September 30, 2016The Boston Globe's Case is Even Worse than Scott Sumner Says
September 29, 2016Missing moods at the Boston Globe
September 29, 2016Economic Growth and the Policy Debate
September 29, 2016Angelo Codevilla on Freedom of Association
September 28, 2016Charles L. Schultze RIP
September 27, 2016The Biggest Loser: Lester Holt
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Bryan Caplan, David Henderson, Alberto Mingardi, and Scott Sumner, with guest blogger Emily Skarbek, blog on issues and insights in economics.
SEPTEMBER 30, 2016
Yesterday, co-blogger Scott Sumner wrote an excellent post taking on the Boston Globe columnist Renee Loth's weak case against marijuana legalization. (Her column is from April, but it's still relevant.)
The case is even weaker than Scott says.
Consider this segment of Loth's case:
As with legalized gambling, the states are in a competitive frenzy to hatch these golden geese before the market is saturated. It's beggar-thy-neighbor time, and no one wants to miss out. States are salivating at the prospect of easy revenue without the pain of raising taxes.
Scott writes: "The endorsement comment is just silly." And he's right.
But notice something else: her discussion of taxes.
Loth rightly recognizes that legalizing gambling would raise tax revenues. And although the payers from whom these tax revenues would be taken would rather not pay them, they would prefer to pay low or even medium taxes on legal low-price marijuana than to pay high risk-freighted prices on illegal marijuana. Numerical example: Imagine that when marijuana is illegal, the price is $200 per ounce. Then it's made legal, with the kind of entry of firms that Loth envisions (in her words, the market is "saturated") so that the price falls to $100 per ounce. Then even a hefty $50 per ounce tax, even if all of it is passed on to consumers (as it would be if the supply curve is essentially horizontal), would cause the price to be $150 per ounce. So the buyers gain and the government gains.
But nooooo, we can't have that, says Loth. Why? Because people aren't contributing "equitably." In other words, she would prefer to purposely make some other people worse off with higher taxes on what they buy (sales taxes) or earn (income taxes) than to raise the same amount of revenue by raising no taxes but instead legalizing a good so that the revenues are taken from people who are better off paying the revenues than buying in an illegal world.
That's either ignorant or cruel, or both.
SEPTEMBER 29, 2016
Polls show that 58% of Americans favor the legalization of marijuana. Even Texans support it. But an initiative to legalize pot in (very liberal) Massachusetts may fail. One reason is anti-legalization editorials like the following, in the highly influential Boston Globe.
When I think about the prospect of legalizing marijuana in Massachusetts, I surprise myself by sounding like my father. Cannabis tourism? THC-infused lip balm? "Budz and sudz" crawls? What is the world coming to? . . .
The editorial continues on in the same vein, with lots of minor bureaucratic points. Notably missing is any discussion of the 400,000 Americans currently serving in prison for drug violations, or the millions more whose lives have been scarred by their criminal record. One might have expected some acknowledgement of the vast racial inequities, the fact that whites are as likely to use pot as blacks, but far less likely to go to prison. After all, Black Lives Matter has become a hot topic at liberal papers like the Globe. But when it comes to drug legalization, minorities are almost invisible. Instead we get this:
As with legalized gambling, the states are in a competitive frenzy to hatch these golden geese before the market is saturated. It's beggar-thy-neighbor time, and no one wants to miss out. States are salivating at the prospect of easy revenue without the pain of raising taxes.
The endorsement comment is just silly. Massachusetts has legalized the sale of cigarettes---does anyone seriously believe the state is endorsing the use of cigarettes? The comment about decriminalization is telling. It's a signal to affluent suburban moms, "don't worry, if your teenage son gets caught buying pot, he won't get a criminal record. Instead we'll send the sellers of pot to prison, and those are mostly minorities."
Back in January, Bryan Caplan did a brilliant post on "missing moods". Here's a sample:
2. The immigration restrictionist. Immigration from the Third World to the First World is almost a fool-proof way to work your way out of poverty. The mechanism: Labor is more productive in the First World than the Third, so migrants generally create the extra riches they consume. This doesn't mean that immigration restrictions are never justified. But the reasonable restrictionist mood is anguish that a tremendous opportunity to enrich mankind and end poverty must go to waste - and pity for the billions punished for the "crime" of choosing the wrong parents. The kind of emotions that flow out of, "The economic and humanitarian case for immigration is awesome. Unfortunately, there are even larger offsetting costs. These costs are hard to spot with the naked eye, but careful study confirms they are tragically real. Trapping innocents in poverty because of the long-run costs of immigration seems unfair, but after exhaustive study we've found no other remedy. Once you see this big picture, restriction is the lesser evil. This is true even after adjusting for the inaccuracy of our past predictions about the long-run dangers of immigration."
I notice the same thing about immigration foes.
I'd expect the drug warriors at the liberal Boston Globe to lament, "It's unfortunate that the drug war has led to the incarceration of 400,000 Americans, mostly minorities. But alas, we need to pay this heavy price in order to avoid becoming a horrific hellhole like Colorado, Washington or Oregon." But we don't even get that argument. Instead, they seem oblivious to the pain caused by their policies. In previous posts, commenters often tell me that these drug criminals are "bad people" and would be doing something else like robbing banks if they were not selling drugs. I say bad laws make bad people.
BTW, this is nothing new for the Globe. A few years back a "right-to-die" referendum had a big lead in the polls, and then lost narrowly after the Boston Globe came out against it. They are the sort of paper that seems liberal on any given issue, except those that would actually give people more freedom.
PS. I should emphasize that this is just one editorial, and may not reflect the official position of the Globe.
SEPTEMBER 29, 2016
In a campaign season here in the United States that seems more like a shouting match than politics, this week's EconTalk episode raises an interesting question. According to guest John Cochrane, a.k.a. The Grumpy Economist, the main issue that we should be concerned about is economic growth. Indeed, "...nothing matters as much as reestablishing or improving on the traditional growth rates." So why don't we hear more about this? (And is Cochrane right regarding the primacy of growth?)
Cochrane is concerned that ever-increasing regulatory burdens are rendering US economic growth sclerotic. His solution- a more "simplified" public life and a renewed focus on the rule of law. But what exactly does this mean? Cochrane offers some policy suggestions throughout. The one most developed focuses on decreasing the debt leverage in banks and turning their holdings to equities as a means of avoiding regulation. He also advocates dispensing with corporate taxes. To what extent might such changes have saved us trouble leading up to 2008? Going forward?
To me one of the most interesting threads is early in the interview as Roberts and Cochrane discuss inequality. Cochrane acknowledges people's concerns about it, and toward the end of the conversation even laments the way he perceives America as turning into a class-based society defined by income. Yet when worrying about inequality, Cochrane says what people are really concerned about is not inequality per se, but rather people's ability to "get ahead." Again, later in the interview, he suggests that in terms of social welfare programs, we should be more generous financially, but this generosity should be paired with more limited time. The problems with social programs today, he says, are with the disincentives they create rather than the amount of money that is spent on them.
If you haven't listened yet, head over to EconTalk and do so. Or read the Highlights. However you approach it, why not let us know what questions this conversation raises for you? (And stay tuned for our EconTalk Extra on this episode, too!)
SEPTEMBER 29, 2016
In a very pessimistic essay about America's future, my former Hoover colleague Angelo Codevilla writes:
What goes by the name "constitutional law" has been eclipsing the U.S. Constitution for a long time. But when the 1964 Civil Rights Act substituted a wholly open-ended mandate to oppose "discrimination" for any and all fundamental rights, it became the little law that ate the Constitution. Now, because the Act pretended that the commerce clause trumps the freedom of persons to associate or not with whomever they wish, and is being taken to mean that it trumps the free exercise of religion as well, bakers and photographers are forced to take part in homosexual weddings. A commission in the Commonwealth of Massachusetts reported that even a church may be forced to operate its bathrooms according to gender self-identification because it "could be seen as a place of public accommodation if it holds a secular event, such as a spaghetti supper, that is open to the general public." California came very close to mandating that Catholic schools admit homosexual and transgender students or close down. The Justice Department is studying how to prosecute on-line transactions such as vacation home rental site Airbnb, Inc., that fall afoul of its evolving anti-discrimination standards.
If I had to name one of my main disappointments about libertarians, it would be the failure of some of them to defend, and even the outright hostility they show towards, freedom of association. I have written here and here, for example, about Mike Munger's and Gary Johnson's rejection of freedom of association.
Here are some excerpts on freedom of association from my book The Joy of Freedom: An Economist's Odyssey, published in 2001.
On freedom to choose a roommate:
Imagine that you're a homosexual and would like to live with a homosexual roommate. Or imagine that you're a heterosexual and would like to live with a heterosexual roommate. Guess what? Some governments in the United States claim that you don't have the right to make such a choice. In Madison, Wisconsin, recently, the government fined a woman for refusing to accept a lesbian roommate. The woman took her case all the way up to the U.S. Supreme Court, which, in May 1997, refused to hear the case. By doing so, the Supreme Court upheld this extreme intrusion on the freedom of association. Is freedom to choose your friends the next area that, with the Supreme Court's blessing, governments in the United States will assault?
On sexual freedom and romantic freedom:
Freedom of association also applies to dating and sex. People are free to say no to those who ask them out on dates or who ask them for sex. In fact, everyone knows the word for the violation of another's freedom to say no to sex. We call it rape. My impression is that governments in the United States completely respect half of the freedom of association in sex, the freedom to say no. It was not always so. In the nineteenth century and before, when a man raped his slave, the courts did not step in and punish him. Back then, judges, and indeed most people, believed that rape did not violate a slave's freedom of association because they didn't consider slaves human beings with rights.
SEPTEMBER 28, 2016
Charlie Schultze, Brookings Institution economist and former economic adviser to President Jimmy Carter has died at age 91.
Charlie was old-school in the best sense of that term. From what I could tell at a distance, he believed in using economic analysis the best way he knew and then giving the information to the politicians he worked under. Like many economists at the Council of Economic Advisers and elsewhere in presidential administrations, he spent a lot of his time arguing against bad ideas.
While not in the government, he was more outspoken against bad ideas, arguing strongly, for example, against industrial policy when that was all the rage in the early 1980s. In the article on Industrial Policy in the first edition of The Concise Encyclopedia of Economics, economist Richard B. McKenzie quoted Schultze's case extensively, writing:
Probably the most outspoken Democratic opponent of industrial policy was Charles Schultze, an economist at Brookings who was chairman of President Carter's Council of Economic Advisers. Schultze, in the Brookings Review, undercut the political and intellectual case for industrial policy with these salient points:
In an insert to McKenzie's article, "Industrial Policy: Democratic Economists Speak Out," I quoted Schultze as follows:
The first problem for the government in carrying out an industrial policy is that we actually know precious little about identifying, before the fact, a "winning" industrial structure. There does not exist a set of economic criteria that determine what gives different countries preeminence in particular lines of business. Nor is it at all clear what the substantive criteria would be for deciding which older industries to protect or restructure.
Here's what I wrote about economist Ron Hoffman in my book The Joy of Freedom: An Economist's Odyssey, and it's an example of Charlie and his staff working behind the scenes to fight bad policy proposals:
During my summer at the CEA, I met a senior economist at the Council named Ron Hoffman. His short stature and facial features made him look as if he could be Dustin Hoffman's brother. In fact, he is. That summer, Hoffman helped me find a good lawyer when I got in trouble with the Immigration and Naturalization Service. As a result, I kept in touch with him, visiting him a few times in the late 1970s and early 1980s, after he had moved over to the U.S. Treasury. Hoffman told me of an internal fight within the Carter administration in the late 1970s, when Joseph Califano, the secretary of the department of Health, Education, and Welfare, proposed draconian controls on health care spending, an early version of Hillary Clinton's 1993 proposal. Hoffman, working a few layers beneath Treasury Secretary Michael Blumenthal, analyzed Califano's proposal, found it to be a bad one, and argued forcefully within the Treasury that Blumenthal should oppose it. Blumenthal was persuaded and gave Hoffman the job of writing memos on the issue for his signature. Hoffman recounted for me that he formed a triumvirate with an economist in Charles Schultze's CEA and an economist in James Lynn's Office of Management and Budget. Their memos, often written for the signature of Blumenthal, Schultze, and Lynn, became known to their group as the Mike, Jim, and Charlie memos. They were successful. The Califano controls went nowhere, and the country was saved for at least a few years from a major attempt to stifle the health care sector.
I had one interaction with Charlie. I tell here how I maneuvered at the last minute to get on a panel at the American Economic Association meetings in Denver in September 1980, along with Charlie (then chairman of Carter's Council of Economic Advisers), Alan Greenspan (a Reagan advisor), and Hendrik Houthakker (an advisor to John Anderson). Here's my speech.
Charlie wasn't particularly friendly to me (Alan was), but I don't think it was personal. He wasn't that friendly to any of the panelists, especially Alan, and my gut feel was that he was pissed that Ronald Reagan, advocating a close to 30% drop in marginal tax rates, was getting traction in the campaign.
The one thing I remember clearly about my implicit interaction was in Q&A. I had bargained for my 7 minutes (the others had 15 to 20), but neither Leonard Silk, the panel moderator, nor I, had thought through whether I would get to participate in Q&A. When the first question came from the floor, all 3 of the other panelists gave their answers and I started to give mine. Leonard cut in and said that he had not agreed to give me time, a completely legitimate point on his part. But when he cut in, I heard an audience of 700 economists come as close to booing as I've ever heard. So Leonard relented and I decided that I would try to satisfy the audience and me, on the one hand, and Leonard on the other, by keeping my comments short.
This is all prelude to my best comment, at Charlie's expense.
Franco Modigliani, obviously friendly to Charlie but also not friendly to increases in the minimum wage, stood up at the front of the room and asked Charlie, "In light of the high teen unemployment rate, what do you think of Jimmy Carter's increase in the minimum wage?" Carter had signed a bill raising the minimum wage in stages from $2.30 per hour when he took office in January 1977 to $3.35 per hour effective 4 months after those AEA Meetings. Franco knew that Charlie would be stuck. The vast majority of economists then thought it was a bad idea to risk pricing some of the most vulnerable workers out of the labor market. Franco probably knew that Charlie thought that too. But what was Charlie going to do? Call out his boss? Unlikely.
So Charlie answered "That's a question best left for posterity."
I saw my opening and didn't even wait for Alan or Hendrik. I said, "Well right now, Charlie, posterity is out on the street looking for work."
My wife, daughter, and I used to get a kick out of watching Ali G make fools of famous people he interviewed. I remember also wishing, though, for one of the famous people not to get suckered and to have total dignity throughout. In all the episodes I saw, two people succeeded. One was the late Andy Rooney; the other was Charlie Schultze. Notice him patiently explaining at the 1:28 point and the 2:13 point.
SEPTEMBER 27, 2016
Although Donald Trump is a very close second.
And, I agree with Paul Krugman but he left something out.
I tried to watch last night's "debate" between Hillary Clinton and Donald Trump. I really did. Unfortunately, I lasted only about 50 minutes. I thought they were both horrible but I thought that in the time I watched, the Hill dominated the Don.
But let's go beyond that to the issues. I want to highlight two.
First, with his first question, Lester Holt led the two contestants on a tangent. Here's what he asked:
So, let's begin. We're calling this opening segment achieving prosperity and central to that is jobs. There are two economic realities in America today. There's been a record six straight years of job growth and new census numbers show incomes have increased at a record rate after years of stagnation. However, income inequality remains significant. And nearly half of Americans living paycheck to paycheck. Beginning with you, Secretary Clinton - why are you a better choice than your opponent to create the kinds of jobs that will put more money into the pockets of American workers?
No. Central to achieving prosperity [I take as given that we have prosperity and that he, and everyone else, understood that he meant increased prosperity] is not jobs. Central to that is economic growth. How do we achieve more than 2 percent growth in real GDP? So he gets them off-track from the get-go, talking about jobs instead of growth.
Granted that neither candidate seems to understand basic economics, and so they would both would have probably gone to jobs instead of growth anyway. But Holt shouldn't have been an enabler.
Second, free trade took a horrible beating last night. Here's how Paul Krugman put it:
More broadly, Trump's whole view on trade is that other people are taking advantage of us -- that it's all about dominance, and that we're weak. And even if you think we've pushed globalization too far, even if you are worried about the effects of trade on income distribution, that's just a foolish way to think about the problem.
But you know who else talked mainly, though not absolutely, garbage? Hillary Clinton. She started off well, saying:
Well, I think that trade is an important issue, of course. We are five percent of the world's population - we have to trade with the other ninety five percent.
I could nitpick and say that it's not literally true that we "have to." But we certainly should be allowed to.
Then the Hill went downhill. She didn't defend free trade and, like virtually all mercantilists, judged trade deals by whether they increase exports without taking account of the other half of benefits: lower prices and higher quality on imports.
*By the way, if you want to see an unintentionally hilarious piece on the debate, check out NPR's transcript with fact checks at various points. When they fact check the Don, they do it generally accurately and sometimes with a lot of attitude. E.g.,
There is no truth to the charge that the Clinton campaign or Hillary Clinton started the birther movement, as we've written. Donald Trump, however, for several years was the chief spokesman for it and the principal person pushing the falsehood. And Trump still has not apologized to the president of the United States for an effort that many African-Americans saw as an effort to delegitimize the first black president. Undoubtedly, Clinton and Obama fought a bitter 2008 primary campaign. Fringe supporters and advisers did go after Obama's "otherness." One of Clinton's informal advisers, Sidney Blumenthal, told a McClatchy bureau chief based in Africa to look into Obama's birthplace, according to that McClatchy bureau chief. But Clinton certainly did not take the show on the road. The false equivalence Trump is trying to draw isn't even remotely close to the same thing as what Trump did. For the record, once again, Barack Obama was born in Hawaii, something proved over and over again. Here's his birth certificate, the legitimacy of which Trump called into question explicitly as late as 2014.
Notice the schoolmarmy "And Trump still has not apologized to the president of the United States for an effort that many African-Americans saw as an effort to delegitimize the first black president." As if that is relevant to a fact check.
When they fact check the Hill, they do it well also. But what's interesting is how often they fact check him and how little they fact check her. E.g., the Hill's statement:
Trickle down it did not work. It got us into the mess we were in 2008-2009.
In context, she seems to mean by "trickle down" tax cuts for high-income people. But it got us into the mess we were in in 2008-2009? I hadn't heard that one. That was crying out for a fact check. NPR's answer: blank out.
SEPTEMBER 27, 2016
Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy.
This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial.
In 2015, the US trade deficit in goods was a little under $800 billion while the US ran a surplus of about $300 billion in services. This left an overall deficit of around $500 billion.9 Reducing this "trade deficit drag" would increase GDP growth.I suppose there might conceivably be some policy that would reduce the trade deficit and also increase growth, but I can't imagine what it would be. Navarro's confusion about the effect of VATs doesn't inspire confidence that he knows either.
Trump proposes eliminating America's $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.Actually, eliminating the trade deficit would have no first order effect on wages. Any second order effects might lead to higher wages, but more likely wages would fall.
According to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist. This textbook state of balanced trade would exist because freely floating currencies would effectively adjust differences in national domestic cost structures to bring about balanced trade.
Where does one start? No, China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000 years, in present value terms. But in that case the current US deficit presents no puzzle; it hasn't lasted for a billion years.
Textbooks say that exchange rates should adjust in the short run to balance trade in goods, services and assets. Trade deficits (actually current account deficits) are caused by imbalances between domestic saving and domestic investment. Those can persist indefinitely. And currency "manipulation" (which is a meaningless concept) is completely beside the point. A country can have a laissez faire policy towards its currency, and still run deficits or surpluses for centuries.
Now let's think about the broader Trump economic plan, how would that impact the saving/investment relationship? To make my point more clearly, I'll compare his plan to Reagan's, which has some similarities:
1. Reagan rebuilt the military and cut domestic spending. Trump promises to rebuild the military, and an increase infrastructure spending by more that twice the rate of Hillary's already generous plan, and protect Social Security (perhaps even increase it?) and protect Medicare. Yes, there is the usual hand-waving about reducing waste, fraud, and abuse. But that requires a high level of expertise, and a candidate deeply immersed in the details of governance. Does that sound like Trump and his advisers? So I think it's reasonable to assume that spending will be more expansionary than under Reagan.
2. Trump promises deep tax cuts. How deep? The Tax Foundation says $2.6 trillion over 10 years. But the proposal he submitted to the Tax Foundation is not the proposal he is campaigning on, which calls for far deeper cuts. Whichever plan you use, I think it's fair to say that the deficit will explode were Trump's promises to be enacted (and perhaps under Hillary too, that's a different issue.)
3. Like Reagan, Trump promises supply-side reforms, including lower marginal tax rates on income, as well as a big reduction in government regulation. This should lead to higher investment.
CA deficit = Domestic investment - domestic saving
Trump's plan would (Navarro claims) boost domestic investment. It would certainly sharply reduce government saving. It seems reasonable to assume that domestic saving would also decline, pushing the current account deficit much higher. BTW, Reagan also had a few trade barriers against Japan, which did almost nothing to impact the size of the CA deficit.
To be fair, I do not view a larger CA deficit as a problem---it isn't. Nor do I view higher investment as a problem. But I do worry about our fiscal policy, which seems likely to become increasingly irresponsible regardless of who is elected.
And yes, I do realize that actual policies often differ dramatically from proposals. This post is not a prediction about what will actually happen, but rather a comment on the quality of the advice Trump is receiving.
PS. The document says Navarro has a PhD in economics from Harvard.
Update: After posting this it occurred to me that I did not answer the question in the post title. Peter Navarro teaches at UC Irvine, and advises the Trump campaign on economic issues.
CATEGORIES: Fiscal Policy , International Macroeconomics: Exchange Rates, International Debt, etc. , International Trade
SEPTEMBER 27, 2016
I hate politics. Part of the reason, to be honest, is that I'm a libertarian, and libertarian views have almost no influence in the world of politics. Libertarians don't just lose every election; policy-makers normally summarily reject our position. Libertarians don't just fail to control a major party; "successful libertarian politician" is almost an oxymoron.
But perennial defeat isn't the only reason I hate politics. On reflection, I'd loathe politics even if my policy views matched Clinton's or Trump's word-for-word. Indeed, I'd loathe politics even if I thought prevailing policies were the pinnacle of wisdom. Why? Because I hate the way people think about politics, independent of the ultimate outcome.
I hate the hyperbole of politics. People should speak literal, measured truth or be silent.
I hate the Social Desirability Bias of politics. People should describe reality as it is, not pander to wishful thinking.
I hate the innumeracy of politics. People should focus on what's quantitatively important, not what thrills the masses.
I hate the overconfidence of politics. People shouldn't make claims they won't bet on, and shouldn't assert certainty unless they're willing to bet everything they own against a penny.
I hate the myside bias of politics. People should strive to be fair to out-groups, and scrupulously monitor in-groups, to counteract our natural human inclination to do the opposite.
I hate the "winning proves I'm right" mentality of politics. Winning only proves your views are popular, and popular views are often wrong.
Last but not least:
I hate the excuses people make for each of the preceding evils. While I'm open to consequentialist arguments for doing evil that good may come, most of the arguments in this genre are deeply tainted by innumeracy and overconfidence. If you calmly weigh the social benefits of political hyperbole, carefully crunch the numbers, and grudgingly and sorrowfully conclude that it's justified in specific cases, I'm all ears. But if you defend hyperbole with casual, undiscriminating delight, life's too short to listen to you.
P.S. While I hate how people act in politics, I emphatically don't hate the people themselves. Politics is only a small sliver of most people's lives, so the apolitical good normally far outweighs the political bad.
CATEGORIES: Behavioral Economics and Rationality , Cost-benefit Analysis , Economic Philosophy , Politics and Economics
SEPTEMBER 26, 2016
Here's Ben Bernanke on the recent moves by the Bank of Japan:
The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. As I noted in a previous piece on targeting longer-term rates, there is a U.S. precedent for the BOJ's new strategy: The Federal Reserve targeted long-term yields during and immediately after World War II, in an effort to hold down the costs of war finance.
Technically, Bernanke is correct; if you target a price then the money supply becomes endogenous. But I believe this misses the bigger picture. If the BOJ wants to reflate the Japanese economy, then it makes more sense to "cap" rather than "peg" the 10-year bond yield. Indeed the Financial Times initially reported the new policy as a "cap", although Japanese commenters tell me that it is actually a peg. Time will tell, and I'm a bit dubious of the claim that the BOJ will not allow negative rates on the 10-year bond.
Why is this distinction important? Return to the recent boom in "NeoFisherian" macro---the view that a policy of very low interest rates is disinflationary, exactly the opposite of the Keynesian view. I've argued that both sides are wrong; whether low rates are inflationary or disinflationary depends entirely on whether they are implemented by an expansionary monetary policy or a contractionary monetary policy.
Using the M*V=P*Y framework, a fall in interest rates is deflationary, holding M constant, as it tends to reduce velocity. The Keynesian argument against NeoFisherianism is that central banks create lower rates by increasing M, and that the combined effect of more M and less V is more M*V.
I think the Keynesians are right on that narrow point, but only if the low rates are indeed created by more M. Bernanke is suggesting that M could be taken out of the equation, and low rates would still be expansionary. But that's making the opposite mistake that the NeoFisherians are making. It ignores the fact that low rates can also be produced by a contractionary monetary policy. Indeed the BOJ has been doing exactly that since the mid-1990s. So a promise by the BOJ of near-zero rates for as far as the eye can see could just as well be interpreted by the markets as "more of the same deflationary policy that we've been getting since 1993". That's how I'd interpret it if I were Japanese.
This conundrum can be avoided if the BOJ were to switch to a less ambiguous indicator than interest rates. Thus they could peg the yen at 130 to the dollar. This would dramatically boost inflation expectations in Japan. Or they could peg the price of CPI futures contracts. Or they could even use the price of gold as a policy instrument, as FDR did in 1933 (not recommended). In each of those cases the money supply is endogenous, but at least the variable being pegged would provide a clear signal of policy. Unfortunately, nominal interest rates are about the worst possible variable for the central bank to peg--hence markets did not find the recent BOJ move to be credible.
In the end, the NeoFisherians are wrong for the mirror image of the reason that the Keynesians are wrong. Nonetheless, they've done a valuable service by lifting up the rock, and showing all the ugly grubs and worms underneath, undermining the foundation of modern macroeconomics.
That's sort of how I feel about Paul Romer's new paper. He's wrong in trying to pin most of the blame on people like Lucas, but is absolutely correct in trying to expose the rot at the heart of modern macro.
It's the identification problem, stupid.
SEPTEMBER 26, 2016
Contracts often require signatories to submit to binding arbitration. If a dispute arises, the parties don't go to court; they go to a private arbitrator. This arbitrator, in turn, makes a definitive ruling neither party can refuse. The whole point of binding arbitration is to bar parties from playing, "Heads I win, tails I break even": If the arbitrator rules against you, you can't appeal the decision to a conventional government court.
Binding arbitration has thrived in recent decades. But on reflection, fully binding arbitration would nullify a vast swath of regulation. Every government effort to shift the terms of trade would be in grave danger. Imagine, for example, an employment contract specifying that alleged minimum wage violations will be resolved via binding arbitration. Any employer who wanted to offer less than the minimum wage could contractually specify an arbitrator who invariably rules in his favor. And any worker ready to work for less than the minimum wage would willingly sign. After all, what's the difference between the absence of a minimum wage and a minimum wage that's never enforced?
The same principle applies to all regulation of capitalist acts between consenting adults: safety regulations, discrimination laws, product liability, and so on. Want to work for me? Fine, as long as my brother adjudicates all our disputes. Parties who can contractually outsource enforcement to anyone they like can informally gut the law.
So why hasn't this already happened? Transactions costs are part of the reason; getting every trading partner to sign a contract is a pain in the neck. But the fundamental reason is that governments refuse to recognize fully binding arbitration - probably because its officials recognize, at least subconsciously, that fully binding arbitration would strip them of much of their power. The Legal Dictionary explains:
The FAA gives only four grounds on which a court may vacate, or overturn, an award: (1) where the award is the result of corruption, Fraud, or undue means; (2) where the arbitrators were evidently partial or corrupt; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing or hear pertinent evidence, or where their misbehavior prejudiced the rights of any party; and (4) where the arbitrators exceeded their powers or imperfectly executed them so that a mutual, final, and definite award was not made. In the 1953 case Wilkov. Swan... the U.S. Supreme Court suggested, in passing, that an award may be set aside if it is in "manifest disregard of the law," and federal courts have sometimes followed this principle. Public policy can also be grounds for vacating, but this recourse is severely limited to well-defined policy based on legal precedent, a rule emphasized by the Supreme Court in the 1987 case United Paperworkers International Union v. Misco...The Legal Dictionary's tone suggests that these are but mild impediments. But they're huge. If the government can overrule binding arbitration because the arbitrators are "partial" or "manifestly disregard the law," arbitration's radical potential stays hidden.
Long ago, I interviewed the CEO of an arbitration firm. When I asked him about the radical implications of binding arbitration, he got nervous. His words were libertarian: "If you don't like the arbitration contract, don't sign." But he clearly wanted to change the subject. One of his key services was helping clients skirt the law - and the best way to continue providing such services was to pretend they didn't exist. I suppose I could have thanked him for mitigating the harm of a multitude of unjust and inefficient laws, but I think that just would have spooked him further.
SEPTEMBER 25, 2016
I recently listened to a podcast where David Beckworth interviewed Cardiff Garcia, of FT Alphaville. I agreed with most of the things Garcia had to say, including his observations on the recent growth slowdown. He discussed the way that top economists argue about whether it was a supply-side or a demand-side phenomenon, and then asked something to the effect, "Why can't it be both?" Indeed.
He also applied this quite reasonable and pragmatic logic to stabilization policy. If there's a debate about whether or not monetary policy is effective at the zero bound, why not use both monetary and fiscal stimulus? But in this case I'm not so sure, even though I understand where he's coming from.
Here's my claim; most economists don't know how to construct a policy that combines highly expansionary monetary policy with highly expansionary fiscal policy. They don't know what that policy would look like. I'm going to explain this by starting with an example, and then getting into the theory that I believe people get wrong. Let's start with an example:
Suppose that over the past 23 years, one country has run up astounding deficits, which pushed the ratio of debt to GDP up to about 250%. And suppose this country also adopted a monetary policy of near-zero interest rates, and an unprecedented increase in the monetary base---from roughly 10% of GDP to roughly 80% of GDP. Massive deficits, ultra-low interest rates and massive QE. My claim is that this policy combination is what most people have in mind when they think of a combined monetary/fiscal expansion.
And yet it failed miserably. Japan did basically what I've described above, between 1993 and 2016, and their aggregate demand showed perhaps the smallest increase ever seen in a developed economy over such a long period of time. If there is a worse performance for AD over a 23-year period, I'd appreciate if someone would point it out to me. NGDP was essentially flat, for 23 years.
Now I understand that Japan is just one data point, and there could have been mitigating factors. But still, an unprecedentedly large fiscal stimulus combined with near zero rates and unprecedented QE, and you get essentially NOTHING? Those mysterious mitigating factors must be incredibly powerful.
Now let me explain what I think actually happened. I don't believe that the BOJ adopted an expansionary monetary policy. Not at all. Nor do I believe that Herbert Hoover's ultra-low rates and QE of 1932 were expansionary. And that's because I don't believe that either interest rates or QE are the correct measure of the stance of monetary policy. And here's what's weird. On one level almost all economists agree with me. Hardly any economists called Fed policy "tight" in late 2007 and early 2008, even though the growth in the monetary base slowed to roughly zero. Instead, they focused on falling interest rates. But if you ask economists whether high interest rates during hyperinflation mean tight money, they will deny it.
So on one level, economists know that neither the monetary base (i.e. QE) nor interest rates measure the stance of monetary policy. But when it comes to Japan, most economists do believe the BOJ has had an expansionary monetary policy. And indeed I believe that their actual policy since 1993 is pretty close to what economists have in mind when they talk about a combined fiscal/monetary expansion---both barrels blazing.
So part of the reason I oppose fiscal stimulus is that it's wasteful, but another reason is because I fear that (as we saw in Japan) it would not even work. Instead, I'd like us to think very hard about what sort of monetary policy actually would work. That might be NGDPLT, combined with a "whatever it takes" approach to asset purchases.
SEPTEMBER 24, 2016
Co-blogger Scott Sumner posted yesterday some interesting facts and figures about the post World War II economic boom in the United States that came after the U.S. government cut government spending massively.
Two things I want to highlight.
First, as I wrote then, "federal government spending on goods and services fell, in a period of two to three years, by over one third of GDP." That puts in perspective Gary Johnson's proposal to cut government spending by 20 percent. A 20 percent cut in federal government spending, when government spending is about 20 percent of GDP, is a 4-percentage-point cut in government spending as a percent of GDP. In other words, Johnson proposes to cut government spending as a percent of GDP by about one eighth of the percent by which Truman and Congress cut it in 2 to 3 years.
Second, I want to answer the question raised by one of the commenters who said:
Real GDP declined an unprecedented 12.7% from 1944 to 1946. Hardly "fine".
I answered this point at length in my Mercatus study. Here's an excerpt from my answer:
According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?
The same commenter, Ben, wrote:
Sure, unemployment didn't increase substantially at all which was likely due to a high demand for workers as women returned home and left the workforce again.
I answered this in some detail in my Mercatus study also. I called this the "Rosie the Riveter Goes Home" explanation. It turns out that half of the additional women who entered the work force during WWII did not go home.
Here's what I wrote in the study:
"There was no surge in unemployment," goes the first explanation, "because women left the defense plants and went back to being housewives and raising families."
UPDATE: Scott Sumner posts further on the employment numbers.
SEPTEMBER 23, 2016
Here's Matt O'Brien:
Libertarian presidential candidate Gary Johnson is a friendly guy, seems pretty moderate. But he could tank the economy.
I mostly agree with this, but not entirely. I certainly agree that the Fed could offset fiscal austerity with a more expansionary monetary policy, just as they did in 2013. But it's not quite right to say that the Fed cannot cut interest rates. The current rate of interest on reserves is 0.5%, and that rate could be cut by 100 basis points, to minus 0.5%. Nonetheless O'Brien is right that interest rate cuts might not be enough.
But I also think he slightly exaggerates how much we know about this issue. Let's take the policy environment at the end of WWII. Here are some relevant facts:
1. There was massive austerity, as government spending fell by far more that 20%. We suddenly went from a deficit of 20% of GDP, to a surplus.
2. Several top Keynesian economists warned that this austerity would lead to another post-war depression.
3. Short term interest rates were very low, but slightly above zero (0.38% on T-bills, for instance.)
Sound familiar? Here's what happened next. After WWII, the Fed did not cut rates at all to offset the fiscal austerity. Indeed after holding them at 0.38% for about 2 years, they began gradually raising them in mid-1947. Nor did they do any QE. And despite all that, the economy remained fine, with the unemployment rate fluctuating between 3% and 5% throughout 1946, 1947, and 1948, despite millions of men suddenly being discharged from the military. The Keynesian predictions did not come true.
I recognize that there are lots of differences between 1946 and today. But even so, it should give us all pause to consider that well-informed Keynesian economists got this wrong. Maybe there is something wrong with the model.
And let's not forget that Johnson is also proposing many positive initiatives that would boost aggregate supply, such as tax reform.
This is not to say that I agree with everything Johnson is proposing. I disagree with him on the wisdom of balancing the budget so quickly, and I disagree with him on QE, at least as an option. Nonetheless, the post-WWII experience should make us all very cautious about predicting the impact of fiscal austerity.
PPS. I recommend this David Beckworth interview of Jason Taylor, which touches on some of these issues. Taylor says that Keynesians predicted 25% to 35% unemployment if the government suddenly discharged 10 million soldiers, and also suddenly slashed massive military spending. The government did exactly that, and unemployment averaged 3.9% in 1946 and 1947. (The specific discussion occurs after the 47 minute mark.)
SEPTEMBER 23, 2016
Speaking of Schwartz...I've spent this week at the meeting of the Mont Pelerin Society, of which Schwartz serves as president. He describes the founding of the Society in this column, in which he also argues the danger of reducing classical liberalism to economic analysis. I'm reminded of other related items here, like this EconTalk episode with Angus Burgin on Hayek, Friedman, and the "Great Persuasion."
Driverless cars continue to make news...and it looks like the sharing economy will be the pioneers. Uber's fleet launches this month. The sharing economy? Nothing new under the sun...EconTalk fav Mike Munger chatted with host Russ Roberts about the impact of driverless cars paired with Uber toward the end of this 2014 interview.
CATEGORIES: Economic Education
SEPTEMBER 23, 2016
If a government agency were as effective, Hilary and Bernie would never let us hear the end of it.
Here's a story that John Strong told on Facebook this morning (reproduced with his permission, along with some slight edits):
I stayed in an Airbnb managed by a lady who had a son with a learning difficulty and she told me about her struggle to get him to leave home and get a job after he graduated from high school. He was completely passive and quite content to live at home with mom, doing nothing much, so eventually she had to put her foot down and threaten to kick him out unless he could "shake hands with at least 3 hiring managers per week." She even chauffered him around to job interviews and claims that she had a revelation on the way to one of the interviews, because she looked over at her son, a huge guy who had excelled at football and not much of anything else, and noticed that he was trembling with fear. She said that in that moment she realized for the first time how big a part fear had played in her son's dysfunction. Who finally hired this young man? McDonald's. And according to my landlady "McDonald's saved him." Why? Oh, they're unbelievable, she said. They are very used to dealing with people like my son. They have all kinds of systems for helping people who lack good work habits become productive. For instance, they start calling you hours before your morning shift to ensure that you are awake and getting ready for work. My son really needed that, she said. In McDonalds he learned that work guidelines have a purpose and he acquired confidence. He is no longer passive now. He has a much better job, a fiancee, and a future.
I'll put in my words the essence of the question that John Strong asked after telling this story: do we really want to put such jobs and such character building at risk by raising the minimum wage?
SEPTEMBER 23, 2016
Economist Paul Romer reprints a letter he received from an aspiring graduate student in economics and his response to the reader. There is much that is valuable in the letter. In fact, it's on net valuable.
But I will follow Paul's advice he gives in one part of his response to challenge what he says in another part.
Here's the advice I will follow:
When you consider graduate school or a job offer, try find one that has a culture like the one that Milton Friedman described at the University of Chicago when he said "an academic is concerned not with being diplomatic, not with trying to avoid hurting people's feelings, but an academic is concerned with saying what's right. Telling the truth, or trying to get at it. And if you disagree with somebody you don't say 'well, now there may be something in what you say' ... You say 'that's a bunch of nonsense.'"
Now to the part I want to challenge. Paul writes:
To learn about a department, visit and ask macroeconomists you meet "honestly, what do you think was the cause of the recessions of 1980 and 1982." If they say anything other than "Paul Volcker caused them [the two recessions] to bring inflation down," treat this as at least a yellow caution flag.
That's nonsense. Paul Romer makes it sound as if recessions per se bring inflation down. If you think that's true, ask yourself this: What if the federal government causes a recession by cartelizing all industries, which causes those industries to raise prices? Then you get recession plus inflation. What's in fact true, and what, I hope, Paul Romer meant, is that Paul Volcker used a drop in the growth rate of the money supply to bring inflation down and that the virtually inevitable result was two recessions.
HT2 Mark Thoma.
SEPTEMBER 22, 2016
Richard Epstein has an article taking sides with the EU Commission on Apple. Certainly the Commission couldn't have a more eloquent advocate, and Epstein argues forcefully that the Commission "makes a classical liberal argument in favor of free trade across national boundaries. Though the EC often acts as a statist institution, it has made a sound economic decision by taking on an American icon that deserves to have its wings clipped."
The bulk of the argument revolves around the selective nature of tax rulings, such as the one Apple was a beneficiary of. The Commission, Epstein maintains, was not trying to impose tax harmonization, but to guarantee a level playing field.
I would like to mention two points in reply. First, Epstein comments that "harmonization in the EU is always harmonization-up rather than harmonization-down". Let's put the Apple case in perspective. Were the European Court of Justice to uphold this decision, would this trend be strengthened or weakened? (see here for a quick explanation of the next judicial steps)
Second, Epstein frames his comment in the context of the proper role of the EU Commission to foster legal certainty. True, special tax rules are certainly not generally applicable norms of the sort that classical liberals tend to like. But let's think for a minute about legal certainty in the longer run. Apple operated under clear guidelines set by the Irish government: it is not the national government which is seeking dues that weren't paid, it is the Commission that enjoins it to seek these dues, against its own will. If a company cannot rely on the government's word for the very taxes it is supposed to pay to that same government, is this going to increase or decrease confidence and legal certainty?
My colleague Massimiliano Trovato made the point that tax policy and competition policy are better kept apart (see here).
I know both these points are concerned merely with the consequences of the Apple decision. But consequences matter indeed.
SEPTEMBER 22, 2016
Four years ago, I posted about Rolf Penner, a Manitoba farmer who was fighting the Canadian Wheat Board, the government-run monopsony that bought and then resold the wheat produced by western Canada's farmers. My interaction with him led to an invite to visit him on his farm while I was at my cottage that summer. I accepted and had a great visit.
While I was there, he was harvesting and so I joined him in his combine. As I had predicted in my 2012 post (not that this was a tough prediction), combines had come a long way since the ones I was familiar with in the Carman, Manitoba area during the mid-1960s. And his wasn't particularly new.
One little problem. When I got out of his combine and started walking to my rental car, I realized that my keys had fallen out. Were they somewhere in that wheat field, in which case I was screwed, or had they fallen out onto the floor of the combine? By the time I noticed the missing keys, the combine was way down at the other end of the long field. So I went to where his 72-year old father, Udo Penner, was sitting in a truck. I told him the situation and he used his walkie-talkie to contact his son Rolf. Good news: Rolf had the keys. But I would have to wait until the combine came back to that end of the field.
Which turned out to be further good news. Because I had a delightful 5 or 10-minute conversation with Udo. He had come from Germany after World War II, where his relatives were also farmers. Unfortunately, they were in East Germany. After the Berlin Wall fell, he had been back in touch and had learned some of the horrors of centrally-planned agriculture. One story that stands out: His relatives said that sometimes during harvest season, they would get a midnight call from MOSCOW!! (not even from the closer central planners in Berlin) telling them to harvest the next day. But, they replied in one case, it's raining hard outside and plowing a wet crop will destroy the crop. It didn't matter. Those were their orders.
This summer, at age 76, Udo Penner was still an active farmer with his son. That is, until a tragic accident on July 31. Udo was killed by in a car accident while driving to church.
But Udo was a very active, productive farmer. Rolf and he worked seamlessly together. What to do?
That's what this article is about.
The hog shipping got underway and completed, with extra help from those the farm normally had doing weighing and sorting duties. Meanwhile, farmer after farmer from areas around Morris, Dufrost, Arnaud and Ste. Elizabeth, finding spare blocks of time amidst their tight work schedules, made themselves available to help with the harvest. Decisions were made. Swathing got underway, and cereal crops came off, often very quickly, with multiple combines going at the job.
This is somewhat a propos of my post on Jonathan Lipow and his claim that I am exceptional. It's not exactly the same, because I risked being beat up (although, truth be told, the risk was small). But it does speak to people's willingness to help each other in times of trouble.
SEPTEMBER 22, 2016
Like Bryan Caplan, I have a strong distaste for politicians. Especially this year. But I have a more favorable view of democracy than Bryan does.
I see democracy as being superior to all other systems, for standard "wisdom of crowds" reasons. At the same time, democracy often produces flawed outcomes for two reasons:
1. The principal/agent problem leads to special interest politics.
2. Uncertainty about how the world works.
Thus part of the problem is that it's hard for voters to prevent special interest policies that basically all economists oppose---say subsidies to Big Sugar.
In addition, even experts like Bryan Caplan and Paul Krugman often disagree about optimal policies, because they don't agree as to how the world works.
In my view, countries with a long history of democracy, such as the US, Switzerland and Britain, tend to produce pretty good outcomes, in a relative sense. Thus imagine a scale of 0 to 100, with zero being the worst possible government, and 100 being the best. My claim is that countries much lower down on the scale, like North Korea, are usually non-democratic. I also believe that the US is in the top 10%. I.e., bad governance could push us much further down in terms of utility, than further improvements in governance could raise us up. Admittedly that only applies to current residents of the US, and Bryan might reply that lots of potential Americans are denied entry. Even if true, that problem is just as likely to occur in non-democratic countries as in democratic countries.
So I believe people should vote for utilitarian reasons---it makes society better. That's especially true of well-informed people. Yes, my vote won't make much difference, but that's also true if I throw a candy wrapper on the ground in a vast national park, like Yellowstone. It doesn't make much difference. Yet even though my individual action makes little difference, I show solidarity with society by not littering, and by voting. I see not voting as being similar to littering, a tiny anti-social action.
I wonder if Bryan is too sensitive to the 10% of the glass that is still empty, because of the stupidity and corruption of politicians, and not sensitive enough to the miracle of our modern rich and free society, which is a product of the 90% of decisions that they get right and that we never even think about because they are not hot button political issues. Decisions like; "Americans can own their homes." Or "Americans can read pretty much any book they choose." Or "Americans can buy cars from Japan." Etc., etc.
Perhaps a North Korean peasant farmer would have an easier time appreciating the 90% of things we get right.
SEPTEMBER 22, 2016
Although I still think Hillary Clinton is likely to win the presidency, both she and some of her supporters are unwittingly undercutting one of her big advantages: her "get out the vote" effort. Clinton is leaving nothing to chance, putting together a sophisticated get out the vote effort that rivals that of Barack Obama in 2012. Trump, by contrast, is hardly doing anything to get out the vote. Put those facts together with even the small polling advantage the Clinton has in the polls--and she should win by a nice margin.
But Clinton and her supporters are also unwittingly investing in Trump's get out the vote effort. Here's what Clinton said about Trump voters:
You know, to just be grossly generalistic, you could put half of Trump's supporters into what I call the basket of deplorables. Right?
There you have it. According to Clinton, half of Trump's supporters are deplorable and un-American. The other half are desperate.
I'm not saying anything new by saying how insulting this is. But here's the other point: Clinton has made a huge investment--not measured by cost but measured by value--in getting out Donald Trump's vote. Think about the Trump supporters. Not all of them were planning to vote. Even some of those who were planning could get sidetracked--on November 8 it's raining, it's snowing, it's hot, it's cold, the lines are long, whatever. But it's quite conceivable that as many as 2 million potential Trump-supporting non-voters will be voters because of Clinton's nasty comments.
And if you want to see a very clever response by Trump and his supporters, see this.
Similarly, some of her Hollywood supporters have made an unintentionally hilarious ad. What's so striking is their moral preening and their almost complete absence of an argument for voting for Clinton. To the extent Trump supporters see this, they will be more inclined than otherwise to vote for Trump. I expect the ad to have a smaller positive effect on the Clinton vote for three reasons: (1) it doesn't really say much, (2) what it does say is hardly inspiring to people who aren't passionate about her, and (3) the people who are moved by it are already being identified and brought to the polls by Clinton's get out the vote effort.
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