Dear Angry Person,

I can tell that you're angry at me again.  I think I understand your complaint, though I have trouble understanding why this specific issue is upsetting you on this specific day.  But based on past experience, asking for clarification will only make you angrier, without helping me avoid your future anger.  As usual, then, I plan to appease you.

But in the silence of my mind, I've got a question for you.  In all the years we've known each other, how many times have I expressed anger at you?  By my count, the answer is... zero.  Question: Do you think that's because your behavior is above reproach?  Do you imagine I'm entirely satisfied with the way you've treated me?  Well, I'm not.  Your emotional abuse aside, you've failed to meet my expectations more than once.

So why haven't I ever raised my voice at you?  Indeed, why do I normally act as if everything you do is unobjectionable?  Seven main reasons.

1. Nobody's perfect.  I take a moderate amount of bad behavior for granted, and count myself lucky it's not worse.

2. Assessing behavior is surprisingly ambiguous.  Real life is not a math exam.  While bad behavior plainly exists, even decent people frequently see the world differently - an insight that inspired game theorists to develop the notion of trembling-hands equilibria.  In such an environment, interpreting people's actions charitably is advisable - especially people with a long, admirable track record.

3. While getting angry often changes behavior for the better, getting angry also often changes behavior for the worse.  Net effect?  Unclear. 

4. Getting angry is far from the only way to change behavior for the better.  So in the subset of situations where anger is an effective motivator, you still have to ask: Does it motivate better than these alternatives?  The answer, once again, is unclear.

5. Even when anger is the best short-run strategy, it damages long-run relationships.  And I value these long-run relationships more than I value winning any specific dispute.

6. Getting angry clouds your thinking, leading to intellectual and moral error.  And two of my chief life goals are being right and acting rightly.

7. All else aside, getting angry is aversive for me.  I don't "love to hate" anything or anyone.  I wish to live in harmony with others, especially people I know personally.

As I rattle off these points in my head, I nervously visualize you getting angrier.  So as usual, I'm not going to tell you what I'm really thinking.  Still, after making full allowance for (2), here's a harsh truth: When you kill the messenger, your ignorance is culpable.  Your obliviousness to my concerns is a vice.  Calm People like me deserve better.

Sincerely,

Calm Person

One of the things that economists, whatever their other views, are most sure of is that free trade is a good idea.

The normal way we argue for trade, either between individuals and companies in a country or between individuals and companies across borders, is that both sides benefit. The seller benefits by selling something for a price greater than his supply price. (The supply price is the minimum price that he requires to be willing to supply the item in question.) The seller's gain is the difference between his supply price and the price he is paid, and is called producer's surplus. The buyer benefits by buying something for a price that is below his demand price. (The demand price is the maximum price the buyer is willing to pay for an item.) The buyer's benefit is his demand price minus the price he pays, and is called consumer surplus. The sum of producer's and consumer's surplus is the gain from the exchange.

Notice that consumer surplus is a big part of the story, whether the exchange is within a country or across borders.

But many people systematically leave out the gains to consumers. There are two recent instances.

Henry Olsen, a senior fellow at the Ethics and Public Policy Center and an adjunct professor at Villanova University, in an op/ed in the Washington Post, writes:

Many of Trump voters' priorities can be addressed in ways consistent with Republican inclinations. Immigration can be reduced but not eliminated; trade deals can proceed if they ensure that benefits flow to average Americans, not just those in finance or exporting industries.

Notice Olsen's narrow focus. The implication of his focus on exporters seems to be that trade deals don't generally generate benefits for average Americans except in their role as exporters or employees of exporters. But they do benefit. One of the main benefits of free trade is lower prices, and therefore consumer surplus, on the items they buy.

Take the 25% tariff on light trucks, please. That tariff makes price of trucks, whether new or used, substantially higher. Yes, it has caused most truck production for the U.S. market to move to the United States. But the producers do that to get around the tariff wall and would likely not do that if there were no tariff. So, although 25% is almost certainly an overestimate of the higher price U.S. buyers pay for new trucks, without a tariff they would certainly pay much less. So a trade deal that cuts tariffs on trucks would definitely help "average Americans." And here's the thing: the U.S. government could to that unilaterally without a trade deal. I choose this example on purpose. When I mentioned to my students, while teaching about free trade and protectionism, that there is a 25% tariff on light trucks coming into the United States, that caught their attention. Many of them have bought new trucks and would have loved to have paid much less. They are not literally average Americans--their and their spouses' incomes probably put them in the top 20% of the income distribution--but next time you talk to an "average American" who owns a pickup truck, tell him about that 25% tariff and see if he is indifferent.

Or consider this recent piece in the Wall Street Journal by Harvard economist Martin Feldstein, my boss when I was at the Council of Economic Advisers. He's trying to defend NAFTA. Good for him. But how does he defend it? He writes:

During the campaign Mr. Trump promised to tear up the North American Free Trade Agreement if he could not negotiate a substantial improvement. Revoking the agreement would put more than $600 billion of U.S. exports to Canada and Mexico in jeopardy. According to the U.S. Census Bureau, U.S. companies export more to Canada than they import from Canada. Including Mexico, total Nafta imports exceed exports by less than $40 billion, an amount equal to just one-quarter of 1% of GDP.

So Marty's defense is that exports would be put at risk and he mentions imports only to compare their size to the size of exports. So all that seems to matter to him, when defending free trade, is gains to producers (exporters), not gains to consumers (importers).

Mercantilism dies hard.

The misunderstanding is bipartisan. But also the understanding is bipartisan. Democratic economist Alan Blinder laid out the case for free trade beautifully in "Free Trade" in The Concise Encyclopedia of Economics.

David Glasner has a post criticizing the rational expectations modeling assumption in economics:

What this means is that expectations can be rational only when everyone has identical expectations. If people have divergent expectations, then the expectations of at least some people will necessarily be disappointed -- the expectations of both people with differing expectations cannot be simultaneously realized -- and those individuals whose expectations have been disappointed will have to revise their plans. But that means that the expectations of those people who were correct were also not rational, because the prices that they expected were not equilibrium prices. So unless all agents have the same expectations about the future, the expectations of no one are rational. Rational expectations are a fixed point, and that fixed point cannot be attained unless everyone shares those expectations.

Beyond that little problem, Mason raises the further problem that, in a rational-expectations equilibrium, it makes no sense to speak of a shock, because the only possible meaning of "shock" in the context of a full intertemporal (aka rational-expectations) equilibrium is a failure of expectations to be realized. But if expectations are not realized, expectations were not rational.

I see two mistakes here. Not everyone must have identical expectations in a world of rational expectations. Now it's true that there are ratex models where people are simply assumed to have identical expectations, such as representative agent models, but that modeling assumption has nothing to do with rational expectations, per se.

In fact, the rational expectations hypothesis suggests that people form optimal forecasts based on all publicly available information. One of the most famous rational expectations models was Robert Lucas's model of monetary misperceptions, where people observed local conditions before national data was available. In that model, each agent sees different local prices, and thus forms different expectations about aggregate demand at the national level.

It's also wrong to say:

But if expectations are not realized, expectations were not rational.

Suppose I am watching the game of roulette. I form the expectation that the ball will not land on one of the two green squares. Now suppose it does. Was my expectation rational? I'd say yes---there was only a 2/38 chance of the ball landing on a green square. It's true that I lacked perfect foresight, but my expectation was rational, given what I knew at the time.

In 2006, it might have been rational to forecast that housing prices would not crash. If you lived in many countries, your forecast would have been correct. If you happened to live in Ireland or the US, your forecast would have been incorrect. But it might well have been a rational forecast in all countries.

Noah Smith has a beautifully numerate discussion of wars being fought by radical Muslims. He does it in the context of analyzing Trump advisor Steve Bannon, and that analysis is not bad.

But what really struck me was his response to this claim of Bannon:

[I]t's a very unpleasant topic, but we are in an outright war against jihadist Islamic fascism. And this war is, I think, metastasizing far quicker than governments can handle it...
. . .

I believe you should take a very, very, very aggressive stance against radical Islam...If you look back at the long history of the Judeo-Christian West struggle against Islam, I believe that our forefathers kept their stance, and I think they did the right thing. I think they kept it out of the world, whether it was at Vienna, or Tours, or other places... It bequeathed to use [sic] the great institution that is the church of the West.

Smith then reports on the numbers on deaths from some Islamic groups fighting others. H writes:

Let's look at the main wars currently being fought by radical Islamic forces. These are:

Syrian Civil War (~470,000 dead)
2nd Iraqi Civil War (~56,000 dead)
Boko Haram Insurgency (~28,000 dead)
War in Afghanistan (126,000 dead)
Somali Civil War (~500,000 dead)
War in Northwest Pakistan (~60,000 dead)
Libyan Civil War (~14,000 dead)
Yemeni Civil War (~11,000 dead)
Sinai Insurgency (~4,500 dead)

Smith adds:

This is a lot of dead people - maybe about 2 million in all, counting all the smaller conflicts I didn't list. But almost all of these dead people are Muslims - either radical Islamists, or their moderate Muslim opponents. Compare these death tolls to the radical Islamist terror attacks in the West. 9/11 killed about 3,000. The ISIS attack in Paris killed 130. The death tolls in the West from radical Islam have been three orders of magnitude smaller than the deaths in the Muslim world.

Three orders of magnitude is an almost inconceivable difference in size. What it means is that only a tiny, tiny part of the wars of radical Islam is bleeding over into the West. What we're seeing is not a clash of civilizations, it's a global Islamic civil war. The enemy isn't at the gates of Vienna - it's at the gates of Mosul, Raqqa, and Kabul.

And radical Islam is losing the global Islamic civil war. In Syria and Iraq, ISIS is losing. In Nigeria, Boko Haram is losing. In all of these wars except for possibly Afghanistan, radical Islamic forces have been defeated by moderate Islamic forces.

Sometimes that's because of Western aid to the moderates. But much of it is just because a medievalist regime holds very, very little appeal for the average Muslim in any country. Practically no one wants to live under the sadist, totalitarian control of groups like ISIS. These groups are fierce, but their manpower is small and their popular support is not very large anywhere.

How tragic it would be if Steve Bannon's innumeracy helped cause the U.S. government to embroil itself in the Middle East even more than Bush and Obama did.

Are Americans racist and xenophobic?  As usual, two package deals angrily competing for our attention.  The first says: Americans are obviously racist and xenophobic.  The second says: No, you're just being paranoid. 

Neither package deal sees America clearly.  For racism, Avenue Q has it right: while (almost) everyone's a little bit racist, the key word is "little."  How little?  In the United States in recent decades, race has minimal effect on earnings once you correct for obvious measures of worker productivity - and minimal effect on incarceration once you correct for obvious measures of law-breaking.  While these aren't the only possible metrics of racism, they are the main ones people get angry about.  And there's not much there.

Xenophobia, in stark contrast, is rampant.  With apologies to Johnny Carson, let me put it this way...

How xenophobic are Americans?

[dramatic pause]

Americans are so xenophobic, they don't even favor open borders with Canada.

Think about all the popular arguments against immigration.  Immigrants hurt low-skilled Americans.  Immigrants abuse the welfare state.  Immigrants commit crimes.  Immigrants don't learn English.  Immigrants refuse to culturally assimilate.  Immigrants vote for Sharia. 

Now ask yourself: How do any of these arguments even remotely apply to Canadians?  But the sound of crickets changes nothing.  If a Canadian asks to live and work in the U.S., America's default answer remains: No.

Historically, yes, opposition to immigration was closely tied to racial and ethnic bigotry: first against Asians, then against Southern and Eastern Europeans.  And anger about immigration continues to be racially enhanced: Americans gripe far more about an illegal Hispanic immigrant from the South than an illegal white immigrant from the North. 

Still, when xenophobia conflicts with racism, it is xenophobia that prevails.  U.S. law genuinely grants citizens, regardless of race, the basic human rights to live and work anywhere they choose - and denies these basic human rights to everyone else on Earth - even if they're the spitting image of Ozzie and Harriet.  We bitterly joke about DWB - the de facto "crime" of Driving While Black.  But WWF - Working While Foreign - is literally illegal... unless, of course, the U.S. government feels like making an exception.  And even if you're Canadian, the U.S. government rarely feels like making an exception.

This doesn't mean, of course, that Americans spend much time decrying Canadians, or even thinking about them.  But if you broach the subject, Americans' xenophobia is plain as day.  Why not let Canadians live and work here?  Well, why should we?  What's wrong with Canada?  Why can't Canadians just stay there?  A fellow human being from Canada wants to rent a U.S. home from a willing landlord and accept a U.S. job offer from a willing employer - and Americans favor prohibition for no identifiable reason whatsoever.  If that's not xenophobia, what is?

But aren't people in every country - Canada included - similarly unreasonable and unfair?  Sure.  Xenophobia - not racism - is the unrepentant bigotry that rules the world.  People in every country on Earth take it for granted.  But as we teach our children, "Everyone else is doing it" is no excuse for bad behavior.  Almost everyone is is extremely xenophobic.  And everyone should stop.  Starting with you.

In a post yesterday, Tyler Cowen writes, "Here is perspective from Larry Summers." Not here is a perspective from Larry Summers. Not here is Larry Summers's perspective. The implication is that Larry Summers has a good perspective. The issue? Trump.

So let's consider Larry's perspective.

I'll lead by saying that there is much about Trump to criticize. Larry nails much of it. There is much I agree with. But he also repeats a falsehood. And falsehoods don't become true with repetition. He writes:

He [Trump] has invoked standard anti-Semitic tropes in his political advertising.

Here's the ad that WaPost writer Dana Milbank and Larry Summers found anti-Semitic. Bob Murphy does a nice analysis, writing:

The only other commentary I will make is to note the points in the video where Trump identifies enemies, in order to get people to vote for him. I will identify people according to their official demographics, for a purpose that will be clear at the bottom.
0:05 Hillary Clinton (white Christian woman)
0:21 George Soros (Jewish man)
0:22 Janet Yellen (Jewish woman)
0:24 A whole group [20+ people] of financial ministers and central bankers, with all kinds of colors, men and women.
0:33 Obama walking with Prime Minister Abe (I think?) (black Christian man, Japanese man)
0:36 Bill Clinton (white Christian man)
0:44 Hillary Clinton shaking hands with Tony Blair (I think?) (white Christian woman, white Christian man)
0:48 Bill and Hillary Clinton representing "the political establishment" (white Christian man and woman)
0:59 - 1:04 More coverage of "global power structure" with 10+ foreign elites, both sexes and many colors
1:14 Lloyd Blankfein walking to podium at Clinton Global Initiative (Jewish man)
1:15 - 2:00 Video doesn't show any more enemies, but instead shows the average Americans who will save the day.

My friend David Bernstein, a law professor at George Mason University, and not someone who is oblivious to anti-Semitism, writes an even better analysis of the ad, in, as it happens, the Washington Post. The whole thing is worth reading. Here's a slice:

First, and in contrast to almost every article I've read about the ad, suggesting that Jews were somehow featured, the Jews in the ad only appear for a total of about four seconds in a two-minute ad. Second, only Yellen and Soros are identified by name. I doubt 1 in 20 voters even knows who Yellen is, much less her ethnic background. Moreover, neither has a recognizably Jewish name -- if you were going for the anti-Semitic vote, why not use Clinton supporters far more well-known and identifiably Jewish, such as Steven Spielberg, Joe Lieberman, or even Sarah Silverman? I didn't know Yellen is Jewish. Third, Lloyd Blankfein is pictured, but not identified by name. How many voters would recognize Blankfein? I didn't. And how many of those know he's Jewish? Again, I didn't.

And:

Even more puzzling, why would you attack Jewish bankers to appeal to the best-informed segment of white supremacist extremists the same weekend you float the name of a Jewish banker, Steven Mnuchin, formerly of Blankfein's Goldman Sachs, as a possible Treasury secretary? Are the white supremacists supposed to be smart enough recognize Blankfein as a Jew, but not smart enough to know Mnuchin is a Jewish name, or to Google him?

There's so much to criticize about Trump and, in the next few weeks, I'll be doing so. I've held off since his election because I've wanted to see his picks for various Cabinet positions. It's becoming clear that some are as bad as I feared.

But that makes it all the more important not to make phony accusations.

It really shouldn't surprise us much, though, that Larry comes at this the way he does. He's an insider. And, if Elizabeth Warren is to be believed, here's a telling recounting by her of a conversation she had with Larry early in her time in Washington:

After dinner, "Larry leaned back in his chair and offered me some advice," Ms. Warren writes. "I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People -- powerful people -- listen to what they have to say. But insiders also understand one unbreakable rule: They don't criticize other insiders.

Someone who won't criticize other insiders is also someone who is unlikely to be fair in his criticism of outsiders or of competing insiders in the other camp.

I've been frequently arguing that fiscal stimulus makes no sense, especially at a time when the unemployment rate is 4.9% and the Fed is raising interest rates. Any impact on aggregate demand will be offset by tighter monetary policy.

In contrast, prior to 2007, no one (AFAIK) was suggesting that infrastructure spending is a sensible countercyclical tool when unemployment is 4.9%. And if someone did recommend it, they almost certainly recommended LOWER than usual spending at 4.9% unemployment.

Now Janet Yellen is saying much the same thing; now's not the time for fiscal stimulus:

President-elect Donald Trump has pledged a $1 trillion infrastructure spending program to help jump-start an economy that he said during the campaign was in terrible shape.

Speaking on Capitol Hill Thursday, Federal Reserve Board Chair Janet Yellen warned lawmakers that as they consider such spending, they should keep an eye on the national debt. Yellen also said that while the economy needed a big boost with fiscal stimulus after the financial crisis, that's not the case now.

"The economy is operating relatively close to full employment at this point," she said, "so in contrast to where the economy was after the financial crisis when a large demand boost was needed to lower unemployment, we're no longer in that state."

In my recent Lake Wobegon post I pointed out that fiscal policy can't always be above average. Thus if you do fiscal stimulus when unemployment is relatively low, then in the next recession fiscal policy will have to be tighter than otherwise:

The key point to understand about fiscal stimulus is that more fiscal stimulus today implies less fiscal stimulus during the next recession. That's because the expansionary impact of fiscal stimulus (in the Keynesian model) occurs because the full employment budget deficit gets larger than before, not because it is large in absolute value.

For the moment, let's assume that the full employment deficit during the next recession is $X. In that case, the larger the fiscal stimulus between now and the onset of the next recession, the smaller the increase in the deficit during the next recession, and thus the smaller the fiscal stimulus during the next recession.

And now Janet Yellen is saying the same thing:

Yellen cautioned lawmakers that if they spend a lot on infrastructure and run up the debt, and then down the road the economy gets into trouble, "there is not a lot of fiscal space should a shock to the economy occur, an adverse shock, that should require fiscal stimulus."

In other words, lawmakers should consider keeping their powder dry so they have more options whenever the next economic downturn comes along.

For weeks and months we've been bombarded with nonstop commentary from media "pundits" about how monetary policy is out of ammo, and fiscal stimulus is the shiny new thing that everyone favors. I've been standing in the middle of the road yelling, "stop".

My opponents claimed that the Fed does not agree with me. So how does it feel to achieve a dramatic come from behind fourth quarter victory?

Pretty darn good!

Might the administrative state have expired quietly, six months ago? Arguably it did, if what we mean by the administrative state is the array of regulatory agencies, not only executing the law, but also creating binding new law without legislative consent. Bear with me.

With an introductory paragraph like that, I had to read on. And it was worth it. This paragraph is from Brian Mannix, "Midnight Mulligan - The Congressional Review Act Rides Again!," and is published on our sister site, The Library of Law and Liberty. Here's his bio at the site:

Brian Mannix is a research professor in the Regulatory Studies Center at George Washington University. From 2005 to 2009 he served as the Environmental Protection Agency's Associate Administrator for Policy, Economics, and Innovation; earlier he served as Deputy Secretary of Natural Resources for the Commonwealth of Virginia. From 1987 to 1989, Mr. Mannix was managing editor of Regulation magazine at the American Enterprise Institute.

I worked with him briefly as one of the editors of Regulation in the late 1980s. His knowledge of regulation, as the above bio suggests, is both wide and deep.

The piece is well worth reading. And the ending is great:

The May 30 cutoff date for rules in CRA jeopardy is only an estimate, based on the House and Senate calendars for the current lame-duck session. If Congress decides to adjourn earlier, that date could move up. The Labor Department's controversial overtime rule was published May 23, for example, and will soon acquire CRA immunity if the lame duck session continues. Which raises the question, what business are the House and Senate conducting that keeps them in town? Surely not to confirm President Obama's nomination to the Supreme Court. If the 114th Congress is inclined to empower their successors, they might decide the best course is simply to wrap up early and adjourn. Thanksgiving is nigh, and we thank you for your service. Go! Fly away home!

For the reasoning that leads to this bottom line, read the whole thing, which is not long.

From what we are reading in the papers, it would appear Donald Trump is relying mainly on seasoned Republican apparatchiks: people that may be liked or disliked, but not considered amateurish newcomers to the Washington scene. Some people, however, are arguing that the Trump's election will have resonance no matter what the new President actually does - just because he won. I think there is more than a grain of truth in there. Though the Trump platform isn't necessarily on par with, say, Marine Le Pen's in France, and though Brexit may well be considered more of a "British" thing than another popular insurgencies against the establishment, all these things have been boxed together by mainstream media as "populism." Therefore, in this narrative, "populists" have won the biggest prize of them all, the White House.

Paul Krugman wrote a piece claiming that Trump is not going to do much damage to the U.S. economy in the short term, but is likely to have very problematic consequences for the American society in the long run. The piece is a masterful exercise in the sort of rhetoric a successful populariser of ideas ought to command. Krugman writes not so much to send a message to a wider and politically neutral readership--that perhaps doesn't even exist--but to reassure his crowd in the wake of the Trump shock. He manages to tell his readers that (a) the world won't blow up because Donald Trump became President, and he has now told you so and (b) well, if Trumponomics works, it will be because it aims to "stimulate" the economy (even though, of course, stimulus for the rich, of the Trumpian sort, is inferior to the Keynesian/Krugmanian sort). So, if the danger isn't imminent, where, according to Krugman, is it lurking? In the long term, the Nobel laureate predicts "a major degradation in both the quality and the independence of public servants," which should imply "the dismantling of financial reform" and a new financial crisis that will hurt the American working class. 

In short, kleptocracy will lead to disaster. The missing link, perhaps, is that the policies Krugman likes (infrastructural stimulus, for example) are the lever to buy the consensus needed to accomplish those actions he fears (the occupation of government and the civil service by an uncouth bunch of barbarians).

Trump's election has brought Krugman to write a piece that emphasises how people in government are self-interested too, something that many tend to forget selectively, depending on the party in government.

Krugman's emphasis on the fact "in the longer run Trumpism will be a very bad thing for the economy," no matter how well the stock market performs in the next few months, made me recall this 2015 piece in which Krugman chastised the "narrow-minded, irresponsible obsession with long-run problems." Of course, there Krugman was denouncing those who don't take sides against austerity, basically because he thinks it imposed such dreadful economic evils in the short run that they offset any vague long-term benefit.  "In today's economic and political environment, long-termism is a cop-out, a dodge, a way to avoid sticking your neck out." 

Well, I suppose a Trump presidency may have also positive, unintended consequences. I bet a fair number of Trump protesters have campaigned against free trade in the past: will the victory of Trump perhaps let them understand how much the dream of a cosmopolitan, tolerant, open society is intertwined with free trade? It's good that in this instance Paul Krugman is shedding light on the possible, long-term consequences of public policies. The obvious next step is start considering the long-term consequences of policies he likes, and not only those of people he dislikes.

The more I learn, the more I'm amazed by people who claim to base their views on "the data alone."  It's a noble dream, but ponder these harsh realities:

1. Carefully studying data is enormously time consuming and question-specific.  If you really hold yourself to this standard, you won't be able to responsibly hold opinions on more than a handful of questions.

2. As a result of #1, people who claim to base their views on "the data alone" end up outsourcing most of their data work to others.  There's nothing fundamentally wrong with this, but note the bait-and-switch: People who claim to rely on "the data" are in fact relying on their own judgments about which sources are credible. 

3. Data analysis and credibility assessment are radically different skills.  Yes, you could carefully audit an expert's data work on one issue, then broadly trust whoever performs well.  But that's only one approach.  We're at least as likely to evaluate credibility based on demeanor, word choice, and mood.  And this seems reasonable.  I delete spam because the senders radiate crazy, not because I carefully audit any of their statements.

4. On further thought, direct data analysis and credibility judgments rest on a more fundamental faculty: memory.  Even people who conduct their own data analysis don't re-do their work before speaking.  Instead, they rely on what they remember about their data analysis.  The same goes, of course, for credibility.  When we decide to trust someone, we rely almost exclusively on our memory of their trustworthiness.

5. The big lesson: Truth-seekers spend far too little time assessing the tools that underlie almost all of their judgments.  Data analysis is great, but knowing who's credible is even better - and measuring the reliability of your own memory is paramount.

6. Betting simplifies this seemingly Sisyphean process in two keys ways. First, betting is a good, clean way to evaluate credibility.  Second, betting constrains selective memory: If you want to objectively judge a person's reliability - including your own reliability! - don't go with your gut.  Check out his life-long betting track record.  It's not the best possible measure, but it's probably the best feasible measure.
 

If you took Economics 101, you can probably dredge up cases of market failure in which government intervention is justified. For example, governments tax the emission of pollutants (or regulate them directly) because the cost of pollution would otherwise be borne by third parties and thus not taken into account in the balance of supply and demand. By the same token, governments regulate pharmaceuticals because buyers would otherwise lack enough information about their safety and efficacy to judge their value.

This is from Barry Eichengreen, "Rethinking Capital Controls," Milken Institute Review, July 15, 2016. HT2 Mark Thoma.

The last sentence of that paragraph is odd.

"By the same token?" It's not the same token at all. The first part of the paragraph lays out the standard Pigovian case for government intervention to deal with externalities. The last sentence doesn't. It's a very different case. At most, it's a public goods case for intervention.

But it's hard, even granting the "information as a public good" case, to get from that to the particular intervention--regulating pharmaceuticals--that Eichengreen thinks is justified. If the problem is that people lack information, the best solution is for them to get information, not to have the government substitute its preferences for theirs. Even people with full information will make different choices than other people with full information. Imagine, for example, that you have a disease and there's a drug available, but not yet legal, that could help cure the disease. What would you do? Your answer might well differ from that of someone else who has the same information.

As I wrote in The Joy of Freedom: An Economist's Odyssey, "The FDA may have some expertise when it comes to drug safety and efficacy, but on the only issue that matters--your tradeoffs between various risks--you are the expert, and the FDA's scientists are rank amateurs."

Also, in that book, I quoted a 1995 letter from my friend, co-author, and former student, Charley Hooper. I still think it's one of the best statements of the issue. Charley wrote:

The choice a patient makes between therapies (with the help of his agent, the doctor) is based on many variables: efficacy, tolerability, side effects, riskiness, monetary cost, nonmonetary cost (e.g., hassle), speed of action. These drug costs and benefits must be judged within the context of many personal values and tradeoffs: the fear of death, the fear of surgery, the fear of the hospital, potential pain, and the individual's health profile, financial status, value of time, value of health, and risk tolerance. For the FDA to decide what compounds pass this complex tradeoff is preposterous, given that the FDA can never frame the problem from the individual patient's perspective. One individual's best alternative could be another's worst. We have seen this with AIDS patients: "I don't care if I develop cancer and this costs me $20,000 a year because without it I'm dead in 6 months." If, instead of medical therapies, they were telling us what kind of washing machines to buy or where to go on vacation, we would consider it laughable. This is what von Mises [Ludwig von Mises, the noted Austrian economist who showed that information problems would prevent socialism from working] said. Centralized bureaucrats cannot make the proper decisions for individuals because they lack the requisite information.

Perhaps you recall this classic line from Dr. Strangelove:

The whole point of the doomsday machine...is lost if you keep it a secret!

I thought of that line when reading a recent Bloomberg piece on monetary offset of the widely expected Trump fiscal stimulus. (Amusingly, it mentions Paul Krugman as a proponent of the idea, but doesn't mention any market monetarists. But that's good if it means the idea is going mainstream.)

This offset should not necessarily be construed as a negative development, he added, as it would ultimately allow monetary policy to regain its traditional effectiveness as the Federal Reserve moves away from the lower bound.

However, the central bank has also recently discussed the potential benefits of allowing the economy to run hot, which include reversing the supply-side damage done in the wake of the financial crisis and allowing the natural rate of interest to rise, which in turn would enable the Fed to raise its policy rate to loftier heights in the future. After years of hoping for a more active role for the government in facilitating an acceleration in growth, it would be curious development if monetary policy makers were to dampen such an expansion.
In that sense, "Trump may find an unlikely ally in Yellen," argued Neil Dutta, head of U.S. economics at Renaissance Macro Research, as she's a Fed Chair that doesn't seem too inclined to counteract the promised fiscal boost.

"Will overheating the economy pull capacity off the sidelines? Maybe or maybe not," the economist said. "But Yellen will make the case for maybe."

An extended period of low levels of market-based measures of inflation compensation and the disinflationary effects of a stronger greenback -- ahead of the implementation of any protectionist measures -- suggest the Fed to forego a more aggressive pace of tightening, Dutta added.

Moreover, if the Federal Reserve wants to act like a price-level targeting central bank -- effectively making up for sluggish inflation since 2012 -- then it can allow PCE inflation to run a full percentage point above 2 percent for several years, as New River Investments Portfolio Manager Matt Busigin observed.

There's a good argument for either of those ideas (running hot and price level targeting). But the good argument was to be made in 2009 when unemployment was 10%, not 2016, when unemployment is already down to 4.9%

Were the Fed today to retroactively adopt a policy of price level targeting, it would represent almost criminal negligence. The whole point of the policy is to make downturns like 2009 less severe, by creating higher inflation expectations. If you deny throughout 2009, and 2010, and 2011, and 2012 that you plan any such catch-up, and then suddenly announce it in 2016 or 2017, it's like building a (mutual assured destruction) doomsday machine and keeping it secret.

I already have a rather low opinion of Fed policy in 2008-2014. If this article turns out to be correct then my evaluation of the Fed's actions during the crisis will be even lower, indeed much lower.

One other point. People who criticize the idea of monetary rules need to really think about the implications of this article. Yes, we don't know that this will happen, but just the fact that it's being contemplated is frightening.

If you are the kind of person who says, "I don't care about this regime stuff, just tell me what the Fed should do now", then you are not part of the solution, you are part of the problem.

HT: Benn Steil

Polygamy was Mormonism's most controversial theological novelty.  Critics casually equated it with slavery, dubbing them "the twin relics of barbarism."  Whatever you think about the wisdom of polygamy, its emergence in 19th-century Mormonism raises a deeper question.  Given human conformity, how did such a radical break from social convention ever get off the ground?  John Turner's Brigham Young: Pioneer Prophet provides an intriguing window into the sales process:

By April, Nauvoo buzzed with tales of adultery, "spiritual wifery," and apostasy. At the church's annual conference, Hyrum Smith felt obliged to contradict rumors " about Elders Heber C. Kimball, Brigham Young, himself, and others of the Twelve, alleging that a sister had been shut in a room for several days, and that they had endeavored to induce her to believe in having two wives." The sister in question was Martha Brotherton.

While individuals often responded with disbelief and disgust when church leaders taught them the doctrine of celestial marriage or approached them about becoming plural wives, Brotherton was somewhat unusual in making her disillusionment with the church and its leaders a matter of public scandal. She did so because of John C. Bennett. The mercurial Bennett lost his church membership in June following allegations of his own sexual indiscretions, and he soon began assembling evidence he could use -- as one unsympathetic newspaper put it -- "to glut his revenge upon the Prophet." Bennett met with Brotherton in St. Louis, where the young woman and her parents had relocated, and persuaded her to detail her travails in a letter, a notarized copy of which was published in one of the city's newspapers and later included in Bennett's exposé of Mormon polygamy, political power, and sacred rituals.

In the affidavit, Brotherton stated that Young and Kimball persuaded her to meet with Joseph Smith in the upper room above Smith's store, the same room in which Young had officiated at two of Smith's plural weddings and in which he received his endowment. According to Brotherton, Smith and Kimball left her with Young, who then "arose, locked the door, closed the window, and drew the curtain" before asking her if she would marry him "were it lawful and right." Young then explained the prophet's teaching on the matter:

brother Joseph has had a revelation from God that it is lawful and right for a man to have two wives; for, as it was in the days of Abraham, so it shall be in these last days, and whoever is the first that is willing to take up the cross will receive the greatest blessings; and if you will accept of me, I will take you straight to the celestial kingdom; and if you will have me in this world, I will have you in that which is to come.

 

When Brotherton demurred, Young, after demanding a kiss, went to fetch Smith. According to Brotherton's affidavit, the prophet provided her with glib encouragement: "if you do not like it in a month or two, come to me, and I will make you free again; and if he [Young] turns you off, I will take you on." Young proceeded more cautiously and seriously, asking, "Did you ever see me act in any way wrong in England, Martha?" Brotherton begged for time to consider the proposal. She and her parents soon left Nauvoo, convinced that Smith and his apostles were "deceivers."

While this particular effort blew up in his face, Young was of course amazingly successful in the end.  He didn't just revolutionize Mormon family structure for six decades; he personally married fifty-five women and fathered fifty-nine children.  So let's break down the key components of his sales pitch.

1. Alpha status.  The supreme leader and his trusted lieutenants personally manage the persuasion.

2. Isolation. The would-be convert is physically separated from contrary influences by the believers. 

3. Slippery slope.  According to the account, Young leads with a hypothetical, "asking her if she would marry him 'were it lawful and right.'"  Once the hypothetical is on the table, he affirms the premise, invoking the teaching of the prophet.

4. Try and see for yourself.  After all this, the salesmen still don't expect a sudden conversion.  Instead, they urge Brotherton to try their proposal by emphasizing how readily she can back out.

My guess: The tactics of the Mormon inner circle well-tailored for their purpose.  But do they extend to non-conformity in general?  To take one pressing example: Could you use an analogous rhetorical steps to convince students to forego traditional brick-and-mortar college in favor of online learning?  I doubt it, but I'm curious.  Can our commitment to college really be more rigid than 19th-century Americans' commitment to monogamy?  Does society penalize educational non-conformity more than marital non-conformity?  Or what? 

Here's Tyler Cowen in Bloomberg:

In Keynesian theory, fiscal policy only works well if you use it in down times and pay off the bill during a boom. Trump seems ready to do the opposite by upping spending as the economy approaches full employment. After that? Recent history suggests that many countries switch back to austerity precisely when they shouldn't. That is a reality proponents of "spend more now" have to reckon with, and it means stimulus can bring a bigger contraction in the future than the boost it gives today.

For years, I have been reading about evidence that the 2009 fiscal stimulus promoted by the administration of President Barack Obama was good for the American economy. Study after study shows that it boosted GDP across a two- to three-year time horizon, as indeed it did. Furthermore, some parts of the stimulus truly were beneficial, for instance the aid to state and local governments that limited the need for temporary layoffs. But a serious evaluation of the Obama stimulus, and its longer-term consequences, remains to be done.

Tyler's right that if the Keynesian model is true, then fiscal stimulus right now would make the economy less stable (as I pointed out in my previous post.) But I don't think the Keynesian model is true, and hence I'm not particularly concerned about that issue. (Instead, I'm concerned that fiscal stimulus will worsen the public debt problem in future decades--the deficit numbers being bandied about are frightening.)

Tyler links to nine studies that supposedly show the 2009 stimulus package was successful in boosting RGDP over a period of several years. But are those studies reliable? The ones that I have read don't even come close to showing what they claim to show. Let's review the evidence:

1. The recovery from the 2009 recession was weaker than the Obama administration forecast, indeed weaker than the forecast path if there were no fiscal stimulus.

2. In theory, fiscal stimulus should have no effect if the central bank is targeting inflation at 2%. The central bank is targeting inflation at 2%. Any empirical or theoretical study that does not account for monetary offset is useless. Some of those studies use cross sectional data, which tells us nothing about aggregate effects, for standard fallacy of composition reasons.

3. Keynesians said the 2013 austerity (when the deficit suddenly fell from about $1050 billion to roughly $550 billion) was a test of the proposition that monetary policy could offset fiscal austerity. Monetary policy passes the test with flying colors--as growth sped up in 2013, as compared to 2012 (Q4 over Q4). So when the stimulus models Tyler alludes to were actually tested in the real world, they failed.

4. Ben Bernanke headed the Fed in 2009. He was a student of history, and his primary desire was to avoid repeating the mistakes of the Great Depression. Recall that he believes that Fed passivity caused the Depression. Avoiding that outcome was his overriding goal. Do you really think he would have just passively sat back if there had been no fiscal stimulus, and not have done any monetary offset?

If someone wants to show me studies that do account for monetary offset, I'd be glad to look at them. Until then, I will continue to assume that there are not any reliable studies showing that the 2009 stimulus was effective.

Negative emotions like sadness, anger, and fear tend to come as a package.  Personality psychologists call this package "Neuroticism."  There's a spectrum, of course.  At the high end of Neuroticism, we have people like Seinfeld's George Costanza, who finds misery and outrage wherever he turns.  At the low end, we have people like Seinfeld's Cosmo Kramer, who discovers amusement and excitement around every corner. 

Having a Neurotic personality is not fun, and Neurotics rarely let us forget it.  This doesn't imply, however, that they're victims.  By acting on their sadness, anger, and fear, Neurotics routinely make the people around them sadder, angrier, and more fearful.  Parallel claims hold for non-Neurotics.  They rarely complain, but that doesn't imply they're not victims.

How exactly does society victimize the non-Neurotic?  Look at the news - or, in an election year, politics.  It's a parade of stories crafted to make every onlooker feel sadness, anger, and fear.  It's a pan-ideological problem: Left and right disagree on many things, but both tribes of activists want you to get upset about something every day.  Take a look at the stories your friends shared on Facebook today.  How many aren't a thinly-veiled demand for negative affect? 

If your Neuroticism is high or even average, you probably aren't even aware that you're imposing on others.  For you, calling on people to be sad, angry, or afraid is on par with asking them to walk with their eyes open.  And since non-Neurotics aren't prone to complain, it's easy to remain oblivious to their concerns.

Actually, as a self-identified non-Neurotic, I should say, "our concerns."  Though I loathe to complain, I can't stand to see my people suffer any longer.  Sadness, anger, and fear do not come naturally to us.  We don't "love to hate" things.  And though we are happy to lend a sympathetic and constructive ear to your concrete problems, we don't want to be part of the vicissitudes of your abstract offense.

I know Neurotics are highly unlikely to change their personalities.  But it would be nice if you showed us non-Neurotics a little consideration.  And we so rarely ask for anything!  Without reproach, I ask you this: Please, stop trying to make us feel what you feel. 

Thanks in advance!

With the recent discussion of a possible "fiscal stimulus" coming out of Washington, I find that many people are forgetting a few basic ideas from EC101. As you may know, I do not believe that fiscal stimulus in the US has a significant impact on NGDP or RGDP. That's mostly because of fiscal offset of the demand side impact---the Fed would simply raise rates faster than it is currently contemplating, in order to keep inflation expectations close to 2%. In addition, it has little impact on aggregate supply; indeed even the sign is ambiguous. But for the moment I am going to assume that I am wrong, and that fiscal stimulus is expansionary.

The key point to understand about fiscal stimulus is that more fiscal stimulus today implies less fiscal stimulus during the next recession. That's because the expansionary impact of fiscal stimulus (in the Keynesian model) occurs because the full employment budget deficit gets larger than before, not because it is large in absolute value.

For the moment, let's assume that the full employment deficit during the next recession is $X. In that case, the larger the fiscal stimulus between now and the onset of the next recession, the smaller the increase in the deficit during the next recession, and thus the smaller the fiscal stimulus during the next recession.

But it's actually worse than this. Many pundits seem to be forgetting about the government's long run budget constraint. Even if the national debt is never paid off, it must be serviced. And that means that even in the US there are limits as to how much can be borrowed. This means that I cannot hold the future deficit constant when contemplating fiscal stimulus today (as in the previous example), I need to assume that a bigger deficit today will imply a smaller deficit during the next recession. When you read some pundits, it almost seems as if they are assuming that fiscal policy can always be more expansionary that average. But that's impossible! (Except in Lake Wobegon.)

Thus the fiscal policy being contemplated today would actually make the economy more unstable if the Keynesian model is are correct. Fortunately, the Keynesians are wrong (due to monetary offset) and hence the foolish and poorly timed fiscal stimulus that we are likely to get out of Washington will merely be a waste of hundreds of billions of dollars, nothing more.

I'd also point out that most infrastructure decisions and financing should be made at the state and local level, where funds are more likely to be spent wisely. There may be a few minor externality cases, such as I-95 though Delaware, but these can be handled on an ad hoc basis, by having a Federal agency require a minimal level of road quality in cases where interstate highways roads are mostly used by out of state residents. Ditto for mass transit. LA County just voted a small sales tax increase to fund a massive expansion of its commuter rail system. That's the level of government where these decisions should be made. People make wiser decisions spending their own money, than if they are spending someone else's money.

Alex Tabarrok has an excellent new post pointing out one area where the federal government could help---making it easier to privatize facilities such as airports. This idea is further advanced in Europe, where infrastructure is much more likely to be privately operated, and is generally of higher quality. Hopefully Trump or his advisers will read Alex's post.

BTW, I am not suggesting that the federal government has no role here. Alex mentions some national security issues with a safe electricity grid. In addition to terrorist attacks, some worry about the impact of large solar flares. So there may be a few cases where externality issues allow for a federal role. But they are few and far between. Thus the federal government should NOT subsidize California's high-speed rail boondoggle. My fear is that Trump likes to build grand projects---I hope I am wrong.

Not a federal responsibility:

PS. Newton, Massachusetts (where I live) does a poor job of maintaining its roads. But it's not due to a lack of money; the town is quite wealthy and just built a $200 million high school (3 times the normal cost). It's because voters keep voting for politicians who would rather waste money on lavish schools than fill potholes.

Here's my speech delivered Friday at the fiftieth birthday of the noble Alex Tabarrok.

---

Today we celebrate Alex Tabarrok's fiftieth birthday.  Alas, fifty years is far too short a time to live alongside such an excellent and admirable hobbit!

 

If you're here, you're nerdy enough to know I'm borrowing the words of Bilbo Baggins from chapter 1 of The Fellowship of the Ring.  Which is fitting, because we're all here to celebrate a stupendous nerd.  Think about his descriptors! 

 

Professor. 

Husband of a professor. 

Father of two future professors. 

Economist. 

Blogger. 

Online educator. 

Textbook author. 

Libertarian. 

Pharmaceutical regulation expert. 

Rush fan. 

 

Still, Alex is hardly the biggest nerd I know.  Once in a while I step inside his office to remind him, "I'm a way bigger nerd than you."  But while the competition is tight, Alex is definitely the most lovable nerd I know. 

 

How lovable is Alex Tabarrok?  Well, I barge into his office an average of... five hundred times a day.  Why?  One time in five hundred, I want his professional opinion on my research.  The other 499 times, however, I'm bored, and require him to amuse me.  And he always does!  This man is busy being a professor, husband of a professor, father of two future professors, economist, blogger, online educator, textbook author, libertarian, pharmaceutical regulation expert, and Rush fan.  And he sets all ten hats aside, dumps the pile of junk off his guest chair, and welcomes me.  He welcomes me!

 

And what a joy his welcome is.  Alex converses insightfully on any subject nerdy enough to fit in my head.  Better yet, he converses with unfailing good humor.  When I open up my mouth and blurt my thoughts, I don't know if Alex will think I'm right, or even sane.  But I know he'll never speak an angry word to me. 

 

Why, though, must I barge in on Alex five hundred times a day?  To totally misuse a textbook concept, Alex has the Winner's Curse.  Tyler has repeatedly stated that out of everyone we know, Alex is the best truth-tracker.  He is, quite simply, the most likely to be correct on any given issue.  Which means, by the Laws of Magical Thinking, that I can make anything true by convincing Alex.  Since I believe many outlandish things, I'm lucky that he's conveniently located thirty feet away from me. 

 

But Alex isn't just a delightful polymath.  He is my big brother, who watches out for me and assures me everything will be okay.  A few times in my life, I have been so distraught, I didn't know where to turn.  Then I remembered that Alex was only thirty feet away, and has never let me down.

 

One of my personal rules is: Never make people bend the truth at your funeral.  Alex, the economist with a heart of gold, goes much further.  He doesn't even make me bend the truth at his fiftieth birthday party!  I love you, Alex.  If you love him half as much as I do, please raise your glass to this excellent and admirable Tabarrok.

Will Wilkinson has a post on Wagner's Law:

"Wagner's Law" says that as an economy's per capita output grows larger over time, government spending consumes a larger share of that output. . . .

There's an abiding faith on the right that there must be policy levers that can be pulled to reduce political demand for government spending. The idea that it is possible to "starve the beast"--to reduce the size of government by starving the government of tax revenue--springs from this hope. But the actual effect of cutting taxes below the amount necessary to sustain current levels of government spending only underscores the unforgiving lawlikeness of Wagner's Law. As our namesake Bill Niskanen showed, tax cuts that lead to budget shortfalls don't lead to corresponding cuts in government spending. On the contrary, financing government spending through debt rather than taxes makes voters feel that government spending is cheaper than it really is, which makes them want even more of it.

I'm not entirely convinced by this argument. You could plausibly argue that Reagan's tax cuts restrained spending in the 1990s, and that spending began rising again once the budget was balanced in 2000. But it's at least a defensible argument.

It's time to consider the possibility that there's no convincing them. What if there's no feasible path within the bounds of normal American democratic politics to significantly lower the level of government spending as a percentage of GDP? If we look at the world, what we see is that when people get richer, they want more welfare state. Maybe there's nothing much we can do about that.

It's quite possible that Will is correct, but I have two objections to this line of reasoning:

1. Goals in politics often look impossible until they succeed. I'm old enough to recall when marijuana legalization seemed like a pipe dream. Polls showed strong public opposition, and almost no country had legalized pot. Now a rapidly growing number of states are doing so. Gay marriage is a similar example. And here's an example that is slightly closer to Wagner's Law. How many people in the early 1960s (when the top income tax rate was about 90%)In would have expected a top rate of 28% by 1986, or even 43% today?

2. The ratio of G/GDP is an equilibrium outcome, reflecting a battle between those in favor of bigger government and smaller government. Here are a few data points showing that there is a lot of elasticity in Wagner's Law (G represents government spending, not output, GDP (PPP) data is from the World Bank):

France: G/GDP = 56.1% . . GDP/capita (PPP) = $39,678
USA: G/GDP = 41.6% . . GDP/capita (PPP) = $55,837
Singapore: G/GDP = 17.1% . . GDP/capita (PPP) = $85,209

One might object that I am comparing apples and oranges, three very different economies on three different continents. But check out an economy right next door to France:

Switzerland: G/GDP = 33.8% . . GDP/capita (PPP) = $60,635

Another objection is that while the cross sectional data is uneven, government always grows rapidly within any given economy, as it grows over time. Perhaps, but AFAIK Singapore's government spent about 15% of GDP back in 1970, suggesting very little growth in government during a 45-year period of dramatic economic growth. Small government in rich countries is rare, but it's not impossible.

My point in these examples is not to show that Wagner's Law is wrong---Will is correct that the correlation is strongly positive, merely that there is substantial variation. Think of the US ratio of 41.6% as representing an equilibrium outcome, arising from a battle between those who favor a Singapore-sized government, and people like Paul Krugman who praise the French model. Perhaps if the right had not fought for smaller government then our government would be even larger today.

Giving up on the quixotic quest to find the magic words or the magic policy lever that would finally and decisively falsify Wagner's Law would also lead us to distinguish more clearly between the welfare state and the regulatory state, and to focus our energy on removing regulatory barriers to economic participation, innovation, and growth. We'll see more clearly that a small government and a limited government that reliably protects rights and promotes freedom aren't really the same thing. And we'll begin to recognize that sowing antagonism to the welfare state hasn't accomplished anything very constructive. The war against the welfare state hasn't slowed growth in welfare-state spending so much as it has made our system unusually loathed and unusually shoddy. Mostly, it has fostered a divisive, racially-tinged "makers vs. takers" narrative while encouraging opposition to reform measures that might have made our safety net fairer, more efficient, and better at minimizing the economic anxieties that drive populist political sentiments fundamentally at odds with an open society of free markets, free trade, liberal migration, and peace.

Arnold Kling responded to this paragraph (and some anti-libertarian comments by Noah Smith) as follows:

1. I do not believe that either Smith or Wilkinson is sincerely trying to appeal to libertarians. . . . They are not trying to pass an ideological Turing test. Instead, they employ slurs and charges against libertarians that are popular on the left, which suggests to me that the motive is not to offer constructive suggestions to libertarians. It is not Cato and Reason that are trying to inject racial overtones into American politics. And it is not that I believe in the absolute perfection of markets-what I believe is that markets are better than government at adapting to solve problems.

2. I am not going to be bullied into supporting policies that I believe are bad just because they are popular. If you want to talk me out of my position against a policy, tell me what is good about the policy.

3. The welfare state, like any Ponzi scheme, can be quite popular as long as it is still functioning. However, some time in the next decade, I think it is probable that one of the major welfare states is going to be unable to borrow enough to meet all of its current obligations . . .

I have some sympathy for both sides. Will is right that the GOP often defends subsidies or trade barriers for their people (farmers, car dealers, Medicare recipients, etc.), while eagerly cutting benefits to "those people" (Medicaid, foods stamps, housing subsidies). And yes, I strongly suspect that race is an issue among some members of the right, especially within the GOP. Arnold is right that opposition to big government among intellectual libertarians is much more idealistic, and as far as I know is not at all racially motivated. Many go out of their way to suggest first cutting middle class subsidies.

Arnold's right that we should not to be intimidated by the other side. I'm a strong opponent of the extreme anti-free speech elements in campus political correctness. And I'm not going to let Trump's embarrassing lack of "reasonable" political correctness deter me from holding on to those views. I'm a strong believer that we'd be better off with a Singapore size government than a French size government, and I'm not going to be deterred by the fact that some racists in the Tea Party also talk about small government, particularly given that this recent election showed that those arguments were hollow on much of the right, a mask for a crude grab at power and dominance over "those people".

PS. Will also suggests that we small government types might be able to make more progress with regulatory reform than shrinking government spending. I think that's probably true. But we still need to push back against big government, especially now that we have a new president:

On the campaign trail on Tuesday, for example, Donald Trump told supporters, "We have 41 days to make possible every dream you've ever dreamed." Oddly enough, it's apparently part of Trump's new pitch: NBC News' Katy Tur noticed the Republican nominee make a similar comment a day later.

"You have 40 days until the election. You have 40 days to make every dream you ever dreamed for your country come true."

Yesterday, Trump also reportedly vowed to supporters he'd "fulfill every single wish" they have for his presidency.

Not quite sure what that means, but "fulfill every single wish" doesn't sound like austerity to me.

Here's my dream, Mr. Trump:

HT: David Henderson, Jonah Goldberg

Many people say they are humbled when others bestow honors on them. I've never understood that. When I get honors, I feel proud, if I think I deserve them. I get humbled when I make mistakes.

I've consistently made one mistake with regard to Donald Trump: I've underestimated him. Very early on, I thought he had no chance to win the Republican nomination. (Although I did win what I regarded as easy money by betting Tim Kane that Trump would not pull out before Jeb Bush did.) Second, I thought he would lose the general election to Hillary Clinton. I did not predict anything close to a landslide for Hillary. But I did predict that it would be a decisive win, that he would win fewer than 240 electoral votes, and that the networks would announce it at 8:01 p.m. PST.

In the days ahead, I'll give my comments about what to expect from a Trump presidency. But they will be very tentative. I don't think anyone knows, maybe not even Trump. I'll also give my thoughts on some other election outcomes, here in California (two of which I was involved in) and elsewhere.

But for now, I want to address an issue that Trump has already made some statements about: repealing Obamacare. Here's what Wall Street Journal reporters Monica Langley and Gerard Baker wrote after an interview with Trump:

Mr. Trump said he favors keeping the prohibition against insurers denying coverage because of patients' existing conditions, and a provision that allows parents to provide years of additional coverage for children on their insurance policies.

The BBC mistakenly referred to these as "the two pillars of the bill." Only one of them--the prohibition against denying coverage--is a key provision. The coverage for "children," that is, people up to age 26, is a small part of Obamacare.

As I've written on Econlog before, there are two key provisions of health-insurance regulation that destroy health insurance as health insurance: the combination of guarantee issue and community rating. Either one of them on its own does not destroy insurance. Together they do, by taking the insurance out of insurance. With guaranteed issue alone, the part of Obamacare that Trump says he wants to keep, health insurance could still function as insurance. Insurers could say, "Sure, we'll insure you even though you have cancer. That will be $50,000 a year." That is what would happen if he didn't keep community rating. With community rating--that is, people being charged the same regardless of risk--insurance could still be insurance. Insurers could charge everyone the same but simply deny coverage to those who are too high-risk.

So it's guaranteed issue that Trump says he wants to keep; he has not addressed community rating. My fear, though, is that he meant he wants to keep both and that possibly he, or the reporters, didn't see the clear distinction. Both provisions are, unfortunately, enormously popular, with Republicans and Democrats. They're also popular with the general public. One data point: a self-employed guy I know who buys health insurance for him and his wife now pays approximately twice what he paid before Obamacare and it's for worse coverage. When I explained to him that it was due to these two provisions, he responded that he likes both provisions but he wants to pay less.

By the way, more recently, Megan McArdle has written an excellent piece on this.

I sometimes learn from people's comments. So I want to hat tip a recent commenter on one of my four pieces on the Council of Economic Advisers' report on alleged monopsony in the labor market. In Part II, I said that non-compete agreements for workers who don't have company secrets seem to "suck." Well, at least I said "seem." My late professor and mentor Armen Alchian would have tut-tutted if he had seen that. One of the most important things I learned from Armen is that when you see a practice that is adopted voluntarily but that doesn't seem to make sense, don't immediately assume that it doesn't make sense. Instead, ask under what conditions it might make sense.

I forgot that momentarily.

But commenter Aaron McNay caught my error, pointing out:

Both employers and employees would like to be able to train the employees if the cost of doing so is less than the gains in productivity. However, there is a potential collective action problem here. What happens if the employer provides the training, but the employee then moves onto another job? The employer bears the burden of the training costs, but does not receive any of the benefits. As a result, the employer does not provide the training, and a mutually beneficial trade is not made.

By preventing the employee from being able to move, a non-compete agreement eliminates the collective action problem. The employer provides the training and the employer and employee are made better off. There are more complications to this than presented here, of course. However, I still think it is an issue that is ignored too often when talking about these type of agreements.

Jason Furman and Alan Krueger followed up on the CEA report with an op/ed in the Wall Street Journal.

That led me to write this letter, which was published today:

Jason Furman and Alan B. Krueger ("Why Aren't Americans Getting Raises? Blame the Monopsony," November 4) claim "There is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause--other than to restrict competition and weaken worker bargaining power."

That's false. There's potentially a very good reason for employers to require such clauses: so that they can get a payback on the training they provide.

A dilemma that faces any employer who provides training to his employees is how to collect on the training. Imagine that the worker produces output worth $10 per hour and is paid $10 per hour. Imagine also that the employer can provide training that costs $1 per hour but increases the employee's productivity by $1.50 per hour. It makes sense to do that, right?

But what if the employee, with that training, can get $11.50 per hour elsewhere that reflects his higher productivity. He may well leave. Then the employer who provided the training lost on the deal. Solution: a non-compete agreement so the employee can't work for a competitor in the same industry that finds that training useful.

The WSJ editor changed the last sentence in a way that's not quite faithful to my view, to make it sound as if I advocate such contracts. I don't know enough to advocate them. Rather, I'm suggesting that employers see non-compete agreements as a solution.