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Next month, I'll collect my final payment from my Dependent Care Flexible Spending Account - and I couldn't be happier.  I hate filling out paperwork.  Though it only takes a couple hours to save thousands of dollars, I resent the process. 

I'm not alone.  Education researchers, for example, find that many students leave free money sitting on the table because they fail to fill out the proper forms.  Furthermore, modest help with form completion markedly raises uptake.   Some highlights:
Some students receiving college financial aid could be getting more. Others fail to qualify for aid entirely: each year, more than one million college students in the United States who are eligible for grant aid fail to complete the necessary forms to receive it. Bird and Castleman (2014) estimate that nearly 20 percent of annual Pell Grant recipients in good academic standing fail to refile a FAFSA after their freshman year, and subsequently miss out on financial aid for the following academic year.
And:
Additionally, the complexity of the financial aid application confuses and deters students (ACSFA 2001, 2005). To determine eligibility, students and their families must fill out an eight-page, detailed application called the Free Application for Federal Student Aid (FAFSA), which has over 100 questions. King (2004) estimates that 850,000 college students who were eligible for federal grant aid in 2000 did not complete the forms necessary to receive their benefits
Since I think education is extremely socially wasteful, I'm glad that so many students fail to game the system.  But - as Robin Hanson pointed out at a seminar on this research - there's probably something much bigger at work.  What researchers have learned about students and FAFSA is probably just a special case of the fact that humans hate filling out paperwork.  As a result, objectively small paperwork costs plausibly have huge behavioral responses.*

Consider a few possible margins:

1. A small business-owner decides not to hire a worker because he doesn't want to fill out tax and other regulatory compliance forms.

2. A home-owner decides not to improve his home because he doesn't want to get the necessary permits and inspections.

3. A traveler decides not to visit a country because he doesn't feel like applying for a visa.

4. An unemployed worker (note the low opportunity cost!) doesn't apply for unemployment insurance because the process is aggravating.

5. A childless couple decides against adoption because the bureaucracy is hellish (or, in the case of international adoption, hellish squared).

Many people's knee-jerk reaction will be, "Let's cut red tape!"  But the craftier response is, "Let's manipulate red tape."  If X is good, we can noticeably encourage it by modestly simplifying the paperwork.  So yes, cut red tape for employment, construction, travel, and adoption.  If X is bad, though, we can noticeably discourage it by modestly complicating the paperwork.  Indeed, complexity is a viable substitute for explicit means-testing: If you lack the patience to fill out ten forms, you probably don't really need the money.

* Of course, if someone fills out paperwork full-time, they might become inured to the drudgery.  But we'd still expect oversized behavioral effects of paperwork for everyone who can't cheaply delegate such tasks to a trusted professional.




Bob Murphy left a comment after my MoneyIllusion post on the NGDP prediction market (and David Henderson had a similar question):

In a traditional financial market, people have skin in the game and that helps to yield the "wisdom of crowds" results that work so well in markets, but work poorly in (say) presidential elections.

Are you just saying this is better than what we have now? I.e. it would be better still if true experts could put hundreds of thousands of dollars of their own money if they perceived a large mispricing of the NGDP futures contract, but letting people use this forum is still better than nothing?

I'm sure you get my point but for others: Suppose that instead of having Google stock trade on the open market, instead we let everybody who wanted to play guess on Google's 2017 profitability. And then at the end of the year we gave $10,000 in prize money to the person whose guess was closest. Surely that procedure wouldn't be nearly as good as estimate of Google's profitability as our current system.


I partly agree, but would like to separate out a couple of distinct issues. Consider two betting markets, in each case where people predict whether outcome A or B will occur (such as a two person election contest.):

Market A: People bet $5000, and get back $10,000 if they guess right.
Market B: People bet nothing, and win $10,000 if they guess right.

In market B, people have no "skin in the game", but in my view they would have just as much incentive to bet wisely as in market A. After all, in market A it's about whether you will win $5000 or lose $5000. In market B it's about winning $10,000 or winning zero. In both cases, you are $10,000 better off by making the right prediction.

Research in behavioral economics suggests that many people have "loss aversion", which cannot be explained by purely "rational" models of behavior. I put 'rational' in quotes because economists define the term differently from psychologists (or the average person for that matter.) If there is loss aversion, then market A might motivate more effort into searching out the truth.

I think Bob's more important point is that in a normal market a trader can invest a lot of money and earn large profits if their predictions are more accurate than the consensus. He's right that the sums involved here (while they will end up being much more than $10,000--I'll announce a big gift very soon) are too small to interest big Wall Street traders.

Of course it's much harder to set up a true futures market. For instance, I'd have to go through the difficult process of getting SEC approval, with no guarantee of success.

And don't write off the usefulness of simple prediction markets. Research by Robin Hanson, Justin Wolfers and others shows that these markets can be surprisingly efficient.

Emile Servan-Schreiber left a helpful comment in response to Bob over at my MoneyIllusion post. Here it is:

There is actually very little data to back-up the idea that real-money markets make better forecasts than play-money market, but there is a lot of data to the contrary. One significant advantage of play-money markets is that they correlate much better wealth and past prediction accuracy. In forecasting the highest-impact recent political events in the U.K., U.S., and France, Hypermind systematically outperformed real-money markets such as IEM, PredictIt and Betfair. Even among real-money markets, those that are most regulated and constrained - IEM and PredictIt - tended to make better predictions than the largest, deepest, least constrained Betfair... Hypermind has been carefully designed to attract and retain only the most dedicated "superforecasters", and it has an enviable track record of accuracy.
PS. Speaking of predicting the future, how can I resist this great picture:

Screen Shot 2017-05-23 at 1.55.33 PM.png

CATEGORIES: Finance



I am pleased to announce that a new Hypermind NGDP market is up and running. Back in 2015, we ran an annual NGDP prediction market and 4 quarterly markets. Because only the annual forecast has much macroeconomic significance, this time around we are only running that one market. Traders will forecast the NGDP growth rate from 2017 Q1 to 2018 Q1.

Last time we had about $5000 in prize money for the annual market, and that is what we are starting off with this time. However I expect the prize money to rise dramatically before the contract expires, as we are involved in a major fundraising operation. If you want to contribute, there is information over at my post at TheMoneyIllusion:

http://www.themoneyillusion.com/?p=32484

Emile Servan-Schreiber at Hypermind has provided me with some useful information for those who want to participate in the Hypermind NGDP market, or just watch the action:

To follow the market's prediction in real time, go here: https://hypermind.com/dash/ngdp/dash.html

(Note that the initial price in the history chart is all wrong, but that will matter less and less as time goes on.)

To participate, one just needs to register to Hypermind at http://www.hypermind.com


And finally, a quick review of my current views on NGDP futures:

1. This is not a policy market. For policy, I propose 3% and 5% "guardrails", where the central bank promises to buy unlimited NGDP futures at 3% growth and sell unlimited futures at 5% growth. That policy does not even require the creation of an NGDP prediction market; the central bank can create the contracts.

2. In addition to the guardrails policy, I favor the creation of a permanent NGDP prediction market that delivers point estimates of NGDP expectations for policy research purposes. This experiment is thus closer to the research market that I favor, not the NGDP guardrails policy market, which is run by the central bank.

Screen Shot 2017-05-22 at 6.04.31 PM.png




EnergyWorkers.jpg


Creating jobs is not the same as creating wealth.

When I start a class in economics, I start with the Ten Pillars of Economic Wisdom. The pillar above about jobs and wealth is #8. When I teach it, I use Dwight Lee's now-classic article "Creating Jobs versus Creating Wealth."

Mark Perry has done a great service by applying this principle to energy. In "Inconvenient energy fact: It takes 79 solar workers to produce same amount of electric power as one coal worker," he writes:

To start, despite a huge workforce of almost 400,000 solar workers (about 20 percent of electric power payrolls in 2016), that sector produced an insignificant share, less than 1 percent, of the electric power generated in the United States last year (EIA data here). And that's a lot of solar workers: about the same as the combined number of employees working at Exxon Mobil, Chevron, Apple, Johnson & Johnson, Microsoft, Pfizer, Ford Motor Company and Procter & Gamble.

In contrast, it took about the same number of natural gas workers (398,235) last year to produce more than one-third of U.S. electric power, or 37 times more electricity than solar's minuscule share of 0.90 percent. And with only 160,000 coal workers (less than half the number of workers in either solar or gas), that sector produced nearly one-third (almost as much as gas) of U.S. electricity last year.


Of course, to do a complete analysis, one would want to look at capital and other costs, not just labor costs. But given the overwhelming data on labor, it's hard to believe that other costs for solar would be so much lower as to make solar less expensive. And we don't have to speculate. If solar power weren't more expensive, governments wouldn't need to subsidize and regulate so heavily to get people to use it.




Back in the 1980s and 1990s, I did some research with Steve Silver on sticky wages and the business cycle. Using postwar data, it's very difficult to draw any conclusion, as the economy was hit by both supply and demand shocks, which have very different impacts on real wages.

During the interwar period, however, demand shocks are much easier to identify and the role of wages really stands out. In the following graph we inverted the real wage series (top line), and compared it to industrial production (bottom line), to make it easier to see the strong countercyclicality of real wages:

Screen Shot 2016-02-14 at 10.53.49 PM.png
We found that there were two factors that reduced output during the interwar years. First, falling prices in the face of sticky wages---which occurred on and off throughout the entire interwar period. Second, an autonomous rise in nominal wages (caused by government labor market policies)---which mostly occurred during the period after 1933.

While cleaning out my office I came across a 1996 QJE paper by Ben Bernanke and Kevin Carey. Here's a portion of their conclusion:

First, like Eichengreen and Sachs [1985], we verified that during much of this period there existed a strong inverse relationship (across countries as well as over time) between output and real wages, and also that countries which adhered to the gold standard typically had low output and high real wages, while countries that left gold early experienced high output and low real wages. It does not appear that any purely real theory can give a plausible explanation of this relationship. Among theories emphasizing some type of monetary non-neutrality (i.e., a non-vertical aggregate supply curve), there are basically only two types: theories in which the price level affects output supply because of nominal-wage stickiness, and theories in which the price level affects output supply for some other reason. We find that, once we have controlled for lagged output and banking panics, the effects on output of shocks to nominal wages and shocks to prices are roughly equal and opposite. If price effects operating through nonwage channels were important, we would expect to find the effect on output of a change in prices (given wages) to be greater than the effect of a change in nominal wages (given prices). As we find roughly equal effects, our evidence favors the view that sticky wages were the dominant source of non-neutrality.
That's why Bernanke was my first choice for Fed chair back in 2006.

PS. Is the 1985 paper that Bernanke and Carey cite co-authored by the Jeffrey Sachs who defended Bernie Sanders and a higher minimum wage? I believe it is. I think it's fair to say that the policy views of economists are not based on the outcome of their empirical research.

PPS. Steve Silver and I had a paper on real wage cyclicality published in the 1989 JPE. We did a follow-up paper focusing on wages and prices during the interwar years, which was published in 1995 in the Southern Economic Journal.




I often debate the question of whether severe slumps are caused by financial crisis or tight money. In my view it's usually tight money, with financial stress being a symptom of falling NGDP. So how would we test my hypothesis?

While cleaning out my office at Bentley, I came across an old NYT article from June 11, 1933:

Wall Street notes a remarkable contrast between the attitude toward the war debt question last December and that of the present time. Last year, financial circles began to become apprehensive about the war debt question long before December 15. By late November the pound sterling had fallen to a record low of $3.14 1/2 and the financial markets were severely depressed. At the present time, although the war debts payments are due by next Thursday, there has been almost no discussion of the subject in financial circles, and the possibilities of wholesale default have left the markets unperturbed.
Why did the markets suddenly stop caring about the war debts issue in June 1933? For the same reason they suddenly started caring about the war debts issue in mid-1931. War debts disturbed the financial markets when they led to devaluation fears, which triggered massive gold hoarding. By June 1933, the US was off the gold standard, and hence gold hoarding no longer exerted a deflationary impact on the US. However, gold hoarding continued to be a problem for countries still on the gold standard, such as France.

In my book entitled "The Midas Paradox", I did a very extensive empirical study of this question. The price of German war debt bonds suddenly become highly correlated with US stock indices in mid-1931 (when Germany got into financial trouble), and this continued through 1932. Fears of German default were triggering a loss of confidence in the international gold standard. That loss of confidence was justified, as Germany adopted exchange controls in July 1931 and the UK devalued in September 1931. At that point people started worrying about a US devaluation, and gold hoarding rose sharply.

Because the supply of newly mined gold doesn't change very much from year to year, big changes in the value of gold are primarily caused by shifts in gold demand. But once the US began devaluing the dollar in April 1933, increases in gold demand no longer had a significant deflationary impact on the US. Gold kept getting more valuable, but now the dollar was losing value. (Recall that price deflation means that money is getting more valuable.)

Back in 1932, the vast majority of serious people rejected my "tight money" explanation of the Depression. It was "obviously" caused by financial turmoil, both domestic and international. Falling NGDP was seen as a symptom. Only a few lonely exceptions like Irving Fisher and George Warren took a "market monetarist" perspective, urging a shift toward expansionary monetary policy. Because we were near the zero bound, they recommended a depreciation of the dollar against gold. In 1933, FDR adopted their suggestion, and it worked just as Warren and Fisher predicted---prices and output immediately began rising sharply. The policy would have been even more effective if not offset by the NIRA, which sharply reduced aggregate supply.

And there is lots more evidence for the tight money--->falling NGDP---> financial distress chain of causation. After the dollar started depreciating against gold in April 1933, domestic bank failures ceased almost immediately.

Some people claim that tight money did not cause the Great Recession, because there was no alternative monetary policy at the zero bound of interest rates. But something similar occurred in the 1980s, when we were not at the zero bound. Between 1934 and 1980, there was a period of calm in the banking system. Some people wrongly attribute that to regulation, but in fact it was caused by higher rates of inflation and NGDP growth during 1934-80, which made it easier for debts to be repaid. As soon as the Fed adopted a tight money policy in 1981, and NGDP growth began slowing sharply, we experienced a bout of bank failures (mostly S&Ls). The causation in this case clearly went from tight money to sharply slower NGDP growth to banking distress, as we were not even close to the zero lower bound on interest rates.

Screen Shot 2017-05-19 at 10.34.22 AM.png
To summarize, the question of whether tight money or financial distress causes deep slumps might seem almost unsolvable, if you simply focus on the Great Recession. But those with a deep knowledge of economic history know that causation clearly runs from tight money to falling NGDP to financial distress. Unfortunately, economic history is no longer widely taught in our graduate programs, so we now have an entire generation of economists who are ignorant of this subject, and who keep developing business cycle models that are easily refuted by the historical record.




David R. Henderson  

Nowrasteh on E-Verify

David Henderson

I asked Alex Nowrasteh for his input on the E-Verify issue that I posted about yesterday.

Here's what he wrote:

E-Verify won't work because employers ignore it in states where it is required with virtually zero legal consequences (see blog post). Enforcing E-Verify laws is about as difficult as enforcing current I-9 violations. If Arizona won't enforce its own E-Verify mandate and the Feds won't enforce their own I-9 mandate, there is no good reason to expect them to enforce E-Verify.

As Nowrasteh and Harper write in their policy analysis on pages 10-11, E-Verify has barely turned off the wage magnet that attracts illegal immigrants in Arizona (second link). E-Verify is a failed program that will raise hiring costs. What's worse is that its failure will prompt calls for a national biometric identity system to plug E-Verify's "loopholes." That system's potential will be abused in short order. Best to forestall that.


The policy analysis he refers to is Alex Nowrasteh and Jim Harper, "Checking E-Verify: The Costs and Consequences of a National Worker Screening Mandate," July 7, 2015.




Whatever you think about anarcho-capitalism, the production values of my Rubin Report interview on the subject are top notch!  Enjoy.



In other news, Mike Huemer and I have a fan from the NFL (and GW Law).




by Nicolás Maloberti

When it comes to information, we have growing powers to filter out what we don't like. Suppliers have also growing powers to cater to our demand without us having to make any conscious choices. This is worrisome since we might end up living in different political universes; or "echo chambers," as Cass Sunstein puts it in his latest book #Republic: Divided Democracy in the Age of Social Media.
#republic.gif
In this week's edition of EconTalk, host Russ Roberts and Sunstein discuss the main themes of the book. Why are echo chambers problematic? Because they prevent us from facing views dissimilar to ours. As a result, we could be led to take falsehoods for truths, become more extreme in our views, and regard others as enemies or adversaries. Part of the value of the right of free speech is that it creates an environment in which our own views are constantly challenged. Sunstein's worry is that this value could be greatly reduced, even when all the legal guarantees of free speech are observed.

That is because echo chambers are simply by-products of our individual decisions as consumers. This very fact imposes constraints in terms of the solutions we can call for, as Sunstein recognizes. To counteract the market architecture of increasing powers to filter out information, Sunstein suggests an "architecture of serendipity". He argues we need to increase the likelihood of getting exposed to views and materials that we have not sought out.

An issue that doesn't come up in Sunstein's and Roberts's conversation is the connection between echo chambers and the more general problem of motivated reasoning. Echo chambers are a manifestation of this problem, but there are many others. In some of those cases, perhaps the government does have a more active role to play.

We tend to derive important psychological benefits from belonging to groups and holding the shared views of their members. In the podcast episode, Sunstein recalls how in the very early days of behavioral economics the psychological benefits of being part of the group of people advancing this new paradigm were quite palpable. For many people, the benefits of belonging to distinct political groups are equally palpable. In order to maximize those psychological benefits, experimental research shows that we tend to engage in motivated reasoning; that is, our judgements dictate how we process and integrate information rather than the other way around.

The very fact that we often seek confirmatory evidence seems to indicate, however, that we also care about being right. Motivated reasoning would be a waste of time and effort if the need for accuracy were not also part of our psychological make-up. Motivated reasoning is thus a strategy to keep high cognitive dissonance costs at bay. This all suggests that there is a limit to what our self-deception capabilities can accomplish.

The benefits we derive from holding our most cherished beliefs start to dissipate quickly in the presence of growing doubts. Echo chambers protect us from doubt, and thus they help us to keep the costs of motivated reasoning low. We simply don't face the sort of evidence that could truly challenge the powers of our reasoning- or at least we don't face it often enough. Certain aspects of our institutional democratic architecture seem to play a functionally equivalent role: they lower the costs of our motivated reasoning by making it harder to confront potentially inconvenient evidence.

The main mechanism by which institutional structures have this effect is by lowering the salience of the costs and consequences of alternative policies. Echo chambers protect our self-image by keeping some information out of our field of vision. Low-salience costs do it by making that information invisible to our imperfect eyes. In both cases, the architecture of our environments enables us to reach the judgements we want rather easily. In particular, both echo chambers and low-salience costs might allow us to bypass the psychological demands of trade-off reasoning, which include cognitive effort, emotional dissonance, and moral angst. This is important to fully capture the benefits of group belonging. Strong, enthusiastic commitment to any set of shared political views is usually incompatible, in a psychological sense, with acknowledging that such policies could impose large burdens on ourselves and others.

Part of the problem is due to the very complexity of certain policy issues. The outcomes of most policies are typically experienced in the long term, unevenly, and the complexity of the issues involved makes it difficult to allocate clear responsibilities. Under those conditions, the costs of motivated reasoning might be as low as those we face in our echo chambers. Yet another part of the problem is how difficult we make it for citizens to understand potentially relevant information.

In markets where providers have no incentive to correct consumers' biases, disclosure mandates are one of the common policies to protect consumers and minimize negative social consequences. Would it be desirable to distribute policy disclosures to citizens stating, for example, the expected consequences of increasing the minimum wage, cutting or raising taxes, or erecting trade barriers as calculated by a non-partisan agency? Could these disclosures force politicians to adjust their claims regarding the benefits and costs of their proposed policies?

If the downsides of policy disclosures are more important than the upsides, would it be desirable to distribute at least a notice of public debt to taxpayers, containing both the deficit and the extent of the public debt for the current year as well as projections for the coming years? Would this notice be simply ignored in the same way we ignore the voices outside our echo chambers? Possibly. Why not then make such a note serve as a bill for the interest due on the public debt, disjoining it from the other budget expenditure categories paid by individuals' income taxes? In thinking how to overcome the challenges of echo chambers, Sunstein highlights the need to capture people's attention, not by coercing them, but by triggering their interest in material that might produce individual and social benefits. Few things would trigger people's attention more effectively than making them reach for their wallets. The same considerations could thus also support the elimination of tax withholding, and the distribution of itemized tax bills.

We care about belonging, but we also care about being right. This is why it makes sense to try to permeate all our echo chambers with alternative views. The hope is to increase the cost of our tendency to manipulate and interpret information to suit our own psychological needs. This is also why it makes sense to increase the salience of the costs and consequences of our political views.


Nicolás Maloberti is a Senior Fellow at Liberty Fund. His research interests include the implications of behavioral economics for the libertarian case for a minimal state.

CATEGORIES:



One of the main things the United States has going for it is its relatively fluid labor market, relative, at least, to labor markets in much of Europe.

I wrote over 20 years ago about the Europeanization of the U.S. labor market, but I did not see E-Verify coming. E-Verify, if implemented nationwide, would be a system of work permits. If you started a new job, you would need the federal government to verify that you are legally allowed to have that job. How long would it be before the government started making judgements about who should be allowed to work? Convicted sexual predators, even those who were, say 19, and sleeping with a consensual 16-year-old, have to register for life and are told that they can't live in certain parts of a city. Is it entirely inconceivable that some would ultimately be told that they can't work?

Even if you don't fear that, Cato Institute immigration policy analyst David Bier has shown how bad the E-Verify system is. It makes a lot of mistakes and those mistakes cause completely legal people to lose jobs. Here's a snippet from his recent report:

The system has already proven remarkably ineffective at its intended purpose--keeping unauthorized workers away from jobs. In fact, in many cases, it does the opposite--keeping authorized workers away from employment. While many have focused on how making it mandatory would increase the number of these errors, E-Verify is already causing headaches and costing jobs for legal workers. In fact, from 2006 to 2016, legal workers had about 580,000 jobs held up due to E-Verify errors, and of these, they lost roughly 130,000 jobs entirely due to E-Verify mistakes.

So even if the feds never get really, really nasty to U.S. citizens and permanent residents, E-Verify would slow down adjustments and make our labor markets more rigid. Sad.

CATEGORIES: Labor Market , Regulation



Bryan Caplan  

The "Real X" Defense

Bryan Caplan
Consider these two couplets:

Couplet #1: "Socialism has failed."  "No, real socialism has never existed."

Couplet #2: "Libertarianism has failed." "No, real libertarianism has never existed."

In both cases, the point of the first clause is to discredit an economic system. 

In both cases, the point of the second clause is to shield an idea.

And in both cases, the shielding comes at a high intellectual cost: You escape blame for real-world failures, but also lose credit for real-world successes.

Strategically, then, you'd expect advocates of views with few successes and many failures to adore the "real X" defense.  Advocates of views with ample successes and few failures, in contrast, will use it more reluctantly.  This expectation holds up: Though both groups have been known to invoke the "real X" defense, socialists are far more likely to deny the relevance of actually-existing socialism than libertarians are to deny the relevance of actually-existing capitalism.

But the fact that an argument is strategically useful (or harmful) for an intellectual movement doesn't speak to its truth.  Maybe socialists are wrong to evade blame for their system's failures.  Maybe libertarians are wrong to claim credit for "their" system's successes.  How would you know?

One approach is to drop binary thinking - "real" or "not real" - and classify actually-existing economic systems on a continuum.  Set pure socialism - full government ownership of the means of production - equal to 0, and anarcho-capitalism - full private ownership of the means of production - equal to 1.  Countries below .2 are at least approximately real socialism; countries above .8 are at least approximately real libertarianism.

Ideally, you could just outsource this to e.g. Fraser's Economic Freedom rankings.  But there are two problems.  First, extreme socialist regimes like North Korea and Cuba don't even get ranked, presumably due to lack of trustworthy official data.  Second, the rankings are top-coded.  Hong Kong gets the high score - 9.03 out of 10, but it's a far cry from minarchism, much less anarcho-capitalism. 

In any case, believers in the "real X" defense would probably just dispute the methodology.  Suppose Fraser gave North Korea a 0.1, and Hong Kong a 6.0.  Libertarians would eagerly conclude, "Socialism has been tried; libertarianism hasn't."  But who else would concur?

The better approach, in my view, is historical.  To ascertain whether "real X" ever existed, you have to find self-conscious believers in X who were, at some point, a powerless fringe movement.  Why a fringe movement?  Because it demonstrates that they weren't significantly compromising their ideals to gain power.  Next, you have to find the subset of such movements that subsequently ruled a country.  Then, you have to find the subset of such movements that were so politically dominant during their reign that they had little need to compromise with any other viewpoint.  Finally, you have to find the subset of the subset of such movements that retained extreme political dominance for many years - enough time to actually implement their ideals.

By these historical standards, real socialism has happened dozens of times.  Look at Lenin's Bolsheviks.  Before World War I, they were a powerless band of socialist fanatics.  Fellow socialists often loathed them, but for their dogmatism and cruelty, not lack of commitment to socialism.  Then, a perfect storm gave the Bolsheviks absolute power over Russia - power that lasted over 70 years.  The origin stories of the other triumphant Marxist-Leninist movements fit the same mold, though the socialists of the Soviet satellite states did have to compromise with the socialists of the Soviet Union proper.

And by these standards, I'm sorry to say, real libertarianism has never happened.  Yes, plenty of libertarian groups manage to become self-conscious fringe movements.  But none of these movements were ever more than junior partners in a broader political coalition.  Reagan and Thatcher gave a few libertarians a place at the table of power, but they were hardly libertarians themselves.  You could point to the Founding Fathers of the American Revolution, but they included plenty of mercantilists and slavers.  Even post-Communist Georgia doesn't qualify

The lesson: Socialists own the disasters of actually-existed socialism - and we should never let them forget it.  Libertarians, however, do not own the successes of actually-existing capitalism.  We were there on the sidelines, desperately trying to nudge the world in a freer direction.  But it's pragmatists that pulled the strings that made the modern world possible.




A new NBER paper by Daron Acemoglu and Pascual Restrepo finds that "deployment of robots reduces employment and wages, but they caution that it is difficult to measure net labor market effects."

Here is a graph that summarizes their results:

Screen Shot 2017-05-17 at 10.12.42 AM.png
Notice that cities with auto factories such as Detroit and Lansing have above average robot adoption and below average employment growth (actually negative.)

This study reminded me of the 2016 Autor, Dorn and Hanson study of the impact of Chinese trade on local labor markets. Even the time period was the same (1990-2007). As with robots, automation reduces employment in local markets, but this does not tell us much of anything about the effect on aggregate employment. Workers losing jobs in Detroit might migrate to Texas, where jobs are plentiful.

Do we have any evidence of the effect of trade and automation on total employment? Let's look at the unemployment rate from 1990 to 2007 (both were peak years of the business cycle.)

Screen Shot 2017-05-17 at 10.10.56 AM.png
The unemployment rate fell slightly during this 17-year period, and thus provides no evidence that either trade or automation negatively impacted employment. However the unemployment rate is only one indicator, and many people prefer the employment to population (above age 16) ratio:

Screen Shot 2017-05-17 at 10.22.07 AM.png
As you can see the employment ratio was about the same in 2007 as in 1990, and hence the aggregate data shows no evidence that either trade or automation reduced employment during the period studied by Autor, Card and Hanson, as well as Acemoglu and Restrepo.

Of course that doesn't mean these factors have not had a negative effect on overall employment, just that doing so would require a very sophisticated study. Unfortunately, the science of economics has not yet advanced to the point where that sort of study is feasible. And thus we are forced to admit that we simply don't know if there is any effect on overall employment.

But I do think that we know that trade and automation raise real GDP.




Alberto Mingardi  

What can we expect from Macron?

Alberto Mingardi

As you know, Emmanuel Macron is the new President of the French Republic. Macron has beaten Marine Le Pen with a substantial majority: 66% of the votes. Most commentators- at least, most of European commentators, were so relieved by Le Pen's loss, that they have quickly transformed Macron into an icon.

Fr election.jpg

But what can we actually expect out of Macron?

I've read Macron's book, Revolution, and came to think that he, as a smart politician, is being most careful and purposefully ambitious in crafting this message. This makes plenty of sense for the leader of a movement that was to go beyond traditional parties both on the left and on the right.

I thought, however, that to get a better picture I may benefit from the views of those that follow French politics more closely.

This is why I've quizzed a few French friends by e-mail and I publish here, with their permission, their answers.


Macron as a minister
To understand where Macron is heading, it might be helpful to see where he is coming from. I thought that it might be useful to have my correspondent's opinion on Macron's tenure as Minister of the Economy, in the government of Manuel Valls.

Alan Kahan, a professor of history at Sciences Po Saint-Germain-en-Laye and the author of the remarkable Mind Vs Money, reminds me that Macron made his reputation abroad for a package of "liberalisations", which included the opening to competition of the long-distance bus industry. "The reforms were very modest, but at least we now have inter-city bus service, and the way in which he dealt with the Socialist Party showed character".

Cécile Philippe, the director of Institut Molinari, a public policy think tank, commented that Macron was "amazingly energetic and showed an amazing amount of persistence for a law that was unfortunately very light and on some issues even counterproductive. You could not help but admire how he responded to questions and fought for his law. But at the same time, it was so disappointing to see that the only thing which in the end he was able to reform was the bus sector".

So Philippe and Kahan seem to agree that Macron was forceful and committed, but didn't accomplish much.

Far more trenchant is Pascal Salin, an accomplished economist and a member and past president of the Mont Pelerin Society. Salin reminded me that "before being minister of the economy he was the economic adviser of François Hollande and he has a great responsibility for the destructive economic policy of François Hollande (increase in public spending and in taxation, regulations, etc..). Therefore, from what he did, both as an adviser and as a minister, one should consider that he is a traditional socialist".

On the other hand, Ran Halévi, a well known historian and the director of Centre de recherches politiques Raymond Aron, points out that "Macron didn't influence much Holland's policies when he was a senior adviser at the Elysée. But it took him quite a long time -- too long -- to realize how little influence he exercised there".


The upcoming elections
France is going back to the ballot in one month, for parliamentary elections. They will be crucial for securing a viable majority to Mr Macron. It is very unlikely that he could be an effective leader if he needs to engage in continuous bargaining with a hostile Parliament.

For Kahan, "Only a fool has confidence about the results of the parliamentary elections. But whether En Marche wins an absolute majority or not, I expect he will be able to make deals with former Socialist and Republican splinter groups and have a working majority".

Halévi is less hopeful: "I doubt he may obtain absolute majority. At best, probably he will have to form a coalition, but nobody knows with whom, since both the Republicans and the Socialists are divided and prone to dissidence among their ranks".

Cecile Philippe points out that "for the Senate, this is going to be even more complex as only a third is going to be replaced this year. The thing is that even if he has a majority he will not necessarily be able to pursue any big policy change. In France, you do not only govern with the parliament. Trade unions and the street can be very potent. And as you might know, abstention has been the highest of the 5th republic and the extreme left has already warned Macron: he has been elected because he is not Marine Le Pen but he better be careful what he wishes for. The biggest lesson of this election is that the extreme represents around half of the voters. It will have a huge impact on the next 5 years.".

So far, Macron has appointed a prime minister, Edouard Philippe, who comes from the moderate wing of the main centre-right, the Republicans party. We will see if this move will help him in growing his electoral support.


Reforms?
Let's assume that Macron succeeds in securing a new government. What shall we expect from him?

Pascal Salin maintains that reforms are very unlikely to happen under Macron's watch.

Kahan is more hopeful: "There will be reforms, albeit not enough. The 'moralisation law' will happen, eliminating the hiring of family members by elected officials, among other things. There will be some labour law reform, not enough, but of some use. Some tax reform (not enough). But the most important thing is this. French taxation is 57% of GDP. Macron promises to bring it down to 53% over 5 years. By comparison, between 1979 and 1986 public spending under Thatcher was unchanged as a % of GDP, at 45%, From 86-89 it fell to 39%, partly as a result of growth. IF, an enormous IF, Macron does what he says in this regard, I think he will have done as well as anyone could reasonably hope."

Philippe points out that Macron "has already said that he will start with a clean-up of politics, a simplification of the labor law (Hollande tried to do the same thing with a lot of debates and no effect so far), a reform of primary schools, a right to make mistake that is, especially in fiscal matters, the right to have made a mistake in the amount you paid, and a reorganization of the fight against terrorism".

But, explains Cecile, "Macron does not really have a big plan of what must be done, so far. Maybe it is part of his strategy. As you can see above, he has many targets. I do not believe that they are the most important ones because they never touch upon the issue of institutional competition. It is a bit the same as Sarkozy and Hollande, he wants to touch upon many things without going deep into any. The risk is he'll provoke a lot of resistance for nothing really big".


What about Europe?
I've also asked my correspondents if they think Macron will side with Germany in pretending Eurozone partners stick with fiscal responsibility, or would pursue big, Keynesian-like projects to develop in Brussels.

Halévi thinks Macron will try to associate the Germans in some attempt to "reshape" the European Union, though the chances he may succeed are "uncertain at best". Kahan maintains that "he will push hard for Greek debt relief, which I approve of, and fairly hard for some pan-Keynesian European spending, which I don't approve of, and which the Germans will stop".

Salin is quite skeptical: "Macron may agree in speeches with fiscal responsibility, but he will likely act quite differently, since he has a demagogical program and he seems to be ready to spend public money in order to please many categories of people".

Of course these answers reflect my friends' politics, and their hopes, not just their cold blooded analysis. And yet I think they provide some sobering words of caution. The risk of a Le Pen presidency was thwarted, with great relief. But this is far from meaning France is now on the way to solid, liberalising reforms. It is very likely that Mr Macron will continue to run up hill - and France and Europe too.

CATEGORIES: Eurozone crisis



In Sunday's post, I noted an important deficiency in Greg Mankiw's treatment of negative externalities and stated that this matters for his treatment of gasoline taxes. Here's why.

Greg lists 3 negative externalities associated with gasoline, and says that the optimal corrective tax is $2.10 per gallon. Here are the three, along with his reasoning for using a gasoline tax for each of the three:

1. Congestion: "A gasoline tax keeps congestion down by encouraging people to take public transportation, carpool more often, and live closer to work."
2. Accidents: "According to the National Highway Traffic Safety Administration, a person driving a typical car is five times as likely to die if hit by a sport-utility vehicle than if hit by another car. The gas tax is an indirect way of making people pay when their large, gas-guzzling vehicles impose risk on others, which in turn makes them take this risk into account when choosing what vehicle to purchase."
3. Pollution. "The burning of fossil fuels such as gasoline is widely believed to be the cause of global warming. Experts disagree about how dangerous this threat is, but there is no doubt that the gas tax reduces the threat by reducing the use of gasoline."

Let's look at them one by one.

1. Congestion. Notice that this is consistent with Mankiw's argument for taxing aluminum because the production process for aluminum pollutes. Just as pollution, not aluminum, is the problem, so congestion, not gasoline is the problem. I went to the 2007 Journal of Economic Literature article that Greg cited. It's by Ian W. H. Parry, Margaret Walls, and Winston Harrington.
Sure enough, they backed my point on congestion. They wrote:

Clearly a fuel tax, which raises driving costs for all regions at all times of day, is a very blunt instrument for alleviating traffic congestion, which is highly specific to rush hour periods in urban areas; the ideal instrument is a road-specific congestion toll that varies with time of day.

They later pointed out: "higher fuel taxes will have a disproportionately large effect on roads with minimal congestion and a disproportionately small impact on congested roads."
It's true that they still advocated higher gas taxes to address congestion, but it would be more accurate to say that they "settled" for gas taxes because of current difficulties in getting congestion pricing, difficulties, by the way, that are diminishing with the advance of technology.

2. Accidents. Think about the careful long-distance driver of an SUV who pays a lot of the tax but causes way less than his pro-rata share of accidents. Wouldn't a better solution be to make those who cause accidents more liable, if they are not sufficiently liable now?

3. Pollution. Greg here is not actually discussing pollution in the normal sense. He focuses entirely on global warming. By the way, notice that Greg goes far beyond even most climate scientists who believe global warming is a big problem. He writes that "the burning of fossil fuels such as gasoline is widely believed to be the cause of global warming." He's wrong. Few people believe that fossil fuels are the cause of global warming. Rather, they are believed to be one of the major causes of global warming.
Back to the economics. The reasoning about global warming, even if it's as bad as Greg fears, justifies a carbon tax, not a tax specifically directed at gasoline.

Interestingly, of the six categories of external costs that Parry et al list, greenhouse warming would lead to a 6-cent per gallon gasoline tax. See their Table 2.




I am going to criticize a recent Tyler Cowen post on Greece. But before doing so, let me explain where I think we agree.

1. Fiscal policy doesn't explain very much of the business cycle.

2. Greece's problems go far beyond deficient aggregate demand; indeed it has rather severe structural rigidities, and well as excessive government debt.

Is there anything we disagree about? Tyler seems to think so:

I said it before, I'll say it again: the 2008-2012 period was a very special one, with a very high risk premium (sorry, Scott!) and with massive contractions in bank intermediation in some of the key affected countries. We draw broader conclusions from it at our peril.
[Perhaps it's presumptuous to assume that "Scott" refers to me, as it's a very common name. So I googled "Scott economist" and my name came second. However the first name specialized in IO and ag. econ, so I'll assume Tyler was referring to me.] In the past, I've argued against people who put too much weight on aggregate demand, and too little on aggregate supply. I do believe that NGDP shocks are the primary driver of the business cycle in developed countries, but I've also been careful to confine my analysis to single currency zones, such as the US, the UK, the Eurozone and Hong Kong.

Does NGDP matter for Greece? I'd say yes and no. Here's an analogy that might help. Suppose that we measured the NGDP for Detroit and Houston, and discovered that Houston's NGDP was rising fast while Detroit's was flat. Would we say that "AD shocks" explain the divergent paths of those two cities? Clearly not---Detroit has serious structural problems. Both cities are part of the US, and both face the same monetary policy at the national level.

So while I view the national NGDP as being almost completely under the control of the Fed (with an appropriate policy regime), at the local level, variations in NGDP tend to reflect supply-side factors.

Now of course Greece is a country, not a city. But it's one that lacks its own currency. Thus for purposes of analysis, the difference between Greece and Germany is equivalent to the difference between Detroit and Houston.

So why did I say "yes and no" above? Because when talking about business cycles, NGDP always matters in the short run (even if not in the long run) even if ultimately reflects supply side factors. Thus if the Federal government had dropped billions of dollars onto Detroit from a helicopter, I don't doubt that the Detroit economy would have had a temporary boost (although it's long run problems would remain unsolved.)

So why does Tyler think we disagree? He starts off the post citing a predicted 1.8% RGDP growth rate for Greece, and then says:

Of course that's not great, especially with all the catch-up they could be doing (but please don't assume that all or even most of the output gap represents potential catch-up). Still, the Greek economy is not shrinking, even though Keynesian fiscal theories predict it should be:

"We accept that there will need to be a 3.5 per cent primary surplus until the end of the [bailout] programme [in 2018] but after that it should come down to something like 1.5 per cent to allow for more capital expenditure to lift the Greek economy."


When combined with his "sorry, Scott!" remark, I see two possible mistakes:

1. Perhaps Tyler assumes I'm a Keynesian that believes fiscal shocks have a big impact on the business cycle. No, that's Paul Krugman, not me.

2. More likely, Tyler might have meant that I favor AD theories of the cycle, and the recent Greek recovery goes against AD-oriented models. That's wrong for two reasons. First, NGDP in Greece is expected to rise this year. Output is beginning to recover, and Greece just went from deflation to inflation. If anything, I'm surprised that the RGDP growth rate is not even higher----Greece is having more inflation and less RGDP growth than I would have expected for any given NGDP growth. And second, I believe that NGDP shocks only matter in the short run. Thus even if NGDP did not recover, the labor market would eventually adjust---as we've seen in Japan. (Of course Greece's labor market is more rigid, and takes longer to adjust.)

Screen Shot 2017-05-15 at 10.33.21 AM.png
Tyler also seems to suggest that I overrate the importance of NGDP shocks and underrate the importance of financial distress. I don't think so. In this case, I believe that part of the financial distress (not all) is due to falling NGDP. I also agree that financial distress can have a negative effect on growth, even with stable NGDP growth. And finally, I believe that financial distress plays a greater (negative) role in regional areas such as Greece and Puerto Rico, and that NGDP shocks are relatively more important for large diversified economies, such as the US, Japan and the Eurozone.




Bryan Caplan  

Geography Is Policy

Bryan Caplan
For the last twenty years or so, Jeffrey Sachs and co-authors have been arguing that institutions and policy matter less than most economists think.  The harsh reality is that geography has a huge effect on countries' economic success.  From what I've seen, the Geography Matters camp is on to something: Even after correcting for national ancestry, high absolute latitude and coastal access continue to have huge economic payoffs.  In fact, geographic effects are much more robust than the effects of national ancestry

Social scientists who accept the power of geography tend to get pretty pessimistic about development.  If poor countries adopted the institutions and policies of rich countries, they still wouldn't do very well.  Few go full fatalist.  But they do lose hope that economic reforms can quickly transform the world.

And that's where the geo-centric economists are completely wrong.  Contrary to their own self-image, their view is radically optimistic.  Consider the extreme scenario where geography is the sole determinant of national prosperity.  Is there anything mankind could do to swiftly raise per-capita GDP?  Absolutely: Move people from poor countries to rich countries.  Is that the kind of thing that policy can change?  Again, absolutely: Legalize movement from poor countries to rich countries.  How much would that accomplish?  Given the draconian regulations now on the books, such deregulation would swiftly transform the world.

In the real world, of course, geography isn't the sole global problem, so deregulating migration isn't a full-blown panacea for global ills.  But if Sachs is remotely right, this deregulation is the closest thing to a panacea we've got.  Bad geography only retards human progress insofar as humans remain in locations with bad geography.   And once it's legal, humans will vacate the bad areas on a massive scale

To be fair, Jeff Sachs has written in favor of freer migration:
When high-income, high-productivity countries close their national borders to migration, they are denying the rights of individual migrants to seek improvement in their own conditions, and are also blocking a vital channel for improved global productivity. A global migration regime should favor migration both on account of the global efficiency gains and on account of the human right of individuals to seek their preferred residences (see Carens 2013, for a cogent ethical analysis from a human-rights perspective).

The global regime should pay special attention to emigration from the world's most impoverished regions, with special attention to those suffering from intrinsic barriers to development due to geographical, ecological, climatological, or other intrinsic factors. Migrants from such regions face the greatest need to emigrate but also the greatest obstacles. They tend to be poor, less educated, and with few familial or business contacts in high-income countries to facilitate their migration. These are the boat people drowning in the Mediterranean.
But to the best of my knowledge, Sachs never quite makes the fundamental point: Migration policy is the co-factor that makes geography important.  "Geography matters a lot" does not imply "Policy doesn't matter so much."  Instead, it implies that "Migration policy matters a lot."  Geography is not destiny, but opportunity.




I was teaching my class Friday on the economics of externalities. I'm using the 5th edition of Greg Mankiw's Principles of Economics. Why the 5th edition? To save my students over $100 a pop. Textbooks rarely get much better after a few editions.

In his treatment of negative externalities, Greg makes a large, and unstated, assumption. He gives an example of aluminum production in which the production process causes pollution. Then he shows the supply curve of aluminum along with the social cost curve of aluminum (which includes private costs and external costs.) He shows that the equilibrium when the externality is not internalized is at a quantity of aluminum that is too high.

But then he jumps to the conclusion that the optimal outcome can be reached by taxing aluminum. That doesn't follow. I'm not making the argument that many libertarians make--that the government can't know the right tax, that it matters where the tax revenues go, etc. I'm sticking within Greg's framework that the optimal outcome can be reached with a tax.

But here's the relevant question: what should be taxed? Greg claims that the tax should be on aluminum. For that to make sense, there would have to be fixed proportions between aluminum production and pollution production. (There would also have to be a constant cost of each unit of pollution to the sufferers from pollution, but put that aside. There's a problem even if that latter assumption is true.)

But what do we know about most production processes? We know that there are various ways to produce. There are probably more-polluting and less-polluting ways to produce aluminum. The problem is that if the government simply taxes per ton of aluminum, it does nothing to give an incentive to the company to use a less-polluting production process.

Remember that the problem is not aluminum per se; the problem is the pollution that comes from the process. So if there is to be a tax, it should be on the pollution, not on aluminum production.

I learned a basic principle early in my economics education. I learned it in a graduate international trade course at UCLA in which we went through Jagadish Bhagwati's proofs that restrictions on trade are almost never first-best solutions to the problems that people want those restrictions to address. The principle is that if your goal is efficiency, the solution should be carefully tailored to aim directly at the problem. Again, the problem is not aluminum production: the problem is pollution.

And it turns out that this error matters for Greg's exposition of his case for taxing gasoline. More on that anon.




Scott Sumner  

Good news on trade?

Scott Sumner

This FT article sounds like bad news, but in my view it's just the opposite:

A deal announced on Friday by officials in Beijing and Washington was billed as "gigantic" and "Herculean" by his administration in its efforts to reset the relationship between the world's two largest economies. It also marked a major de-escalation from Mr Trump's bellicose campaign rhetoric and widespread fears that he might set off a trade war.

To some former US officials, Trump advisers, business executives and other close watchers of the US-China relationship, however, this was a poor deal in which Beijing had simply reheated old promises. They say it raises questions about the Trump administration's strategic wherewithal and the very negotiating muscle the president has so often touted. 

"This is disappointing on many levels," says Dan DiMicco, former chief executive of US steelmaker Nucor and a campaign adviser to Mr Trump who has long advocated a tough approach on Beijing. "We are rewarding China before stopping their massive trade cheating." 

"They got played," was the blunter assessment of one former US official.


Screen Shot 2017-05-14 at 11.00.42 AM.png
When combined with the administration's recent decision not to exit Nafta, it suggests that the pragmatists in the Trump Administration are gaining the upper hand.

In my view, there are two problems with Trump's focus on "winning" trade battles. First, trade is a win-win proposition. And second, America's size and power give it a lot of leverage in trade negotiations. Here's the Economist:

WHEN, three days after his inauguration, Donald Trump pulled America out of the Trans-Pacific Partnership (TPP), a 12-country free-trade deal that his predecessor, Barack Obama, wanted to be his legacy in Asia, it was the fulfillment of a campaign promise. . . .

What a difference three months make. This week in Toronto, the surviving members--Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam--met to discuss how to move the partnership forward without America. At the end of May, they will meet again for a more substantive gathering in Hanoi. There, bet on TPP confounding the undertakers and rising from the dead.

That may seem strange. After all, although Mr Trump convinced himself that TPP was lousy for America, it was the other members who had to make most of the "concessions" in terms of opening markets. They did so because the American market is a huge prize.


It's probably just human nature to assume that you are being taken advantage of by foreigners. For instance, here's Trump:

I don't know who the people are that would put us into a NAFTA, which was so one-sided. Both from the Canada standpoint and from the Mexico standpoint. So one-sided. Wilbur [Ross, the secretary of commerce] will tell you that, you know, like, at the court in Canada, we always lose. Well, the judges are three Canadians and two Americans. We always lose. But we're not going to lose any more. And so it's very, very unfair.
And here's the actual record:
The 35 claims brought against Canada comprise 45 per cent of the total number of claims under NAFTA. That's significantly more than Mexico's 22 or the 20 brought against the U.S.

Canada has lost or settled six claims paying a total of $170 million in damages, while Mexico has lost five cases and paid out $204 million. The U.S.,meanwhile, has won 11 cases and has never lost a NAFTA investor-state case.


HT: Matt Yglesias

CATEGORIES: International Trade



Mark Barbieri, a regular reader of this blog, asked the following question and gave me permission to use his name.

He wrote:

Dr. Henderson,

My oldest son is a junior in high school and is getting serious about the college admissions process. One thing that surprised me was the importance colleges seem to place on "volunteer" activities. I'm curious as to whether economics programs have this same bias for unpaid work over paid work.

It seems to me that when a student does paid work, we know that he's adding value for someone. When he does volunteer work, he might be, but he might also be totally wasting his time.

It reminds me of my stint with Habitat for Humanity a few years ago. I had just finished a grueling day working in the hot Texas sun on a house when I thought about just how stupid what I was doing was. I hated construction work. I like my office job. For the amount of work I did for HfH, I could have earned a great deal of money if I'd spent the time working on data systems in an office. Instead, I did construction work that the market would have valued at 1/10th that amount (partly because construction work pays much less but mostly because I was inept at it). Everyone would have been much better off if I'd spent a little more time at the office and used the money to hire a construction worker to take my place.

So I'm curious: why do colleges seem to consider volunteer work more important than paid employment?


Mark asks the question very well. I think the main reason college admissions people tend to value volunteer work is that those jobs in college admissions tend to attract people who are pro non-profit organizations and against for-profit organizations. They often see profits as gains of some at the expense of others, which means they don't understand the basics of gains from exchange.

I don't know whether economics programs have this same bias, but even if they don't, my guess is that most economics department faculty have almost no clue about what the admissions offices are doing.




Bryan Caplan  

What Is Emotional Truth?

Bryan Caplan
As a rule, I don't care for "hard sci-fi."  In fact, artistically speaking, I normally dislike true stories of any kind.  And I barely care about continuity errors.  When I read novels or watch movies, I crave what I call "emotional truth."  This recently prompted Robin Hanson to tweet:

I don't have a full answer today, but I'd start by quoting this passage from Being John Malkovich:
Well, Maxine, I'm not sure exactly. Perhaps it's the idea of becoming someone else for a little while. Being inside another skin. Moving differently, thinking differently, feeling differently.
Why can't hard sci-fi or true stories fulfill this ideal?  In principle, they could.  But when creators spend a lot of mental energy on the accuracy of their physics or the historical sequence of events, they tend to lose sight of their characters' inner lives.  A well-told story is designed to maximize the audiences' identification with the characters - to bridge the Problem of Other Minds via art.  And you know a creator has succeeded when you temporarily lose yourself in the story.




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