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Timothy Lee has an excellent new post:

Brexit isn't the most serious threat to the EU -- the euro is

One surprising thing about Britain's vote to leave the EU is that the British economy has been doing better than a lot of European countries. Unemployment in the United Kingdom has fallen to 5 percent, its lowest level in a decade. In contrast, the average unemployment rate among countries that (unlike Britain) have joined the EU's common currency, the euro, is still above 10 percent.

And many economists argue that's not a coincidence -- that poor policies by the European Central Bank have systematically weakened growth in countries that have adopted the euro.

A new paper from economist David Beckworth makes the case that the economic woes of eurozone countries like Spain and Greece can ultimately be traced back to the euro itself. He argues that other problems in those countries, like their problems with high debt, were made worse by the ECB's tight-money policies.

This argument has huge implications. It suggests that without reforms, eurozone countries could continue suffering from slow growth and abnormally severe recessions for decades to come. That, in turn, will fuel public resentment against the EU and increase the danger that other countries will follow the UK's lead.

The stock markets that have been hardest hit by Brexit are in places like Italy, Spain and Greece, the epicenter of the on and off again eurozone crisis. This suggests that investors fear a contagion effect. Indeed with the sharp rally today, the FTSE100 is actually above it's pre-Brexit level, and even the more meaningful FTSE250 (which focuses on British domestic stocks), is only down about 7%, not much different from France and Germany).

I'm pretty skeptical of anyone's predictions as to how all of this will play out, including my own. Just to give you a sense of how hard this is to predict, consider the following hypothesis. Suppose Britain is able to successfully negotiate a Norway/Switzerland style agreement with the EU, and is also able to avoid the recession that almost everyone is now predicting. What then?

One effect would be to discredit the "experts" (like me) who warned that the UK should not exit the EU. And what implications might long-suffering citizens from Greece and Portugal draw from Britain's successful Brexit?

And here's something else to think about. If Greece noticed that the UK did well with its Brexit, and that led to a "Grexit", the results might be far worse. The Greek banking system might collapse for reasons explained in Timothy Lee's post, and the contagion effect could also hit the banking systems of the other PIGS.

In other words, while real factors are the dominant influence on long run growth, over business cycle frequencies it is monetary factors that dominate. The one issue Britain does not have to deal with is exiting the euro. And that's the most difficult problem of all.

Just to be clear, it's by no means certain that Britain will be able to negotiate a Norway/Switzerland type solution. The two sides are still far apart on immigration, and the EU is in no mood to hand out favors to the Brits. But in the end, serious countries do tend to muddle through, and come up with some sort of agreement. If that tempts some of the eurozone members to also try exiting, we may get a clear test of my view that monetary shocks tend to be more disruptive than real shocks, at least in the short run.

PS. I hope EU negotiators don't read this post and vow to make the UK suffer. If so, I apologize to Boris.

PPS. The mainstream media still hasn't quite figured out that Brexit is a problem because it tightens monetary conditions. But they are getting closer, worrying that Brexit leads to "tighter financial conditions."

Mark Blaug (1927-2011) was an economist best known for his work in history of economic thought and the methodology of economics. He was a student of George Stigler at Chicago in the 1950s and went on to teach at Yale, UCL, and LSE. His work was wide ranging, but above all, he was an astute and critical observer of economics.

Next fall I will be designing and teaching a new history of economic thought class for our political economy seniors at King's College London. I will draw from parts of Blaug's Economic Theory in Retrospect, an excellent resource for those interested in the development of economic theory, as Blaug describes it - "undiluted by entertaining historical digressions or biographical coloring". I certainly have been influenced by his views that the primary purposes of studying history of economic thought is to teach contemporary economic theory and that students should read original texts. Here is a quote from the preface to the first edition of Economic Theory in Retrospect that gives a sense of these views:

In truth, one should no more study modern price theory without knowing Adam Smith than one should read Adam Smith without having learned modern price theory. There is a mutual interaction between past and present economic thinking for, whether we set it down in so many words or not, the history of economic thought is being rewritten every generation.

The study of the history of economics must derive its raison détre from the extent to which it encourages a student to become acquainted at first hand with some of the great works of the subject....The importance of reading original sources in a subject such as economics cannot be overemphasized. We must all have the experience, after reading a commentary on some great book, of going back to the text itself and finding how much more there is in it than we had been led to expect. Commentaries are tidy and consistent, great books are not. This is why great books are worth reading.

For an accessible taste of Blaug's work, here is an ungated 2001 Journal of Economic Perspectives paper addressing the decline of history of economic thought in the classroom (but the apparent rise in papers, seminars, and specialized journals in the field).

The Foundation for European Economic Development (FEED) is financing and awarding an annual undergraduate student essay prize in his honor. Rather than applying economics to a particular problem, eligible essays must reflect critically on the state of economics itself, as Mark Blaug did in many of his works. Critical reflections may include the assumptions adopted, the suitability of the concepts deployed, the mode of analysis, the role of mathematical models, the use of econometrics, real-world relevance, the presumed relationship between theory and policy, the unwarranted influence of ideology, the use (or otherwise) of insights from other disciplines, and so on.

All essays must be in English and submitted by students who are currently enrolled in an undergraduate program or by graduates who obtained their Bachelor's degree no earlier than 1 January 2015. There is no residential or geographical restriction. 6,000 words maximum (inclusive of references and appendices). Author names, affiliations and email must be placed on the first page, below the title of the essay.

Up to two prizes will be awarded by a committee of leading scholars - £500 and £300 - depending on the quality of the best papers. Essays should be submitted by email to by 1 October 2016. For details, see the website.


Last Friday, New York Times columnist Tom Friedman gave a talk at the Naval Postgraduate School, where I teach, and I had a front-row seat. Here are some impressions and responses to his talk.

First, I arrived with a bias against him. I hated his "Suck on this" line and all the stuff that went before it in his interview with Charlie Rose. He was justifying an invasion of Iraq in 2003 based on terrorist attacks on the United States. Yet Saddam Hussein had virtually nothing to do with those attacks.

Second, he's one of the best speakers I've ever seen. I recorded his talk on my iPhone and downloaded it to my iTunes. When I'm driving on my own up in Canada next week, I'll listen to it for pointers. Putting aside whether he is right or wrong, his speech was an exquisite combination of facts (or, at least, factual claims), stories, name-dropping (just the right amount--didn't come off as full of himself, more as "Gee, look at the tall cotton I get to walk in"), slight analysis, and well-timed humor. I aspire to speak like that and I'm way closer than I was, say, 20 years ago.

Well, I don't quite aspire. The one problem is that I am an economist and he's a popular columnist and author. So for me it's important, in a way that it isn't for him, to lay out the reasoning behind a claim, and sometimes that reasoning is complex. Still, I could go further in his direction without compromising my standards.

Now to content, and I won't be comprehensive here. I'll hit highlights, good and bad, that I made notes on, seriatim.

The title of his new book: Thank You for Being Late: An Optimist's Guide for Thriving in the Age of Acceleration.

Interesting story about his interaction with a parking attendant where he leaves his car to get on the D.C. Metro. "Oh my God, the parking attendant is now my competitor." Referred to a 6-page memo he wrote the guy on how to write a column. I would love to see that memo.

Talks about 3 great forces: (1) the market, mother nature (he expressed his belief in the climate hockey stick and seemed to have no awareness of the controversy), and (3) Moore's Law.

Laid out an amazing number of things that happened in 2007: Twitter and many others. The rate of progress increased in 2007 (like many people nowadays, he referred to it mistakenly as an inflection point) but was completely disguised by the financial crisis of 2008.

Population of Niger: It is now 17 million (I checked and it's more like 18.5 million) and in 2050 will be 72 million. I'm virtually positive that he's wrong, but there's no point in betting: I probably won't be around and the probability that both he and I will be around is, I'm sure, under 0.2. His prediction implies an annual population growth rate of 4.078 percent.

Tax and Spending Policy: He wants: single-payer health care (although he didn't specify whether he wants Canadian style where people are forbidden in many cases from spending their own money on health care or British style, where people are allowed to spend their own money); mandated family leave; end the corporate income tax; reduce the payroll tax; have a high tax on carbon, bullets, sugar, and stock transactions (Tobin tax, although he didn't use that term.)

"Is God in cyberspace?" asked a young man in Portland. Friedman then pointed to all the yuck in cyberspace that seems to argue against God's presence: porn, people trying to rip you off, etc. I was surprised because with his somewhat optimistic view, I thought he would point to much of the good stuff: Airbnb, eBay, etc., with the incentive to establish reputation. I'm not an expert on God, but didn't people believe there was a God in the universe when porn, cheating, etc. existed well before cyberspace?

Naive foreign policy: "Drones and walls where necessary; chicken coops and gardens where possible." But where are the drones and walls necessary? He said Obama's policy is "If you see bad guys, then kill them," and that's Friedman's belief too. Really? Any unintended consequences there, Tom? How did it work out after Qaddafi was killed?

On the chicken coops, he told a story of Bill Gates laying out how if you started with 3 hens and didn't eat their eggs, you, in the third world, could, after one year, raise your income from $2 a day to $4 a day. That's great. It really is. But he suggested that would cause way fewer people to want to immigrate from Africa to richer countries. He stated: "If we don't find a way to anchor these people, they're going to keep coming." But, according to his own earlier exposition, they see the richer world on their cell phones and they want it. If they can immigrate and make $30 a day, I would bet that over 80% of the people who wanted to leave a place where they earned $2 a day would want to leave that same place if they were leaving an income of $4 a day. Maybe he had in mind that if you hold off another year from eating the eggs, you make $8 a day. I'm not sure.

"We need the mother of all Marshall Plans." Hmmm. One of Tyler Cowen's best articles ever laid out the truth about the Marshall Plan. See my reference in "German Economic Miracle," The Concise Encyclopedia of Economics. It would be much more effective to increase the immigration quota by 200 percent.

Great line: "If you break it, you own it. Colin Powell got that line from me."

"Which is the one Arab Spring country that managed to succeed? Tunisia. Which is the one Arab Spring country that we [U.S. government] had nothing to do with? Tunisia."
Are you listening to yourself, Tom Friedman?

David R. Henderson  

Fantasy Granted (Sorta)

David Henderson
One of my fantasies is of a classroom in which a tenured economics professor at an accredited institution of higher learning says, "We must have free trade," and a few students leap out of their chairs and shout, "You first!"
This is from Arnold Kling, "Similar Lines."

I don't know of any student who has stood up and said it. But a few years ago, when I, a tenured professor, was laying out the benefits of free trade, a question a student asked led me to think that he was asking something like that but wasn't quite willing to come out and say it, on the mistaken impression that I would be offended. So I introduced the thought immediately. I was teaching a distance learning class and I pointed out that that could just as easily be done from, say, Singapore and at probably half the price. So that's not quite immigration. But I also pointed out that I wanted the U.S. government to allow in people from other countries who would compete with me. I still do.

Moreover, I used to think, like Arnold, that it is hard for a professor to immigrate to America. I based that too much on my own tough experience with the INS in the 1970s when I immigrated from Canada. Arnold is right that there is not free immigration of professors. My impression from a previous post by Bryan Caplan, though, that I can't find offhand, is that immigration of academics to the United States is much freer than of people in most other kinds of jobs.

Emily Skarbek has already offered very sound thoughts on Brexit - and David Henderson and Scott Sumner (as well as David Beckworth) are debating whether Brexit constitutes a monetary shock.

I would just like to build on the point Emily was making: that is, "Trade policy that is crafted in the next few years will be crucial to the economic impact of Brexit".

Indeed, when push comes to shove, it will all be about the sort of trade policy the "Brexited" UK will pursue. It has been pointed out, for example here, that, for all the free trade rhetoric on the Leave side,

The pro-Brexit forces are correct that the EU has a strongly protectionist tilt towards the world outside the union. Although its 28 nations can exchange goods and services free of tariffs inside the trading bloc, the EU is a walled expanse that imposes duties on most of what enters from the U.S., China, and the rest of the non-EU world. The tariffs are especially high on manufactured products and food, averaging from 10%-to-20%.

(...) Yet Johnson and other pro-Brexit leaders have never suggested eliminating or even reducing current EU duties. In fact, Johnson recently stated that leaving the EU would allow the UK to raise duties on steel imports to keep jobs in the beleaguered industry in Wales and Northern England. Toyota, GM, and other big automakers in the U.K. do a thriving export business with the rest of Europe. They're adamantly opposed to a Brexit that would force them to pay 10% tariffs on the cars they sell in France or Germany. And if the U.K. exits, does anyone believe it wouldn't impose duties at least that high on imports from Japan or Korea to shield an industry employing 800,000?

If the U.K. exits, it would be forced to pay tariffs, often heavy ones, on the 45% of its exports sold in the EU. Yet it's likely to impose the same duties, or even higher barriers, to support cars, agriculture and a host of big industries, and get no benefit at all from the lower prices prevailing outside the EU.

Brexit Puzzle resized.png

On the top of that, by leaving, the UK will be in no position to attempt to influence European legislation, though it will still be affected by it profoundly, when it comes for example to the setting of standards and various product regulations, precisely because EU countries are a very important trading partner.

The prevalent comments in the EU are now stressing the importance of expedited negotiations with the UK, and seem to be rooted in a retaliatory understanding of the future trade deal. As always, people tend to forget that free trade is beneficial for all parties. Tariffs won't just hurt, say, Rolls Royce's exports to France, but also those very French customers that may want to buy a Rolls Royce first and foremost.

The most dangerous effect of Brexit, as seen from Brussels, is that it might trigger a domino effect - or at least suggest to some countries that real benefits can be gained by entering in tougher negotiations with the EU leadership for whatever special conditions they may want to negotiate. Brexit is a precedent (*).

So, even if member states' own interest would suggest negotiations should reach a free trade agreement as smoothly as possible (think about Italy, where roughly speaking 7% of exports is with the UK), EU negotiators may try, perceiving it as their own self-interest, to produce a different outcome. A single market should remain far superior, in terms of lower transaction costs, to whatever trade agreement may be reached. And yet perhaps negotiators may aim to "teach a lesson", besides this point. Handersblatt reports that Germany's Minister of Finance, Wolfgang Schäuble, is himself carefully weighing the alternatives.

So, what should Boris Johnson or Theresa May, or whoever is going to be the next prime minister, do? Perhaps it is time to be bold: unilateral free trade, at least with EU member countries. Sure, unilateral free trade is very unpopular. To the best of my knowledge, in recent years only Georgia moved in that direction, as "since 2006, it implemented basic free trade unilaterally for its imports from the whole of the world, such that its average industrial tariff is now 0.3%, compared with 4.6% for the EU. But its reforms have gone far deeper still, unilaterally opening all its markets to foreign direct investment and recognizing the technical standards for imports from all OECD countries, including the EU".

But if the new British prime minister want to puzzle and indeed shock its European counterparts, this may well be the best option. Go ahead and zero tariffs on imports coming from the EU. It might well be one of those very few choices that could prove to be economically beneficially in the long run, not least because it will minimize the problem of capture by special interest groups when it comes to trade policy. But it may prove to be expedient from a political perspective too. As the government should run through the Houses its proposed "interpretation" of the vote (which was, after all, a consultative referendum), open support for free trade may help, in the short run, to restore peace and harmony among the Tories. On top of this, it might give the UK a strong card in negotiations with the EU, making retaliatory attempts hard to "sell" to the public.

(*) A more interesting precedent would be if Brexit were to be followed by another Scottish referendum, this time won by the independence front. The Scots may prefer to stay with the EU than keeping the United Kingdom united. The EU so far has been lukewarm with secessionist movements. But if they welcome the Scots in, what about the Catalans? Watch out for some interesting developments.

CATEGORIES: Eurozone crisis

Commenter Matthew Moore asked the following question:

Any chance of a post on the likely consequences of GBP devaluation? Ejection from the ERM caused a boom. I realise the UK wasn't deliberately overvalued this time, but are there parallels?
In my view the key difference is not the question of "overvaluation" but rather the source of the shock. In 1992, the devaluation was a policy decision, which was (correctly) seen as enabling a more expansionary monetary policy. Hence it had an expansionary impact on NGDP.

This time around the shock was Brexit, which was seen as reducing the real growth prospects for the British economy. One way we know this is that British stocks fell on the news. By the way, in several earlier posts I underestimated the impact of the shock to British equities, by looking at the FTSE100. Commenter Vaidas Urba pointed out that this index includes lots of multinationals with a great deal of foreign earnings. An index of domestic British firms declined much more sharply, comparable to many mainland stock markets. So the expected hit to the UK economy was presumably larger than I originally thought. Mea culpa.

Nonetheless, I continue to believe that the most important effects are global, and that at the global level this was primarily a monetary shock. For instance, the Japanese yen soared in value and the Japanese stock market crashed. Obviously this has nothing to do with the likely long and boring negotiations over tariff rates between the UK and the continent. This is about risk averse investors looking for a safe haven currency, and pushing that currency up so much that deflation may return to Japan.

One of the most complicated issues here is the extent to which the depreciation of the pound reflects the direct impact of the Brexit shock, and the extent to which it reflects actions the Bank of England might take to soften the blow. In my view the bottom line is that NGDP growth in the UK is likely to slow despite the fall in the pound, based on the reaction of their stock and bond markets. However, the BOE is probably expected to do much better than the BOJ, and hence the hit to UK stocks should probably be thought of as mostly a real shock, whereas the severe hit to Japanese stocks, and indeed most foreign stocks, would reflect a monetary shock, that is, the failure of central banks to keep Brexit from depressing expected NGDP growth.
Arnold Kling objects to me calling declines in expected NGDP growth "monetary shocks." Ben Bernanke and I think the term is appropriate, as they are shocks to the value of money. But even if Arnold were 100% correct, it would not have any practical implications for my policy views. If someone insists that I call then uncertainty shocks, or banana shocks, then I'll simply insist that it's the central bank's job to prevent uncertainty shocks, or banana shocks. The bottom line is that unstable NGDP causes economics dislocation, regardless of the ultimate cause of the change in NGDP. Central bank errors of omission and commission are equally bad, equally inexcusable. And central banks have near infinite ability to adjust the quantity of fiat base money, and hence have the tools required to stabilize its value, in terms of the share of NGDP that can be purchased with each dollar, or pound, or yen.

My fellow UCLA grad and former Council of Economic Advisers senior economist colleague applies Ronald Coase-type thinking to limits on liability for nuclear power plants. He writes:

The same principle applies to nuclear construction. If people and owners of property are compensated fully for the damage caused by a nuclear accident -- if the owners of nuclear facilities bear full liability for the adverse effects of accidents -- too many people, businesses and physical capital will be located near the reactors, yielding an increase in damages when a serious accident occurs. This analytic truth holds even for reactors sited in earthquake or tsunami zones; sometimes those are the most appropriate sites for the reactors even given the risks. Accordingly, the Price-Anderson liability limit at least directionally is economically efficient -- it conserves resources -- by providing incentives for those who can avoid the potential damage from a nuclear accident most cheaply to do so, thus preventing some portion of prospective nuclear damage by limiting location choices near the reactors below the levels that otherwise would be observed if public policy imposed full liability on the nuclear owners.

Read the whole thing. It's not long.

My next project is my non-fiction graphic novel on the ethics and social science of immigration, tentatively titled All Roads Lead to Open Borders.  But I've already begun outlining my next big word book, Poverty: Who To BlameHere are the slides from my recent talk on the topic. 

Since I've yet to start seriously reading for this project, much less writing, the time is especially ripe for constructive criticism and reading recommendations...

A straightforward application of public choice theory.

Brexit Puzzle resized.png

Various friends on Facebook have been making fun of Britons who are madly googling to find out the implications of the vote to leave the EU. "Aren't they stupid," "they didn't know what they were voting for," blah, blah, blah.

They well could be stupid, but there are two more-charitable explanations. First, there might not be a huge overlap between those who are googling and those who voted. It makes sense for those non-voters to want to know the implications because the vote did go a certain way and people want to figure out what will happen next.

But there probably is a large overlap between those who voted and those who are googling to find out the implications. The reason is that the percent of eligible Britons who voted was so high. Unless there are a huge number of 16- and 17-year olds googling on Brexit, something I doubt, a large percent of the people googling are of vote-eligible age and probably voted.

Which leads me to my second reason, which doesn't require that people be stupid; all it requires is that voters be rationally ignorant.

People know, at a conscious or subconscious level, that their vote is not determinative of the outcome. So in deciding how to vote, the vast majority don't spend hours carefully sifting through the arguments and evidence. That's rational. But once the outcome is determined, there will be implications. People want to understand those implications for their own life: How should I invest my retirement funds? Should I quit that job I'm not thrilled with or hold on? What about that flat that I wanted to buy? Etc. Also, they might want to know why the pound did this or the Euro did that: in other words, simple curiosity. So trying after the fact to get information that might help guide those decisions, or satisfy their curiosity, makes total sense.

On a somewhat related note, one of my frustrations with our local newspaper, the Monterey Herald, over the years is that in the 6 or 8 weeks before we got to vote on various initiatives and referenda, the Herald's articles would give some facts but were also fairly vague about implications. Then, when a referendum passed, within 24 hours the Herald listed bullet points in great detail about what this would mean. I remember particularly a ballot measure about youths and crime. I learned enough to vote against it. Once it passed by a huge margin, the Herald laid out some pretty draconian implications that they hadn't even hinted at. Now this could be because the newspaper didn't have the manpower to look into it and were simply reporting some material the advocates gave them. Then my upset would be at those advocates, but it would be clear why those advocates would withhold that information. Still, my gut feel is that the Herald could have, at very low cost, given us those facts, but didn't.

CATEGORIES: Public Choice Theory

I can't recall how many times I've visited some tropical paradise, only to be told, "that's funny, it usually never rains at this time of year." When I move to California, I can guarantee that their beautiful Mediterranean climate will suddenly become more like Morocco, due to global warming. Whenever I hear about a foolproof way to beat the market, it seems to immediately stop working the minute that I try it out.

Screen Shot 2016-06-25 at 10.45.08 AM.png
So how can we use my bad luck to make monetary policy more effective?

Commenter Zathrus recently asked me the following:

Second, moving from Brexit to NGDP futures targeting, how could it be politically sustainable to set monetary policy with NGDP futures markets if there is a perception out there, even among market commentators like the one above on Bloomberg, that prices are being set by the elites? I would think that as soon as the market started doing something politically unpopular there would be overwhelming political pressure to detach monetary policy from the futures market and go back to what we have now (discretionary policy, bound by some rules). If market participants believed this was a possibility, a monetary regime attached to even a highly liquid NGDP futures market would never have the credibility to be successful in the first place. How could these political credibility issues possibly be overcome?
It turns out that both of these concerns can be easily addressed with a monetary reform that leverages my gloomy disposition.

Under the basic NGDP futures targeting proposal, the purchase and sale of NGDP futures contracts automatically adjusts the money supply (and hence interest rates), in a way that the market believes will lead to on-target future NGDP. This is the proposal that Zathrus thinks is too controversial, and he's probably right. As a result I've recently moved over to a version of Bill Woolsey's "index futures convertibility" approach, which is more analogous to the old gold standard, except that gold is replaced with NGDP futures. Under this plan, the Fed would have unlimited discretion to set the money supply and interest rates wherever they wished, as long as they made NGDP futures contracts convertible at a fixed price. This could be viewed as the central bank providing insurance to anyone concerned about NGDP volatility. In my plan, they would implicitly charge a price, and hence earn a profit. For instance, I've suggested a "guardrails" approach where the Fed takes a long position on 3% NGDP growth contracts, and a short position on 5% NGDP growth contracts. That means the Fed profits whenever the actual NGDP growth is within those guardrails. And yet, a three to five percent range is small enough to provide decent macroeconomic stability.

So far, you might wonder what any of this has to do with the little raincloud that always hovers over my head. It turns out that the existence of that raincloud is the key to making the entire system work. Back in late 2008, I would have been rubbing my hands together with glee. It was obvious that NGDP growth for the next 12 months was going to come in far below 3%. In that case, I would have had an easy way to get rich---just put my entire 401k plan into a short position in NGDP futures, and if you assume a reasonable margin requirement, I would probably have doubled my money. That would have pushed me from upper middle class to lower rich class.

Unfortunately, there's the Lucas Critique. It's very unlikely that someone like me will ever be presented with an easy path to riches. That means that if the Fed installs a monetary regime where obvious likely policy failure provides an easy path to riches, then as soon as the regime is implemented, there will no longer be obvious likely policy failures. In other words, opportunities like 2008 (or the 1965-81 period on the high side) will no longer occur. Darn it!

Of course for this plan to work, it's essential that I stay alive, so that there is someone unlucky enough to make the entire system work. And I'm already 60. But surely among the 7.3 billion people in the world, there is at least one other person as unlucky as me.

Screen Shot 2016-06-25 at 11.23.28 AM.png
So I'm confident that even after I am dead the plan would continue working.

And if the policy fails, we would all have at least one silver lining to look forward to---it would be extremely easy to get rich!

PS. This is obviously partly tongue in cheek, but on the actual policy proposal I'm dead serious. Don't assume that you can find an obvious flaw of gimmick, just because it sounds silly.

PPS. I provided some responses to questions raised in David Henderson's recent post.

CATEGORIES: Monetary Policy

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Weekend Grab Bag

Amy Willis

Malcolm Gladwell has a new podcast project, Revisionist History. The second episode relates the RAND/Pentagon study of enemy combatants during the Vietnam war. Can you measure morale???

The world of self-driving cars is getting a lot closer than I thought. Lots going on: I'm sure I would scream in the demo, too!

I found this interesting reflection on the great Jorge Luis Borges in Longreads. The author was initially drawn to Borges because she found him "so benevolently and self-effacingly un-capitalist." It's an interesting discussion of Borges's personal financial history, and how this may have influenced Borges's literary output. (It also reminded me of this laudatory post from blogger Alberto on another Latin American literary hero and classical liberal, Mario Vargas Llosa.)

The situation in Venezuela continues to deteriorate. The PamAmPost pointedly blames 21st century socialism for what is now a humanitarian crisis. For more, see Emily Skarbek's earlier post on why Hayek wouldn't be surprised by what's happening in Venezuela today.

And in the so-sad-it's-almost-funny category, did Brits really know what they were voting for in this week's referendum?

grab bag.jpg

What else are you reading this weekend?

CATEGORIES: Economic Education

David R. Henderson  

Is Brexit a Monetary Shock?

David Henderson

Both co-blogger Scott Sumner and blogger David Beckworth argue that the Brexit vote is a large monetary shock. To be a monetary shock, it has to be either (1) a shift in the supply of money or (2) a shift in the demand for money.

Scott argues that it's not a shift in the supply of money. That then leaves only one possibility: a shift in the demand for money. But neither Scott nor David Beckworth makes the actual case that would make that clear.

How do we know there was a shift in the demand for money? And which money? The euro? The pound? Both?

They may well be right but, after having read their posts 3 times, I don't see it.

CATEGORIES: Monetary Policy , Money

David R. Henderson  

One Cost of the Drug War

David Henderson
We walk the floor. He stops. We stop. "You know what is stupid?" he says. "I see murderers. I see rapists. I see robbers. And then I see, the vast majority is in here for bein' stupid enough to smoke a joint too close to a school. Twenty-five years, federal mandatory. Then you got somebody that slaughtered a whole f**king family gets 25 to life and he's out in six to eight." (About one-fifth of Winn inmates are in for drug-related crimes. Getting busted with a joint near a school will typically land you about six years, not 25.) Edison's indignation about drug criminalization surprises me. "Now, where's the f**king justice in that? And we're paying how much per inmate per day?"
This is from Shane Bauer, "My four months as a private prison guard," Mother Jones, July/August 2006.

I read the whole piece and it's long. I recommend it. It's riveting, for way more reasons than the excerpt I cite above. Once you read it, then, if you're a fan of private for-profit prisons, I predict that you will be less of one. It would be interesting to see someone do the same for a government-run prison. Whatever bottom line you come to about private vs. government, one partial solution is to have fewer peaceful people go to prison. That's why the quote above is relevant. We often hear that almost no one goes to prison simply for using marijuana. Edison, quoted above, may have exaggerated with that number as he did with the length of the prison sentence, but it does appear that some people who smoke joints near schools do go to prison.

CATEGORIES: Economics of Crime

Scott Sumner  

Brexit is not about Britain

Scott Sumner

I'm seeing a lot of confusion about the implications of Brexit. Here are two common misconceptions:

1. Some people see it as a real shock, whereas it's primarily a monetary shock.

2. Some see it affecting Britain's economy by disrupting trade, whereas it actually hurts the eurozone more, by depressing expected NGDP growth. The real effects are often overstated; Norway and Switzerland do fine outside the EU.

In some respects, this is quite similar to the British decision to leave the gold standard in September 1931. That decision also hurt the continent of Europe more than Britain (indeed in that case it actually helped Britain.)

This time around the UK was probably hurt somewhat; British stocks are down around 4% as I write. But French and German stocks are down 7% to 8%. The markets in southern Europe are down 10% to 15%. Brexit's most powerful effect is to make the eurozone crisis worse, by increasing doubts as to whether the eurozone will stay together. By analogy, the 1931 UK decision to leave gold made things worse for the rest of the gold standard, indeed a surge of public and private gold hoarding over the next few months drove global commodity prices sharply lower.

To understand the effects of Brexit, it's best to forget about the UK and look at market reactions around the world:

1. Plunging stock prices
2. Plunging bond yields
3. Plunging commodity prices

This is how global markets react when NGDP expectations fall. In contrast, negative real shocks are inflationary.

I don't want to overstate things; the level of equity prices in the US is still quite high---and thus the markets currently do not seem to be forecasting a recession. If the central banks react in the correct way then it's possible that markets will recover. But at the moment, expectations of global nominal growth have clearly declined somewhat.

Several people asked me why this is a monetary shock and not a real shock. First of all, it clearly is a bit of a real shock for the UK economy, but even there it's also partly monetary. But at the global level (which is far more important) it's almost entirely a monetary shock. Here's how the two differ:

1. A real shock is a shock that would depress RGDP even if monetary policy maintained stable NGDP growth expectations.

2. A monetary shock only depresses RGDP because of a decline in NGDP (and/or inflation) expectations.

I think people get confused over two points:

1. Many people wrongly think of monetary shocks in terms of interest rates. Since interest rates fell sharply, these "IS-LM" people don't see how monetary conditions could have tightened. These ISLMic people are often referred to as Keynesians.

2. Old monetarists are also confused, as they focus on the supply of money, which did not decline today. But an increase in the demand for money is every bit as contractionary as a decline in the supply of money; indeed monetary models are completely symmetric in that respect

The most interesting market reaction occurred in the fed funds futures market, where rates fell sharply. The markets now forecast ultra-low interest rates in America, as far as the eye can see. This suggests that the Fed needs to undertake a radical regime change. Unfortunately, central banks are conservative institutions, and thus they'll have to be dragged kicking and screaming into this new reality. I fear that the economics profession as a whole will misdiagnose the nature of the monetary problem, just as they did in the 1930s, and in 2008. The single most useful reform at this moment would be a global shift toward level targeting.

I frequently point out that the economics profession, which is still stuck in the Stone Age, has not even taken the basic step of creating a highly liquid NGDP futures market. Last night would have been a great time to have had such a market, but alas we do not have one. With a highly liquid NGDP futures market we could actually watch monetary policy change in real time.

There are also some odd political aspects to Brexit. Three in four young voters wanted to remain. They will have to live with the consequences. There is a sense in which the older UK voters stabbed their children in the back (Yes, that's a bit melodramatic, but there's a grain of truth.) When the older voters die off, will Britain rejoin the EU, or will the young get more nationalistic as they age? BTW, there are some very good arguments in favor of Brexit; I'm just discussing the psychology of the vote here.

Of course this is good news for Trump, as it suggests a groundswell of nationalism. It's also good news (for Trump) in the sense that the Brexit vote was greater than predicted by either polls or betting markets. I think at some level Brexit voters understood that their decision was destructive (even if justified in the long run) and hence they were more reluctant to reveal this "politically incorrect' view to pollsters. Maybe the same will be true for Trump voters.

Update: I also recommend David Beckworth's excellent post on Brexit.

Robin argues that even if my main criticisms of The Age of Em are correct, most of his predictions remain true.  I'm skeptical.  On Twitter, Robin challenged me to randomly select five pages from his book to inform our dispute.  Limiting myself to his chapters on Economics, Organization, and Sociology, a random number generator gave me the following pages: 189, 216, 241, 304, and 336.  Robin's in blockquotes, I'm not:

We have many reasons to expect an em economy to grow much faster than does our economy today. As mentioned in Chapter 13 , Competition section, the em economy should be more competitive in the sense of more aggressively and more easily replacing low-efficiency items and arrangements with higher-efficiency versions.
Seems reasonable.  Indeed, if I'm correct to think ems will be "robot-like," this just makes Robin even more right.  As I've stated, however, I interpret "much faster" to be a few extra percentage-points of growth per year, not a monthly doubling time.
Reduced product variety and spatial segmentation of markets help innovations to spread more quickly across the economy.
With robot-like ems and fabulously wealthy humans, I'd expect the opposite: more variety, more spatial segmentation as the typical human enjoys global travel and multiple residences.
Stronger urban concentration should also help promote innovation (Carlino and Kerr 2014).
In an em world, it's not clear what even counts as urban concentration in the relevant sense.
The fact that more productive em work teams can be copied as a whole should make it much easier for more productive em firms and establishments to rapidly displace less productive firms and establishments.
Most of the research that aids innovation is "applied" as opposed to "basic" research. Thus we expect most of this better and faster em innovation to consist of many small innovations that arise in the context of application and practice.
If, as Robin argues, ems are based on a small number of humans, why wouldn't we expect this pattern to reverse due to the homogeneity of the innovators?

An em economy might further reduce the costs of crime and disease, and increase the gains from innovation. After all, well-designed computers can be secure from theft, assault, and disease.
On standard human definitions of "theft, assault, and disease," this makes sense.  But why should we think ems are less vulnerable to the cyber-analogs of these problems than humans are to the conventional versions?  Why couldn't computer viruses bedevil ems as germs bedevil us?
More important, traffic congestion costs could be much lower in an em city because most transport of ems could be done via communication lines, and most virtual meetings within a city do not require the movement of em minds at all. As congestion costs now limit city sizes, this increase in virtual meetings could plausibly tip the balance toward much larger em cities.
Telecommuting hasn't done much on this front so far.  So why think ems will lead to "much larger" em cities?  Furthermore, doesn't being a virtual being vitiate most of the social reasons to live near others?
Thus instead of today's equal distribution of people across all feasible city sizes, most ems might instead be found in a few very large cities. Most ems might live in a handful of huge dense cities, or perhaps even just one gigantic city. If this happened, nations and cities would merge; there would be only a few huge nations that mattered.
With robot-like ems, this might lead to free-trade zones, but not national mergers.  This is especially true if, as Robin claims, the Age of Em only lasts a couples of years.
Larger em cities could allow great increases in social complexity.
Very vague, but ok.

Similarly, mass-market ems can be comforted to know that most disturbing life events were part of the clan's plan.
If I'm right, ems will primarily be "distubed" by doing a bad job for their human creators, not by "life events."
When an em clan supplies workers to a very large mass labor market, there must be at least as many members of that clan as there are workers who serve that labor market, times the market share of that clan. Because this number will sometimes be larger than the total number of members in a small clan, clans who supply very large labor markets must also be large. This may create a correlation between clan size and mass-market work; larger clans may tend more to supply mass labor markets, while smaller clans more often serve niche labor markets.
If ems are robot-like, I don't see why they would form into "clans" in the first place.  They'll be part of their human owners' teams, not their own.
While ems that serve mass markets could more easily be copied as a part of large teams that retain most of their familiar friends and context, such copied teams could not as easily bring along copies of large shared community spaces such as city neighborhoods or parks. For very large spaces this is not a problem, as the different copies of the team can just share the same original space, and only rarely meet in the large space. For smaller spaces, however, ems must choose between moving to a new "parallel world" space, which can of course still look a lot like the old space, or sharing the old space and dealing with the prospect of meeting more often and mixing with similar members of other teams.
I think I'd have to read a lot of background information just to know what this means.
In sum, the lives of both mass-market and niche-market ems differ substantially from our lives, but in different ways.
Very vague, but ok.

Ems from large clans should be less aware of, and feel more secure in their identifying with a personal combination of personality, style, and early life history. They know there is in effect a whole "planet" out there of perhaps billions of ems just like them, "super-twins" to whom they can talk at any time, or ask for help. Thus when around ems from other clans, ems might feel more like expatriates, that is, emissaries from a foreign land.
If ems are robot-like, they'll identify primarily with the owners' interests, and simply won't have a lot of "personality" in a human sense.
As discussed in Chapter 19, Managing Clans section, ems who made a plan and then split into many copies to execute that plan are likely to feel that they and their copies are the "same" person, while copies who openly disagree with each other are likely to see themselves more as different people. In an attempt to unify their members, clans may discourage open disagreement, focus more on the fact that they have a shared mental style and shared memories of early life, and focus less on recent opinions and memories. After all, those recent opinions and memories often differ.
Again, in my scenario I see little role for em disagreement or self-organization.
When doing physical jobs, ems could use interchangeable bodies. Virtual ems could also easily change their virtual bodies at any time. Thus em identities need tie less to details of a particular body. However, to create a vivid memorable identity that is easily remembered by other clans, each clan may still create and stick close to a consistent visual style.
See above.
People today stay loyal to product brands over surprisingly long periods (Bronnenberg et al. 2012). This weakly suggests that ems will also stay loyal to brands for long times. Brand owners are eager to offer deep discounts to young ems with promising futures. While the em world has few children, each child has on average a great many descendants. On the other hand, collective purchasing by clans makes for better-informed consumers, and such consumers tend to have a weaker attachment to brands (Bronnenberg et al. 2014).
Very vague, but ok.
Today, our physical illnesses give us excuses to escape social pressures and expectations. If we don't want to do something, we can pretend to be sick. Ems, who never get physically sick, lack this excuse. Perhaps ems will expand their expectations of temporary mental illness to compensate.
Given Robin's discussion of "software rot," I'm puzzled by these claims.  In any case, robot-like ems won't be inclined to make excuses for anything.

Because ordinary humans originally owned everything from which the em economy arose, as a group they could retain substantial wealth in the new era. Humans could own real estate, stocks, bonds, patents, etc. Thus a reasonable hope is that ordinary humans become the retirees of this new world. We don't today kill all the retirees in our world, and then take all their stuff, in part because such actions would threaten the stability of the legal, financial, and political world on which we all rely, and in part because we have many direct social ties to retirees. Yes we humans all expect to retire today, while ems don't expect to become human, but em retirees are vulnerable in similar ways to humans. So ems may be reluctant to expropriate or exterminate ordinary humans if ems rely on the same or closely interconnected legal, financial, and political systems as humans, and if ems retain many direct social ties to ordinary humans.
As my earlier critique explained, Robin's analysis strongly suggests this amicable human-em relationship will end in an objective year or two.  With robot-like ems, however, it's basically right.
Few ordinary humans can earn wages in competition with em workers, at least when serving em customers. The main options for humans to earn wages are in direct service to other humans. Thus individual ordinary humans without non-wage assets, thieving abilities, private charity, or government transfers are likely to starve, as have people throughout history who lacked useful assets, abilities, allies, or benefactors.
In our world, financial redistribution based on individual income has the potential problem of discouraging efforts to earn income, and thereby reduce the total size of the "pie" available to redistribute. In an em economy, however, where most all humans are retired, this problem goes away; there are fewer incentive problems resulting from financial redistribution between retired humans.
In Robin's scenario, I don't see why humans wouldn't tax ems, leading to standard disincentive effects (or perhaps non-standard Malthusian effects). 
Ordinary humans are mostly outsiders to the em economy. While they can talk with ems by email or phone, and meet with ems in virtual reality, all these interactions have to take place at ordinary human speed, which is far slower than typical em speeds. Ordinary humans can watch recordings of selected fast em events, but not participate in them.
Do CEOs "participate" in their firms?  Of course; though they don't have time to follow the details, they're ultimately in control.  I've argued the same holds for humans in the Age of Em.
Although the total wealth of humans remains substantial, and grows rapidly, it eventually becomes only a small fraction of the total wealth, because of human incompetence, impatience, inattention, and inefficiency. Being less able than ems, humans choose worse investments. Being more impatient, they spend a larger fraction of their investment income on consumption. 
In my scenario, humans hold 100% of wealth regardless of their incompetence, impatience, inattention, and inefficiency.  Humans own ems, ems own nothing.

Is Robin really wrong 90% or more of the time?  I don't know quite how to score this five-page dissection, but I'm open to readers' suggestions.  After performing this exercise, I'm more inclined to say Robin's only 80% wrong.  By any measure, however, his forecast accuracy seems low.  My main complaint is that his premises about em motivation are implausible and crucial.  But in several cases his reasoning from his own premises seems shaky as well.

Bryan Caplan  

Brexit Bet Comment

Bryan Caplan
Mark Steyn seems to be declaring victory on our bet.  I now think he will win, but the terms are not yet satisfied.  As I stated last week, I will happily pay as soon as the British Parliament votes for unilateral exit or the European Union officially removes Great Britain as a member.

Brexit Puzzle resized.png
The results of the referendum are in and the UK has voted to leave the European Union. The official campaign was littered with awful arguments that play to the public's worst sentiments - and the decision was likely driven by ignorance and the older voting population. As a foreigner in the country and someone who believes passionately in free trade, open immigration, and the principles of a free society - I am nervous.

The markets have slid and there is uncertainty over what this will mean for the future of the UK and Europe. David Cameron has resigned. No one knows just how this is going to play out. The longer horizon will depend on the course that is chartered in policy negotiations and positions adopted by the UK.

Many of the people I have discussed this with in academic and policy circles want a freer, more open society. This led some to vote remain and others leave, based on divergent predictions about which course of action would lead to a more open society. I take this as one reason for optimism amidst the fear.

The aftermath of this vote will require a broader coalition of liberals to push for an open trade and immigration policy. Trade policy that is crafted in the next few years will be crucial to the economic impact of Brexit. Britain desperately needs policy entrepreneurs, City of London, and leaders in Parliament to craft a solution that maximises openness to counter the populist, nationalist, and collectivist sentiments that may have got us here. It is hard to see this now, having just voted to leave the EU single market.

As my friend Sam Bowman points out, the biggest reason London is a great city is due to immigration. We want more of that, not less - from Europe and everywhere else. The voices for free trade must be louder than ever.


Bob Murphy was kind enough to review my recent book on the Great Depression, in the Quarterly Journal of Austrian Economics. Here are the concluding two paragraphs:

Putting aside the detailed statistics, I will end this review with a simple question: How can it be that the classical gold standard is largely responsible for the Great Depression, when the classical gold standard was operating during several previous financial panics and depressions (small "d")? To blame the Great Depression on the gold standard is akin to blaming a particular plane crash on gravity.

In contrast, the Rothbardian analysis at least has a shot at being satisfactory. After all, Herbert Hoover in his memoirs tried to defend his legacy by assuring his readers (truthfully) that his administration had taken unprecedented measures in battling the Depression, meddling in the economy in ways that no president during peacetime had done before. That's the place to start, when we ponder why Herbert Hoover suffered from a worse downturn than any president before.

I don't recall ever saying precisely that the classical gold standard was largely responsible for the Great Depression. If I did, it was an error. My actual belief (which explains the original title of my book---The Midas Curse) is slightly different---that the initial phase of the Great Depression was caused by massive gold hoarding during 1929-33 (under the interwar gold standard), especially by central banks. This gold hoarding sharply reduced prices and NGDP, and since nominal wages were sticky it also led to mass unemployment. The unusual duration of the Great Depression (including an 8 year recovery after a 3 1/2 year contraction) is partly explained by FDR's high wage policies.

I believe that the gravity metaphor better applies to Bob's explanation for high unemployment---sticky wages. In my view, sticky wages and prices are just one aspect of reality, something that policymakers must account for, just as airplane designers must account for gravity. Thus monetary policy should aim for stable growth in NGDP, so that sticky wages don't become a problem.

In fairness to Bob, there is a grain of truth in his attempt to blame wage stickiness. He points to the fact that Hoover pressured firms not to cut wages after 1929, whereas during the severe 1920-21 price deflation, wages were allowed to adjust downwards. But I don't think this proves as much as Bob assumes. Even without any government interference, wages would be sticky in the short run, and the 1921 depression was also quite steep. The difference in 1929-33 was that the deflation continued for 3 and 1/2 years, whereas after 1921 prices started rising again. So the monetary shock was far worse in 1929-33, which largely explains why the latter contraction was longer and deeper.

Having said that, I do agree with Bob that Hoover's high wage policy was also a significant factor, and explains part of the greater severity of the 1929-33 slump. I also agree with the Murphy/Rothbard view that other Hoover policies were also destructive, such as the Smoot-Hawley tariff and the sharp increase in marginal income tax rates.

However, Adam Smith was right when he said there's a great deal of ruin in a nation. During 1964-73, Johnson and Nixon did lots of things that led to greater government spending and regulation, as well as higher taxes. The net effect of these on measured economic efficiency was negative (aside from civil rights laws). And yet the economy boomed. It didn't boom because supply-side factors don't matter, it boomed because in the short run demand shocks are the primary determinant of output and employment. Hoover's policies were quite counterproductive, but nowhere near important enough to explain the Great Contraction. It was tight money that did it.

When I wrote the book, I consciously tried to avoid monocausal explanations that pinned "blame" on a single policy or political figure. The Great Depression was very complex, and my book makes it quite clear that if during the 1930s the gold standard had been operated according to the "rules of the game", there might well have been no Great Depression (we can't be sure either way). That's why I say it's an oversimplification to say I "blamed" the gold standard for the Great Depression, especially the claim that I blamed the "classical gold standard", which usually refers to the pre-WWI system (where central bank intervention was milder and hence the rules of the game were more closely followed).

On the other hand I'm quite comfortable saying that I think we would have been better off if the gold standard had been replaced by fiat money after WWI. Even that new system would have probably performed poorly by the standards of the 1990s, but it would have done less poorly than the actual result that we got under the interwar gold standard.

One other point. I think Bob makes too much of the fact that I was unable to explain the stock market crash of 1929. I explained as much of it as I could (which is far more than what anyone has been able to do for the similar 1987 crash) but freely acknowledged that I fell well short. It remains something of a mystery. At the beginning of the book I indicated that I believe I was able to do a much better job of explaining stock market movements in 1930-38, as compared to 1929. A reviewer certainly should point out that I fell somewhat short of explaining 1929 (although I still think I did better than others) but the greatest weakness in the book (in my view) is that I had almost nothing interesting to say about the rapid recovery of 1940-41.

But then that's where I'd guess a Keynesian reviewer would take me to task, not Bob Murphy. :)

Despite these quibbles, I appreciate Murphy's review, which did have some positive things to say as well.


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Big Day for Britain

Amy Willis

Today the United Kingdom will decide via referendum whether or not to remain in the European Union... What's at stake?

The New York Times has this good summary of the issue. The Economist offers another good option here. And finally, Slate offers its version of everything you need to know.

Recently on EconLog, Alberto Mingardi, Scott Sumner, and Emily Skarbek have offered some (conflicting) commentary. You can also find Richard Epstein's "cautious yes" at the Hoover Institute.

Bloomberg offers a tracker here, noting, "We won't know the outcome for sure until the votes have been counted."

What are your thoughts on the outcome of today's vote?

Earlier this year, my Ancestry and Long-Run Growth Reading Club walked through Putterman and Weil's "Post-1500 Population Flows and the Long-Run Determinants of Economic Growth and Inequality." (Quarterly Journal of Economics, 2010)  Quick review: Putterman and Weil measure the ancestral origins of the world's current inhabitants, then show that past civilization of countries' inhabitants is a much stronger predictor of current economic prosperity than past civilization of countries' territory.
Instead of looking at the long-run effects of places' traits, they look at the long-run effect of tribes' traits.  They focus on two measures: state history and years of agriculture.  State history measures how long a country "had a supratribal government, the geographic scope of that government, and whether that government was indigenous or by an outside power."  Following previous work, they massage this measure: "The version used by us, as in Chanda and Putterman (2005, 2007), considers state history for the fifteen centuries to 1500, and discounts the past, reducing the weight on each half century before 1451-1500 by an additional 5%."  Years of agriculture, in contrast, is not massaged.  It's simply the "the number of millennia since a country transitioned from hunting and gathering to agriculture."


Now for the punchline: Migration-adjusted measures are much more predictive of modern GDP than raw measures.  "Not surprisingly, given previous work, the tests suggest significant predictive power for the unadjusted variables. However, for both measures of early development, adjusting for migration produces a very large increase in explanatory power. In the case of statehist, R2 goes from .06 to .22, whereas in the case of agyears it goes from .08 to .24. The coefficients on the measures of early development are also much larger using the adjusted than the unadjusted values." 
The more I explored this paper, however, the more I realize that the world's three most populous countries - China, India, and the United States - are big outliers.  The people of China and India have great scores for state history and agriculture, but remain poor.  The people of the United States have mediocre scores for state history and agriculture, but remain rich.  If these three outliers were Grenada, Slovakia, and Botswana, I wouldn't demur; outliers have ye always.  But the fact that the three countries with the most people manifestly deviate from Putterman-Weil is troubling to say the least.

The obvious remedy, as my last post explained, is to run a weighted regression, to place heavier weight on more populous countries, and lighter weight on less populous countries.  GMU econ prodigy Nathaniel Bechhofer volunteered to do all the legwork, and David Weil confirmed the accuracy of his output.  Specifically, Bechhofer did the following for Putterman-Weil's Table 4, columns (2) and (6).

1. Replicate the original results.
2. Re-do the original specifications with year-2000 population weights.*

You can access Bechhofer's unabridged results here, here, and here.  For now, though, let's walk through the basic findings. 

Putterman-Weil's original output for the effect of ancestral state history and absolute latitude on modern per-capita GDP:


The same output, with countries weighted by population:

Putterman-Weil's original output for the effect of ancestral agriculture and absolute latitude on modern per-capita GDP:

The same output, with countries weighted by population:

In both cases, the original coefficients imply huge positive effects of ancestral development on modern living standards.  And in both cases, these huge coefficients actually turn negative after weighting for population.  For agricultural history, a large statistically significant positive effect transmutes into a large statistically significant negative effect.  Reviewing all of Bechhofer's results, the signs on ancestral development are not uniformly negative, but Putterman-Weil's dramatic positive results never re-emerge.

In stark contrast, the measured effects of sheer geography withstand population-weighting with ease.  Absolute latitude continues to have a huge positive effect.  So, to a slightly lesser extent, does being land-locked.  (See the unabridged results).

What does this all mean?  At minimum, the apparent effects of ancestral development on modern living standards are not robust.  They don't proverbially "leap out of the data"; they hinge on the debatable assumption that every country on Earth, no matter how small, is equally informative about the causes of economic development. 

Personally, I'd go further: Despite its ubiquity in growth regressions, the equal-weighting assumption is silly.  China, India, and the United States obviously teach us more about human societies than Grenada, Slovakia, or Botswana.  And what they teach us is that ancestral greatness is not vital for modern prosperity.

* Bechhofer also tried year-1500 population weights, with very similar results.

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