In a recent podcast with David Beckworth, Noah Smith argued that macroeconomics was still in its infancy. Smith suggested that we needed stronger microfoundations in order to develop rigorous scientific models of the economy.I have a different view. Old Keynesian economics reached a dead end in the 1970s. This led to two major innovations—the expectations revolution and the push for microfoundations. The New Keynesian economics that developed in the 1980s did a much better job of accounting for expectations of variables such as inflation. Since then, various studies have tried to develop strong “microfoundations”, which means a better explanation of how individual people make decisions to consume, save, invest, and work.Nonetheless, I don’t see much evidence for progress in macroeconomics, at least if you define macro as developing useful general equilibrium models of the macroeconomy. Instead of being in its infancy, macro seems to be suffering from senility. In my view, things have reached a dead end and further progress would be more likely to occur if we abandoned the basic Keynesian framework and adopted an entirely different approach to macro.  I’d prefer we stop trying to model consumption, investment, and the other components of spending, and move to a more monetarist approach.  I see macro as being analogous to an inefficient conglomerate than needs to be split up into two independent firms.  Here’s how I’d do the split: Macro 1:  A model of nominal variables such as the price level or (better yet) NGDP, including short run fluctuations and long run trends. Macro 2:  A model of real GDP and employment, including short run fluctuations and long run trends.  The term “nominal” means in money terms, and my proposed Macro 1 would be policy regime dependent.  I’ll give three quick examples: Gold standard:  Back in 1985, Robert Barsky and Larry Summers modeled the price level under a gold standard.  Here’s the abstract: This paper provides a new explanation for Gibson’s Paradox — the observation that the price level and the nominal interest rate were positively correlated over long periods of economic history. We explain this phenomenon in terms of the fundamental workings of a gold standard. Under a gold standard, the price level is the reciprocal of the real price of gold. Because gold is a durable asset, its relative price is systematically affected by fluctuations in the real productivity of capital, which also determine real interest rates. Our resolution of the Gibson Paradox seems more satisfactory than previous hypotheses. It explains why the paradox applied to real as well as nominal rates of return, its coincidence with the gold standard period, and the co-movement of interest rates, prices, and the stock of monetary gold during the gold standard period. Empirical evidence using contemporary data on gold prices and real interest rates supports our theory. A greatly underrated paper. Fixed exchange rate regime:  Under a fixed exchange rate regime, global shocks can impact the equilibrium real exchange rate.  If the nominal exchange rate is fixed by the government, then the domestic price level must move to generate the appropriate move in the real exchange rate.  This model applies to Hong Kong in the post-1983 period.   Unconstrained fiat regime:  This is the one that most of us care about.  I prefer the market monetarist model, where Fed policy determines the path of nominal aggregates such as NGDP.  Even if not directly targeting NGDP, achievement of the dual mandate requires fairly stable growth of NGDP, at roughly 4%/year.  Large fluctuations in NGDP growth are caused by monetary policy errors (except in the rare case where much lower employment is desired, i.e., the spring of 2020.)  The Fed determines the trend rate of NGDP growth, which means that undershoots like 2008-09 and overshoots like 2021-22 are caused by Fed policy mistakes.  Consumption, investment, fiscal policy, trade, animal spirits, etc., play almost no role in determining the path of NGDP.  It’s all about monetary policy targets and policy mistakes. After completing a course in macro 1, students can move on to macro 2.  The path of NGDP then becomes an input into the determination of real variables such as RGDP and employment.  Due to sticky wages and prices, NGDP shocks affect real variables in the short run, but not the long run.  Other “real” shocks (wars, Covid, oil embargoes) can also affects RGDP in the short run.  Only real factors such as population and productivity growth explain RGDP growth in the long run. What’s left to be done?  To achieve a better monetary policy, we need to develop financial instruments linked to the key macro variables such as NGDP, traded in highly liquid markets.  These real time market forecasts can then guide monetary policymakers. How about the real side of macro?  How to we make progress in that area?  Here I’d emphasize that we cannot make progress on understanding real shocks until we can measure them.  And we cannot measure real shocks until we can eliminate nominal shocks.  For instance, Noah Smith believes that 2008-09 was a real shock—a severe financial crisis caused the Great Recession.  I believe it was a nominal shock—a tight money policy by the Fed caused NGDP growth to fall from its 5% trend to negative 3%.  In my view, the financial crisis was 75% endogenous.  Until we get a monetary policy that produces stable NGDP growth, we’ll never be able to figure out who’s right.  We won’t be able to determine how much of the business cycle is real and how much is due to nominal shocks.  Take away the nominal shocks and what’s left of the cycle is real. Macro will have grown up and become a mature field when all we teach is real business cycle theory.  Not because RBC theory is correct (it’s currently false), rather because it will have become correct. PS.  Smith rightly mocks the NeoFisherians for suggesting that a low interest rate policy is a tight money policy.  But the Keynesians are equally guilty when they claim that a low interest rate policy is an easy money policy.  If Turkey refutes NeoFisherianism, doesn’t Japan refute Keynesianism?  Interest rates are not monetary policy.  Never reason from a price change.  PPS.  You might wonder if I have any empirical evidence to support my thesis that macro should split into two fields.  If I am correct, then the Phillips Curve should apply to the gold standard and to Hong Kong, but not to the post-1968 fiat money regime in America.  And that’s exactly what we find.  Phillip’s study looked at the relationship between inflation and unemployment during a period where the price of gold was mostly fixed.  The same sort of relationship holds for Hong Kong post-1982: But the relationship doesn’t hold for the US in recent decades.  The Fed has been trying to eliminate demand shocks, making real shocks relatively more important:    Again, never reason from a price (level) change. 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Like many other people, I have enjoyed giving prompts to ChatGPT, an AI chatbot created by OpenAI. ChatGPT will respond to a wide range of prompts, often in amusing ways, yet often in ways that are surprisingly impressive.  I have seen many of my fellow academics express concern that students will use this type of AI to cheat. I can understand their concern. The AI wrote some material that I could imagine grading favorably. For example, at one point I asked the AI to write a Christopher J. Coyne article. It did not write an article Chris would write. However, it did write a fairly good summary of his excellent book After War: The Political Economy of Exporting Democracy.  However, as OpenAI directly warns users, ChatGPT “may occasionally generate incorrect information.” This is certainly true on economic topics. Every time I have asked ChatGPT about the Alchian-Allen effect, the AI has talked about different economic phenomena, never about the Alchian-Allen effect itself. I imagine the same is true for at least some other economic concepts. Students should be careful about using ChatGPT as a substitute for real research and studying. They certainly should not treat it as though it’s “better than Google” for finding factual information. Instructors concerned about students using ChatGPT to cheat should try directly asking ChatGPT to answer the same questions they ask students. The instructors might be pleasantly surprised by how ineffective cheating using ChatGPT would be. Or they may choose to drop questions that the AI answers too reliably. Does ChatGPT have implications for economic education beyond the academic integrity concerns it raises? Perhaps! I have been having fun asking ChatGPT to write song lyrics. So far I’ve had it write songs about a variety of economic topics, including microeconomics, public choice, and Elinor Ostrom. These types of whimsical prompts could offer educators new and memorable ways to present material, though students might find the results more cringeworthy than appealing.  That said, faculty should also be careful to fact check any educational materials they try to create using ChatGPT. Just as the AI’s errors could cause trouble for unscrupulous students, they might embarrass us too if we’re not careful!   Nathan P. Goodman is a Postdoctoral Fellow in the Department of Economics at New York University. His research interests include defense and peace economics, self-governance, public choice, institutional analysis, and Austrian economics. (0 COMMENTS)

A streetwise analyst does not expect the typical politician to profess a consistent economic theory. The summits reached by Vladimir Putin in this area would be a matter of analytical wonder if they did not also remind us of the lower peaks where our own political rulers stand–as well as of the poor level of general economic literacy. The readers of yesterday’s Financial Times got two good examples in a single story (“Vladimir Putin Threatens to Cut Oil Output After G7 Price Cap,” December 9, 2022). Putin is quoted as saying: If someone agrees at some point that the consumer determines the price, then the whole industry will collapse, because the consumer will always insist on a lower price. Since the consumer always wants to pay the lowest possible price (“insists on a lower price”), one wonders why all industries don’t collapse. Another pearl reported in the Financial Times story (paraphrasing and then quoting Putin): If buyers do manage to get lower prices for oil, “prices will go down, investment will be reduced to zero, and in the end prices will go through the roof.” This is what, in a previous EconLog post, I called the yo-yo economic model. A simple confusion between supply and quantity supplied, and between demand and quantity demanded, leads to this sort of reasoning: if demand decreases, prices will go down; if prices go down, demand will increase; if demand increases, prices with go up (“go through the roof”); and the cycle will repeat. “What goes up must go down.” The confusion is between a move along the demand or supply curve and a shift in the whole curve. (Incidentally, one advantage of a mathematical representation of supply and demand is that one sees that immediately.) In defense of Mr. Putin in both cases, if we can call this a defense, he may have been speaking of the consumer or producer as a nation or country, for he cannot imagine anything else, even as an ideal, than a collective consumer and a collective producer. Run-of-the-mill protectionists fall in the same collectivist trap. (1 COMMENTS)

In 2021, venture capital investment will reach a record US$15.7 billion in Latin America, more than the amount attracted by startups in the region over the past ten years, according to the Latin American Private Equity Investment Association (LAVCA). In the local environment, Colombia today has 1,100 startups and its entrepreneurial ecosystem is one of the four most competitive in the region, together with Brazil, Mexico, and Argentina. According to KPMG’s Colombia Tech Report 2021, the country’s startups raised more than US$800 million last year. Sadly, the promising future for these companies is about to change forever. On August 8, 2022, a bill was filed before the Congress of the Republic to adopt a new tax reform in Colombia, which aims to raise 25.9 billion annually. The tax reform bill presented contains rules that directly impact both tech-based ventures whose development is based on growth and exit strategy (highly scalable startups backed by venture capital) and those whose nature or objective is not the medium-term sale of the company but rather profit through dividends (more “traditional” ventures). The startup business works very differently from traditional companies, so these valuations often do not reflect the company’s actual value. For example, a company valued at US$500 million does not have that kind of money in equity. Venture capitalists consider “intangible assets” and not the company’s money.   How will this affect the industry? Although the equity tax already existed (for those who owned as of January 1 of each year, a net worth equal to or greater than 5 billion Colombian pesos), with the new reform, both the taxable base and how the shares owned in a company are valued are modified. Previously the nominal value (acquisition value) was taken – and now the intrinsic value (net worth divided by the number of shares outstanding) is proposed. This new form of valuation seeks to reflect the equity reality of the shareholders of those consolidated companies, i.e., the source of income and considerable profits that take into account the contributive capacity, an objective that was not achieved with the previous rule. The tax reform aims to increase the occasional profit tax, which is currently at a rate of 10% to 15%. Does the government want to discourage money, a product of several years of hard work in entrepreneurship, brought back to Colombia to continue generating development by investing in new startups or donating it to social causes? Elimination of the 50% discount on the Industry and Commerce Tax – ICA. Article 115 of the ETN contemplates the possibility, at the entrepreneur’s choice, of: i) taking 50% of the industry and commerce tax (ICA) as a tax discount or ii) a 100% deduction of the ICA in the income tax. The reform bill eliminates this benefit and leaves only the possibility of taking it as a 100% income tax deduction. The difference is that the discount is applied directly to the tax already paid, while the deduction is part of the subtracted items to determine the tax. The impact will depend on each case, but as a general rule, a 50% discount is more beneficial than a 100% deduction of the ICA tax. This modification would imply a higher tax burden for ventures that are in the commercial, industrial, or service businesses, meaning that e-commerce entrepreneurs will now have to pay more income tax because of this change.   Elimination of the orange economy benefit Before this reform, entrepreneurs from creative industries who won the orange economy benefit were allowed to pay 0% income tax for 5 years. But now, this would not be possible. According to the principle of non-retroactivity of taxation provided in article 363 of the Colombian Constitution, those ventures that benefited from the exempt income programs of the orange economy program provided in article 235-2 of the ETN continue to maintain 100% of the exempt income for the years granted. However, unfortunately, the benefit would be lost for entrepreneurs who would like to access it in the future.   35% income tax rate for large and small businesses alike. Although the reform would not modify the income tax rate for legal entities and maintains it at 35%, it does not provide special treatment or rates for startups. While it is true that during the early years, startups do not yield profits, precisely because all their income and capital are destined for the growth of the company, it can happen, and taxing a startup with an income tax at a rate of 35% is to leave the entrepreneur without any incentive. The reform aims to increase the payment rate for dividend distributions, which are currently subject to 10% and could reach up to 39%. For non-residents (individuals and corporations), a withholding tax of 20% will be applied.   What do companies think about it? Faced with this “reform,” Endeavor entrepreneurs launched a counter proposal before the tax reform project in Colombia. They propose an exception so that the value of the shares revolves around the fiscal cost, not the intrinsic value. Daniel Botero Acevedo, co-founder, and CEO of Lizit, said that the tax reform would virtually wipe out the ecosystem of startups or fast-growing digital ventures in Colombia. In conclusion, the National Government must understand the entrepreneurial ecosystem and establish differentiated and progressive tax rules and combined tariffs that allow them to be competitive with their peers in other countries.   Michelle Bernier is an attorney specializing in international law and commercial law. She is currently studying Master of Laws and International Business with a double degree from the Universidad Internacional Iberoamericana in Mexico and the Universidad Europea del Atlántico. She is also a part of Students for Liberty’s inaugural cohort of Fellowship for Freedom in India.   (0 COMMENTS)

Good plan, Pat. Theranos’s victims, Judge Davila said, include venture-capital firms Lucas Venture Group and Peer Venture Partners, and individual investors including Pat Mendenhall of U.S. Capital Advisors LLC; Richard Kovacevich, the ex-CEO of Wells Fargo & Co.; and Rupert Murdoch. Mr. Murdoch, who invested $125 million in Theranos, is the executive chairman of News Corp, which owns the Journal. “We all screwed up,” said Mr. Mendenhall, an early Theranos investor who testified against Mr. Balwani. “I will never, ever invest in any company again without audited financials.” This is from Heather Somerville and Christopher Weaver, “Balwani Gets 13-Year Sentence,” Wall Street Journal, December 8, 2022 (print edition.) Balwani, in case you haven’t followed, was the president of Theranos, the firm that claimed to have a revolutionary blood test machine that . . . wasn’t. I’ve been following this since reading Bad Blood: Secrets and Lies in a Silicon Valley Startup, John Carreyrou’s excellent book on Theranos. (0 COMMENTS)

This is what happens when a country refuses to give in to bullying: In November 2020, accompanying its import bans, China produced a list of 14 grievances and demanded that Australia “correct” its behaviour. Mr Morrison ignored the demand, and took China to the WTO over its barley and wine bans. Yet now China has relented. This was consistent with Mr Xi’s broader charm offensive in Bali. And no doubt the advent of Mr Albanese, a less abrasive prime minister, provided cover for the climbdown. At bottom, though, Australia’s refusal to bend meant the Chinese approach was just not working. It is a lesson, says Malcolm Turnbull, Australia’s prime minister from 2015 to 2018, universally applicable to victims of bullying: “Stand your ground.” If all countries responded in this way, the world would see less bullying.  Unfortunately, not all countries are willing to stand their ground. The US government recently gave in to bullying from Russia, which essentially kidnapped a US basketball player and held her hostage as a bargaining chip in negotiations to free a convicted arms dealer.  It is tempting to view this prisoner sway as a “humanitarian” gesture, but just the opposite is true.  The fact that Russia’s tactics were successful insures that more people will be used this way in the future.  In the long run, there will be more hostages taken as a result of the US government decision to give in to the Russian demands. This is a perfect example of what economists call the “time inconsistency problem”.  Actions that seem beneficial in the short run may end up being very costly in the long run. (1 COMMENTS)

American Enterprise Institute economist Michael Strain has a new paper looking at the relationship between wages and worker productivity and concludes that, contrary to common belief, the link between wages and productivity is strong. I say “contrary to common belief” because the prevailing view is that the once-tight link connecting wages to productivity has been severed (illustrated by a nice chart). In other words, somehow wages for the last few decades have not kept up with productivity growth and, as a result, there is today a real productivity-pay gap. The gap has been used to make the case, on both the left and the right, for allegedly corrective interventions, such as higher minimum wages and wage subsidies. As Strain shows in his paper, however, the alleged gap is an artifact of methodological choices made regarding how to calculate the relationship between productivity and earnings. A more careful and comprehensive analysis of real worker pay and productivity data shows that worker compensation does indeed remain closely linked to worker productivity. Strain starts his paper with a nice discussion about how we should think about wages. He presents the simple economic model and then notes that “In reality, the labor market for an industry or a geographic area—to say nothing of the U.S. labor market as a whole—likely never reaches equilibrium.” In part that’s because nominal wages are sticky, but also playing roles are minimum wages, international-trade patterns, and technological changes. In addition, employers do have more power at setting wages than the simple model states. Strain then goes into which workers should be included in the calculation of the productivity-pay gap. He thinks that most workers should be included, but he is also open to arguments made on the left that managers should be excluded when studying the relationship. He nevertheless concludes that: In addition to the typical worker’s wages, it is also of interest to study the relationship between productivity and the average wage of all workers in the economy. The logic here is straightforward: If you are using economy-wide productivity to study the relationship between productivity and wages, then you should use economy-wide wages as well. While it is true that wages have been growing relatively faster for high wage workers over the past several decades, it may also be true that the productivity of those workers has been growing relatively faster. Excluding them from the analysis may leave a key piece of the puzzle missing. In addition, if the underlying reason for interest in the relationship between productivity and wages is not to see how workers’ standards of living have evolved with productivity, but instead to study how firms compensate workers in their role as a key input to production, then it’s desirable to study the average wage of all workers, not just of production and non-supervisory workers. Next, Strain looks at “which measure of inflation should be used to convert nominal wages into real wages.” He concludes, as have many others, that, …when investigating the relationship between wages and productivity, a strong case can be made that wages should be deflated using a measure of the change in the prices of goods and services produced by businesses, not those consumed by workers. Economic theory predicts that workers are paid according to the marginal product of what they produce, not what they consume. Thus, an output price deflator is most appropriate. He also correctly makes the case that to capture the relationship between worker pay and productivity correctly, investigators should use total compensation rather than just wages. This point is particularly important since about one third of employee compensation today is paid in the form of benefits. Benefits, of course, are compensation paid to workers no less than are money wages. Here’s what I wrote a while back for Reason magazine: According to the Federal Reserve Bank of St. Louis, inflation-adjusted wages have grown by just 2.7 percent in the last 40 years. But inflation-adjusted total compensation—wages plus fringe benefits, such as health insurance, disability insurance, and paid vacation, along with employer-paid Social Security and Medicare taxes—increased by more than 60 percent in the same period. Wages still make up a significant share of your total compensation: 68.3 percent, according to 2017 data from the Bureau of Labor Statistics, vs. 31.7 percent that goes to benefits. But that latter piece has grown significantly, in no small part due to the rising cost of health insurance. And that trend is only going to get worse. Strain’s final argument is that a better way to measure productivity is to use net output rather than gross output. The main reason is that “gross output includes capital depreciation, while net output does not. Since depreciation is not a source of income, net output is the better measure to use when investigating the link between worker compensation and productivity.” He puts it all together and concludes: When properly measured, with variable definitions based on the most appropriate understanding of the relevant underlying economic concepts, trends in compensation and productivity have been very similar over the past several decades. Of course, it is also the case that two variables can evolve similarly over time without necessarily being related. But this chart, combined with the statistical evidence in the Stansbury and Summers paper and economic theory, provides compelling evidence that productivity and compensation are strongly related. Here is the Anna Stansbury and Larry Summers paper. I couldn’t copy the chart he has in the paper, so I am adding this chart I made a few years ago making roughly the same case. Here it is:   The Strain paper is here and well worth reading.   Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (0 COMMENTS)

The first decades of Irish independence would have been an economic disappointment to those who birthed the nation in 1922. Then, Irish per capita GDP was 56% that of the United Kingdom: by 1988 it had risen to just 64% and The Economist carried an article on Ireland titled ‘The poorest of the rich’. Figure 1: Irish GDP per capita as % of United Kingdom’s Source: Maddison Project   In 1997 Irish per capita GDP exceeded that of the United Kingdom for the first time (Figure 1) and The Economist now hailed the ‘Celtic Tiger’. Why did Ireland, so poor, suddenly become so rich?   The poorest of the rich Ireland’s economy was badly mismanaged in the 1970s. Governments ran ever larger deficits and as a share of GDP Irish government debt rose from 40% in 1971 to 95% in 1991. This brought no economic benefit: unemployment rose from 6.6% in 1971 to 17.6% in 1987. The economist Dermot McAleese wrote that “high taxes, low confidence, high labour costs, excessive regulation and anti-competitive practices” plagued the Irish economy in the 1980s. Ireland’s accession to the European Economic Community in 1973 brought no respite from these economic woes.   The Celtic Tiger By the end of the 1980s it was obvious that this was unsustainable. The government — with wide support — slashed spending and made credible commitments not to run deficits or inflate the currency. It deregulated and lowered tax rates. The 2002 Index of Economic Freedom ranked Ireland the world’s 4th freest economy. Ireland’s corporate tax rate – 12.5% – is famously low, but there was more to Celtic Tiger fiscal policy than that. As economist Sean Dorgan argues, since 1987: …personal tax rates have been reduced progressively from a base rate of 35 percent to 20 percent and from a top rate of 58 percent to 42 percent. Tax bands (brackets) have also been broadened so that the higher rate now applies to higher income levels than before. The power of low rates was also shown when the 40 percent capital gains tax rate was halved in 1999 to 20 percent and revenue increased by 50 percent in one year and by 270 percent over three years. McAleese argues that controlling government spending was crucial: The espousal of fiscal rectitude and new consensus economic policies was not in fact new. What was new was the decision to attack the debt by controlling public spending, rather than by increasing taxes. For a small, open economy, curbing public spending proved a far more productive way forward. It created room for tax cuts while simultaneously lowering the debt ratio. Another ploy was the introduction of a tax amnesty. Following on the high tax policy of the 1980s and the reorientation in fiscal policy, it proved hugely successful in terms of revenue generation. Domestic interest rates fell steeply as investor confidence grew, thus starting off that rare occurrence in modern economics, an expansionary fiscal contraction. Fears that strong fiscal contraction would prove deflationary were confounded, though precisely why this was so remains the subject of controversy. The results were striking. Ireland’s economy grew at an average annual rate of 9.4 percent between 1995 and 2000. Real GDP growth outpaced that in the United Kingdom in every year from 1989 to 2003 and of the United States in every year after 1993. While Ireland’s GDP grew by 229 percent between 1987 and 2007, the figure was 161% for the United States and 152% for the United Kingdom. Government debt fell from 95% of GDP in 1991 to 25% in 2007 and unemployment fell from 17.6% in 1987 to 3.4% in 2001.   The bust In 2008 this came to a shuddering halt. Growth collapsed and government debt and unemployment rocketed. Some blamed Ireland’s low tax and light regulation policies. The reality was rather different, as economist Patrick Honohan explained: Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold…Among the triggers for the property bubble was the sharp fall in interest rates following euro membership.  In short, there had been a good Celtic Tiger, based on sound money, low taxes, and light regulation, which had been replaced by a bad Celtic Tiger based on cheap credit following Ireland’s entry into the euro. True, there was much to condemn in the excesses of the boom’s later stages, but the fiscal and regulatory policies which had spurred a decade of solid growth were not among them.   The primacy of domestic policy (again) In the century since ‘Irexit’ from the United Kingdom, Ireland’s economy has fared badly and fared well. Whether it has fared badly or well has not primarily, or even largely, been determined by its membership of the United Kingdom or even the European Union. It has been determined primarily, instead, by domestic policy decisions. So it will be with other more recent ‘exits’.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

I found this article by Alex J. Pollock and Paul H. Kupiec, “Profligacy in Lockstep,” at our sister site “Law and Liberty,” interesting. It’s about the financial position of many of the world’s central banks. A large part of the Pollock/Kupiek discussion is about marking assets to market. I sent the link to monetary economist Jeff Hummel for his comments. Here’s what he wrote: As I’ve pointed out several times before, including here (https://www.econlib.org/is-the-fed-likely-to-go-bankrupt/), marking the Fed’s balance sheet to market tells you little, because nowadays the Fed rarely sells assets before maturity. Even when tapering, the Fed usually just fails to replace maturing assets with new purchases. I don’t know to what extent this applies to other central banks. Back when central banks purchased assets solely by creating money, as did the Fed before the financial crisis, any losses were far less likely, less severe, and temporary, even if they marked their balance sheets to market. Minor losses might result from bad loans to private banks or operating expenses that were unusually high. But only a government default could result in major losses. What has changed that situation is central banks now paying interest on reserves and borrowing in other ways (as with Fed reverse repos) to finance their purchases of interest-earning assets. On the asset side, the Fed is in much better shape than the European Central Bank (ECB.) Although the Fed temporarily acquired fully private assets during the financial and Covid crises, it eventually unloaded most of them with few if any losses. It has not even made any significant discount loans to private banks for a long time. As a result, its interest-paying assets consist almost entirely of Treasuries and government-guaranteed mortgage-backed securities (MBS.) Thus only a Treasury default could really threaten the Fed’s solvency. The ECB, on the other hand, faced restrictions on buying sovereign debt when it was first created and held mainly private assets. Since the European debt crisis, it has been freer to acquire sovereign debt, but it still holds a lot of private assets. Moreover, not all European sovereign debt is equally sound. This makes the ECB’s solvency much more vulnerable to market factors. Pollock and Kupiec are correct that the ECB is not very transparent and considerably less so than the Fed. My own efforts to find out what precise assets are on the ECB’s balance sheet has not been very successful. The Pollock/Kupiek article states: “This idea would not help the Federal Reserve, because it owns no gold.” That’s technically correct because the Fed holds only gold certificates. But those are demand claims against the Treasury’s gold. So their statement is misleading. I (DRH) checked the Federal Reserve’s holding of gold certificates, which, in the Fed’s balance sheet, it calls “Gold stock.” It is valued at $11.041 billion. But a footnote explains that the value is based on a gold price of $42.22 per fine troy ounce. In reality gold currently sells for about $1,778.00. So the real value of the good holdings by the Federal Reserve is not $11 billion but, rather, $465 billion. (0 COMMENTS)

Tyler Cowen broke the sad news that Walter Grinder passed away. Tyler was one of the many intellectual protégées of Walter- certainly the most prominent and successful, the one with whom Walter felt the stronger bond, as he met Tyler when the latter was a teenager. But Walter, as the engine behind the Institute of Humane Studies, played a similar role to many, whom he gently and wisely steered in several new avenues of research. Never underestimate the role of the person who puts a good book in your hands. Particularly if he imagines you could expand your views thanks to it and perhaps use it to see the world from perspectives you did not imagine before. Walter did precisely that to perhaps countless people, some of whom honoured his sagacity by building on his insights, becoming thoughtful academics or serious think tankers. In the last few years, when he was already seriously debilitated by illness, Walter did that predominantly by e-mail, engaging with a younger generation of libertarian scholars and authors that he perhaps never met in person. I was privileged to be in his e-mail list. Walter was not sending around comments or reviews to show his erudition off: he was writing about works he considered important and eye-opening, to carefully assembled mailing lists of people that he thought could benefit of those. I have myself met him only once, in early 2020 (before Covid). I know he corresponded, and rather intensely, with colleagues whose faces he never knew. This is an effort too easily dismissed as the pastime of an old man. Walter was again playing, as the circumstances allowed him, the role of the intellectual impresario that so suited him. He belonged to the generation of libertarian scholars who envisioned and built the modern libertarian movement. A few of those, most notably Murray N. Rothbard, were constantly writing and producing page after page as ammunition for this new small movement. Others were quieter, like Walter and his friend Leonard Liggio, but weaving the web of connections and institutions which allowed the following generation of libertarian scholars to benefit from opportunities unknown to them. Walter edited a new edition of Albert J. Nock’s Our Enemy, the State and Capital, Expectations, and the Market Process by Ludwig Lachmann, an author he helped many to appreciate better. He wrote many articles, always insightful, some of which can be found online. In the last few years, he was working, with John Hagel III, on a paper entitled “Evolving Liberalism to Thrive”, which I hope will still see the light. He was planning, if I’m right, for his books to be donated to the Institute of Liberal Studies in Canada. I hope this happened and that we may all go visit a “Walter Grinder Library” soon. In different moments in history, classical liberalism shows different nuances. It is largely because of the circumstances, but also because of the personality of some highly influential authors. Vilfredo Pareto, for example, was very upset with some of the late 19th century liberals. He thought they were overemphasizing reasons for optimism, inebriated as they were by economic growth, and they forgot a key lesson by one of their very heroes, Frédéric Bastiat. That is, that government is basically plunder, and that exploitation mechanisms lie behind any kind of government. This was an insight never lost on Walter. It may have been for generational reasons, because they lived through WWII and then the Korean war and, of course, because of Vietnam, or because of the influence of the so-called “old right,” or because they were scoffed by the “cold warriors,” but I think the great libertarians of Walter’s generation tended to have clearer in their mind the indissoluble link between government and violence. Perhaps Walter’s way of thinking is still best expressed in “Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure”, written with John Hagel in the 1970s. He was certainly distressed by the reemergence of militarism, as he was by the lack of historical curiosity by some of the contemporary libertarian economists and pundits. He was a very good man, intellectually as honest as he was pugnacious. May we do a fraction of the good he did, for this movement. (0 COMMENTS)