The Economist has an article suggesting that Fed chair Arthur Burns has an undeservedly bad reputation, and “deserves a second look”: Richard Nixon picked Burns to run the Fed, viewing him as a friend who would do his bidding. Despite stubborn inflation, Nixon pressed Burns to cut interest rates in 1971, thinking it would help him win re-election. Sure enough, the Fed did just that. Nixon was re-elected and inflation soared, hitting double digits by 1974. But the story is more complicated than the basic outlines suggest, and its complexity contains lessons for today’s policymakers. With the holiday season upon us—and with the Fed approaching a turning point in monetary policy—it is a fine time to reassess the legacy of the much-maligned central banker. Start with what happened after inflation took off. The Fed jacked up interest rates from 3% in 1972 to 13% in 1974, one of its sharpest-ever doses of tightening, and enough to help tip the economy into a deep recession. Doing so took some of the heat out of price growth, with inflation settling at around 6% for the remainder of Burns’s tenure.  Burns was Fed chair from January 1970 to March 1978, roughly in the middle of the Great Inflation.  From the first quarter of 1965 to the third quarter of 1981, NGDP growth averaged 9.6%, far too high for price stability.  During the 8 years that Burns chaired the Fed, NGDP growth averaged 9.7%.  And things were not getting better near the end, NGDP growth averaged 10% over his final two years, and 10.8% over the final year of his tenure.  Nor did his policies have a delayed payoff after he retired due to “long and variable lags”.  Inflation sped up after he left the Fed, as NGDP growth accelerated sharply in late 1978 and 1979.  It is unlikely things would have been much different if he had stayed.   I also strongly object to this: An oil shock that began in 1973 led to a near quadrupling in energy prices as well as a surge in food costs. A second oil shock in 1978, just after Burns left the Fed, kicked off another inflationary surge. Given this backdrop, how much of the inflation can truly be blamed on the Fed? A review written in 2008 by Alan Blinder and Jeremy Rudd, two economists, found that supply-side factors were decisive. They calculated that the energy and food crises accounted for more than 100% of the rise in headline inflation relative to its baseline level. The Fed could have reacted more strongly, given that inflation had already been unanchored. But Burns was not responsible for the massive shocks facing the economy. Yes, oil shocks explain why inflation is higher one year than the next, but the Great Inflation of 1966-81 was caused by rapid NGDP growth, which was 100% due to the Fed printing too much money during a period when interest rates were not close to zero.  I don’t see how this is even debatable.  So why do economists continually look for revisionist explanations?  Why search for alternative theories such as supply shocks, labor unions, budget deficits, etc.  None of those can explain why the Fed printed to much money.  If you raise NGDP at 9.6%/year for 16 years, you’ll get a lot of inflation.  Over the entire period, we got roughly as much inflation as we would have had with 16 years of balanced budgets, no labor unions and no OPEC during a period of 9.6% NGDP growth.  Persistently high inflation is caused by rapid NGDP growth, which is caused by monetary policy.  It’s that simple.   (0 COMMENTS)

Paul Johnson passed away a few days ago, at age 94. Theodore Dalrymple, in the City Journal, writes: He coined striking phrases—Hitler’s views, for example, were “the syphilis of antisemitism in its tertiary phase”—and he could never be accused of mealy-mouthedness. His views, though somewhat changeable, were expressed with vigor approaching dogmatism, though they were always well-informed. You knew where you stood with him. It is customary to say of remarkable men that we shall not see their like again. Whatever may be the case with other remarkable men, this is likely to be true of Paul Johnson. It is unlikely that anyone will tackle so huge a range of subjects again with such knowledge and verve. This rings quite true to me. Not only because Johnson was a forceful and passionate polemicist, something which goes less well in times like ours, that prize political correctness over clarity and sincerity. But also because Johnson’s breadth of knowledge was absolutely remarkable. The Intellectuals, for example, is often dismissed as a “pamphlet”: yet it brings together short portraits which do not lack intellectual rigour or sound information, besides often demolishing quite a few portrayed writers or prophets (the collection starts with an unforgettable essay on Jean-Jacques Rousseau, but also includes Ernest Hemingway, Bertrand Russell and Victor Gollancz). His history books (Modern Times or the History of the Jews are the first to come to mind) are certainly readable works, accessible to a wider circle than scholarly historians. Yet they are accurate in facts and original in perspective. In later years, Johnson has been remarkably prolific, with books like his biographies of Napoleon, Darwin and Socrates, an inevitable Churchill book, or Creators. The style kept impeccable, yet these are certainly less memorable works. But if a writer that never falters exists at all, she is unlikely to be a prolific one. My gut feeling about Johnson is the following: he was more famous at the times of his great work than he was lately, and perhaps that is for two reasons. First of all, to be utterly simplifying, his great books are “right wing” but came out of the pen of a writer who was considered “left wing” before Thatcher rose to power. Indeed, Johnson was the editor of the New Statesman, which was playing a pivotal role within the intellectual left. In recent years, he was seen instead, by a younger generation, as “right wing.” Period. Few remembered his being a “convert”, and people who read tend to find “right-wingers” off-putting and may make an exception only for converts, i.e. people who at least were left-wingers at a certain point. To put it in more serious albeit equally lapidary words: people on the right read less or by all means buy fewer books and are a less dependable audience than left-wingers, or centrists with left leanings. Second of all, while right-wingers, particularly in the United States, used to be enthusiastic about Johnson, they were far less so in more recent times. For one thing, his conservatism was unmistakably “Thatcherite” and had free market undertones, which are less popular now than they used to be. For another, Johnson was a polemicist but his books (and his understanding of history) are rich with nuances. And that doesn’t go very well with the Zeitgeist, left or right. When a great mind leaves us, the world is poorer. But we may become richer, if we develop a curiosity and read more of her. Let’s go back to Paul Johnson’s books. (0 COMMENTS)

In his State of the Commonwealth speech on January 11, Virginia governor Glenn Youngkin stated: In addition, Virginians – not the CCP [Chinese Communist Party] – should own the rich and vibrant agricultural lands God has blessed us with. That is why I am asking the General Assembly to send me a bill to prohibit dangerous foreign entities tied to the CCP from purchasing Virginia farmland. The stakes are too high and the consequences are too great. Friends, that is just common sense. I hope throughout our time here, that as we reach moments of impasse… whether on who should own Virginia farmland, how to protect the privacy of our children online, or whether Virginia law should be written in Virginia or California… we will find the courage and the confidence to choose commonsense. His “Virginians” point in the first sentence is just an empty rhetorical flourish; he has no intention of prohibiting people from Maryland or Georgia or California from owning farmland in Virginia. As he makes clear, he wants to ban “entities tied to the CCP” from purchasing Virginia farmland. Why? What are the stakes? What are the potential consequences? Youngkin doesn’t say; he says that it’s common sense. But, as Charley Hooper and I say in our book, Making Great Decisions in Business and Life, common sense “is not all that common.” I think this is an instance. What is he afraid that entities tied to the CCP would do if they own farmland? Would they take it out of production? That would hurt consumers, but it would also hurt the owners of the suddenly unproductive land. Would they make the farmland even more productive? That would help consumers. It would also hurt competing farmers, but that shouldn’t be a concern of someone who, at least occasionally, makes noises in favor of free markets. Land, moreover, is going nowhere, literally. So whatever entities tied to the CCP might do, the land is an incredibly good hostage that gives the U.S. government leverage in dealing with the CCP. I’m not advocating that the U.S. government use that leverage. My point is simply that politicians who are that negative on CCP influence should realize that they have that leverage. The picture above is of Virginia farmland. (0 COMMENTS)

Merriam-Webster defines pacifism as “opposition to war or violence as a means of settling disputes.” As long as disputes are possible and not everybody is a pacifist, the pacifist can only hope to live in peace if some non-pacifists stand on his side. In other words, being prepared for self-defense is essential to a situation of usual non-violence. (See my EconLog post “The Economics of Violence: A Short Introduction.”) To quote Roman poet Lucan, due consideration being given to the difference between ancient (collective) liberty and modern (individual) liberty: Ignorantque datos, ne quisquis serviat, enses [And they ignore that swords are given so that nobody be a slave.] (0 COMMENTS)

One (seemingly) obvious solution to inadequate voter information is something like a market approach – an epistemic division of labor accompanied by a marketplace for enlightenment. Can this process ameliorate the knowledge problems faced by a technocracy? Friedman is skeptical. Here I focus on two problems he raises. One is the problem of too much rather than too little information. The other is the problem with radical rather than rational ignorance. Friedman reviews the substantial literature showing that voters’ understanding of even basic political facts is palsied at best, dryly noting that as one “reads the more recent scholarship, it sometimes seems as if researchers have been trying to outdo each other in expressing their discouragement at the breadth and depth of the public’s political ignorance.” This seems to suggest an obvious solution – a better informed public, and “researchers’ tacit (and often explicit) assumption has been that if people would just get more political knowledge into their heads, they would make reliably good political decisions.” But this would suppose the problem is too little information. In reality, the problem is that there is too much information. For all practical purposes, we are drowning in an overabundance of information, and no person can gather more than the most miniscule fraction of it. Throughout Friedman’s book, the figure of Walter Lippmann looms large, as does his work on information problems of civilization. Friedman approving quotes Lippmann as saying: The world about which each man is supposed to have opinions has become so complicated as to defy his powers of understanding…Even the things that are near to him have become too involved for his judgment. I know of no man, even among those who devote all of their time to watching public affairs, who can even pretend to keep track, at the same time, of his city government, his state government, Congress, the departments, the industrial situation, the rest of the world. What men who make the study of politics a vocation cannot do, the man who has an hour a day for newspapers and talk cannot possibly hope to do. Lippmann wrote these words around a century ago. Since then, the quantity of available information and the ease with which it can be accessed have increased to a degree that few could have imagined. And yet, the capacity of the human mind hasn’t changed. Inevitably, as society grows more complex, each of us grows increasingly more ignorant of how society works. You can’t solve a problem caused by superabundant information with even more information. Our understanding will inevitably be limited to our fallible interpretations of the hopelessly tiny fraction of information we can manage to acquire. But if solution isn’t more information, maybe it’s ensuring that we have the right information? This is where the problem of radical ignorance raises its head. Friedman thinks the idea of rational ignorance (that we deliberately decide the relevant information isn’t worth the cost of acquisition) is drastically overrated, and the real issue is radical ignorance – the things we don’t know that we don’t know. Deciding that the relevant information isn’t worth acquiring presupposes that you already know in advance what the relevant information would be, before you’ve acquired it. Simply telling people to use reliable sources to acquire the best information from the most qualified experts only hand-waves away an enormous amount of epistemic complexity which renders such advice functionally useless. This is due to an unavoidable “part of the human condition, insofar as human beings are ignorant – that is, insofar as the truth is not self-evident.” Friedman goes on to note: Before we know the truth, we cannot know which information is true or which interpretations are adequate; if we knew this, we would not be ignorant of the truth. Prior to the consumption of enlightening information and interpretations, radically ignorant voters will not be able to distinguish misleading information and interpretations from enlightening information and interpretations, because they are, by definition, ignorant of the truths about which they are seeking enlightenment. If instead they receive misleading information and interpretations, they will not have the knowledge of the totality that would allow them to recognize the inadequacy of that information and those interpretations. One might pin their hopes on a form of competition helping consumers find the best information. Unfortunately, this wouldn’t work, Friedman says. The process of economic competition has mechanisms that tends towards progress even with radically ignorant consumers. In an economic market, consumers can judge if the final output they receive is satisfactory or not and can exert selection pressure against firms producing unsatisfactory products. This allows consumers in the market to “serve as anchors to reality and, therefore, as checks against dysfunction in the division of economic labor. This functionality of the system is ensured, however, only insofar as consumers are able to distinguish adequately between satisfactory and unsatisfactory products.” This is what breaks the analogy between an economic market and a market for political information: In a “market” for political information and interpretation, “consumers” (voters) cannot possibly play such an anchoring role, because a consumer shopping for enlightenment finds herself facing the conundrum of the radically ignorant (where, again, radical ignorance means ignorance of unknown unknowns)…When one is radically ignorant of which information is true and which interpretations are adequate, one cannot know if one is “buying” bad information or interpretations, so one will be unable to exert a selection pressure against those who purvey the bad information and interpretations…Ultimately, a “market” for enlightenment cannot work in the way that ideal-typical consumer-goods markets work because in the latter, the ultimate guarantor of efficacy is supposed to be the feedback consumers get from the products they buy: the knowledge they acquire, by using the products, about whether their purchases have been unwise. There is no such feedback with most political knowledge, including the four types of technocratic knowledge. If people have been politically misinformed, how would they know it? If they were capable of knowing it on their own, they would not need the division of epistemic labor to enlighten them. Attempting to outsource the process of selecting the “right” information by having journalists present information from the “best experts” runs into similar problems: If experts disagree, at least some of them must be wrong. This is to say that, on the question at issue, at least some of them must be false experts. In turn, journalists cannot reliably screen out false expertise unless they have a kind of meta-expertise that allows them to be reliable adjudicators of disagreements among experts. This, too, is unlikely, as it would entail that journalists are more expert than the experts. In reality, journalists are usually unqualified to judge the adequacy of the information and interpretations they relay to voters from experts who disagree among themselves. Moreover, even if some journalists were meta-experts, radically ignorant consumers would be unable to tell which journalists these are. Even stipulating the existence of ideal epistocrats who can successfully solve the knowledge problems of technocracy, the problems of radical ignorance remain systemic: Suppose that somewhere within the division of epistemic labor of a mixed technocracy such as ours, in which there are both democratic and epistocratic elements, the Ideal Epistocrat (IE) comes up with an adequate interpretation of the cause of a significant social problem and devises a policy solution that objectively passes the cost-benefit test. How can the other actors in the system— voters, journalists, editorialists, amateur opinion-mongers, and epistocrats other than the IE— identify who the IE is? (Indeed, how can the IE know this?)…So long as the truth is not self-evident, everyone in the system may be radically ignorant of the identity of the IE, such that the system as a whole may be said to experience the conundrum of the radically ignorant. “The system” will not “know” which information and interpretations to mediate to consumers – the information and interpretations that originate with the IE – as the system will be unable to distinguish between the IE’s views from the views of putative IEs whose information or interpretations are in fact misleading. Still, all of these problems are secondary to what Friedman sees as the most fundamental obstacle to an effective technocracy – ideational heterogeneity. That will be the topic of the next post.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.  (0 COMMENTS)

Last week, one of my favorite interviewers, John Batchelor, interviewed me for his show, “Eye on the World,” on CBS Radio. The topic: my article on the Southwest “meltdown.” Why is he one of my favorites? Because he actually carefully reads what I write and thinks about it before interviewing me. And his goal is clearly to get the information out to his audience in a way that’s understandable. He also is a very personable, nice guy with a fun sense of humor. And here’s the link to the interview. It lasts just under 10 minutes. And here’s my article on the Southwest meltdown. (0 COMMENTS)

Last Thursday’s column by Greg Ip, the Wall Street Journal‘s chief economic commentator, is strange in more than one way (see “Inflation Is Turning the Corner,” January 12, 2022). It seems to confuse changes in relative prices (for example, gasoline prices recently decreased relatively to the prices of other goods and services) and changes in the general level of prices. In fact, a change in the general level of prices—the definition of inflation—gets added to the change in a specific relative price. But let me focus on what appears to be a more elementary and less debatable error. Speaking of post-pandemic increases in the prices of housing, energy, and cars, Mr. Ip apparently tries to explain why prices are now decreasing as he writes: Either demand self-destructs, or supply responds, or both, which happened to varying degrees in all of these markets. The concept of self-destructing demand is a mystery. I don’t think we could find it in three centuries of economic literature, at least in mainstream economics. What can it mean? How can the demand curve for a good disappear from the market through self-destruction? For sure, one can imagine that the incomes of all consumers drop to zero, but this would not explain the “self” in “self-destruct.” I find it difficult to interpret the quoted statement in any other way than as follows: an increased demand generates a higher price which in turn decreases demand—a literal self-destruction of demand through the higher price generated by the original increase. In a previous EconLog post, I called this the yo-yo model: demand and supply bounce up and down non-stop. Ultimately, it implies that no price would ever move to a higher (or lower) equilibrium. The basic economic error is to confuse an increase (or decrease) in demand with an increase (or decrease) in quantity demanded (and mutatis mutantis for supply). A “change in demand” is defined in economics as a shift in the demand curve (or demand schedule); a “change in quantity demanded” is a move along a given demand curve. An upward shift in the demand curve, which is by definition a ceteris paribus change excluding all other factors than price, will normally cause an increase in price and a consequent increase in quantity supplied. (I write “normally” to account for the theoretical possibility that the long-term supply curve show constant or decreasing returns to scale.) Since we have a new demand curve, the increase in price cannot cause a decrease in demand, but only a decrease in quantity demanded along the new demand curve. Except if supply is totally inelastic, quantity supplied and quantity demanded on the market will have increased. In short, demand cannot “self-destruct” because of a price increase. This is confirmed by the sentence just following the quote above: In none [of those industries] are prices about to return to where they were before the pandemic. This means that, after all, there is no self-destruction of demand, just a move along the supply curve. Using “demand” or “supply” in the economic sense avoid misleading, confusing, or contradictory statements. Otherwise, analysis self-destructs. (0 COMMENTS)

What would you end up with if you took a bunch of Democratic voting social liberals from California and transplanted them to an entirely different state with no income tax and a light touch regime of business regulation?You’d end up with the fastest growing city in America: Austin grew by 33% between 2010 and 2020, far faster than any other large metro area.  Back in the 1960s, there was a movie entitled How to Succeed in Business Without Really Trying.  Austin residents vote Democratic, but they have not been allowed to try out the sort of policy regime that you see in other Democratic areas, such as California.  Austin is an island of liberalism plunked down in the middle of conservative Texas. So what can we infer from Austin’s amazing success? It seems as though people are voting with their feet for a mix of policies that are socially liberal and economically conservative.  Interestingly, the neoliberals who like Austin’s policy regime don’t have a home in either major political party.  A two party system can only represent a limited set of policy mixes, and Austin’s is not one of them. Of course Austin is in the sunbelt and benefits from warm sunny weather.  But then so does California, which is losing population.  So what’s the fastest growing big city in the cold rainy north?  Seattle: Socially liberal Seattle is embedded in a state with no income tax, due to the fact that Washington’s constitution forbids progressive income taxes.  That makes instituting an income tax a hard sell, as even middle class residents understand that they would have to pay higher taxes. Even though only a small fraction of states levy no income tax, 8 of the 10 fastest growing big cities (during the 2010s) are located in one of those states.  The  following population growth data is provided by the Brookings Institute: PS.  Elon Musk considers himself to be socially liberal and economically conservative, and recently moved his business from California to Austin. PPS.  Bloomberg has a story on a couple of new “supertall” skyscrapers being build in Austin.  Even more notable than their height is that they are both residential towers.  High rise living tends to be more popular with socially liberal people.  Perhaps they enjoy looking down on us.  🙂 (0 COMMENTS)

Should the British Museum return the Elgin Marbles, taken from the Parthenon in Athens about 200 years ago? What should be the purpose of museums, education or social justice? Listen as Tiffany Jenkins, author of Keeping Their Marbles, discusses these questions and more with EconTalk host Russ Roberts. The post Tiffany Jenkins on Plunder, Museums, and Marbles appeared first on Econlib.

Martin Luther King Day provides an opportunity to reflect on self-defense by individuals in persecuted minorities. Frederick Douglass, an escaped slave, published a newspaper out of Rochester, NY, named the Frederick Douglass’ Paper. In 1854, another escaped slave was caught in Boston and eventually returned to his master in Virginia under the federal Fugitive Slave Act. While he was jailed, a crowd of abolitionist intent on liberating him attacked the jail and killed a US marshal trying to repel them. (Nobody was ever condemned for that.) The Frederick Douglas’ Paper of June 9, 1854 (page 2) commented with a piece titled “The True Remedy for the Fugitive Slave Bill.” Although without a byline, it was likely written by Frederick Douglass himself. The first paragraph reads (emphasis in the original): A good revolver, a steady hand, and a determination to shoot down any man attempting to kidnap. Let every colored man make up his mind to this, and live by it, and if needs be, die by it. This will put an end to kidnapping and to slaveholding, too. We blush to our very soul when we are told that a Negro is so mean and cowardly that he prefers to live under the slavedriver’s whip—to the loss of life or liberty. Oh! that we had a little more of the manly indifference to death, which characterized the Heroes of the American Revolution. The Library of Congress advises me that that “the ‘true remedy’ theme in connection with slavery is mentioned more than 30 times in various African American newspapers, from ca. 1828-1860” (email of December 28, 2022). I was alerted to Douglass’s statement by Damon Root’s interesting article “The New York Times Is Surprised To Find Public Defenders Championing the Second Amendment” (Reason, August 1, 2022). The last two sentences of Douglass’s quote above raise what is known to economists as the problem of collective action (see Mancur Olson, The Logic of Collective Action [Harvard University Press, 1971]). If a large number of slaves (assuming they could have owned or obtained revolvers), escaped slaves, and their supporters had shot a sufficient number of slave owners and slave catchers, they would have abolished slavery. The collective action problem is who will start the action and shoot first, for they are themseves likely be killed or punished instead of being liberated. Most people are not willing to die for a cause, even just, that is likely to only benefit others. If however Douglass had succeeded instilling in a sufficient number of individuals the “determination to shoot down any man attempting to kidnap” or to shoot any slave master, slavery would have unraveled through a simple mechanism of incentives. The way to stop persecution is to increase its cost for persecutors so that they don’t derive any net benefit from it. If that succeeds, the persecutor will back off. Individual self-defense by persecuted individuals or their supporters may not be sufficient by itself to achieve that goal, but it can certainly contribute to it. (0 COMMENTS)