There are two different ways one might use economics to analyze political activism. (Well, more than two, but in this post I’ll just be talking about two of them.) First, what do I mean when I speak of political activism? I mean things like attending rallies or protests, signing petitions, voting in elections, frequently advocating for and attempting to persuade people of some particular view or in favor of some kind of political policy, things of that nature.  One way to think of activism is to view it as a form of production. In this model, the activist is engaging in activism in order to produce some kind of output. Thus, activists with a grievance over the justice system are protesting in the streets, signing petitions, voting, and raising arguments in an attempt to produce a better justice system. Environmental activists engage in these activities in order to produce the outcome of better environmental health, however one may define that, and so on. When seen as a form of production, we can say that activism seeks to ensure or improve the production of public goods. In the environmental case, for example, improved air quality would be a public good – it is nonrival and nonexcludable.  The second way to view activism is not as a form of production, but as a form of consumption. What does it mean to be a consumer of activism? It means the activist engages in activism in order to enjoy some private benefits. These benefits include things like feeling a sense of community and belonging with fellow activists, acquiring social status, and a sense of purpose and meaning. While activism as production is oriented around the production of public goods, activism as consumption is about attaining private goods. When engaged in as a form of consumption, the wider results of activism are externalities. Just as education can be both a form of human capital accumulation and a form of social signaling, activism can be both a form of production and a form of consumption. Any given activist can be motivated by either, or by both to varying degrees. But each form of activism has very different implications for what we should expect. When activism is viewed as a form of production, we would expect the activist to be deeply informed about the subject – environmental science, criminal justice, or whatever else it may be. They would have well-defined end goals – a clear point where one could say “mission accomplished” and upon completing that mission, the activism would cease. The activist would have a careful eye on how their activities are moving things closer to or away from their desired goal. This would motivate the activist to engage in self-scrutiny and course correction if an approach seems to be ineffective or counterproductive. When activism is engaged in as a form of consumption, none of those above conditions need apply. Since the activist is seeking personal psychological and emotional satisfaction, as well as social esteem, there is no particular need to be deeply informed about the topic. We would expect to see people who both passionately protest about some issue while simultaneously being unable to answer even the most basic questions on that same issue. Nor will the activist be able to clearly identify and define what the desired outcome is, and how they will know it’s been achieved, in anything but the vaguest and most indefinable ways. Rather than saying “mission accomplished” at any point, the activist would constantly move the goalpost. How effectively activism achieves its stated goals will also not come under scrutiny by the activist, nor will new approaches be taken if a particular mode of activism seems to be ineffective or actively counterproductive. Instead of focusing on the issues that are most pressing and using methods that are the most effective, the activist will be motivated by whatever issues are most trendy, or make them feel the best. Their activism will be centered on activities that send the strongest signal and raise their social status, rather than on what effectively achieves the stated end. Activism as production has a number of features that make it potentially socially beneficial in a way activism as consumption lacks. The course-correction methods we would expect to find in activism as production will of course be imperfect, but they will at least help the movement tend in a direction that leads to the production or improvement of some public good. But activism as consumption lacks these mechanisms, so it’s only by sheer chance that the externalities of this consumption will be positive rather than negative. And there is a higher prior probability for the externalities to be negative – there are more ways to make things worse than to make things better, so activities taken that lack methods of evaluation and correction are far more likely to do harm than good.  It seems to me that the vast majority of political activism today is the consumption of a private good with high negative externalities, with relatively little being a productive activity that genuinely contributes to the creation or improvement of some public good. Those who treat activism and political engagement as a consumption good are best described from a line of T. S. Eliot’s play The Cocktail Party: Half the harm that is done in this world is due to people who want to feel important. They don’t mean to do harm – but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves. (0 COMMENTS)

  He’s probably wrong on medicine. Ray Kurzweil writes: After working in the field [of AI] for 61 years—longer than anyone else alive—I am gratified to see ai at the heart of global conversation. Yet most commentary misses how large language models like Chatgpt and Gemini fit into an even larger story. ai is about to make the leap from revolutionising just the digital world to transforming the physical world as well. This will bring countless benefits, but three areas have especially profound implications: energy, manufacturing and medicine. This is from, “Ray Kurzweil on how AI will transform the physical world,” The Economist, June 17, 2024. (gated) Kurzweil makes his case well. Another excerpt: By contrast, AI can rapidly sift through billions of chemistries in simulation, and is already driving innovations in both photovoltaics and batteries. This is poised to accelerate dramatically. In all of history until November 2023, humans had discovered about 20,000 stable inorganic compounds for use across all technologies. Then, Google’s gnome AI discovered far more, increasing that figure overnight to 421,000. Yet this barely scratches the surface of materials-science applications. Once vastly smarter AGI [artificial general intelligence] finds fully optimal materials, photovoltaic megaprojects will become viable and solar energy can be so abundant as to be almost free. Energy abundance enables another revolution: in manufacturing. The costs of almost all goods— from food and clothing to electronics and cars— come largely from a few common factors such as energy, labour (including cognitive labour like r&d and design) and raw materials. AI is on course to vastly lower all these costs. Where he falls short is on medicine. It’s not that he doesn’t make a good case that in a relatively unregulated market, AI could easily have huge positive effects on the kinds of drugs that we put in our bodies. It’s that he seems unaware of the immense power that the Food and Drug Administration has over what drugs we will be allowed to have. He writes: Much more laboratory research is needed to populate larger simulations accurately, but the roadmap is clear. Next, AI will simulate protein complexes, then organelles, cells, tissues, organs and—eventually—the whole body. This will ultimately replace today’s clinical trials, which are expensive, risky, slow and statistically underpowered. Even in a phase-3 trial, there’s probably not one single subject who matches you on every relevant factor of genetics, lifestyle, comorbidities, drug interactions and disease variation. Digital trials will let us tailor medicines to each individual patient. The potential is breathtaking: to cure not just diseases like cancer and Alzheimer’s, but the harmful effects of ageing itself. This will happen only if the FDA backs off in a substantial way. Let’s hope, but don’t let hope overrule painful learning from experience.   (0 COMMENTS)

For years, the advanced economies have been lecturing poorer countries as to what they should do to develop their economies. Often called the “Washington Consensus”, we’ve been telling developing countries that they are poor because they engage in too many industrial policies such as high tariffs and subsidies. They need to liberalize, to move in a free market direction. Don’t be like Argentina, be like Singapore.A recent article by Scott Lincicome points out that it’s now the advanced economies that are adopting these anti-growth policies: I suppose you could argue that we’ve changed our minds about industrial policies.  But we are still telling developing countries like China to reduce trade barriers and subsidies for manufacturers. PS.  This comment in The Economist caught my eye: The Economist, using data from the Manifesto Project, a research group, examined the ratio of favourable to unfavourable discussions of free enterprise in the manifestos of political parties in 35 Western countries from 1975 to 2021, the most recent year available (see chart 1). We used a five-year-moving average and excluded parties that won less than 5% of the vote. In the 1990s deregulation, privatisation, unfettered trade and other policies that bring joy to the hearts of businessmen were praised almost twice as often as they were criticised. Now politicians are more likely to trash these ideas than celebrate them. (0 COMMENTS)

It is a relatively uncontroversial result, confirmed by a number of econometric studies, that economic freedom has a positive effect on incomes (GDP per capita). An econometric study to appear in the European Journal of Political Economy, “Revisiting the Relationship Between Economic Freedom and Development to Account for Statistical Deception by Autocratic Regimes,” argues that the relationship is biased downward by dictatorial regimes because their GDP figures are overestimated. Such regimes restrict economic freedom and have an interest in hiding the consequences from their subjects. Moreover, the constraints a dictatorial regime faces are much reduced by the absence of a free press and of periodical elections that could remove him. The authors of the paper are Vincent Geloso, an assistant professor of economics at George Mason University, and two Ph.D. candidates at Middle Tennessee State University, Sean Alvarez and Macy Scheck. Vincent Geloso is a young professor and mounting star who has published economic studies of great interest in many areas. The authors measure economic freedom mainly with the Fraser Institute’s Economic Freedom of the World index. As for estimating the gap between officially reported GDP figures and the true ones, they adjust the former by using the nighttime light intensity observed by satellites (following the research of economist Luis Martinez). The idea is straightforward: there should be a correlation between a country’s average wealth (proxied by GDP per capita) and its night lighting; the poorer a country, the darker you expect it to be at night. Pictures of the extreme cases of North Korea and South Korea are one case in point. Geloso et al. use data of more than 110 countries over two decades. By comparing the coefficients representing the impact of economic freedom on GDP and growth in the equations using both reported GDP and adjusted GDP, they obtain an estimate of how the lies of dictatorial regimes falsely boost reported prosperity. Quoting from the conclusion of the accepted version of their article: For income levels between 1992 and 2013, we find that the true effect of economic freedom is between 1.1 and 1.62 times larger than estimations based on manipulated GDP numbers. … we do find signs that the association between income growth and changes in economic freedom is being modestly understated. Our results are consistent with findings that dictatorships are generally unable to sustain high levels of economic development and that they are not noticeably better at securing faster economic growth. These very plausible results, I suggest, raise two related questions. First, falsifying GDP figures while keeping them minimally credible is not as easy as it seems. When the figures are provided to international organizations such as the World Bank, the false numbers need to be consistent and appear to respect the demanding and internationally recognized methodology of national accounting. Second, why doesn’t the World Bank audit national accounts data more carefully? I suspect the answer is that, like the International Monetary Fund and other intergovernmental organizations, the World Bank is dependent on its member governments and the latter’s politicians. In other words, I hypothesize that intergovernmental organizations are too political and their bureaucracies of economists not independent enough. (0 COMMENTS)

Government is largely the art of whacking your knees with a baseball bat, handing you a Band Aid, and asking you to remember the Band Aid next polling day. Minnesota – a reliable source – provides an example.  In March, Minneapolis City Council issued an ordinance establishing minimum pay rates for rideshare drivers.  Lyft announced that it would cease services in the city and Uber that it would withdraw from the entire Twin Cities metro. Local media reported that alternative services were waiting to fill the gap. But, as the days rolled by, they kept waiting.  The Minnesota Reformer reported: …nearly two months after the City Council passed those rates — delaying enactment until May 1 and then July 1 — just two transportation network companies are operational in the city: Uber and Lyft. Why? Because of “barriers to entry” which your textbook might define as “Obstacles that limit the freedom of potential rivals to enter and compete in an industry or market.”  Here, these barriers take the form of fees and regulations: Just one potential competitor — MyWeels (with no ‘h’) — became licensed in Minneapolis on Wednesday after paying the city’s annual fee of $37,145 plus $10,615 for a “wheelchair surcharge.” MyWeels is also the only ride-hail alternative to be licensed in St. Paul after paying its annual fee of $41,115. Three companies — MyWeels, Moov and Twin City Taxi — have applied to operate at the Minneapolis-St. Paul International Airport, which has a licensing fee of $500. MyWeels founder Elam Baer… said what set him apart from the others was his access to capital — not some new proprietary technology or the allegiance of hundreds of drivers. … Finding investors is the main test for Uber and Lyft alternatives. In addition to operating licenses for Minneapolis, St. Paul and the airport, transportation network companies need to carry commercial insurance for their drivers with premiums running around $150,000 per year. Joiryde CEO David Linhardt said he dropped out of the race to enter the Twin Cities because of the “excessive licensing fees and lack of clarity on insurance costs and coverage requirements.” The saga – which derailed the state’s legislative session – was resolved, for now, by the state enacting minimum rates of pay for rideshare drivers below those proposed by Minneapolis City Council: Uber and Lyft will remain in Minnesota.  What of those alternative services? The Pioneer Press reports: Wridz, which operates in nine states, has yet to complete a license application with the city of St. Paul, though [chief executive Steve] Wright said Thursday the company is hopeful its paperwork will be in order by June 1. “It sounds like they have every intention of getting things through quickly,” Wright said Thursday. “Between the two cities and the airport, it’s $100,000 in licensing fees that we dropped to get into this market. I’m in 23 regions, and that’s the highest I’ve ever seen.” The lack of license prevents the company from performing authorized passenger pick-ups in St. Paul. The app indicated Thursday to “please try again once this region becomes active.” It was unclear Thursday if a lack of license also bars the company from doing passenger drop-offs in St. Paul… … …getting MOOV rolling has had its challenges — most notably the licensing and related application fees of around $37,000 in Minneapolis and $41,000 in St. Paul. Unlike St. Paul, Minneapolis has at least begun the review process for [MOOV founder Murid Amini’s] license while he works out a payment plan, he said. He’d been in talks since March with the St. Paul Department of Safety and Inspections, he said, and finally reached an agreement May 7. “They said, ‘OK fine, we’ll take half upfront,’” said Amini, who still is fundraising to come up with the money. “Technically, I can launch in the suburbs right now,” he added. “I just don’t want to because people will look for rides in Minneapolis and St. Paul, and I don’t want to say we don’t serve this area. At the airport, we’re in the middle of processing our application. We hope to get that done in the next couple weeks.” A supposed increase in market “concentration” where, as an article for the Chicago Booth Review put it, “many industries have grown more concentrated—such that bigger companies (not just the giants) make up an increasingly larger share of the economy” is a current economic bugaboo. As the example of rideshares in the Twin Cities shows, the role of government in generating this phenomenon should not be overlooked and suggestions that government action can fix a situation it created should be treated with skepticism.   But these are not the only alternative services. In March, one state senator suggested – or should that be ‘threatened’ – “a state-run/developed Rideshare app.” Remember who gave you that Band Aid next polling day.  John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

If you’re always imitating others or aspiring to be something else, what’s left of the “authentic” you? According to the French philosopher René Girard, not much: Nothing can be truly authentic, he argued–everything comes from somewhere else. This is just one of the many original and counterintuitive claims put forth in Girard’s sweeping approach to […] The post René Girard, Mimesis, and Conflict (with Cynthia Haven) appeared first on Econlib.

Here are two different versions of American nationalism:Version 1: High tech is evil, part of the woke conspiracy to radicalize America. We need to go back to muscular old industries like coal and steel and autos, which employ lots of blue color workers. We need to revive the Rust Belt. EVs are a fad. Brick and mortar stores are better than Amazon. Silicon Valley is full of lots of immigrants from non-white countries. The Bay Area no longer looks like America.Version 2: China is our greatest adversary. The battle of the 21st century will be determined by who controls AI, which will impact the battle for military supremacy. We need to import vastly more high skilled engineers from places like India and China. This will strengthen America and weaken China. Greater San Francisco is our most important city, by far. It has the smartest people and it is where the future of AI will be determined.I am certainly no expert on artificial intelligence. But people much smarter than me insist that military supremacy in the 21st century will be determined by which country achieves AGI first. It seems to me that there are two types of American nationalism. One type might be called “nostalgic nationalism.” A yearning to recreate the America of the 1950s. Another type might be called “future-oriented nationalism”, and focuses on winning the race to control AI and thus dominate the world. I’m not at all sure that what I’ve called future-oriented nationalism is actually nationalism at all.  In that case, it might make more sense to think of a single nationalism with internal contradictions.  Nostalgic nationalism is the real thing, but it’s full of internal contradictions.  Its proponents wish to go back to the 1950s, but they also want to confront the threat of a rising China.  Can we do both?   PS.  Neither of these versions of nationalism reflects my own view. (0 COMMENTS)

  The Deadly Tobacco Drug War Down Under by Jacob Grier, Reason, June 17, 2024. Excerpt: Since March of last year, the Australian state of Victoria has been rocked by a series of arsons and firebombings. Some of the targets are victims of extortion; others are caught in an escalating turf war between rival gangs. Two men with links to organized crime have been publicly murdered, one in a broad-daylight shooting at a shopping mall in a Melbourne suburb. Violent conflict is not unexpected in organized crime, but what is unusual is the drug at the center of this conflict: nicotine.   DRH comment: The Australian government could respond by getting rid of the regulations that led to the problem in the first place, but instead decides to go the Saudi route: A new bill expected to pass the Australian Senate would take even more drastic measures, threatening imprisonment for importing, manufacturing, supplying, or even possessing commercial quantities of vaping goods without authorization. Health Minister Mark Butler explained that penalties will include up to seven years imprisonment and fines up to $2.2 million. “We are serious about stamping this public health menace of recreational vaping out,” said Butler. The bill includes an exemption for personal use, but as it is currently written possession of even noncommercial quantities of vaping products could be punished with up to one year in prison.   Fauci Was Just a Symptom By Jeffrey H. Anderson, Thomas D. Klingenstein, June 20, 2024. HHS now brazenly asserts that PEPFAR has saved “over 25 million lives.” The sole basis for this dubious claim seems to be that over 25 million people (counting babies in the womb) have been given antiviral drugs. HHS’s apparent dual assumption is that every one of those people would have died without the drugs, and every one of them has subsequently survived because of the drugs. This is what passes for scientific rigor at HHS. Both during AIDS and during Covid-19, Fauci and company fought the use of inexpensive, repurposed drugs to help people’s immune systems fight off the threats. Kennedy argues that they were motivated by a desire to bring pharmaceutical products to market—both antivirals and vaccines—without facing cheap competition, as a portion of Big Pharma’s profits would make their way into the public health officials’ pockets. Indeed, NBC News reports that NIH researchers have personally collected up to $150,000 a year in royalty payments for drugs they have helped develop at taxpayer expense. NBC says that in 2004 NIH researchers pocketed a total of $8.9 million. That’s in addition to their taxpayer-funded salaries. More recently, royalties from Covid vaccines appear to have been quite a boon to NIH, as in 2022 the agency’s overall royalties (not just the portion paid out to employees) skyrocketed to nine times what they were in the pre-Covid year of 2019. Rather than debate Duesberg or provide persuasive evidence to debunk him, the public health establishment simply ostracized him. Kennedy writes that both Larry King and Good Morning America scheduled joint appearances with Fauci and Duesberg only to cancel on Duesberg at the last minute and give Fauci the stage to himself (presumably at Fauci’s insistence). He writes that, when Reagan wanted the two to have a “friendly debate” in front of him, the idea was called off because, in the words of a member of the Reagan administration, Fauci “threw a ‘small fit’…and demanded to know why the White House was interfering in scientific matters.” (Imagine the gall of a president wanting an executive branch employee to defend his theory on one of the most pressing issues of the day!) DRH note: My quoting from this review does NOT mean that I endorse everything that RFK Jr. says. I do think that he and the reviewer have good insights. Federal Budget Deficit Forecast Jumps $400 Billion, Fueled by Student Debt Forgiveness by Emma Camp, Reason, June 21, 2014. Excerpt: In 2024, the federal budget deficit is estimated to reach nearly $2 trillion, according to new projections released by the Congressional Budget Office (CBO) this week. In February, the agency predicted that the deficit would only be $1.58 trillion. However, spending increases have caused the projected deficit to increase by $400 billion, a staggering 27 percent hike. According to the CBO, 80 percent of the spike in the deficit can be blamed on four sources of government spending. The largest source, responsible for $145 billion of the increase, is changes to the federal student loan program that have resulted in massive waves of federal student loan forgiveness and increased forgiveness going forward.   How 3M Executives Convinced a Scientist the Forever Chemicals She Found in Human Blood Were Safe by Sharon Lerner, ProPublica, May 20, 2024. Excerpt: Kris Hansen had worked as a chemist at the 3M Corporation for about a year when her boss, an affable senior scientist named Jim Johnson, gave her a strange assignment. 3M had invented Scotch Tape and Post-­it notes; it sold everything from sandpaper to kitchen sponges. But on this day, in 1997, Johnson wanted Hansen to test human blood for chemical contamination. Several of 3M’s most successful products contained man-made compounds called fluorochemicals. In a spray called Scotchgard, fluorochemicals protected leather and fabric from stains. In a coating known as Scotchban, they prevented food packaging from getting soggy. In a soapy foam used by firefighters, they helped extinguish jet-fuel fires. Johnson explained to Hansen that one of the company’s fluorochemicals, PFOS — short for perfluorooctanesulfonic acid — often found its way into the bodies of 3M factory workers. Although he said that they were unharmed, he had recently hired an outside lab to measure the levels in their blood. The lab had just reported something odd, however. For the sake of comparison, it had tested blood samples from the American Red Cross, which came from the general population and should have been free of fluorochemicals. Instead, it kept finding a contaminant in the blood. DRH note: This is the first time I’ve linked to a ProPublica story without making a critical comment. While I think their ethics on revealing people’s taxes were shoddy, as was their analytic ability, I found this piece persuasive. With respect to the last 2 items above, as Arnold Kling would say, “Have a nice day.” (0 COMMENTS)

Nearly everybody seems to think so, including many economists: when a price rises, it fuels inflation. The venerable magazine The Economist doesn’t think twice about it. Speaking of Argentina, it writes (“Javier Milei’s Next Move Could Make His Presidency—or Break It,” June 19, 2024): Monthly inflation may creep up in June as energy prices rise. The Wall Street Journal runs a headline saying “Rent Hikes Loom, Posing Threat to Inflation Fight,” June 18, 2024. Examples are everywhere. But if every price increase fuels inflation (a general rise in the price level), it must be that every price cut threatens deflation (a general drop in the price level, seen in recessions). Other things being equal, then, every price drop on the market is a threat, just like every price increase is. Every price change is a bad omen. Is this strange theory valid? No. The error lies in the failure to distinguish changes in relative prices and a change in the general level of prices, that is in all prices, which is what inflation (or deflation) is. Imagine that there is no inflation nor deflation and that the demand for beef increases, everything else being the same. As a consequence, the price of beef increases relative to (say) pork. This is the same as saying that the economy has moved on its production possibility frontier (PPF) to more beef and less pork, which implies that beef now costs more relative to pork. (The chart below shows a standard PPF for an economy with two goods. If good Y is beef and good X is pork, the economy has moved from point B to point A.) Any price index (say, the Consumer Price Index) will have changed between the original situation B and the new one A on the PPF. Whether the index shows an increase or a decrease will depend on the precise quantities of beef and pork because these quantities are the weights with which the price index is calculated. It would be a fluke if it did not change. Thus, we cannot use a change in a relative price to conclude that inflation or deflation is present. Inflation—a general increase in the level of prices—is a different phenomenon, caused by the quantity of money in the economy. If there is inflation, a price index catches both the changes in relative prices and the change in the general level of prices. We cannot attribute part of the inflation to the change in a specific price, because the latter change is partly due to inflation (how all prices have increased)–and partly due to the change in that price compared (relative) to other prices. Rents or energy prices cannot fuel inflation (or deflation) because they are partly caused by it. Causality works the other way. I have written a few EconLog posts on this topic, but my recent article “A Rising Product Price Doesn’t Cause Inflation,” in Ryan Bourne, editor, The War on Prices (Cato Institute, pp. 19-27) provides a more detailed explanation. My post “Guns and Butter” contains another illustration of the PPF concept. ****************************** Does a price cut fuel deflation? By DALL-E and your humble blogger (0 COMMENTS)

. . . get a stupid answer.A recent article on inflation beautifully illustrates the truth of this old maxim. Before getting to the article, let’s review another maxim, this one not at all old:Never reason from a price change. Thus, for instance, it would make no sense to ask people about the “welfare costs of inflation”, without first specifying whether the inflation was caused by less supply or more demand.  But that doesn’t stop pollsters from asking.  Here’s The Economist (from an article entitled “Is Inflation Morally Wrong?”): Americans who responded to Ms Stantcheva’s surveys were angry for a number of reasons. Most believed that inflation inevitably meant a reduction in real incomes. They said that rising prices made life more unaffordable and prompted them to worry they would not be able to afford the basics. Respondents did not see a trade-off between inflation and unemployment—referred to as the “Phillips curve” by economists—but thought that the two would rise in parallel. Some 70% did not view inflation as a sign of a booming economy, but as an indication of one in a “poor state”. Notice that all of the public’s beliefs are true if the inflation is generated by an adverse supply shock, and false if generated by a positive demand shock.  Now contrast these views with the views of economists: Why, then, are some economists more relaxed about rising prices? Inflation does present difficulties: it can undermine central-bank credibility and causes arbitrary redistribution from creditors to debtors. The constant updating of prices also carries costs for companies. Yet if all prices are adjusting at the same rate, the change is not as consequential as many workers believe. It no more means that workers are getting poorer than measuring someone’s height in feet rather than centimetres would mean that they are getting shorter. What is more, inflation is often the consequence of a hot labour market  Notice that the perspective of economists is mostly accurate if the inflation is generated by positive demand shocks, but quite misleading if generated by adverse supply shocks. It’s not so much that the public and economists disagree about inflation; rather they are discussing entirely different concepts.  It would be like conflating a decline in coffee prices caused by a caffeine cancer scare, with a decline in prices caused by a bumper crop of coffee beans.  The effect on consumer welfare will not be the same! Consider the following two views, both widely held by many people: 1. The public hates high inflation.   2.  We need an independent central bank because politicians are tempted to enact expansionary monetary policies to become more popular. Do you see the conflict here?  The puzzle can be resolved, or at least reduced greatly, if we distinguish between supply and demand side inflation.  Clearly the public hates supply side inflation, as it is associated with falling living standards.  There are cases where demand side inflation is also somewhat unpopular (like right now), but this case is far more ambiguous.  Here are some counterexamples: 1. Between 1929 and 1933, a contractionary monetary policy reduced the cost of living by roughly 25%.  And yet President Hoover was highly unpopular.  2. Between the spring of 1933 and the spring of 1934, FDR’s expansionary monetary policy raised the cost of living by about 10% (which is even more than the peak 2022 inflation.)  FDR was extremely popular. 3. Between 2008 and 2009, a tight money policy drove inflation sharply lower, to roughly zero.  People saw the economy as doing poorly. All three of these anomalous cases of public opinion moving in the “wrong way” in response to shifts in inflation share one thing in common.  In each case, the inflation change was generated by demand side shocks.  These reflect the views of economists, as discussed in the Economist article.  I’m not suggesting that demand side inflation is always popular (it isn’t), rather that the welfare effects of supply and demand side inflation are vastly different, and the public has at least some ability to sense this difference.  For instance, supply side inflation reduces real income, whereas demand side inflation temporarily raises real income (i.e. real GDP.) Many people at the Fed think NGDP targeting is a bad idea.  One argument you often hear is that the public understands inflation targeting, but doesn’t understand NGDP targeting.  Nothing could be further from the truth.  NGDP targeting is far easier to explain to the public. Any Fed official suffering from the delusion that the public “understands” the Fed’s inflation targeting policy should go to a town meeting, and explain that when inflation falls to 1%, the Fed works hard to raise inflation back up to 2% (or even 3%, as with FAIT).  Check out the incredulous looks on their faces.  Yes, some of the public has vaguely heard about the Fed’s 2% target, but they assumed that meant the Fed was trying to make sure inflation did not exceed that level.  Not one in a hundred understands the true nature of inflation targeting, which is a policy that assumes 2% inflation is actually a good thing, and that when inflation falls below that the level it is necessary to make the cost of living go up even faster.   You might argue that NGDP suffers from the opposite asymmetry, that the public doesn’t understand why excessively high NGDP growth would be a bad thing.  Actually, the asymmetry with NGDP is much less of a problem.  It takes a PhD in economics to truly understand why higher inflation can reduce unemployment. (And sometimes even that isn’t enough—see reasoning from a price change.)  On the other hand, if you tell average people that very rapid growth in the public’s incomes might lead to the problem of high inflation, they’ll sort of understand. The Fed needs to tell the public that monetary policy is not about interest rates, it’s not about inflation, and it’s not about unemployment.  Monetary policy is about keeping national income growing at 4%/year.  Full stop. (0 COMMENTS)