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The Library of Economics and Liberty
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15 декабря, 00:11

Bob Murphy Conversation with David Henderson, by David Henderson

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I had a blast doing this. Here is the link. Now the highlights. The times listed are roughly right. 3:30 to 5:00: My bio 5:00 to 15:00: How I got hooked on economics, especially the role of Harold Demsetz 15:30 to 18:00: Advice Milton Friedman gave 19-year-old me. 18:25: My change in plans after my brother committed suicide. 19:40: My ah-hah moment when I realized that I could really understand some technical economics. 21:15: Demsetz, “Remind me who you are.” 23:00: “No one has wanted me in my life.” 24:00: Tullock is so Tullock. 25:00: Buchanan on the “UCLA disease.” 27:40: How I almost ended my shot at grad school. 29:25: Bob Murphy on “ethnic cleansing” at NYU (humor). 30:00: Axel Leijonhufvud’s depressing orientation talk. 31:20: Demsetz’s no-nonsense approach. 32:00: “Seatbelt Sam” Peltzman. 37:35: Alchian’s class and the UCLA disease. 41:20: Bill Baumol. 44:40: How I got to be a summer intern at Nixon’s Council of Economic Advisers (CEA). 46:30: My shock in June 1973 when the Old Executive Office Building flew the huge Soviet flag. 48:00: Staying away from price controls. 49:30: Acting senior economist—at age 22. 50:00: My argument with Justice Department’s chief economist, George Hay. 52:50: Niskanen not sold on me for CEA senior economist. 53:20: I said we bought a house; I wish. I should have said we rented a house. 53:40: Feldstein invites me not to come. 54:40: My gotchas on Marty Feldstein’s work are better than those of Ted Kennedy’s staff. 56:00: Boning up on health economics. 57:00: Marty Feldstein’s meeting with whole CEA. 57:20: My big risk to become health economist. 59:00: My perception of Larry Summers’s and Paul Krugman’s views of UCLA. 1:00:00: Honesty is the best policy. 1:03:30: 1970s price controls on oil. 1:08:45: Krugman, Summers famous inflation memo. 1:10:30: Murphy’s and my inflation bet. 1:14:00: My motives in betting. 1:16:40: My Mercatus study of Canada’s 1990s/early 2000s budget cuts. 1:21:50: Post-WWII budget cuts: no depression. 1:24:00: How I got writing on war. 1:26:30: My 1990 Wall Street Journal op/ed on why the U.S. government shouldn’t got to war for oil. (Edited by David Frum.) 1:27:00: Started writing for antiwar.com. 1:28:50: The quality of discussions with my students at the Naval Postgraduate School. 1:29:30: “I didn’t invade Iraq; maybe some of you did.” 1:33:00: “I think it’s something called the First Amendment.” 1:35:00:  Q&A with Leon Panetta. 1:38:40: The background to my book The Joy of Freedom: An Economist’s Odyssey. 1:39:50: How Phil Magness came to his libertarian views. 1:41:00: The background to Henderson and Hooper, Making Great Decisions in Business and Life. 1:42:30: Computing present values with an implicit real interest rate of zero.         (0 COMMENTS)

14 декабря, 21:18

Just blow it all up?, by Scott Sumner

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In addition to the split between the left and the right, there’s also a split between people who favor incremental change and those who want to “blow it all up.”  In 2016, the British voted in a referendum in favor of exiting the EU.  The referendum did not have the force of law, but the government (quite reasonably) was reluctant to ignore the results of this poll.  After all, why even have a referendum if you plan to ignore it? The supporters of the Brexit campaign promised that there would be no “hard Brexit”, as the EU would want to negotiate free trade with the UK.  But they also promised that the UK would make a substantial break, with a much greater degree of freedom than before.  In other words, it would not be merely a symbolic break where (like Norway) the UK still adheres to almost all the EU rules.  The government of Theresa May found it impossible to negotiate an agreement with the EU that achieved all these objectives.  The EU demanded substantial concessions (adhering to many EU rules) in exchange for the UK continuing to have relatively free access to the EU market. Thus May negotiated a compromise that pleases neither the “leave” nor the “remain” supporters.  As of now, it clearly does not have enough support in Parliament, although that might change.  Most people in Parliament actually favored keeping Britain in the EU, and there are not enough votes for the “hard Brexit” option, a clean break.  Many fear that a hard Brexit would be extremely disruptive to the UK economy, which has close trading relations with the EU. So how should Parliament vote?  The subtitle of a recent Economist article suggests that there is radical uncertainty as to the impact of a no vote on Theresa May’s negotiated agreement with the EU: The consequences of saying no to Theresa May’s Brexit deal If Parliament rejects the prime minister’s deal next week, the result could be no deal—or no Brexit That sort of uncertainty is actually rather unusual, and reflects a change in our politics.  Most votes are between option A and B, where it’s pretty clear which option will advance each agenda.  Not in this case.  The odds markets confirm this, showing a significant probability of any number of possible outcomes, including an entirely new referendum.  Lurking in the background is the possibility of a new election, which (far left) Labour might win.  Making things even more complicated, it’s not clear what Labour would do. In retrospect, many believe that complicated legislative problems should not be solved via referenda.  Alternatively, the UK government should have said from the beginning that after the new treaty was negotiated, the British public would have another referendum where they’d choose between the negotiated agreement and the status quo.  This is because referenda are suited to deal with binary choices, and there seemed to be no majority in the UK in favor of any of the various possibilities.  Thus in 2016, those favoring a hard Brexit and those favoring a soft Brexit both voted to leave the EU, but neither group was large enough to later put together a compromise that would attract 50% of the public, or 50% of the MPs. While this dilemma is rather unusual, the exact same thing is now occurring in the US.  Donald Trump ran for President promising to (metaphorically) “blow up” the existing way of doing things.  He was unable to get rid of Obamacare, but did have enough power to renegotiate Nafta.  Once in office, he seemed to realize that Nafta was actually a pretty good deal, as the new version is not much different from the old version.  But he’s also a sort of prisoner of his populist rhetoric, and doesn’t want to stick with the old Nafta. The problem here is that it’s not at all clear that there are enough votes in Congress to pass the new Nafta agreement.  Then what?  Trump has promised to blow up the old Nafta if Congress rejects his proposal.  Similarly, Theresa May has suggested that a hard Brexit would lead to economic chaos, and the UK government has done little to plan for a hard Brexit.  (The don’t even have customs facilities in place in Dover, and there’d be massive lines for trucks from France.)  She claims that there is no plausible alternative to her negotiated agreement with the EU.  Some think this is bluffing, and that there might be a softer Brexit option, such as Norway’s arrangement.  This is complicated by the weak position of the Conservative government, and by Labour’s unwillingness to give the Tories a win.  Labour would rather see the Conservatives tear each other apart, opening the door to a new Labour government. (And I won’t even try to explain the complicated Northern Ireland problem.) And what about President Trump?  Is the promise to blow up the old Nafta a bluff?  Perhaps if Congress rejected his plan he’d actually keep the old Nafta in place, and add a few “national defense” tariffs on Mexico and Canada, as a face saving gesture.  After all, completely blowing up Nafta might cause a severe disruption in US supply chains, and perhaps a stock market slump. I’m actually not sure how bad it would be if Trump ended Nafta, as US tariffs tend to be pretty low, even on goods from countries outside Nafta.  But it would certainly be quite controversial, and perhaps not what Trump wants as he’s in delicate negotiations with China.  The point here is that just as with the UK politicians contemplating their vote on Brexit, it’s not clear whether Congressional supporters of the old Nafta should reject Trump’s proposal, or vote for it. Our politics is increasingly full of this sort of brinksmanship.  Trump has told Congress that he’ll shut down the government if they don’t approve his wall, a tactic that has become increasingly popular in recent decades.  Furthermore, this new brinksmanship seems to be a global phenomenon.  Here’s The Economist describing a dramatic change in Australia’s (conservative) Liberal Party. In politics, says one senior party member, you used to make progress through compromise. “Now, it’s, ‘If you don’t give me something I want, I’ll blow the place up.’” Perhaps Mr Abbott and his like really do have a death wish. Perhaps they fancy that defeat by the Labor Party will have a wonderfully purgative effect, clearing the wets out of the Liberal Party and allowing their faction to enjoy unadulterated rule. What is nearly certain is that a grand old party faces a whipping next year. The question is whether it can survive at all. Politics has never been polite, but it seems to be getting even rougher. PS.  I’m agnostic on both the Brexit and Nafta votes, for the reasons explained above.  That’s very unusual for someone as opinionated as me. PPS.  Here’s a picture of Theresa May along with Boris Johnson, a somewhat Trumpian politician who would like to take her place as leader of the Conservatives. (6 COMMENTS)

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14 декабря, 20:04

Read “The Culture of Poverty: An Ideological Analysis”, by Bryan Caplan

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Next week I’m going to blog a piece that is at once lucid, engaging, insightful, and flabbergasting: David Harvey and Michael Reeds “The Culture of Poverty: An Ideological Analysis.” (Sociological Perspectives, 1996)  As far as I can tell, there’s only a gated version, but if you want to peek inside the intra-left debate on “culture of poverty” research, this is the place to start. (3 COMMENTS)

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13 декабря, 23:44

Haiti > Cuba, by David Henderson

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  Tiny Sunrise Airways runs 12 direct flights weekly from the Cuban cities of Havana, Camaguey and Santiago to Port-au-Prince. Cubans interviewed in the market said they spend about $700 on airfare, food and lodging and another $700 on merchandise, which they resell at a markup high enough to make several hundred dollars profit per trip. Most of those interviewed said they made near-monthly trips, generating more than $2,000 in extra income a month in a country where annual state salaries are less than $400. This is from Michael Weissenstein, “Cubans fly around the world hunting shopping bargains,” The News & Observer, December 11, 2018. HT2 Tyler Cowen. Read the whole article, which is not long. The article and especially these 2 paragraphs above say so much: 1. First, Haitians are almost certainly much better off than Cubans. That shouldn’t be surprising given that Cubans are still suffering under Communism, now with a few nods to slightly freer markets. But it’s striking nevertheless. 2. Second, this inefficient way of getting goods to the Cuban markets implies that very high barriers to imports are making Cubans much worse off than otherwise. Spending $700 plus time to arbitrage a relatively small number of goods is very expensive. My gut estimate is that ending all trade barriers would almost immediately double per capita income in Cuba. 3. Third, and my commentary: I hope Fidel Castro is burning in hell. (11 COMMENTS)

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13 декабря, 20:03

Lower-Class Families and Evolutionary Psychology, by Bryan Caplan

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A few more thoughts on Rodman’s Lower-Class Families: 1. There is little sign that the welfare state has anything to do with ubiquitous impulsive sexual behavior in Coconut Village.  Even the neediest single moms appears to receive little or no support from the government. 2. So how do the neediest single moms cope?  Rodman: What does the woman do, however, when she has children by a man and he leaves her?  The separation may “solve” the man’s financial problem if he stops supporting the woman and her children, or if he contributes less to their support after his departure.  It is on this point that we can explain the child-shifting pattern in Coconut Village.  Since a woman is often left alone with her children, the child-shifting pattern provides her with a solution to her problem.  She cannot both care and mind her children, and so she turns their care over to a female relative while she takes on the job of minding them financially. 3. Rodman never mentions evolutionary psychology, but the residents of Coconut Village are almost explicitly Darwinian (or, more precisely, Dawkinsian).  Males avow extremely high sex drives and women demand financial support for their offspring.  Men promise the world early on, but quickly renege.  Both men and women cheat – men with anyone who will have them, women with men who are more charming or generous.  The calypso songs of the island (in a 20-page appendix!) are a memetic testament to evolutionary psychology. 4. But how could the impulsive society that Rodman describes evolve in the first place?  Male libido is predictable, but why do women accept such plainly unreliable partners?  The best story is probably the “sexy son hypothesis.”  In Coconut Village, this amounts to: Emotional susceptibility to charming men leads women to have charming sons, which ultimately gives women extra grandchildren. 5. Does this mean that Rodman is ultimately right to claim that lower-class values are socially functional?  Not at all.  Evolutionary psychology doesn’t claim that human psychology benefits humanity – or any sizable subset thereof.  It only claims that human psychology benefits individual human’s selfish genes. 6. Doesn’t evolutionary psychology mitigate individual blame?  It is hard to see how it would.  Long before Darwin, human beings have been aware that humans often have wicked impulses – and affirmed our duty not to act on these impulses.  How does discovering the biological origin of these impulses in any way undermine our duty to control them? (10 COMMENTS)

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12 декабря, 23:09

Regulation watch, by Scott Sumner

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One often hears about the Trump administration’s deregulation push. But how real is it? Is the number of regulations rising or falling?  One Mercatus Center study found that growth in federal regulations slowed during 2017: As the saying goes, talk is cheap. What do the numbers—the numerous metrics of the stock and flow of regulation—tell us about the Trump administration’s first year of regulatory reform? For one, the growth of regulation has clearly slowed. During President Trump’s first year, federal regulations grew by about 0.65 percent, less than the growth rate of any other president’s first year in office since our data begin in 1970. This rate of growth is also less than one-third of the long-term annual growth rate for federal regulations, which, from 1970 to 2016, was about 2.1 percent. Slower growth is a good thing, but it doesn’t represent “deregulation”. There are many areas where regulation is still increasing: Under new regulations the Treasury Department put in place Wednesday, foreign investments that result in a non-controlling equity stake in U.S. biotechs would be subject to review by the Committee on Foreign Investment into the United States, or CFIUS. The expanded rules also cover 26 other critical fields, including guided missile technology and nuclear electric power generation. . . . Broadening CFIUS’ scope could have serious implications for early-stage U.S. biotechs, which have seen an influx of venture money from abroad. Through the first eight months of 2018, cash from Chinese and other Asian investors made up nearly half of venture capital investments flowing into U.S. biotechs, according to data from Pitchbook cited by Reuters. That figure is up sharply from just two years ago, when Chinese and Asian investment made up a little more than a tenth of deal flow into U.S. biotechs. Here’s another example: The Trump administration is using the country’s vast and nearly opaque immigration bureaucracy to constrict the flow of foreign workers into the United States by throwing up new roadblocks to limit legal arrivals. The government is denying more work visas, asking applicants to provide additional information and delaying approvals more frequently than just a year earlier. Hospitals, hotels, technology companies and other businesses say they are now struggling to fill jobs with the foreign workers they need. And another: The bill includes a provision to help stop the flow of illicit opioids into the country by mail, especially synthetic fentanyl and its analogs, which are fueling the rise in overdose deaths. The provision was pushed by Senator Rob Portman, Republican of Ohio, whose state has been especially hammered by the opioid epidemic.  It will require the United States Postal Service to start collecting information on international mail shipments, just as private carriers like Fed Ex and DHL already have to do. By the end of this year, the Postal Service will need to provide the name and address of the sender and the contents of the package, as described by the sender, for at least 70 percent of all international packages, including all of those from China. It will have to provide the information on all such shipments by the end of 2020.   The Postal Service could block or destroy shipments for which the information is not provided. Foreign investment, immigration paperwork and mail delivery.  Three very different types of regulation, with one thing in common.  The US government seems increasingly suspicious of the rest of the world.  Look for the US to continue taking regulatory steps to close itself off from the rest of the world.  I expect us to remain much more open than places like Cuba and North Korea, but less so than places like Canada and Australia. Meanwhile, I’m increasingly suspicious of claims that we are in a deregulatory environment.  Environmental regulations have recently been pulled back, but many other types of regulations are clearly increasing. Slightly off topic. David Henderson has a recent post that quotes Larry Summers as follows: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. David makes a number of excellent points in response to Summers, but I’d like to add one more.  When large, mainstream international organizations try to help struggling developing countries with economic reforms, they generally encourage those countries to reduce subsidies and open their economies to trade.  So Summers has it backwards; fewer Chinese subsidies and more openness would have led to faster growth, not slower. (9 COMMENTS)

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12 декабря, 22:14

Is the “Culture of Poverty” Functional?, by Bryan Caplan

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At last, I’m starting my next major project: Poverty: Who To Blame.  As usual, my first step is assembling and reading several tall stacks of research. One of these stacks is the “cultural of poverty” literature, and one of the classics of this literature is Hyman Rodman’s Lower-Class Families: The Culture of Poverty in Negro Trinidad (Oxford University Press, 1971).  Rodman provides a detailed ethnography of impoverished Coconut Village (location name changed to protect subjects’ anonymity).  While Rodman runs through numerous social angles, the most glaring feature of this subculture is extremely short-sighted sexual behavior.  Courtships are brief, marriage is rare, breakups are common, cheating is endemic, and contraception almost unknown.  As a result, few children grow up in homes with a reliable provider and a reliable caretaker.  Kids can really only count on their mother’s support – if that. One way a mother has of signifying paternity is through the assignment of the father’s title, or surname, to the child… The reaction of the reputed father, however, is the most important factor, for, in effect, he holds the power of veto.  If he is living [cohabitating] or married he has come to know his wife well and is probably convinced of her fidelity.  If he is friending [casually sleeping with] with the girl, he has visited her at irregular intervals to see whether he could “bounce up” somebody else that she was seeing.  If he is satisfied that the woman has not been friending with anyone else, and that the child is his own, he will ordinarily acknowledge the child and contribute to its support, for “who disown it, and know the child is yours, is wrong, is bad.” There will also be some social pressure upon the man to support the child, particularly if the girl is known as a quiet, respectable girl who does not run around.  But if there is any element of doubt in the man’s mind, he can disown the child and not contribute to its support, and these social pressures will not usually be able to force him to own his child.  Moreover, even if he believes that the child is his own, if he does not want to support the child he will disown it, and usually with impunity, unless the girl should bring him to court for the maintenance of the child. [which very rarely happens, and does little good in any case] The most arresting claim in Rodman’s work, however, is that sexual behavior in Coconut Village (and, he claims, similar subcultures around the world) is in fact socially functional: There are many observers who are quick to focus upon illegitimate births, non-legal marriages, female-headed households, and deserting fathers as the major problems of the lower class… My own intention is to avoid a moral stance and to describe the situation as objectively as possible… Others terms with pejorative connotations are avoided (and new terms such as “marital-shifting” and “child-shifting” have been used) in order to prevent middle-class moral judgments from creeping in.  The result, as the reader will see in the theoretical chapters, is that family patterns which are frequently referred to as problems of the lower class are perhaps better seem as cultural solutions of the lower class to other, more basic problems. This seems like an awfully tall order.  How on Earth is impulsive sexual behavior supposed to be a “cultural solution” for anyone – much less people in dire poverty?  Rodman’s response is underwhelming: The man’s role as worker-earning lies at the center of an explanation of lower-class family relationships in Trinidad.  The man is expected to work and to earn for his family… Unfortunately, the lower-class man is involved in much unemployment, underemployment, poorly paid employment, and unskilled employment.  Because of these handicaps in his occupational role he is frequently unable to fulfill his provider role… The consequences for the man are particularly far-reaching when damage is done to him in this crucial joint role.  He loses status, esteem, and income power, and this influences his position in the community and the family.  He is held in low esteem by the members of his own family when he is unable to fulfill their expectations of him as a provider.  As a result, he often seeks gratification and relationships outside his family.  This may be a factor in explaining the strong peer relations that develop within the lower-class community.  Male peers who are in similar circumstances are able to develop relationships through which it is possible to gain gratification.  Similarly, in extramarital relationships a man may have sufficient resources available in order to provide adequately for another woman, if even only for a short period of time. And that’s pretty much it!  You might think that the difficulty of supporting a family would be a good reason to delay fatherhood, but no.  To Rodman’s mind, it’s a good reason to spend resources your kids desperately need drinking with your buddies and courting new girlfriends.  While many men will see the appeal, this hardly shows their behavior is a “cultural solution to basic problems of the lower class.”  Above all, how could anyone imagine that this is a “cultural solution” for mothers or children? Rodman closes Lower-Class Families with scorn for the straightforward interpretation of his own research: It must be remembered that words like “promiscuity,” “illegitimacy,” and “desertion” are not part of the lower-class vocabulary, and that it is misleading to describe lower-class behavior in this way.  These words have middle-class meanings, imply middle-class judgments, and should not be used to describe lower-class behavior – unless, of course, our intention is to judge this behavior in a middle-class manner in order to bolster a sagging middle-class ego. Reply: The absence of these terms from “lower-class vocabulary” credibly explains why the people of Coconut Village are lower-class in the first place.  If they adopted middle-class norms, they wouldn’t become rich overnight.  But over time, delayed gratification would sharply raise their standard of living – especially for mothers and children.  While Rodman inveighs against the “middle-class ego,” the root cause of the misery he describes is rather the inflated lower-class ego.  In any walk of life, it is wisdom for less successful people to emulate more successful people.  This is true in sports, games, school, jobs, and life itself.  Only foolish pride says otherwise.   (27 COMMENTS)

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12 декабря, 20:20

Henderson versus Leon Panetta on the Long War, by David Henderson

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I posted in 2011 about my question to Defense Secretary Leon Panetta in a public forum and his response. I was telling Bob Murphy, who interviewed me for his podcast, about it  and found, with a few keystrokes, the audio/video. For my question and his response, go to 43:41. (1 COMMENTS)

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12 декабря, 08:36

What is the United States?, by David Henderson

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In “Can anything hold back China’s economy?” Larry Summers makes a number of good points. By the way, his implicit answer to the question he raises in the title seems to be “No.” Along the way, though, he writes as if the United States has one mind rather than over 300 million minds. Good point #1: At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent. By the way, when he writes 1 percent, he clearly means 1 percentage point. It is very easy to imagine China’s growth rate being altered by 1 percent, which is trivial. Good point #2: Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year. Here it’s also clear that by “0.1 percent” Larry means 0.1 percentage point. The United States as one mind: Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict? Let’s break down the above quote and consider each sentence or clause. Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? What is the United States? It’s a land mass with over 325 million people living on it. The odds are that most readers of this are among that 325 million. Can you imagine it? I can. The rest of the paragraph raises good questions and I sense that Larry and I have the same answers. Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? He could. Would he, or she? I don’t know. Would it matter? If Larry’s right, it will happen anyway. And I bet he’s right. While it might be unacceptable to the United States to be so greatly surpassed in economic scale, There’s that “United States” thing again. I bet it’s acceptable to lots of Americans. I gave a talk on globalization in Maryland to the 55 newly chosen U.S. Navy Admirals in 2010. It was kind of their one-week boot camp. I said to them that I don’t care if China’s wealth quadruples as long as our wealth doubles. Many of them resisted but, except for their concerns about increasing Chinese dominance in the world, had no other argument. And even on the dominance issue, the main Admiral who argued quickly admitted that his concern was Chinese dominance in China’s part of the world. I pointed out that we had this great barrier that would make it hard for the Chinese to invade us, namely the Pacific Ocean. None of them argued against that. Their argument came down to their desire for the United States government to dominate the world. does it have the means to stop it? Probably not. I think Larry and I agree on this. Can China be held down without inviting conflict? Probably not. Larry seems to think so too. When I read people talking about what “United States” thinks, I remember an old Bastiat quote, but when I Google it, I find that I’m the only one who used it. So either it’s Bastiat’s, or it’s my mentor Clancy Smith’s, or it’s someone else’s, or it’s mine. Here’s the quote: Bring society to lunch and we’ll talk about it. In this context: Bring the United States to lunch and we’ll talk about it. HT2 Mark Thoma. (9 COMMENTS)

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12 декабря, 01:19

Bitcoin is not a bubble, by Scott Sumner

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Over the past few years, I’ve noticed that people tend to predict that Bitcoin is a bubble, and then later suggest that a subsequent price drop shows that it was a bubble. Thus lots of pundits said Bitcoin was a bubble when its price was at $30. Then when it was at $300, even more suggested that it was a bubble. Each time the price plunges they say “I told you so.”  Now the price of Bitcoin is over $3300, and even more people are saying it was a bubble.  Noah Smith has a new piece in Bloomberg: Yep, Bitcoin Was a Bubble. And It Popped. His main piece of evidence is that the price rose sharply and then fell sharply.  But that sort of price pattern also occurs in 100% efficient markets that are highly volatile because the fundamental value of the asset is hard to ascertain.  And if there ever was an asset with a value that is difficult to ascertain, it’s Bitcoin.  I have no clue as to what Bitcoin should be worth, and I doubt anyone else does either. Bubble theories are only true if they are useful, and they are not useful.  The people who said it was a bubble at $30 were implicitly giving you advice not to buy.  Ditto for those who said it was a bubble at $300.  This advice was exceedingly non-useful; in fact if you followed the advice of bubble proponents you missed out on the opportunity to earn a massive profit investing in Bitcoin.  That’s why I don’t follow the advice of bubble theorists; it’s not useful.  BTW, I don’t own Bitcoin for unrelated reason; I prefer index stock (or bond) funds. In any efficient asset market with an extremely volatile price, the current value of the asset will usually be far below the historical maximum price.  That’s equally true if bubbles don’t exist.  BTW, I define a bubble as a price that is clearly too high relative to fundamentals, and thus an asset with a poor expected return, based on rational analysis.  In fairness, Noah Smith defines it differently: Formally, an asset bubble is just a rapid rise and abrupt crash in prices. In the real world, the vast majority of times where people speak of bubbles they are using my definition, assuming market irrationality.  And it’s clear that while Smith’s definition of bubbles does not explicitly endorse market irrationality, he thinks they provide pretty strong evidence for that hypothesis: Defenders of the efficient-market theory argue that these price movements are based on changes in investor’s beliefs about an asset’s true value. But it’s hard to identify a reason why any rational investor would have so abruptly revised her assessment of the long-term earnings power of companies in 1929, or the long-term viability of dot-com startups in 2000, or the long-term value of housing in 2007. Actually there is very good reason why investors might have revised their expectations for future earnings in late 1929, we were entering the Great Depression.  But his point is valid for the 1987 stock crash. Speaking of efficient markets, there’s another nail in the coffin of anti-EMH theories.  When I started blogging in early 2009, people pointed me to all sorts “anomalies”, which they believed show that markets are not efficient.  I’ve done many posts explaining how those theories have failed to do well in the period since I became aware of them.  Recently I learned of the failure of another anti-EMH theory that was provided to me back in early 2009—value stocks as a good investment: Just to be clear, I understand that value stocks had an amazing run for quite a long while.  So did Bitcoin.  My point is that anti-EMH theories are not useful, because by the time you start trying to take advantage of them they are likely to stop working.  If that were not true then mutual funds based on highly robust anti-EMH theories would outperform index funds. Market’s are amazingly efficient, and you’d be wise to base your life decisions on that assumption.  For instance, if someone insists that his investment fund consistently offers really high returns, year after year, and the returns seem uncorrelated with the broader market, that should raise a red flag. Otherwise you might find that the investment manager made off with your money. In contrast, the SEC does not believe in the EMH, and ignored warnings about a fund with implausible returns, year after year. (20 COMMENTS)

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11 декабря, 17:25

A Conservative Confession, by Bryan Caplan

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Few psychological results are as well-grounded as hedonic adaptation.  Human beings often have strong short-run reactions to even mild stimuli.  An ice cream cone can put a huge grin on our faces.  Missing a red light can make us scream with rage.  In the long-run, however, human beings’ emotional reactions to even extreme stimuli soften to a shocking degree.  If you won millions in the lottery, the thrill would soon fade.  If your girlfriend dumped you, the pain of that would soon fade, too.  Hedonic adaptation isn’t perfect, but it is a mighty psychological force. I’m weird in many ways, but as far as I can tell, my hedonic adaptation is quite normal.  Indeed, my only visible abnormality is self-awareness.  I know that I’m going to hedonically adapt to most good and bad life events, so I place little stock in life events.  And I get impatient with people who refuse to do the same. So what?  Well, all this leads to an uncomfortable epiphany.  Intellectually, I’m convinced that even liberal, democratic societies are deeply unjust.  Logically, for example, the analogy between Jim Crow and immigration restrictions seems apt.  But psychologically speaking, I can still get used to this injustice.  Indeed, I’ve long since done so. So what politically aggravates me?  Change in the wrong direction.  Though I do my best to regulate my own emotions, I fall short of perfect Stoicism. The upshot: Even though my political views are deeply unconservative, the honest truth is that if existing justices and injustices were locked in place for ever, I would personally be happier.  When the world stops changing, it’s easy to accept the world as it is. What does this justify?  Nothing, of course.  But don’t say that I only feel this way because my life is fine.  Plenty of people with far more than me are filled with rage.  Plenty of people with vastly less than me live relaxed, care-free lives.  Why?  Epicurus elegantly explained it millennia ago: What inspires positive and negative emotion is not so much our situation, as the gap between our situation and our expectations.  The lower your standards, the better you’ll feel. And that is my conservative confession. (13 COMMENTS)

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11 декабря, 14:00

Brits Could Have a Brexit Cake and Eat It Too, by Pierre Lemieux

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In an essay on “The Great Brexit Breakdown” (Wall Street Journal, December 7, 2018), Gerard Baker quotes the director of a London-based think-tank: “You can have national sovereignty—and that’s fine. Or you can have economic integration—and that’s fine. But you can’t have both,” says Mr. Grant. This is true if “national sovereignty” means that the national government has the right to control its subjects’ decisions to become integrated to the world economy, that is, to import to from or exporting to other countries. In other words, the dilemma is true if “you” refers to a very controlling national ruler. Otherwise, it is not. To see this, imagine that “national sovereignty” means something completely different from its accepted definition, something closer to Anthony’s de Jasay’s “capitalist state” than to the authoritarian state. De Jasay’s capitalist state is a state whose only function is to prevent other states from taking over the country and oppressing its customers (citizens or residents). Perhaps such a state could even assume the quasi-contractual production of other public goods and services, as in James Buchanan’s contractarian theory, but it would need to be strictly limited. For our purpose, it suffices to imagine that Britain’s post-Brexit state does not claim to determine how its citizens will “integrate” or not, and with whom. (My formulation assumes that Scotland and Northern Ireland would secede following Brexit; if you don’t agree, just substitute “Britain” with “the United Kingdom.”) Then “you,” British citizen, could have both national sovereignty and economic integration—if you individually want that. What I have described is as simple as it is ignored in the generally collectivist perspective of public debates. It is called unilateral free trade. (I have blogged a number of times on this topic here.) Under this regime, any British resident would have the right, as recognized by his own government, to establish (nearly) any relation he wants with a resident of the European Union (or other countries), whether it is import, export, marriage, investment, etc., provided that his  counterparty is willing and allowed to conclude the agreement. The term “allowed” must be emphasized. A British resident might want, for example, to export something to a E.U. resident who is prohibited by the E.U. government from importing it—or from importing it without paying a tax (a tariff) that ruins the deal. This would be most unfortunate, but it is more a problem for the E.U. resident, whose liberty is infringed, than for the British resident, who could try to export elsewhere. Moreover, since the European Union’s imports must be equal to its exports—or else E.U. residents will be flooded by pounds sterling that they will want to invest in Britain—British residents will be able to export much more than stiff-lip continental mercantilists would like. It is true that this argument does not solve the problem of the free movement of people, which many Brits and Europeans value in the current European Union. But perhaps the British government could also give the example in this area, by allowing reasonable movement of foreigners on British soil. “Reasonable” means that the declaration of freedom to import goods, services, and capital–which is the definition of unilateral free trade–could include some liberal restrictions on immigration. As in the case of unilateral free trade, liberty would arguably be more contagious than tyranny. At least we have some reasons to hope so. So the Brits could have Brexit and eat it too, in the sense that a non-authoritarian “national sovereignty” would be maintained and they would be free to individually integrate with Europeans. There is no such thing as a free lunch, so what would be the price? The price of this sort of Brexit cake would be a decrease in state power: the European Union’s government would lose power and the British government would not fill the vacuum. This price would be paid those who like to rule and those who count on the rulers to exploit others on their behalf. Although British libertarians would like this solution, many others, probably most others, would not. There is some evidence that individuals with authoritarian values were much more likely to vote Leave than Remain. An interesting report by Kirby Swales of NatCen, Understanding the Leave Vote, concludes: People identified as ‘authoritarian’ were significantly more likely to vote Leave than those identified as ‘libertarian’, 66% compared with 18% respectively (see Figure 9). I am grateful to Mark Brady for reminding me that one may disagree with the way “authoritarian” and “libertarian” are defined (see p. 28). Yet, it seems to me that many if not most of the questions (from the standard British Social Attitudes survey) that served to define the two terms “authoritarian” and “libertarian” are indicative of what we usually mean by them. It also seems to me that much anecdotical evidence suggests that, if many libertarians favor Brexit, authoritarian bigots outnumber them by far. Many Brexiters hope that European regulations and controls, currently integrated into U.K. law, will be maintained, with a nativist vengeance. Stephen Filder of the Wall Street Journal (“Brexit Upends British Political System,” December 10, 2018) observes: [Brexit] also attracts people on the left of the main opposition Labour Party, who see the EU as shoring up corporate capitalism and constraining nationalization. Most Brexiters certainly have no clue about unilateral free trade, which they would probably instinctively abhor. They don’t want to have their cake and eat it too, or have no idea how to do that. (12 COMMENTS)