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The Library of Economics and Liberty
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23 февраля, 02:57

A Modest Proposal for Prosecutors Who Lie, by David Henderson

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  The title is a little simplified because this post is not just about prosecutors who lie. It’s also about those who hide exculpatory evidence and get witnesses to lie. The proposal is this: Any prosecutor who does this should be charged with a crime and the penalty should be equal to the penalty that the judge has imposed on the defendant. The one exception is when the judge has imposed capital punishment. In that case, the penalty for the prosecutor should be life in prison without the possibility of parole. This should be so even if it can be shown that the defendant was guilty. Prosecutors today have little fear of going to prison for a long time for lying, withholding exculpatory evidence, or getting witnesses to lie. If they knew that they had some reasonable probability of getting caught and severely penalized, they would clean up their acts. Will there be downsides? Sure. What if, for example, the jury finds that the prosecutor accidentally withheld evidence? But there’s a solution for that. Go back to the old mens rea criterion. The prosecutor has to be shown to have had criminal intent. Will there nevertheless be cases where a jury finds criminal intent where there wasn’t? Yes. It will probably be rare and one thing that will make it rare is that prosecutors will be on the ball to make sure any exculpatory evidence, for example, is revealed and to make sure that they don’t coach witnesses to lie. If you’re tempted to argue that this is a bad idea–and I’m sure some people will–before you write your argument, see if it would apply also to the problems with our current system where innocent people often face harsh punishment. HT2 Thomas Nagle for previous discussions. (2 COMMENTS)

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21 февраля, 22:48

It’s blackmail all the way down, by Scott Sumner

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David Henderson recently raised doubts about whether blackmail should be illegal, and Robin Hanson advocated legalizing blackmail. David cited the argument that activities that are generally legal (such as gossip), should not become illegal merely because money changes hands. Robin cited the argument that blackmail is a way of enforcing society’s norms, and that the threat of blackmail might deter bad behavior. Tyler Cowen argued against legalizing blackmail, as did I.  One of Robin’s commenters pointed out that one of society’s norms is “blackmail is wrong.” The following story is intended to be a humorous way of exposing the internal contradictions of blackmail: Let’s suppose that after years of effort, Robin gets a conservative Virginia legislature to legalize blackmail.  Robin argues that this will help to enforce society’s norms against bad behavior.  One of Robin’s colleagues is a grouchy 75-year old man.  He overhears gossip that a female GMU student from a good family is engaging in prostitution on the side, to earn money for her living expenses. The old guy decides to try to enforce society’s norm against prostitution by blackmailing the young woman. Robin encourages him to stop, arguing that society’s attitudes against prostitution are based on the idea that an activity that is OK when no money changes hands becomes immoral when turned into a business transaction.  He worries that the act of blackmailing a student for engaging in an activity tainted by money will tend to undermine the argument for legalizing blackmail (another activity widely viewed as immoral when it is turned into a commercial transaction.)  Alas, his pleas are not successful, as the old guy is mean and spiteful. Soon after, Robin’s colleague Tyler hears about what’s going on.  Tyler opposed the legalization of blackmail and sees this example as a way to discredit the policy. But he is too polite to raise the issue publicly as he doesn’t want to embarrass the young woman. Things change when Tyler’s twin brother (Tyrone) gets wind of what’s going on and hatches a devious plan to get revenge, to give the old man a taste of his medicine.  Tyrone begins blackmailing the old professor, threatening to expose the old guy’s blackmailing of the young coed.  Tyrone reasons that he’s merely enforcing society’s norms against blackmail, particularly when it’s a mean old man blackmailing a vulnerable young woman.  Even though the GOP-dominated Virginia legislature legalized blackmail, among the old professor’s colleagues at GMU there remains a widespread view that blackmail is a despicable activity. OK, that’s just a fanciful story.  But if blackmail is useful because it enforces society’s norms, what are we to make of the fact that one of society’s norms is that many activities become immoral as soon as money is introduced into the equation (as with prostitution)?  And the norm that blackmail itself is immoral? Great literature and great films often turn people violating society’s norms into sympathetic characters, especially when they are ground down by “the machine”.  I suspect that the almost universal public opposition to legalizing blackmail reflects society’s view (subconscious to be sure) that enforcing these norms (especially for non-criminal activities) requires a “light touch”, and that turning shaming into a highly profitable industry will do more harm than good. It will turn society into a mean, backstabbing culture.  The people hurt most will be sensitive good people who made a mistake, not callous gang members who don’t care if others think they are evil. Dueling was outlawed in the 19th century, after society realized that this ostensibly “voluntary” activity was not actually voluntary at all, and that the harm done exceeded the very real benefit of discouraging men from engaging in personal slights that annoyed other men. Yes, men were free to decline a duel (at a cost to their reputation), and people today are free to not pay blackmailers.  But I’d rather live in a world where people don’t have to make those choices. (26 COMMENTS)

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21 февраля, 20:00

Who’s Afraid of Budget Deficits?, by David Henderson

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  In a provocative article in Foreign Affairs titled “Who’s Afraid of Budget Deficits?” Jason Furman and Lawrence H. Summers argue that we should not worry much about the federal government’s large and growing budget deficits.  While they admit that politicians and policymakers “shouldn’t ignore fiscal constraints entirely,” they say that they “should focus on urgent social problems, not deficits.” And throughout the piece, they assume, for every single problem they address, that the solution is more spending. It’s not surprising that they don’t worry much about deficits. Furman and Summers aren’t just rank and file economists. Furman, an economics professor at Harvard University’s Kennedy School, was the chairman of former President Barack Obama’s Council of Economic Advisers. Summers, who is president emeritus of Harvard, was the Treasury Secretary under former President Clinton and head of the National Economic Council under former President Obama. I know Summers from when we were both economists with President Reagan’s Council of Economic Advisers and I know Furman from his work. These are not, to put it mildly, dumb guys. And if you dismiss them as such, you make a big mistake. It’s important to look at their argument. I’ve studied their argument, and I find it unpersuasive in two respects: (1) their main case, which is that we shouldn’t worry much about deficits and (2) their subsidiary point, which is that we need at least the amount of government spending we have now and should be ready and willing to increase government spending. This is from my latest Defining Ideas article, “Who’s Afraid of Budget Deficits? I Am,” February 20, 2019. That middle paragraph is there because I sometimes get comments on Facebook and elsewhere to the effect that we can ignore these guys because they’re idiots. They’re not. And I had to read their Foreign Affairs piece 4 times before making my own judgment about it. (3 COMMENTS)

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21 февраля, 19:36

Apology for a Trainwreck, by Bryan Caplan

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The ethnographies of Oscar Lewis paint a bleak picture of lower-class life.  The thousands of pages of published interviews in books like Five Families, The Children of Sanchez, Four Men, and La Vida show a relentless trainwreck of impulsive sex, unplanned pregnancy, child neglect, child abuse, drug addiction, drunkenness, degenerate gambling, intra-family violence, near-random violence, parasitism, and gross financial mismanagement.    The picture is so bleak that I struggle to believe Lewis’ subjects are representative of any human subculture.  But if his subjects are representative, it’s hard to imagine how a thoughtful person could look upon their “culture of poverty” with anything but horror. Yet in the rare moments where Lewis stops letting his subjects speak for themselves, he is far from horrified.  From the Introduction* to La Vida: A Puerto Rican Family in the Culture of Poverty – San Juan and New York: Middle-class people — and this would certainly include most social scientists — tend to concentrate on the negative aspects of the culture of poverty. They tend to associate negative valences to such traits as present-time orientation and concrete versus abstract orientation. I do not intend to idealize or romanticize the culture of poverty. As someone has said, “It is easier to praise poverty than to live in it”; yet some of the positive aspects that may flow from these traits must not be overlooked. Living in the present may develop a capacity for spontaneity, for the enjoyment of the sensual, for the indulgence of impulse, which is often blunted in the middle-class, future-oriented man. Perhaps it is this reality of the moment that the existentialist writers are so desperately trying to recapture but that the culture of poverty experiences as natural, everyday phenomena. The frequent use of violence certainly provides a ready outlet for hostility so that people in the culture of poverty suffer less from repression than does the middle class. Yes, Lewis even finds something positive to say about “the frequent use of violence.”  Sure, the victim gets a savage beating, often leading in his narratives to permanent disability.  But on the other hand, the perpetrator eases his “repression”!  Frankly, if social scientists are going to “overlook” anything, this dubious “positive aspect” of violent crime should be near the top of the list. Why would Lewis makes such bizarre claims?  The only plausible explanation is the painful psychological tension between his scrupulous empiricism and his fervent Marxism. A typical Marxist would have searched the world’s slums for heroes to interview, but Lewis had too much integrity for such trickery.  An apolitical ethnographer would have followed Lewis’ methods, but drawn the obvious conclusions that (a) his subjects’ culture is plain evil, (b) since the subjects refuse many opportunities to exit this culture, they’re evil too.  The most sympathetic thing you can reasonably say is, “I feel so sorry for the innocent children in these families.” Intellectually, however, Lewis was stuck between a rock and a hard place.  So he showed his readers the trainwreck in gory detail, then tried to convince us that trainwrecks have “positive aspects” that “must not be overlooked.”  A crazy route, to be sure.  But the day you admit that personal irresponsibility is the leading cause of adult poverty – and parental irresponsibility the leading cause of child poverty – you have left the church of Marxism. * You can read the Introduction online; go here, then scroll down to Chapter 7. (5 COMMENTS)

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21 февраля, 14:00

An Argument for a Marriage Tariff, by Pierre Lemieux

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Find the error. A Wall Street Journal story (“As China Trade Talks Resume, Trump Pushes an Ambitious Agenda,” February 18, 2019) states matter-of-factly: “As trade negotiations with China resume this week, the Trump administration is racing to strike a deal that will result in long-term reforms—and prove that tariffs are an effective battering ram to open markets around the world.” Once you realize that tariffs hurt mostly consumers in the country whose imports they hit, the last part of the statement does not make much sense. There is no serious reason to protect “our national producers.” If trade tariffs, which amount to taking domestic consumers hostage in order to open foreign markets for domestic producers, are defensible, why not decree tariffs on other foreigners’ activities with domestic effects. Consider the following example. Some states in the world practically forbid their citizens to emigrate or travel without official permission, rendering virtually impossible for an American citizen to bring one of them to America to marry her. (Yes, sure, we can switch gender. The same happens to an American woman who wants to marry, say, a North Korean man. The case would appear even stronger as it would be a matter of helping “our national women” marry whom they want in the world.) Following the logic of protectionism, the US government could forbid American citizens from marrying foreigners whose state imposes a similar domestic prohibition, in the hope that this would be “an effective ram to open marriage markets around the world.” It would amount to taking all Americans hostages in order to help some of them by protecting the rights of foreigners. Tariffs are a sort of partial ban. A very high tariff (called “prohibitive tariff” in trade theory) amounts to a total ban. A more “liberal” US government would not forbid Americans to marry foreigners. Instead, it could impose a tax of $10,000 to Americans who want to do it. A $1,000,000 tax would amount to a foreign marriage ban for nearly all Americans. A 100-billion-dollar tax would be more egalitarian and hit all Americans. Doesn’t the idea of a retaliatory tariff against foreign marriages provide a reductio ad absurdum of any retaliatory trade tariff? Instead of a retaliatory marriage tariff, it may be argued that the state has a duty to rescue any foreign woman who consensually wants to marry one of its citizens but is prevented to do so by her own government (just as the state would be deemed to have a duty to rescue any foreigner barred by his government to trade). The rescuing state would be defending individual liberty internationally. The problem is that this solution is a recipe for continuous war. Such institutionalized imperialism, especially (but not only) if pursued by foreign tyrants, would make it very difficult for a liberal state to maintain individual liberty within its own borders. War is the health of the state. Hence the liberal argument for the Westphalian state, protected against foreign intervention. (1 COMMENTS)

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20 февраля, 22:14

Wilbur Hamilton Ross, by David Henderson

  Payday for Public Choice. Because it’s [the tariffs on Chinese goods] spread over thousands and thousands of products, nobody’s going to actually notice it at the end of the day. This quote is from an interview of Commerce Secretary Wilbur Ross on CNBC’s Squawk Box last September. And now here’s Alexander Hamilton in April 1782: No mode [other than tariffs] can be so convenient as a source of revenue to the United States. It is agreed that imposts on trade, when not immoderate, or improperly laid, is one of the most eligible species of taxation. They fall in a great measure upon articles not of absolute necessity, and being partly transferred to the price of the commodity, are so far imperceptibly paid by the consumer. What’s interesting, beyond their assertion that consumers won’t notice the slightly higher prices, is that both Hamilton and Ross use this an an argument for tariffs. We economists who apply Public Choice to understand government policy often point out that one reason tariffs are so popular is that they benefit a concentrated group (domestic producers) at the expense of a dispersed group (consumers.) It’s striking to see how upfront both Hamilton and Ross are at admitting that that is one of their arguments for tariffs. (9 COMMENTS)

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20 февраля, 21:45

Another big success for libertarianism, by Scott Sumner

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Pot legalization is an issue that has been largely ignored by Democrats and Republicans, but championed by libertarians. And now it’s sweeping the country, as more and more states jump onboard. I often get newsletters from various libertarian groups, and I’ve noticed that asset forfeiture laws are another big concern. Police who pull someone over on the highway can simply take the driver’s money, on suspicion that the funds were used in some sort of crime.  No crime need be proved.  It’s highway robbery by police. In other cases, a minor conviction results in the forfeiture of a valuable piece of property, worth far more than the maximum fine imposed for the crime. For instance, an Indiana man had his $42,000 SUV seized by the government after being arrested for a minor drug offense with a maximum penalty of $10,000. Asset forfeiture process is a completely lawless system, which relies on the discretion of law enforcement officials. They do not have to prove anything in order to seize one’s property. While Democrats and Republicans ignored this issue, libertarians fought hard to eliminate the practice.  Now the Supreme Court has struck a blow against unrestrained asset forfeiture: WASHINGTON — Siding with a small time drug offender in Indiana whose $42,000 Land Rover was seized by law enforcement officials, the Supreme Court on Wednesday ruled that the Constitution places limits on civil forfeiture laws that allow states and localities to take and keep private property used to commit crimes. Civil forfeiture is a popular way to raise revenue, and its use has been the subject of widespread criticism across the political spectrum. The revenue aspect of asset forfeiture is particularly corrupt.  Police seize assets to gains revenue for their own use, to help fund more lavish police budgets.  This is something you expect in third world countries, not advanced democracies. Occupational licensing, organ transplant markets, and zoning reform are other areas that are ignored by the two big parties.  Let’s see if we can begin to make progress on more parts of the libertarian agenda. PS.  It was a unanimous 9-0 decision, which is one reason why I’m skeptical of arguments that focus on “liberal” and “conservative” justices. All that matters is whether they are good judges or bad judges. (5 COMMENTS)

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20 февраля, 20:45

Technological Unemployment and Work, by Bryan Caplan

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The state of technology and the unemployment rate look nothing like each other.  What about the state of technology and the labor force participation rate (LFP)? Well, LFP doesn’t have massive spikes like the unemployment rate.  Since the state of technology doesn’t have massive spikes either, that eliminates one big discrepancy. Otherwise, however, LFP and technology have almost nothing in common.  Technological progress is nonstop, but LFP rose for five decades, then started falling. Disaggregating a bit: 1. LFP was roughly flat from 1948-1965, a period of legendary technological progress. 2. LFP rose non-stop from 1965-1999, a period of noted technological progress. 3. LFP fell almost non-stop from 2000-2015, another period of noted technological progress. 4. LFP has been flat ever since, as progress from earlier in the 21st-century continues unabated. If technology doesn’t explain these ups, downs, and lulls, what does?  I see every reason to accept the orthodox view that demographics are the most important factor, by far.  The main reason for the rise: Far more women now want to work outside the home than in 1948, so far more do.  The main reason for the fall: aging.  Why the hump?  There’s an upper bound on female LFP, because there’s a solid core of women who want to stay home and take care of their kids.  We hit that bound a couple decades ago, so the effects of aging finally became obvious. Yes, there’s also been a decline in prime-age male participation.  You could blame technology, but it makes a lot more sense to blame the mating market.  As female income rises, women understandably place less weight on men’s financial success.  As a result, attractive men no longer need a job to date, and unattractive men need more than a low-status job to date.  Culture amplifies these effect: The fewer men work, the lower the shame of idleness – and the lower the shame of dating an idle man. Is the mating market story speculative?  Perhaps.  But unlike the technological story, at least it doesn’t directly contradict the facts. (2 COMMENTS)

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20 февраля, 01:30

Van Doren on Payday Loans, by David Henderson

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  The Consumer Financial Protection Bureau (CFPB) recently proposed the elimination of new payday lending rules created under the Obama Administration and imposed in 2017. Payday lenders are frequently vilified—a recent New York Times editorial declared that the CFPB “betrayed financially vulnerable Americans last week by proposing to gut rules…that shield borrowers from predatory loans”—but recent evidence indicates that the predatory costs of payday loans may be nonexistent and the benefits are real and measurable. Thus, the original regulatory restrictions were unnecessary. Most Americans take access to credit for granted, but many lower-income Americans have difficulty meeting the requirements to get a credit card or take out collateralized loans. With minimal approval requirements that are easier to meet—often just a bank account statement, a pay stub, and a photo ID—payday lenders offer short-term, uncollateralized loans. These loans are advances against a future paycheck, typically about $100-$500 per loan, and customers usually owe a fee of around $15 per $100 borrowed for two weeks. These are the opening two paragraphs from Peter Van Doren’s excellent post today, “The CFPB and Payday Lending Regulations,” at the Cato Institute’s Cato at Liberty site. The whole thing, which is not long, is worth reading. (Disclosure: Van Doren is the editor of Regulation, which I write for regularly) He lays out the evidence that payday lending is competitive. He also points out that a large component of the payday lending fee is not properly seen as interest but is, rather, a fixed charge for the transaction. In that sense it’s not much different from the ATM charge you pay when you use an ATM affiliated with a bank other than your own. When I taught my students about interest rates and pointed out that usury laws are price ceilings (and they had seen earlier in the course the problems caused by price ceilings on apartments and on gasoline), they got it. But usually someone in class pointed out that they had had enlistees who had got payday loans to buy the latest video game or Xbox. (Recall that the majority of my students were U.S. military officers.) The student raising the point usually objected to allowing payday loans or, at a minimum, advocated tight limits on the interest rates that could be charged. I got caught off guard by this the first time it came up. But the next time I was ready. I asked if any of them had ever paid a $3 fee to use an ATM not affiliated with a bank. There were fewer takers than I expected because many of them, being in the military, banked with USAA and, if I recall correctly, USAA allowed them to use other banks’ ATMs without paying fees. Still, there were a few takers. I pointed out that if they had paid $3 to get, say, $40 (that used to be my typical draw from an ATM) instead of waiting a day to get $40 from their own bank’s ATM, they were paying a daily interest rate of $3/$40, which is 7.5 percent per day. This, I pointed out, was way higher than the 15 percent for two weeks that is typical of payday loans. I think one of the hardest things to do, but something that is absolutely required if you want to be a good economist is to put yourself in the shoes of someone who differs from you and ask yourself how he or she sees the world. One of my students shook his head in disapproval at the idea of a soldier or sailor using a payday loan to be able to play a game a little earlier. I could imagine the young soldier or sailor shaking his head in disapproval at the officer who pays a fee at an ATM so he can buy a snack or a toy for his kid. By the way, good for the Consumer Financial Protection Bureau for doing this. Typically a good way to protect consumers is to let them engage in transactions that they see as benefiting them. (6 COMMENTS)

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19 февраля, 21:06

Deadlock and Partisan Bitterness, by Bryan Caplan

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Why does American politics seem so deadlocked?  The media mostly focuses on issues where Democrats and Republicans refuse to compromise because they strongly disagree: immigration, guns, health care.  But American politics often seems deadlocked even when both parties agree.  For example, supermajorities of both parties want to protect DREAMers, but they’ve never reached an agreement to do so.  How is this possible? 1. Transactions costs.  Hammering out a deal is hard work, so many mutually beneficial deals don’t happen. Critique: Economists routinely appeal to these alleged costs, but how high can they possibly be?  Seriously, why should it take more than a single day for the DREAM Act to become a law?  Vote, vote, sign, done. 2. The hold-out problem.  Suppose we agree that X is good, but you want X a lot more than I do.  In this situation, it makes sense for me to demand some “compensation” from you even though we basically agree. Critique: This might make sense for a year or two.  But if we’ve failed to reach an agreement after many years of negotiation, you’d expect both sides to moderate their demands to cut their losses.  Yes, they could conceivably be investing in their reputations for intransigence to secure favorable terms in the future, but does anyone seriously expect to see the day when one party finally submits to the other? 3. Insincerity.  For example, perhaps Republicans only claim to want to protect DREAMers in order to seem nice and reasonable.  In fact, however, they never genuinely favored the DREAM Act in the first place. Critique: This is often plausible, but it’s hard to see it as a general explanation.  Politicians have clear incentive to lie about their goals, but why would average citizens bother to lie in anonymous polls? 4. Partisan bitterness.  The two main parties intensely dislike each other.  Like a quarrelsome couple, they could find something to fight about at a fancy restaurant on Valentine’s Day.  As a result, the two parties have trouble cooperating procedurally even when they agree substantively. Critique: This is my preferred story.  What I wrote about divorce a decade ago cleanly explains political deadlock as well: Unfortunately, the Coasean argument overlooks a pretty obvious fact: Couples contemplating a divorce often hate, loathe, and despise each other. We’ve all heard of stories of divorcing couples deliberately destroying objects of sentimental value to each other. Indeed, many couples in this situation wallow in petty spite; they can’t stop bad-mouthing each other to anyone who will listen. With these facts firmly in mind, how confident are you that Coase’s zero transactions costs assumption is remotely true? At risk of sounding Austrian, transactions costs are subjective: Bargaining with your mortal enemy hurts. If this story seems grim, I should add that bitter politics has one major advantage over bitter divorce.  Namely: Partisan bitterness throws much-needed sand into the gears of the state.  Given public opinion, amicable government is likely to be big government.  As long as political antipathy is too shallow to cause civil war, both libertarians and pragmatists should welcome it.  Will Rogers once mused, “Be thankful we’re not getting all the government we’re paying for.”  I’d add, “Be thankful we’re not even getting all the government both parties support.” P.S. I’m well-aware that deadlock locks existing bad policies in place, too.  But I see little political support for repealing such policies, and broad political support for adding new bad policies.  Tragic, but that’s the world we live in.   (4 COMMENTS)

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19 февраля, 02:50

High-powered money (100 years of stability), by Scott Sumner

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When I studied economics, the term ‘high-powered money’ was often used synonymously with the monetary base, which consists of currency plus bank deposits at the Fed. This asset was called “high-powered” for three reasons: 1. It is determined exogenously by the monetary authority. 2. It is non-interest-bearing. 3. It is the medium of account. As a result of these three factors, high-powered money is a sort of “hot potato”. When the Fed injects new high-powered money into the economy for reasons other than responding to an increased demand for liquidity, the public tries to get rid of excess cash balances by spending them. Prices and NGDP rise until the public is again content to hold the newly enlarged supply of high-powered money. Today, bank deposits at the Fed earn interest, and thus are no longer high-powered money. Only currency remains high-powered. $100 bills comprise about 80% of US high-powered money The stock of high-powered money has risen by roughly 265 times over the past 100 years, from about $6.45 billion in early 1919 to just over $1.7 trillion today. NGDP has risen by almost the same proportion, leaving the high-powered money to NGDP ratio at roughly 8.2%, even after 100 years! People seem to want to hold about the same fraction of income in the form of high-powered money as they did 100 years a go. As a result, you might say that the Fed caused NGDP to grow 265-fold by increasing the stock of high-powered money 265-fold. Actually, it’s a bit more complicated than that. The demand for high-powered money had fallen to 5.6% of GDP right before the Great Recession, and the fortuitous coincidence of almost no change in the ratio over 100 years is actually due to two offsetting factors. Technological progress reduced the demand for high-powered money over time, and very low interest rates plus increased foreign demand for US currency recently boosted the demand for high-powered money. Currency demand rose after rates fell close to zero Even so, the Fed determines the long run path of NGDP via adjustments in the stock of high-powered money. (RGDP is up about 16.7 fold over the past 100 years, the rest is inflation.) I’m hesitant to talk about MMT theory, because its proponents always insist that critics get it wrong. But unless I’m mistaken, MMTers seem to assume that money creation is an important source of funding for federal spending. George Selgin has a post criticizing MMT, and cites this passage from Stephanie Kelton, Andres Bernal, and Greg Carlock, who are MMT proponents: As a monopoly supplier of U.S. currency with full financial sovereignty, the federal government is not like a household or even a business. When Congress authorizes spending, it sets off a sequence of actions. Federal agencies, such as the Department of Defense or Department of Energy, enter into contracts and begin spending. As the checks go out, the government’s bank ― the Federal Reserve ― clears the payments by crediting the seller’s bank account with digital dollars. In other words, Congress can pass any budget it chooses, and our government already pays for everything by creating new money. This is very misleading.  Nick Rowe has a post where he points out that money creation provides very little revenue for advanced economies, citing a rough estimate of 0.25% of GDP for Canada.  If we assume 4% trend growth in NGDP in the US, then an 8% currency ratio will lead to steady-state revenue of roughly 0.32% of GDP, ignoring costs of producing money.  That’s trivial compared to total federal spending, which is over 20% of GDP.  Studies of the “Laffer Curve” for seignorage tend to produce maximum inflation tax revenue estimates on the order of a few percent of GDP, assuming a revenue maximizing inflation rate of several hundred percent per year. Obviously those sorts of inflation rates are politically infeasible in the US, and hence as a first approximation it’s best to assume that money creation is not a significant source of funds to pay for government spending.  Programs need to be funded with either taxes or debt, and of course debt represents future tax liabilities. The only possible exception is if the interest rate on public debt will stay persistently below the economic growth rate (as has been the case in recent years), in which case a government could earn a one-time revenue windfall by supplying the public with the extra Treasury debt it seems to crave.  But it would be foolish to rely on that one-time gain to pay for expensive permanent programs such as “Medicare for all”. In any case, whatever one’s views on the “dynamic inefficiency” argument for more federal debt, it’s misleading to claim that money creation provides a significant source of funds for government spending.  Perhaps the confusion comes from the huge QE programs of the past decade, which looked to many people like a case of “monetizing the debt”. While bank reserves used to be high-powered money, today they are not (except for vault cash, of course.)  In fact, QE largely exchanged one form of federal debt (T-bonds) for another (bank reserves.)  QE does not pay for a significant fraction of government spending; for the most part it simply changes the maturity of the public debt. PS.  The Nick Rowe post I linked to is the best explanation of MMT that I have encountered.  I also recommend the George Selgin post linked to above, as well as Paul Krugman’s critique: [T]here are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds. The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility. Now, I am not predicting hyperinflation for the US  . . .  But the MMT people are just wrong in believing that the only question you need to ask about the budget deficit is whether it supplies the right amount of aggregate demand; financeability matters too, even with fiat money. PPS.  My early NGDP data comes from Balke and Gordon’s data set (actually GNP).  My high-powered money data is from FRED, and from Friedman and Schwartz. HT:  Pat Horan   (17 COMMENTS)

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18 февраля, 21:40

Including the Renegade, by Bryan Caplan

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In the last six months, I’ve found myself stuck in two separate Sermons on Inclusion.  These were public events.  Neither was branded as left-wing.  Both, however, gave the floor to speakers who explained the supreme value of making everyone feel included in the community. In each case, my mid-sermon reaction was the same: “I don’t think I’ve ever before felt so excluded in all my life.” Why would I react so negatively?  It’s not because I disagree with the one-sentence summary of the sermons.  Sure, be friendly to people.  Make them feel welcome.  It’s common decency.  So what’s the problem? I’m tempted to blame the glaring hypocrisy.  It was obvious that the speakers had zero interest in making Republicans, conservatives, macho males, traditional Christians, veterans, or economists feel included.  In fact, the Sermons on Inclusion were full of thinly-veiled accusations against members of these groups. Yet on reflection, glaring hypocrisy is too ubiquitous in life to explain why I personally felt so excluded by the Sermons on Inclusion. The real reason I felt so excluded was that the preachers of both Sermons on Inclusion spoke as if human beings naturally value their cultural heritage.  Frankly, I usually don’t.  I don’t value my religious heritage.  My mother was Catholic, and I was raised Catholic.  But I deem the religion false and don’t care about it.  I don’t value my ethnic heritage.  My mother was Irish, my father was Jewish, but neither identity matters to me.  I don’t support Ireland or Israel… or any other country for that matter.  My parents raised me to be an American nationalist; my schools taught me about the wonders of democracy.  But in all honesty, the only institution I really believe in is business. So what am I?  A renegade.  And I’m not alone.  Lots of people turn their backs on the religion of their birth.  Lots of people never feel – or lose interest in – their ethnic heritage.  Lots of people dissent from “their” political culture.  Cultural loyalists may call them traitors, sell-outs, self-haters, or gusanos.  Yet despite our cosmic diversity, we renegades have one thing in common: We refuse to be ruled by the circumstances of our birth.  And any sincere Sermon on Inclusion ought to acknowledge our existence and outlook. Unfortunately, this omission is hard to correct, because one of the main goals of Sermons on Inclusion is to foster group pride… and the existence of renegades is an affront to group pride.  You can’t favorably discuss the assimilated Irish without tacitly snubbing people who cherish their Irish identity.  You can’t praise people who leave Orthodox Judaism without tacitly snubbing Orthodox Jews.  Et cetera. But don’t Sermons on Inclusion lionize some renegades, like anti-war veterans or the transgendered?  Sure.  But since the the Sermons barely acknowledge the existence of these renegades’ groups of origin, there’s little tension.  It’s easy to welcome renegades from group X if your default is to exclude typical members of group X. Are efforts to promote inclusion therefore self-defeating?  Not if you’re careful, because actions speak louder than words.  As I’ve argued before, the best way to make people feel included is just to be friendly and welcoming.  Sermons divide us.  Common decency brings us together. (11 COMMENTS)