I used to think of 100% confidence in a belief as being equivalent to metaphysical certitude.  But in recent years, I’ve heard more and more young people use the phrase “one hundred percent” when they meant something like “I strongly agree”.  So perhaps I misunderstood the meaning of this Bloomberg headline from October 17, 2022: In all seriousness, I’m not here to gloat that Bloomberg missed this call.  At that time, the consensus view of economists called for a recession in 2023.  I also thought the risk of recession was substantially elevated during a time when the Fed was attempting to bring inflation down.  Nonetheless, this is just one more example of the fact that economists as a group are utterly unable to forecast the business cycle.  We have failed to forecast any of the recent recessions experienced in America, and on the one occasion we did forecast a recession it did not occur.  That’s not just a bad record, it represents “100% failure”. Should we be ashamed of this dismal performance?  I’d say no.  During my very first week of blogging back in early 2009, I did a post drawing an analogy to the work of structural engineers.  We don’t want engineers to accurately predict the collapse of a major bridge; we’d like our engineers to prevent bridge failure.  We’d like them to spot cracks in the steel supports and prop up the structure before it falls into the river. Similarly, we should not ask economists to be oracles—a role they are unsuited for.  Rather we should ask them to design public policies that prevent recessions, at least as far as is feasible.  (I doubt that anything would have prevented a brief recession in March 2020.) Similarly, we should not ask economists to predict how high California housing prices will rise in 2024 (recall the EMH), we should ask them to design housing policies that make housing more affordable for average people, such as deregulating housing construction. We should not be dismayed by the fact that economists have such a dismal record at predicting recessions.  In most cases, if the Fed could have predicted a recession then it would have prevented it.  Did you ever accurately predict any traffic accident you were in?  If you are like me, a traffic accident occurs when you least expect it. We should be dismayed that economists have not devised better policies for preventing recessions.  But we are making progress—recessions have become less frequent since 1982.  With the adoption of nominal GDP level targeting, there would be a further reduction in the frequency of recessions. PS.  If I were President Biden I would ask myself why I am so unpopular despite avoiding a widely predicted recession.       (0 COMMENTS)

Once you realize that political rulers are subject to the same, mainly self-interested, incentives as ordinary individuals, hidden features of the world become visible. Consider the question of who is responsible for the blast at the Al-Ahli Arab Hospital in Gaza. Until economists started developing public choice theory in the mid-20th century, and despite some exceptions (Machiavel comes to mind), it was common for political analysts and economists to neglect the self-interested incentives of political rulers, including in democracies. Thanks to this analytical tradition, we can better understand many political phenomena, including atrocities in the current Middle East war. Self-interest explains much of the incentives of any little barbarian warlord (in this case, self-interest may include, but not only, 72 virgins in heaven). Self-interest similarly explains the behavior of Israeli prime minister Benjamin Netanyahu and American president Joe Biden. The incipit of Anthony de Jasay’s The State gives a methodological heuristic to grasp this: ”What would you do if you were the state?” (Giving up beds of roses grown with your own money in return for nothing?) Now, to our question, who would have the strongest incentives to take the risk to bomb, intentionally or not, a hospital in Gaza, even if it killed tens or hundreds of civilians? From a public-choice and rational-choice perspective, we know two related things. First, it is in the interest of the agents of whatever side is guilty to lie: if Hamas (the Palestinian quasi-state terrorist group), in order to erase its own moral turpitude and gain some apparent moral high ground; if the Israeli state, to shift the blame to Hamas or their fellow Palestinian terrorists. Second, constraints and limits (one’s “feasible set” or feasible options) change incentives. The incentive to lie is stronger if the lie has fewer chances of being exposed because, for example, there is no free press or independent organization to investigate on-site; and if the expected penalty for the outed liar is low. This is why autocratic states or barbarians lie more glaringly. If this is true, the liars on the hospital blast are more likely to be Hamas or the Palestinian Islamic Jihad. This hypothesis was buttressed by US intelligence, the Israeli military, private analysts, and open-source imagery. The cause would be an “errant” or “misfired” missile, perhaps after an attempted launch from a nearby cemetery. The pictures taken at the scene also appear to be consistent with a rolling fireball from the missile’s fuel, but not with an aerial attack. (See “U.S., Experts Say Evidence Suggests Palestinian Rocket Hit Gaza Hospital,” Wall Street Journal, October 18, 2023.) This hypothesis of a nearby launch would also be consistent with the terrorists’ practice of operating behind human shields. On the other hand, it would not be the first time that the US government (and, I suppose, the Israeli government) has lied to its citizens or to the world, but the fact that such lies are regularly found and disclosed attenuates this possibility. Of course, we need to be open to any new evidence that may come up. At the very beginning of the war, some analysts underlined the risk of an Israeli defense strategy that would not recognize and proclaim the moral necessity of not behaving like the barbarians who had started the war. It was difficult to find such proclamations; we mainly heard talks of vengeance. And when Netanyahu said something to that effect during Biden’s visit, it was accompanied by an ambiguous qualification if the Wall Street Journal‘s report is correct (“Biden Backs Israel Over Gaza Hospital Blast,” Wall Street Journal, October 18, 2023): Netanyahu said Israel is doing everything it can to keep civilians out of harm’s way, while also saying that “this will be a different kind of war, because Hamas is a different kind of enemy.” Of course, we know that: barbarians are a different enemy than non-barbarians. A few days after Hamas’s aggression, Financial Times columnist Edward Luce voiced a prescient warning (“Biden, Netanyahu and America’s choice,” Financial Times, October 11, 2023): Last weekend’s massacres were designed to provoke retaliatory Israeli atrocities in the Gaza Strip. … The rational position is to reject the playbook that Hamas wants. It seems that affirming the moral-individualist position is also (or would have been) the best strategic decision from an Israeli viewpoint. (0 COMMENTS)

On October 6, 1973, Egypt and Syria attacked Israel. The Soviet Union supplied the Arab nations and the United States backed Israel. On October 16, with the war going badly for Egypt and Syria, a group of Arab oil producing countries retaliated, raising oil prices by 17% and announcing production cuts. The ‘Oil Crisis’ had begun. On October 19, the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an embargo of oil exports to nations supporting Israel. By the end of the embargo in March 1974, the global oil price had quadrupled, from $3 per barrel to nearly $12 per barrel; US prices were significantly higher.  When, in 1974, American inflation hit 11%, many blamed the ‘oil shock’. John Kenneth Galbraith later wrote that “Four factors were at odds with American economic well-being” in the 1970s, one of which was “the highly specific matter of energy prices” which “became an inflationary force in the economy as a whole.” More recently, J. Bradford DeLong argues that: Because oil was the key energy input in the world economy, the shock of these price increases reverberated throughout the world, and eventually they would lead to the double-digit annual inflation of the late 1970s. This is a common explanation for the high inflation of the 1970s. But is it correct? Both Galbraith and DeLong concede that inflation was rising before the oil shock: from 1.6% in 1965 to 5.9% in 1970. It was one of the ills Marvin Gaye sang about on 1971’s ‘Inner City Blues.’  On August 15, 1971, President Nixon announced, “I am today ordering a freeze on all prices and wages throughout the United States.” Galbraith blamed “the continuing pressure of wages on prices and prices on wages – the now-tedious wage-price spiral,” without explaining how consumers could simply swallow the higher prices generated by this supposed spiral. DeLong gets closer. Originally imposed for 90 days, controls remained in place until shortly after Nixon’s reelection in November 1972, and he writes that “…the supply of money greatly outran demand, and as Nixon’ price controls were lifted, inflation accelerated ever upward.” Milton Friedman would have substantially agreed.     This inflation meant that the dollar was, Robert Bartley wrote, “depreciating against oil, against gold, against foreign currencies, and against nearly everything else.” Under the Bretton Woods system, dollars were convertible into gold at $35 per ounce. As the dollar depreciated, people began swapping their dollars for gold. Besides imposing price controls, August 15 also saw Nixon ‘close the gold window,’ suspending the redemption of dollars for gold and freeing the currency from the last vestiges of the discipline of the gold standard.  This inflation also meant that, with oil priced in dollars, oil producers were receiving a depreciating asset in payment for their product. Bartley explained that: …in 1969, a barrel of oil was worth almost 1/12 of an ounce of gold. At world prices in 1972, a barrel of oil was worth almost 1/16 of an ounce of gold. On the eve of “the first oil shock” a barrel of oil was worth 1/26 of an ounce of gold. In September 1973, the Organization of the Petroleum Exporting Countries (OPEC) issued a resolution “concerning the recent international monetary developments and their adverse effect on the purchasing power of the oil revenues of Member Countries,” noting that “these developments have resulted in a de facto devaluation of the United States dollar, the currency in which posted prices are established.” They resolved to adopt: …ways and means to offset any adverse effects on the per barrel real income of Member Countries resulting from the international monetary developments as of 15th August 1971. This they did. “In the first half of 1974,” Bartley wrote, “after “the shock,” a barrel of oil was worth almost 1/12 of an ounce of gold,” just as it was in 1969.  The oil shocks were, then, more a consequence than a cause of the inflation of the 1970s.  The notion that they were the causes was, however, politically useful. As Galbraith noted,  …for those who wished to shed personal responsibility for the poor performance of the American economy, the political convenience was compelling: it was more than agreeable to attribute the blame to the Arabs. Little has changed. In April, 2022, President Biden claimed that a war which began in February 2022 was responsible for “70 percent of the increase in inflation” which began in May 2020. As a track from 1973 put it, ‘The Song Remains the Same.’     John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Economic freedom matters. On a recent visit to Israel, I toured the west-bank territory occupied during the 1967 six-day war. Much to my surprise, there was almost no sign of a military presence. Israeli soldiers were conspicuous only by their absence. The Jordanian Arabs were peacefully going about their business. I had no feeling whatsoever of being in occupied territory. This is from Milton Friedman, “Invisible Occupation,” Newsweek, May 5, 1969. I “discovered” Milton Friedman while perusing old Newsweek magazines in the summer of 1968. I still remember the first column that caught my eye, a column titled “The Public Be Damned.” So I started reading every 3rd Newsweek to see what he would write next. (Milton, Paul Samuelson, and Henry Wallich took turns.) I didn’t know much about Israel but I had followed the 1967 6-day war. So when I saw this piece less than 2 years later, I found it eye-opening. Another excerpt: This wise policy involved almost literal laissez-faire in the economic sphere–and is possible only because it did. Jordanian money is permitted to circulate alongside Israeli money. West-bank farmers may grow whatever they wish and may sell their produce at any price they can command not only in the west bank but also in Jordan itself, so there is active trade across the Jordan River. An agricultural extension service manned by several hundred Jordanian civil servants, plus a literal handful of Israeli experts added after the war, has been galvanized into greater activity and has been extremely effective, so that agricultural output is growing rapidly. To a casual observer, the area appears to be prospering. The major interferences with economic laissez-faire are restrictions on the export of farm products to Israel and on the movement of labor. Restrictions on exports have been imposed because Israel has adopted a governmental policy of supporting the prices of some farm products (we are by no means the only country that goes in for such foolishness). The importation of these products into Israel from the west bank would tend to force down the fixed prices or require the accumulation of additional surpluses. Restrictions on the movement of labor partly have a similar rationale–preservation of union wage rates–and partly the valid justification of reducing social tension and the danger of disruptive activity. Read the whole thing. It’s a Newsweek column and so it’s short. I wondered what Milton’s further thoughts would be and I found them in Chapter 27 of Milton and Rose D. Friedman, Two Lucky People, 1998. (My copy is autographed by Rose.) Milton wrote: Unfortunately, the happy situation described in the Newsweek column was short-lived. The six-day war was followed by the Yom Kippur war in 1973. Palestinian guerrillas launched terrorist attacks on Israeli civilians, and the rest of the dreary record of violence of the ensuing years unfolded. In addition, the Dayan policy of laissez-faire was largely abandoned, in line with growing government control of the Israeli economy. I believe that the increased socialization of the Israeli economy was a tragedy for both the internal economy and external relations. If Israel had followed a more laissez-faire policy internally, it would have been more prosperous and could have followed more nearly a Dayan policy with the occupied territories. That would have provided greater economic opportunities for the Palestinians and greatly eased political relations.   (0 COMMENTS)

Some people advocate for public schools by suggesting that education is a public good. It’s not, but maybe this is a case of people mixing up terminology. To most non-economists, “public good” sounds like “something good for the public.” So maybe what they mean is to suggest that education has positive externalities. I benefit from being numerate and literate, but I also benefit when my neighbors are also numerate and literate. This is fair as far as it goes, but it still doesn’t amount to an argument for the public provision of education. While standard economic theory says markets will fail to provide public goods, and therefore such goods should be provided by the government, it also says that goods with positive externalities will be provided by the market, but at a lower than optimal quantity. Positive externalities don’t call for the public provision of some good – at most, they call for subsidizing that good. Or in other words, the positive externalities of education can be an argument in favor of a school voucher system, rather than government-run schools. The arguments for and against school vouchers is obviously beyond the scope of what I can cover in a single blog post. But there are two common arguments I hear against school vouchers that have never made any sense to me. The first argument is the concern that if vouchers were an option and as a result private schools were more widely available to students, it would drain students away from public schools and severely undermine them. This outcome may or may not be what occurs, but even if the prediction is accurate, I fail to see what the problem is. Public schools are a means to an end, not some terminal good that is an end in themselves. So simply claiming that the scope of public schooling would diminish cuts no ice. And besides, saying “if people had a choice about where to send their kids to school then nobody would want to use the public school system” is not the powerful defense of public schooling that its advocates seem to think it is. The second argument is that parents, not being professional educators, are unqualified to determine what constitutes a good education. Thus, if parents were allowed to choose where to send their children to school, they would be unable to make a well-informed choice. This has always struck me as unpersuasive, for at least two reasons. The first reason is that this line of reasoning is one that even its advocates would reject when applied to other areas of life. Most parents are not professional theologians, but that doesn’t mean parents should not be allowed to choose their children’s religious upbringing. Most parents are not medical professionals, but that doesn’t mean parents shouldn’t be allowed to choose their child’s pediatrician or approve of what medical treatments their child will or won’t receive. The argument “If parents aren’t trained professionals in X, then decisions about X should be made by the state instead of by the parents” isn’t any more valid an argument when X is choosing a school – and to apply this argument only to the school system and reject it elsewhere is just special pleading. The second reason is that parents do, in fact, make decisions about what schools are better for their kids all the time, and we all find it largely unobjectionable when they do. For example, President Biden, an opponent of school choice systems, sent his own sons to private schools. No doubt he didn’t make the choice about what school to send them to willy-nilly – I’ll bet he gave it a good amount of time, effort, and thought. I’m sure the same is true of other parents who send their children to private schools. What would the people who insist parents aren’t equipped to make good choices about schools say to such people? Would they say the time and effort the parents spent making sure they found the best possible option for their kids was wasted, because as mere parents and not professional educators, they lacked the knowledge to make a good choice? I doubt it. People often put the same effort into making these decisions regarding public schools as well. When buying a home, a major factor many people consider is the school district to which they’d be assigned when they buy that home. If you’re the sort of person who is skeptical of school vouchers because you think parents are poorly equipped to judge what schools are best, imagine you’re in this situation. You are talking with some friends of yours, a young married couple, who are making their final decision on which house to buy. They inform you that they have finally chosen. It was down to two houses, the one on Oak Street, and the one on Van Buren. While they actually liked the house on Van Buren a little better, they have decided to go with the one on Oak Street, because the Oak Street house would put their kids into a better school district. Upon hearing this, would you say to them “Oh, don’t be silly! You’re not professional educators – you’re not qualified to decide what school would be better for your kids anyway! So, forget about that, and just get the house on Van Buren! You liked that one better after all, and there’s no reason for you to pass on the house you liked more because you think the other house would make for a better school choice!” Clearly that’s not a reaction even most opponents of school choice would have. We don’t merely find it unobjectionable that parents would take the quality of school districts into consideration when deciding on what house to buy – it’s widely viewed as a wise and appropriate consideration. If anything, failing to account for that would be viewed as irresponsible and blameworthy. It turns out that parents making “school choices” for their kids already exists and is nothing to fear. Vouchers wouldn’t be putting parents into a new position they are unqualified to handle – they would just grant more parents the ability to make the same kind of choice that many others are already exercising without issue. (0 COMMENTS)

The following comment is based exclusively on my impressions, hence it may be completely wrong… but it seems to me that the movie industry, in its insatiable demand for new content (not by chance, Netflix, Amazon or Apple are behind the films I’m about to mention), is becoming more interested in business stories. This year, for example, we had the formidable “Air”, a truly excellent movie that centered around the development of a product, the Nike Air Jordan, stripped of all romance and drama; “Tetris”, the very well told story of the intricacies and power plays behind the development of one of the world’s most famous games; “The Beanie Bubble”, on the eponymous stuffed animal, a more traditional story full of drama and strongly biased against “greed” (as virtually all business movies used to be). And now, “Blackberry”, by Matt Johnson. I liked “Blackberry” a great deal. For one thing, it played the nostalgia effect, for me. I loved my blue Blackberry and I still miss it as the best cell phone I ever had. Not that my iPhone isn’t packaging together a great deal more things – but the Blackberry was all about e-mails, a by now outdated form of communication still dear to me vis-à-vis WhatsApp, Telegram, et cetera. Blackberry was fast, lean, and (but my memory may be tricking me) quite reliable. The movie is mostly about business, in the sense that it does not indulge in the personal or love lives of the characters. That sometimes is important for the story, but sometimes is a trick played by screenwriters who just find business uninteresting. It is not the case of Matt Johnson. I know very little about the story of Research in Motion, RIM, the company which made Blackberry. I finished the movie wanting to know more, which is a good sign. The film focuses on mainly two figures: Matt Lazaridis, the brain behind Blackberry, and Jim Balsillie, the co-CEO with a business rather than a tech background. It could be seen as a suits vs geeks story. Screenwriters, but also viewers, tend to be biased in favour of the geeks. So I assumed Blackberry was, at least looking at the theatrical manifesto. But it is a more balanced movie. The success of Blackberry is traced back to Lazaridis’ genial intuitions, both when it comes to the product itself and the way in which it interacted with the telecom network. But it is clear that the company would have never taken off, if it wasn’t for Balsillie imposing some business discipline on it. The Faustian bargain between being loyal to the nerdish original spirit and the quest for success (and profits) at the beginning pays off, but then it provokes a mutation of the geek Lazaridis into kind of a suit – which doesn’t work particularly well. I do not want to anticipate too much, but I found it telling that, though late and bad because he was distracted by personal matter, it is Balsillie who understood the change of the game with the iPhone. Lazaridis is now sacrificing him (for reasons you may remember, or go watch the movie) but moreover can’t hear him. He is enamored (as many genuine entrepreneurs are) with his business model and can’t contemplate an alternative one. As I said, I do not know how accurate the movie is, and I would like to know. I suspect it exaggerated the precarious conditions of RIM before the launch of the Blackberry phone and presented its decline after the introduction of the iPhone as more tumultuous and quicker than it was. Yet I found it a decent description of the business world. It does not deny the existence of “pirates” and fraudsters (who could?) but tells a story in which a company is being truly innovative and generating value for customers and wealth for its founders. It also points out, in a rather neutral and intelligent way, that the tables may turn, and innovation is not necessarily path dependent. A new comer may arrive and revolutionize the market. Creative destruction doesn’t spare anyone. Our understanding of the world we live in is shaped by stories, and in the times we live stories are mainly movies and TV series. How people “get” the market economy depends upon them more than anything else. So, I find good business movies a more promising and important signal than good best-sellers in economics (and no longer a rarer one, perhaps because best-seller in economics are now mainly carbon copies of old Marxist pamphlets). (1 COMMENTS)

  On this 9-minute video from Marginal Revolution University, at about the 2:40 point, is told the tale of Claudia Goldin, as a Ph.D. student, going down to the South to get archival data on the economics of slavery and the post-Civil War South. Narrator: She had to travel to some southern states to gather archival materials for this research. Goldin didn’t approach this trip like a traditional economist. Lawrence Katz [Claudia’s husband]:  She thought what I should do is hitchhike between the different cities in the South. She met some woman from one of the archives who let her stay at their place, and when she came back, her advisor asked her for a list of the receipts and expenses associated with the trip, and she had no clue that you were supposed to actually stay in hotels and pay for actual travel and that you could get reimbursed for this. But in fact, by actually staying with the archivist and getting access to archives and knowledge that you wouldn’t have had, it probably created inroads and understanding that wouldn’t have been possible if you were going through usual channels. In February 1975, when I was doing archival research for my Ph.D. dissertation on the economics of safety legislation in underground coal mines, I flew to Washington and spent a whole afternoon digging in the United Mine Workers’ library. Had I done the Claudia version, I would have tried to stay with the librarian. (0 COMMENTS)

During the first half of the 20th century, great power competition often involved the military.  During the second half of the 20th century, competition switched to trade and investment.  Canada seems to be one of the first countries to understand that the 21st century will be a battle for the world’s top talent: Last month, Canada offered a three-year work permit to anyone holding a U.S. H-1B visa, the most common entry permit for immigrants working in the tech sector. The program, aimed partly at workers laid off in Silicon Valley’s recent downturn, drew 10,000 applicants in its first 48 hours — “a strong indication of just how competitive Canada is on the global stage,” a spokesman for the country’s immigration ministry said. It was also a reflection of frustration among migrants who find the U.S. visa system difficult and slow. According to one estimate, only about one in 10 people who register for the annual H-1B lottery get a visa. “A Canadian visa is much easier,” Gireesh Bandlamudi, a 29-year-old software engineer from India, told me. With a U.S. job offer in hand, he considered his chances of winning an H-1B and applied to Canada instead. He now works remotely with AtoB, a San Francisco firm that provides financial services to trucking companies, from his new home in Vancouver. Several factors are making immigration policy increasingly central to great power competition: 1.  Rapidly declining birth rates.  Some countries will see their population fall in half each generation, if they do not allow immigration. 2. The switch from agriculture and manufacturing to the information economy, where top talent is especially important. 3.  The ability to work from anywhere. This general argument also applies to competition among American states.  High tax/low service states will increasingly lose out to more business friendly locations. PS.  The NYT suggests that the US is missing out on talent due to an overly cumbersome immigration regime: Most of the emigrants I spoke to, explaining why they did not pick the United States, cited America’s complicated and unpredictable process for applying for visas and permanent resident status. The number of student visas granted by the United States to Chinese nationals, long a starting point for promising future emigrants, began to fall in 2016, as relations between the countries deteriorated. In the first six months of 2023, Britain granted more than 100,000 study visas to Chinese nationals, while the United States granted roughly 65,000 F1 student visas.     (0 COMMENTS)

One of my main arguments for legalizing weed, cocaine, heroin, etc. relates to costs and benefits when drugs are illegal versus costs and benefits when they’re legal. Specifically, those who bear a large part of the costs when drugs are legal are the users themselves whereas, when drugs are illegal, the drug war imposes costs on people who have no connection to the drug trade. In the former case, think of people who overuse drugs (by some standard) and have a pretty awful life. In the latter case, think of the innocent bystanders we hear about in Chicago and elsewhere who are unlucky enough to be caught in the crossfire. I don’t want anyone to bear costs, but if people are to bear them, it’s much more fair for those who use drugs to bear them than for innocent bystanders to bear them. Here’s the abstract of a recent study by three economists at the Kansas City Federal Reserve Bank: We analyze the effects of legalizing recreational marijuana on state economic and so- cial outcomes (2000–20) using difference-in-differences estimation robust to staggered timing and heterogeneity of treatment. We find moderate economic gains and [sic] accompanied by some social costs. Post-legalization, average state income grew by 3 percent, house prices by 6 percent, and population by 2 percent. However, substance use disorders, chronic homelessness, and arrests increased by 17, 35, and 13 percent, respectively. Although some of our estimates are noisy, our findings suggest that the economic benefits of legalization are broadly distributed, while the social costs may be more concentrated among individuals who use marijuana heavily. States that legalized early experienced similar social costs but larger economic gains, implying a potential first-mover advantage. The study is Jason P. Brown, Elior D. Cohen, and Alison Felix, “Economic Benefits and Social Costs of Legalizing Recreational Marijuana,” September 28, 2023. In short, their findings roughly fit what I have thought would result from legalization. The part that doesn’t fit is arrests. I would have thought that arrests would fall, not rise. The costs of substance use disorders and chronic homelessness are arguably borne mainly by the users. That’s why I don’t think the authors are careful enough in their use of the term “social costs.” We generally think of “social costs” as being equivalent to “negative externalities.” To be sure, there probably are negative externalities from people have substance use disorders and/or being chronically homeless. But it’s important to separate the externality part from the “costs borne by users” part. The reduction of “caught in the crossfire” is not likely to be important for legalizing marijuana because, at least in my perception, there aren’t many drug gang fights over the marijuana trade. (I’m open to being corrected on this.) One of the main benefits I would expect from legalizing much harder, and more expensive, drugs is that the price would come down and, therefore, users wouldn’t steal as much to support their habit. I wouldn’t expect this effect with legalization of marijuana because, as I noted recently in my review of Robin Goldstein and Daniel Sumner’s Can Legal Weed Win?, the heavy regulation that accompanies legalization of weed means that legal weed is often more expensive than illegal weed. By the way, you might wonder why economists at a federal reserve bank are writing about an issue that has nothing to do with monetary policy. But if you’ve followed studies by Fed economists over the years, you wouldn’t be surprised. Each federal reserve bank has a lot of economists looking for issues to research. One benefit, from the viewpoint of the researchers, of researching issues that have nothing to do with monetary policy is that you can’t get in as much trouble as you can get into by researching monetary policy. HT2 Kevin Lewis. (0 COMMENTS)

Portland, Oregon is a city I have for which I’ve always held fond feelings. I grew up fairly close to it, and spent a good deal of time there throughout my youth. It’s also the location of my favorite book store, Powell’s City of Books, a giant new and used book store that where I have spent an amount of money over the years that would add up to a down payment on a house. Whenever I would travel back to visit family, a trip to Powell’s was just assumed to be part of the plan – and I’d always make sure when flying out there that my luggage would have plenty of empty space for all the extra books I’d be bringing back. However, knowing what I’ve always known about the political zeitgeist in Portland, I wasn’t at all surprised to learn about some new policies that are being rolled out for the public school system there. Among these policies is a mandate that would “prohibit teachers from giving students a failing grade for missing work or even if they are caught cheating.” The news story reports some of the other new policies: Teachers must also do away with the 0-100 grading scale and replace it with a 0-4 scale, which the district claims is “more mathematically accurate.” Moreover, students’ total grades will reflect only their most recent performance – not their total work over the course of a semester. To combat teachers’ “implicit bias,” homework will not be graded, and teachers cannot provide extra credit or penalize students for “non-academic factors,” including attendance, performance, effort, attitude and behavior. According to the school district, this new “equitable grading policy” is meant to reduce “racial disparities in our pass/fail rate in multiple subjects in both middle grades and high school.” Let’s just assume that this policy will achieve its stated goals, and the distribution of student grades is more “equitable” in the outcome rather than process sense. Would that mean the policy has achieved something good? No. Grades are meant to serve a particular purpose – to convey information about a student’s level of mastery on a given topic, as well as how consistently a student carries out assigned tasks. Low grades are a sign that a student is falling short in one or both of these areas, and changing the grade doesn’t change the underlying reality. It’s similar to how prices reflect information about the relative supply and demand for a particular service. Changing the price by fiat doesn’t change the underlying facts that created it – it only masks them, hiding both a useful signal and removing the incentive to respond to that signal.  To a certain kind of reformer, prices simply appear as arbitrary obstacles, interfering with the achievement of some desirable goal. Lacking an appreciation of prices as conveyers of information about an underlying reality, they see changing the price as all that’s needed to “fix” some perceived social problem. When the perceived social problem is the high price of housing, these reformers don’t think about what underlying factors might be creating these high prices (aside from vaguely gesturing at “greed”), and because of that, they don’t see the solution as policy changes that might increase the housing supply. Instead, in their mind, all that’s needed to fix the problem is to implement price ceilings like rent control. There are no further factors to consider, or deeper lessons to be learned.  In the same way, these reformers see low grades as merely an arbitrary obstacle to achieving some other social goal they value. And rather than try to deal with the underlying issues that created the signal, they seek to manipulate the signal instead. But inflating the grades of students who don’t understand the material or who don’t perform the assigned work doesn’t do anything to fix the issues that actually need fixing.  It’s worth pointing out that hiding the accurate signal doesn’t help the students either, for at least two reasons. One was put rather cheekily by the Australian comedian Jim Jefferies in a bit where he was mocking Americans for insisting on affirming everyone’s abilities and always wanting to protect everyone’s self-esteem and self-image. As he put it, “There are two lots of people in life, winners and losers. You’re not going to be a winner at everything and you’re not going to be a loser at everything, but you’ll never figure out what you’re good at in life if they tell you you’re f****ing good at everything!” The other reason is similar to something recently pointed out by David Henderson – when you restrict (or mask) information, people will “look for what statisticians call ‘noisier’ data” instead. When good grades are no longer a reliable signal for a good work ethic and understanding of the material, other signals will be sought. And this is a game that heavily favors the wealthy over the poor. By weakening the signal, these reformers are removing a tool that helps bright students from disadvantaged backgrounds distinguish themselves. In the name of lifting people up, they will only hold more people down. (0 COMMENTS)