Some people seem to find this confusing, because they cannot get beyond thinking that the plight of the poor is either caused by outside forces, or poor life choices. But why not both?
Let me use myself as an example.
1. I believe that I have made lots of poor life choices. So many poor choices that if I had been born in a deeply impoverished village in Bangladesh, I would have been a failure---perhaps dead by age 30. Fortunately I was born in a rich country, and was able to overcome those poor choices.
2. I also believe that if I had faced a different set of incentives, I might have made many fewer poor life choices.
Each of us is born in a different environment with different innate abilities, including things like intelligence, work ethic, patience, ability to enjoy life, etc. Utilitarianism is about constructing a set of public policies that allow people to make the most of their situation. In my view, that set of public policies is best described as "moderate libertarian."
To return to the commenter's point, a given worker might be a ZMP worker if facing one set of incentives, and a positive marginal product worker if facing a different set of incentives. To take an extreme example, if the alternative were starvation (not my recommendation!) then a lot of American ZMP workers would suddenly become more "cooperative".
PS. Just to be clear, I certainly agree that the world is full of victims and villains (the Holocaust is an obvious example). My point is that this way of thinking is not helpful in addressing the sort of complex social issues we face in modern America, and we are better off thinking in dispassionate utilitarian terms.
JANUARY 4, 2017
DECEMBER 20, 2016 --President-elect Donald Trump is breaking with tradition yet again, this time by retaining his own private security force.
In what security experts are calling an unprecedented move, Mr. Trump has continued to employ a private security and intelligence team at his post-election "thank you" rallies around the country and is expected to keep at least some members of the team after his inauguration, according to Politico. He's said to be the first president or president-elect in modern history to do so, as all others have relied solely on the Secret Service for personal security and local law enforcement for event security.
The decision has come under fire from some security experts who say that using private security personnel may be a risky move that could hurt both the president-elect and his team as well as protesters. Over the course of Trump's campaign, dozens of protesters have accused his private security personnel at rallies of racial profiling, undue force, or aggression, with three lawsuits currently pending against Trump, his campaign, or its security. Meanwhile, some Trump supporters have applauded the move as a sign of Trump's loyalty and commitment to shaking things up in Washington.
"It's playing with fire," Jonathan Wackrow, a former Secret Service agent who worked on President Obama's protective detail during his 2012 reelection campaign, told Politico. Having a private security team working events with Secret Service, he continued, "increases the Service's liability, it creates greater confusion and it creates greater risk."
This is from Gretel Kauffman, " Trump could set new precedent with private security force," Christian Science Monitor.
A libertarian friend on Facebook commented as follows:
Shades of imperial* Rome, and what that entailed: being surrounded by armed men who are pledged, *not* to defend the United States Constitution (and only secondarily charged with keeping the president safe), but who are pledged to and take orders from the specific person of the president, is frightening. (I am all for "private security" for private persons, but not for the president. It inaugurates a distinction between his interests and the Constitution and backs it with armed force.)
*Not republican.
I'm not so sure. I'm not completely tied to one side or the other, but I lean to private security.
Here's how I think about it.
I generally believe in private solutions to problems rather than government subsidies. The payments to the Secret Service are a huge subsidy. If Trump wants to pick up the tab for even part of this, and if that saves hiring, or replacing, even one or two Secret Service employees, good for him--and good for us.
Moreover, I can understand, and sympathize with, why Trump would want to do this. He wants people who are protecting him to be loyal to him, to have his well-being as their primary goal. I would bet that Secret Service employees are pretty much the same--their main goal is to protect the President--but there could be some slim margins on which the Trump people would do better. Recall the Colombian scandal. It's not clear that this threatened presidential security--it probably didn't--but one could imagine plausible situations in which it would.
My Facebook friend argues above that Trump would be "surrounded by armed men who are pledged, *not* to defend the United States Constitution (and only secondarily charged with keeping the president safe), but who are pledged to and take orders from the specific person of the president." That's true about the U.S. Constitution. I would bet, though, that keeping the President safe, given that he's paying them out of pocket, would be primary, not secondary.
Moreover, when the Secret Service forcibly removed some protestors away from the Oregon hotel where George W. Bush was dining during the 2004 campaign, they did not have protecting the U.S. Constitution on their mind. Indeed, the U.S. Supreme Court, 10 years later, affirmed this restriction on their freedom of speech.
Kauffman writes above:
Over the course of Trump's campaign, dozens of protesters have accused his private security personnel at rallies of racial profiling, undue force, or aggression, with three lawsuits currently pending against Trump, his campaign, or its security.
In which case are you more likely to win for a given amount of undue force: a case against a Secret Service agent or a case against a private bodyguard? I would think it's the latter. So this argues for, not against, private guards hired by Trump.
JANUARY 3, 2017
What sorts of benefits do you receive from your employer that aren't included in your take-home pay or on your income tax returns? We don't all have "free" cafeterias and laundry and fitness facilities, like Google. If you do have these kinds of amenities, how do you assess their value in terms of your overall compensation? Setting these cultural amenities aside for now*, probably most of us have health care that is covered, at least in part, by our employers.
In this week's EconTalk episode, the Mercatus Center's Mark Warshawsky talks about this "perk" of employment, and how it may be drastically affecting the way we look at income inequality. While compensation packages have long been greater than the take-home pay to which they're attached, they've also long been much less visible. But a new wrinkle has been added in recent years. Warshawsky notes that the cost of health insurance to employers has tripled in just the last fifteen years. This means that the total cost of an individual's employment to the employer has greatly increased, even if their productivity has remained flat. This means lower-income workers are receiving a greater proportion of their total compensation in the form of benefits. Warshawsky argues that when income inequality is being analyzed, studies tend to focus on income data, or take-home pay, thereby overestimating, or at least distorting, the degree of inequality.
But how are we to shift from comparisons of income to comparisons of compensation? And what's the best way to evaluate workers' level of well-being? Tricky questions- both philosophically and politically.
* One of host Russ Roberts's biggest questions is the effect of mandating benefits- whether legislatively or culturally- for employees. There's no such thing as a free lunch, after all.
JANUARY 3, 2017
Meanwhile, newly released State Department emails cause some people to suggest that the reason a variety of dodgy foreign businesspeople and nations gave millions of dollars to the Clinton Foundation while Hillary Clinton was secretary of state was that they expected -- get a load of THIS wacky right-wing conspiracy theory! -- to receive special access to or favors from the U.S. government. Hillary has no choice but to roll her eyes and laugh in a violently unnatural manner at this latest attempt to use these discredited smear tactics to prevent her, a historic and lifelong woman, from fighting for working families as well as working for fighting families.
This from Dave Barry's year in review, which, as always, is well worth reading.
Another excerpt:
Trump's victory stuns the nation. Not since the darkest days of the Civil War have so many Americans unfriended each other on Facebook. Some even take the extreme step of writing "open letters." Angry, traumatized protesters cry, march, shout, smash windows, set fires --and that's just the New York Times editorial board. Leading celebrities who vowed to leave the country if Trump won immediately start making plans to ... OK, to not actually leave the country per se, but next time they definitely will and YOU'LL BE SORRY.
And:
Meanwhile a somber Trump, preparing to assume the most powerful office on the planet, puts the pettiness of the campaign behind him and -- facing a world rife with turmoil -- gets down to the all-important work of taking Twitter shots at the cast of "Hamilton." He also begins assembling a cabinet that -- reflecting the diversity of the nation he has been elected to lead -- includes several non-billionaires. The president-elect also receives classified briefings, during which he learns, among other things, that there are a LOT of foreign countries, including some where he does not even have golf courses.
Finally, a justifiably non-funny quote:
In the month's biggest non-election news, the death of Fidel Castro is greeted with expressions of sorrow from several dozen world leaders who never had to live under his rule, and tears of happiness from many thousands of Cubans who did.
JANUARY 2, 2017
Finland has begun an experiment with a universal basic income (UBI) program:
Finland has started a radical experiment: It's giving 2,000 citizens a guaranteed income, with funds that keep flowing whether participants work or not.
The program, which kicks off this month, is one of the first efforts to test a "universal basic income." Participants will receive €560 ($587) a month -- money that is guaranteed regardless of income, wealth or employment status.
The idea is that a universal income offers workers greater security, especially as technological advances reduce the need for human labor. It will also allow unemployed people to pick up odd jobs without losing their benefits.
The initial program will run for a period of two years. Participants were randomly selected, but had to be receiving unemployment benefits or an income subsidy. The money they are paid through the program will not be taxed.
If the program is successful, it could be expanded to include all adult Finns.
The Finnish government thinks the initiative could save money in the long run. The country's welfare system is complex and expensive to run, and simplifying it could reduce costly bureaucracy.
The change could also encourage more jobless people to look for work, because they won't have to worry about losing unemployment benefits. Some unemployed workers currently avoid part time jobs because even a small income boost could result in their unemployment benefits being canceled.
Many free market economists favor this sort of program, partly for reasons outlined above. And it's very possible that the program would constitute an improvement over Finland's current welfare system. But I'd also like to offer a few words of caution.
Although I am all for evidence-based policymaking, including policy experiments, this evidence needs to be viewed with caution. For instance, consider a UBI that equaled 80% of the monthly earnings of low skilled labor. A policy experiment lasting two years might yield very different results from a permanent shift to a UBI, for two reasons. First, workers may be reluctant to give up low skilled jobs to live off the UBI, because they fear the program would end after two years, and they might not be able to get their old jobs back. Under a permanent UBI, they might quit the job and make up the 20% earnings shortfall with a bit of part time work. In that case, the UBI would increase leisure time and reduce GDP. Second, a permanent UBI would gradually lead to cultural change, which would lessen the stigma of living on "welfare". That's less true of a two-year experiment.
So what's wrong with a bit of extra leisure time? If freely chosen, I have no objection. But a UBI program tends to reduce the incentive to work. There is a risk that providing an income to people who chose not to work will lead to this sort of outcome (from a Reason article describing coal country in West Virginia):
I ask FACES' Whitt why so many young unmarried women in the county become pregnant. She sighs and notes that birth control is freely available at school. Most of the girls and women are "on medical cards" (that is, enrolled in Medicaid) that would pay for contraception as well. It doesn't matter. "There are no consequences to pregnancy--they get immediate access to a medical card, food stamps, a check, WIC, and home visits," she explains. "They have all the welfare benefits as long as their kids are not adopted, plus there's no babysitting, since the grandparents will look after the kids."
FACES organizes a Second Time Around support group for folks who are raising their grandkids or great-grandkids. It meets once per month. Slagle notes that her friend and her friend's husband are raising two of their grandkids despite health problems. "Neither one of them is able to do it," Slagle says. "You know, if I weren't rooted here, I would take the kids and go."
Cold Turkey
So why don't people just leave? That question is actually surprisingly easy to answer: They did. After all, 80 percent of McDowell's population, including my grandparents, cleared out of the county to seek opportunities elsewhere during the last half-century.
But as the mines mechanized and closed down, why didn't the rest go, too? Reed, Whitt, and Slagle all more or less agree that many folks in McDowell are being bribed by government handouts to stay put and to stay poor. Drug use is the result of the demoralization that follows.
A well-constructed UBI can provide more incentive to work than our current welfare programs, which sometimes leads to implicit marginal tax rates of above 100%. But I would argue that a well-constructed wage subsidy program is even better.
In the end, it's likely the case that a very small UBI, combined with a wage subsidy, is better than either program in isolation. That's because a very small UBI would not stop very many people from working, but would be easier to administer than an equal size wage subsidy. So you might want to provide a minimal UBI, topped off with a more generous wage subsidy program.
I don't know much about the Finnish economy, but $587/month sounds like it's not high enough to cause very many people to stop working. Hence I expect the experiment will be a "success". On the other hand, if you really wanted the UBI to replace all welfare programs, the monthly stipend would have to be much larger. And the long run impact of that sort of UBI is much less clear.
A wage subsidy tends to encourage people to work more hours. It also tends to discourage the acquisition of human capital. However, that disincentive is largely offset by massive subsidies to education at all levels of government.
JANUARY 2, 2017
The NSR, which many people understand more intuitively from physics, sheds light on the DWL in economics. As I explain below, while the NSR does not literally meet the Mankiw challenge, it does come close: it illustrates that each tax increase hurts economic efficiency more than the previous one.
This is a key paragraph from the January Econlib Feature Article " The Noise-to-signal Ratio as a Metaphor for the Deadweight Loss of Taxes." The article is by Cyril Morong, who teaches economics at San Antonio College in San Antonio, Texas.
Another key paragraph:
A basic insight from economics is that prices are signals that reveal the value or scarcity of resources; this helps people use them efficiently. But taxes can be seen as the noise that distorts that signal. The more distorted the signal, the less efficient prices become in allocating resources. As I show in the accompanying graphs, when a per unit tax is placed on a good, the price the sellers receive (that is, the amount they get to keep after they pay the tax to the government) falls while the price the consumers pay rises. This tax "wedge" distorts the market because it causes buyers and sellers to face two different prices for the same item: the buyer pays the price gross of tax while the seller receives a price that is net of tax. The larger this tax wedge, the greater is the distortion. In my metaphor, the greater is the noise. If you are listening to the radio and start hearing noise or static, the signal starts to lose its value. Eventually, the noise overwhelms the signal, and there is no longer a reason to listen since the NSR is so high. The same thing happens with taxes: as the NSR rises, the DWL rises at a similar rate. Thus, the NSR helps illustrate how rising taxes increasingly damage economic efficiency.
Take a look at the article, especially Figures 3 and 4, to see how closely NSR tracks DWL.
JANUARY 1, 2017
George Bernard Shaw finds one of two crucial mistakes in Karl Marx; George Stigler finds the other.
One of the late George Stigler's many contributions to economics, one that was not recognized by the Nobel Committee when it made its award in 1982, but that I briefly recognized in my bio of him in The Concise Encyclopedia of Economics, was his work on the history of economic thought. He did this relatively early in his career, but it's some of his best work.
Here's a lengthy quote from his 1959 piece "Bernard Shaw, Sidney Webb and the Theory of Fabian Socialism," reprinted in Kurt R. Leube and Thomas Gale Moore, The Essence of Stigler:
The criticisms of Henry George by English Marxists drove Shaw to the French edition of Volume 1 of Das Kapital. He was captivated without being persuaded of the validity of all its economic theory. These doubts spilled into print in a letter to a weekly, Justice, entitled "Who Is the Thief?" It is a tribute to Shaw's penetration that he had found for himself a crucial flaw in Marx's labor theory of value.
Marx's central argument was that the capitalists, by their control over capital equipment and the means of subsistence, forced a worker who added ten shillings of value to ten shillings of material, to work for only three shillings (his assumed subsistence requirement), yielding up seven shillings of surplus value.
[This is Shaw.] But mark what must ensue. Some rival capitalist, trading in tables on the same principle, will content himself with six shillings profit for the sake of attracting custom. He will sell the table for nineteen shillings; that is, he will allow the purchaser one shilling out of his profit as a bribe to secure his custom. The first capitalist will thus be compelled to lower his price to nineteen shillings also, and presently the competition of brisk young traders, believing in small profits and quick returns, will bring the price of tables down to thirteen shillings and sixpence.
[Back to Stigler.] But if the worker is being robbed of seven shillings, then the purchaser is committing thirteen-fourteenths of the theft--every English consumer is the thief. The criticism received no reply.
The assumptions of competition and of surplus value are indeed incompatible, and even today I would like to amend Shaw's argument in only two respects. The competition of capitalists would also take place in the labor market, and force wages up. And, secondly, the customer-thieves are, of course, chiefly the workmen and their families.
JANUARY 1, 2017
News distorts policy priorities. The primary mechanism: News showcases exciting stories with colorful characters, while ignoring boring stories with big numbers. One story about Trump's relationship with Ivanka gets more coverage than most trillion-dollar pots of money. A major secondary mechanism, though, is that stories that dramatically unfold get a lot more coverage than big static facts. An Elephant in the Room may warrant some coverage, but if he just sits in the corner, media interest soon peters out. It would be amazing if these disparities in coverage failed to shape the problems the public worries about - and, in turn, the problems attention-seeking politicians vow to solve. What can be done to mitigate the media's policy misdirection? I suggest we start the New Year with what I call the Priority Resolution. Are you a serious thinker? Then step back from the media cycle and name the world's Three Biggest Problems. Instead of trying to score points over the latest exciting story with colorful characters, let us self-consciously change the subject to the Big Picture. While this obviously won't lead to consensus anytime soon, the Priority Resolution makes us argue about which issues really matter. Think your issue is more important than my issue? Then convince me. The Copenhagen Consensus is the best such effort I know of, but why shouldn't a thousand Big Pictures compete? Since I try to be the change I wish to see in the world, I'll start. What are the Three Biggest Problems? At the top of the list, by a wide margin, is Death itself. Almost every child is horrified to discover that man is mortal. But most adults not only accept the inevitability of death, but even bizarrely rationalize death as a blessing in disguise. Why bizarre? Imagine humans were already immortal. If an inventor figured out how to make us mortal, who would see this "innovation" as anything other than a catastrophe? After Death itself, the next most serious problem probably remains Absolute Poverty. While human happiness depends less on material well-being that you'd think, hunger, homelessness, and short lifespans are awful. Furthermore, if you buy my long-run Pacifist Syllogism, ending Absolute Poverty is a twofer: Since rich countries fear war, making the whole world rich greatly reduces the risk of any version of World War III. What's third? Here, I'll be a doctrinaire libertarian and decry the Problem of Political Authority. Governments should leave people alone unless the social benefits of doing otherwise clearly heavily outweigh the costs. Since no government on Earth comes close to observing this moral truism, grave injustice is common-place - even in the morally self-satisfied First World democracies. Needless to say, people who agree on priorities can easily disagree about the best way to achieve them. My prescription for swiftly ending Absolute Poverty, for example, is open borders, globalization, and economic freedom. Most people who share this priority probably disagree, but that's okay. Debating the best way to solve the world's second-biggest problem has a huge potential upside. Debating the headlines does not. I expect few readers to agree with my top three priorities. But I hope we can all agree that we spend far too little time discussing that most important issues on Earth. Fortunately, we can improve - and New Year's Day is a focal time to start. Who else wants to adopt the Priority Resolution?
DECEMBER 31, 2016
Tyler Cowen recently linked to an interview of Gary Cohn, who will be Trump's top economic advisor:
The Chinese have taken multidecade views on what they're doing. They built up their surplus capital account over many, many years. It is going down. It is undeniably going down, and you can see it in the numbers. They may take some actions in the next few months to deal with that. You know, look, so I believe that they're going to end up devaluing the currency? I do believe they will end up devaluing the currency.
This surprised me, as there are rumors that Trump will name China a currency manipulator on his first day in office. That suggests that Trump thinks the yuan is too weak. And yet Cohn seems to imply the yuan is currently too strong. Here is some more of the interview:
"At the start of 2015 there were three countries in the world that were willing to have a strong currency. The Swiss, the Chinese, and the U.S. The Swiss pulled the rip cord overnight. They just ripped it off and said, 'We are done. We are done having a strong currency. It is too expensive to defend this.'
"And now you have two countries, two countries in the world that are willing to have a relatively strong currency, and it is unsustainable that the rest of the world try and devalue against these two currencies. It is not fair to those two countries. And I think we have got to do something with this. We will never have those real conversations, but if we woke up tomorrow and every central bank in the world raised their interest rates by 300 basis points, the world would be a better place. No currency should move because all the relationships would be the same, but insurance companies would work, pensions would work, savers would work, we would get people out of bank-loan funds, we would get people out of bond funds and they could put their money back in banks and back in government bonds where it belongs."
I don't think anyone will be surprised to find that I don't agree with most of this. He's completely wrong about Switzerland, which actually sharply revalued the franc upward in early 2015, not downward. That's a pretty serious factual error for a top banker at Goldman Sachs. And the Swiss didn't do it because it was too expensive to defend the currency---just the opposite; they were accumulating massive amounts of foreign exchange.
However, this does pretty much confirm that Cohn thinks the yuan is overvalued (a view held by virtually all experts), which is going to create an interesting dilemma for the Trump administration. Will they actually label China a currency manipulator? If so, on what basis?
He also offers a rather strange suggestion that all central banks immediately raise rates by 300 basis points, on the assumption that this won't matter because the relative value of each currency in the foreign exchange markets won't change. This policy recommendation would probably create a repeat of the Great Depression of the early 1930s, which also occurred due to tight money during a period of fixed exchange rates. In other words, I don't believe it's a good idea.
Most of his other comments are pretty sensible---just keep him away from monetary policy.
PS. Regarding this statement:
It is not fair to those two countries.
I think it is fair to the US, but it's not fair to China. I say that because China's excessively strong currency is partly a reflection of US political pressure. In contrast, the strong US currency is entirely due to decisions made by the Fed.
DECEMBER 31, 2016
Can markets work without state regulation? The conventional wisdom suggests that this is not possible, but it turns out that trade often thrives outside of the state. There is a growing literature that demonstrates this. One of my favorite studies is from Peter Leeson, who shows that 18th-century pirate ships were self-organizing based on constitutional, democratic principles. Other classic pieces show why Orthodox Jewish diamond dealers didn't use contracts, how rural neighbors resolve disputes through social norms instead of courts, and how long-distance commercial ventures in the 11th-century were self-regulating. My own research has also shown how an informal money transfer system, known as Hawala, allows high-volume, international financial transactions without any oversight or regulation by nation states, and that it has done so successfully for several centuries. These studies illustrate how markets and social cooperation can emerge without the state.
In a recent paper in the American Political Science Review, David Skarbek contributes to this literature by showing how prisoners create systems of self-regulation in the underground economies in prisons around the world. (Full disclosure: David is my partner.) The paper, "Covenants without the Sword? Comparing Prison Self-Governance Globally," shows that there is significant variation in the informal life of prisoners (ungated copy).
For instance,
In Latin America, inmate groups of diverse variety wield authority, and they are sometimes the main or only source of governance. In Scandinavian countries, by contrast, informal institutions are relatively unimportant. Informal institutions also vary within developed western countries. Organized, ethnically segregated gangs govern Californian men's prisons, but similar groups do not operate in England.
Skarbek makes two arguments. First, when officials do not govern effectively, informal prisoner institutions play a more important role. Prisoners fill the gap in governance left by delinquent officials. When officials do their jobs well, such as in Norway, prisoners have little need to self-organize. Second, prison gangs do a good job of regulating the underground economy, but they are not always the most efficient source of governance. As earlier studies showed, ostracism is effective in small, tight-knit communities, but these decentralized punishments are ineffective in large populations of strangers. As a result, in large prison systems, prisoners turn to gangs to create rules, threaten more severe punishments, and to facilitate order (see this Econtalk). In small prison systems, prisoners do not need gangs to do so. They can easily do it on their own.

Studying prison social order shows how informal institutions work and how they evolve across time and space, given the constraints faced by a particular community. This account differs from much of criminology by providing a new theoretical framework for analyzing prison social order. It also builds on one of Elinor Ostrom's classic (1992) contributions, by showing that not only is self-governance possible, but it can even work among people most likely to misbehave. As Skarbek writes:
prison presents something closer to a "worst case" scenario. Prison populations are comprised of a biased agent type, forced to interact with each other, with no exit options, and sometimes living in desperate poverty. Nevertheless, this article shows that inmates can develop effective (albeit far from ideal) solutions to the problem of order, and these solutions take diverse forms depending on official's choices and the demographics of the community. Extralegal governance is not only possible, but is often robust to significant difficulties.
DECEMBER 31, 2016
Christmas break is a wonderful season to catch up with some long-procrastinated reading. These days I'm reading Bastiat's Economic Sophisms eventually cover to cover. I'm quite ashamed I never did it before -- but, as it happens with classics, you just skim them, relying on secondary literature. This is a trivial sin if you pretend to be acquainted with an author, a serious one if you want to study him or her.
I like Bastiat and I am, so to say, favourably biased in his favour. And yet I'm amazed by how insightful, brilliant, and cogent the Sophisms are.
Just consider the very first one. It begins with Bastiat pointing out that:
it is certain that political economy will not have completed its task and performed its practical function until it has popularized and established as indisputable this very simple proposition: "Wealth consists in an abundance of commodities."
This is a seemingly commonsensical insight. But Bastiat shows beautifully how protectionists of different kinds are consistently forgetting it, in order to make things rare and scarce. Read the whole thing. You can see that Bastiat is still relevant when you see that many highly intelligent people still believe there is no point in maintaining the welfare of consumers takes precedence over that of producers (see this post by the great Don Boudreaux).
DECEMBER 30, 2016
Normally, Scott Alexander writes very long posts. This one is very short and well worth reading.
His bottom line:
The correct way to report on this graph is "About twice as many economists believe a voucher system would improve education as believe that it wouldn't."
By leaving it at "only a third of economists support vouchers", the article strongly implies that there is an economic consensus against the policy. But its own source suggests that, of economists who have an opinion, a big majority are pro-voucher.
(note also that the options are only "vouchers will improve education" and "vouchers will not improve education", so that it's unclear from the data if any dissenting economists agree with the reporter's position that vouchers will make things worse. They might just think that things would stay the same.)
I think this is journalistic malpractice. I have no idea how Brian Williams can provoke a national scandal by saying that he was on a helicopter when in fact he was on a slightly different helicopter, but the Times will not get in trouble for reporting the opinion of the nation's economists to be the opposite of what it actually is, in an area with important policy implications.
Now, to be fair, this wasn't the New York Times. It was an op/ed by Susan Dynarski, a professor of education, public policy and economics at the University of Michigan. She has a Ph.D. in economics from MIT and is associated with the National Bureau of Economic Research, which, if anything, makes her statement even worse. She probably knows better. Still, Scott is right to criticize the Times because a good editor would have caught this.
DECEMBER 30, 2016
The New York Times has a good article on the trade-off between growth and jobs (a theme I have repeatedly discussed):
Donald J. Trump wants us to dream bigger about the economic future. We shouldn't be content with the roughly 2 percent annual growth that has been the norm this century, he has said. And he thinks he can bring about the kind of robust growth of 4 percent or more that was commonplace in decades past.
But the closer you look at the math of economic growth, the more you see the inherent contradictions in trying to make that happen. The two strategies that would most directly help achieve that goal clash with other planks of Mr. Trump's economic agenda.
Economic growth can happen two ways: More hours are worked, or more economic output is generated from each hour of labor.
Higher productively often leads to job loss:
[S]ome of the very innovations that have helped improve workers' productivity are also the main culprit behind the decline of well-paying manufacturing jobs.
These advances have made the United States richer -- with jobs like designing software systems and taking medical images. But that's not much solace for former manufacturing workers who haven't found lucrative or rewarding work in growing fields, a group that is at the core of Mr. Trump's campaign appeals.
It's not just manufacturing. Consider one innovation that could plausibly become a reality in the years ahead: trucks that drive themselves. Over time, that will make the United States economy more productive and raise incomes.
But if you are one of the 1.7 million long-haul truck drivers in the United States, making an average of $42,500 for a job that doesn't require advanced education, it should be concerning. It's plausible to imagine a majority of those jobs going away over the next decade, which will be a boon for the countless industries that rely on trucks to bring in supplies and distribute finished goods. That will raise G.D.P., the broad measure of economic growth.
The other way to raise growth is immigration. Consider this story about the opening of the world's highest bridge:
The Beipanjiang Bridge took three years to build, cost more than $146.7 million dollars, and stretches to be 4,396 feet long. Its four-lane roadway sits nearly two thousand feet over the Beipan River, which it's named after, to connect the Yunnan and Guizhou provinces in southwest China, People's Daily Online reported. It surpassed the 1,837-foot-tall Sidu River Bridge for its world record title.
We know what you're thinking: $146.7 million is cheap! And it is! After all, when the Golden Gate Bridge spanning San Francisco Bay was built in 1933 it cost $1.5 billion (in adjusted dollars), and the brand new New Bay Bridge, on the other side of town, ended up costing a whopping $6.7 billion when it was finished in 2013.
In fairness, the two Bay Area bridges are both longer and wider. Nonetheless, the Chinese bridge would have certainly cost far more than $147 million if built in the US.
The best way to rebuild our infrastructure would be to bring in Chinese construction firms and Chinese temp workers, who would live in prefab dorms while providing America with first-rate infrastructure. But we won't do that, because American workers would complain. Hence we will not end up with first-rate infrastructure. Despite all the talk, we will fail to rebuild our infrastructure.
Unlike Canada, this country has not yet accepted that the things that would provide faster economic growth (trade, immigration and automation) are exactly the same things that threaten to take jobs away from domestic workers. This is why I believe that growth will remain low over the next 10 years, even if there are occasional spurts of above 2% growth. We say we want faster growth, but we simply do not want to do the things that would be necessary to achieve that goal.
It's even worse in southern Europe. They say they'd like to have the sort of healthy economy that Germany has, but their governments are not willing to adopt German style economic reforms. Indeed they don't even like it when the Germans tell them how to do it.
You'd think that people would appreciate good advice.
DECEMBER 30, 2016
Princeton economist Alan Blinder, who has often written very good work--I'm a fan, with qualifications, of his book Hard Heads, Soft Hearts and he has two excellent entries, here and here, in The Concise Encyclopedia of Economics--has written a bad article. In it, he essentially takes off his economist hat and becomes a pundit--and not a good one.
Blinder is one of the most articulate and clear defenders of free trade. So when I saw that he had written an article critical of Trump, who is awful on trade, I hoped that he would do a good job of taking apart Trump's weak case. He doesn't. He does point out that Trump's trade policies would have bad effects, but he gives no reason for why. Instead, he spends most of the piece talking about how Trump's views are at odds with those of the American public. Even if that's true--and I'm not as convinced as Blinder is about that--so what? What if the American public is wrong on many of these issues? Blinder thinks they're wrong on trade. What else might they be wrong on?
But instead of doing any real economic analysis--and Blinder has shown in the past that he can do so beautifully in a short article--he writes as if he's not even an economist. Here's one of the items that stood out:
Labor standards: Trump's choice for Secretary of Labor, Andrew Puzder, is a CEO in the fast-food industry. Never mind that he uses crass sexual imagery to sell hamburgers. What's more germane is that he prefers robots to human workers, doesn't want to raise the minimum wage, and opposes the Department of Labor's attempt to raise the salary level below which companies must pay extra for overtime.
The public could not disagree with him more. Raising the minimum wage has been winning in polls consistently for decades, and by wide margins - generally even among Republicans.
Yes, it has been winning. I bet that if Alan surveyed a bunch of Princeton students coming into their first economics class, he would find that they support the minimum wage. Would he then say, "Ok, then, we've got that one solved; let's raise the minimum wage." Or would he point out that the wage for a worker tends to come close to the value of what he produces? Would he then go on to point out that a higher minimum wage doesn't magically make low-skilled people more skilled? Would he, finally, show his students a supply and demand curve and then show them that some of the people whom minimum wage supporters want to help with a higher minimum wage will end up with a zero wage? I hope so. The Alan Blinder whom I met in November 1975, who gave me some tips about my career, would have done so.
Also, Alan Blinder is a very smart guy. So it's shocking that he doesn't see the irony in this sentence segment in his own article:
What's more germane is that he [Puzder] prefers robots to human workers, doesn't want to raise the minimum wage,
Does Alan not see any connection between those two things? Does he not see that the higher the minimum wage, the more businessmen will start to prefer robots to human workers. It's called substitution. In any introductory microeconomics class, we talk about how people respond to incentives. Make one option more expensive, and you give people an incentive to switch to another option. Blinder, in this sentence segment above, has actually, and, apparently, unwittingly, said why the U.S. government, if it wants people not to be replaced by increasingly sophisticated robots, should favor cutting or even abolishing the minimum wage.
Like the late Vince Lombardi, I wonder.
DECEMBER 29, 2016
If you were a poor person in a poor country, would you choose to work in a sweatshop, or be your own boss, buying and selling in the local market? Which would you value more- security and stability, or variability with the potential for income growth? And should we really be pressing for more sweatshops in poor countries, as many economists- from Krugman to Sachs, seem to advocate of late?
If you haven't listened to this week's EconTalk episode, I hope you do, as I think you'll find it challenging. Host Russ Roberts, as filled with humility as any economist I know, says, "I don't know how to solve all the problems of the world at one time, but when I see people desperately trying to do something, I assume they are trying to better themselves, and probably know more about their situation than I do." So when 300 people line up to vie for 50 jobs in a factory (or WalMart), their revealed preferences suggest that these jobs beat the alternatives. Right??? Chris Blattman of the University of Chicago returns this week, and challenged a lot of my thinking (and his own, he tells Russ) about just how good an alternative employment in a sweatshop is for people in developing countries.
Blattman and Stefan Dercon conducted a fascinating experiment in Ethiopia, trying to tease out the trade-offs people make in their employment choices. Blattman admits he assumed that stability would be prized over the risk inherent in entrepreneurship, but the results they got surprised him. See if they surprise you, too, and let us know your thoughts. We love to hear from you!
DECEMBER 29, 2016

Earlier this month, we found out that our favorite cat, Joey, has small cell lymphoma. That's the bad news. The good news is that they now have chemotherapy for cats. We inject a pill 3 times a week. All things considered, the pills are not expensive.
I'm posting on this, partly to share my love for my cat, but mainly to point to the economic progress we have that allows us to buy medical care for cats. This was unheard of in my parents' generation and probably not even heard of 20 years ago.
Indeed, if it hadn't been for the medical progress that allows doctors to give chemotherapy to humans, there would likely be no chemo for cats. That is the story of progress. Think of the cell phone. The first people who benefit from it are the richest and they think of it as a luxury. Then the middle class. Then the poor. And the next step--we're already there with cell phones--is that even most of the poor, at least in the United States, start to think of it as a necessity.
And now there's a new twist, at least with chemo: the next beneficiaries in line are the cats of relatively wealthy families like us. But the prices are such that even middle-class families can now afford it.
In his excellent 1959 essay (article), "Bernard Shaw, Sidney Webb and the Theory of British Socialism," reprinted in The Essence of Stigler, George Stigler quotes the following passage from Shaw:
A New York lady, for instance, having a nature of exquisite sensibility, orders an elegant rosewood and silver coffin, upholstered in pink satin, for her dead dog. It is made: and meanwhile a live child is prowling barefooted and hunger-stunted in the frozen gutter outside.
It isn't quite the same as chemo for Joey. For one thing, he's alive and we're trying to avoid having him die too soon. (And when he does die, he will get a very cheap grave.) For another, there aren't children prowling barefooted and hunger-stunted in the frozen gutter outside. People in that situation are likely to be in Asia or Africa. And, by the way, the progress around the world, even in Asia and Africa, is not due to the socialism that Shaw espoused. The major progress virtually everywhere is due almost entirely to economic freedom.
DECEMBER 28, 2016
Suppose I had a crystal ball and saw one year into the future. At that time, the Japanese yen and the Brazilian real had both depreciated by 15% in the foreign exchange market. What would that tell me? At one level, it doesn't tell me anything for standard "never reason from a price change" reasons. On the other hand, I might make some educated guesses:
1. I would probably reduce my estimate of Brazilian economic growth. In Brazil, short run fluctuations in the exchange rate often reflect "real" factors (no pun intended) such as the state of the global commodity market, and the quality of Brazil's governance. A weaker real would most likely reflect a weaker economy.
2. Japan has a large diversified economy, with stable governance and not much susceptibility to global commodity shocks. Instead, monetary factors drive changes in the value of the yen---the stance of Japanese monetary policy relatively to other regions such as the US and the eurozone. A 15% weaker yen would probably reflect a more expansionary Japanese monetary policy and stronger growth in the short run.
I thought of this perspective when I read a recent article in The Economist:
These days a dollar buys 3.4 reais, but no one in Brazil or in other emerging markets with devalued currencies is declaring a belated victory. A cheap currency has not proved to be much of a boon. Indeed new research from Jonathan Kearns and Nikhil Patel, of the Bank for International Settlements (BIS), a forum for central banks, finds that at times a rising currency can be a stimulant and a falling currency a depressant. They looked at a sample of 44 economies, half of them emerging markets, to gauge the effect of changes in the exchange rate on exports and imports (the trade channel) and also on the price and availability of credit (the financial channel).
They found a negative relationship between changes in GDP and currency shifts via the trade channel. In other words, net trade adds to economic growth when the currency weakens and detracts from growth when it strengthens, as the textbooks would have it. But they also found an offsetting effect of currencies on financial conditions. For rich countries, the trade-channel effect is bigger than the financial-channel effect. But for 13 of the 22 emerging markets in the study, the financial effect dominates: a stronger exchange rate on balance speeds up the economy and a weaker one slows it down.
Interestingly, I reach pretty much the same conclusions about developed vs. developing countries in a simple model where neither the financial channel nor the trade channel has any effect at all on growth. In my example, monetary stimulus leads to growth in Japan due to sticky wages, even if Japan were as closed as North Korea. And in Brazil, a collapse in Chinese demand for commodities hurts growth even in a world where Brazil has no debt issues.
Of course that doesn't mean the study discussed above is wrong. Rather that you need to be careful in examining these sorts of studies. Thus when looking at the trade channel, did they account for changes in the stance of monetary policy? How did they measure the stance of monetary policy? Many economists use interest rates to measure the stance of monetary policy, but I have no confidence in those estimates, for . . . you guessed it, standard "never reason from a price change" reasons. I prefer NGDP growth as a indicator of monetary policy.
I suppose it seems like I am one of those older economists obsessed with one idea---which reminds me of a clever John Carney parody.
DECEMBER 28, 2016
Towards the end of his latest Bloomberg column, Tyler Cowen writes:
It's well known in economics that when prices and opportunities change, it is the elastic factors of production (those that can change their plans readily) that gain the most, and the inelastic factors that are most likely to bear losses. Insiders and long-term residents are so often the inelastic ones while outsiders and newcomers have the greater willingness or ability to adjust.
Actually, it's not well known because it's not true. It is true that when demand for factors falls, those factors that are more elastically supplied lose the least. (They don't, as Tyler says, gain.) But when the demand for factors increases, those factors that are inelastically supplied gain the most. Just draw a demand curve and an inelastic supply. Then shift the demand curve up and see what happens to price. Presto.
Indeed, it's in part because many long-term residents of a city like San Francisco bought their houses long ago, before government regulation made the supply of housing inelastic, and then the housing supply became inelastic due to government regulation, that we see people with 5-figure incomes having 7-figure net worths.
DECEMBER 27, 2016
At age 86, Tom Sowell has decided to retire as a regular columnist. This is his final column.
A few items in it caught my attention. Here is one:
During a stay in Yosemite National Park last May, taking photos with a couple of my buddies, there were four consecutive days without seeing a newspaper or a television news program -- and it felt wonderful. With the political news being so awful this year, it felt especially wonderful.
In a future post, I'll discuss how this relates to my own recent career decision.
Here are some other comments on material progress:
In material things, there has been almost unbelievable progress. Most Americans did not have refrigerators back in 1930, when I was born. Television was little more than an experiment, and such things as air-conditioning or air travel were only for the very rich.
Although I'm 20 years younger than Tom Sowell, I have noted some of the same things in my lifetime, only slightly less dramatically. Although we had a refrigerator all my life, we didn't have one at our cottage where we went every summer because we didn't get electricity until 1957 or 1958. So the word "icebox" meant for me what the word actually means. In January 1961, every family I knew in my town of Carman, Manitoba had a TV. Except for ours. I persuaded my father to buy one: a used Philco 21 inch (if I recall correctly) for $155. (And the Canadian $ was worth a little over 93 U.S. cents.) Remember the term "television repairman?" With our used TV, I do.
Air travel: My mother, who died at age 53 in 1969, never took a flight in her life. She had been in only two countries: Canada and the United States. And not much of those countries. She never saw Toronto. And the only U.S. state she made it to was North Dakota, and only the northern part of North Dakota. Fargo? You're dreaming.
My own family did not have electricity or hot running water, in my early childhood, which was not unusual for blacks in the South in those days.
We didn't have running water in our house (which we didn't own) in Boissevain, Manitoba, until 1957.
It is hard to convey to today's generation the fear that the paralyzing disease of polio inspired, until vaccines put an abrupt end to its long reign of terror in the 1950s.
My father had polio in 1943. My sister had it in 1952.
Tom goes on to talk about ways the country has gone downhill. On some of these, I agree with him, especially his points about black ghettoes in the 1930s and 1940s versus now.
But one item that he regards as a negative is one that I regard as a positive. And it's not small. He writes:
Back in 1962, President John F. Kennedy, a man narrowly elected just two years earlier, came on television to tell the nation that he was taking us to the brink of nuclear war with the Soviet Union, because the Soviets had secretly built bases for nuclear missiles in Cuba, just 90 miles from America.
Most of us did not question what he did. He was President of the United States, and he knew things that the rest of us couldn't know -- and that was good enough for us. Fortunately, the Soviets backed down. But could any President today do anything like that and have the American people behind him?
To his last question, which he asks rhetorically, my answer is "I certainly hope not." If you want to know more about why, see my post yesterday.
To what does Tom Sowell attribute this decline in presidential credibility? He writes:
Years of lying Presidents -- Democrat Lyndon Johnson and Republican Richard Nixon, especially -- destroyed not only their own credibility, but the credibility which the office itself once conferred. The loss of that credibility was a loss to the country, not just to the people holding that office in later years.
Notice that he singles out presidents who were in office while Tom was an adult. He brought his well-honed skepticism to the issue. But he doesn't mention one of the biggest liars in his lifetime: FDR. Even while trying to get America into World War II in 1940, FDR said in his famous Boston speech late in the 1940 presidential campaign:
And while I am talking to you mothers and fathers, I give you one more assurance.
I have said this before, but I shall say it again and again and again:
Your boys are not going to be sent into any foreign wars.
Or how about Harry Truman's initial announcement of the nuclear bomb dropped on the city of Hiroshima. His statement to the press said:
Sixteen hours ago an American airplane dropped one bomb on Hiroshima, an important Japanese Army base.
There are downsides to distrust. The main downside is when the distrust is undeserved because the president is telling the truth. But there are upsides too.
DECEMBER 26, 2016
Since the election, several people have privately asked me, "Well, whatever you think about Trump, don't you at least enjoy the attendant outrage of the left? At least that must make you happy, right?" In my misanthropic youth, the answer would have been a resounding yes. But in all honesty, I put away such childishness years ago. I have a rich, full life that affords me ample opportunities for pure joy. I have no need to seek out joy sullied by anger. And again in all honesty, I wish everyone else felt as I do. Living through this disgraceful election, and then seeing partisan pundits double down on their disgraceful behavior afterwards, just discourages me. This is especially true when I'm sympathetic to the conclusions of practitioners of the disgraceful behavior. Reasonable, fair-minded disagreement gives me hope; unreasonable, unfair agreement just creeps me out. What about the unreasonable and unfair? Don't I want to see them choke on their own rage? Not at all. To give me pleasure, they would have to display a far rarer reaction: heart-felt repentance. All of the following would be music to my ears: 1. "Forgive me, for I have allowed my emotions to cloud my judgment. From now on, I'll strive to be calm when I analyze politics." 2. "Forgive me, for I have apologized for dishonesty, demagoguery, and half-truths. From now on, I'll prize truth over political victory." 3. "Forgive me, for I have trolled, stating arguments I know to be flawed in order to aggravate others. From now on, nobility comes first." 4. "Forgive me, for I have advocated collective punishment of groups I dislike, even though I know most members of these groups are innocent. From now on, I will make a special effort to treat members of groups I dislike justly." 5. "Forgive me, for I have advocated government coercion, even though it's far from clear that leaving people alone would lead to worse results. From now on, I embrace the presumption of liberty." If any of these mea culpas come my way, I'll be delighted and grateful - and never say, "I told you so." But if repentance remains rare - as I firmly expect - I won't let it get me down. Any observant person who turns to politics for happiness is doomed to dismay. I have my Bubble, and it is enough.
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