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)

In my last post I described just a few of the many terrible planning decisions that were described in Alexander Field’s book The Economic Consequences of U.S. Mobilization for the Second World War. I closed out by mentioning that some of the blame can be laid at the feet of political corruption or incompetence, but that I don’t think this was the main issue. In this post, I’ll describe what I think the main problem was, using an example from another troubled realm of war-planning – logistics and distribution.  Field reviews the data and concludes “the productivity record of military distribution, like that of manufacturing for the military, was often disappointing. In both cases, impressive output metrics reflected the deployment of even more impressive quantities of labor and physical capital, much of which lay intermittently idle or inefficiently used.”  He cites case after case of supplies getting lost, going to waste, being delivered to the wrong location, taking far too long to reach their destination, and so forth. But he also points out that there were a staggering number of constraints and factors to be traded off against each other, with no obvious answers about how to handle the situation: The requirements of military distribution during the war presented optimization challenges that were far from simple. The objective functions to be maximized had multiple, rather than one or only a very few, arguments. (During the war no one used such language or posed matters in these terms.) It could seem obvious that ordering port managers to fully load ships, or promoting this as a desirable rule of thumb, would enhance the efficiency of distribution. But this might not be true if it resulted in ships remaining in port for longer periods. It might not be true if it meant that critical goods took longer to reach their destination. It might not be true if it resulted in more goods going to the wrong destinations. It might not be true if it meant that ships had to spend more time and fuel delivering their cargoes to multiple locations. It might not be true if it led to more goods damaged in transit, or if it meant that it took longer for high-priority items to reach fighting forces because the items were buried in the bottom of a hold.  Or it could seem obvious that maintaining ships offshore as floating warehouses was more efficient than unloading them in locations with inadequate port facilities and storage facilities, risking spoilage, theft, deterioration, and other forms of wastage. But this might not be true if the practice effectively removed a freighter from the available transport fleet for weeks or months.  Under these circumstances, what rules of thumb should guide port officers or planners? Reduce the turnaround time for ships? At the cost of sending out half-full vessels, carelessly loaded, resulting in damage to goods during transit and multiple errors in destinations? To make the process more efficient, one certainly needed officers better trained in logistics who could analyze operations at the macrolevel, not just the individual components piecemeal. But one needed more than this: these officers needed a means for systematically and quickly evaluating huge numbers of potential programs (coordinated or sequenced activity levels) on the basis of how well they met identified goals. Unfortunately, planners lacked such a “means for systematically and quickly evaluating” how to make these tradeoffs. As a result, military distribution was frequently done in a way that was messy, inefficient, wasteful, and counterproductive.  One could lay all the blame on the folly of attempting to plan or attempting to reason through how to trade off all these margins against each other. But that would be a misleadingly incomplete answer. In a market, individual companies make plans, and also have to make decisions about how to trade off margins against each other. The key difference, I believe, can be identified from the ideas in Vernon Smith’s book Rationality in Economics: Ecological and Constructivist Forms. While wartime planners had only constructivist rationality to depend on, in a market, individual firms use constructivist rationality but also gain feedback (and incentives to respond to that feedback) from a more ecological rationality in the form of prices, profits, and losses. As Smith succinctly puts it: The two concepts are not inherently in opposition: the issues are emphatically not about constructivist versus ecological rationality, as some might infer or prefer, and in fact the two can and do work together. For example, in evolutionary processes, constructivist cultural innovations can provide variations while ecological fitness processes do the work of selection.  Modern shipping, transportation, and distribution companies have to figure out how to adjust for the same kinds of margins Field identified as confounding wartime planners. But in a market, there is crucial feedback that isn’t available to central planners. One company might decide to prioritize reducing turnaround time based on a really compelling argument made by an executive, while another company might focus more on optimizing a different margin based on a different argument they found equally compelling. But prices and profits will signal which of these tradeoffs was in fact best, giving both companies information and incentives to adjust. The market process provides endless opportunities for countless iterations, optimizations, and alternatives to be tried, tested, filtered, selected, and optimized.  Modern distribution is a true marvel of economic development, and performs in a way that is far superior to what was done in the Second World War. But this difference in performance isn’t due to the fact that wartime planning was done by Incompetent Corrupt Bureaucrats while businesses are run by Smart Well-Intentioned Saints. The main problem is that centralized planning necessarily lacks any feedback method to evaluate different variations it might employ, while marketplace operations are constantly receiving that feedback from prices and profits – which also provide a strong incentive to respond to that feedback quickly. The constructivist rationality of market actors is also tempered and guided by the ecological rationality of the market process – and planners simply can’t replicate that, no matter how well intentioned they might be.  (0 COMMENTS)

Was the recent excess inflation an aggregate supply or an aggregate demand shock?  Tyler Cowen weighs in on the issue: A year or so ago I recall telling Bari Weiss in a podcast that the inflation was perhaps half real shocks, half an aggregate demand problem.  Don’t let the revisionists talk you into the hardcore RBC view! I didn’t know that hardcore RBC types had a view on this question, but today I’m more interested in Tyler’s comment on aggregate demand. Back in 2022, I also thought it was reasonable to talk about high inflation representing a roughly equal mix of supply and demand factors.  As of today, supply problems have eased and almost all of the cumulative excess inflation since 2019 is demand driven—as NGDP has overshot its trend by roughly the same amount as prices have overshot their 2% inflation target path.  These facts support Tyler’s claims about the excess demand.  So why don’t all economists see things in this way? Here’s where things seem to get weird.  As far as I can tell, economists do not actually have any substantive debate about the existence or non-existence of a recent aggregate demand shock.  There is pretty general agreement as to what has happened; the debate seems to be over the meaning of the specific term “aggregate demand”.  Thus if I point to very rapid growth in nominal spending, those who disagree with me won’t deny that NGDP rose sharply, they’ll typically say that NGDP is not aggregate demand. Others point to modest growth in real spending (which has been close to trend since 2019), as evidence that there was no big aggregate demand surge.  I respond that real GDP is not aggregate demand, as a rise in aggregate supply also causes real GDP to increase. In this imaginary debate, we aren’t disagreeing as to whether some well-defined concept like “aggregate demand” increased or did not increase, we are disagreeing over how to define AD.  It’s merely a debate over semantics.  But when I see these debates on the internet, I see little or no awareness that it’s merely a debate about semantics, not substance. To be clear, I’m not saying the issue is purely subjective—“Just a matter of opinion.”  We have dozens of economics textbooks with AS/AD diagrams.  In that model, a sharp rise in NGDP is evidence of a rightward shift in AD.  In contrast, a sharp rise in RGDP is not evidence of an increase in AD (rising AS also boosts output).  So there really is reason to prefer NGDP over RGDP as a proxy for aggregate demand. I suspect that most economists use neither NGDP nor RGDP as a proxy for AD.  Instead, they have some sort of model of factors that they believe should make aggregate demand go up.  If that model says AD should have gone up, then they assume that it did increase. But that makes economics seem more akin to religion than science.  Instead of just accepting as a matter of faith that certain fiscal and monetary policy stances ought to boost AD, why not look at actual empirical data and see if the model is correct?  Did AD increase in response to stimulative policies?  What does the data show?  But this just puts us back in the original dilemma—how do we measure aggregate demand?  How do we test whether fiscal and monetary policy boosted AD, if we cannot measure AD?  And if we can measure it, then what’s the debate all about?  Just look at the data to see if AD increased. It is clear that if economists disagree as to whether there has been a big surge in AD, then they must, ipso facto, disagree as how best to define AD.  One economist has a model showing a big rise in AD, while another has a different model showing no unusual surge in demand.  In this case, each model represents a different definition of aggregate demand.  Again, the debate is merely over semantics. I believe the Bible says something to the effect: Wherefore by their fruits ye shall know them. Economists seem to believe we determine what happened to AD by its effects, but they cannot seem to agree as to what these effects would be.  In that case, they don’t agree as to what AD actually is. I suspect that Tyler would argue the real issue is not the role played by aggregate demand, rather the important issue is the role played by stimulative monetary and fiscal policy. At first glance, that seems like a more tractable approach.  We all accept the fact that NGDP rose sharply in 2021-23, but we don’t know if that increase was due to fiscal stimulus, monetary stimulus or a rise in animal spirits (say due to revenge spending after Covid.) Unfortunately, that doesn’t actually help at all.  I wrote an entire book explaining that economists frequently refer to the stance of monetary policy being “easy” or “tight” without having any sort of coherent definition of what they mean by “monetary policy”.  All you’ve done is to replace a meaningless semantic debate over aggregate demand with a meaningless semantic debate over monetary policy. I wish we lived in a world where all economists agreed that aggregate demand was nominal GDP, but we do not.  I wish we lived in a world where all economists defined the stance of monetary policy in terms of whether the expected growth rate of NGDP was above or below the central banks implicit target, but we do not. Most of all, I wish we lived in a world where economists showed some awareness that their debates over things like “aggregate demand” and “monetary policy” are actually largely a debate over semantics, but we do not. Here are some debates that would actually be useful: 1. Was the rapid 2019-2023 growth in NGDP appropriate, or undesirably fast? 2. If NGDP growth was excessive, was there some alternative fiscal and monetary policy path that would have delivered appropriate NGDP growth? 3.  If Congress was determined to do an excessively large fiscal stimulus, was there an alternative monetary policy path that would have offset this stimulus, delivering appropriate NGDP growth? 4. If there was a monetary policy path that would have prevented excess NGDP growth, should the Fed have adopted that policy in 2021? Those are relatively clear and interesting questions with meaningful policy implications.  In contrast, the entire “Was is supply or demand?” debate is so poorly defined as to be almost meaningless. In my new book, I basically argued that, “The emperor has no clothes”.  I called out the economics profession for making “monetary policy” a key part of macroeconomics, without ever offering a coherent definition of monetary policy.  I could write another book offering a similar critique of “aggregate demand”. I suspect that most economists would regard my new book as boringly pedantic.  But the current very depressing debate over the role of aggregate demand in inflation shows that there’s never been a greater need to clearly define our core macroeconomic concepts.  Until we do so, we’ll continue talking past each other.  And non-economists will be justifiably scornful of a profession that cannot even answer a question as basic as “Was the recent inflation demand or supply-side?” If the supply and demand model cannot answer a question that basic, then of what use is the supply and demand model?  What is its purpose? (1 COMMENTS)

Art Carden wrote a recent article that is both simple and profound. It’s titled “You Are Making a Difference: You Just Have to Know How to Look at it,” American Institute for Economic Research,” January 16, 2024. Here are three key paragraphs: Look around you at the countless ways people are making important differences in the lives of the people around them, even if they don’t intend to. Someone who designs a better salad bar or who lays out a better floor plan for a grocery store might not think he’s feeding the poor, clothing the naked, or fighting food insecurity. But he is, and without transferring resources to other people but by creating new ways for people to cooperate. Part of the beauty of the Christmas classic It’s a Wonderful Life and the tragedy of George Bailey is that he doesn’t seem to understand just how big a difference he is making by working to save three cents on a length of pipe. The seeming triviality of running the Bailey Bros. Building and Loan obscured a lot of the points that became evident at the very end of the movie when people took up a collection to help him make up for the shortfall in his accounts. One of Charles Dickens’s characters, Mrs. Jellyby, is so consumed with saving the world and feeding Africa that she ignores her family. It’s easy to ignore the ordinary business of life in pursuit of some kind of noble extraordinary business; however, it’s the very ordinary business that makes the biggest difference. That’s how George Bailey changed the world by changing Bedford Falls. The whole thing is worth reading. It reminded me of a discussion on a panel I chaired at a Hoover Institution event some years ago. The conference was a one-day affair to celebrate George Shultz’s 95th birthday. One of the speakers on the panel was Condi Rice. An issue that came up in the Q&A was that of “public service.” Condi said that she encouraged young people to do some public service, whether in the military or the government more generally. I pointed out that people who work at McDonald’s are engaged in public service: they serve the public. I could have gone further and pointed out that when you’re in government, you might tell yourself that you’re serving the public but it’s hard to know because there’s no market test. What if you end up promulgating a regulation to prevent people from getting new inexpensive stoves that run on natural gas? Or what if you’re putting together a regulation that makes dish washers less effective? Are you serving the public? You might be serving a subset of the public that badly wants to interfere in other people’s lives. But is that “the public?” (0 COMMENTS)

[ANNUAL LISTENER SURVEY: https://www.surveymonkey.com/r/ZGY3G9W. Vote for your 2023 favorites!] How did a husband-and-wife vacation end up saving a city from the atomic bomb while destroying another? And how did a century-old murder of one family bring another into existence? Easily, explains political scientist Brian Klaas of University College London, who points out that history is replete […] The post If Life Is Random, Is It Meaningless? (with Brian Klaas) appeared first on Econlib.