Bryan Caplan and David Henderson
Last night's immigration debate with Mark Krikorian and Alex Nowrasteh was... interesting.  Reflections forthcoming.  For now, here's my opening statement.

America Should Open its Borders

Under current U.S. law, it is illegal for a foreigner to work for a willing American employer or rent from a willing American landlord without government permission.  For most foreigners, this permission is impossible to obtain.  As a result, hundreds of millions who want to move here are stuck in their birth countries.  Most would-be immigrants are desperately poor, but could easily work their way out of poverty if they were here. 

I say America should open its borders to them all.  Every other country should do the same.  But given America's illustrious open borders tradition, it is fitting that we lead the way.  My case for open borders comes down to two claims: One moral, one empirical. 

The moral claim: Immigration restrictions are unjust.  Letting people work for willing employers and rent from willing landlords is not charity.  It's basic decency.  And even though foreigners wickedly chose the wrong parents, they're clearly people. 

The empirical claim: Being just to foreigners would cost us less than nothing.  When people immigrate here to work, they simultaneously enrich themselves and us.  Though a high-skilled worker enriches us more than a low-skilled worker, the typical low-skilled worker is far better nothing - and there's plenty of room for everyone.

Let's start with our laws' injustice.  Imagine the U.S. made it illegal for blacks, women, or Jews to take certain jobs or live in certain neighborhoods.  You wouldn't merely object.  You'd be appalled.  Whatever your specific moral views, you know it's wrong to prohibit a black, woman, or Jew from accepting a job or renting a home. 

My question: How is mandatory discrimination against foreigners against less wrong than mandatory discrimination against blacks, women, or Jews?  The leading rationale is that "we should take care of our own first."  That might be a good argument against sending foreigners welfare checks.  But it's an Orwellian argument for stopping immigrants from working or renting here.  Minding your own business when two strangers trade with each other is not a form of charity. 

This is not a weird libertarian point.  The fact that I never put Krazy Glue in the locks of the Center for Immigration Studies does not make me one of its donors.

Friends of immigration restrictions often compare nations to families.  I'll accept their analogy.  I love my children more than I love the rest of you put together.  This is a good reason to worry that I'll treat you unjustly if there's ever a conflict of interest.  But it's no excuse for me to treat you unjustly.  "I want my beloved son to get this job" does not justify slashing rival candidates' tires the morning of the final interview.  The same goes for immigration policy.  Your love for Americans may tempt you to treat foreigners unjustly, but it's no excuse for treating them unjustly.

We should refrain from unjust actions even if they're in our self-interest.  In the zombie apocalypse, you shouldn't eat me because you're hungry and I'm wimpy.  Yet in the real world, fortunately, justice usually pays.  Becoming a violent criminal is a poor path to prosperity.  So were Jim Crow laws.  What about immigration laws?

This brings me to my second big claim: Being just to foreigners would cost us less than nothing.  Everyone has his problems.  Opponents of immigration spend most of their time staring at foreigners to find fault.  But if you pick a random would-be immigrant - even a random illiterate peasant - and calmly weigh his positives and negatives for us, the sum is positive. 

To see why, you need a little labor economics.  Hard fact: Immigration laws trap people in countries where workers produce far below their potential.  When Haitians move to the United States, their wages easily increase twenty-fold.  That's not +20%.  It's plus +2000%.  The reason isn't that American employers are nicer than Haitian employers.  The reason is that Haitians produce vastly more in America than they do in Haiti.  Think about how little you could contribute to the world economy if you were stuck in Haiti.

How much would total production rise under open borders?  Every economist who asks the question reaches an astronomical answer.  A typical estimate is that global free migration would double global production.  If the U.S. alone opened its borders, the global effect would naturally be smaller, but the national effect would be even larger.

How is vastly higher production in your self-interest?  The obvious reason: More stuff produced means more stuff consumed.  This is not trickle-down economics; it is Niagara Falls economics.  Production is what distinguishes the rich world of today from the wretched world of the past.  If half the workforce suddenly retired, it would be bad for you.

Production always has its naysayers.  When driverless cars arrive, you can count on people to complain that they're putting truck-drivers out of work.  But by this logic, we'd be richer if law-makers in the 19th-century banned the tractor.  The fundamental truth of economic growth: While innovation often hurts immediate competitors, it is the fountainhead of rising prosperity.

Doesn't immigration hurt workers by increasing the supply of labor?  It's complicated, because immigration also increases labor demand.  After all, workers buy stuff.  To grasp immigration's full effect, keep both eyes on production.  Trapping Mexican farm workers on primitive Mexican farms starves them and us.  It's far better if they move here and enrich themselves by putting better and cheaper food on our tables.

Like driverless cars, immigration can impoverish some Americans while enriching the rest.  As a native-born research professor, I ought to know.  Thanks to an immigration loophole, about half the people in my occupation are foreign-born.  Closing that loophole would give my career a big shot in the arm.  Most labor economists similarly find that lower immigration helps native high school dropouts.

How can I concede this yet insist that illiterate foreigners are far better than nothing?  Because unlike Mark, I don't look at a would-be immigrant and ask, "Is there any possible downside?"  Instead, I ask, "Is his net effect positive?"  Every innovation is bad for someone, but innovation is still a good thing.  Every immigrant is bad for someone, but immigrants are still good thing.

Why must I be so radical?  In part, because this is a matter of basic human rights.  We don't have to give foreigners welfare or let them vote.  But treating fellow human beings like criminals for working without government permission is unconscionable. 

What cements my radicalism, though, is that doing the right thing would cost us less than nothing.  If you think production leads to poverty, open borders should terrify you.  Otherwise, the sooner America opens its borders, the better.


I was reading recently John Vincent's "The Formation of the British Liberal Party 1857-68", a classic on the subject and a most interesting book. I was struck by the following passage:

Very striking rewards, then, did not act at all on the people at the top, because of the prevailing morality there; nor did the people at the top much wish to create a system of rewards for those below them. Naturally, too, the mass of the electorate could not be influenced by these means. But in the middle level of politics, at the point of contact between the MP and the leading notables, the joint system of honors and patronage came into its own. Government patronage continued to be very useful in the 1860s in binding civic leaders to the Cabinet, and in raising the authority of those civic leaders locally.
Discussions over the importance of "codes of honor", attitudes, and mindsets in restraining corruption trends are interesting, but very often look somewhat fuzzy to me. Perhaps Victorian England could provide a more solid point of reference. But I also find interesting that "rewards" were rather useless both for the élites (bound by this code of honor) and the masses--not enough money was at the government's disposal, back then, to bribe the great majority of voters. But they played a role for those that were actually organizing consensus.

It is banal to say that the most densely politicized strata of society--those that deal with securing consensus on a daily basis--are characterized by an extensive recourse to political patronage. The organization of consensus and the extraction of benefits out of the political system go together: one justifies the other. This is a rather simple and logical point. And yet part of modern politics is a farcical charade written and acted so that this basic fact doesn't come across as clearly as it should. Consensus is considered good, extracting benefits out of the political system not-so-good: this is something it seems to me the right and the left share, as a basic narrative. But can one go without the other?



Crazy Immigration

Bryan Caplan
Under open borders, over six billion people would be free to move to the United States.  The population could increase by more than a factor of twenty.  And under real open borders, there's no mandatory waiting period.  If everyone wants to move the day the borders open, they're free to do so.

This seems like a crazy policy.  Imagine the chaos of six billion people migrating in unison!  Yet strangely, analogous policies are already on the books, and the system works so well few complain about it.

Consider: Under current U.S. law, over three hundred million people are free to move to my home town of Oakton, Virginia.  Population: About 34,000.  Thus, the population of Oakton could legally increase by a factor of almost 9000.  Under the status quo, moreover, there is no waiting period.  If everyone in the United States decides to move to Oakton today, they're free to do so.

How come no one's worried about the swamping of Oakton?  Part of the reason, of course, is that there's no pent-up demand to live in Oakton.  The deeper reason, though, is that housing markets would peacefully regulation migration even if the whole country suddenly decided Oakton was an earthly paradise. 

If demand for living in Oakton suddenly spiked, the market provides a short-run and a long-run solution.  In the short-run, a demand spike leads to higher rents and housing prices, discouraging relocation without depriving anyone of the right to relocate.  In the long-run, these higher real estate prices provide an incentive for construction firms to build more housing.  As a result, housing prices would gradually decline from their temporary high - and the population of newly-popular Oakton would gradually swell. 

Over the course of a decade or two, market forces could easily transform Oakton into a metropolis a hundred times its current size.  There's plenty of room to do so: Oakton has over 25% of the land area of Manhattan.  Is such a population growth realistic at the national level?  Yes.  If the continental U.S. had the population density of suburban Oakton, its total population would be about ten billion - more than the current population of the planet. 

True, as I've explained before, most people on earth don't want to immigrate anytime soon.  Due to diaspora dynamics, immigration from a country starts out low, then gradually snowballs.  It took about a century of open borders with Puerto Rico before half its people moved here.  My point, though, is that housing markets provide the necessary incentives for massive yet orderly migration.  These markets already quietly guide internal migration.  They are quite able to do the same for external migration.  Let them come, and we will build it - for the market price.


Many people assume that Germany has long been an economic success story. It was certainly successful back in the 1950s and 1960s. But as recently as 2004 it was widely viewed as the "sick man of Europe" despite all those sleek BMWs and Mercedes they churn out each year.

The normally reliable Matt Yglesias falls into the trap of (implicitly) assuming long term German success in a piece on youth unemployment. Yglesias tries to explain the low rate of youth unemployment by pointing to their system of technical training for students that are not college bound. That certainly seems like a fine system, but it's been around for decades, and thus can hardly explain the amazing post-2004 German jobs miracle. Why do I use the term 'miracle'? Consider:

1. Germany was hit roughly as hard by the 2008-09 recession as the US.
2. Unlike the US, the German working age population is not growing.

Put those two together and you'd expect very little German job creation in recent years. And yet German employment has risen by 6% over the past 6 years, whereas American employment has declined, despite a RGDP recovery that is far more brisk than the eurozone, indeed faster than in Germany. That's pretty amazing.

I sometimes wonder how progressive readers would filter Yglesias's message. The type that thinks that if a program works in Sweden it would certainly work over here. The ones that Paul Krugman insists are "reality based" in their thinking. German job training seems good, and Obama has recommended some programs for America. The highly inegalitarian German high school system might make American progressives squirm, but Yglesias reassures them that this approach would be hard to implement in a country that lacks the tight cooperation between companies, unions and local governments.

Of course none of this has anything to do with explaining how Germany went from being the sick man of Europe to its shining star, all in a period of 10 years. Here's the German unemployment rate since 1960. Notice that Germany had 8% unemployment as far back as the mid-1980s, during the Reagan boom in America. Things had been getting worse for decades, and the 1980s figures suggest that the problem wasn't just German reunification.

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So what's the real explanation for the German success? That's pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. (Germany has no minimum wage.) Here is the Guardian:

Exactly 10 years ago today, Germany's labour market was subjected to the first of the so-called Hartz IV reforms. Brought about by the smooth centre-left chancellor Gerhard Schröder, it was a watershed moment that changed the way the German government deals with poverty.

The changes were riddled with the kind of Anglicisms that German officialdom likes to deploy for any modernisation. In the past decade, unemployed Germans have been bewildered with a kaleidoscope of new "Denglish" terms, from "Jobcenter" to "Personal Service Agentur" to "Mini-Job" to "BridgeSystem". But the measures recommended by the Hartz commission - named after its chairman, former Volkswagen executive Peter Hartz - boiled to down to this: the bundling of unemployment benefits and social welfare benefits into one neat package.

The immediate effect was to leave those living on benefits worse off (as of 2013, the standard rate for a single person is €382 a month, plus the cost of "adequate housing" and healthcare). But the new element that brought the most profound change was the contract, drawn up between the "jobseeker" and the "Jobcenter", which defined what each party promised to do to get the jobseeker back on somebody's payroll. This was coupled with "sanctions" - in other words, benefit cuts - if the jobseeker failed to keep up his or her side of the bargain. With those two measures, Germany came to accept the modern interpretation of the word "incentive" in the job market: the doctrine that poor people will only work if they are they are not given money.

There are myriad debates about the net results or benefits of the Hartz reforms. Unemployment, both long-term and short-term, has certainly dropped considerably in Germany since 1 January 2003, but critics say that's only because most jobless people are forced to accept the next job they can find - and often they end up in one so low-paid and part-time that they were still dependent on some sort of state welfare anyway. Then again, the flexibility that allows employers - especially major industrial companies - to take on and lay off part-time shift workers depending on the state of the export market has certainly helped Germany to ride out the global economic crisis in the past three years.

But what is hard to overlook is that the Hartz reforms have had two social effects. First, they have helped to accelerate inequality in Germany. According to an April 2012 OECD report, "Germany is the only [EU] country that has seen an increase in labour earnings inequality from the mid 1990s to the end 2000s driven by increasing inequality in the bottom half of the distribution." The report goes on to point to "a set of reforms in 2003 meant to increase the flexibility of the labour market" which help to explain the "wage moderation".

So the one major success story among developed countries has achieved its success by doing essentially the exact opposite of what progressives want. Germany has no minimum wage, reduced its incentives to live off welfare, and has a level of wage inequality that is increasing even faster than in the US. It's no wonder that progressives prefer to focus on things like "vocational training programs," which were just as common during the 30-year period of steadily rising German unemployment.

And yet Paul Krugman can say the following without blushing:

Just to be clear: Yes, you can find examples where *some* liberals got off on a hobbyhorse of one kind or another, or where the liberal conventional wisdom turned out wrong. But you don't see the kind of lockstep rejection of evidence that we see over and over again on the right. Where is the liberal equivalent of the near-uniform conservative rejection of climate science, or the refusal to admit that Obamacare is in fact reaching a lot of previously uninsured Americans?
Here's an example for Krugman. Much of the progressive movement seems entranced by a pied piper from France who thinks inequality can be reduced almost costlessly, and that even France needs to be much more socialist. Meanwhile they almost totally ignore a highly successful social market economy. The biggest economy in Europe. What would Al Gore call German labor market policy success? An inconvenient truth?

PS. I have a follow-up post on Germany here.


Paul Krugman has a strange post on solar power that contradicts basic microeconomics. He writes:

Like just about everyone who has looked at the numbers on renewable energy, solar power in particular, I was wowed by the progress. Something really good is in reach.

And so, inevitably, the usual suspects are trying to kill it.

How are they trying to kill it? By banning it perhaps. Or maybe by regulating it. Or maybe by taxing it. Those are the three typical ways that opponents of a particular technology usually try to kill that technology.

So which of those methods, or which combination of those methods, do the opponents of solar power advocate? Actually, none.

What's left? How about deregulating? You read that right. These critics and opponents of solar power, whom Krugman accuses of "tribalism" because of their criticism, oppose solar power so much that they want to stop requiring that it be used and requiring that electric utilities buy it.

Krugman accuses them of wanting "to block solar even if it saves money." But the way to tell if it saves money is to quit making people use it and quit making people buy it. Then, if it really saves money, people will use it.

Krugman's piece is priceless: that is, it ignores basic price theory.


My previous post discussed the strangeness of the efficient markets hypothesis. Here I'll defend its utility.

In the field of economics, all models represent simplifications of reality. Thus when we consider whether the EMH is true, it makes no sense to compare it to something like Newtonian physics. Yes, even Newtonian physics is only approximately true, but the approximation is much better than almost anything we observe in economics. So let's compare apples with apples.

Supply and demand has become the archetype model of economics. It's a workhorse widely used to explain the behavior in all sorts of markets, from haircuts and dry clearers to automakers and PC producers. Of course if you read the fine print the model is, strictly speaking, only applicable to a very restricted set of markets, essential grain producers. But almost all economists use it in a much wider range of applications, with justification. It's really, really useful.

But is it true? One of the most important implications of S&D is that producers are price takers. This assumption is what underlies the existence of a supply curve. If firms are not price takers then no supply curve exists. You can't have a supply and demand model without the assumption of firms being price takers.

But are they price takers? Not really. The vast majority of firms, even in highly competitive industries such as laundromats, dry cleaners and pizza shops, could raise prices by 5% and still hold on to a substantial share of their customers. Exxon might not be able to do so, but most small businesses could. This means the supply and demand model is not literally "true."

Fortunately, S&D is incredibly useful, even if not strictly true.

I would argue the EMH is truer that the S&D model. And by EMH I am actually only talking about the assumption that asset price deviations from trend are essentially unforecastable. Specific versions such as the CAPM may be flawed in other ways. However I believe the random walk model is truer than S&D, and also quite useful. But how can we test the EMH?

Many academics look for "anomalies." This is asking both too much and too little. Contrary to widespread belief, the EMH does not claim that a search of 20 million statistical patterns would fail to identify 1 million anomalies that show non-random price movements at the 5% level, or 200,000 at the 1% level. On the other hand, I'd also argue that it's asking too much of academics to suggest they need to find get-rich-schemes that violate the EMH, it should be enough to prove that at least someone has done so (say Warren Buffett.)

As an analogy, an economist looking for signs that the most famous secret in alchemy--turning lead into gold--had been discovered should not have to identify the magic formula, but rather merely show that gold prices are behaving in a way consistent with the fact that someone had discovered this sort of chemical process.

Eugene Fama understood that the only meaningful test of the random walk was to look for evidence that others had found anomalies. The initial tests showed no evidence; mutual funds excess returns were serially uncorrelated, whereas they would be correlated if a subset of investors had found the magic formula. Later work with Kenneth French slightly modified that conclusion. There was some evidence of stock picking ability, but too small to overcome the expense ratios of mutual funds. So now the EMH is only approximately true. But since it's a part of economics, we should have known that all along. No economic model is precisely true.

OK, but is it useful? I see three uses:

1. For ordinary investors, it suggests you'd want to stick to indexed funds.

2. For academics, it suggests that asset prices contain the optimal forecasts, and hence you should use something like TIPS spreads rather than the output of VAR models when trying to identify the optimal forecast of inflation. And you should use the response of asset markets to monetary policy announcements to evaluate the effectiveness of programs like QE, not subsequent movements in the economy.

3. For policymakers, it suggests that central banks and/or bank regulators should not try to identify bubbles. And that central banks should create and subsidize NGDP future markets. And that SEC officials should actually pay attention when whistleblowers bring in evidence that hedge fund returns are inconsistent with the predictions of the EMH (i.e. the Madoff case.)

To conclude, the EMH is a very useful model. It's also more true than the S&D model, as the pricing power of firms in so-called "competitive industries" where S&D is widely applied is actually much greater than the excess returns identified by Fama and French.

From now on any commenter who tells me the EMH is not true, should also tell me whether they think S&D is true, and if so, why it's true.


The Our America initiative, which is headed up by 2012 Libertarian presidential candidate and former two-term New Mexico Gov. Gary Johnson, has produced a sharp commercial asking for donations to fund a legal challenge to presidential debates. The basic argument? The debates should be open to "all qualified candidates." Which implies that both the Dems and Reps may have to rethink their candidate-selection processes.
This is a quote from Nick Gillespie, "Change the Presidential Debates": Gary Johnson and Our America's Bold New Lawsuit," Reason Hit and Run, April 21.

Go to the link Nick supplies and you find out that:

The vast majority of Americans who rely on the nationally-televised Presidential Debates to help make their voting decisions have no idea that the "official" General Election debates are, in fact, productions of a private, nongovernmental organization comprised of representatives of the Democrat and Republican parties who exercise complete and exclusive control over the process. That is just wrong, and Our America is committed to challenging this political duopoly in the nation's courts. Help fund the lawsuit to make the Presidential Debates fair.

So clearly, although many Americans do not understand that the organization choosing who is in the debates is "a private, nongovernmental organization," Gary Johnson does.

One of the most basic tenets of freedom is that people should be free to associate. This means the freedom not to associate. Go to the Gillespie article and watch the video and it will tell you how horrible have been the results of the two-party system in America. But the video, which lasts over a minute and a half, doesn't have even one sentence making the case that it's alright to deny people's freedom of association. I did due diligence. I looked at every link provided on the Our America site and couldn't find even a semblance of an argument against Republicans' and Democrats' freedom of association. Maybe that shouldn't be surprising. It's hard for someone who believes in freedom to make that case.


The strongest evidence against the economic way of thinking is the way that people describe their own behavior.  People rarely announce, "I'm looking out for number one."  Businesses rarely advertise, "Our own profit is our top priority."  Students rarely declare, "I just look for easy A's."  Workers' resumes rarely identify their career goal as, "Money!"  To hear a CEO trumpet, "I'm retiring to have more time with my material possessions," you must turn to The Onion.

Economists have a long-standing defense mechanism against this mountain of evidence: Behaviorism.  Milton Friedman told us you can't believe what people say.  Many of us still believe him.  But this position isn't just self-refuting; it's absurdly dogmatic.  Virtually every person alive professes noble aims, so economists invoke the methodological principle that "Words count for nothing"?  If that's our best response to ubiquitous empirical evidence, the world is right to dismiss us as a cult.

Fortunately, there is a far more compelling response... with one big catch: Economists have to outsource their intellectual defense to psychologists.  Like economists, psychologists are deeply skeptical about mere words.  They too hold a cynical view of human nature.  To defend it, though, they don't rely on half-baked philosophy of science.  Instead, they carefully measure and compare the divergence between what people say and what they do.

The fruit of psychologists' toil, as I've mentioned before (here, here, and here for starters), is the sprawling literature on Social Desirability Bias.  To re-summarize:

Social desirability bias is the tendency of respondents to answer questions in a manner that will be viewed favorably by others. It can take the form of over-reporting "good behavior" or under-reporting "bad," or undesirable behavior. The tendency poses a serious problem with conducting research with self-reports, especially questionnaires. This bias interferes with the interpretation of average tendencies as well as individual differences.

Topics where socially desirable responding (SDR) is of special concern are self-reports of abilities, personality, sexual behavior, and drug use...

Other topics that are sensitive to social desirability bias:

  • Personal income and earnings, often inflated when low and deflated when high.
  • Feelings of low self-worth and/or powerlessness, often denied.
  • Excretory functions, often approached uncomfortably, if discussed at all.
  • Compliance with medicinal dosing schedules, often inflated.
  • Religion, often either avoided or uncomfortably approached.
  • Patriotism, either inflated or, if denied, done so with a fear of other party's judgement.
  • Bigotry and intolerance, often denied, even if it exists within the responder.
  • Intellectual achievements, often inflated.
  • Physical appearance, either inflated or deflated
  • Acts of real or imagined physical violence, often denied.
  • Indicators of charity or "benevolence," often inflated.
  • Illegal acts, often denied.
Why is the psychologists' approach so superior to the economists'?  Simple.  Economists reject all-pervasive testimony on lame methodological grounds.  Psychologists, in contrast, aggressively cross-examine this all-pervasive testimony, and empirically expose its all-pervasive perjury.  Despite what they say, people really are selfish, businesses really are greedy, students really are lazy, and workers really are materialistic.  Econo-cynicism has a firm basis in psychological fact.

Of course, a "firm basis in fact" is hardly the same as "unvarnished truth."  Some deviations from narrow self-interest handily survive cross-examination.  Voting really is largely unselfish, workers really do obsess about nominal pay, and managers sincerely hate firing anyone.  The point, though, is that the economic way of thinking is on much stronger empirical ground than economists themselves have managed to demonstrate.  Though we've often belittled psychology, it's ably served us for decades.  Perhaps if economists give psychologists some much-deserved credit for Social Desirability Bias, they'll be more eager to vouch for the value of what we do.


Old Home Week

David Henderson

Three of my former students were in town last week and I had lunch with each of them. Meeting with them and hearing what they had learned in my class was very gratifying.

On Wednesday, I had lunch with one student, whose name I've not sought permission to mention. Because he was in a hurry to get back to a special class he was taking, I suggested we go to Costco and each have a hot dog. Big spender that I am, I offered to pay. He insisted on paying, saying that he wanted to convince me that, contrary to what I taught in class the first day, there is such a thing as a free lunch.

On Thursday, I went to lunch with Nuno Pires, a Marine officer who had taken my energy economics class in the spring of 2012 when it was first offered. He brought along a friend whom he and his family were staying with while in town and started systematically laying out to his friend some of the lessons he learned: why we don't need to go to war for oil and how CAFE kills being the highlights. It was fun to sit there and watch him explain the reasoning clearly to his friend. Also gratifying is that when he laid out how CAFE had killed the station wagon, he got the reasoning right without remembering that I had written the article he was laying out. I like it when people remember what's important without remembering who said it, although I do like them to remember the basic ideas associated with Adam Smith, Friedrich Hayek, John Maynard Keynes, Ronald Coase, and Milton Friedman

On Friday, I went to lunch with Eric Cheney, whom I hadn't seen in the 13 years since I taught him. When I had run into him in the hallway earlier, he said that when he looks at his transcript, he sees A, A, A, A, B+, A, A, A, etc. and that the B+ is the grade I gave him in a course in which he learned the most. I asked him if that upset him and he laughed and said "Not at all." "Notice," he said, "that you're the one professor I had here whom I wanted to look up."

CATEGORIES: Economic Education



David Henderson

One of my pet peeves is people latching on to alleged facts and then running with them even when there is doubt about whether they are true. These "facts" then get repeated so often that many people form an emotional attachment to them. As a result, it is difficult, even when you give them evidence, to get them to reexamine their "facts." They seem to hold on even more tightly.

Although I am a partisan, my upset is not based on partisanship. It's based more simply: on my respect for truth. Indeed, I think you will quickly see that. I despise the two Presidents whom I'm about to defend, and I think both of them, not just one of them, should have been impeached.

I'll give two examples from the last 20 years and then a more-recent example that I think might turn into a "fact" even though there should be strong doubts. By the way, this post is motivated by my co-blogger Scott Sumner's quote from George Soros. Soros presents a "fact" that might not be one: that's the more-recent example I refer to in this paragraph.

1. Bill Clinton's famous: "It depends on what the meaning of the word 'is' is."

I can't count the number of people who say that and guffaw, as if Clinton was making something up. While I think Clinton was a congenital liar, this was not a lie. When I read it in context, it made perfect sense to me. Here's the whole quote:

"It depends on what the meaning of the word 'is' is. If the--if he--if 'is' means is and never has been, that is not--that is one thing. If it means there is none, that was a completely true statement....Now, if someone had asked me on that day, are you having any kind of sexual relations with Ms. Lewinsky, that is, asked me a question in the present tense, I would have said no. And it would have been completely true."

Timothy Noah, writing on Slate at the time, wrote:
Years from now, when we look back on Bill Clinton's presidency, its defining moment may well be Clinton's rationalization to the grand jury about why he wasn't lying when he said to his top aides that with respect to Monica Lewinsky, "there's nothing going on between us."

Of course, it is possible that Clinton was lying because it's possible that he was still having an affair with Monica Lewinsky. So then he's just a straight liar. But if indeed, the affair was over, he was telling the truth and those aides, had they wanted to know the whole truth, should have asked him a more carefully worded question.

2. George W. Bush's famous "Mission Accomplished" banner.

In early May 2003, George W. Bush landed on the U.S. Navy aircraft carrier Abraham Lincoln, and was greeted by a large banner that said "Mission Accomplished." Many critics and opponents of the war on Iraq later jumped on that, arguing that Bush's crowing about victory in Iraq was premature.

But the banner was not his or the White House's idea. It was entirely the idea of the officers of the ship.

I teach military officers and the plurality, and typically the majority, of them are U.S. Navy officers. About a year after this event, I had a student who was a junior officer on the USS Abraham Lincoln at the time. What had happened, he said, was that the carrier had been on a 10-month deployment, which is a long time, and, according to Wikipedia, was the longest time such a ship had been deployed since the Vietnam war. So when the White House told them that they should suggest words for a banner when the President arrived, they met in the ward room and came up with these two words. Then the White House had the sign made. End of story.

3. The snipers in Ukraine.

In the recent post by Scott Sumner on George Soros, Scott quotes the following:

Contrary to all rational expectations, a group of citizens armed with not much more than sticks and shields made of cardboard boxes and metal garbage can lids overwhelmed a police force firing live ammunition.

My impression is that the group of citizens was armed with far more than "sticks and shields," but put that aside. Maybe he's right. Here's the controversial one: "police firing live ammunition." If Soros is referring to snipers, which I think he is, then he is completely accepting of one side's statement on this. It turns out that there's a lot of doubt, even by those who are not on the side of the previous government. Check out the conversation between European Union Foreign Affairs Chief Catherine Ashton and Estonian Foreign Affairs Minister Urmas Paet, reported on here.

CATEGORIES: Economic Methods


Quantum finance

Scott Sumner

The New York Review of Books has a very interesting interview of George Soros. At one point he is asked about the recent revolution in the Ukraine. Here is part of his response, and then a follow-up question:

[Soros] Contrary to all rational expectations, a group of citizens armed with not much more than sticks and shields made of cardboard boxes and metal garbage can lids overwhelmed a police force firing live ammunition. There were many casualties, but the citizens prevailed. It was a veritable miracle.

Schmitz: How could such a thing happen? How do you explain it?

Soros: It fits right into my human uncertainty principle, but it also reveals a remarkable similarity between human affairs and quantum physics of which I was previously unaware. According to Max Planck, among others, subatomic phenomena have a dual character: they can manifest themselves as particles or waves. Something similar applies to human beings: they are partly freestanding individuals or particles and partly components of larger entities that behave like waves. The impact they make on reality depends on which alternative dominates their behavior. There are potential tipping points from one alternative to the other but it is uncertain when they will occur and the uncertainty can be resolved only in retrospect.

On February 20 a tipping point was reached when the people on Maidan Square were so determined to defend Ukraine that they forgot about their individual mortality. What gave their suicidal stand historic significance is that it succeeded.

I was intrigued by the quantum mechanics analogy. At the same time I wasn't entirely convinced. I'm certainly no expert on quantum superposition, but I believe the claim is that something exists in two states simultaneously. The idea is so paradoxical that some physicists believe the universe splits in two when an observation is made. Rather than being random, we can say that both outcomes happen deterministically, but in different universes. (Please correct me if this is wrong.)

I don't find it all that paradoxical that people sometimes behave like individuals and at other times behave like members of a mob. But I do find the Efficient Markets Hypothesis to be somewhat paradoxical. This hypothesis says that individual traders cannot know more than the market, and hence deviations of assets prices from trend are essentially unforecastable. Consider the following example:

A very knowledgeable trader walks onto the floor of a market where gold is actively traded. To make things simple, let's assume that there is no risk premium, and that the futures price equal the expected future spot price. Suppose October 2014 gold futures are trading at $1300, but this very smart trader believes that gold will be trading at $1360 in October. Is this information valuable?

In one sense the answer is no. The market forecast is freely available, and is much more reliable. But in another sense the answer is yes. If the trader decides to act on his knowledge, the market will become even more efficient. The market price will immediately represent a more accurate forecast of the expected future spot price.

The average opinion of traders is dumb; the average of their opinions is brilliant. (Have I used 'average' the same way both times?)

Alternatively, let's suppose markets are efficient. What makes them efficient? Lots of traders who dig up information on the value of gold. And why do they do that? Because they believe markets are inefficient.

One of my favorite examples is the joke about the two university of Chicago professors walking along a sidewalk. One says "Look, a $100 bill." The other replies, " That's not possible, someone would have picked it up already." When I tell my students the joke, I ask them whether it is a pro-EMH joke or an anti-EMH joke. But here's the problem, I'm not quite sure myself. Consider the following two interpretations:

A. The EMH represents Truth with a capital T. In that case the joke seems to be mocking those who believe in the EMH.

B. The EMH is a highly useful theory. For philosophical pragmatists it doesn't get any better than that. In that case the joke seems to be supportive of the EMH.

I prefer B. I don't know about you, but I often see money lying on the sidewalk. But it's always coins or small bills. Not once in my life have I seen a $100 bill. And now the EMH tells me why I shouldn't waste my time walking around fruitlessly hoping I'll find a $100 bill down there. I should look up at the birds and the trees and the clouds. I should enjoy life.

But then who will pick up the $100 bills? Two groups of people. Those who foolishly think they will be able to find them if they look hard enough. (Oddly, some of those foolish people will find them.) And those who know it's a very long shot but enjoy treasure hunting. Or enjoy looking at sidewalks. Some of them will also be successful. Especially those who know where to look---like very early in the morning outside an expensive nightclub. Or in an area where there are lots of drug deals. There are enough people like that to keep sidewalks cleared of $100s.

I enjoy collecting old prints. And because I enjoy doing so, I help to keep the old print market efficient. But not sidewalks, and not stock markets. Someone else will have to do those jobs.

PS. I recommend the Soros interview---most of it is much better than the passage I quoted.



I'm a Liberal

David Henderson

When I figured out my basic political beliefs at ages 17 and 18, I didn't know the term for them. Katherine George, a left-wing sociology professor at the University of Winnipeg with whom I was arguing, called me a libertarian. That was in the summer of 1968 and it was the first time I had ever heard that word.

"A what?" I asked, confused.

"A libertarian," she answered.

"What's that?" I asked.

"You know, it's those people who ran the student newspaper last year: Dennis Owens, Clancy Smith."

"I didn't know," I said, "but I'll be sure to look them up."

"S**t," she said.

So I did look them up and quickly became involved with the University of Winnipeg libertarians. The above-mentioned Clancy Smith, whom his Kelvin High School classmate, Neil Young, had in mind when he wrote "Nowadays Clancy Can't Even Sing," became my mentor.

It was Clancy who taught me that no, the libertarian tradition doesn't begin with Ayn Rand but goes back to the classical liberals of the 18th and 19th centuries. In fact, said Clancy, they didn't call themselves classical liberals. They were, simply, liberals.

Now George Mason University economics professor Dan Klein, working with Kevin Frei, has undertaken a project to reclaim the term "liberal." He has produced a statement that many economists and others have signed. I go back and forth about this project. Dan wants to do it and I want to help him and I believe in it, which is why I signed. I also wonder if the project is Sisyphean.

But I've bet wrong on Dan before. When he wanted to meet in St. Louis eleven years ago this month to discuss his idea for a journal that would contain articles critical of articles in other journals, I planned to go there and say, "Dan, don't do it." Because of a family crisis that came up at the last minute, I cancelled. Of course, he did do it. And the result is one of my favorite journals: Econ Journal Watch.


This Tuesday, Reason is hosting a DC debate on "Should America Open Its Borders?"  Cato's Alex Nowrasteh and I say yes; the Center for Immigration Studies' Mark Krikorian says no.

The Center for Immigration Studies' masthead reads, "Low-Immigration, Pro-Immigrant."  I've dissected this before, but here's a further thought.  Imagine telling your spouse, "I love your mother, but I want her to visit as rarely as possible."  Can you even say it aloud without laughing?  What you really mean is, "Your mother's insufferable, but as long as she's here, I'll try to be nice to her."

That's what the CIS slogan amounts to: Immigrants are insufferable, but as long as they're here, we'll try to be nice to them.


Europe vs Uber

Alberto Mingardi

Uber is having a hard time in Europe. The San Francisco company has started its operations in quite a few cities now. This fact has raised protest by taxi-drivers (as any other human being, they do not like new competitors). Their remonstrances are likely to find a friendly ear: very often local decision makers can easily find some local regulations that Uber violates just by the virtue of existing. The discipline of taxi and black cars is, after all, the fruit of many successful years of restricting access to this trade. To allow for MORE competition, norms should be changed.
In Brussels the App has been banned, and it may be in Berlin too, where, as the Associated Press reports, "the head of the Berlin Taxi Association convinced a local court that the company's service breaks the law". European Commissioner Neelie Kroes has lamented that the Brussels ban is "not about protecting or helping passengers - it's about protecting a taxi cartel". She does not seem to realize that the taxi cartel is a product of specific norms all over Europe, not the result of unfettered capitalism: to be serious on the matter, she should advocate these rules to be revised.
But let's put politics aside. It's noteworthy that, on the other hand, a new rather interesting App has just been put on the market, in Berlin:

The latest Berlin-based start-up app idea has taken the online dating principle to the sex industry., launched on April 1, allows prostitutes to upload profiles of themselves that potential clients nearby can browse.
Clients can search for male or female "Pepprs," and adjust their filters for special services and body type. They can then send an enquiry and make a date.
The prostitutes do not pay to put their profiles online, while clients pay the website a €5 or €10 booking fee.

The principle isn't much different than Uber's: the app connects supply and demand, even though - if I understand correctly - "Pepprs" do not intermediate the payment from the buyer to the seller.
Some may comment that it is a rather strange country, one in which the same technology could be legally applied to picking up prostitutes but not for black cars' pick-ups. I'd say that it is quite understandable, that an industry less affected by government intervention is more welcoming to innovation.

CATEGORIES: Eurozone crisis


This is another installment in my posts on my visit to the San Francisco Fed on April 9.

My talk was in the afternoon, but I always like to see the talks that precede mine so that I can get a feel for the audience--what they know and don't know, what they're thinking about, etc. The first talk was in the morning. It was titled "The Economic Outlook" and was by Glenn Rudebusch, Executive Vice President and Director of Research at the San Francisco Fed.

My big impression was how Keynesian he was/is. A large part of his focus was on household spending, auto and truck sales, home sales, and home building. There wasn't even one slide, in his 18 slides, about investment. (Of course, to some extent, housing and car and truck sales are investment. Maybe that's what he would argue.)

Of course, whether you think that's sensible will depend on whether you think the Keynesian model is basically right and also on whether the focus should be on the short-run (consumption) or the long run (investment).

But I was surprised that he made a basic economic error, one that I would expect my students not to make after we've gone over it in class. After showing a slide on sales of existing homes--it showed a big drop in the last few months--he referred to this as "housing demand." But it's not housing demand, nor is it housing supply. The only thing that a figure on home sales tell us is how many homes were sold. The drop could be due to a drop in demand. One could even argue that it's likely due to a drop in demand. But it also could be due to a drop in supply. At most, it's an equilibrium quantity determined by the intersection of supply and demand.

I've even seen one sharp petroleum economist from the American Petroleum Institute make the same mistake: he presented data on consumption and referred to it as "oil demand."

CATEGORIES: Macroeconomics


Tourists Welcome

Bryan Caplan
Almost everyone wants to heavily restrict immigration.  Foreigners will take our jobs, go on welfare, poison our culture, and vote for socialism.  But there's one kind of foreigner almost every country welcomes: tourists.  Sure, locals gripe about their cluelessness and clownishness.  But almost no one wants to shoo tourists away.

Yes, visas and other regulations on tourism are well-established.  Their chief rationale, however, is to prevent tourists from mutating into immigrants.  From the State Department:
The required presumption under U.S. law is that every visitor visa applicant is an intending immigrant until they demonstrate otherwise. Therefore, applicants for visitor visas must overcome this presumption by demonstrating:

• That the purpose of their trip is to enter the United States temporarily for business or pleasure;
• That they plan to remain for a specific, limited period;
• Evidence of funds to cover expenses in the United States;
• That they have a residence outside the United States as well as other binding ties that will ensure their departure from the U.S. at the end of the visit.
Requiring "evidence of funds to cover expenses" seems designed to prevent tourists from going on welfare or begging in the streets.  All the other requirements, though, ultimately reflect a single goal: preventing foreigners from getting U.S. jobs.  As long as they run around spending money on hotels, restaurants, and Disneyland, great!  But we don't want them to take jobs and start producing stuff for us.

The populist view, as you're well-aware, is that immigrant workers are "taking jobs" that rightfully belong to natives.  But you could just as easily accuse tourists of "taking stuff" - hotel rooms, restaurant meals, Disneyland tickets - that rightfully belong to natives.  Selling stuff to foreigners is mutually beneficial?  Then why isn't producing stuff for natives mutually beneficial, too?

To explain this odd double standard, I once again accuse misanthropy.  We readily welcome foreign money.  Money, after all, can be exchanged for goods and services.  But foreign people?  Of what possible use are they?  Just think of all the bad things a person might conceivably do or be.  Shudder. 

An economist might claim that the very fact that an immigrant lands a paying job is a strong sign that they're useful to somebody.  He could even insist that immigration drastically raises foreigners' wages by drastically raising their productivity.  But that's just market fundamentalism.  Move along, nothing to see here...


Answer: No.

But it has become increasingly common for people, even otherwise numerate analysts, to write as if it can.

Consider a recent instance. In the Spring 2014 issue of Regulation, Sam Batkins and Mitch Boynton discuss a case in which an estimate of a regulatory cost fell from $672 million to $89 million. That's a drop of 87 percent.

But that's not what they wrote. They call this "a 750 percent drop in costs." How did they get that? It looks as if they take the drop as a percent, not of the number from which it dropped, but of the number to which it dropped. The drop was $583 million. That's 655 percent of the number it dropped to. Then, for some reason, they add another approximately 100 percentage points.


TravisV sent me to the following graph of industrial production:

Screen Shot 2014-04-17 at 8.21.15 AM.png
That looks like good news. To see why it is bad news, we need to take a brief digression. The recent recession has been rather unusual. RGDP fell sharply between 2008 and 2009, and since bottoming out in mid-2009 has grown at about 2.4% annually, which is below the 3% trend line of the past 100 years. This has led many to conclude that the economy is not recovering at all.

A counterargument is that the unemployment rate has fallen from a peak of 10% to the current 6.7%, and in my view it will fall even further over the next year or two. A counter counterargument is that the employment/population ratio fell sharply in the recession, and has not been recovering. A counter counter counterargument is that this partly represents boomer retirement, as the over 55 year old category is where all the recent population growth has been occurring. This is from a recent Joe Weisenthal post:

Screen Shot 2014-04-17 at 8.30.28 AM.png
The counter counter counter counterargument is that labor force participation has even fallen in the 25-54 demographic. This could go on forever---labor force data will never resolve anything.

Here's what we need to figure out, is the recovery cyclical or is it secular growth? Suppose it was secular growth, what would it look like? In my view we'd expect roughly 2% to 3% growth in the major components of GDP, as output remained cyclically depressed, but grew at the trend rate (so that the recession wasn't becoming worse.)

Now suppose the secular growth rate had slowed to say 1%, and the economy was briskly recovering toward that new trend line. What then? In that case I'd expect very rapid growth in highly cyclical sectors, and very slow growth in non-cyclical sectors.
Now let's return to industrial production. This sector (mostly manufacturing but also mining and utilities) is always much more cyclical than RGDP. Whereas RGDP fell about 4.3% peak to trough, IP plunged 16.9%. Since the trough in early 2009, IP is up 23.3% (although the low base in 2009 means we've barely passed the previous 2007 peak.)

That might sound like good news---the economy is recovering! But it's actually bad news. If the economy is recovering then the trend rate of growth must be much less than the anemic 2.4% rate we've seen over the past 4.5 years. I'd guess that 1% to 1.5% is the "new normal." And not just in the US, but also in other (non-Obama ruled) developing countries, with the possible exception of high-immigration places like Australia and Singapore.

I also wondered where the IP trend line is. The trend growth from the early 2000 peak to the late 2007 peak was 1% annual growth in IP. But this might underestimate trend, as the 2000 boom was an IP-heavy business investment boom, whereas 2007 was more of a housing boom. Even so, manufacturing is a falling share of GDP, so if overall RGDP trend growth is only 1% to 1.5%, I'd guess IP trend growth rate is also pretty low. We are only 2.5% above the November 2007 peak, but IP is up 1.9% in just 2 months. If it keeps growing at 4%/year or so, we'll quickly close the gap. Believe it or not the US economy will be "recovered" by late next year.

Bonus forecast--the unemployment rate will fall several ticks in April.

Also note that if I'm right about the recovery, it supports the argument that low interest rates are the "new normal." Short-term rates will rise at some point, but to 2% to 3%, not the usual 5%

CATEGORIES: Macroeconomics


I've Won My TARP Bet

Bryan Caplan
Back in 2008, I noted an obscure TARP provision:


Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt. (emphasis mine)

In response, I publicly offered the following bet:
If the Director of the OMB's 2013 report says that a shortfall exists, I win.  Otherwise, I lose.  The stakes: I will make up to five $100 bets at even odds.
The OMB's 2013 report is now in.  You can download all 510 pages here, then turn to page 39:
As of December 31, 2011, total repayments and income on TARP investments were approximately $318 billion, which is 77 percent of the $414 billion in total disbursements to date. The projected total lifetime deficit impact of TARP programmatic costs, reflecting recent activity and revised subsidy estimates based on market data as of November 30, 2011, is now estimated at $67.8 billion.

This is actually more pessimistic than the OMB's previous update, which also had me on track to win:
Compared to the 2012 MSR estimate of $46.8 billion, the estimated deficit impact of TARP increased by $21 billion. This increase was largely attributable to the lower valuation of the AIG and GM common stock held by Treasury.
If you don't wish to download a 510-page pdf, try the CBO's 8-page summary of the OMB report, combined with the CBO's slightly different (but still negative) estimates of TARP's budgetary costs. 

TARP was passed on October 3, 2008.  Since the CBO's report is dated May 23, 2013, you could argue that I am declaring victory a few months prematurely.  However, the CBO report also explains that this is the 2013 TARP report:
Originally, the law required OMB and CBO to submit semiannual reports. That provision was changed by Public Law 112-204 to an annual reporting requirement. OMB's most recent report on the TARP was submitted on April 10, 2013.
None of TARP's cheerleaders accepted my bet, even though their announced beliefs seemingly implied that betting me would be taking candy from a baby.  As far as I can tell, the only people who clearly accepted my bet were EconLog readers Michael K and Rick StewartSteve Roth somewhat ambiguously accepted, so I leave payment to his conscience.

HT: Philip Wallach at Brookings for reminding me about the bet.

Update: All three of my partners have arranged for payment.  EconLog is an clearly an honorable corner of cyberspace.

CATEGORIES: Economic Methods , Finance


On a flight home from Las Vegas last night, I found the April 14 issue of Time magazine. I hadn't read it in years. On the last page was a feature called "10 Questions." They were 10 questions to "activist, atheist and best-selling author Barbara Ehrenreich." Interestingly, they left out any mention, in their adjectives, of her political views. She's quite far left.

So, given that I'm a big believer in economic freedom, you might think that I would disagree with her about her answer in income inequality, right? WRONG. I TOTALLY agreed with her.

Here was the question: "If I could give you one power, one wish, what would you do to lessen income inequality?"

Before I give her answer, stop and think what you would expect it to be. Guaranteed annual income financed by an increase in the top marginal federal income tax rate to 60 percent or higher? More welfare programs?

Seriously, think about it before you read her actual answer.

Here's her actual answer:

Stop all the ways that money is being taken from the poor. I mean, you can just spiral down so fast into poverty. You have a broken headlight, you get stopped. That fine is going to be greater than the cost of a new headlight. You don't have money to pay the fine, you're looking at an arrest warrant--and down you go.

Think about that: the one most-important step Barbara Ehrenreich would take to lesson income inequality is to have the government stop hassling poor people.

I agree.


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