John Gray is an English philosopher and author. Gray retired in 2008 from his position as School Professor of European Thought at the London School of Economics and Political Science. In this episode of EconTalk, host Russ Roberts hosts John Gray for a conversation on Gray’s book Seven Types of Atheism. Human progress is illusory, Gray says, just one of his radical views in measuring the modern state of religion and atheism. How do Gray’s ideas strike you? Let us know your thoughts below; we love to hear from you.   Roberts and Gray discuss the purpose of religion as opposed to science, suggesting religion and stories like Adam and Eve are not meant to be literal. Why was religion created? What is the relationship between religion and science; are they necessarily at odds with one another? How should bible stories be read?   In Gray’s atheistic view, he denies the existence of a creator god, and with this simple gloss, he says the lines between atheism and religion are blurred. Buddhism and polytheism do not have creator gods. Can someone be atheistic and follow one of these religions/ways of life? What does atheism mean to you?   Gray is cynical about human progress; it’s an illusion, he says. Is progress within science progress within the quality of civilization? How does the advancement of knowledge and technology influence our notion of ‘progress’? Do you agree with Gray that quality within our civilization has remained stagnant?   Can humans improve and transform themselves? Gray is skeptical of human self-improvement, which he believes cannot exist without a world of stability. Does self-improvement have only short-term effects? Can people ever realize their authentic selves? Gray and Roberts discuss the tendency for people to look down upon those who are religious as being unintelligent or ignorant. To what extent will religion fade away as people become smarter? Is religion an antidote to credulity as Gray says it is? (0 COMMENTS)

This doesn’t go where many of you think it might go. I generally find that workers in for-profit companies perform better than workers in government agencies. The main reason is that for-profit companies have good incentives to make sure their workers, whether in or under management, are productive. The better they perform, all else equal, the greater is the company’s profit. Performance includes responding well to customer requests and concerns, especially if those customer concerns are what most people would regard as reasonable. Government agencies, on the other hand, don’t get more “profit” if their employees perform well. That means that the managers of the government agencies have very little incentive to monitor employee performance. With less monitoring, performance suffers.That’s the basic economic theory, and the theory goes a long way in explaining behavior. I’m also an empiricist. No matter what economic theory says, I judge people’s performance well or badly depending on my observations of their performance. I had an experience last week with two for-profit firms, State Farm and Storelli Brothers auto repair, and one government agency, the Pacific Grove police department. State Farm did badly, the PG police department did very well, and Storelli Brothers did very well. On Wednesday evening, a young man came to my door and told me that he had witnessed a driver do a hit and run on my car. The driver had smashed my driver-side rearview mirror. Fortunately, the young man had quickly taken a picture of the car and the license plate. I thanked him, got his name and phone number, and got his permission to use him as a witness. Because my local insurance agent for State Farm was closed, I called an 800 number and reported the facts. The next morning someone at State Farm called me. Here’s where it got weird. I told her the license number and she surprised me, saying that State Farm couldn’t necessarily track down who owned the car. “Do you realize that every California car license plate is unique?” I asked. “So you should be able to track it down.” “I didn’t realize that,” she answered, “thanks for telling me that.” But the information I gave her didn’t seem to affect her strategy. I asked her her name. “Why do you want my name?” she asked. “I would like to know it; after all, you know my name.” She refused. “I would like to talk to your supervisor,” I said. “She would tell you what I’m telling you,” she answered. “You don’t know that,” I responded. “After all, you admit that you didn’t know that license plate numbers are unique. Maybe there are other things she knows that you don’t.” I kept repeating that I wanted to talk to her supervisor. She kept refusing. At one point, I raised my voice. “If you talk loud, I can’t hear you,” she said. So I dialed down my volume but stuck to my request. Finally, she put me on hold and came back a few minutes later with a vague promise to call me the next week. (This was Thursday morning, December 21.) I thought I would do better with my local State Farm rep. It worked out slightly better but not great. At least, she understood that license plate numbers are unique identifiers of owners. She also said I should contact the Pacific Grove police. This turned out to be her best piece of advice. I asked her whether it was better to call them or to go down to the station. “I can’t advise you what to do,” she said. “I understand,” I said, “but I figure you have more information from past clients’ experience than I have, which is why I asked which is better.” “I can’t tell you what you should do,” she answered. “Ok,” I said, “I’ll go down there. Now once they identify who owns the car, am I hurting my chances of getting reimbursed if I get it fixed quickly or should I wait until the person admits guilt?” “They might not be insured,” she said, “in which case you wouldn’t get reimbursed.” “Fair enough,” I said, “but if the person is insured, do I hurt my changes of collecting if I get my repairs done first?” “They might not be insured,” she answered, “in which case you wouldn’t get reimbursed.” I said goodbye to the broken record. Now it gets good. I drove the 5 minutes to the PG police headquarters and said I wanted to report a hit and run. I gave the police employee my information and he told me that if I wanted to wait, it would be only about 20 minutes. So I retrieved a Wall Street Journal from my car and waited. About 20 or so minutes later, a police officer came in. I told her I recognized her. We live on one of the 2 busiest streets in PG, a city of about 15,000 people, and so I had seen her drive by. I’ve forgotten her last name. Her first name was Giselle. I gave her the details and showed her the picture of the license plate. She told me that the two letters I identified as “F” could be “E” or one of them could be “E.” She went away and came back less than 10 minutes later. She had found the owner and called the owner but got an answering machine message from someone who identified herself as a doctor. She told me that she would go to the address. I realized that in all the excitement I had completely forgotten to have breakfast, a rare event for me. So I went home and ate quickly. While brushing my teeth, I received a phone call from Giselle. She had tracked the woman down at her house and got all her insurance and driver’s license information. The woman had admitted that she was the driver. Giselle gave me the woman’s phone number; she was a fellow PG resident. I planned to call the woman; I’ll give her a fictitious name: Abby. But before I could call, Abby called me. She asked me if I would call her once I got the body shop estimate so that she could pay and not bother with insurance. I said I would. Less than an hour later, I got the estimate and found that it could be repaired the next morning. The estimate wasn’t bad. By reusing a piece that had been barely scratched, I could save her money. I decided to do so since I had to look closely even to see the scratch. The estimate: $338.85. The next day I got the work done and called Abby to see if she wanted to come over with the check or she wanted me to come over. She asked me to come over. I did, and she wrote the check. I told her that I managed to have the repair people, Storelli Brothers, reuse a part and that that had saved her money. I thought she would thank me, but no. She gave me a nice bottle of champagne, but I would have traded that for a simple apology. Not once in our 2 phone calls or our in-person conversation did Ann say she was sorry. So State Farm let me down, the Pacific Grove policy department did very well, and Storelli Brothers, as always did well. I did learn something: the next time that happens, I’ll contact the police right away, even before I contact my insurance company. By the way, I sent a check for $40 to the young man who bothered taking a picture and knocking on my door. Quiz: “Abby” made a payment for the exact amount of the repair bill. Which part of my cost, which is comparable in magnitude to the repair bill, did she not cover? (0 COMMENTS)

I recently talked about a Southwest Airlines policy regarding passengers who require the use of more than one seat, and how it provided a good opportunity to visit one of David Henderson’s Ten Pillars of Economic Wisdom – there ain’t no such thing as a free lunch. But it also occurred to me there’s another item on the list that’s relevant to these kinds of seating policies. One might think that a person who uses two seats should pay for two seats, because they are using twice as many resource units as a person who only occupies one seat. But understanding another pillar of economic wisdom reveals a somewhat more subtle take.  The third pillar is “Economic thinking is thinking on the margin.” For example, in the perfect competition model, we say that the price of a widget will be equal to its marginal cost. The marginal cost of a widget is how much it would cost the company to produce one more widget. Thinking on the margin means thinking about things in terms of the next available unit. Adam Smith was puzzled by the fact that something essential like water was inexpensive but something frivolous like diamonds could be very expensive indeed. The so-called diamond-water paradox is explained by thinking on the margin: The marginalist explanation is as follows: The total utility or satisfaction of water exceeds that of diamonds. We would all rather do without diamonds than without water. But almost all of us would prefer to win a prize of a diamond rather than an additional bucket of water. To make this last choice, we ask ourselves not whether diamonds or water give more satisfaction in total, but whether one more diamond gives greater additional satisfaction than one more bucket of water. For this marginal utility question, our answer will depend on how much of each we already have. Though the first units of water we consume every month are of enormous value to us, the last units are not. The utility of additional (or marginal) units continues to decrease as we consume more and more. In my original post, I mentioned that part of the cost of occupying two seats is the opportunity cost – by taking up two seats, you are preventing someone else who had travel plans from having a seat as well. And I mentioned that aside from Southwest, the general policy is for people who occupy two seats to pay for two seats. But there is an additional factor I didn’t talk about.  With these airlines, the policy also states that if the flight was anything other than full when the plane takes off, then the passenger who had to buy two tickets will be refunded for the cost of the second ticket. And thinking on the margin, this makes sense. If the flight was full, then the second seat this passenger used could have been a seat that was available for another traveler. In this case, the passenger using two seats displaces the travel opportunity of another potential passenger and costs the airline the opportunity to sell another ticket, so the marginal value of that second seat is one seat. But if there is even a single empty seat on the plane, the margins change. In this case, occupying that second seat didn’t displace a potential traveler, because the marginal potential traveler could have taken the empty seat instead. And when this is the case, the airline will retroactively reprice the second ticket as being equal to its marginal cost – that is, by refunding the second ticket, they retroactively change the price of the second ticket to zero.  So it’s not quite the case that a person who uses two units of a resource should pay twice the price of a person who uses one unit. Thinking on the margin leads to a slightly more nuanced take. Instead, the idea is that someone who uses an additional unit of a good should also pay the marginal cost of the second unit. Often, the marginal cost of the second airplane seat is a second airplane ticket. But, sometimes the marginal cost of the second seat turns out to be zero, and when that is the case, most airlines do in fact set the price of the second seat to be equal to its marginal cost.   (0 COMMENTS)

Tyler Cowen has an excellent Bloomberg article discussing the fact that economists did a poor job of forecasting the economy of 2023.  But the article has one paragraph that contains a troubling ambiguity: 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. The meaning of the phrase “massive negative shock to aggregate demand” is more ambiguous than you might assume, perhaps even more ambiguous than Tyler assumed.  Here are two possible meanings: 1. There were massive policy initiatives that should have reduced AD, but failed to do so. 2. There was a massive reduction in AD that should have caused a recession, but failed to do so. In the first case, we’d see what looks to many people like contractionary fiscal and monetary policy, combined with continued rapid growth in nominal spending. In the second case, we’d see a sharp drop in nominal spending growth, but no significant drop in output and employment. Either case would represent the failure of an economic model, but they would be very different models.  If contractionary policy failed to reduce AD, then our understanding of policy tools is flawed.  If a sharp drop in AD failed to cause a recession, then almost all versions of the Phillips Curve model would be flawed. So what actually happened in 2023?  While we don’t yet have the 4th quarter data, it looks like it was mostly a failure of the first type.  Some supposedly contractionary policy tools failed to significantly reduce AD.  I say “significantly”, because while nominal GDP growth will likely be around 6% to 7% in 2023, that is a bit less than in 2022.  Even so, if 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. The model that did get refuted is the assumption that the fiscal policy and interest rates have a reliable impact on aggregate demand.  It isn’t just 2023, these tools have NEVER had a reliable effect on AD.  Economists who assume that rising interest rates are “tight money” are engaging in the fallacy of reasoning from a price change.  (Previous prediction failures of this sort were generally waved away with vague comments about mythical “long and variable lags”.) This is not to say that all of the Phillips Curve models performed well in 2023.  When economists use inflation as a proxy for demand shocks, they are engaged in reasoning from a price change.  The Philips curve model that uses changes in the inflation rate did poorly in 2023.  In contrast, NGDP did pretty well as a policy indicator. The poor performance of the inflation/unemployment Philips Curve is probably due to two factors, both mentioned in Tyler’s article: 1. In 2022, actual inflation was above underlying inflation due to supply problems.  Then in 2023, actual inflation was below underlying inflation as supply chains healed.  Thus underlying inflation fell by much less than headline inflation. 2. The Fed had been targeting inflation at roughly 2% for 30 years and therefore inflation credibility was not completely lost during 2022.  Thus, it was possible to reduce inflation with less of hit to real output than we saw back in 1981-82. Many economists might be inclined to re-evaluate their model after the failed predictions of 2023.  In my case, 2023 has caused me to double down on my key beliefs: 1.  Aggregate demand models should focus on NGDP growth, not inflation. 2.  Interest rates are a poor indicator of the stance of monetary policy. 3.  It’s almost impossible to forecast turning points in the business cycle. Tyler mentioned that the Fed raised rates “from near-zero levels to the range of 5%, and fairly rapidly”.  I’m not sure if he thinks adding “fairly rapidly” is a way to avoid reasoning from a price change, but it isn’t.  It’s true that raising rates rapidly often makes policy more contractionary than otherwise, but it doesn’t provide any indication of whether policy was contractionary in an absolute sense.  In retrospect, it’s clear that the Fed was way behind the curve in early 2022, and the sharp rise in rates merely moved policy from highly expansionary to something close to neutral.  There was no massive negative demand shock. (0 COMMENTS)

President Javier Milei is wasting no time in implementing economic reforms in Argentina. On December 20, only ten days after taking office and outlining the disastrous state of the economy in his inauguration address, Milei issued an emergency ‘mega-decree’ with over 300 measures that significantly deregulate the economy by attacking crony capitalism. Indeed, the executive order focuses on removing obstacles in different areas. Perhaps the most important law to have been repealed by Milei’s decree was the Rent Law (“Ley de Alquileres”). Passed by an overwhelming majority only a few years ago, the law banned property owners from raising rent more than once a year, which in an economy with over 160% inflation was a recipe for disaster. The law also prevented owners from evicting renters who ceased to pay. In recent years, both measures had caused rent prices to increase and the number of available housing units to fall. Milei’s reforms allow for the signing of contracts without government intervention. Other laws that were repealed by Milei’s decree include the Industrial Promotion Law (“Ley de Promoción Industrial”), the Commercial Promotion Law (“Ley de Promoción Comercial”) and the Buy Argentine Law (“Ley de Compre Nacional”). These laws provided tax exemptions and subsidies to specific industries located in specific parts of the country, which in turn provided artificial advantages to some business over others for decades. In his decree, Milei also liberated markets in several agricultural provinces by removing obstacles to free enterprise. For example, regulations like the National Winemaking Policy Law (“Ley de Política Vitivinícola Nacional”) or the Sugar Law (“Ley de Azúcar”) are gone, which means that government-imposed maximum prices have been eliminated for wine producers and that sugar producers will no longer be required to sell part of their products within Argentina. Moreover, foreigners will now be able to buy as much land as they please, following the repeal of the Land Law (“Ley de Tierras”) by the megadecree. In a blow to the near-monopoly of the state-owned Aerolíneas Argentinas, Milei also implemented an “open skies” policy by repealing minimum prices for flight tickets. Until now, low-cost airlines were forced to charge customers higher than they wanted to so that inefficient Aerolíneas Argentinas would be in a better position to compete with them, but this is no longer possible. The state-owned company, by the way, is set to be privatized as per the decree. Unions were hit hard by Milei’s reforms as well. For years, they were able to withhold money from all registered employees even if they did not wish to use their services. For example, if an employee wanted to buy private health insurance, their union would still charge them a “fee” only for transferring their money to the company of their choosing. This possibility has been eliminated. With his decree, Milei also went after a unique feature of Argentine bureaucracy: Vehicle registers. (‘Registros del automotor.’) Until now, there existed over 1,500 private vehicle registration offices, with the government arbitrarily extending new licences to relatives and friends of public officials. Incredibly, these private offices were authorized to collect and keep several taxes and fees each time anyone had to register or transfer a vehicle. The megadecree calls for the creation of an online national register and a series of reformer to eliminate these intermediaries. Finally, Milei also repealed bizarre laws that regulated, for example, how products had to be displayed on supermarket shelves. Argentines will now also be able to purchase Starlink terminals, an option that was not available to them before the decree as satellite internet was heavily regulated. People will even have the chance to buy over-the-counter drugs outside pharmacies, who until now were the only ones authorized to sell them. Understandably, all of these decisions have caused an uproar by those whose legal privileges are now revoked. Unions protest because they are no longer allowed to keep money that is not theirs. Pharmacists protest because they are losing the monopoly to sell OTC drugs. Public bank employees protest because if those are privatized, working conditions will be based on market needs. There is also significant opposition to Milei’s reforms in Congress, as representatives from the opposition have voiced concerns about implementing so many reforms via decree. If both the House and the Senate vote to repeal it within a year, all of the reforms will have been annulled, but it is unclear whether this will be the case as the power balance in Congress is unstable. In any case, one thing is certain: The offensive against crony capitalism in Argentina has begun.   Marcos Falcone is the Project Manager of Fundación Libertad and a regular contributor to Forbes Argentina. His writing has also appeared in The Washington Post, National Review, and Reason, among others. He is based in Buenos Aires, Argentina. (0 COMMENTS)

High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes. From Adam Smith, The Wealth of Nations. Notice that there are two “leakages” due to the high tax. The first is simply a move up the demand curve for the taxed item. The second is a reduction in the quantity purchased legally. When I gave my recent OLLI talk on The Wealth of Nations, I noted that there appeared to be such a case in Canada in the early 1990s. I noticed it at the time and found the following, from testimony by a GAO official before a House subcommittee: According to the Canadian government, sharp increases in Canadian federal and provincial cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the United States and Canada conducted almost entirely by organized crime. Violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues. Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes and increasing its enforcement efforts, among other steps. Since then, smuggling has declined considerably. In his testimony, the official pointed out that from 1984 to 1993, Canada’s federal cigarette taxes rose from 42 cents per pack to $1.93; Ontario’s rose from 63 cents to $1.66; and Quebec’s rose from 46 cents to $1.78. Those two provinces alone accounted for well over 50 percent, and close to 60 percent, of Canada’s population. The result of all these tax increases was that the price of a pack rose from $2.64 in 1984 to $5.65 in 1993, all in 1994 dollars. How did the illegal flow occur? The official stated: During most of this period, cigarettes made in Canada were exported tax-free to the United States. Organized criminal groups purchased Canadian cigarettes that had been exported to the United States and smuggled them back into Canada. This resulted in more than an 11-fold increase in United States cigarette imports from Canada from 1990 to 1993 (see fig. 1). The 1994 study found that an Indian reserve that straddles the U.S.-Canadian border between Cornwall, Ontario, and Massena, New York, had become the primary conduit for smuggling cigarettes into Canada. I had grown up in Canada thinking of us Canadians as relatively law-abiding and I think that was true. But change the incentives, and behavior changes. Adam Smith would not have been surprised. (0 COMMENTS)

The Latin phrase Nemo judex in causa sua can be roughly translated as:  No man can judge his own cause. This ancient maxim is a bedrock principle of English common law.  In this post I’ll argue that violation of this principle has caused great damage to the field of macroeconomics.  Macroeconomists have sat in judgment of their own decisions, and failed to reach an accurate assessment.  Here’s my hypothesis: In areas when economists play a major role in policymaking the economics profession will fail to provide a fair and balanced appraisal of the extent to which bad outcomes are due to policy mistakes and the extent to which bad outcomes are due to exogenous shocks. To be clear, I’m not suggesting that economists are doing anything illegal, or even unethical.  Rather, I’ll argue that in the normal course of “doing macroeconomics”, the profession ends up sitting in judgment of their own decisions, and almost inevitably a certain bias seeps into the way they evaluate the effects of policy.  That has led to important blind spots in our understanding of contemporary macroeconomic events. Here are some specific claims: 1. Economists (broadly defined to include key monetary policymakers without an economics degree) have great influence over the course of monetary policy.  Monetary policy tends to mostly (not entirely) reflect the consensus view of economists. 2.  Economists are unlikely to reach the conclusion that their policy views were wrong.  Instead, they will blame any resulting macroeconomic problems on various “shocks”, even when the evidence strongly points to a failure of monetary policy. 3.  In contrast, economists will be willing to criticize the policy decisions made by earlier generations of policymakers, or the policy decisions of economists in other countries. Here is some evidence: 1. At the time, most economists did not believe that a Fed tight money policy was a major cause of the Great Depression.  Today, that is a widely held view among economists, even Fed economists. 2. At the time, most economists did not believe that a Fed easy money policy was the cause of the Great Inflation of 1966-81.  Today, that is a widely held view among economists, even Fed economists. 3.  Many western economists were highly critical of Japanese monetary policy during the late 1990s and early 2000s, despite the fact that Japan had cut interest rates to zero and done some QE. 4.  These same economists tended to be much less critical of Fed policy during 2008-09, despite conditions being quite similar to the Japanese case. 5. In the case of the recent high inflation, American economists focused most of their blame on supply side problems and excessive fiscal stimulus. I believe that American economists were also more likely to blame the ECB’s tight money policy for the eurozone’s double dip recession in 2011, whereas European economists were more likely to point to the debt crisis.  (I’m less confident on this point than the other five—please correct me if I’m wrong.) Here is some evidence for the claim about Japan. In 2003, Princeton economist Lars Svensson published a paper offering a “foolproof” way out of its liquidity trap and deflation.  The term foolproof suggests that even a fool could accomplish this task.  But the Japanese failed to do this, so what are we to infer? In 1999, Paul Krugman had this to say about Japanese policy: What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy. Will somebody please explain this to me? In 1999, Ben Bernanke published a paper entitled: “Japanese Monetary Policy: A Case of Self-Induced Paralysis?*  In a nutshell, the answer he provided was “yes”: I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years . . . I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.” Japan had suffered a real estate and banking crisis, followed by recession and near-zero interest rates.  In 2008-09, the US faced a quite similar situation.  But this time most of our economists failed to blame the central bank for the severe decline in “nominal spending”.  Instead, the problem was attributed to various “shocks”, and the central bank was excused because there was a feeling that they had done all they could. In fact, the Fed failed to do the specific things that we recommended the Japanese do.  The Fed did not do level targeting.  The Fed did not do a “whatever it takes” approach to QE.  Instead, the Fed warned of various vague costs and risks associated with open ended QE, concerns that were brushed aside when advice was given to the Japanese. The underlying problem is that the Fed’s policy was close to the consensus view of American economists, and no one likes to admit that they were wrong. The case of the recent inflation is a bit more ambiguous.  Many economists did suggest that the Fed waited a bit too long to raise rates.  Even in this case, however, you find very few economists plainly stating that the Fed caused the high inflation of 2021-23 with a recklessly expansionary monetary policy.  Instead, the overwhelming majority of the attention has focused on two other factors—supply problems due to Covid/Ukraine, and overly expansionary fiscal stimulus.  In my view, economists have put about 50% of the blame on supply problems, 40% on excessive fiscal stimulus, and at most 10% on Fed stimulus. In fact, almost 100% of the cumulative inflation since 2019 is due to monetary policy.  Full stop.   It’s the Fed’s job to take fiscal stimulus into account and offset it so that aggregate demand grows at a rate consistent with its dual mandate.  Although the Fed doesn’t have to offset supply shock inflation (due to its dual mandate), those effects have mostly unwound over the past year.  While some of the inflation of late 2021 and early 2022 was supply side, over the longer run the rate of excess inflation (inflation above 2%) is almost identical to the amount of excess NGDP growth (nominal growth above 4%.)  Real GDP growth over the past 4 years has been about 2%, slightly above the Fed’s estimate of trend RGDP growth (which is 1.8%).  So the cumulative excess inflation since 2019 is almost all demand side. The Fed created the high inflation of 2021-23, and now Powell is being lionized by the profession for creating a soft landing.  Powell has done a good job of fixing the problem (so far), but it’s a problem that was almost entirely created by the Fed. In my view, this is a fatal flaw with modern macroeconomics.  Because monetary policy reflects the consensus views of economists, we cannot expect our economists to accurately diagnose the causes of policy failures.  At best you’ll get a few heterodox economists pointing to the role played by Fed policy, people like Robert Hetzel and Tim Congdon. How can this problem be solved?  We need a policy regime where policy failures are able to be clearly identified.  I thought FAIT would be such a regime, but the Fed spoiled it by later deciding that average didn’t mean average.  We need a clear and specific target path for NGDP, and a promise to return to that path when the economy deviates from stable growth in nominal spending.  Only then will it become apparent who deserves blame for policy failures. BTW, I’m not saying policy must immediately return to the trend line.  NGDP data can be noisy, and during periods like Covid it makes sense to allow a year or two to return to trend.  But policy must commit to a long run trend line if we are to avoid repeating the mistakes of 2008-09 and 2021-22. PS.  In fairness, Paul Krugman did argue (correctly) that the Fed should be more aggressive during the post-2009 recovery.  That was a minority view. But in my view he overlooked the role of tight money in the 2008 recession, which he attributed to exogenous shocks. PS.  Merry Christmas! (0 COMMENTS)

Do psychologists know anything? Psychologist Paul Bloom says yes–but not the things that you might think. Bloom discusses his book Psych with EconTalk’s Russ Roberts and what the field of psychology can teach us about human intelligence, consciousness, and unhelpful instincts. They also discuss just how far psychology is from a true understanding of the human […] The post Can Artificial Intelligence Be Moral? (with Paul Bloom) appeared first on Econlib.

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A gift is free only for the recipient, not for the giver. If it were free for the giver too, it would mean that it required no use of scarce resources (inputs) or that it has no market value. It would not be a gift, because the recipient could get it for free by herself. “Look at the moon” is not a gift if the moon is shining. From an economic viewpoint, nothing is free that incorporates the use of scarce resources (including time) or has a market value (somebody else is willing to pay something for it). A gift may not be free even for the recipient if, to benefit from it, he needs to pay or do something (say, buy a subscription). One may of course define “free” as one wishes, but there is an advantage in using a coherent concept, as does the analytical tradition of economics in which resources are scarce and valuable and nothing produced with these resources (including labor) can be free for everybody. Either the resources are conscripted or somebody has to pay for their use. Even for Christmas, free gifts do not exist: somebody pays for them–which should be pretty obvious. A fund-raising advisement on Wikipedia’s website gave me an excuse for this reflection. They were asking for some ridiculous minimum donation –something like two dollars and a few cents. The strategy obviously works: like every year, I fell for it and gave a little more. I don’t use Wikipedia as often as other reference tools. For example, I usually prefer Britannica’s signed entries. But I still use Wikipedia occasionally and often find it useful. Like many people, I felt morally compelled to contribute to charity which, in this case, amounts to the private production of a “public good.” Soon after my contribution, I got an automated reply signed by the CEO of the Wikipedia Foundation; an excerpt: Thank you so much for the one-time gift … to support Wikipedia and a world where knowledge is free for everyone. … I’m truly grateful for your support in enabling billions of people to experience the gift of knowledge through Wikipedia. We are determined to extend this access as far as possible to make sure that no matter where you are born or where you live, the ability to access free knowledge is always within your reach. These few words contain much nonsense. A world with free knowledge is a mirage or a fairy tale. I thought that such cliched marketing deserved a reply. I sent a short email explaining that Knowledge is not and can never be “free for everyone.” Some access to some information can be paid by somebody else than the consumer; any other promise is highly misleading. Moreover, of course, the time spent on learning is part of the cost (non-price cost), which neither I nor you reimburse to Wikipedia users. I should have added that checking the validity of new knowledge is costly, which also applies to Wikipedia. I noted that Wikipedia is useful but should not say that it gives what it cannot give. My answer must not be very common, for I received an answer that had nothing to do with my little lesson on giving and the cost of knowledge. At the end of the answer was a note: Due to the volume of inquiries we receive, we use Zendesk as a donor response platform. By emailing donate@wikimedia.org, you understand that your information will be processed by the Zendesk Group in accordance with Zendesk’s terms. Merry Christmas to all EconLog readers! (Note that this wish gift did use some resources albeit of a very low marginal cost.) (0 COMMENTS)