I recently rode a commuter train through San Mateo County, California, which is just south of San Francisco. San Mateo is one of the most expensive places to live in all of America, and the view from the train made it easy to see why.Zoning restrictions in the Bay Area are almost unbelievably counterproductive. Looking outside the train window, you see lots of valuable land right next to the major commuter rail line that is used for unproductive purposes. While there are a few newer apartment buildings, mostly you see lots of ugly low rise buildings, including run down ranch houses, one story warehouses, strip malls, etc. It’s a bleak sight, and a tremendous waste of valuable real estate.While riding in the train, I thought about the Orange Line subway through Arlington, Virginia, which is the county just south of Washington DC. It’s a nice comparison, because each country is a beacon for high paid professionals working in some of our most dynamic labor markets.But there’s a big difference between San Mateo and Arlington counties. While the latter does contain lots of low-rise residential neighborhoods, it also allows dense high-rise development within walking distance of the subway line. According to a study by Emily Hamilton, this has led to a surge in apartment construction: Development along the Rosslyn-Ballston Corridor is visible (most strikingly where I live, in Ballston) as is development along the other transit corridors. In the 1970 Census, ahead of the Orange Line’s inauguration, the county’s housing stock included about 30,000 detached single-family houses, a number that has remained steady in the decades since. But the stock of other types of housing has more than doubled from about 41,000 units to nearly 88,000 units. This infill apartment construction has allowed the county’s population to increase by 60,000 residents in this 50-year period – without expanding the area developed at all. This contributes to the DC area being substantially cheaper than metro areas with lots of professional jobs but tighter building restrictions.  Not surprisingly, they are showing greater population growth: Four US metropolitan areas in particular – Los Angeles, San Francisco, New York, and Boston – have become increasingly expensive, thereby pushing out low- and middle-income families as higher-income in-migrants outbid them for a stagnant supply of housing.  Two other ‘superstar regions’ with high productivity and high average incomes – DC and Seattle – are doing a better job of accommodating new demand for housing with new housing construction. Relative to the other four superstar cities, they are losing domestic residents at much lower rates. DC, Seattle, and some other growing cities across the country are suffering from their own housing shortages, but not on the same scale as those places with the most severe impediments to housing construction. In case you think this comparison is unfair because there’s something special about the geography of the Bay Area, or reflects the effects of Silicon Valley, keep in mind that San Diego also has tight building restrictions and extremely high housing prices.  It’s a general problem wherever you combine lots of well paid jobs and tight restrictions on building. It impacts all of coastal California, as well as New York and Boston. And even the DC area is far from perfect, with many more building restrictions than would occur in a truly free market.  I cite Washington DC rather than a city like Houston, because DC is more similar to other affluent metro areas in the northeastern US and California. Nor has all this apartment construction led to deterioration in the schools: Contrary to some of the received wisdom on high-density residential construction in the U.S, Arlington has a highly-rated school district (one school ranking organization ranks it second in Virginia, behind only the city of Falls Church, Arlington’s neighbor to the west with fewer than 15,000 people) Scott Alexander recently argued that increased density would push up property prices.  While there is undoubtedly a positive correlation between real estate prices and density, the causal implications depend on why density has increased.  If density rises because of a booming job market in a specific location, then housing prices will rise.  If density rises because regulatory changes allow for more apartment construction, then prices will usually decline, or at least rise more slowly than otherwise.  Here’s Hamilton: Between 2012 and 2018, rents in DC actually rose slower than inflation. Virginia Beach, VA, was the only other large metropolitan area in the country for which this was true. The Hamilton study is full of interesting information, and is well worth reading.  Here’s another example discussing northern Virginia’s Fairfax County: Many of Fairfax County’s peers in California, Massachusetts, and New York are permitting virtually no apartment construction. For example, between 2000 and 2020, the stock of apartments in Marin County, just north of San Francisco, didn’t increase at all. Long Island didn’t do much better, with its supply of housing other than detached single-family housing increasing by about seven percent in those two decades. By contrast, Fairfax County’s increased by about one-quarter. If you don’t build it, they won’t come. PS.  Hamilton provides a map showing how the recent rise in density is concentrated along the Orange Line subway (yellow dots):   (1 COMMENTS)

“I think the (EPA) standards are a disaster,” says David R. Henderson, a research fellow at the Hoover Institution, a public-policy think tank based at Stanford University in California. “The thing is if someone buys an EV now, there are distorted incentives to do so. But at least people get to choose to do so. But mandates blow past all market signals and that’s one big argument against them.” This is from Ken Wysocky, “Large-Scale Adoption of EVs Faces Logistical Hurdles,” Motor, June 20, 2023. Wysocky does a nice job of building an article around the thinking of Alan Reynolds, Jeffrey Miron, and me. Wysocky ends with this: Given all these barriers, is mass EV adoption within a few years realistic? For answers, Henderson suggests looking to California, where emission-free vehicles must account for 43 percent of new car sales by 2027. “California is the canary in the coal mine,” Henderson says. “That’s a pretty tough goal to achieve by 2027.” One possible way to achieve that goal is to dramatically increase the price of ICE vehicles to drive consumers to EVs, he notes. “If that ever happens, I predict a huge consumer revolt,” he says. I think the relative price impacts of this have been underreported. I may do a post on that soon. Read the whole thing. (0 COMMENTS)

This information is from the Mayo Clinic: Agoraphobia often results in having a hard time feeling safe in any public place, especially where crowds gather and in locations that are not familiar. You may feel that you need a companion, such as a family member or friend, to go with you to public places. The fear can be so overwhelming that you may feel you can’t leave your home. To be clear, agoraphobics do have some reason to fear leaving their homes. Each year, thousands of Americans are killed in traffic accidents and thousands more are murdered. Life is dangerous. But taken to extremes, agoraphobia can lead to a highly limited existence, where sufferers miss out on much of what makes life worth living.I sometimes wonder if the US is becoming irrationally fearful of the outside world. Consider a recent story from Bloomberg, which describes the outrage occasioned by a proposal by a Chinese company to build a routine corn milling plant in Grand Forks, North Dakota: The city this year abandoned a project that, just two years earlier, it had aggressively sought as an economic bonanza:  a $700 million corn mill that would have risen from rich farmland on the outskirts of the community. The mill faced a groundswell of opposition, especially regarding its owner: a Chinese company,  Fufeng Group. Locals were concerned that the plant might be used to spy on the Grand Forks Air Force Base, which is located 12 miles to the west.  This raises some interesting questions: 1. What sort of spying is likely to occur?  Why would a corn mill make this spying easier? 2. Aren’t Chinese nationals pretty much free to travel anywhere in the US, even if the plant is not approved?  Couldn’t they spy just as well from a random hotel in Grand Forks? 3. Perhaps the plant would allow for the installation of some massive spying equipment, which a lone spy could not bring within 12 miles of the base.  But in that case wouldn’t the hundreds of American working at the plant notice this spying operation? Perhaps readers with more knowledge of spying than I have can help me understand how stopping this plant prevents China from spying on our air force bases.  Many Chinese critics insist that, “We don’t hate the Chinese people, we simply object to the Chinese government.”  I worry that the line is becoming increasingly blurred.   Fufeng is not a SOE, it’s a private company based on Hong Kong, with lots of American investors.  Some critics respond that even private Chinese companies are suspect, as the Chinese government can force them to turn over information.  That’s probably true, just as the US government forces our companies to turn over private information about Americans. But taken to its logical extreme, that level of suspicion makes all 1.4 Chinese citizens suspect.  Here’s Bloomberg: Local opposition focused at first on concerns such as pollution, subsidies and land use, but soon shifted to the mill’s ownership.  “Larger and louder than all of the other concerns was a fear of Communist China,” said Katie Dachtler, the only member of the city council to initially vote against the project, who has since left office. “And we can’t talk about the Chinese without them being ‘communists.'” People in Grand Forks who opposed the project from the start say their political leaders should have seen the trouble coming.“You come here because you can get away with stuff,” said Frank Matejcek, a farmer who lives just outside the city. It almost seems like Chinese people are being pre-judged to be security risks, without any specific information pointing in that direction.  And doesn’t the term “prejudice” originally derive from “pre-judgment”.  I’m having real trouble distinguishing between anti-Chinese prejudice and a worldview that the Chinese government is evil and all Chinese people are potential agents of that government.  Can someone help me out?  Isn’t this the mentality that led to the Japanese-American internment camps in 1942?  (Of course the earlier event was far worse.) As the following map shows, Grand Forks was not originally viewed as a sensitive area: So then why not move the plant to an area hundreds of miles from any sensitive military bases, like Sioux Falls, South Dakota?  Here’s Bloomberg: Bob Scott, the mayor of Sioux City, Iowa, another city Fufeng considered, said in an interview that there’s no longer any interest. “Following that, up in North Dakota, they’re going to have a very, very difficult time getting a community,” he said. Once anti-Chinese hysteria reaches this fever pitch level, there’s no longer any safe place in America. It’s not that the risk of Chinese spying is non-existent.  As we saw in the recent balloon case, China does spy on the US.  Indeed as far as I know, all great powers spy on their rivals.  Rather, I wonder whether the actual risks involved justify the recent level of concern.  In April, there were headline stories about how outrageous it was not to shoot the Chinese balloon down immediately.  Two months later, the media quietly reports that the balloon was not even transmitting data: The findings support a conclusion that the craft was intended for spying, and not for weather monitoring as China had claimed, the report said. But the balloon did not seem to send data from its eight-day passage over Alaska, Canada and some other contiguous US states back to China, WSJ said. But not one American in a hundred will read that follow-up story.  They’ve made up their minds. The irony here is that we think that our increasing nationalism will make us safer.  In fact, the rise in nationalism in the US and China makes war ever more likely. (0 COMMENTS)

How do you decide whether Abraham Lincoln really said, “Never trust the Internet”? Well, Lincoln died long before the Internet existed, so the quote must be bogus. Common sense. Simple, right? But teaching a computer such common sense turns out to be not so simple at all.  ChatGPT has become notorious for providing users with garbage information: fictitious court cases, fake quotations, made up news articles. Did the program simply invent the stuff out of thin air; did it find the “fake news” somewhere on the web; or did it combine facts, conjecture, and conspiracy theories from multiple sources to create false information? Perhaps we can use AI to filter out the most egregious fabrications. ChatGPT itself could vet its input – that is, the information it takes in from the Internet. And independent, AI front-ends could analyze ChatGPT’s output. “Facts” could be checked by gauging the quality of the source, checking multiple sources for verification, and ensuring that the claims don’t violate basic rules. Consider, for example, the common click-bait claims that this or that celebrity has just died. What are the chances that the only site posting the news is a sponsored webpage that sells herbal hair-growth products? Wouldn’t the news flash be popping up on sites from AP to Reuters?    Or what about that great quotation from an obscure 19th Century U.S. Senator. Can a search engine find it and find it on a reputable site? Doesn’t that perpetual motion machine, so convincingly described on a “science” website, violate the First Law of Thermodynamics?  The claim that women are paid 75 percent of what men earn for doing the same jobs requires that millions of employers ignore their own self-interest.  Why would they leave so much money on the table? Why not hire an entirely female workforce, pay them (say) 80 cents on the dollar, and wipe out the competition?  Does the alleged fact require that countless people are colluding? Consider, for example, the claim that inflation is caused by corporate greed. Really? Hundreds of thousands of firms simultaneously raise their prices and not one of them sees an opportunity to grab market share by underselling the competition? Is the information logically consistent or is it self-contradictory? For instance, consider the statement, “all property is theft.” Theft implies the existence of property – that is, something must first be owned before it can be stolen, and its ownership must be legitimate otherwise taking it is not theft. Therefore, the statement implies that property can be legitimately owned. But if that’s true, then ownership isn’t necessarily theft. Yet, the phrase explicitly states that all property is theft, which means that no ownership can be legitimate, but then there can be no theft. (On the other hand, the statement, “some property was obtained through theft,” while perfectly true and non-self-contradictory, is not nearly as pithy and is far less likely to get pitchfork-armed mobs into the streets.) Competing ChatGPT front ends, all using their own proprietary sets of tests and rules could offer their filtering services to users. A user would enter his question to the front end of his choice, which would then submit it to ChatGPT. The front end would then analyze ChatGPT’s response according to its ruleset. If it found discrepancies, it could optionally end the session or confront ChatGPT with those discrepancies in hopes that the ensuing dialog would result in a more reasonable answer. The conversation could be made transparent to the user to better enable him to gauge the reliability of the final response. In a world in which knowledge is power, people might be willing to pay for the service that best separates the wheat from the AI chaff.   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource. (0 COMMENTS)

There has been a long running debate going on between Bryan Caplan and Scott Alexander on how to understand mental illness. Caplan argues that mental illness doesn’t really exist. Very briefly, Caplan uses the distinction between budget constraints and preferences in consumer choice theory to analyze the behavior of the “mentally ill.” A key component of his view is what Caplan calls the “gun to the head test.” If you put a gun to the head of a diabetic and told them to normalize their insulin levels (without medical intervention), they wouldn’t be able to do anything differently. But if you put a gun to the head of someone with an overeating disorder and ordered them to put down the doughnut, they would be able to do so. This, Caplan says, shows the overeater is capable of doing otherwise while the diabetic is not. Therefore, the diabetic faces a constraint and has a true illness, whereas the overeater just has a really strong preference for eating lots of food, and therefore compulsive overeating is just fulfilling a preference and doesn’t qualify as an illness or disorder. Scott Alexander replied that consumer choice theory is inadequate for understanding or classifying mental illness for a variety of reasons. Bryan offered a rebuttal, Alexander came back with a rejoinder, and now Caplan has responded yet again. I recommend reading the entire exchange for full context. While I admire both of these thinkers greatly, I think Alexander has the stronger arguments. At the highest level, I think Caplan gives far too much credence to the consumer choice model he uses. Economic models are useful tools, but like all models in social science, they are useful because they are simplifications. The map is not the territory, and the model is not reality. And any model of human behavior that does not perfectly and completely describe reality (which is to say, all of them) can end up being more confusing than enlightening when misapplied. Consider the compulsive overeater. Overeating has many potential causes, of course, but one of these causes is leptin deficiency. Leptin is a hormone that regulates hunger and desire to eat. In his book The Hungry Brain, Stephen Guyenet describes it in the following way: While a normal child may be about 25% fat, and a typical child with obesity may be 40% fat, leptin-deficient children are up to 60% fat. Farooqi explains that the primary reason leptin-deficient children develop obesity is that they have “an incredible drive to eat”…leptin-deficient children are nearly always hungry, and they almost always want to eat, even shortly after meals. Their appetite is so exaggerated that it’s almost impossible to put them on a diet: if their food is restricted, they find some way to eat, including retrieving stale morsels from the trash can and gnawing on fish sticks directly from the freezer. This is the desperation of starvation. Yes, such a person might very well put down the doughnut (or trashcan scraps and uncooked fish sticks) if you held a gun to their head at any given moment. But so what? Their behavior still seems to me like it’s much better described as a budget constraint caused by low leptin levels, and not as someone merely fulfilling their unusual and socially disapproved preference to eat themselves into oblivion. Another reason I find the gun-to-the-head test unimpressive is that it contains a hidden premise that I don’t think can be justified. Here’s how Caplan describes this test in his most recent post: If any incentive in the universe makes you stop, you must have been able to stop all along. Incentives matter implies voluntariness implies preference implies non-disease.* That’s my Gun-to-the-Head Test. The hidden premise behind this test is the idea that any behavior someone can engage in (or refrain from) while under extreme, life-threatening duress is therefore something they are capable of engaging in (or refraining from) at all times, for their entire life. But I don’t see any reason to believe this is true. Consider, for example, the case of mothers who have lifted cars off the ground to save their trapped children. Suppose a week before that happened, you asked these women to deadlift 500 pounds in the gym and found none of them could do it. Yet, a week later, they lifted considerably more weight than that in order to save their child. I’d say this is just a case of showing that what a person is capable of doing is different in normal circumstances and in extreme circumstances. As I understand it, Caplan’s argument would commit him to saying that since there was at least one “incentive in the universe” that made them lift such immense weight, that shows they must have been able to lift such immense weight all along, and their inability to pull off a 500-pound deadlift the prior week wasn’t a real constraint, it was just them expressing their preference for not lifting heavy weights. That’s what a straightforward application of consumer choice theory would imply, but that only shows the limits of consumer choice theory. Yes, incentives did matter in their car-lifting feat, but that does not imply the inability to carry out such a feat in normal circumstances is therefore “voluntary” in any meaningful or interesting way, nor does it imply that the genuine inability to deadlift 500 pounds the week prior was actually just a preference. (As an aside, Alexander is also unimpressed with this test, offering to “tell [Caplan] about all of the mentally ill people I know about who did, in fact, non-metaphorically, non-hypothetically, choose a gunshot to the head over continuing to do the things their illness made it hard for them to do. Are you sure this is the easily-falsified hill you want to die on?” But notice the asterisk above in Bryan’s description of his test. That asterisk leads to footnote where Caplan implies that even if someone does take a gunshot to the head over altering their behavior, that still wouldn’t falsify his argument, because “incentives don’t matter does not imply involuntariness, though it leaves the possibility open.” When every possible outcome of one’s hand-picked method of testing their view can still be interpreted as compatible with that view, then it’s not a very impressive test, and holding it up as some sort of ace-in-the-hole for the argument doesn’t inspire confidence.) People are sometimes temporarily capable of things in extreme duress they couldn’t achieve in normal circumstances. This is both common sense and widely known. This aspect of human behavior doesn’t fit into the simple consumer choice model of constraints and preferences – and that’s okay! Consumer choice theory isn’t and shouldn’t be treated as a theory-of-everything, meant to explain and classify all forms of human behavior. It’s just a useful oversimplification for understanding a small subset of human life. In the closing paragraphs of Caplan’s most recent post, he cites an argument from someone named Emil Kierkegaard making the case that homosexuality is best understood as a mental disorder – a position Caplan disagrees with, arguing that homosexuality is simply a preference. Caplan closes out by saying: Emil’s position may fill you with rage, but it’s logically consistent. So is mine. Choose one, because as Emil’s namesake Søren Kierkegaard titled his most famous book, it’s Either/Or. In response to this, I would quote Ralph Waldo Emerson’s observation that “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” To go back to my observation in the beginning, economic models – including consumer choice theory – are not perfect descriptors of all reality. And when your model doesn’t fully capture reality, forming all your beliefs to be perfectly consistent with that model is not automatically a virtue. The understanding we gain of the world from any of our models will always be limited and partial. In light of this fact, being a little inconsistent will often be more truth-preserving than perfect consistency. And on this topic, I find Scott Alexander’s less-than-perfect consistency far more truth-preserving than the total consistency of either Caplan or Kierkegaard.   (1 COMMENTS)

I thought Kevin Corcoran’s recent post “Military Experience and Moral Authority” was excellent. I started to write a comment, which turned out to be too long. So instead it’s this post. Overall, I agreed with Kevin’s post. I have four comments, only one of which is a disagreement. First, unless I misunderstand the term, what Kevin discussed is not “moral authority” but intellectual authority. There are moral issues in war–big time–but he didn’t discuss those. He discussed the positive issues: what will happen? what’s true? what’s false? etc. Second, the post reminds me of a conversation I had with one of my students who came back to visit about 16 or 17 years ago. I had taught him 22 years ago. He had been to Iraq and had come back in one piece. He said that some of his long-time friends told him that they would defer to him on whether the war was right or wrong because he had been there. That IS a moral issue. He told me that he had said in response, “No, I believe in America and I believe in freedom of speech and in people’s right to judge for themselves. So please do judge.” Third, Omar Bradley is often quoted as saying “Amateurs talk strategy; professionals talk logistics.” A colleague of mine who taught logistics (naturally) had that saying on his door. Logistics can explain and predict a lot. Fourth, Kevin wrote: Prior to the invasion, there was a widespread consensus that the Russian military would quickly plow over the Ukrainian armed forces leading to a swift capture of Kyiv. Outside observers drastically underestimated both the resilience of the Ukrainian military and the ineptitude of the Russian military. I was one of the people who didn’t say that. A UCLA law professor friend on Facebook said the first day, “I give Kyiv 4 days. Does anyone disagree?” I said that I did. He asked, quite reasonably, how long I gave them. I think I answered “Many weeks at least.” What was I thinking? Three things: (1) the substantial size of Ukraine’s military; (2) the Ukrainians “local knowledge” a la Hayek; (3) the Ukrainians’ incentives versus the incentives of the Russian military. Notice what I left out but shouldn’t have: logistics. (0 COMMENTS)

Oren Cass, founder of the think tank American Compass, presents a vision of the “new right” in his recently released book, Rebuilding American Capitalism. In it, he advocates for a top-down approach to governance in response to what he perceives as free-market failures.  He tends to believe that certain politicians can and should shape markets to achieve desired outcomes rather than letting free markets, which are free people, work. This attempt to rebrand not only the right but capitalism itself is flawed, as history and sound economics prove.  Cass pinpoints growing concerns in the economy to help bolster his arguments, like poor inflation-adjusted wage growth and lack of strong social and family units. These are problems making it harder for people to prosper, but they are not, as he suggests, evidence that free-market capitalism has failed.  But these problems–if they are problems, as Scott Winship and Jeremy Horpedahl recently found that people are thriving–aren’t the results of free markets but are driven instead by government failures.  These failures include bloated government spending, restrictive regulations, high tax burdens, excessive safety net programs, costly tariffs, and other barriers to entry in the marketplace. They are imposed by politicians and government bureaucrats, hindering competition, disrupting entrepreneurial endeavors, impeding wage growth, and destroying human flourishing. Cass contends that capitalism only works under the right conditions, which must be facilitated by the government to keep the labor market and the economy strong. Rather than what he calls the “Old Right’s market fundamentalism” of fewer regulations and less government intervention being best, he welcomes more government with certain politicians in power. He proudly makes markets the scapegoat and, with it, globalization and financialization.   In the book’s foreword, Cass writes: Globalization must be replaced with a bounded market that restores the mutual dependence of American capital and labor and invites the trade and immigration that benefit American workers. Financialization must be reversed so that both talent and capital in pursuit of profit find their best opportunities in productive investment rather than extraction and speculation. Believing that more opportunities in the form of globalization inhibit rather than help Americans is the same faulty basis with which people discourage immigration and trade, which are central to thriving economies.  But the crux of Cass’s theory is that he believes markets must be molded, even referring to work by the father of modern economics Adam Smith. Conveniently, he fails to cite the economist Frederick Hayek, who built on Smith’s ideas, to identify spontaneous order, the basis of free-market capitalism that argues economic growth and prosperity arise from voluntary transactions by free people, not government guidance and control.  This “new right” idea was debunked long before Cass came along by Hayek (and others), who also highlighted the “knowledge problem” associated with central planning. He argued that no central authority can possess the information necessary to make efficient decisions for an entire economy. The complexity of economic interactions and the constant flux of information require decentralized decision-making and market mechanisms to aggregate and incorporate local knowledge effectively. Hayek’s insights emphasize the limitations of top-down control and the importance of allowing market forces and individual actors to shape economic outcomes based on their localized knowledge and preferences from the bottom-up. But Cass would have it that government is heralded as the keeper of knowledge and the arbiter of good decisions rather than encouraging freedom and liberty in individuals, i.e., the essence of capitalism. Capitalism allows individuals to pursue their economic aspirations and make decisions based on their knowledge and preferences through voluntary exchange within rules of the game set by limited government. Through this freedom, innovation, entrepreneurship, and competition thrive, leading to greater prosperity for all. History is full of successful economic transformations driven by leaders who championed limited government and free markets. Former President Calvin Coolidge cut government spending, cut taxes, and reduced the national debt, providing more paths for human flourishing. Likewise, former President Ronald Reagan cut taxes, tried to rein in government spending, and reduced regulations, unleashing economic growth and job creation.  Both of them understood that cutting spending, reducing taxes, and removing excessive regulations create an environment where businesses thrive and workers can benefit. Their approaches embraced the power of individual freedom and self-determination, not top-down control that breeds the opposite. Oren Cass’s theory of the “new right” and its embrace of government fundamentalism misunderstands the principles of capitalism and human behavior. Top-down approaches, rooted in centralized control and regulation, do not lead to economic prosperity or personal freedom no matter who is in charge but do distort the efficient allocation of resources, undermine the adaptability of markets, and reduce opportunities to let people prosper.  To achieve a thriving and prosperous economy, we must adhere to and strengthen the principles of free-market capitalism, which too much of our economy today is deprived of when considering healthcare, education, transportation, manufacturing, and the labor market. This should include embracing limited government, voluntary exchange, and individual freedom as the pillars of strong families, productive workers, and profitable employers.  Economist Milton Friedman noted what this debate is about decades ago. “The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.” And while “history suggests that capitalism is a necessary condition for political freedom,” it’s clearly “not a sufficient condition.” But capitalism is the best system yet that has supported economic prosperity and political freedom. The problem is that we have had too little free-market capitalism for people to thrive because of too much government.  There’s no need for a “new right” of big-government progressive policies offered by Cass and others when free-market capitalism of the “old right” is too often missing in our lives.    Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, senior fellow at Americans for Tax Reform, chief economist or senior fellow at multiple think tanks across the country and host of the Let People Prosper podcast. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn. (0 COMMENTS)

Brian Albrecht has a clever series of tweets comparing inflation and weight gain: After a sarcastic comment about cutting off legs to lose weight, Albrecht then draws some policy implications: I’d like to take this analogy a bit further.  I can imagine a few cases where it might make sense to attribute weight gain to a specific part of the body.  Suppose all of the weight gain occurred in the lower torso, due to a cancerous tumor.  In that case, a doctor might recommend that the patient not try to lose weight in other parts of the body to offset the gain in the lower torso.  In that case, it might make sense to speak of a tumor as causing weight gain.   In most cases, however, weight gain is caused by eating too much food (combined with not enough exercise.) Most serious bouts of inflation are caused by excessive aggregate demand—excessively rapid growth in nominal GDP.  This is equivalent to excessive consumption of food.  In some cases, however, brief periods of inflation can occur due to problems in a specific area of the economy, without any increase in NGDP.  An oil shock might raise prices and lower output by an equal amount.  Increasingly monopolistic corporations might reduce output to drive up prices.  Increasingly powerful labor unions might reduce the total workforce to drive up wages. In that case, a “monetary doctor” might suggest not offsetting price increases in one sector with deflation in another.  Instead, it might be better to allow a temporary rise in inflation, as long as NGDP growth remains on track.  This would be like allowing some weight gain from a tumor. Of course that doesn’t mean that a tumor is not a problem, rather that dieting is not the optimal solution to cancer.  Instead, you might try radiation or chemotherapy.  Similarly, my claim is not that supply shocks are not a problem; rather the claim is that the resulting rise in the CPI is in some sense optimal, given the existence of the supply problem.  You may wish to use other policy tools to boost aggregate supply.  I see a lot of confusion when people speak of inflation being caused by “supply bottlenecks”, or “greed”, or “rising wages”, or “budget deficits”, or “currency depreciation”.  What are the relevant policy counterfactuals?  What do you mean by “cause”?  Just because prices rise before wages doesn’t imply that prices cause wages. This is from a recent paper by Norbert Michel and Jai Kedia: Beyond these simple comparisons of percentages, more sophisticated research suggests that there is little reason to expect monetary policy to have much of an effect on prices in the services industry. As a Cato study using a VAR technique finds, Fed policy has hardly mattered in explaining inflation (services or otherwise). Figure 1 below reproduces the breakdown of inflation into its demand, supply, and monetary policy components from 1960 onwards. As the graph shows, supply factors dominate – they account for over 80% of the variation in service‐​sector inflation, both in the short‐​term and long‐​term. In the near term, monetary policy explains less than 2% of inflation. In the longer term, the effects increase but never account for more than 5% of service‐​sector inflation. VAR studies aren’t going to tell you anything about inflation causation, at least in any commonsense meaning of the term “cause”. In my view, almost all of the inflation since 1960 has been due to monetary policy.  If real GDP grows at 3% since 1960, and  nominal GDP grows at 7%, then you’ll have a 4% average inflation rate.  Monetary policy drives NGDP growth, and hence explains the excess of NGDP over RGDP growth.  With less expansionary monetary policy we would have had less inflation (both total and services.) Furthermore, monetary policy is not an alternative theory to “demand”, it’s what determines demand.  Once you’ve isolated the supply and demand “components”, there’s nothing left. Brian Albrecht is exactly right when he suggests that in economics it’s most useful to think of causation in terms of policy counterfactuals: I don’t want to get into semantic disputes, but a theory of inflation should be *causal*. A causes inflation generally. B caused inflation here. At the heart of causation is the counterfactual. If X had been different, then Y would have been different. It’s theoretically possible that our recent inflation was caused by something other than monetary policy, such as increased greed, or increasingly powerful labor unions.  But it just so happens that the recent overshoot of NGDP growth is quite similar to the recent overshoot of inflation.  That means that in this case the cause is simply “overeating”, no need to search out mysterious “tumors” in the body. My daughter recently sent me a San Francisco Fed paper by Adam Hale Shapiro looking at the effect of wage inflation on overall inflation.  The abstract suggests little impact: Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation. The opening paragraph quotes Jay Powell: In a November 2022 speech, Federal Reserve Chair Jerome Powell mentioned that it is helpful to explain elevated inflation levels by examining three underlying categories: goods, housing services, and nonhousing services. He paid particular attention to the last category, stating that it “may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category” (Powell 2022). And Shapiro concludes as follows: For instance, recent evidence shows that wage growth tends to follow inflation, as well as expectations of future inflation (Glick, Leduc, and Pepper 2022). Overall, the results highlight that recent labor-cost growth is likely to be a poor gauge of risks to the inflation outlook. I suspect that some readers might conclude that Shapiro is contradicting Powell.  But I don’t see it that way—I think they are both correct.  Wages are not causing inflation.  Wages don’t predict changes in the path of core inflation.  But there is a sense that wages are the essence of the current inflation problem (as Powell is implicitly suggesting.) Here’s how I look at inflation.  An optimal monetary policy (say 3.5% NGDP growth) would lead to steady nominal wage growth at about 3%/year.  Because of productivity growth of roughly 1%, that will deliver 2% inflation, on average.  Actual inflation will fluctuate due to supply shocks.  But any periods of above 2% inflation will be “transitory”, as long as monetary policy keeps nominal wages growing at 3%.  And not just transitory; the excess inflation will also be appropriate—that is, better than the alternative of forcing down some prices to offset spikes in other prices. The fact that nominal wage growth has risen to roughly 5% is an indication that monetary policy has been too expansionary.  The resulting inflation is not transitory, and won’t go away on its own.  It will take a monetary policy that is tight enough to at least somewhat depress the labor market.  (Hopefully not extreme enough to cause a significant recession.)  We need to get wage growth down to 3%. When monetary policy is too expansionary, the effects show up first in flexible prices and nominal GDP.  Nominal wages respond with a lag.  Thus in any statistical test it won’t look like wages are causing inflation.  But because stable wage growth is a roughly optimal monetary policy, wages are in a sense the essence of the inflation problem, without being the cause. I’m struggling to think of an analogy with weight gain, but let’s suppose that when eating too much the weight first went to your stomach, and then later to your thighs.  Also suppose that it’s easier to get the weight back down when it’s still in your stomach, but harder once it adds to your thighs.  Excessive wage growth is sort of like the fat thighs; once wages begin growing too fast it’s harder to reduce inflation without a recession. The question of causation in macroeconomics is trickier than many people suspect.  Economists that I respect will say, “It’s silly to say inflation is caused by soaring oil prices, as rising prices are the definition of inflation.  That’s like saying inflation is caused by inflation.”  Yes, but it’s also true that under certain appropriate monetary policy regimes, certain types of supply shocks can create temporary inflation.  All these recent theories of bottlenecks, greed, and wages causing inflation aren’t wrong because they can’t be right, they are wrong because they don’t happen to be right in this case—it’s almost all excess NGDP growth (since 2019). As a country we ate too much, gorging on monetary stimulus.  And now we need to sacrifice with an unpleasant period of dieting.   (0 COMMENTS)

In this episode of EconTalk, Russ Roberts hosts Robert Hall, a professor of economics and fellow at Stanford University’s Hoover Institution. Roberts and Hall discuss The Federal Reserve’s monetary policy following the Great Recession, in addition to Hall’s experience as chair of the National Bureau of Economic Research Committee on Business Cycle Dating. The two explore what we know and don’t know about the recovery from the Great Recession and what we may have learned about the choices facing the Federal Reserve and the policy instruments the Fed has available. In the wake of the COVID pandemic and another round of economic “stimulus,” the questions raised in this episode remain pertinent. We hope you’ll use some of the prompts below to continue the conversation.     1- Extensive disagreement exists amongst economists, politicians, and citizens on the role of monetary and fiscal policy following a recession. Following the Great Recession, The Fed aggressively employed expansionary monetary policy, including the lowering of interest rates. Hall asserts that during the post Great Recession years, expanding discretionary fiscal policy was not politically feasible. To what extent should expansionary monetary and fiscal policy be used as a tool to aid an economy’s recovery from a recession? What monetary and fiscal policy measures should be employed or avoided following a recession? How can governments and central banks determine the adequate level of monetary and fiscal policy expansion, while prioritizing the national debt and inflation?     2- During the Great Recession, the Obama administration initiated an $800 billion Stimulus Package. A large amount of the funds from the stimulus package went directly to state and local governments. Hall argues that many of these governments used the stimulus money to pay off their debts. If the federal government utilizes economic stimulus, what programs and services should it invest in? Should individual citizens, businesses, or local governments be the priority of federal economic stimulus? If federal stimulus funds are given directly to state and local governments, should those governments be allowed to use the funds to pay off their debts? Why or why not?   3- Hall attests that for many Americans, it doesn’t make fiscal sense to enter the labor market and relinquish government benefits. This problem persisted during the COVID-19 pandemic, where many Americans stayed unemployed, partially motivated by record-high unemployment benefits that exceeded the compensation of some occupations. Hall asserts that disability is the welfare program most in need of reform; to what extent do you agree? Besides disability, what other welfare programs are in need of reform, and why? How can the welfare system best be reformed to ensure that current recipients are able to re-enter the workforce and be self-sufficient in the long-run?   4- Around the start of the Great Recession, The Fed started paying interest on excess reserves. As a result, banks were encouraged to keep their excess reserves in the Fed, rather than loan them out. At the time of this episode’s recording, The European Central Bank paid a negative interest rate to banks holding excess reserves, a policy that Hall desired the Fed employ. Should the Fed’s excess reserve rate be positive, negative, or zero? How can adjustment of the excess reserve rate be used as an effective monetary policy tool to control unemployment, inflation, and the national debt?   5- Historically, the simplified start date of a recession was determined to be after two consecutive quarters of negative GDP growth. Hall argues that this theory isn’t always accurate, citing factors such as the aggressive revision of previous GDP data, the transition to GDP being measured monthly, and factors beyond negative GDP growth that can signify the start of a recession. Do you think that two consecutive quarters of negative GDP growth automatically signifies an economy is in a recession? What other factors should be used to determine if an economy is in a recession? Is the United States currently in a recession or destined to face one soon? Explain. (0 COMMENTS)