18 марта, 01:53

Uber Scam?, by David Henderson

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I'm a big fan of Uber. I'm in New York City this weekend and have had great success using it. The fares, though high, have been below the cab fares and the cars don't play those horrible ads that assault you in New York's Yellow cabs. Plus I had 2 good conversations with a driver from Ghana and a driver from India who's a Muslim refugee. I had something happen 2 hours ago, though, that makes me wonder. I don't know if this is a scam: thus the question mark at the end of title. I just wonder if it is and I wonder if others have had this experience. I walked in 14 minutes to a Chinese restaurant 2 long blocks and 13 short blocks away to get there by noon when it opened. I timed it perfectly and gave the take out order. I wanted to get the food back to our hotel room while it was still hot. I didn't know how long the food would take and so I waited until it came out before I ordered an Uber. My strategy made sense, I thought, because when I got on Uber, it looked like only a 4-minute wait. So when the food came, I contacted Uber immediately and it looked like that same 4-minute wait. The fare would have been only about $6.50. A driver named Mohamad accepted. Then Uber started tracing his path and it looked as if he was moving away. That might have made sense because of the way he might have been aiming along with all the one-way streets there are. But then the estimated wait turned into 5 minutes, then 6 minutes. Then a minute or two later, it turned into 8 minutes and he was clearly driving even further away. Had I been confident that it would have been 8 minutes, I would have hung tough. But I wasn't. I knew I could walk it in 12 minutes. So I cancelled and, of course, was told that there might be a small cancellation fee since Mohamad had accepted and was on his way. That made sense to me. But now it looks, from my credit card statement, as if the fee was about $12. I'm not familiar enough with Uber to understand all the ins and outs to be sure that the $12 fee is for this and not for some other trip. It's just that there's no other trip I've taken in the last few days that would have had a fare that low. So here's what I'm wondering. Are there some Uber drivers who will accept the trip and then reconsider and look for a better fare? Then they drive away, thinking that the customer might get fed up, as I did, and cancel. Then they get both the cancellation fee and the next customer, who probably is going further. I'm asking this as a customer but also as an economist who wants markets to work well and who believes that they normally do. Is this a case where they don't work really well? Any insights from people who have used Uber a lot and have canceled at least a few times would be appreciated. Comments that are not informative or insightful will not be appreciated. (15 COMMENTS)

17 марта, 21:52

Coase and Krugman, by Scott Sumner

There were lots of good answers after my previous post. Commenters dlr (first) and then Rajat provided my preferred answer, and there were some other good options as well (Friedman, Lucas, etc.) Here I'll explain the special connection between Coase and Krugman. In 1960, Coase developed a radically new way of thinking about externalities. At the time, Pigou's interwar theory of externalities was very well established, almost unquestioned. When a person or company does something that imposes external costs on others, there is a market failure. The optimal public policy is a remedial tax, equal to the size of the external cost. Coase's alternative view was the sort of shocking "bolt from the blue" that almost never occurs in a mature science like economics. There was a famous seminar at the University of Chicago, where almost everyone went in convinced Coase was wrong, and he convinced them all, one by one. Coase's basic insight is that external costs, by themselves, are not market failures. The victim would have an incentive to bribe the entity imposing external costs. That bribe has a similar impact to an optimal tax. Thus before Coase, economists thought there was an economic rationale for government regulation of indoor smoke. After Coase, economists recognized that the owner of the property, not the government, should regulate indoor smoke. But Coase did not stop there. He also showed that when many people are harmed by externalities, there may be "transactions costs" in privately negotiating an agreement. In that case, Pigou's suggestion that a remedial tax is needed might be correct. But the real problem is not externalities, it's transactions costs. In 1998, Krugman came up with a radically different way of thinking about liquidity traps. During the interwar period, Keynes had argued that monetary policy may become largely ineffective at zero interest rates, as money and bonds become very close substitutes. He recommended government actions such as fiscal stimulus. Krugman showed that even at zero interest rates, monetary injections should be effective. That's because the liquidity trap is presumably not expected to last forever (an assumption that Krugman himself later questioned) and thus an increase in the money supply should raise prices once the liquidity trap had ended. Krugman showed that in a rational expectations model, the mere expectation of a higher future price level would tend to raise the expected long-term rate of inflation, and reduce real interest rates on long-term bonds. Thus monetary policy would continue to be effective at zero interest rates. And if real interest rates did not decline, then nominal rates would rise, which would end the liquidity trap---also making monetary policy effective. No need for activist governments engaging in fiscal stimulus But Krugman didn't stop there. He noted that (conservative) central banks might not be able to convince the public that currency injections are permanent. In that case, future expected inflation would not rise, and the monetary injections would be ineffective. Krugman argued that the real problem was not that cash and bonds are perfect substitutes at zero rates, producing a "liquidity trap", but rather that central banks might not be able to convince the public that they will allow higher inflation in the future, creating what Krugman called an "expectations trap." If there is an expectations trap, then the original Keynesian policy of fiscal stimulus might make sense, but not for the reason assumed by Keynes. This is similar to Coase's argument that corrective taxes might be called for, but not for the reason originally assumed by Pigou. But Krugman also indicated that something like a higher inflation target ("promising to be irresponsible") was a first best policy, and indeed Krugman recently cited Abe's decision to raise Japan's inflation target to 2% as an example of what he had in mind (although Krugman would probably prefer an even more aggressive target.) I'll add my own wrinkle here. In a 1999 Economic Inquiry piece I argued that the constraints of the gold standard were always lurking in the background of Keynes's thinking. When I first wrote that paper, I was not aware of Krugman's 1998 paper. But in retrospect, I was claiming that the gold standard created a sort of expectations trap, which prevented central banks from raising the expected rate of inflation. My previous post was not just intended to be a diverting puzzle. I believe that seeing these sorts of underlying similarities allows us to better understand each theory separately. Indeed being a good economist is largely a matter of seeing common underlying factors behind a lot of seemingly disparate phenomena. This sort of intuition is what puts Coase and Krugman ahead of most economists. Coase had written a paper back in 1937, pointing out how "transactions costs" help to explain why firms are big. If transactions costs did not exist, the principle/agent problem would cause films to contract out almost every single specific task they do to other smaller and more specialized firms--even to individuals. Big firms would be almost completely hollowed out. Then, 23 years later, Coase recognized that these same transactions costs explain why the private sector may have trouble negotiating solutions to complex externality problems. I can't disagree with people who pointed to Friedman and Phelp's insight that it's not high inflation that matters, but rather higher than expected inflation. That was a really important breakthrough. But the way Coase and Krugman reframed the longstanding dogma on externalities and liquidity traps seems like more of a radical intellectual shift--not just adding one derivative. And in both cases the original policy suggestion became a sort of special case, a policy that is called for when other options are not available. (6 COMMENTS)

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17 марта, 03:06

Henderson at Troy University, by David Henderson

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I'll be giving a speech at Troy University in Alabama on Tuesday, March 20. Topic: How Economists Helped End the Draft Location: Troy University, 129 Bibb Graves Hall Date: March 20 Time: 5:00 p.m. If you're an EconLog reader and want to attend, please come up and say hi before or after. If you want to see a version of the talk--I've tweaked it only a little since then--see this one I gave at Middle Tennessee State University in Murfreesboro, TN. Dan Sutter of Troy University's Johnson Center posted this short piece on the talk. (1 COMMENTS)

16 марта, 22:50

Who are we?, by Scott Sumner

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Most of all, I hope this puzzle will be fun, but I also hope it will somehow be a bit enlightening. It's a sort of "who am I?" puzzle, but with a twist: Back in the interwar period, a famous British economist modeled a problem that can occur at certain times and places. He then suggested what sort of public policies could address this problem. Many decades later, another brilliant economist saw that the early theory had misconstrued the actual nature of the problem. He wrote a paper re-conceptualizing what the problem was actually all about. Along with this new formulation came a new a new policy approach, which might not involve as much government action. However this brilliant economist did not stop there, he also recognized that this "first best" solution might also be impractical in many situations, and that the original policy proposals recommended during the interwar period might actually be appropriate in many cases, as a sort of second best option. I suppose this puzzle is not all that difficult for someone familiar with economics. But let me make it a bit more difficult by asking for two answers to the puzzle. I want the names of two modern economists who each have first-rate intuition, and who each radically transformed our understanding of a longstanding problem in the way I just described, not just one economist. Note to commenters. I'm going to make an unusual request, and ask people to hold off on naming just a single person for a day, until we give people a chance to find both names at once. So please only leave a comment if you have both names. I'd rather have the puzzle not be solved "by committee", if possible. It makes it more challenging. (11 COMMENTS)

16 марта, 20:58

Red Sparrow's tweets, by Alberto Mingardi

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I am too much of a Jennifer Lawrence's fan to actually hold a nuanced view of Red Sparrow. I thought the movie nice and fast-paced, and I thought she was glorious. I understand it is not Tinker, Tailor, Soldier, Spy but I thought it was good entertainment with a good lead actress who happens to be the most beautiful Hollywood actress of her generation. For a two hour-long movie, you know, that's enough. For this very reason I was a bit baffled by a very negative review by Armond White on National Review. Most reviews I've run into aren't positive, with some exceptions. But White also comments on the politics of the movie, pointing out that: Lawrence's Dominika Egorova (Domineering Egotist) talks with a Russian accent, but she recalls the politically naïve yet cynical American girl Camille Paglia has warned about in our jejune, neo-feminist era: This chick accepts no responsibility for her own provocative behavior (she blames the state's "whore school") while using her sexual wiles to her own advantage. Well, certainly Lawrence's Dominika Egorova is sexy and becomes strong and cynical. But I thought that the movie was quite strong on individualism, beginning with her name, and actually in Lawrence's strong character I found traces of what we may call "the spirit of Ayn Rand". Let me get you some hints without spoilering too much. Dominika is a young woman: beautiful, intelligent, hard-working. She was harmed by her colleagues' envy and needs to find a way our of her dismal predicament: something she herself despises. She is then ground down by a bureaucratic mechanism, that the movie cares to portray in historical continuity with the Soviet Union. She wonders if things in America are truly any different: if individual freedom there really comes before what is good for the government. If she cannot figure it out first hand it is not because of her sense of belonging to her home country, but because she personally cares deeply for another individual (her mother). That is what drives her in life. All in all, it seemed to me a message sounder than most movies: government can be bad to the point of making poor girls prostitutes for its needs; even good government officials sometimes make mistakes, bright beautiful girls need to learn to game the system lest they are crushed by it. But then again, it may be that Lawrence's glorious light is blinding me to the shortcomings of the movie. (2 COMMENTS)

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16 марта, 18:50

Happy Open Borders Day!, by Bryan Caplan

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Today is Open Borders Day.  To celebrate, I'm pleased to announce that All Roads Lead to Open Borders, my graphic novel with Zach Weinersmith, will be published in 2019.  For now, here's a draft page.(Click here for full-sized version). (13 COMMENTS)

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15 марта, 21:49

Me on C-SPAN, by Bryan Caplan

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My full-hour interview airs on C-SPAN this weekend... twice! #AfterWords this Saturday at 10pm and Sunday at 9pm ET economics professor Bryan Caplan @bryan_caplan argues that higher education has become more about educational credentials and less about ensuring that students are prepared with skills for the job market @PrincetonUPress pic.twitter.com/80H3zo1KF8-- BookTV on C-SPAN2 (@BookTV) March 13, 2018 (1 COMMENTS)

15 марта, 04:20

Functional capitalism, by Scott Sumner

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Singapore Airlines is majority owned by the Singapore government. Alitalia is privately owned. So which country's airline industry is better described as "capitalist", Singapore or Italy? Free market economists like myself tend to be opposed to government ownership. That's not because there's anything inherently wrong with government ownership per se, but rather because governments that own companies tend to also do other bad things, like erect barriers to entry or subsidize production. (First class US postal service is an example of both mistakes.) On the other hand, if a government does not protect its state-owned firm from competition, and does not subsidize the firm, then there's really no problem with government ownership. You still have a free market. Indeed there may even be cases where public firms can provide a service cheaper than private firms. Some claim that to be true of title insurance in Iowa, which is provided by a state-owned firm. (I don't know enough to comment.) The Singapore government does not protect Singapore Airlines from competition, and they do not subsidize the airline. They instruct it to operate like a normal firm, earning a profit and competing with other airlines. It's technically state-owned but functionally private. In contrast, Alitalia is technically private, but occasionally receives bailouts from the Italian government. Tyler Cowen recently linked to a Matt Bruenig article entitled: How Capitalist Is Singapore Really? Here's an excerpt: Then there are the state-owned enterprises, which they euphemistically call Government-linked Companies (GLCs). Through its sovereign wealth fund Temasek, the Singaporean government owns a large share (20% or more) of 20 companies (2012 figure). Together these companies make up 37% of the market capitalization of the Singaporean stock market. The state also owns a large share of 8 real estate investment trust (REIT) companies (2012 figure), which they call GLREITs. The value of the GLREITs make up 54% of the country's total REIT market. The sovereign wealth fund Temasek doesn't just own domestic assets. It also is invested broadly throughout the world, especially in other Asian countries. In March of last year, Temasek had a net portfolio value of S$275 billion, which is equal to around 62% of the country's annual GDP. To put this figure in more familiar terms, Temasek's total holdings are equivalent to if the US government built a $12.4 trillion wealth fund. Call me old-fashioned, but I don't generally associate state ownership of the means of production with capitalism. There are two issues here. One is the nature of Singapore's state-owned firms, which I'd argue are usually pretty capitalist. The second is the question of sovereign wealth funds. I'd argue that if the alternative is a fiscal regime like we see in America, Europe or Japan, then sovereign wealth funds are the lesser of evils. I'd much rather my government be a high saver that was prepared to meet the fiscal challenges of the 21st century, than one that ran chronic budget deficits and had a Social Security system that was basically a vast unfunded Ponzi scheme. Singapore is certainly not a libertarian ideal. The citizens are forced to save for their retirement and future health needs. But I see that as a lesser of evils compared to a regime where people are forced to pay taxes for the current needs of older citizens, and are given the (false) impression that these taxes are some sort of pension contribution that the government is setting aside for their future needs. The article also mentions the fact that the Singapore government owns most of the country's land. Again, that's not ideal. But it's worth noting that the Singapore government has in some ways behaved like a hyper-capitalist landowner. They've recently created more new land (proportionately) than any other country in the world. Land in Singapore is very valuable, and like any good profit-maximizer they take advantage of that fact. I don't see that being done in other areas where land is valuable (like New York and LA.) Correct me if I am wrong, but I'd guess that's because government regulations prevent new land formation in much of the coastal US. So again, in terms of land production you could argue that Singapore is one of the most functionally capitalist countries in the world. That's not to say things are perfect, I'd like to see both the US and Singapore governments privatize a large share of their vast landholdings. The article ends as follows: Singapore (and Norway, among others) shows that it is quite possible to collectively own the means of production while also using price systems to assist in the allocation of productive factors. This is what market socialists have been saying for a hundred years. If I'm right that Singapore is functionally capitalist, then this sort of "market socialism" is not likely to lead to any of the other goals that socialists may have in mind. Thus, for instance, Singapore has a rather unequal distribution of income. Companies are run for the benefit of shareholders, not workers. Singapore may not be a libertarian ideal, but it even further from being a socialist ideal. PS. The red areas show that Singapore has recently expanded by about 25%: (31 COMMENTS)

14 марта, 23:27

What About a Travel Ban to Reduce the Trade Deficit?, by Contributing Guest

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by Pierre Lemieux Countries are collections of individuals and trade no more than they eat, consume drugs, or travel. Only individuals do that. Besides the failure to understand the straight economic arguments for free trade, a methodological error often seems to underlie protectionist arguments. The error is to assume that "countries" trade. For example, consider what President Donald Trump said in defending his recent tariffs ("Trump Defends Steel and Aluminum Tariffs Threat with Attack on EU," Financial Times, March 2, 2018): "The European Union has been particularly tough on the United States," Mr Trump said. "They make it almost impossible for the United States to do business with them. And yet they send their cars and everything else ..." It looks as if "the European Union" and "the United States" are thinking and acting like two individuals who trade. The rhetorical plural ("them," "they") is not enough to dispel this impression, especially since the same impression is conveyed by countless other similar statements. The recent 2018 Trade Policy Agenda of the President makes such statements as: Countries that are committed to market-based outcomes and that are willing to provide the United States with reciprocal opportunities in their home markets will find a true friend and ally in the Trump Administration. Who are these countries? The only way to make sense of such statements is that "country" means the government of the country. It is more useful to distinguish the two concepts. Countries are collections of individuals and trade no more than they eat, consume drugs, or travel. Only individuals do that. Even in a totalitarian country like China, it is ultimately individuals who trade, with or against the consent of their government. In a supposedly free country, a fortiori, it is individuals and their private entities who trade. Of course, the current administration uses the same terminology as past ones, if only perhaps with a vengeance. One could argue that talking about countries as if they were persons is just a figure of speech and a linguistic shortcut. Personification of countries seems harmless under the pen of David Ricardo when, in his Principles of Political Economy and Taxation, he writes, speaking of Portugal (and nicely using the feminine gender for countries): Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labor of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of wines to the manufacture of cloth. For others than Ricardo, however, this sort of "poisoned language" (to use the title of a chapter in Friedrich Hayek's The Fatal Conceit) is misleading and may lead to faulty reasoning, like thinking that a country, like an individual, might "choose" to purchase less from another country, even if some individuals within the country would want to buy more. A collectivist methodology is useless because it does not help explain what happens in the social world. We have to start from individual preferences and actions. Most people--except perhaps some rulers--with a passing knowledge of the ways of the economic world understand that individuals and private entities, not countries, trade. In all times, smugglers have reminded us of this fact. So perhaps the collectivist assumption that underlies protectionism is more of the normative kind: countries should be the entities that control trade. But this amounts to attaching a normative value to the supremacy of collective choices over individual choices, which is somewhat difficult to defend if one is not a communist or a fascist. Nationalism does not change that. An example may serve to illustrate both the methodological problem and the normative judgment in considering a country as an acting entity. America does not travel to foreign countries; individual American residents do--about 35,000,000 of them a year (in 2016). And whether "America" should travel more less is either a meaningless or a liberticidal question. About 86% of the trips made abroad by American residents have "vacation/holiday" or "visiting friends/relatives" as one of their purposes. Given that Americans spent a total of $174 billion in travel and tourism expenses abroad in 2017 (data from the Bureau of Economic Analysis), a rough estimate of their leisure tourism spending is $150 billion per year (86% of $174 billion). This is where the idea of a travel ban gets interesting. The $150 billion in leisure travel expenditures by Americans accounts for 27% of the estimated U.S. trade deficit in 2017. Spending on foreign airlines, tourist accommodations, and other purchases while visiting are of course imports since they use foreign resources to produce goods and services for Americans, and they are entered as such in official trade statistics. Thus, one way to significantly reduce the trade deficit, assuming it were a worthy goal, would be to ban foreign leisure travel by Americans. Note that this would require no reduction in business travel and the sacrosanct exports, although we must realize that many leisure trips would suddenly morph into business trips, the individual raising his ugly head again. Many Americans, perhaps a majority, would not be affected simply because they do not, or rarely, travel to foreign countries. Thus, a ban on foreign leisure travel by Americans would have a potentially larger effect on the trade deficit than the $100 billion deficit reduction than the U.S. government is asking "China" to achieve ("U.S. Asks China for Plan to Reduce Trade Deficit by $100 Billion," Wall Street Journal, March 8, 2018). A foreign travel tax (or tariff) imposed to Americans by the U.S. government, if large enough, would achieve the same result. Note how a travel ban or tax works in basically the same thing as bullying "China" to exports less, for it means that foreign producers export to individual Americans less than what the latter want to buy. Preventing "America" from importing via bans or taxes (tariffs) may not be a good idea after all. The first reason is that individual Americans (or their intermediaries or private organizations) are the ones who actually import. The second reason is that a moral justification for preventing Americans to exchange with foreigners--which is what protectionism amounts to--is not easy to find. (8 COMMENTS)

14 марта, 20:14

Priors and the Death Penalty, by Bryan Caplan

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I have long favored the legalization of drugs - and the "opioid crisis" has done nothing to change my mind.  The right to do what you want with your own body is not absolute, but it sacred nonetheless.  Since I oppose any legal punishment for consenting adults who use or sell drugs, I obviously oppose the death penalty for drug offenses.  Still, I was perplexed by Adam Minter's recent piece on the failure of this maximally punitive approach.  Minter begins:Unlike in the West, where addiction has long been treated as a medical condition, Asian governments have typically viewed any drug use as a criminal issue. China, for example, has focused on imprisonment and executions since the 1950s. Others followed the same path. Starting in the 1970s, countries ranging from Singapore to Vietnam created criminal codes with low thresholds for executing traffickers, dealers and users. Yet, even as the region's drug enforcement apparatus developed, so did drug addiction. By the early 1990s, 40 years after Mao's eradication campaigns, Chinese officials were forced to concede that entire villages were once again addicted to opiates arriving from Myanmar.Rather than question their focus on harsh punishments, China and Southeast Asian nations, including Malaysia and Singapore, doubled down through the mid-2000s. Then Minter makes a series of odd claims:Yet, evidence that executions serve to deter drug use or crimes in Asia (or anywhere else) is virtually nonexistent. For example, the Chinese government reported that the number of registered Chinese drug addicts increased 6.8 percent in 2016, to 2.51 million (the government concedes such numbers are massive undercounts), up from 901,000 in 2001. The growth has been fueled by new synthetic drugs like methamphetamine, seizures of which surged 106 percent in 2016.In Singapore, 3,089 "drug abusers" were arrested in 2016 (40 percent of whom were identified as new abusers), compared with 1,127 arrested in 2006. In Malaysia, the number of newly registered drug addicts rose from 10,301 in 2012 to 22,923 in 2016. And in Indonesia, which has unapologetically executed local and foreign drug traffickers in recent years, the number of addicts increased from 3.6 million in 2011 to 5.9 million in 2015, according to the government.What's so odd here?First, Minter totally ignores common sense.  In the absence of any specific evidence, we should have extremely high confidence that credibly threatening death for X would sharply reduce X.  Why?  Because almost everyone has a strong desire to stay alive.  If you think that alcohol taxes significantly cut alcohol consumption, how can you not expect the death penalty for drugs to significantly cut drug use?  Yes, it's an empirical question.  But if you don't start with a strong Bayesian prior in favor of the efficacy of the death penalty, you lack good judgment.Second, the evidence Minter cites is utterly irrelevant.  Suppose the death penalty cut drug use by 90% at every point in time.  We could easily still see enormous shifts in drug use.  Both demand and supply move in response to many factors besides drug policy.  Indeed, you could use exactly the same specious reasoning to argue that treatment programs don't work: "If treatment works, I dare you to explain the doubling of addiction rates."  The reply is straightforward: "If we abolished treatment programs, addiction rates could grow even more."Minter then makes a slightly better argument:The most compelling evidence that executions have failed as an anti-drug strategy is the fact that many Asian governments have begun to retreat from them. The trend can take modest form, such as Singapore's 2012 decision to reduce the number of drug crimes eligible for mandatory executions, or China's quiet, decade-long effort to open methadone clinics and voluntary rehabilitation facilities.Question: If Asian governments were sharply ramping up executions, that would be "compelling evidence" that execution does deter?  Hardly.  If there's any tendency for governments to move toward more effective policies, it's weak.  Politicians often don't know what works.  Without careful social experiments, definitive answers are hard to come by.  More importantly, politicians often don't care what works.  If they seek popularity - and what leader doesn't? - they just have to pander to public opinion.  If the most effective policies horrify the public, leaders will avoid them despite their efficacy.  To quote the murderous Octavian in HBO's Rome, "Agrippa has a point. We should proceed more slowly. We do not want to appear butchers."To repeat, I'm not advocating the death penalty for drug offenses.  In fact, I consider drug prohibition to be a heinous crime against humanity.  But in the absence of overwhelming contrary evidence, we should still believe that the death penalty heavily deters drug use.  And the contrary evidence that Minter presents is underwhelming indeed. (12 COMMENTS)

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14 марта, 18:21

Reminder on Brescia Speech Today, by David Henderson

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I will be speaking at Brescia University in Owensboro, Kentucky today--Wednesday, March 14. Topic: Economic Inequality: Popular Misconceptions and Important Facts. Time: 7:00 p.m. Location: Science Building - Taylor Lecture Hall. If you make it, please come up and say hi before or after (or both). (0 COMMENTS)

14 марта, 00:14

Norway's peculiar decision, by Scott Sumner

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At a recent Brookings event, Janet Yellen discussed the possibility of adjusting the inflation target: I suppose that with the type of reasoning that led us to the 2 percent inflation target--which was partly based on estimates of how often you'd hit the zero lower bound--we probably would come out with a higher inflation target now if we were starting from scratch. But moving to a higher inflation target is a tricky business. I'm not sure that Congress would regard it as consistent with their mandate of price stability. I think the transition from a lower to a higher inflation target would be a difficult one and could succeed in unanchoring inflation expectations that I interpret as reasonably well anchored around 2 percent. I think that's exactly right. If we knew then what we know now, then the Fed would have obviously chosen a higher inflation target---high enough to prevent the zero bound problem from occurring. (That might have meant a target around 3%.) But there are costs to moving the inflation target, once it has been established, as it reduces central bank credibility. This make's Norway's recent decision especially hard to understand: Norway this month made the first changes to its framework in 17 years, lowering the inflation target to 2 percent from 2.5 percent. This brings it in line with the target of other central banks and is a reasonable step because the massive inflow of oil revenue into the economy will start abating, the government argued. It also formally enshrined that inflation targeting shall be "forward-looking" and "flexible" to contribute to "high and stable output and employment" and inserted a phrase that said the bank shall also counteract the "build-up of financial imbalances." If Norway is to change its inflation target (and I'm not sure they need to), I'd expect them to increase the rate to 3%, not cut it to 2%. Why did they do this? The comment about bringing it into line with other central banks makes no sense, partly because the ECB does not have a 2% target, nor does Australia, but more importantly because the Norwegian currency floats, so there is no reason why they should have the same target as other central banks. The oil revenue comment also confuses me. I'd expect declining oil revenue to reduce Norwegian growth. If the trend RGDP growth rate in Norway were about to slow, you'd want to raise the inflation target, not reduce it. PS. Yellen also has this to say: So it's certainly worth considering the costs and benefits, but it's not a clear, 'yes, we should have a higher target.' That takes you to other systems, like nominal GDP targeting that has some interesting advantages, or price level targeting...I think they're worth studying, debating, because this is an important issue. This caught my attention, as Bernanke has recently advocating a shift to price level targeting when the economy is at the zero bound. (2 COMMENTS)