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The Library of Economics and Liberty
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24 июня, 02:01

What causes recessions and “empressions”?

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Before starting this post, let me highly recommend George Selgin’s recent post on NGDP targeting. Nick Rowe has a post discussing a scenario where a lack of media of exchange disrupts trade, without affecting employment and output: I would call that a “recession”, even though (by assumption) output, employment, and (aggregate) consumption are unchanged. People are worse off, because of a reduction in the volume of exchange, due to a reduction in the circular flow of money around the Wicksellian triangle. Nick’s terminology is unconventional; recessions are usually defined more in terms of output and employment.  I’d prefer a third definition—a sharp rise in the unemployment rate, regardless of what happens to output.  But I don’t get to choose definitions, so rather than fight a losing battle I’ll invent a new word for the concept I’m interested in.  Let’s call an employment recession an “empression”. To see the difference, imagine a primitive economy where all workers are peasant farmers.  There is zero unemployment, as all are self-employed.  A spell of bad weather would cause a recession (falling output), but not an empression.  However, it just so happens that in the US all recessions seem to also be empressions, and all empressions seem to be recessions.  In the following graph, the grey bars reflect recession periods.  You can see that sharply rising unemployment is a necessary and sufficient condition for a recession.  You can’t say that about inflation, stock prices, yield spreads, steel output, or numerous other variables. Lots of things might cause a higher unemployment rate.  These include: 1.  Sharply higher minimum wage rates, or a surge in union organizing. 2.  A sharp rise in the share of GDP going to capital, meaning less money to pay wages. 3.  A sharp rise in hours worked per week, meaning fewer workers are needed to produce the same nominal output. However, I don’t believe that any of those factors are important causes of the US business cycle, at least since WWII. Rather the problem is sticky nominal hourly wages and unstable NGDP.   Before looking at NGDP, lets examine the growth rate of total labor compensation: Notice that nominal labor compensation growth slows sharply during recessions and empressions—every single time.  So the problem does not seem to be a surge in hourly wages, rather the labor market is being starved of funds to pay workers—my musical chairs “model” of unemployment.  (Or perhaps “metaphor”, as respectable economists wouldn’t think it rises to the level of being a model.) So what causes nominal labor compensation growth to slow at various times?  Does the corporate sector suddenly grab a bigger share of national income, leaving less money to pay workers?  Or does growth in national income itself slow?  Not surprisingly (as labor compensation is a big share of national income) it’s the latter.  It turns out that falling NGDP growth (combined with sticky hourly wages) is the proximate cause of both recessions and empressions: Recall that I said that wage spikes don’t seem to be the cause of recessions and empressions.  There is, however, one wage spike that made a recession/empression somewhat worse than one would have otherwise expected.  Notice that the slowdown in NGDP growth was pretty modest during the 1973-75 recession.  And yet that was one of the more severe postwar recessions/empressions.  Why?  It turns that that 1974 saw an unusual wage shock, something that generally does not occur during US recessions: Why did wage growth spike during the 1974 recession?  I’d guess it was because Nixon phased out his wage controls during 1974, and workers demanded wage increases to compensate for the high inflation of 1973-74.  But while that sort of situation may be common in some unstable developing countries, it’s pretty unusual in the USA.  And even during 1974, slowing NGDP growth was still part of the story.  The 1974 recession was one part NGDP shock and one part wage shock. So the cause of post-war US recessions is actually quite simple.  NGDP growth slows while nominal hourly wages are sticky, and thus employment falls while unemployment rises. Why don’t workers offer wage flexibility to prevent high unemployment?  For the same reason that Wall Street financiers don’t offer indexed bonds to prevent falling NGDP from creating financial crises—it’s a collective action problem.  If any one worker agrees to flexible wages, it doesn’t help him preserve his job.  He shows up at the factory gate and finds his workplace is closed down.  Only if all workers have flexible wages can we avoid a recession/empression during periods of sharply slowing NGDP. If all workers bargained collectively that might be possible. But a labor union that covered all 150,000,000 workers would create lots of microeconomic inefficiency, which might be even worse than the business cycle.  Better to use monetary policy to keep NGDP growing at a steady 4%/year, or something close to that figure. To summarize, recessions/empressions are quite simple.  A combination of sticky nominal wages and unstable NGDP (i.e. unstable monetary policy) causes recessions.  At elite universities they have models that don’t even feature nominal wages and NGDP.  Rather they focus on price inflation, interest rates, output and other irrelevant variables.  Again, sticky wages and unstable NGDP are pretty close to a necessary and sufficient condition for US recessions/empressions—no need to look for microfoundations.  No need to make it complicated. The policy implications are also simple.  Adjust monetary policy to keep market expectations of NGDP growing along a 4% trend line.  That will mostly solve the problem of empressions in the US, and any remaining movement in RGDP will be an efficient “real business cycle”, not be worth worrying about. (5 COMMENTS)

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22 июня, 18:40

A Mythical Micro Meeting

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I recently discussed the teaching of Ph.D. Microeconomics with a noted professor in a top five econ department.  His bottom line: The curriculum is virtually the same as it was when I took Ph.D. Micro a quarter century ago.  Among active researchers, the status of pure theory has dramatically fallen during that period, but pure theorists retain a stranglehold over the first-year curriculum.  This surpasses even my pessimistic expectations for the education system; I would have thought that top schools would have at least marginally decreased pure theory in favor of empirical work.  But at least according to my source, this hasn’t happened. Rather than decry this stasis, however, I thought it best to write a dialogue. The Scene: Meeting room at a prestigious university The Cast: Professor Proof, old-school micro teacher Professor Raze, radical curriculum reformer Professor Well, swing voter on the curriculum committee Prof. Raze: I just reread your Ph.D. Micro syllabus, Prof. Proof.  Frankly, it’s ridiculous.  You haven’t changed the content in a quarter century.  You make zero effort to introduce students to any of the great empirical work that’s been done in the meanwhile.  Instead, you waste a year of their lives on useless math.  Enough is enough! Prof. Proof: Relax, Raze.  Students have plenty of time to learn empirical work later on.  The point of Ph.D. Micro is to train economists in the fundamental ideas of their discipline.  That’s what I set out to do when I wrote the syllabus 25 years ago, and that’s what I’ll continue to do. Prof. Well: Let’s take it down a notch.  We’re the curriculum committee, so we have to work together, Raze.  And the chairman appointed us to reach a consensus, Proof.  You can’t just stonewall. Raze: [sullenly] Fine. Proof: [snottily] Fine. Well: Let’s start with Raze.  What exactly is wrong with Ph.D. Micro as it is? Raze: We spend the whole year teaching mountains of irrelevant math and theory.  The opportunity cost is high, because we could spend that time teaching promising young minds about how the economy actually works – not to mention basic economic principles.  And it’s a needless entry barrier for students who care about the real world. Proof: “Irrelevant math and theory”!  So we should just become sociologists? Raze: I never said that.  I’m all for teaching math that students are likely to use in their research, and theories that actually shed light on the real world. Proof: [harumphs] That’s already what I do. Raze: [mock incredulously] Oh really!  Students are likely to use topology in their research? Proof: Many do. Raze: Name one. Proof: Well, two years ago my student Chloe used topology in her dissertation. Raze: And for her sake, all her classmates had to spend weeks suffering through the subject? Proof: Suffering?  It was their privilege.  Topology is one of the most beautiful branches of mathematics. Raze: See what I’m talking about, Prof. Well?  This is all about micro theorists’ bizarre aesthetics; it’s got nothing to do with training future economists. Well: Here, I’m inclined to agree.  If you want to teach math because of its intrinsic beauty, Proof, you should do it in a math department. Proof: [exasperated] Even so, you need topology to grasp basic economic theorems, starting with general equilibrium theory. Well: Naturally… Raze: [annoyed] Theorists need topology to prove the theorems, but that hardly means that students need to actually learn topology.  Why not just give the intuition behind the theorem, point the rare future theorists to some reference works, and move on?  A single lecture would suffice. Proof: [outraged] A single lecture?  This is a top five economics department – and you want us to turn out a generation of ignoramuses? Raze: Just tell me this, Proof: How empirically relevant is general equilibrium theory anyway? Proof: There are many applications… Raze: How many rely on more than a quick intuitive version of GE theory? Proof: That’s hardly the point. Raze: Uh-huh.  More importantly, how many of our students realize that the sparse empirical applications of GE rely on no more than a quick intuitive version of the theory? Proof: That would hardly motivate them to study the topic. Raze: In other words, you keep your students in ignorance of the deep irrelevance of what you’re teaching them, because otherwise they’d be less motivated to study it. Well: Surely you’re not proposing that we cut theory altogether, Raze? Raze: Far from it.  I think we should teaching empirically relevant theory, using as much math as empirical researchers need to know. Proof: And according to you, what would qualify? Raze: Basic supply and demand for starters.  Game theory.  Information economics. Well: Doesn’t sound too different from what we already do. Raze: Actually, it is.  First, I wouldn’t teach any more math than you actually need to grasp the intuitive idea.  And second, I would immediately follow any theoretical topic with relevant empirics. Proof: But often the “relevant empirics” directly contradict the theory.  See much of behavioral economics. Raze: That’s a bingo.  Our students ought to learn the extent to which standard economic theory correctly describes the real world.  I don’t mind teaching influential flawed theories, as long as students realize the severity of their flaws. Well: I’m worried that our students will barely remain economists if we follow your advice. Raze: Look, what’s intellectually distinctive about economists isn’t our knowledge of math.  It’s our rejection of Social Desirability Bias. Proof and Well: [in unison, skeptical] What?! Raze: You know how economists are always saying, “Look at what people do, not what they say”? Proof: Yes… Well: Yea… Raze: Well, psychologists have empirically confirmed that we’re on to something.  When the truth sounds bad, people tend to say – and often believe – falsehoods.  Psychologists call this “Social Desirability Bias.” Proof: What in the world does this have to do with Ph.D. Micro? Raze: Plenty.  One of the main goals of Ph.D. Micro should be to root out Social Desirability Bias from our students.  It’s central to “thinking like an economist.” Well: What, stuff like, “If you put an infinite value on life, you’d never cross the street”? Raze: Exactly.  Some of the wisest words ever said. Proof: You want to replace general equilibrium theory with a bunch of trivial slogans? Raze: They’re deep truths, not “trivial slogans.”  Yet many of your students have barely heard them. Well: Could you name some others? Raze: Sure.  I’ll express them as slogans, though each deserves multiple lectures of elaboration. “If you’re right, why hasn’t anyone gotten rich using your idea?” “What’s are the relevant elasticities?” “What precisely is the market failure supposed to be?” “What are the regulators’ incentives?” “Immigration is trade in labor.” Proof: So you want to politicize Ph.D. Micro.  [sarcastic] Great! Well: I have to admit that I share Proof’s concerns, Raze.  This isn’t science. Raze: If it’s true and important, who cares if it’s “science”? Proof: See, Well?  Raze doesn’t even believe in science. Raze: [losing his cool] Fine, I misspoke.  Yay, science!  My point remains: We should radically overhaul our Ph.D. Micro curriculum.  Proof should stop wasting our students’ time with irrelevant math and theory.  He should teach them how the economy actually works, delving into math and theory only insofar as it serves that goal.  None of this will “turn our students into sociologists” as long as he instills the deep truths of economics along the way. Well: I see… Raze: Actually, since we could never trust Proof to do any of this, you should hand his class over to me. Proof: [glares daggers at Raze] Well: Very well.  I think I have enough information to make my recommendation to the chairman. Raze and Proof: [in unison] Namely?! Well: You both make good points.  I’m going to ask the chairman to ask Proof to update his syllabus in light of the last quarter century of research. Raze: And..? Well: That should do it. Raze: But that will change next to nothing!  Proof will be the sole judge of what “needs to be updated”! Proof: [smugly] I promise I’ll do a scrupulous job. Well: [self-satisfied] Please see that you do.  We’ll revisit this issue again in three years to see how things are going.  Until then, colleagues! (8 COMMENTS)

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21 июня, 22:59

Is economic nationalism even possible?

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A great deal of ink has been spilled about the causes and consequences of the recent rise in economic nationalism. Maybe it’s time to step back and ask whether economic nationalism is even possible in the modern world. The Economist has an interesting article discussing the British struggle to negotiate a Brexit agreement with the EU: Dominic Cummings, the former campaign director of Vote Leave, thinks that Brexit is being “irretrievably botched”. Ambrose Evans-Pritchard, a pro-Leave journalist, says that “the quixotic bid for British independence has failed”. On the Remain side, Jonathan Powell pronounces hard Brexit “dead”, killed by the conundrum of the Irish border. . . . On June 6th Boris Johnson, the foreign secretary, delivered an agonised speech to a group of Conservative donors which was recorded and leaked. Mr Johnson argued that Britain runs the risk of ending up in “a sort of anteroom of the EU” and blamed this unhappy prospect on a combination of insufficient will on the part of the prime minister and strong resistance on the part of the establishment. He claimed that Britain needed a strong leader like Donald Trump—“he’d go in bloody hard”. He called the Treasury the “heart of Remain”. He lamented that Britain was so terrified of short-term disruptions that it would sacrifice long-term gains. The more conservative Brexiteers advocated a hard break with the EU, which would allow the UK to chart its own course.  In their vision, the UK would dump lots of burdensome EU regulations, strike free trade deals with many other countries, and become a sort of Singapore of Europe. In retrospect, it’s easy to see why they are struggling to implement their vision.  Consider the following: 1. While 52% of British voters supported Brexit, not all favored the more libertarian version envisioned by some Conservatives.  Brexit also did well in many (northern) Labour areas, as the more socialist wing of the Labour Party has often seen the EU as being a bit too “neoliberal”, to willing to promote free markets and capital mobility. 2.  The “establishment” in the UK opposed Brexit to a striking degree.  It was opposed by both the Conservative and Labour parties, by big business, labor unions, academics, much of the press, and most people within the bureaucracy. It’s fine to talk about the “will of the voters”, but precisely what version of Brexit did they support?  If it’s the Singapore version, then why do British voters consistently support politicians who favor big government and lots of regulations?  The fact is that people voted for Brexit for many different reasons, and under a representative democracy it’s up to the elected representatives to implement the actual policy. Theresa May called an election soon after Brexit in the hope and expectation that it would strengthen her negotiating hand.  But the British electorate delivered a stinging rebuke, as the Conservatives lost many seats, despite facing a Labour leader widely viewed as an extreme, eccentric, Marxist left-winger. The voters didn’t seem to want May to have a strong hand in negotiation, and their decision effectively gave those who favored a “soft Brexit” a veto over the final outcome. So what does this mean for the US?  Consider: 1. In 1979, the UK elected Margaret Thatcher, and in 1980 the US elected Ronald Reagan. 2. In June 2016, the British public shocked pollsters and the establishment by supporting Brexit.  In November 2016, the US public shocked pollsters and the establishment by electing Donald Trump. If the hard Brexit option fails to be enacted and the UK stays 90% in the EU while formally leaving it, would that be an indication of the likely outcome of Trump’s recent trade war?  I think the answer is probably yes.  The forces of globalization may be too strong for any politician or political movement to overturn. It seems likely that Trump will be forced to back off at some point, and globalization will proceed much as before. It is possible that the US is able to achieve a few concessions on trade; perhaps our trading partners slightly reduce their trade barriers.  But that’s not the sort of hard economic nationalism agenda advocated by Trump supporters like Steve Bannon.  A move toward freer trade in China would result in a stronger dollar and even more manufactured imports pouring into America’s rustbelt.  It would be a victory for globalization, not economic nationalism. Think about Trump’s rhetoric.  Does he advocate open borders?  Obviously not.  But he does pay lip service (sincere or not) to the abolition of all tariffs.  That’s a tacit acknowledgement that free trade still has the upper hand in terms of intellectual respectability.  Even economic nationalists must at least pretend to be globalists. (28 COMMENTS)

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21 июня, 20:25

Henderson on Radical Markets

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In Radical Markets, University of Chicago law professor Eric Posner and Microsoft senior researcher Glen Weyl propose a radical restructuring of property rights, immigration policy, and voting, as well as a substantial change in corporate law. Their most radical proposal is to completely overturn property rights so that people would need to continuously “bid” for property they already own. They want to alter immigration policy to allow about 100 million more immigrants into the United States, but change who decides whether or not to allow particular prospective immigrants to enter. They want to switch to “quadratic” voting as opposed to the current one citizen–one vote method. They also want a major change in how investors can hold shares in corporations. For all of these positions, they make clever and sometimes compelling arguments. The most compelling one is on voting. The least compelling, and also absolutely horrific, one is on property. These are the opening two paragraphs of “A Radical Restructuring and Redistribution of Wealth,” my review of Radical Markets by Posner and Weyl. It appears in the Summer issue of Regulation. (Scroll way down to see my review.) Some highlights on their stiff 7% annual tax on wealth: What would prevent people from underestimating the value of their assets? This is where Posner and Weyl’s proposal is horrific. Once a homeowner, say, has stated the estimated value publicly, he would have to sell his house to anyone who offers more than that value. So, for example, suppose my aforementioned house is worth about $900,000 on the open market. If I estimated the value at $900,000, my annual tax under their proposal would be a whopping $63,000. If I estimate the value below that, I would risk losing the house to anyone who bids more than my estimate. To be safe, I would probably estimate the value at $1 million because I like living there. But then I would pay $70,000 in taxes on my home annually. (Notice that a 7% annual tax on an asset would amount to an implicit tax of over 100% on the income from many assets.) In short, Posner and Weyl would fundamentally undercut property rights, making them conditional. If you’ve lived in your home for 32 years, as my wife and I have, and put a lot of sentimental value on the place where you raised your children, then you would have to put a number on that value. And in case you think you can handle that, you must remember that they want to do the same with virtually all of your net worth. Toward the end of the book, they even toy with having people pay taxes on their human capital. They give an example of a surgeon who announces that she would perform gallbladder surgery for $2,000 and pay a tax accordingly. She would be obligated to provide that surgery to anyone willing to pay $2,000. So if the surgeon was thinking of retiring, forget it. The only satisfactory solution for her would be to estimate the value of her services at a number that really would make her indifferent between working and retiring. The authors are aware that they’re treading on sensitive ground here, writing, “A COST on human capital might be perceived as a kind of slavery.” Might be? They claim that such a perception is incorrect, but the reasoning behind their claim is weak. I go on to say why it is weak. (13 COMMENTS)

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20 июня, 22:38

The Illusory Arbitrariness of Deploring?

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I’ve previously argued that public deploring is exceedingly arbitrary.  The “outrages” we hear about on the news – the outrages that “We cannot tolerate!” – are usually no worse than dozens of other problems that we barely acknowledge or discuss.  In my words: When I witness the unbearable arbitrariness of deploring, two unsympathetic types of explanations come to mind. First, people’s negative emotions depend far more on the vividness of the evil than its badness.  A hundred stories about celebrity harassers would upset the world far more than ironclad statistical proof that 10% of celebrities harass.  Indeed, it’s likely that one detail-rich story about a celebrity harasser would upset the world more than the best statistical study ever performed. Second, people’s negative emotions are intensely social.  People don’t want to rage alone.  They want to get mad with their friends and countrymen.  So when a new round of ugly stories pop up, almost no one asks, “Is this really the best target of our collective anger?”  Instead, they jump on the bandwagon.  Who cares where we’re going, as long as we’re united in negativity? As examples, I name the crusades against chemical weapons and sexual harassment.  I don’t see why chemical weapons are worse than the endless alternative methods of mass murder, and I don’t see why sexual harassment is worse than the endless alternative ways of mistreating employees and co-workers. Yesterday, however, renowned rationalist Scott Alexander defended the basic rationality of the conventional view.  Unlike most people, however, Scott doesn’t try to defend conventional priorities.  Instead, he finds a hidden wisdom of effective deterrence lurking beneath the surface.  Scott: I have a different theory: people get upset over the violation of already-settled bright-line norms, because this is the correct action if you want to use limited enforcement resources efficiently. Imagine a town with ten police officers, who can each solve one crime per day. Left to their own devices, the town’s criminals would commit thirty muggings and thirty burglaries per day (for the purposes of this hypothetical, both crimes are equally bad). They also require different skills; burglars can’t become muggers or vice versa without a lot of retraining. Criminals will commit their crime only if the odds are against them getting caught – but since there are 60 crimes a day and the police can only solve ten, the odds are in their favor. Now imagine that the police get extra resources for a month, and they use them to crack down on mugging. For a month, every mugging in town gets solved instantly. Muggers realize this is going to happen and give up. At the end of the month, the police lose their extra resources. But the police chief publicly commits that from now on, he’s going to prioritize solving muggings over solving burglaries, even if the burglaries are equally bad or worse. He’ll put an absurd amount of effort into solving even the smallest mugging; this is the hill he’s going to die on. Suppose you’re a mugger, deciding whether or not to commit the first new mugging in town. If you’re the first guy to violate the no-mugging taboo, every police officer in town is going to be on your case; you’re nearly certain to get caught. You give up and do honest work. Every other mugger in town faces the same choice and makes the same decision… The police chief’s public commitment solves mugging without devoting a single officer’s time to the problem, allowing all officers to concentrate on burglaries. A worst-crime-first enforcement regime has 60 crimes per day and solves 10; a mugging-first regime has 30 crimes per day and solves 10. But this only works if the police chief keeps his commitment. If someone tests the limits and commits a mugging, the police need to crack down with what looks like a disproportionate amount of effort – the more disproportionate, the better. Fail, and muggers realize the commitment was fake, and then you’re back to having 60 crimes a day. I happily grant that Scott’s story is logically possible.  But I see minimal real-world relevance of his thought experiment.  Sticking to his example: In the real world, muggers can become burglars. In the real world, deterring muggers more requires deterring burglars less. Zero-tolerance for muggers means a free hand for burglars. In the real world, mugging and burgling are not equally bad.  If authorities choose to prioritize one, it will be because of vividness and herding, not actual badness. To be fair to Scott, he does argue that his model successfully explains the standard approach to both chemical weapons and sexual harassment. But I find neither of his analyses convincing: This looks to me like what’s happening with chemical weapons. The relevant difference between chemical weapons and conventional weapons is that the international community made a credible commitment to punish chemical weapons use, and so far it’s mostly worked. People with chemical weapons expect to be punished for using them, so they rarely get used. If there are some forms of atrocity that are easier with chemical weapons than with conventional ones – ie a dictator with a limited arms budget can kill more people with a choice between chemical and conventional weapons than they can when restricted to conventional weapons alone – then the taboo against chemical weapons saves lives. And so when a dictator tests the limits by trying a chemical weapon, it’s worth responding to that more forcefully than if they used conventional weapons to commit the same massacre. You’re not just preventing the one attack, you’re also acting to enforce the taboo. I agree that chemical weapons rarely get used.  But has the chemical weapons ban actually reduced total number of war deaths?  On the contrary, it probably increased total war deaths because (a) chemical weapons aren’t especially cheap or effective, and (b) the ban was the key rationale for the Iraq War.  Furthermore, the mere fact that almost no one reflects on this distinct possibility confirms that the ban derives from vividness and herding, not shrewd deterrence strategy. The sexual harassment situation seems like the same dynamic. We can’t credibly demand our elites are never jerks to their subordinates – jerkishness is too vague a concept, there’s too much of it around, and it’s just not really an enforceable norm. But we have sort of credibly demanded our elites don’t sexually harass their subordinates, and it seems like we might be getting enough of a coalition together to enforce this in a lot of cases. If we can solidify this into an actual social norm, such that the average elite expects to be punished for sexual harassment, then elites will stop sexually harassing their subordinates and we won’t have to keep calling the whole coalition together all the time to enforce the punishment. This is a more promising case for Scott: Governments that can’t kill their enemies with gas will simply bomb them, but sexual predators that can’t harass probably won’t switch to asexual emotional abuse.  But again, the obvious question to ask is: Has the taboo on sexual harassment actually raised overall job satisfaction?  It’s possible, but how many people with strong feelings on the subject have ever perused the numbers?  And this is an especially strange position for Scott to take, because he’s blogged extensively on the vagueness of romantic-sexual norms.  There’s probably stronger agreement that “Bosses who publicly scream at employees are jerks” than “Bosses who date employees are presumptive sexual harassers.” All this aside, the fundamental question is not whether selective extreme reactions to chemical weapons or sexual harassment has done some good, but whether it was the best possible use of the moral energy and resolve employed to fight them.  As far as I can tell, Scott claims nothing like this.  True, that’s a high bar.  But almost no normal person even pretends to try to meet it.  Instead, they pick their targets in exactly the way my original piece described: vividness and herding.  If you lose sleep over Moloch, isn’t this precisely what you should expect humans to do?   (8 COMMENTS)

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20 июня, 20:17

Henderson on Pinker

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Steven Pinker’s Enlightenment Now is, quite simply, a fantastic book. In this fact-filled and incredibly well-footnoted tome, Pinker, a Harvard psychology professor, shows how the conditions of life for ordinary people have gotten much better, not just for those in wealthy countries but also for most people around the world. He shows that life expectancy has increased almost everywhere, health and nutrition have improved, and wealth and living standards have skyrocketed. The environment has improved. The destruction caused by war—and war itself—have decreased. Safety has increased and terrorism is a tiny problem. Literacy has increased. People have become generally more tolerant of others’ differences and people are happier. He attributes this progress to the Enlightenment, the four pillars of which—as the book’s subtitle suggests—are reason, science, humanism, and progress. In laying out the facts and his argument, Pinker also shows a knack for the punchy, and often humorous, turn of phrase. Although he occasionally slips, as when he criticizes libertarianism, his slips are few and far between. These are the opening 3 paragraphs of “The Wonder of Modern Life,” which is the lead book review in the Summer 2018 issue of Regulation. Do read the whole thing, especially if you want to comment. And, even better, read Pinker’s book; you will likely be “enlightened.” HT to Pierre Lemieux and Richard B. McKenzie for telling me that the issue is out electronically. (5 COMMENTS)

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20 июня, 16:53

Predicting Trade Wars

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As the aphorism goes, prediction is difficult, especially about the future. But sometimes, the incentives involved and some basic economic knowledge help prediction, at least regarding the not-too-distant future. Having an idea of how Leviathan works, which can be considered a sub-domain of public choice theory, is also useful. In early May, I wrote for Regulation an article titled “How’s Your Trade War Going?” As Regulation is a quarterly magazine, my article will soon hit the stands, and has just hit the electrons. The outlook has not improved, but I think I did not forecast the current situation badly—besides explaining some aspects of the economics of free trade. What was in store has been rather obvious since the presidential campaign  and the election of 2016. In a tweet of last week, I wrote: Trump promised he would be a protectionist, he showed no understanding for the economics of protectionism, he surrounded himself with protectionists, he is acting like a protectionist, and some people believe he is not a protectionist! I still find this reaction puzzling, especially from intellectuals who should know better. Why so many people believe in protectionism after more than two centuries and a half of economic criticism is even more puzzling. It may have to do with the fact that many have not been exposed to economics in their formative years, combined with a psychological feature that John Maynard Keynes mentioned in the closing paragraph of The General Theory of Employment, Interest and Money (1936): [I]n the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age. Many of us try to avoid this cognitive trap and make Keynes wrong. It is arguably much more difficult for the gerontocrats who govern us (whatever their political affiliations). If changing one’s opinions may be feasible in old age, changing one’s emotions is certainly difficult. And protectionism is based on emotions or, at best, on unexamined value judgments.  I am keeping my mind open, but I think they will understand free trade when pigs fly. (3 COMMENTS)

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20 июня, 02:07

The New York Times’ Shoddy Reporting

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NASHVILLE, Tenn. — A team of political activists huddled at a Hardee’s one rainy Saturday, wolfing down a breakfast of biscuits and gravy. Then they descended on Antioch, a quiet Nashville suburb, armed with iPads full of voter data and a fiery script. The group, the local chapter for Americans for Prosperity, which is financed by the oil billionaires Charles G. and David H. Koch to advance conservative causes, fanned out and began strategically knocking on doors. Their targets: voters most likely to oppose a local plan to build light-rail trains, a traffic-easing tunnel and new bus routes.   So read the first two paragraphs of a front-page article in today’s New York Times. Here’s the article’s title: How the Koch Brothers Are Killing Public Transit Projects Around the Country The Times reporter, Hiroko Tabuchi, makes it sound as if the Koch brothers had a huge role in defeating the tax measure in Nashville on last month’s ballot that would have increased 4 taxes (including a one-percentage-point increase in the sales tax) to generate $9 billion for mass transit in Nashville. But nowhere it the Times article are we told how much money the Koch brothers spent. Fortunately, a much earlier article in Nashville’s main newspaper, the Tennessean, did say. Surely Ms. Tabuchi had access to that article. In a vote with relatively high turnout for an off-year election (about 122,000 people voted, with about 78,000 people voting no), the proponents of the tax-subsidy proposal spent about $2.9 million and the opponents spent $1.2 million. So the Koch brothers must have contributed a large fraction of that $1.2 million, right? Say at least 10 percent? Not quite. Here’s the last paragraph of the news article in the Tennessean: Separately, a political action committee led by Americans for Prosperity, a conservative advocacy group funded by the conservative billionaires David and Charles Koch, contributed a modest sum of $10,000 for mail advertising. I doubt that the Koch brothers are the only contributors to Americans for Prosperity, and so $10,000 is an upper limit on their contribution. And $10,000 is less than 1 percent (actually 0.83 percent) of the overall spending against the tax-increase measure. Wow! Those Kochs sure are powerful. By the way, Ms. Tabuchi’s lack of numeracy may be excused. After all, her Linked in page tells us, she reports on climate change. The old New York Times motto was: All the news that’s fit to print. Its new motto should be: All the news that fits, we print.   (24 COMMENTS)

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19 июня, 19:00

Do poverty programs reduce poverty?

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The answer is “probably”, but by less than you might assume. The LA Times has an interesting article entitled: New evidence shows that our anti-poverty programs, especially Social Security, work well I’m not quite convinced by this argument.  The article discusses some very interesting research by Bruce D. Meyer and Derek Wu, which shows the poverty rate looking at only official income data, and then again after accounting for taxes and various income support programs.  I’m convinced by their argument that poverty, properly measured, has fallen rather sharply over time.  There are clearly far fewer poor people in America than when I was young (in 1960). Indeed research by Bruce Meyer and James Sullivan produced another similar graph that I included in this post, which shows that the consumption poverty rate has fallen to extremely low levels, below 5%.  I like that graph so much I included it in the new principles textbook that I am working on. And yet, none of this tells us about the causal impact of poverty programs.  The first time I ever spoke up in a college econ class (back in 1974), was to challenge my professor on exactly this point.  He showed data on the income distribution before and after transfers, and argued that this showed the impact of transfers.  I raised my hand and suggested that without transfers, low-income people would probably have more market income.  (He graciously conceded the point.) For instance, if there were no Social Security program, older people would be more likely to keep working beyond age 65.  Having said that, I would also like to make the following two points: 1. Even if Social Security does not raise the income of the elderly, it quite likely makes them better off.  Many old people would prefer to spend their final years enjoying life, not working at Walmart, or at least working less than full time. 2. I do think it likely that Social Security did reduce poverty, as the offset of fewer hours worked and less market income is likely less than 100%. When you look at poverty programs for the non-elderly, things get a bit murkier.  It is certainly plausible that they have also reduced poverty, but it’s hard to prove.  While poverty has declined sharply since the 1950s, it’s important to keep in mind several factors: 1. Much of the fall in the official poverty rate occurred prior to 1966, before the Great Society programs were fully implemented. 2. Even without poverty programs, you would have expected a sharp fall in poverty because of economic growth.  Per capita GDP is much higher than in the 1950s. Consider a family of illegal immigrants from Latin America, where both the husband and wife work full time.  What is the poverty rate among that sort of family?  I suspect it’s pretty low.  And yet that family does not qualify for government income transfers. So here’s the $64,000 question.  To what extent have poverty programs caused different labor market behavior among America’s native-born poor, as compared to that hypothetical immigrant family?  I don’t know.  How many single moms who are on welfare would instead be married and working as hotel maids if welfare was not currently available?  I don’t know.  What if welfare had never been available over the past 50 years?  I don’t know, and I don’t even know of any way to find out.  We should be very modest about our ability to answer these sorts of questions. PS.  Can anyone find annual data on the poverty rate going back to WWII?  I know it’s out there, but Google can’t find it. (13 COMMENTS)

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19 июня, 17:41

Immigration: A Confession and a Value Judgment

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I must confess that, contrary to my former anarcho-capitalist stance for unrestricted immigration (shared by many of my co-bloggers here), I now find the topic more complicated. I of course have no economic objection to immigration, if by “economic” is meant its effects on wages, incomes, and the allocation of resources. Basically, as Jean-Baptiste Say would have said, supply creates its own demand. As far as value judgments are concerned—some are ultimately needed to evaluate any government policy—I find no moral case for banning competition by the poorest. Any newborn citizen is an immigrant from within, and—except for Malthusian environmentalists—we understandably don’t worry about that. The invasion argument is more difficult to reject. Assume that “our” state is a contractual agent for protecting our liberty. An invasion of immigrants who do not share that value would compromise it. We then have a classical-liberal argument against open immigration. How many and what sort of immigrants would actually come is an empirical issue that cannot be decided in advance, and it may be impossible to go back after the fact. But whatever one’s stance on the general issue, I think we should agree that the way illegal-immigrant families are treated at the U.S. border is inconsistent with common humanity and decency, not to speak of individualist values. (Christian churches should be up in arms.) Saying that the law mandates such treatment of illegal immigrants is false, for the new “zero tolerance” policy is not required by law. The legal argument would be a poor justification anyway. At about the time I published my last post on a related event, the New York Times documented the case of a Guatemalan woman who, travelling with her son, had entered the United States illegally through the Texas border. She was arrested, separated from her son, and deported back to Guatemala without him. After about two weeks of separation, the boy remains in the United States under the care of Health and Human Services, and the mother does not know when she will see her son again. From Guatemala, she was able to talk to him once on the phone late last week. This inhumane separation was partly caused by bureaucratic snafus, as the New York Times story shows. An inhumane state is not more efficient than a benevolent one. This is one economic lesson of the episode. The federal government is too big to manage. The story also illustrates the incentives and behavior of government agents. “I can’t go without my son,” the mother pleaded as government agents put her on the deportation flight. The government agents who committed this infamy were not necessarily thugs, but they were all following orders and complying with the team. One of them, a female agent, was apparently crying. (Perhaps all these cops should be women: we might have more humanity.) The main culprits are the people at the top of the pyramid: politicians, political appointees, and high-level bureaucrats in Washington, DC. My value judgment is that these actions are totally unacceptable. (40 COMMENTS)

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18 июня, 20:47

Whose Tariff Rates Are Higher?

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I’ve been having discussions with a number of pro-Trump friends who favor Trump’s raising of tariffs as a way to induce other countries’ governments to reduce their tariffs. They think my fear of a trade war is overstated. One major premise of their argument is that the United States has lower tariff rates than other countries. I don’t think that matters much for the argument: even if it’s true, the dangers of a trade war are serious. Indeed, I have shared their premise. But the Cato Institute’s Simon Lester casts doubt on that premise. In an important blog post this morning, he gives a table of tariff rates by country. The first thing to notice is how low tariff rates are generally, something I have pointed out previously. But the second thing to note is this, in the words of Simon Lester: Taking all of these tariff figures into account, it can be hard to come up with a precise ranking, but you can see that New Zealand and Australia are the low tariff leaders. The U.S., EU, Canada, Japan, and Switzerland come next, clustered closely together. Mexico has tariffs that are a bit higher. Then come China and Brazil with even higher tariffs. I emphasize that whether U.S. tariff rates are higher or lower than other countries’ tariff rates is not important for my argument about the dangers of starting a tariff war. But it does seem important to some of those whom I argue against. Are they factually correct about China? Yes. Canada? Yes by the WTO measure, but no by the World Bank measure. Average the two measures and you get an average of 2.0 percent for the United States and 1.95 percent for Canada. In other words, virtually no difference. (13 COMMENTS)

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18 июня, 14:02

Does reality turn you into a statist?

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One of the rhetorical tricks in contemporary debates goes as follows: Present people who agree with you as if they were convinced of the validity of their (your) positions by reality, suggest people who disagree with you never put their nose out of their office. I am reading a bit on “neoliberalism” (a tip: if it has neoliberalism is in the title, feel free to assume it’s a terrible book. There are exceptions, but only a handful). In particular, I am reading one of Oxford’s typically excellent very short introductions, this one written by Manfred Steiger and Ravi Roy. They write (p.5): The fury and longevity of the Great Depression convinced leading economic thinkers like John Maynard Keynes and Karl Polanyi that government was much more than a mere ‘nightwatchman’. Now, I’m no native English speaker but it seems to me that the sentence suggests that Keynes and Polanyi were full-fledged champions of laissez faire, or at least moderate supporter of the market economy, until the Great Depression “convinced” them that such quaint ideas were an unhelpful leftover for the modern world. Was it so? Then why did Keynes published “Am I a liberal?” in 1925 and “The end of laissez faire” in 1926? Sure, Churchill returned to the gold standard in 1925, an act that Keynes considered disastrous, but was he building his own political views on the evidence of such pieces of monetary history? Before the Great Depression, Keynes was already convinced that society should start “exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business”. No night watchman here. As it were, the Great Depression certainly helped him to sharpen his views and deepen his analysis, but he had, like all of us, political instincts. Is that too difficult to admit? (2 COMMENTS)