Bryan Caplan and David Henderson

Mixed signals from France. The Financial Times, among others, has stressed the potential of the liberalisation plan pursued by the new Economy Minister Emmanuel Macron.

The bill aims at lowering barriers to entry in liberal professions--notaries, pharmacists, et cetera. The remnants of the guild system would be weakened by opening liberal profession partnerships to external capital. Sunday opening hours will also be liberalised, albeit timidly: as a rule, shops should remain closed on Sundays, but it will be easier to obtain a waiver, particularly in tourist areas.

All of this may seem trivial to American readers, but it is indeed a significant step forward for France (see here a comment by French think tank IREF), a country well-known for a pervasive hostility towards market mechanisms and economic freedom in general. Monsieur Macron has been credited for this new course, which takes into account the need for creating new growth opportunities--particularly for younger people entering the labour market. France's youth unemployment is 24%.

Interestingly enough, however, France has also just announced that it will ban UberPop (which in the US goes by the name of UberX) starting in January of next year. This in spite of a court decision that allowed Uber to continue to operate in Paris. The spokesman for the Ministry of Interior apparently commented on French TV that

Currently, those who use UberPop are not protected in case of an accident," Mr. Brandet told the French news channel BFM TV, on Monday. "So not only is it illegal to offer the service, but for the consumer, it's a real danger.
These are of course very different arguments: one that UberPop is illegal because the law requires all drivers who chauffeur paying passengers to have a license, and one that deals with the lack of appropriate insurance. But the fact that they are officially made together signals that the pressure on Uber is growing all over Europe.

The rape of a woman in Delhi by an Uber driver has created a window of opportunity to crack down on Uber services, having a good card to play in the public debate. Now, I found a bit bizarre the idea that Uber car drivers are more likely to be rapists than taxi drivers: is rationing the taxi supply enough to drive taxi drivers to be immaculately honest? Of course, local government doesn't issue license plates to people with a criminal record: but my impression is that controls do not go much further than license issue. Nicole Gelinas has a very wise comment, on the issue.

However, in the European debate juxtaposing "Uber" and "rape" might just be working. A sense of anxiety and want for "security" may end up being instrumental in maintaining the status quo.

What is surprising in France is that the ban on Uber comes at a time when the French government aims to convince the world that its approach to competition and markets is changing.

CATEGORIES: Eurozone crisis


As is probably known to virtually all readers of this blog, President Obama announced today his steps to normalize relations with Cuba. It is long overdue and finally we have a President willing to do something about it.

I have written about these issues over the years.

On Econlog, I've written here, here, and here.

I also wrote a more extensive case for ending the Cuban embargo here and here.

For a more complete report, see here.

CATEGORIES: International Trade


The title of this post sounds like a truism, and yet it's actually highly controversial. In my previous post I pointed out that the ECB was not hitting its 1.9% inflation target, and apparently has no plan for doing so in the future.

In a new article, William Pesek recommends that the Bank of Japan stop doing its job, as a way of pressuring Prime Minister Abe to enact the BOJ's preferred policy agenda, in areas unrelated to monetary policy.

Analysts are expecting a rush of new fiscal stimulus early in the new year. Kuroda, too, will face pressure to one-up himself when the BOJ meets on Friday. Like addicts looking for their next fix, markets want the central bank governor to outdo his "shock-and-awe" from April 2013 and recent Halloween surprise on Oct. 31, when he boosted bond purchases to about $700 billion annually.

It's time for Kuroda to do exactly the opposite: hold his fire and prod Abe to begin doing his part to push through his "third arrow" structural reforms. To this point, Kuroda has been a dutiful and circumspect policymaker -- perhaps to a fault. Other than a brief flash of impatience with Abe's foot-dragging in a May Wall Street Journal interview -- when he said "implementation is key, and implementation should be swift" -- Kuroda has held his tongue. Yet he bears a responsibility to play the honest broker role that monetary powers have over the years -- from Paul Volcker at the Federal Reserve decades ago to Raghuram Rajan at the Reserve Bank of India today.

On Friday, Kuroda should tell reporters, "Now that the election is over, it's up to Prime Minister Abe to carry out the will of the people and deregulate the economy. For now, we at the BOJ have done all we can -- and are willing to do -- to make Abenomics a success."

Kuroda's mandate is not to "make Abenomics a success," it is to hit a 2% inflation target, and thus far he has fallen short of that goal. The target is probably not optimal, but economies do better when central banks follow a consistent and predictable monetary regime. There are two problems with encouraging central banks to miss their targets:

1. It undercuts democracy and transparency. Political regimes work best when each part of the government has clearly defined tasks, and is held accountable for achieving its policy goals. The monetary authority should do monetary policy, and the Japanese government should do fiscal policy and structural reforms.

2. Yes, it's theoretically possible that damaging the Japanese economy through excessively tight money will lead to even greater gains elsewhere, if it encourages structural reforms. But the downside risks are much greater. History is littered with cases where failed monetary policy led to harmful economic changes (the NIRA in 1933, or Argentinian moves toward statism after 2002.) And of course there are cases where bad monetary policy led to disastrous political changes, notably the German deflation of 1929-32, which led directly to a Nazi government.

It's simply too risky to intentionally damage an economy in one area in the hope that it pressures a different part of the government to adopt better polices in another area. Central banks need to follow a clear and transparent policy rule, and let other parts of the government address other issues. Central banks should do their job.

CATEGORIES: Monetary Policy


Everything I've written about The Moral Case for Fossil Fuels, my favorite book this year:

1. The thesis.

2. We owe civilization to fossil fuels.

3. We can live with warming.

4. Refining the case.

The book's a great Christmas present, all the way down to the festive cover.



I've asked tough questions before. When Leon Panetta, my former Congressman, came to NPS as Secretary of Defense, I asked [here at the 43:40 point] whether, given his own previous statement that Al Qaeda was down to a handful of dangerous people, he should say about the war, "Enough is enough." When Admiral McRaven, head of the Special Operations Command, came to speak, I quoted to him a New York Times article about President Obama's "kill list" and asked, "Are you ordered to kill anyone on the kill list? If so, do you do your own due diligence to make sure they are indeed terrorists and not just military-age males who happen to be in the area?" I've asked other visiting Admirals tough questions.

But this time was different. Usually, after the event ends and people are milling around on the way out, three to five people - students, faculty, and people in the school administration - will come up to me and say "Good question." This time, no one looked at me and people seemed to look away when they saw me. That didn't cause me to regret asking. I just found it interesting.

This is from my article "Questioning the Powerful" published earlier today at

CATEGORIES: moral reasoning


Remember the joke about the motorist who gets lost, and then asks for directions to Podunk? The farmer replies, "If I was headed to Podunk, I wouldn't start from here." Yes, and if I was targeting inflation at 1.9%, I would not start from a position of negative 5-year inflation expectations in the eurozone's most prosperous country. But first let's review how they got so far off course.

Market monetarists claim that the ECB should target NGDP, not inflation. Had they done so, they could have responded much more vigorously to the eurozone depression. Recall that eurozone interest rates have been above zero for at least 80% of the past 6 years. But the ECB insists on targeting inflation. So then what do they do?

Then they should stop using interest rates as the policy instrument, and adjust the monetary base as needed to keep 5 year inflation forecasts on target. But the ECB insists on adjusting interest rates, despite the potential zero bound problems. So what do they do at the zero bound?

At the zero bound they should shift over the level targeting of prices. That way as prices fall further and further below target, expected inflation rises and real interest rates fall. That makes it easier to get back on target via forward guidance on interest rates (or QE for that matter.) But the ECB insists on targeting the rate of inflation, not the price level. So then what do they do?

Here's the ECB's basic problem. They don't seem to understand what it means for a central bank to "target inflation." They seem to think that some sort of magical process will make inflation return to 1.9%, even if they are not using any sort of policy instrument to make it happen. This view seems especially strong in Germany. Recall that interest rates cannot be lowered, and the Germans oppose QE. That means the Germans oppose having the ECB actually do anything to make 1.9% inflation happen, despite the fact that the Germans are often viewed as being more obsessive about inflation targeting than the others. Weird.

Many central bankers seem to think that monetary policy is something to be "used" or "not used" to fix problems. That's not at all what inflation (or NGDP) targeting means. The right metaphor is steering a ship. There should be no debate between the pilot and co-pilot about whether to use the steering wheel to steer the ship. But there is a debate among central bankers about whether to "use" monetary policy.

Now for the bad news. At first glance the negative 5-year inflation expectations in Germany might look like a problem that the ECB is well suited to fix. And in a technical sense they could do so, quite easily in fact. Indeed one important theme of market monetarism is that market signals should be used to steer monetary policy. But the whole point of this approach is to prevent sharp deviations from occurring in the first place. The negative inflation expectations in Europe already account for the ECB's likely response to those negative expectations. Read that again and think about what that means. The markets don't just believe that policy will fail under current instrument settings, but also that it will fail under the likely instrument setting adjustments by the ECB. Those 5-year deflation expectations in Germany already account for the QE that the market expects the ECB to do in 2015.

(As an analogy, God's knowledge that you are about to exercise your free will in such a way as to end up suffering eternal damnation is really bad news even if you think you have free will. And yes, I did just compare the markets to God. Call it the super-strong EMH.)

There are steps the ECB could have taken in 2011, like cutting their interest rate target instead of raising it, which will no longer work today. And there are things that would have worked in 2013, like QE, that will not work today, at the quantities being contemplated.

Now for the really bad news. During the 1930s, the worst outcomes did not occur when no devaluation was expected. Nor did the worst outcomes occur when devaluations occurred. The worst outcomes occurred when devaluation was feared, but did not occur. Perhaps when one country left the gold standard, and others were seen as likely to leave, but struggled to stay on the standard. Now consider the recent news out of Greece.

Polls suggest the winner would be Syriza, a populist party led by Alexis Tsipras. Although Tsipras professes that he does not want to leave the euro, he is making promises to voters on public spending and taxes that may make it hard for Greece to stay. Hence the markets' sudden pessimism.
And now for the really, really bad news. There's a rumor that Draghi might resign. Good luck to the new President. It's like the car has gone over the cliff and the driver yanks off the steering wheel, and gives it to the person beside him; "here, you drive."

Have a nice day.



Starting in January, Californians will pay an added 10 cents or so per gallon of gasoline due to a new law that goes into effect next month. UC Berkeley economist Severin Borenstein writes:

Under California's cap-and-trade program to reduce greenhouse gas emissions, after Jan. 1, wholesale gasoline distributors (mostly refiners) are going to be responsible for the emissions from their fuel. They will have to buy, and eventually turn over to the California Air Resources Board, one emissions allowance for every metric ton of greenhouse gases you emit when you burn the gasoline or diesel they sold you.

The calculation looks like this: When you buy one gallon of California gasoline, the seller will have to cover about 18 pounds of emissions. At the current price of allowances -- about $12 per metric ton -- that works out to about 10 cents per gallon of gas. So, in early January, the state's cap-and-trade program will increase our gas prices by about a dime.

This is not literally a tax but it is a tax in all but name: we will pay more to generate revenue for the government.

Borenstein's article is titled "Learning to love paying 10 cents more per gallon" and is in the Los Angeles Times. Before you dump on him for that title, though, be aware, as I have pointed out a number of times before, that authors of op/eds rarely get to choose their titles. I doubt Borenstein would have used this title. He can't be so naive as to think that people will learn to love higher prices for gasoline.

He does, though, argue for them. His case is interesting. It's twofold.

First, it's about the uses the government will make of the revenue. He writes:

That money goes to the state when it sells emissions allowances to oil refiners and other fuel wholesalers -- about $1.7 billion a year at current prices. The plan is to spend it on clean energy and sustainability programs, including building the proposed north-south bullet train, subsidies for buying low-emissions vehicles and help for low-income households to afford energy.

His second reason is signaling. Immediately after the paragraph above, he writes:

But just as important, by establishing a price for emissions, California sends a signal to the rest of the country and the world that we recognize the risk of climate change and are willing to take actions to address it.

For Borenstein, this signal has independent value.

Back to its uses, though. Borenstein doesn't state that he likes the idea of spending the money on a north-south bullet train, but his starting the next sentence with "But just as important" suggests that he does. From everything I can tell, virtually all of the expenditure on that train will be deadweight loss. So rather than the usual, often small, triangle of deadweight loss that we draw for our students, the deadweight loss from this expenditure will be almost the whole rectangle. Can Borenstein really justify that expenditure?



The Moral Case for Fossil Fuels is the best book I've read all year, and makes a great holiday gift.  But there's still room for improvement.

1. Epstein centers his moral case around "human life as the standard of value."  This is virtually the only Objectivist jargon he uses.  And when we're talking environmental ethics, it sounds reasonable.  Most people, laymen and philosophers alike, think we should protect the environment primarily for the sake of humanity.  Rhetorically, "human life as the standard of value" works.

Philosophically, however, it's a mess.  Philosophers unfamiliar with Objectivism will assume Epstein's an old-school utilitarian, trying to maximize total human happiness.  But he disavows this view:
My view of the right approach is: Respect individual rights, including property rights. You have a right to your person and property, including the air and water around you. Past a certain point, it is illegal for anyone to affect you or your property. But-- and here's where things get tricky-- it's not obvious what that point is. Let's look at two extremes.

One policy would be: People can pollute or endanger other individuals at will so long as they are viewed as benefiting "the common good." This policy, encouraged by some businesses in the nineteenth century, is immoral. It says that some individuals should be sacrificed for the business and its customers.
Yet in the blink of an eye, Epstein seems to reintroduce "the common good" through the back door:
Here's another bad policy: Any amount of impact on air, water, and land should be illegal. This is simply impossible by the nature of reality-- for example, consider that perhaps our most dangerous emission, contagious disease, can often be transmitted through the air or other life forms in ways we cannot detect or prevent. At any given stage of development, some amount of potentially harmful waste cannot be prevented. For example, the man who invented fire could not protect himself or his neighbors from smoke. Should he be prohibited from using fire? Obviously not, because the right to be protected from pollution exists in a context, which is the right to the pursuit of life more broadly.
Epstein might mean something like, "On the 'common good' view, pollution should be allowed as long as it benefits most people.  On my view, pollution should be allowed as long as it benefits everyone."  But this is an extremely stringent standard, because pollution varies widely from place to place and sensitivity to pollution varies widely from person to person.  In a world of billions, there are bound to be a few asthmatics who live next to coal-fired power plants.  Some are on net better off with more energy and more pollution, especially in the long-run.  But others will be too sensitive (or elderly) to profit from the long-run wonders of fossil fuels.  This is especially clear if NIMBYism is on the table.  If we eschew arguments about "the common good," what's wrong with the position, "The government should allow moderate pollution, but none within 500 feet of me"? 

My challenge for Epstein: Semantics aside, how does your view functionally diverge from the "common good" view you condemn as "immoral"?  If talk about individual rights means anything, shouldn't there be noteworthy cases where you favor stricter pollution controls than utilitarians?  Weaker controls?

2. Epstein powerfully argues that the total benefits of fossil fuels are enormous.  Most people in our society need to hear this.  But this doesn't imply that the marginal benefits of fossil fuels are enormous, or even positive.  This is textbook environmental economics: Most human beings blithely pollute even when the personal benefit of extra pollution is small and the cost to strangers of extra pollution is high.  The textbook solution, of course, is to raise the price of pollution.  In the long-run, this spurs industry to search for cleaner technologies.  In the short-run, though, it deliberately does something rhetorically uncomfortable for Epstein: discourage energy consumption.

I'm sure Epstein understands marginal thinking.  But the word "marginal" appears but once in his book.  Instead, he talks repeatedly about "minimizing" environmental harms.  A typical passage:
[D]evelopment and the fossil fuel energy that powers it carries risks and creates by-products, such as coal smog, that we need to understand and minimize, but these need to be viewed in the context of fossil fuels' overall benefits, including their environmental benefits. And it turns out that those benefits far, far outweigh the negatives-- and technology is getting ever better at minimizing and neutralizing those risks.
This is sloppy thinking. There's only one way to "minimize" the negative effects of coal use: Use zero coal.  To avoid this implication, you have to minimize negative effects subject to some another constraint, such as maintaining 3% economic growth.  But this formulation has a rhetorically unwelcome effect for Epstein: it highlights the trade-off between pollution abatement and other goods.  Epstein is right, of course, to point out all the ways that technology powered by fossil fuels helps clean the environment.  But we nevertheless face trade-offs between pollution abatement and other goods on a daily basis.

3. When societies get rich enough, they use technology and laws to clean up the environment.  Epstein is all for this.  A typical passage:
Nineteenth-century coal technology is justifiably illegal today. The hazardous smoke that would be generated is now preventable by far more advanced, cleaner coal-burning technologies. But in the 1800s, it was and should have been perfectly legal to burn coal this way-- because the alternative was death by cold or starvation or wretched poverty.
While this technology-and-law approach sounds very sensible, it pales in comparison to the wisdom of textbook environmental economics.  The essence of the approach: Neither tolerate nor ban pollution.  Instead, put a price on it!  This simultaneously (a) discourages pollution at the margin and (b) encourages anti-pollution innovation.  It also raises revenue, allowing government to reduce taxes on work and savings.  Yes, this approach has some moral and practical problems.  But it's still the story to beat - and Epstein doesn't address it.

The good news is the Epstein is both young and young at heart.  He has ample time and energy to refine the moral case for fossil fuels - and I'm optimistic that he will.

P.S. I'm leaving for family vacation in my favorite state, Florida, today.  Happy holidays to all!  And if you happen to spot me in southern Florida, please say hi.


According to a legal theory I am about to sketch, the Supreme Court would let stand the subsidies that are being paid to people through the Federal health care exchange, in spite of the language in the law that says only state exchanges are entitled to pass on subsidies. Instead, the Supreme Court would say that from a common-law perspective, the subsidies on the Federal exchange are what people have come to expect.
So writes Arnold Kling, former blogger at Econlog, in "The Supreme Court and the Text of the Law."

My question is "which people?"

The Obama administration decided that, despite the law's language, the subsidies apply even in states whose governments have not set up their own exchanges. So it's clear what the Obama administration's expectations were. But that's a small number of people. Well then, maybe we could look at what one of the architects of the law, Jonathan Gruber, thought it meant. Gruber thought (see here, starting at the 31:50 point) that the subsidies would not apply in states that didn't set up the exchanges. Maybe we could look at what Oklahoma's attorney general Scott Pruitt thought it meant. He agreed with Gruber.

The problem with the "what people have come to expect" is that it gives weight to some people's expectations over those of other people. How does one find a way out? That's hard when all we have is expectations. It's easy, though, when we actually have a fairly clearly written law. The way out is to insist that the law be interpreted as written.


Here's the New York Times:

I TRIED magic mushrooms out of curiosity and in middle age. I'd been on the amateur mycological circuit for a couple of years, but hallucinogenic species were rarely mentioned at the foraging expeditions and conferences I attended. It's almost as if they were the black sheep of mycology: embarrassing to serious taxonomy jocks. I read some books on the subject, but most were tripper's guides that didn't utilize, um, specific language or current science. Psychoactive mushrooms had been in a kind of scientific ghetto ever since they were criminalized in 1968.

. . .

A study published last month in the Journal of the Royal Society Interface compared M.R.I.s of the brains of subjects injected with psilocybin with scans of their normal brain activity. The brains on psilocybin showed radically different connectivity patterns between cortical regions (the parts thought to play an important role in consciousness). The researchers mapped out these connections, revealing the activity of new neural networks between otherwise disconnected brain regions.

. . .

The fact that under the influence of psilocybin the brain temporarily behaves in a new way may be medically significant in treating psychological disorders like depression.

. . .

Outlawed in 1968, it was swept up in the counterculture panic of the Nixon era and classified as a Schedule 1 drug, like heroin, under the Controlled Substances Act of 1970. A Schedule 1 drug means it is considered to have the highest potential for abuse and no currently accepted medical use.

. . .

A study published last year in the journal Experimental Brain Research found that psilocybin eliminated conditioned fear responses in mice, which has implications for sufferers of PTSD. And psilocybin has been shown to relieve anxiety, depression and despair in terminal cancer patients, who describe their experience as giving them a new perspective on their lives.

Anecdotally, psychoactive mushrooms may positively affect even nonsufferers. They did for me. I ate the mushroom as part of research for a book. The experience lasted about four hours, much of which I spent outdoors, but seemed to last much longer. I think because everything I was seeing was so new: the way the air was disturbed behind the flight of a bee, the way the trees seemed to respire, how the clouds and breeze and rocks and grass all existed in a kind of churning symbiosis.

There's been a lot of recent discussion of torture allegations against the CIA, and rightfully so. But let's not lose sight of the others ways in which our repressive government inflicts pain on the public. It is illegal for a trained doctor to prescribe this type of mushroom to a depressed cancer patient, with only 6 months to live. No different from selling heroin on the street. How do you feel about living in a country governed by people that cruel?

BTW, I notice that Congress has finally said NO!! to the Obama Administration's insane war on the use of medical marijuana:

The spending bill passed by Congress on December 14 includes a provision that prevents the Department of Justice, including the Drug Enforcement Administration, from interfering with states' medical marijuana laws.

The provision applies to 32 states and Washington, DC, which allow the use of marijuana or a marijuana-based compound, such as the non-psychoactive CBD, for medical purposes.

. . .

Advocates hope the provision will stop the DEA and other federal law enforcement agencies from conducting raids on state-legal medical marijuana dispensaries. These raids have continued under the Obama administration, despite campaign promises to end them.

The bill's repeal of DC pot liberalization was a step backwards, but reining in the DEA on medical marijuana will be far more important in the long run. Glad to see bipartisan support for this in Congress. I had thought Obama would back off on the drug war after getting re-elected---he no longer has to worry about the voters. The Obama Administration's continued war on medical marijuana is a disgrace. The voters (and GOP) are actually ahead of Obama.


Bryan Caplan

The Man of One Study

Bryan Caplan
Another great piece by Scott Alexander:

So here's why you should beware the man of one study.

If you go to your better class of alternative medicine websites, they don't tell you "Studies are a logocentric phallocentric tool of Western medicine and the Big Pharma conspiracy."

They tell you "medical science has proved that this drug is terrible, but ignorant doctors are pushing it on you anyway. Look, here's a study by a reputable institution proving that the drug is not only ineffective, but harmful."

And the study will exist, and the authors will be prestigious scientists, and it will probably be about as rigorous and well-done as any other study.

And then a lot of people raised on the idea that some things have Evidence and other things have No Evidence think holy s**t, they're right!

On the other hand, your doctor isn't going to a sketchy alternative medicine website. She's examining the entire literature and extracting careful and well-informed conclusions from...

Haha, just kidding. She's going to a luncheon at a really nice restaurant sponsored by a pharmaceutical company, which assures her that they would never take advantage of such an opportunity to shill their drug, they just want to raise awareness of the latest study. And the latest study shows that their drug is great! Super great! And your doctor nods along, because the authors of the study are prestigious scientists, and it's about as rigorous and well-done as any other study.

But obviously the pharmaceutical company has selected one of the studies from the "very good" end of the bell curve.

Read the whole thing, including the stuff about the minimum wage.

CATEGORIES: Economic Methods


Don Boudreaux has an insightful letter to Slate. Let me just single out one sentence, which beautifully summarizes Don's arguments:

If slave-grown cotton were a key spur to capitalism, it's difficult to understand why a booming capitalist revolution never occurred in Russia.



In July 1994, Jonathan Gruber, then an assistant professor of economics at MIT, and I, then the John M. Olin Fellow at Washington University's Center for the Study of American Business, testified on the economic effects of government mandates on employers to provide health insurance for their employees. The late Senator Edward Kennedy was the committee chair.

Kennedy's brief introduction of the witnesses starts at 2:35:54. Gruber's testimony starts at 2:37:20 and goes to 2:42:58. My testimony starts at 2:43:02 and goes to 2:49:22.

Here's the video.

Here's an article I wrote about it a few months later.

CATEGORIES: Labor Market , Regulation


David R. Henderson

My Apologies

David Henderson

As someone who has made a lot of mistakes and who tries hard to admit them and apologize when I think apologies are in order, I have become somewhat of a student of the apology. I think it's important, if you apologize, to do so sincerely and actually to admit your mistake.

"Well, of course," you might say, "what other kind of apology is there?" There are two others that I know of. In my lexicon, I call them the "Jesse Jackson" apology and the "I forgot who did it" apology.

First, the Jesse Jackson apology. In January 1984, Jesse Jackson, running for the Democratic nomination for President, referred to Jews as "Hymies" and New York city as "Hymietown." When an article in the Washington Post referenced his statements, Jackson, after first lying, saying he hadn't made these statements, ended up, according to Larry Sabato, making "an emotional speech admitting guilt and seeking atonement before national Jewish leaders in a Manchester, New Hampshire synagogue." I have insufficient reason to think it wasn't an actual apology.

But then, on a much bigger stage, the nationally televised Democratic convention in San Francisco, Jackson gave what I now call the "Jesse Jackson" apology. He said (at about the 6:20 point):

If, in my low moments, in word, deed or attitude, through some error of temper, taste, or tone, I have caused anyone discomfort, created pain, or revived someone's fears, that was not my truest self.

Why the "if?" There's no if about it. With his earlier comment, he did cause people pain.

The other apology, the "I forgot who did it apology," is so common that I'm sure you can find your own examples. The key is the passive voice. That allows the person not to identify who did the thing he is apologizing for. Some standard versions are "mistakes were made" and "things were said." Someone not paying close attention would wonder who made the mistakes and who said the things. And that's the point.

Fortunately, I've seen two apologies this week that are unusually "clean." By that I mean that the two people apologizing actually said that they were wrong and that they were sorry. The two are Jon Stewart of the Daily Show and Ben Edelman, a Harvard economics professor.

I don't want to get into whether an apology was justified in each case. Instead, I want to point out how beautifully clean both apologies were.

Here's Stewart (at about the 1:35 point), responding to a district attorney who claimed that Stewart had his facts wrong:

You were right about that. District Attorney Ramos is right. We were wrong. In our list of unarmed black men shot by police, we should not have included Dante Parker, who, according to the county medical examiner, died of a PCP overdose. So I'm sorry about that. Shouldn't have done that. AHHH! I [bleep] hate making unforced errors like this. I hate it. I get so mad at myself. Stupid, stupid, stupid [while hitting his forehead.]

Here's Edelman:
Many people have seen my emails with Ran Duan of Sichuan Garden restaurant in Brookline. Having reflected on my interaction with Ran, including what I said and how I said it, it's clear that I was very much out of line. I aspire to act with great respect and humility in dealing with others, no matter what the situation. Clearly I failed to do so. I am sorry, and I intend to do better in the future. I have reached out to Ran and will apologize to him personally as well.

Very nice.

CATEGORIES: moral reasoning


When John Cochrane writes on finance I prefer him to be "the grumpy economist." When he writes on macro, I prefer the less grumpy version. His new (non-grumpy) post on macro is outstanding, full of so many important insights that I'll need to do several more posts. Here's one important point:

I long ago sat at a hilarious academic advisory meeting at a Federal Reserve, at which the bank president asked, bottom line, whether we thought the Fed should raise, cut, or leave alone the funds rate. Academic after academic gave beautiful speeches about the right policy rule. (Me, an ode to price level targets rather than inflation rate targets.) The poor exasperated president said, "that's all very nice, but what should we do now?"

This call for action, for activist discretionary response, is at the core of Keynesian economics. It's very very hard to talk about rules and institutions rather than actions. And the core answer of modern intertemporal economics is to unask the question. But people expecting a daily discretionary decision just don't want to hear about the rule. In this regard, the policy mindset still is decidedly old-Keynesian.

As a counterexample, consider asking the question "what should monetary policy do about unemployment" in the 1800s. There was no Fed. "Monetary policy" consisted of the gold standard, implemented by the Treasury. The answer would be, "the price of gold is $20 per ounce. What's your question?" I'm not (!) saying that's the right policy, but it is a pure example of a rule rather than activist discretion. A serious discussion about a rules-based Fed would start by canceling the regular FOMC meetings and the economic review. That just presupposes that the whole process is to come to a discretionary decision.

I often get frustrated when people debate whether the Fed should raise interest rates next year, without first spelling out the goal of monetary policy. How can one evaluate the wisdom of a rate increase when we don't know what it is trying to achieve?

One can think of monetary policy in terms of two issues; what is the policy rule, and how best can that rule be implemented? The Fed does have a very fuzzy rule, but it's far too fuzzy to allow us to answer the question of whether a rate increase next year would be appropriate. (Here I'm assuming that the unemployment rate will be about 5% next year, slightly below the Fed's estimate of the natural rate. If unemployment is still 5.8% and inflation is still below 2%, then a "no" answer seems obvious.)

So what's the problem with the Fed meetings? Why does Cochrane want to abolish them (and why do I agree)? Two distinct issues are debated at Fed meetings, even though only one debate is acknowledged. What should the rule be, and how should it be implemented? If everyone accepted the same policy rule, the debate would be 100% focused on how best to get there. There would be no consistent inflation "hawks" or "doves," as 2% would be the agreed upon target. In reality, you'd have to be pretty naive to believe that Yellen and Plosser have the same policy goals, in terms of the optimal path of inflation and unemployment. So there's also a (hidden) debate over goals. In the 1970s the doves had a hidden agenda. They claimed to favor low inflation, but did not vote that way. Now the hawks have the hidden agenda; they claim to accept the 2% inflation target, but don't vote that way. (It's even worse in Germany.)

One way to reduce the "hidden agenda" debate is to establish a non-fuzzy rule. I prefer NGDP level targeting, but you could construct a reasonable alternative out of a weighted average of inflation and output gaps. In that case FOMC meetings would have a clear agenda, and you'd get rid of the hawk/dove problem. Level targeting takes the long run NGDP growth rate (and hence inflation rate) off the table, and both hawks and doves tend to favor less nominal volatility. So monetary policy would become a purely technical problem--smoothing the growth of NGDP. And at that point I think both Cochrane and I favor turning over the mechanics of implementation to the market (say via TIPS spreads targeting (Cochrane), or NGDP futures (me).) So there'd be nothing for the FOMC to do.

Now go back to where Cochrane discusses the frustration of the Fed bank president:

"that's all very nice, but what should we do now?"

The bank president doesn't realize that the answer to that question depends on how the same question will be answered next month, next year, and 5 years from now. Without knowing those subsequent answers, it's impossible to give a reliable answer today.

Now in fairness the Fed must be careful here. In the past, various central banks have made highly credible commitments to rules, which later turned out to be huge mistakes (the US committing to gold after WWI, Argentina to a currency board in 1990, and Greece committing to the euro.) One area where I differ slightly with Cochrane is the time inconsistency problem. I think central banks can easily overcome that problem, if they have a policy rule that actually embodies their policy objectives. Hence I worry more about a rule that is almost irreversible (like the euro), than one that is too easy to abandon. But "easy to abandon" need not mean fuzzy. They need to very precisely spell out where they want the economy to go in terms of some clear nominal metric, and set policy levers to a position where the markets expect them to succeed. And that means never revising their longer-term nominal forecasts of the policy goal, rather revising the policy instruments as needed to hit those goals.

If you are a ship captain, don't adjust your "port city destination forecast" when there is wind and waves buffeting the ship, adjust the steering wheel. Simple common sense? Monetary policy is still far from achieving even that minimum level of competence, both in the US and elsewhere.

PS. If we apply the ship steering metaphor to the "when to abandon a policy rule," then you don't want to abandon your target post city when wind and waves have pushed you off course, but may want to if you receive radio communication that a plague is sweeping the destination port.

Here's another analogy. When do you abandon a promise to help one of your friends move out of an apartment?

a. Whenever it is in your momentary interest, as when another friend gets extra tickets to a NBA game.

b. Only under extreme duress, as when your wife in in the hospital with serious injuries.

c. Never.

In the 1970s, many central banks were like the fair-weather friend of answer "a." Today (as in the 1930s) some have veered too far towards answer c, especially the ECB.



Rolling Stone (ahem) includes Alex Epstein, author of The Moral Case for Fossil Fuels, on its list of top "global warming deniers."  Epstein:
[T]hose who dispute catastrophic global warming are accused of denying the greenhouse effect and global warming. I experienced this in 2013 when I woke up to find myself named to Rolling Stone's Top 10 list of "Global Warming's Denier Elite" --in which they cited three articles of mine, each of which explained that CO2 has a warming effect!
How can anyone believe in anthropogenic global warming yet continue to enthuse over fossil fuels?  It's a question of magnitudes, of course.  Massive warming is deadly; modest warming is fine.  Epstein thinks the magnitude of warming has been - and will remain - modest.  Which brings us to the obvious question: Why should anyone go with his judgment, rather than the scientific consensus?

There was a time, Epstein admits, that he didn't take this challenge seriously. 
But there was so much going on in discussions of global warming , I didn't know how to decide where the evidence lay. I would hear different sides say different things about sea levels, polar bears, wildfires, droughts, hurricanes, temperature increases, what was and wasn't caused by global warming, and on and on.

With such a mess to work with, I - like most, I think - tended to side with the scientists or commentators whose conclusions were more congenial to me. I will admit to reiterating the arguments of skeptics of of catastrophic global warming with the lack of rigor I think is extremely common among believers. But I didn't do this for long. I acknowledged that I didn't really know what to think, and the idea that we might be making the Earth fundamentally uninhabitable scared me.
Most us, myself included, are in the same epistemic boat.  I'm not qualified to evaluate Epstein's main claims about the magnitude of global warming.  But he expresses his main claims so clearly that experts shouldn't find it hard to confirm or deny them.  Two claims in particular stand out.

Claim #1: While hard experimental evidence confirms a greenhouse effect, this effect is logarithmic; increasing CO2 warms at a decreasing rate:
While I've met thousands of students who think the greenhouse effect of CO2 is a mortal threat, I can't think of ten who could tell me what kind of effect it is. Even "experts" often don't know, particularly those of us who focus on the human-impact side of things. One internationally renowned scholar I spoke to recently was telling me about how disastrous the greenhouse effect was , and I asked her what kind of function it was. She didn't know. What I told her didn't give her pause, but I think it should have.

As the following illustration shows, the greenhouse effect of CO2 is an extreme diminishing effect--a logarithmically decreasing effect. This is how the function looks when measured in a laboratory.
Figure 4.1: The Decelerating, Logarithmic Greenhouse Effect

Claim #2: Complex interactions between this logarithmic greenhouse effect and other factors could generate a lot more warming, but this is not based on hard experimental evidence.  The only way to judge these more complex climate models is against observational data.  What we've learned over the past few decades is that these models systematically overstate warming:
Here's the summary of what has actually happened-- a summary that nearly every climate scientist would have to agree with. Since the industrial revolution, we've increased CO2 in the atmosphere from .03 percent to .04 percent, and temperatures have gone up less than a degree Celsius, a rate of increase that has occurred at many points in history. Few deny that during the last fifteen-plus years, the time of record and accelerating emissions, there has been little to no warming-- and the models failed to predict that. By contrast, if one assumed that CO2 in the atmosphere had no major positive feedbacks, and just warmed the atmosphere in accordance with the greenhouse effect, this mild warming is pretty much what one would get.

Thus every prediction of drastic future consequences is based on speculative models that have failed to predict the climate trend so far and that speculate a radically different trend than what has actually happened in the last thirty to eighty years of emitting substantial amounts of CO2.
Which brings us to the single most striking figure in the whole book.

Figure 4.3: Climate Prediction Models That Can't Predict Climate
[larger version]

My question for experts: Is there anything seriously wrong with this figure?  In particular, is it really true that virtually every major climate model overpredicts global temperature?  I'm genuinely curious, but I insist on a straight answer.


I am still waiting for my copy of Sven Beckert's "Empire of Cotton: A Global History", which Amazon promised me for January. But I have read Eric Herschthal's review in Slate, and I am a bit perplexed.
Herschthal offers qualified praise for the book, that he considers "remarkable and unsettling". But why? Because the book

insists that many of the myths we tell ourselves about capitalism--how it functions best when government gets out of the way, how it broke clean from slavery--are as false today as they were during its 500-year history. In Beckert's account, not only does slavery play a pivotal role in capitalism's rise, but so does the state. Governments supplied the guns, built the roads, enacted the tariffs, and regulated the markets that made, and continue to make, capitalism thrive.
Empire of Cotton.jpg
Herschthal makes the interesting but somewhat dubious point that the "history of capitalism" is gaining new attention after the financial crisis. Is this really true? The names of many great economic historians immediately come to mind, from Eric L. Jones to Joel Mokyr, not to mention Nobel Laureates Robert Fogel and Douglass North. They may not have been, though, "historians of capitalism" in the sense that Herschtal appears to have in mind, since he writes:
If anything like "the history of capitalism" existed, it exalted entrepreneurs and inventors, extolled the efficiency of the factory and the free market, and suggested that the whole system thrived only in the absence of a regulatory state.

So, Herschthal associates proper history of capitalism with a reflection on the role of government and slavery, and improper history of capitalism with history of entrepreneurs and inventors. Now, this is a rather complicated issue: certainly "real" capitalism emerged in history intertwined with government actions and regulations of different kinds. Lobbying is not "new" in any sense. And yet was government patronage what defined capitalism, and made for its success? At the end of the day, was this or that kind of regulation/protection/subsidy more important than entrepreneurial ingenuity and creativity, for industrial capitalism to transform the world?

Certainly American slavery played a role in the global supply of cotton, which in turn was an important part in the British industrial take off. And yet, as Herschthal asks, then "Why did the British government, at precisely the moment cotton was fueling its Industrial Revolution, back the anti-slavery movement?"

One answers lies perhaps in those very ideas that suggested the whole system may thrive by keeping the regulatory state to a minimum: classical liberalism. During the American Civil War, John Bright and Richard Cobden were known as "the two honourable members from the United States" in the House of Commons, though they had never abandoned their committed anti-interventionism (read Cobden here). Workers in Manchester famously sided with the North, in spite of their own self-interest, which was hindered by the blockade of confederate exports.

This is not to say that the British cotton mills did not take advantage of cotton imports from the American South. But to deduce that slavery played an _essential_ part in the development of capitalism, or better, to say that early capitalism couldn't make it without it, is a rather difficult logical jump. Both government intervention and slavery are ubiquitous in human history: industrial capitalism is not, and it developed into what Deirdre McCloskey calls "the great enrichment" in a very peculiar situation. So, we shall search for what differed from previous periods - thus slavery, which was widespread in human societies, is hardly the right single "enabling factor" of capitalist development.

On a slightly different point... Read David Levy and Sandra Peart on why Carlyle coined the sentence "dismal science". I think it is safe to say that economics (and those classical liberal ideas that were, for quite a few years, associated with it) played an _emancipating_ function too. It discovered consumers, and by placing a new emphasis on peaceful cooperation, dethroned ideas such as the "great man view of history" so dear to Carlyle. Perhaps there was something exhilarating and inspiring in the stories of inventors and entrepreneurs, and "history of capitalism" should thus take notice of them.



When most people stare at this table (courtesy of Greg Mankiw), they see strong evidence that the U.S. tax system is highly progressive.

If you calmly peruse the table, however, a stranger pattern emerges - a pattern neither liberals nor conservatives will expect.  Look closely.  While taxes are highly progressive, transfers have an upside-down U-shape.  Households in the middle quintile get the most money.  The richest households actually get more money than the poorest.  Think about how many times you've heard about government's great mission to "help the poor."  Could there be any clearer evidence that such claims are mythology?*

If government really wanted to help the poor, it wouldn't tax everyone to fund everyone.  It would raise only taxes required to help the genuinely poor, then say "mission accomplished."  Relative to the status quo, that means big tax cuts and stringent means-testing.  Picture a world where the lowest quintile continues to receive whatever it gets now, all other quintiles get zero, and the government refunds all the savings with tax cuts.  Then ask yourself, "Why not?"

* Yes, I know that rich households have more people, but the basic pattern remains.


According to this popular cartoon, getting rid of fossil fuels is a free lunch.


The wise will roll their eyes at this wishful thinking.  But no one exposes its sheer absurdity better than Alex Epstein in The Moral Case for Fossil Fuels.  You cannot have modern civilization without abundant energy.  And despite decades of government favoritism, alternative fuels have yet to deliver.  As global wealth has skyrocketed, energy use has risen 80%, thanks almost entirely to increased production of fossil fuels:
From the 1970s to the present, fossil fuels have overwhelmingly been the fuel of choice, particularly for developing countries. In the United States between 1980 and 2012, the consumption of oil increased 8.7 percent, the consumption of natural gas increased 28.3 percent, and the consumption of coal increased 12.6 percent. During that time period, the world overall increased fossil fuel usage far more than we did. Today the world uses 39 percent more oil, 107 percent more coal, and 131 percent more natural gas than it did in 1980.
Haven't alternative fuels played a big role, too?  No.
Solar and wind are a minuscule portion of world energy use. And even that is misleading because fossil fuel energy is reliable whereas solar and wind aren't. While energy from, say, coal is available on demand so you can keep a refrigerator--or a respirator-- on whenever you need it, solar energy is available only when the sun shines and the clouds cooperate, which means it can work only if it's combined with a reliable source of energy, such as coal, gas, nuclear, or hydro.

Why did fossil fuel energy outcompete renewable energy-- not just for existing energy production but for most new energy production? This trend is too consistent across too many countries to be ignored. The answer is simply that renewable energy couldn't meet those countries' energy needs, though fossil fuels could. While many countries wanted solar and wind, and in fact used a lot of their citizens ' money to prop up solar and wind companies, no one could figure out a cost-effective, scalable process to take sunlight and wind, which are dilute and intermittent forms of energy, and turn them into cheap, plentiful, reliable energy.
What's so deficient about solar and wind?
Traditionally in discussions of solar and wind there are two problems cited: the diluteness problem and the intermittency problem. The diluteness problem is that the sun and the wind don't deliver concentrated energy, which means you need a lot of materials per unit of energy produced...

Such resource requirements are a big cost problem, to be sure, and would be one even if the sun shone all the time and the wind blew all the time. But it's an even bigger problem that the sun and wind don't work that way. That's the real problem-- the intermittency problem, or more colloquially, the unreliability problem. As we saw in the Gambian hospital, it is of life and death importance that energy be reliable. There are some situations where it isn't, to be sure, and solar has a place there-- such as solar hot water heaters or swimming pool heating systems. But for just about everything we do, reliable, on-demand energy is vital--and without it, our electricity grid blacks out.
But aren't some countries like Germany making solar and wind work?  Not really:
How, then, can so many say that solar or wind generates over 50 percent of Germany's energy? What they are referring to is the fact that because solar and wind are so variable, at any given moment solar can generate 50 percent of the electricity being used. It can also generate 0 percent of the electricity generated at any given moment...

As you look at the jagged and woefully insufficient bursts of electricity from solar and wind, remember this: some reliable source of energy needed to do the heavy lifting. In the case of Germany, much of that energy is coal. As Germany has paid tens of billions of dollars to subsidize solar panels and windmills, fossil fuel capacity, especially coal, has not been shut down-- it has increased...

In a given week in Germany, the world leader in solar and number three in wind, their solar panels and windmills may generate less than 5 percent of needed electricity.  What happens then? Reliable sources of energy, in Germany's case coal, have to produce more electricity. For various technical reasons, this is even more inefficient than it sounds. For example, because the reliable sources have to move up and down quickly to adjust to the whims of the sunlight and wind, they become inefficient-- just like your car in stop-and-go-traffic-- which means more energy use and incidentally more emissions (including CO2). And what about when there's a particularly large amount of sunlight or wind? For an electric grid, too much electricity will cause a blackout just as too little will-- so then Germany has to shut down its coal plants and be ready to start them up again (more stop and go). In practice they often have so much excess that they have to pay other countries to take their electricity-- which requires the other countries to inefficiently decelerate their reliable power plants to accommodate the influx. This is obviously not scalable; if everyone's electrical generation was as unreliable as Germany's, there would be no one to absorb their peaks.

The only way for solar and wind to be truly useful, reliable sources of energy would be to combine them with some form of extremely inexpensive mass-storage system. No such mass-storage system exists, because storing energy in a compact space itself takes a lot of resources. Which is why, in the entire world, there is not one real or proposed independent, freestanding solar or wind power plant. All of them require backup --except that "backup" implies that solar and wind work most of the time. It's more accurate to say that solar and wind are parasites that require a host.
Of course, none of this refutes claims about fossil fuels' deadly side effects.  But it does put all the kvetching in perspective.  Maybe the best paragraph in the book:
[A] proper reaction to a major danger from fossil fuels would be sorrow. Think about it: If the energy that runs our civilization has a tragic flaw, that is a terribly sad thing. It would be even worse, say, than if wireless technology caused brain cancer. The appropriate attitude would be gratitude toward the fossil fuel companies for what they had done for us, combined with recognition that we would have to suffer a lot in the years ahead, combined with the commitment to the best technologies that I mentioned earlier [hydro and nuclear].
If anyone can turn this passage into a great cartoon, I'll be delighted to post it.


Binyamin Applebaum has an excellent article in the New York Times today, titled "Who Wants to Buy a Politician?", on the ineffectiveness, on the margin, of spending on political campaigns.


One reason is that buying elections is economically inefficient. Most voters, like most consumers, have defined preferences that are difficult for advertisers to shift. Chevron spent roughly $3 million during a recent campaign backing, certain City Council candidates in Richmond, Calif., where it operates a major refinery. Voters instead chose a slate of candidates who want to raise taxes. "Campaign spending has an extremely small impact on election outcomes, regardless of who does the spending," the University of Chicago economist Steven Levitt concluded in a 1994 paper. He found that spending an extra $100,000 in a House race might be expected to increase a candidate's vote total by about 0.33 percentage points. Investors appear to agree that companies can't make money by investing in political campaigns. A 2004 study found that changes in campaign-finance laws had no discernible impact on the share prices of companies that made donations.

One clarification on Levitt: Companies don't donate directly to the campaigns of candidates for the House of Representatives, the Senate, or the Presidency. That has been illegal since 1907. The previous year, a racist Democratic Senator from South Carolina, "Pitchfork Ben" Tillman, upset that corporations were giving money to Republican candidates who were critical of Jim Crow laws, introduced legislation banning corporate donations. It was signed by Teddy Roosevelt in 1907.
Applebaum covers ground that is covered in the entry, "Campaign Finance," in The Concise Encyclopedia of Economics. Here's one excerpt:
Every two years, public-interest groups and media pundits lament the fact that winning candidates typically far outspend their rivals. They infer from this that campaign spending drives electoral results. Most systematic studies, however, find no effect of marginal campaign spending on the electoral success of candidates.

How can this be so? The best explanation to date is that competent candidates are adept at both convincing contributors to give money and convincing voters to give their vote. Consequently, the finding that campaign spending and electoral success are highly correlated exaggerates the importance of money to a candidate's chances of winning. To gauge the causal relationship between campaign spending and electoral success, it is necessary to isolate the effects of increases in campaign spending that are unrelated to a candidate's direct appeal to voters. For example, wealthy candidates are able to spend more money on their campaigns for reasons that have little to do with their popularity among voters. Consider the experience of Senator Jon Corzine (D-N.J.), who defeated a weak Republican opponent to gain election to the Senate in 2000. Corzine spent sixty million dollars, mostly from his personal fortune, on his Senate campaign. Many observers pointed to this episode as an example of how a wealthy individual can buy elective office. Despite his record spending, however, Corzine's vote total ran behind that of the average House Democrat in New Jersey and behind the Democratic nominee for president, Al Gore, even though Gore did very little campaigning in strongly Democratic New Jersey. There is even some evidence that Corzine's wealth was a liability, given that many yard signs urged his Republican opponent to "make him spend it all!"

HT2 Tyler Cowen, who emphasizes a different, but also interesting, part of the article: Political spending just isn't that high.


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