In a segment on the economics of price gouging on NPR last Friday [it starts at about the 11:40 point], my former University of Rochester colleague Richard Thaler points out that merchants who price gouge create ill will among their regular customers that will come back to bite them later. He's right. In response, Don Boudreaux lays out clearly both the fact that Thaler is right and, more important, the fact that this does not undercut the case for allowing price gouging. Don writes:

Yet surely no one is more aware of this downside of "price gouging" - and more interested in avoiding it - than are merchants themselves. Therefore, if after a natural disaster we nevertheless witness significant price hikes, we must ask why the price-hiking merchants are knowingly risking their reputations with consumers. The obvious answer is that the natural disaster caused supplies of goods to fall so extremely that it pays merchants to raise prices even though doing so imperils these merchants' good reputations.

There's another point to make too. We economists point out, as I did here, that the higher prices during emergencies attract resources--water, plywood, etc.--from other parts of the country. Think about who those people are who are supplying the resources. The obvious point is that they probably wouldn't do it if they were not allowed to charge higher-than-normal prices. The more-subtle point is that they don't have to worry about lost good will from future customers because many of them are engaged in one-time transactions. The guy who thinks to buy a lot of cases of water in advance and then sell them to others may not even be in the water business. He's simply trying to make a buck by doing something that buyers show by their actions is very valuable.

As I pointed out in my interview, by allowing price gouging, we get, to some extent, the best of both worlds. We get the traditional merchants like Wal-Mart, who worry about reputation, stocking certain supplies in advance and not raising prices. We also get the fringe, one-time suppliers, bringing in more supplies in response to the higher prices they can charge.

I found this quote from Thaler, at the 15:09 point, economically illiterate:

A time of crisis is a time for all of us to pitch in; it's not a time for all of us to grab.

Remember that he said this in the context of opposition to price gouging. But what price gouging does, as Don Boudreaux points out, is cause people far from the crisis spot to pitch in by temporarily foregoing buying the water, plywood, etc. that, due to price gouging, are priced higher even outside the directly affected area.

P.S. If you're inclined to dis NPR, then listen to the whole thing. It goes only about 4 minutes. They do a nice job, calling on two economists and one philosopher, of laying out the beneficial economics of price-gouging before going to Thaler to give an alternate, if badly thought out, counterpoint. My one criticism is that the host, Kai Ryssdal, leads by saying that "the free market is cold-blooded, heartless." He never says why, assuming, as he probably knows he can, that most of his listeners will agree with him.

For the last two years, I homeschooled my elder sons, Aidan and Tristan, rather than send them to traditional middle school.  Now they've been returned to traditional high school.  We decided to mark our last day with a father-son/teacher-student podcast on how we homeschooled, why we homeschooled, and what we achieved in homeschool.

In person, Aidan and Tristan are rather reserved, so if you've only met them once or twice, you don't know what's going on inside their heads.  On the podcast, in contrast, they are... outspoken.  And all paternal pride aside, they are knowledgeable beyond their years.  Their 5's on the Advanced Placements tests in United States History, European History, Microeconomics, and Macroeconomics are only the beginning.

You can hear the whole podcast now on Soundcloud.  Enjoy!



P.S. In the opening of the podcast, I state that I homeschooled them for "two weeks."  The actual time was two years!  Slip of the lip.

On April 27, 2017, Boeing petitioned the U.S. Department of Commerce to impose antidumping and countervailing duties for a total of "at least" 159.91% on Bombardier's C Series commercial jets. Antidumping duties are supposed to compensate for the sale of an imported good at a price lower than its normal price or "normal value." Countervailing duties are meant to compensate for subsidies from the government of a foreign exporter. On the first ground, Boeing claims that Bombardier is charging Delta Air Lines a price 41% less than the production cost; and, on the second ground, that Bombardier has received $2.5 billion in subsidies from the provincial government of Québec and a promise of a few hundred million dollars more from Canada's federal government.

This is from Pierre Lemieux, "Boeing vs. Bombardier," Econlib Feature Article for September.

One of the things I like about the piece is that in a few paragraphs, Pierre lays out the basic facts about antidumping duties and countervailing duties. Also, he gives the reader a feel for the petitioners' likelihood of success. Hint: it's very high. The whole piece is worth reading.

Pierre draws on the work of Dartmouth international trade economist Douglas A. Irwin. In his understanding and perceptive on trade, I would put Doug in the top 10 trade economists in the United States.

Here's Larry Summers in the Financial Times:

Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far.

I decided to follow the link, expecting an academic study showing the rise of monopoly power. Instead I found another FT article, which began as follows:

Have we reached a market top in technology stocks and, in particular, those of the Fangs: Facebook, Amazon, Netflix and Google? That is the question many investors are asking, not only because their valuations seem so high but also because it seems Big Tech has become the new Wall Street and the prime target for a populist backlash in a world increasingly bifurcated, economically and socially.

It's interesting that Summers chose those examples of monopolies reducing the purchasing power of consumers. Let's take them one at a time:

1. Facebook: Totally free social networking.

2. Amazon: Known for slashing prices by introducing more competition into industries such as book retailers. Just purchased Whole Foods, and is now slashing the prices of groceries.

3. Netflix: A new product that did not previously exist; hence it cannot possibly explain declining consumer purchasing power. If compared to movie theaters, it's cheaper.

4. Google: Totally free search engine.

Even if Facebook, Netflix and Google were very expensive, instead of dirt cheap, I don't see how they would reduce purchasing power. Back in 1990 the cost of these services was infinite---they didn't exist.

There may be some problems associated with these companies---perhaps they lead to more inequality at the very top of the income distribution. But I don't see how they can be accused of ripping off consumers with monopoly prices. Am I missing Summers' point?

Perhaps it was the editors at the FT who added the link, not Summers.

A week ago I criticized an article in the Economist, which saw a "puzzle" in the co-existence of low unemployment and sluggish wage gains. I said there was no puzzle, as wage growth was slow because nominal GDP growth was slow. The labor market can eventually adjust to almost any (reasonable) trend rate of growth in NGDP.

Now the Economist has responded, and in doing so has somewhat misinterpreted my position. That's actually not their fault--my post was very terse and the nuances of this issue are quite subtle, with many different interpretations. For instance, take their concluding paragraph:

Janet Yellen's critics tend to say she is excessively devoted to the idea that low unemployment portends higher inflation. They characterize this as adherence to the Phillips curve, which is associated in many peoples' minds with Keynesian thinking. But it was monetarists who first argued that policymakers ultimately cannot control unemployment, because if loose money drives unemployment too low, inflation will accelerate. It is right for the Fed to look for the labour market for signals as to whether monetary policy is tighter or looser than the economy can sustain. Wage growth is the clearest of those signals. And it suggests that we are not in the long run yet.

Many people will read this and infer that it was the monetarists who came up with the idea that the Fed should look to the labor market for signals about the appropriate stance of policy. That's not the case. When Milton Friedman developed his Natural Rate Hypothesis, he argued that unexpectedly high inflation caused low unemployment, and unexpectedly low inflation caused high unemployment. Many Keynesians took that idea and reversed it---that low unemployment causes high inflation. That was not Friedman's view (nor mine). In addition, many Keynesians came to believe that the natural rate of unemployment could be estimated, and used as a guide to policy. That was not Friedman's view. Friedman believed (as do I) that the natural rate of unemployment changed over time, and was difficult to estimate. He favored steady growth in M, whereas I favor steady growth in MV. But neither of us have been supportive of using the natural rate as a guide to policy.

Now I don't want to take this too far. I concede that if unemployment suddenly soars from 4.5% to 10%, as it did in 2007-09, and NGDP falls, that's prima facie evidence that unemployment is above the natural rate. What I deny is that we can know whether unemployment is above or below the natural rate today, when unemployment is 4.4%. In between those two extremes we might have varying levels of confidence in estimating the position of the labor market. Both Friedman and I believe that the Great Inflation of 1966-81 was partly caused by people underestimating the natural rate of unemployment, and the central bank responding with an excessively expansionary monetary policy. I don't want that to happen again.

That's not to say I'm necessarily opposed to easier money. The Fed is falling short of its 2% inflation target, and you can make a good argument that easier money is needed to hit the target. What I deny is the claim that the labor market provides justification for an easier money policy today.

Mr Sumner's view implies there is no output gap, the labour market is in equilibrium, and wage growth is low because inflation expectations have been low. I find this unconvincing, for two reasons. First, it means that unless the Federal Reserve brings job growth back in line with working-age population growth, inflation will soon rise. (Central banks cannot for long keep unemployment below its natural rate.) Yet inflation is in fact falling. Second, as Adam Ozimek at Moody's Analytics has shown, wage growth as measured by the employment cost index is almost exactly where you would expect it to be given the employment-to-population ratio for 25- to 54-year-olds (see chart). If the rate of wage growth consistent with labour market equilibrium had changed to account for a shift in trend nominal GDP growth, you would expect this relationship to have broken down. It has not.

Actually, I would argue that we don't know whether there is an output gap or not. Economics it too imprecise a science to make these sorts of fine distinctions. We underestimated the natural rate of unemployment in the 1970s and overestimated the natural rate of unemployment in the late 1990s. But I'm willing to play the devil's advocate, and defend the hypothesis that we are at the natural rate of unemployment (and employment).

What is the Economist's evidence against this claim? They point to the fact that employment is rising faster than expected, based on growth in the prime age labor force. And I plead guilty to not expecting this to occur this year. (Japan has also had more growth in employment than I expected.) Like many economists, I did not expect unemployment to fall to 4.4%. But contrary to the Economist, this does not show that we still have economic slack in the economy. The strongest argument for economic slack is a falling unemployment rate coinciding with a stable rate of wage inflation. We have that, so I'm happy to admit that it now looks like there was some slack a year ago. But will unemployment keep falling? Maybe, but I'm not convinced. If it's about 3.5% next year then I was wrong. If it's 4.2% to 4.5% next year then that would count in my favor.

A second (and more recent) argument for economic slack is that even if unemployment bottoms out, there are people on the sidelines just waiting to enter the labor force. According to this view, an easier money policy may not reduce unemployment much further, but will lead to more employment by expanding the labor force. This is basically a brand new theory, and I just don't see the data to support this claim. I also find it hard to see the theoretical justification.

I find it much more plausible to assume that the rapid growth in employment reflects secular trends in labor force participation, especially among the elderly. Perhaps various social trends are leading to an extra 50,000 non-prime age workers each month, and these workers are entering the labor force for reasons unrelated to diminishing economic slack. If this seems implausible, let me frame it differently, and tell me which is more plausible:

1. Over a 12-month period, an extra 600,000 older people start working because boomers are retiring, they are still healthy, service jobs don't require brute strength, and American pensions are often inadequate.

2. Over a 12-month period an extra 600,000 people enter the labor force because they think jobs are easier to find when the unemployment rate is 4.4% as compared to when it is 5.0% (a year earlier)

It's quite possible that both of these are true to some extent. But I find the second one to be less plausible. I can understand "discouraged workers" when there is 8% or 10% unemployment---but 5%? Would a bit easier money by the Fed actually draw new workers into the labor market? Yes, a few, but how many? My hunch is that employment has been growing faster than working age population because unemployment is falling and because more older people are entering the labor force. I expect unemployment to stop falling soon, and I don't think the recent trend of the elderly entering the labor force is any sort of "economic slack" phenomenon that can be sped up with easier money. Trying to do so risks destabilizing the economy.

As far as the wage/employment graph, I believe Phillips curves are roughly vertical in the long run. So I don't see how that evidence refutes any of my arguments.

Again, a bit easier money might be appropriate---to hit the Fed's 2% inflation target. But don't try to target the labor market. That didn't work out well in the 1970s, and there's no reason to expect it would work any better today.

PS. I picked the assumption of more elderly people working as just one example of why the labor force might be growing faster than the working age population. There are many other possible assumptions. I picked the elderly because the data seems to point in that direction:

Under my agreement with the Wall Street Journal I can now show you the whole article that John Cochrane and I had published on July 30. Here it is.

Climate Change Isn't the End of the World
By David R. Henderson and John H. Cochrane
July 30, 2017 4:24 p.m. ET

Climate change is often misunderstood as a package deal: If global warming is "real," both sides of the debate seem to assume, the climate lobby's policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

To arrive at a wise policy response, we first need to consider how much economic damage climate change will do. Current models struggle to come up with economic costs commensurate with apocalyptic political rhetoric. Typical costs are well below 10% of gross domestic product in the year 2100 and beyond.

That's a lot of money--but it's a lot of years, too. Even 10% less GDP in 100 years corresponds to 0.1 percentage point less annual GDP growth. Climate change therefore does not justify policies that cost more than 0.1 percentage point of growth. If the goal is 10% more GDP in 100 years, pro-growth tax, regulatory and entitlement reforms would be far more effective.

Yes, the costs are not evenly spread. Some places will do better and some will do worse. The American South might be a worse place to grow wheat; Southern Canada might be a better one. In a century, Miami might find itself in approximately the same situation as the Dutch city of Rotterdam today.

But spread over a century, the costs of moving and adapting are not as imposing as they seem. Rotterdam's dikes are expensive, but not prohibitively so. Most buildings are rebuilt about every 50 years. If we simply stopped building in flood-prone areas and started building on higher ground, even the costs of moving cities would be bearable. Migration is costly. But much of the world's population moved from farms to cities in the 20th century. Allowing people to move to better climates in the 21st will be equally possible. Such investments in climate adaptation are small compared with the investments we will regularly make in houses, businesses, infrastructure and education.

And economics is the central question--unlike with other environmental problems such as chemical pollution. Carbon dioxide hurts nobody's health. It's good for plants. Climate change need not endanger anyone. If it did--and you do hear such claims--then living in hot Arizona rather than cool Maine, or living with Louisiana's frequent floods, would be considered a health catastrophe today.

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

Facing this reality, some advocate that we buy some "insurance." Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. But the same argument applies to any possible risk. If you buy overpriced insurance against every potential danger, you soon run out of money. You can sensibly insure only when the premium is in line with the risk--which brings us back where we started, to the need for quantifying probabilities, costs, benefits and alternatives. And uncertainty goes both ways. Nobody forecast fracking, or that it would make the U.S. the world's carbon-reduction leader. Strategic waiting is a rational response to a slow-moving uncertain peril with fast-changing technology.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won't make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion--subsidizing high-speed trains or a human-free park the size of Montana.

Then, we need to know what effect proposed policies have and at what cost. Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. The Intergovernmental Panel on Climate Change's "scientific" recommendations, for example, include "reduced gender inequality & marginalization in other forms," "provisioning of adequate housing," "cash transfers" and "awareness raising & integrating into education." Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

Climate policy advocates' apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power--waste disposal and the occasional meltdown--might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

Mr. Henderson is a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School. Mr. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar of the Cato Institute.

The piece appeared in the July 31 print edition.

John provides a welcome update, citing a working paper by William D. Nordhaus and Andrew Moffat:
A Survey of Global Impacts of Climate Change: Replication, Survey Methods, and a Statistical Analysis
William D. Nordhaus, Andrew Moffat
NBER Working Paper No. 23646
Issued in August 2017

The present study has two objectives. The first is a review of studies that estimate the global economic impacts of climate change using a systematic research synthesis (SRS). In this review, we attempt to replicate the impact estimates provided by Tol (2009, 2014) and find a large number of errors and estimates that could not be replicated. The study provides revised estimates for a total of 36 usable estimates from 27 studies. A second part of the study performs a statistical analysis. While the different specifications provide alternative estimates of the damage function, there were no large discrepancies among specifications. The preferred regression is the median, quadratic, weighted regression. The data here omit several important potential damages, which we estimate to add 25% to the quantified damages. With this addition, the estimated impact is -2.04 (± 2.21) % of income at 3 °C warming and -8.06 (± 2.43) % of income at 6 °C warming. We also considered the likelihood of thresholds or sharp convexities in the damage function and found no evidence from the damage estimates of a sharp discontinuity or high convexity.

Note that the top end mean is 8.06% of GDP. Even if it went to the top end of the top estimate, that would be 10.49% (8.06 + 2.43), making our 10% almost spot on for the extreme of the extreme.

In retrospect, it is difficult to believe that Congress bothered to come to Hollywood to investigate Communist infiltration, other than for publicity. The movies that Hollywood cranked out from 1934 to 1959 were patriotic. They were socially conservative to a fault: twin beds for married couples. They were politically non-controversial. I think of Yankee Doodle Dandy. This was the era of the New Deal, the Fair Deal, and Grandpa Ike. The fact that Hollywood made The Grapes of Wrath in 1940 is hardly surprising. It had been a best-selling novel. Hollywood makes movies about best-selling novels.

This is an excerpt from Gary North, "Lost Causes on the Right," August 30, 2017. I don't normally link directly to his work. But the piece is insightful while being occasionally hilarious.

Another excerpt:

Alger Hiss at Yalta was important. That was a matter of espionage. The Left has never admitted that he was a spy, and the Left has always tried to cover up his importance at Yalta. Whittaker Chambers was right in blowing the whistle. But if we're talking about homegrown domestic Communism, the true believers who were committed to it wasted their lives, and the dedicated anti-Communists who tried to expose them wasted a lot of time and scotch tape.

Actually, I believe that some of the Left has admitted that Hiss was a spy.

The whole thing is worth reading.

Raghuram Rajan recently gave a speech in Chicago on inequalities. Unfortunately the text is not available on line, but at "Pro Market" we can find a synthesis. Though most of it is hardly original, it seems to me that Rajan has framed the issue in a more interesting way than most.

I find it particularly interesting that he adds a horizontal dimension to inequality, "urban centers and more rural areas that have been deeply affected by trade". This brings us back to the longstanding contrast between cities and the countryside, with innovation being concentrated in the first. This also helps Rajan in giving his policy prescriptions sort of a federalist touch, arguing against more centralization in decision making.

I am less convinced by his main point, though. That is: populism breeds crony capitalism. Certainly nationalism has been the ideological justification of protectionism, and that's not news. But as Rajan notes, people are angry at markets because of the financial crisis, which has been understood as evidence of the corruption of the financial elites. Wasn't that crony capitalism, too?

Rajan's point may be that people are confusing the medicine with the illness, but it doesn't come out like that from the blogpost.

Alan Goldhammer directed me to a very interesting article on the Texas housing market (which avoided the worst of the housing boom and bust):

A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans cannot total more than 80 percent of a home's appraised value. There's a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it's illegal to get even a dollar back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date from the first days of statehood in 1845, when the constitution banned home loans.

"Delinquency and foreclosure rates are significantly lower in Texas," says Scott Norman of the Texas Mortgage Bankers Association. "The 80 percent loan-to-value limit -- that's the catalyst for a lot of this."

Right after the housing bust I suggested that we ought to discourage loans of more than 80% of a home's appraised value. One way to do this is to have FDIC insurance only apply to banks that refuse to issue mortgages of greater than 80% of the appraised value of a home.

Other institutions are free to make those sorts of loans, and if there is a market for them then presumably the loans will be made. But with my proposal the taxpayer would no longer be exposed to the risk of default on low down payment mortgages. It also reduces the government's role in the economy, by restricting the reach of FDIC.

Some worry that these sorts of restrictions would discourage homebuilding. I doubt it---at least not very much---as Texas has the most vibrant homebuilding industry in the entire country. In 2016 Texas built far more homes than any other state, despite being hit hard by the oil price bust. Although limiting the scope of FDIC would have little impact on homebuilding, it would reduce moral hazard and protect taxpayers.

PS. Here's a FT article on the return of subprime mortgages, now called "nonprime".

"The global financial crisis that began in August 2007 resulted from a massive, unavoidable cognitive mistake on the part of regulators and bankers." In a recent op-ed for Project Syndicate, Antonio Foglia made this point in "celebration" (not sure this is the right word) of the tenth anniversary of the financial crisis. Foglia, who is a banker but also a libertarian economist involved with a few think tanks, maintained that unfortunately the crisis taught us the wrong lessons: "regulators have piled on ever-more complex rules, and too-big-to-fail banks have become still bigger". Foglia's article echoes Jeffrey Friedman and Wladimir Kraus's Engineering the Financial Crisis, to me still one of the best works on the crisis.

Antonio's op-ed is well worth reading. I was particularly impressed by the causal link implied in this seemingly uncontroversial observation: "When banks enjoy extraordinary profitability even while playing by the rules, bankers assume that they are doing something right, and they compensate themselves accordingly. ".

The title of this post is the title that Tom Woods gave his interview with me. It's here.

It goes about 23 minutes. Make sure you listen for the pastor/congregation and filet mignon jokes at the end.

People often ask me about the textbooks I used to homeschool my sons during grades 7 and 8.  I appreciate the question, because - aside from grading essays - textbook selection was probably the most time-consuming part of being Caplan Family School's Head Teacher.  The books I assigned, with commentary:

7th Grade
For Algebra we used Practical Algebra: A Self-Teaching Guide.  This is probably the best math text I've ever seen: clear, thorough, and (to our eyes) literally infallible.

For Geometry, I couldn't find a really good text, so we just used the geometry sections of the Kaplan SAT prep book and Kaplan SAT Math Level 1 prep book, plus miscellaneous others.

Our source for Algebra II was Practice Makes Perfect: Algebra II.  Pretty good, but quite a few errors.

For United States history, I assigned Nation of Nations, volumes 1 and 2.  It's not thrilling, but was comprehensive, and low on annoying political remarks and outright economic illiteracy.  Here, and in many other cases, I saved a bundle of money by using old editions.  History really hasn't changed much since 2007, after all.

Later, I bought virtually every A.P. U.S. History prep book for practice questions, as well as Barron's excellent flash cards.

My students also took my labor economics class, using all the assigned texts.

8th Grade
For Trigonometry and statistics, we used the later chapters of Practice Makes Perfect: Algebra II.

For calculus, we used Quick Calculus: A Self-Teaching Guide.  This book is very well-written and easy to follow.  It's also full of errors, but a public-minded Amazon reviewer posted a nearly-complete page of errata here.

If Caplan Family School were continuing, I would start a normal calculus textbook from page 1 now that we finished Quick Calculus.  The subject's hard and deep enough it's worth mastering the basics, then redoing it with all the bells and whistles.

Our primary source for European history was Carlton Hayes' A Political and Social History of Modern Europe, volumes 1 and 2.  Few historians are more fun and funny.  Though his words are occasionally monstrous to modern ears, cut him some slack.  The guy moonlighted by saving tens of thousands of lives during World War II.

Since Hayes only goes up to 1924, I added Civilization in the West to get up to the present day.  But despite its massive size, this book's coverage of the twentieth century was superficial, especially the post-war era.  My sons mainly learned about the twentieth century from random lectures, Wikipedia, and David Phillips' awe-inspiring flash cards.  Best... flashcards... ever.

For micro and macroeconomics, we relied on Cowen and Tabarrok's Modern Principles of Economics.  Using a text written by two guys within earshot may seem like nepotism, but my students privately called it their very favorite textbook: written with joy and packed with mind-expanding problems.

This year, my sons also took my public choice class, using all the assigned texts.

Did I choose textbooks wisely?  Hard to be sure, but I know two things as facts:

1. My students were happy doing their work, day after day. 

2. We took a total of four Advanced Placement tests - U.S. History, European History, Microeconomics, and Macroeconomics, earning straight 5's.  In middle school.  I'll probably never get to cheer for my boys at a competitive sporting event, but this before all the world do I prefer.

For most of the past decade, I've been arguing that people have underestimated the role of falling nominal GDP in the financial crisis of 2008, and that falling NGDP was almost completely to blame for the Great Recession itself. Now it looks like I might have been one of those people who underestimated the role of falling NGDP. Ben Southwood sent me a very interesting NBER paper by Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal, which argues that the financial crisis was not caused by a surge in subprime lending. Here's the abstract:

A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. We argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period.

I had previously bought into the conventional wisdom on subprime loans. And here's how their study differed from previous work in this area:

Mian and Sufi (2009) and Mian and Sufi (2016) identify subprime individuals based on their credit score in 1996 and 1997, respectively. We show that, since low credit score individuals at any time are disproportionally young, this approach confounds an expansion of the supply of credit with the life cycle demand for credit of borrowers who were young at the start of the boom. To avoid this pitfall, our approach is based on ranking individuals by a recent lagged credit score, following industry practices. This prevents joint endogeneity of credit scores with borrowing and delinquency behavior but ensures that the ranking best reflects the borrower's likely ability to repay debt at the time of borrowing. Our analysis shows that income growth and debt growth are positively related during the credit boom for individual borrowers.

This finding is especially important for the work of Kevin Erdmann. It's looking more and more like Kevin got the housing crisis right before anyone else. I eagerly await the publication of the book that he is working on.

PS. The fact that the crisis doesn't seem to have been caused by a surge in risky lending does not mean that our financial system is fine. The system is still riddled with moral hazard, which creates a bias toward excessive debt. It's just that this problem doesn't seem to have gotten worse in the lead up to the Great Recession. Something else is to blame---presumably tight money (i.e. falling NGDP)

PPS. I'm sure that people will contest this study---it will be interesting to see how the debate plays out. The stylized facts do seem to point to a surge in subprime lending:

The sanctions that the United States has piled on Iran for years have become so extensive and complex, and the penalties for violation so severe, that many American companies have erred on the side of caution by forgoing business opportunities in Iran even more than is legally required. The fear of God, or rather of the U.S. Treasury Department, has made them wary of inadvertently stepping across some unclear line.

This is from Paul R. Pillar, "Iranians and Their iPhones, and the Futility of Sanctions," The National Interest, August 26, 2017.

Pillar does a beautiful job in a short space of pointing out some of the consequences of U.S.-government-imposed sanctions on Iran.

Excerpt:

The new development is that Apple is attempting to shut down apps developed by Iranians for use on iPhones inside Iran. The sanctions prohibit Apple from selling its phones in Iran, but millions of the popular devices have been smuggled into the country from places such as Dubai and Hong Kong. Hence the market for apps that Iranians find useful, such as an Uber-like ride-hailing service known as Snapp. Apple is removing Iranian-developed apps, including Snapp, from its App Stores. The company issued a message to Iranian developers in which it attributed the move to "U.S. sanctions regulations".

That Apple's move is the result of an abundance of fear and caution is indicated by Google taking a different tack. Google has done nothing to remove Iranian-developed apps for Android phones from its Play store, and it permits Iranian developers to publish their apps in Iran provided that they do not involve purchases. Maybe Google is on firm legal ground. But with the American political impulse to keep imposing still more anti-Iran sanctions, and with a resulting system of sanctions that is so complicated it can be fully understood only by a few experts in Treasury's Office of Foreign Assets Control, many companies will take Apple's more cautious approach.

And an unintended, but totally predicable, consequence:

As with many of the U.S. sanctions, the overall effect on the Iranian economy is to weaken portions of that economy that are outside the regime and to strengthen the regime's influence over other parts, including the economic activities of the Islamic Revolutionary Guard Corps.

I have written about such consequences here and here, to name two of the many places I have written about them.

HT2 Antiwar.com

This summer, I assigned Tetlock and Gardner's Superforecasting (see here, here, and here) to my homeschoolers.  They took to this masterpiece of political psychology like fish to water.  I'd already taught them about human beings' wacky mapping from language to quantitative probabilities, but these passages have really stuck with them:

In March 1951 National Intelligence Estimate (NIE) 29-51 was published.  "Although it is impossible to determine which course of action the Kremlin is likely to adopt," the report concluded, "we believe that the extent of [Eastern European] military and propaganda preparations indicate that an attack on Yugoslavia in 1951 should be considered a serious possibility." ...But a few days later, [Sherman] Kent was chatting with a senior State Department official who casually asked, "By the way, what did you people mean by the expression 'serious possibility'?  What kind of odds did you have in mind?"  Kent said he was pessimistic.  He felt the odds were about 65 to 35 in favor of an attack.  The official was started.  He and his colleagues had taken "serious possibility" to mean much lower odds.

Disturbed, Kent went back to his team.  They had all agreed to use "serious possibility" in the NIE so Kent asked each person, in turn, what he thought it meant.  One analyst said it meant odds of about 80 to 20, or four times more likely than not that there would be an invasion.  Another thought it meant odds of 20 to 80 - exactly the opposite.  Other answers were scattered between these extremes.  Kent was floored.

Ideally, analysts would adopt standard conventions on the correct way to translate from English to math.  But since that won't happen anytime soon, my son Tristan proposed a simple, effective half-measure.  Namely: every serious book (and perhaps every article) should include a Probability Glossary in the opening pages, alongside the List of Illustrations and List of Tables.  In these glossaries, each author would explicitly state what probabilities (or probability ranges) he assigns to probability-relevant English words.  For example, here are roughly the probabilities I have in mind when writing this blog:

English Term	My Probability
Absolutely certain	100%
Certain	>99%
Almost Certain	≈95%
Highly Likely	>80%
Probable	>60%
Likely	>51%
Toss-up	45-55%
Unlikely	<49%
Possible	1-35%
Highly Unlikely	<15%
Almost impossible	≈5%
Impossible	<1%
Absolutely impossible	0%

Filling out this table makes me self-conscious of the inadequacies of my current usage.  But it's still a big step forward in the War for Clarity.  Indeed, reading this table might make you realize you and I suffer from illusory disagreement - or illusory agreement.  And even if publishers are loathe to add a Probability Glossary, there's no reason why every thinker who wants to signal seriousness couldn't publicly post one on his blog or webpage.

When you do, please credit my son for the idea...

When an area is hit by a natural disaster, the media tends to focus on the proximate cause---a storm, earthquake or some other unusual event. But in many cases there are also deeper causes, which offer a more powerful explanation. Thus the proximate cause of a North Korean famine might be a drought, whereas the deeper cause is bad economic policies. The proximate cause of the high death toll in an Italian earthquake is the collapse of buildings, whereas the deeper cause might be something like corruption in the building industry. For the recent financial crisis, the proximate cause was a lot of loan defaults, whereas the deeper cause was moral hazard created by FDIC, Too-Big-To-Fail, and the GSEs.

The Houston area is currently suffering from a very costly disaster:

Flood damage in Texas from Hurricane Harvey may equal that from 2005's Hurricane Katrina, the costliest natural disaster in U.S. history, said an insurance research group on Sunday. . . .

Hurricane Katrina resulted in more than $15 billion in flood insurance losses in Louisiana and Mississippi that were paid by the National Flood Insurance Program (NFIP), a federal program that is the only source of flood insurance for most Americans.

But Andrew Siffert, the resident Meteorologist at insurance broker BMS Group said it was easy to understand that Harvey will easily reach well over $10 billion in economic loss, and estimated the insured loss at over $5 billion. That figure did not include money that would be paid by NFIP, he added.

The NFIP is already deeply in debt and likely will have to be bailed out again by U.S. taxpayers, as it was after Katrina, to cover the bill for flood damage claims from Harvey.

Just like FDIC, the NFIP program creates excessive risk taking. It also leads to the development of fragile coastal areas, which is why it is opposed by an unusual coalition of free market advocates and environmentalists:

The NFIP was created in 1968 after private insurers stopped selling flood coverage. Critics have said the program provides a misguided tax subsidy to coastal and river valley property owners, encouraging development in flood-prone, often environmentally sensitive areas such as wetlands.

Congressional reform efforts, supported by a coalition of environmental activists and free-market advocates, have largely been thwarted by waterfront real estate interests.

In this particular case, I doubt whether the NFIP played a major role in the disaster, as much of the damage has occurred far from the ocean. But in the case of other coastal storms, the role of flood insurance is much more important, as it encourages the construction of vacation homes on outer islands that are easily overrun by hurricane level storms.

There's another more subtle problem with the Federal government providing disaster relief. This takes pressure off of states and local governments to take preventive actions. If Louisiana had known that it would have had to foot the entire $15 billion tab for Hurricane Katrina, then they might have done more preventive work such as improving the levies along the river.

In the case of Houston, it's too late to fix the federal insurance policy. Going forward, a good first step might be to turn the insurance function over to the states, perhaps accompanied by some sort of block grant. States would then have the incentive to explore options that would minimize the risk of catastrophic insurance losses.

PS. Good luck to everyone on the Texas coast--I have some relatives down there.

This [Cartalist] account fails to explain, however, why governments chose bits of gold or silver as the material for these tokens, rather than something cheaper, say bits of iron or copper or paper impressed with sovereign emblems. In the market-evolutionary account, preciousness is advantageous in a medium of exchange by lowering the costs of transporting any given value. In a Cartalist pay-token account, preciousness is disadvantageous -- it raises the costs of the fiscal operation -- and therefore baffling. Issuing tokens made of something cheaper would accomplish the same end at lower cost to the sovereign. (By the way, note also Graeber's equivocation "invented or." Proposing that governments enlarged the acceptance of coins, after the market economy had already begun using them, is categorically different from proposing that governments invented coinage. Menger himself had no problem with the former proposition, but he rejected the latter as an unfounded prejudice.) (italics in original)

This is a key paragraph from Larry White, "Why the 'State Theory of Money"'Doesn't Explain the Coinage of Precious Metals," Alt-M.org, August 24, 2017.

The whole thing is well worth reading.

Counter-factual history is really hard.  If World War II hadn't happened, one could easily imagine it being replaced by a global thermonuclear war in the 1960s.  But the history of proximate causes is much easier.  Let A, B, C, and D be highly specific major events.  A good historian can credibly determine that A caused B, B caused C, and C caused D, so if not for A, D almost certainly wouldn't have happened.  The assassination of the Austrian Archduke caused World War I, which caused the rise of Marxism-Leninism and Nazism, which caused World War II, which caused the Korean War, which caused Kim Jong Un to be the present dictator of North Korea.  This doesn't prove the world today would be better-off if Princip's assassination plot had failed; something worse could have happened instead.  But we can still chronicle the path of history's dominoes.

My favorite recent example: almost all of the Middle East's disasters over the past four decades can be credibly traced back to a single highly specific major event: the Iranian Revolution.  Let me chronicle the tragic trail of dominoes:

1. In late 1977, political resistance to the Shah comes into the open, with demonstrations, civil resistance, and strikes.  Rather than crushing it with an iron fist as you'd expect, the Shah is indecisive, erratically mixing conciliation with brutality.  By 1979, Iran is officially an Islamic Republic under the dictatorship of Ayatollah Khomeini.

2. Smelling revolution-induced weakness, Saddam Hussein attacks Iran in 1980, starting the Iran-Iraq War.  The war drags on until 1988, killing roughly a million people.

3. During the Iran-Iraq War, Kuwait lends Iraq $14B.  Afterwards, Hussein pressures Kuwait to forgive the debt, and Kuwait refuses.  This leads to an unraveling of relations, and ends in Iraq's invasion of Kuwait in 1990.

4. The U.S. organizes an international coalition to expel Iraq from Kuwait, culminating in the Gulf War.  Part of the deal: the U.S. gets military bases in Saudi Arabia.

5. Iraq is defeated and becomes an international pariah, but Saudi dissidents, most prominently Osama bin Laden, are outraged by the U.S. military presence in the land of Mecca and Medina.  In 1996, bin Laden issues a fatwa calling for the U.S. to leave.

6. Bin Laden tries to give his fatwa teeth by calling for and organizing terrorist attacks against the U.S., culminating in the events of September 11, 2001.

7. The same year, the U.S. responds by giving the Taliban (the rulers of Afghanistan) an ultimatum to hand over bin Laden and his whole organization.  When the Taliban refuses, the U.S. invades.  Though victory is swift, it is far from total.  The war continues to this day, though the body count is lower than you'd think - Wikipedia counts under 100,000 cumulative deaths in a country of over 30M.

8. In early 2003, the U.S. invades Iraq as well.  While the U.S. government does not officially accuse Hussein of involvement in the 9/11 attacks, the wartime hysteria silences most domestic opposition.  Years later, Bush's CIA director concedes that they knew of no actual al Qaeda-Iraq cooperation.

9. After a crushing military victory, the U.S. swiftly loses the peace - unsurprisingly, since the Bush team made almost no plans for the post-war era.  Civil war breaks out, mostly calming down by late 2008.  At this point, the Bush Administration agrees to remove all U.S. forces by 2011.  Body counts vary widely, but all are much higher than Afghanistan's.  Obama tries to renegotiate a delay, but fails.

10. While there's no blatant link between the Iraq War and the start of the Syrian Civil War in 2011, chaos in post-war Iraq is crucial for the rise of the Islamic State of Iraq and the Levant and the long length of the civil war in Syria.  ISIL soon begins launching high-profile terrorist attacks around the world, and sharply aggravates the Syrian refugee crisis.

11. And here we are.

While you could quibble with a few of my points, the basic story is pretty clear.  But notice: If Cassandra had foretold the future of the Middle East in 1977, she would have seemed totally crazy to the entire world.  "One wishy-washy dictator is going to cause all this?!  Yeah, right."

All of which make me wonder: Which thinkers in the 70s came closest to predicting what actually happened?  The Cassandras may already be dead, but it would be nice to know their names.

Regular readers of my posts know that I sometimes highlight the bad or inefficient behavior of government officials and the good or efficient behavior of private for-profit actors. I don't cherry pick. I report what I see. So, for example, I recently wrote about bad behavior from Verizon, but then also wrote about Verizon's fixing the problem. (A number of commenters pointed out, probably correctly, that I got Verizon on the problem so quickly because EconLog is such a prominent, well-known blog.)

So now I'll report some very pleasant and efficient behavior by Sonya from Seattle, who works for the Social Security Administration.

A little over a week ago, I returned from a 3+ week vacation in Canada and Vermont. Catching up on mail a couple of days later, I found a letter from the Social Security Administration congratulating me on having started an electronic account with them on July 25. July 25 was 2 days before I left on vacation. So, even though my short-term memory isn't as good as it used to be, I doubted that I had done any such thing. The letter gave me a number to call in case I hadn't started such an account.

So toward the end of my day last Tuesday, I called the 800 number. The next part might not surprise people who deal much with government. After trying to explain to a robot what I was calling about, I kept getting options that I was not calling about. So I said, "I wish to speak to a human." That worked. The little wrinkle: the wait would be, are you ready, 40 minutes.

I decided to wait, put the phone on speakerphone, and multi-task while waiting. That was made more difficult by two things: (1) background music that I didn't enjoy, and (2) an interruption about every 30 seconds by a male voice that apologized for the wait. One thing that particularly grated was that about every 4th time, which means about every 2 minutes, the male voice explained that I should understand that the wait was so long because Social Security deals with 50 million beneficiaries. That was a surprise to them?

My guess is that many people in my position, frustrated by the long wait they just experienced, would take it out on the person who actually came on to deal with them. But that made no sense; it wasn't her fault. So I chalked up the annoying wait to sunk cost and decided to deal pleasantly with the woman who came on. Good move. She was pleasant too.

She quickly figured out that yes, someone had set up a fraudulent account, and, with apparently a few key strokes, eliminated it. Then she encouraged me to set up a real account while she waited. She wasn't sure that would work because she had just eliminated the fraudulent one and wondered if there might be a lag before my real one took. So at each step, as she walked, me through the process, I got taken to screens that I should have been taken to. When I got to the third screen, she cheered. In all my time dealing with government officials who don't know me, I've never heard that kind of reaction. Then screen after screen, she cheered. It was fun working together.

At the end, I asked her her name and where she was. She was Sonya from Seattle. I told her that I appreciated her spirit and her willingness to help. She encouraged me to stay on the line to give that feedback. I assured her I would. I did. I stayed on the line for about 40 seconds, and, hearing nothing, hung up.

On Facebook this morning, economics Ph.D. student Garrett Malcolm Petersen, aka The Economics Detective, asked the following:

Has anyone else noticed the contradiction between Rawls' veil of ignorance argument against inequality and the concept of male privilege?

Not only had I not noticed it, but, even after reading his question, I still didn't see it.

Fortunately, I was not alone. Other commenters asked Garrett to explain. He did, and has allowed me to reprint his explanation. Here goes:

Men are the high-variance gender. We see more men at the highest peaks of achievement but also at the lowest points of failure. If the men and women in the same country were actually two different countries, Manistan would have a higher average income than Womania but it would also have more absolute poverty, much more crime and incarceration, a higher suicide rate, etc. By saying that men have male privilege, we're essentially saying that being born in Manistan is inherently advantageous over being born in Womania.

The difference between Manistan and Womania is similar to the difference between the United States and Sweden. The US is richer but more unequal than Sweden. So it's somewhat contradictory to say that, behind a veil of ignorance, you would choose being born male over being female (male privilege) while also saying that, behind that veil, you would choose to live in a less unequal country even if it meant a lower average income (social democracy).

Garrett even has an explanation for why people have come up with the idea of male privilege:

My theory is that people who talk about male privilege are high achievers surrounded by other high achievers, in which case their experience would be with men dominating most areas they have experience in. If a social worker came up with a theory of privilege, they would probably invent a theory of female privilege based on all the poor and homeless men they deal with. But privilege theory was developed by academics, so the privilege they saw around them was male privilege.

Although I don't think he should use the word "privilege" to describe success, I think he's making an excellent point.

By the way, I think Garrett is an excellent interviewer, at least based on his interview with me.