In an episode of Jeopardy last week, one of the categories was “One-Term Presidents.” Here was the “answer:” Britannica: He “was blaming the depression on events abroad & predicting” his foe’s win” would only intensify the disaster”; it didn’t. The question that Jeopardy was looking for was “Who was Herbert Hoover? The Jeopardy fact checkers were arguably wrong. The depression did intensify under FDR. Unemployment reached its peak of 25% in FDR’s first term. Of course, you could argue that with lags in the effect of policies, this was on Hoover. That argument seems reasonable because FDR was elected on November 8, 1932 and inaugurated on March 4, 1933. But one of the big things people wondered about during those 4 months, given that bank failures were a huge part of the story, was whether FDR would take the United States off the gold standard. He wouldn’t answer. Here’s what Gene Smiley writes in his entry “Great Depression” in David R. Henderson, ed., The Concise Encyclopedia of Economics: The Fed’s expansionary monetary policy ended in the early summer of 1932. After his election in November 1932, President-elect Roosevelt refused to outline his policies or endorse Hoover’s, and he refused to deny that he would devalue the dollar against gold after he took office in March 1933. Bank runs and bank failures resumed with a vengeance, and American dollars began to be redeemed for gold as the gold outflow resumed. As financial conditions worsened in January and February 1933, state governments began declaring banking holidays, closing down states’ entire financial sectors. Roosevelt’s national banking holiday stopped the runs and banking failures and finally ended the contraction. It is true that output started picking up in the second quarter of 1933, as Smiley elaborates. But then FDR’s National Industrial Recovery Act, which cartelized hundreds of U.S. industries, slowed things down and caused the Great Depression to last longer than otherwise. So if “intensify the disaster” means make the depression deeper, Jeopardy is not clearly right or clearly wrong. But if “intensify the disaster” means make the depression last longer, indeed, much longer, then Jeopardy is clearly wrong. (0 COMMENTS)

Back in the early 1980s, the Fed tried to gradually squeeze high inflation out of the economy, so as to avoid a bout of high unemployment. They failed. But it was not a failure to control inflation; it was a failure to bring inflation down gradually. Inflation fell much faster than almost anyone anticipated, and as a side effect the unemployment rate soared to a peak of 10.8% in late 1982.   This convinced many that reducing inflation was costly, and that it was best not to allow the inflation genie out of the bottle in the first place. [To be sure, there is more evidence for this claim that just the 1982 recession.  Anti-inflation programs also led to recessions in 1921, 1957, 1970 and 1991, to name just a few examples.  But 1982 was a particularly dramatic case.] So what did we learn from the 1982 experience?  Did this show that gradualism doesn’t work?  Not exactly, as a necessary precursor for gradualism never occurred.  The 1982 recession showed that gradualism is not easy to implement, but it provided no evidence on whether it would work if implemented. So what is the necessary precondition for gradualism to work?  The central bank must engineer a gradual slowdown in the growth rate of NGDP. That’s the only reliable method for achieving a “soft landing”.   A few weeks back, Tyler Cowen wrote a Bloomberg piece criticizing the economics profession for its failure to explain the economy’s surprising strength in 2023.  And  some of those who correctly saw that we might avoid recession had previously advocated models where inflation could not be brought down without high unemployment.   It’s a very good article, but Tyler fails to mention the fact that 2023 is a strong piece of evidence in favor of one particular approach—gradualism.  For instance, look at the modest slowdown in 12-month NGDP growth from 7.1%.in late 2022 to 5.8% late 2023: When presented with this argument, many people complain that I’m engaged in a tautology.  “Growth slowed gradually because growth slowed gradually.”  Those making that complaint are confusing nominal GDP with real GDP, a completely unrelated concept. The fear has always been that sharply slowing inflation would be costly in terms of falling real GDP and high unemployment.  When economists use the term ‘growth’, they are referring to real GDP, not nominal GDP. Thus there is nothing tautological in a claim that a recession might be often be associated with slow growth NGDP.  For instance, in 2008, Zimbabwe’s real GDP fell even as its NGDP rose more than a million-fold.  The two are radically different concepts, which do not always move in the same direction. On the other hand, because of wage/price stickiness, short run movements in NGDP and RGDP are often highly correlated in the US.  Thus in late 1982, NGDP growth plunged from a peak of 14% to less than 4%, triggering a significant fall in RGDP and high unemployment.  While it’s much too soon to declare victory, there’s a real possibility that Jay Powell’s Fed will successfully implement the gradualism program that Volcker’s Fed tried and failed to implement.  [In fairness, Powell was dealt a far easier hand, as by the early 1980s inflation expectations were stuck at double-digit levels and the Fed had lost credibility with the public.  This time around, long-term inflation expectations remained fairly low.]  In his Bloomberg piece, Tyler made the following observation: Krugman has lately further explained his position — complete with unironic headline — suggesting that the untangling of broken supply chains had helped lower the rate of inflation. That point, too, is correct. He didn’t mention that there also has been a massive negative shock to aggregate demand: High rates of M2 growth became slightly negative rates of M2 growth. Fiscal policy peaked and then retreated. The Fed raised interest rates from near-zero levels to the range of 5%, and fairly rapidly. It also sent every possible signal that it was going to be tight with monetary conditions. I did an Econlog post criticizing his claim that there was a massive negative shock to aggregate demand: [I]f you’d told economists in late 2022 that we’d have 6% to 7% NGDP growth in 2023, I doubt that very many would have predicted a recession.  So the events of 2023 in no way refute the assumption that a sharp slowdown in AD will generally trigger a recession—we failed to have a sharp slowdown in AD. Notice that I’m equating “aggregate demand” and NGDP growth.  Not everyone defines AD in that way, indeed some people derisively call it a “tautological” definition.  Well, definitions are tautological, but that doesn’t mean they are not useful.   A few days after I did this post, Tyler posted the following: Any “very heavy” reliance on real shocks to explain the macro of the last two years has to account for why 2021 had high growth rates, in spite of supply chains then being quite tangled.  And why prices haven’t gone back down to their original levels?  And what happened to aggregate demand, once the Fed turned its attention to the problem?  There simply was a huge, negative AD shock in recent times, at least under any non-tautological definition of aggregate demand.  Why didn’t that crush us?  Any account needs to address these issues. Tyler doesn’t mention my name, but given that a few days earlier I had argued that he was wrong about the existence of a “massive negative shock to aggregate demand”, and used the assumption that AD equals NGDP to back up my claim, I felt like his remark might have been directed at my post.  After all, “non-tautological definition of aggregate demand” isn’t a phrase you hear every day. (BTW, I’m inclined to equate “non-tautological definition” with “so vague as to be useless”.) Over at Marginal Revolution University, Alex Tabarrok summarizes the definition of aggregate demand used in Cowen and Tabarrok’s superb textbook: You can think about spending growth another way, too. It’s actually the equivalent of nominal GDP growth. If nominal GDP growth is 5%, an AD curve shows all of the possible combinations of inflation and real GDP growth that add up to 5% nominal GDP growth. Likewise, if nominal GDP growth is 7%, the AD curve will show all of the possible combinations of inflation and real GDP growth that add up to 7%, and so on. Increases in the growth rate of nominal GDP shift the aggregate demand curve outwards, whereas decreases shift it inwards. That sounds pretty tautological to me.   And just to be clear, I don’t believe that 2023 saw a massive negative demand shock even using a non-tautological definition of AD. More than a decade ago, Tyler started a blog post as follows: Without meaning to take sides in the controversy, I got a kick out of this sentence, which describes the attitudes of contemporary macroeconomists: Even something anodyne like “demand might also play a role” would come across like the guy in that comic who asks the engineers if they’ve “considered logarithms” to help with cooling. The blog post, by JW Mason, is interesting throughout. If you follow the link, JW Mason has a long post, which begins as follows: People often talk about aggregate demand as if it were a quantity. But this is not exactly right. There’s no number or set of numbers in the national accounts labeled “aggregate demand” Actually, there is—NGDP. Mason continues: Rather, aggregate demand is a way of interpreting the numbers in the national accounts. (Admittedly, it’s the way of interpreting them that guided their creation in the first place). It’s a statement about a relationship between economic quantities. Specifically, it’s a statement that we should think about current income and current expenditure as mutually determining each other. Now we are back in the world of tautologies: Gross domestic Income = Gross domestic Expenditure = Gross domestic product Seriously, when people tell me something is inexpressible, a sort of way of thinking about the world, I’m likely to assume they are referring to some sort of eastern mystical religion, not a branch of economics that is supposed to explain prices, output and employment.  Aggregate demand is either total nominal spending, or it’s nothing at all, at least nothing of any use to economists.  Given that Mason thinks AD is not NGDP, I can’t criticize him for treating AD like a big joke.    Economics is already full of hard to measure entities, such as the natural rate of interest or the natural rate of unemployment.  Let’s not make things needlessly obscure by acting as if AD is not a specific number that can be easily measured.  In the long run, aggregate demand (NGDP) does not matter at all.  In the short run, it’s the most important macro variable—explaining almost everything we care about.  Why have we had a soft landing so far?  Because NGDP growth has slowed gradually.  Why has NGDP growth slowed gradually?  Because the Fed raised its interest rate target up close the the economy’s natural rate, without overshooting (as it had done so often in the past.). How were they able to do that?  I wish I knew.  Probably a mix of luck (30 years of Fed credibility plus some positive AS shocks such as a surge in immigration) and skill (more sophisticated reliance of financial market signals and a deeper understanding of the process based on learning from past mistakes.). But that’s just a guess, and we are not even sure there won’t be a recession in 2024.  But there is one thing I can predict with confidence—the performance of the economy in 2024 will be largely determined by the NGDP growth rate.  If it’s around 4% by yearend, then we’ll have a soft landing.  If it’s around 2%, we’ll have a recession.  If it’s around 6%, we’ll have resurgence in inflation.  Looking out over the next few decades, NGDP won’t matter much at all—the performance of the economy will depend on real factors such as the impact of AI.  HT:  Commenter JP reminded me of the Cowen and Tabarrok textbook. (0 COMMENTS)

Back in May 2023, co-blogger Kevin Corcoran posted on Randy Holcombe’s discussion of how people form preferences on  government policies. Kevin quoted Randy as follows: These are voters whose beliefs about free trade were simply a derivative preference, derived from their anchor preference of identification with the Republican party. When the Republican party advocated free trade, so did they. And when the Republican party turned away from free trade, so did they. In the same way, after Trump’s rise to prominence in the Republican party, support for free trade among Democrats shot up dramatically, to significantly higher levels than Republican support for free trade during the presidency of George W. Bush. This quote is from Randall G. Holcombe, Following Their Leaders: Political Preferences and Public Policy, Cambridge University Press, 2023. Kevin wrote: These are voters whose beliefs about free trade were simply a derivative preference, derived from their anchor preference of identification with the Republican party. When the Republican party advocated free trade, so did they. And when the Republican party turned away from free trade, so did they. In the same way, after Trump’s rise to prominence in the Republican party, support for free trade among Democrats shot up dramatically, to significantly higher levels than Republican support for free trade during the presidency of George W. Bush. I don’t disagree with this reasoning. I think there’s lot to it. But I do want to point out a counterexample. Back in 2021, Trump revealed to his supporters that he got a booster for the COVID-19 vaccine. A fair number of them booed. So they didn’t adjust their views based on the guy that many of them seemed to love. Of course you could argue that they can’t adjust their views instantly. It’s quite conceivable that many of them thought that Trump wouldn’t get a booster and thus, in their view, be “on their side.” So they might have booed out of surprise. Still, a fair number of them had to know that he had done Operation Warp Speed to get the original vaccine produced quickly. If they had adjusted their views of the vaccine to what they must have thought his view was, they would have been in favor. But a fair number of members of the audience, going by the volume, saw him as being wrong on this.   (0 COMMENTS)

Your mileage may vary, dear reader, but I’ve never been much of a fan of bundled goods. In theory, you might find a bundle that includes exactly what you want, and only what you want, and comes at a lower price than all the individual components. But it’s never worked out that way for me. My cell phone plan, for example, lists out 20 different bundled “features” that are all included in my bill. But there are only about three or four things on that list I actually care about, want, or use. For example, my cell phone plan has included, among other things, a cloud backup service run by Verizon. This is a completely redundant service for me, as I already have cloud backup with iCloud and Google services – Verizon just also happens to run a pretty terrible knock-off version of those platforms. I doubt much of anyone would pay for it if it was only a standalone service. Hence, the best way to get more and more people to pay for their low-quality services it is to mandate bundling them with their high-quality services.  But, unfortunately, selecting a less expensive plan that includes fewer of these (to me) worthless add-ons also just so happens to cut back on the services provided with the features I actually do care about, resulting in lower data speeds and diminished (or eliminated) mobile hotspot abilities. There’s simply no option to choose a plan that includes only a high-end version of those few features I do want and cuts out all the rest. Boo.  For the same reason, I stopped getting any kind of cable TV service years ago. I’m not much of a TV guy – at any given time there are maybe two or three shows I might even aspire to keep up with, assuming I have the time. But unfortunately, there was never an option to only get the few channels I might actually want to access. In order to get them, I would have to get a whole bundle that included hundreds of additional channels of content I had absolutely no interest in watching or paying for. Luckily, streaming options have allowed me to largely bypass this particular annoyance.  Anyway, all of that was just a meandering framing for another kind of bundling I like even less – political bundling.  Political bundling is something I’ve touched on before in my multi-post review of Randall Holcombe’s book Following Their Leaders: Political Preferences and Public Policy. To recap very briefly, Holcombe argues that in politics, people have both anchor preferences and derivative preferences. As he puts it, “Anchor preferences are those that define people’s political identities. They define how people see themselves, and how they want others to see them.” Derivative preferences, as the name suggests, derive from the anchor: “Most policy preferences are derivative preferences, derived from the preferences associated with the person’s anchor. People’s political identity forms an anchor, and most of their policy preferences are derived from that anchor.”  According to this model, much of the (past) support among Republican voters for free trade did not come about because of a measured consideration of the issue by those voters. They supported free trade because they were Republicans, and Republicans support free trade. But being a Republican was, for many, the anchor point, and support for free trade was simply derivative from that. Hence, as Holcombe put it, “The Republican party, at least since Ronald Reagan’s presidency, supported free trade, but after President Trump won on a protectionist platform aimed at China, Mexico, and other countries, most Republicans did not push back and argue that Trump’s protectionist policies were out of step with the party’s values.” Instead, most rank-and-file Republicans simply switched their position on free trade. Now, support for free trade among Republican voters has plummeted, not because of a measured consideration of the issue by those voters, but because they are Republicans and Republicans don’t support free trade.  Holcombe argues that since in America there are effectively only two choices for political party at the national level, there are also at any given time effectively only two bundles of policies available to voters. Voters will vote for whichever bundle happens to align with their anchor preference, whether that is their political identity (I’m a Republican!) or some specific issue (We need more gun control laws!). Because all the other policies come along with the bundle, voters just adopt those other policies as preferences wholesale. Michael Huemer has made similar observations, writing “This is part of why I say ideology isn’t about ideas. If people actually cared about ideas, a party couldn’t just radically shift its positions and still have pretty much the same people supporting them and the same people opposing them.” All that said, what I’ve been noticing more lately is how political bundling is being wielded outside of the policy space and into public argument. People will try to bundle unrelated issues together, arguing that you can only truly support X if you also support Y, even when X and Y are completely independent issues. To give a concrete example, I was recently puzzled by seeing some pro-Palestinian protestors marching with a banner saying, “Reproductive Justice Means Free Palestine!” This seemed like a very strange position to take. For one, these are completely unrelated issues. For two, it’s been pointed out that abortion is illegal in Palestinian controlled territories, while it’s generally legal in Israel. Why on Earth would anyone insist on tying these two issues together? Logically, this seems like a very counterproductive line for those protestors to take.  I think what drives this is an attempt at political bundling. If, say, someone strongly supports the Palestinian side of the Israeli-Palestinian conflict and wants to shore up support for that issue, one way to do that is to try to make a focused argument on the relevant issue. Or a way to sidestep that process is to instead try to bundle that issue with another issue you know people might feel strongly about – if you can just convince people that the abortion issue is somehow bound up the issue of Gaza, you can get people into the latter cause based on their support for the former without that irksome need to provide any real arguments.  Or, if someone’s political view is heavily anchored on the oppressor-oppressed axis Arnold Kling describes in his The Three Languages of Politics, then convincing that person that Israel represents oppression and Hamas represents the oppressed will lead them to bundle support for Hamas in with their other views as well. Hence you can have Judith Butler, one of the most high-profile feminist philosophers of the 20th century, saying that “understanding Hamas, Hezbollah as social movements that are Progressive, that are on the Left, that are part of a global Left, is extremely important.” In general, it’s wise to be wary of people who try to sell you on a specific positions by means of political bundling. I’m not here to take a stand on the Israeli-Palestinian conflict. But I will say that for this issue or any other, the more one side tries to drum up support by bundling it with, or relabeling it as, reproductive justice, or climate justice, or any other issue other than the specific issue at hand, the more skeptical I become.     (0 COMMENTS)

I’m taking half an hour at the end of most work days to finally read through some of the letters that my sister, April Henderson, who died in November 2018, either sent or received. She saved almost everything, including letters that weren’t even to her but were to friends or relatives who knew of her interest in those around her. I’ve found a lot to be sad about in relationships within our family. But enough about the sadness. I want to focus on two things that this whole experience is bringing home to me. Neither will surprise you if you’re over 50 years old or even under 50 with a sense of recent history. The first is the fact of the letters themselves. They’re often between my mother, living in Carman, Manitoba in the mid-1960s, and April, who, having graduated from high school in 1964, went to work in Winnipeg. Those two places are only 50 miles apart, but with the price of long-distance phone calls and my mother’s and sister’s very tight budgets, writing was really the only efficient way of communicating. I emphasize that this probably shouldn’t come as a surprise to anyone reading this. But still, it just hit me over the head. It made me realize all the ways we can keep in touch and not wait until we find time to write and then wait again for the Canadian or U.S. postal service to deliver. The second is monetary magnitudes. For some reason, my Aunt Ruby, who was my favorite great aunt, shared with my sister some correspondence she had with her nephew (my uncle) in 1949. My uncle was asking her for a loan and he listed the various expenses that had put him in debt, plus existing debts. Here they are: Dr. Upton (dentist): $28.00 Dr. Corley: $48.00 Publishers Guild (books): $8.00 Prescription drugs: $12.00 Holy Cross hospital: $26.00 General Hospital: $15.00 Union Tractor and Equipment (his employer): $15.00 for new glasses and safety boots Bank payment: $35.00 Clothes for children: $10.65 Clothes for ourselves: $14.75 Household finance (debt): $200.00 Mom and Dad (debt): $200.00 About behind on grocery bills: $40.00 Grand total: $652.40. Obviously, all the amounts are low because they’re in 1949 dollars. The Canadian CPI in 1949 was 12.2 and rose to 157.1 by 2023. That’s an increase of 1188 percent. So $652.40 would be $8,401 today, still a sizable amount. If we compare it to average wages, it’s even a bigger bite, probably on the order of $25,000. Here’s what I found more interesting: relative prices. A hospital charged $26.00, I think for my aunt’s delivery of one of her sons. Adjust for inflation and you get $335.00. And remember that few people in Canada at the time, just as in the United States, had health insurance. What would $335.00 buy you today at a hospital? Not much. There are three contributors to the high price now: much higher quality–they can do more things to help you, third-party payment, and higher real doctors’ and nurses’ salaries. Oh, and add a fourth: the permit process to build new hospitals. And while on the issue of medical care, look at the dentist. $28.00 in 1949, inflation adjusted, is $361 today. That would still buy some dental services. And notice that way fewer people have dental insurance than have health insurance. Hmmm. I don’t know what kind of clothing they bought their 2 sons, but it’s conceivable that the real price of clothing has declined. (0 COMMENTS)

Many people seem to think that the freedom of some to express their opinions is more important than the freedom of others to peacefully go about their daily activities; that free speech by blocking a road or an air terminal takes precedence over the freedom of somebody else to catch a flight to visit a loved one, to take a vacation, or just simply to earn a living. Wall Street Journal columnist Jason Riley raises this issue when criticizing pro-Palestinian protestors who recently blocked access to bridges, roads, and air terminals to draw attention to their cause (“If Police Won’t Back Up ‘Mr. Brooklyn,’ Maybe a Lawyer Will,” January 23). Except if one favors conflicting and unequal freedoms among individuals, free speech does not entail my freedom to speak in your living room or arguably to block a road supposed to belong equally to everybody. What free speech means is the equal freedom to express one’s opinions on one’s property, or on property one has leased such as a convention hall, or on public property provided that other users are not excluded, or on a piece of property whose owner welcomes the speaker, like in the pages of a newspaper. Paradoxically, those who block roads or organize or inspire protests typically have the best access to popular media. What would they say if a mob blocked the printing presses of the New York Times or the Washington Post? Freedom of speech is closely related to private property, which explains why it does not exist under collectivist regimes of the left or of the right—the regimes protesters often defend. Many on the left show a logical incoherence that Donald Trump, certainly not handicapped in this department, could envy them. Anthony de Jasay, the economist and political philosopher who was both a classical liberal and an anarchist (portrayed in the featured image of this post), often becomes an iconoclast when he follows the logical implications of his theories. He labels “freedom-talk” or “rightsism” the political theories that favor conflicting rights picked up from thin philosophical space. In his view, liberties simply but wholly consist of everything that does not cause an actual tort to somebody exercising his own equal liberty; and a right is nothing but a benefit obtained from another party through a voluntary contract (generally against consideration). Protesters, newspapers, and travelers have the same liberties to do anything that does not interfere with the equal liberty of others and anything within their contractual and property rights. As usual, public property raises special problems, but why would one group have the power to deliberately exclude another group of individuals who have supposedly the same liberty to access it? (On “freedom-talk” and “rightsism,” see de Jasay’s book Social Justice and the Indian Rope Trick, especially Chapters 3 and 4 of Part 1;  and the chapter “Before Resorting to Politics” in his Against Politics. Expect to be challenged.) (0 COMMENTS)

In my previous post, I discussed some poorly defined concepts in macro, such as “aggregate demand” and “monetary policy”. A recent David Beckworth interview of Jonathon Hazell touched on some of these issues, and added a few more. Here Hazell discusses the role of demand shocks in the Phillips Curve model: Between the end of 2020 and roughly now, the United States underwent a gigantic and very persistent demand shock. Even with a flat Phillips curve, one might expect that very big demand shock to have large effects on inflation. . . . Now, one challenge with the story of a flat Phillips curve and a big demand shock is the behavior of unemployment. Unemployment in the United States is roughly 3%. It was also roughly 3% in 2019, but, of course, in 2019, inflation was not very high. And so I think that if we’re going to go down the big demand shock story, we do need some explanation for why unemployment wasn’t incredibly low, because that’s what you would need for this story to work. But one can think of reasons why, perhaps, unemployment has reached its rock bottom and slack was showing up elsewhere in the labor market, for instance by workers doing lots of job-to-job switching. So, I guess, to summarize, to come back to your original question, I think it’s quite possible that a nonlinear Phillips curve could be what’s going on. Hazell seems to be presenting two ways of understanding AD shocks.  One is associated with the amount of spending in the economy, and the other is associated with the amount of slack in the labor market.  An economist taking the later approach might assume that since unemployment in 2023 was no lower than in 2019, excess aggregate demand was not a problem.  Hazell correctly points out that there might be some other factor explaining this situation—perhaps 3% is the minimum possible unemployment rate in the modern US economy, even with demand overheating. In this case, you could say that two economists “disagree” about the role of aggregate demand in the recent inflation, because one focuses on economic slack and one focuses on nominal spending.  But are they actually disagreeing about the role of AD, or are they defining AD in different ways?  I agree with an economist who says that excessive nominal spending mostly explains the high inflation of 2021-23, and I also agree with an economist that says the low unemployment rate does not explain the high inflation.  They are both correct with respect to the way that they define an AD shock. Here’s another comment that caught my eye: Okay, so, just to set the scene, so why do we care about this thing called the R-star? Most of your readers are probably familiar with it, but just to be clear, we think there’s this idea, which I think goes back to Wicksell, which is what he calls the natural rate of interest. This is what clears the market for saving and investment while ensuring stable inflation and full employment. It’s the interest rate at which the economy is at a steady equilibrium.  Hazell has accurately described how conventional macroeconomists think about R-star, but it’s not a definition that I particularly like.  What if the interest rate that generates stable prices fails to generate full employment (or vice versa)?  I prefer to view (nominal) R-star as the interest rate consistent with 4% NGDP growth expectations if we had a NGDP futures market (assuming level targeting).  If that market doesn’t exist, then it’s the interest rate consistent with our best guess as to where rates would be if market participants expected a 4% NGDP growth path.  But even this definition is somewhat vague.  Suppose we start from a position where the economy has drifted off course.  There is a “natural rate” that pushes us back toward the target path, and another “natural rate” that represents where interest rates would be if we had not drifted so far off course.  If I am correct, then you might not expect much consensus among economists as to the natural rate of interest, and that seems to be the case: Of course, it’s very difficult, because to use these structural techniques, one has to be sure that the structure of the economy is correctly specified. And we, macroeconomists, know that we rarely understand the structure of the economy correctly, and so it’s quite difficult to know what R-star is. In practice, this is going to lead to real issues. And so— I actually saw this tweet from you, David— different measures of R-star disagree now, or at least when you tweeted, by something like 200 or 300 basis points, like really big amounts. Some measures of R-star say we’re in the low-interest rate world, some say we’re in the high-interest rate world. And so there’s a theoretical lure to R-star, but in practice, when we try to measure it, [it’s] really difficult to do so. And so, that one challenge is just that the point estimates disagree a lot between these different structural models. A second one would be nerdier, but I think equally important, which is that the standard errors associated with these estimates are giant. So, the last time I checked the Laubach and Williams measure, it spans something like the 95% confidence interval span, something like five or six percentage points of interest rates, really big amounts. Now, again, I don’t mean to be mean-spirited. I think it’s a crucial object to measure and these people like Laubach and Williams, and successors like Lubik and Matthes, but, you know, really breaking the frontier. What we wanted to do is see if we can come up with different measures to come out of that. So, that’s the preamble, why we should care about R-star. Unlike Hazell, I do mean to be mean-spirited.  I would like to see the profession abandon the concept of the natural rate of interest, and I’d like to see central bankers stop trying to target interest rates. Those huge standard errors are a red flag.  It’s not so much that economists don’t agree as to the natural rate of interest, they don’t even seem to agree as to what it is they are trying to measure.  You can think of each model of R-star as a sort of definition of the underlying concept.  The fact that these models generate such radically different estimates tells me that this vaguely defined concept is not useful for policy purposes.  Yes, many central banks do target short-term interest rates.  But they do not do so on the basis of structural models of R-star.  Instead, they are mostly feeling their way along in the dark, nudging rates higher or lower in reaction to a wide range of data, both slow moving macro data and high frequency financial market data.  Macroeconomics is full of vague concepts, including various “multipliers”, velocity, the IS and LM curves, monetary policy, fiscal policy, aggregate supply, aggregate demand, bubbles, and the natural rates of interest, unemployment and output. Because these concepts are so poorly defined, we end up with lots of tiresome debates about essentially nothing.  Consider the money multiplier.  Some economists say it exists and some economists say it doesn’t exist.  Both are correct.  Those that say it exists can point to the existence of the ratio of M2 to the monetary base.  Those that say it doesn’t exist point to the fact that this ratio is not stable.  They are not disagreeing about whether the money multiplier exists, they are disagreeing about how best to define the concept. Another example is saving.  MMTers define national saving in a way that is radically different from how conventional economists define saving.  Debates between the two groups end up being about nothing, as they lack a common language to communicate. I like to focus on concepts that are measured, such as PCE inflation, average hourly earnings, the unemployment rate and the currency stock.  One reason I focus so much on measured NGDP is that it something that is relatively unambiguous.  If I say that I regard NGDP as aggregate demand, another economist knows exactly how I view recent trends in aggregate demand, without even asking me.  In contrast, I have no idea how most economists interpret aggregate demand.  Perhaps Larry Summers thinks AD increased by more than Paul Krugman thinks it increased.  But I’d have no way of knowing that unless they told me.  Most of modern macro is a black box to me. PS.  The Hazell interview is excellent.  I’ll do another post later—with a more upbeat message. (0 COMMENTS)

Milton Friedman may be of the most recognizable economists across our Econlib family, and especially so here at EconTalk. Friedman was a teacher of our beloved host Russ Roberts (as well as one of his first podcast interviewees), a Nobel laureate, a popular political lightning rod, and a best-selling author. When historian Jennifer Burns undertook her intellectual biography of Friedman, she was initially most interested in his role as a pundit. But as she delved deeper into his scholarship, she found other elements of Friedman’s life and work more interesting. How, she cam to wonder, could someone so famous be so underappreciated? In this episode, Roberts welcomes Burns back to discuss her book, Milton Friedman: The Last Conservative. Roberts and Burns have a wide-ranging conversation about Friedman- the man and his work. Now we’d like to hear what you took away from the conversation. Leave your answers in the comments below, or use our prompts to start a conversation offline or guide your reading of Burns’ excellent book. As always, we love to hear from you.     1- Burns describes how she labored over the title of the book. Why did she ultimately choose “the last conservative?” Why does she dub Friedman the last conservative, and how was his brand different from conservatism today?   2- Both Burns and Roberts are struck by the role of women in Friedman’s life; Burns even calls them “his secret weapon.” What did you find most interesting about the stories of Friedman’s collaboration with women such as Anna Schwartz, Dorothy Brady, and Margaret Reid? (You may also be interested this Darwyyn Deyo EconLog post on economics’ “hidden women.”)   3- The conversation turns to Friedman’s legacy as an academic economist about half way through. How did Friedman manage to go from “crank” to mainstream? What does Burns regard as the most significant elements in this legacy, and to what extent do you agree with her assessment? What specific and general lessons do you think Friedman’s academic record has left for economists today?   4- How would you regard Friedman’s policy legacy- half full or half empty? What did he achieve? To what extent do you agree with Burns that his “policy ideas and orientation became influential far beyond conservatives?” What does Friedman get blamed for today, and to what extent is such blame justified?   5- The conversation concludes with Roberts musing on things he misses about Friedman. He says, “I think people who defend freedom on its own for its own sake have lost the moral high ground.” What do you think he means by this, and what does it suggest Friedman may have gotten wrong in his approach to capitalism and freedom? What are the best arguments defenders of freedom can make today? (0 COMMENTS)

Suppose you lived in a free country—not a country freer than most unfree countries, but a truly free country. (One necessary condition of “truly free” is certainly the absence of constant government regulation and surveillance in most areas of life.) You would prefer the whole world to be as free as you are, if only because it would give you more trading opportunities, interesting relations, and international mobility. But the worst situation for you would be if your country, in the sense of its residents including you, became as unfree as others in the world. In other words, let the other states in the world regulate and control, but do not wish that on the country where you live. In the Financial Times (“The Bitter Lessons of Brexit,” January 22, 2022), columnist Martin Wolf complains about many bad economic consequences of Brexit. He correctly laments that the nirvana promises of the Brexit advocates have not been realized. But he suggests that the single European market was useful because it was submitted to a single set of top-down regulations, which British businesses still have to follow anyway if they want to sell their wares on the continent short of moving there. Indeed, what a mess: trading one meddling government for another! Instead of pursuing unilateral free trade (imitating what its old territory, Hong Kong, used to do), the UK government is playing the protectionist-dirigiste game. On this, Mr. Wofe is silent. Let the UK government abolish most regulations. Stop regulating and controlling your own subjects. Let them buy where they want and sell where they can. British exporters will naturally have to adapt to EU regulations if selling to regulated customers on the continent is worth the cost. Forget about the myths around the “balance of payment” (which, by the way, as noted by Wolf, has deteriorated with the EU since Brexit). Let them foreigners regulate and be regulated as they want or as they can support. You don’t build a free country by plagiarizing the unfree. Just let your subjects be free. “Dammit!” as Javier Milei would add. For reasons well explained by public-choice theory, this is not what the UK government is doing or is likely to do. But if Mr. Wolf realized that efficient trade—trade that follows what diversified consumers want—does not require top-down regulations, he could perhaps contribute to cutting the Gordian knot of dirigisme. (0 COMMENTS)

Matt Zwolinski, a philosophy professor at the University of San Diego, has responded to Bryan Caplan’s critique of a Universal Basic Income. His defense is deficient. I’ll highlight three things. First, on the effect of a UBI on children. Zwolinski states: For instance, Bryan argues that cash transfers to parents of young children would be a bad idea, since the fact that such parents require taxpayer assistance is evidence of their irresponsibility, and “they may spend it on alcohol.” He responds: But this is a case where Bryan is the one who is not paying enough attention to empirical evidence. We actually know a good deal about how cash transfers affect children. In particular, evidence from the 2021 temporary expansion of the Child Tax Credit shows that cash transfers led childhood poverty to fall to their lowest level on record: 5.2%. When that expansion ended in 2022, child poverty more than doubled almost immediately, rising to 12.4%. Matt’s response tells us nothing about how cash transfers affect children and shows a misunderstanding of what the federal government’s data on household income show. The data are on household income where there are children present; they tell us nothing about how the income is spent. Take two households with the same income. In household A, the parents spend the money in ways that Matt approves. In household B, the parents spend a huge amount of the income on alcohol. Both show the same income. The income data do not distinguish between the two households. Matt’s mistake is akin to one that one advocates of government spending often make: We must be doing good things; look at the large amount we’re spending. Second, on the added cost of a UBI. Matt considers a lot of versions of a UBI: with seniors but without children or teenagers; with children but without seniors; without seniors or children. He also considers two levels of a UBI: $500/month or $1,000/month. He then quotes from Universal Basic Income: What Everyone Needs to Know, a book that he co-authored with Miranda Perry-Fleischer, a law professor at the University of San Diego: [T]he cost of a $500 per- person per- month UBI that replaced most current welfare programs in the United States would be roughly 7% of GDP. Government spending in the United States is currently around 38% of GDP, compared to 49% of GDP in Norway and 50% in Sweden. A $500- per- month UBI would keep the ratio of US government spending to GDP below Nordic levels, while a $1,000- per- month UBI would vault us ahead of Denmark (55%) and just behind Finland and France, both of whom clock in at 57%. There are two things to note. First, the authors don’t tell us what they mean by “most current welfare programs” in the United States. Presumably it would include SNAP (food stamps), TANF (temporary assistance to needy families), and housing subsidies. Would it also include Medicaid? My sense is that it wouldn’t. Second, and even more important, notice how the authors seem to be at ease with the idea of moving us much closer to European levels of spending. That’s what I found most shocking about their defense of the UBI. Third, on taxes. Matt writes: Note that the cost estimates above assume zero means-testing, either on the front-end or back-end. The net costs of either a Negative Income Tax or a UBI with a phaseout/surtax would thus be considerably lower. That statement is correct for a phaseout but incorrect for a UBI with a surtax. But the phaseout also has problems. Let’s look at the phaseout. Assume that a couple with no children would otherwise make $40,000 a year and gets $2,000 a month, which is $24,000 a year. Past the $40,000, there’s a phaseout. It can’t be too steep or we’re back to really poor incentives to make money. So let’s say it’s a loss of 25 cents for every additional dollar earned. That couple will reach a zero subsidy when it gets to $136,000. (It takes $96,000 in additional income to drive the UBI down to zero.) There will be tens of millions of people in that income range getting subsidies. So Matt is right that the subsidy won’t be as large as the no-phaseout subsidy, but it will be substantial. Also, there will be a 25-percentage-point diminished incentive to work for tens of millions of people. Many of them will be in a 24% federal tax bracket and a 4 or 5% state tax bracket, along with a 7.65% payroll tax bracket. (We really should count much of the employer’s portion but I’ll leave that out.) So that’s a marginal tax rate of 35 to 36%. Add in 25 percentage points and you get a whopping 60 to 61%. In saying that the net cost of a UBI would be considerably lower with a surtax, Matt almost seems to be treating a lump-sum subsidy as equivalent, but in opposite direction, to a higher marginal tax rate. But they aren’t equivalent. When the government is trying to get hundreds of billions of dollars back by imposing probably about a ten-percentage-point increase in marginal tax rates on tens of millions of high-income people, that definitely affects their incentives to work, to buy tax-deductible items (a more expensive house, for example), to buy tax-free municipal bonds (as high-income people did before the 1986 Tax Reform Act), and to hide income. Finally, I’ll just make a point that I saw Bryan Caplan make in a debate on UBI some years ago. He pointed to his father, who is not close to being a libertarian but who strongly objects to putting tens of millions of additional adults on welfare. Bryan said, “Libertarians should be at least as libertarian as my father.” Two additional points. First, note that this discussion is happening at a time when we are seeing federal deficits equal to over 5% of GDP for many years. There’s only starting to be a discussion of which programs to cut or pare and which taxes to raise. So advocating a massively expensive new program with accompanying tax increases is irresponsible. Second, for a detailed look at the case against a UBI that has held up well, check my “A Philosophical Economist’s Case against a Government-Guaranteed Basic Income,” Independent Review, v. 19, n. 4, Spring 2015. (0 COMMENTS)