An outcry followed World Bank president David Malpass’s refusal to make a profession of faith in climate change. The New York Times reported (“World Bank Leader, Accused of Climate Denial, Offers a New Response,” September 22, 2022): The uproar began on Tuesday when Mr. Malpass refused to say during a public event at The New York Times whether the burning of oil, gas and coal was driving climate change. Speaking onstage during a discussion about what industrialized nations owe developing nations grappling with climate problems, Mr. Malpass was asked to respond to a remark made earlier in the day by former Vice President Al Gore, who called the World Bank president a “climate denier.” Pressed three times, Mr. Malpass would not say whether he accepted that man-made greenhouse gas emissions had created a worsening crisis that is already leading to more extreme weather. “I’m not a scientist,” he said. As the NYT title above indicates, Mr. Malpass’s burst of dignity did not last long. He rapidly got in line and confessed his social heresy. But, like for witches in the 16th or 17th centuries, confessing that he slept with the devil did not win him a pardon. (See also “World Bank Head under Pressure to Quit over Climate Change Doubts,” Financial Times, September 22, 2022; and “World Bank’s David Malpass Says He Isn’t Resigning Amid Criticism of His Climate Views,” Wall Street Journal, September 23, 2022.) His answer—“I am not a scientist”—does make some intellectual sense. Whether the climate is changing due to human activity is a valid question, but we should not necessarily accept for cash the answer of politicized scientists. Their professional future and perhaps daily bread depend on their compliance with the reigning political vulgate pushed by power-hungry governments and complicit activists all over this dear earth of ours. Agnosticism may be the best attitude. “Science” can make mistakes. As Karl Popper argued, the obsession of any scientist is, or should be, to falsify hypotheses. A scientific theory or “law” remains a tentative conclusion. (See Popper’s The Logic of Scientific Discovery [Harper & Row, 1959, 1968]). And social-engineering in the name of science is a recipe for disaster. In the early 20th century, for example, mainstream biologists and medical scientists, including public-health experts, supported eugenics. Under the American states’ eugenic laws, in force between 1907 and 1980 depending on the state, 65,000—mainly poor—women were forcibly or fraudulently sterilized under the mantle of science (see sources in my post “Economic Reflections on Abortion”). A Wall Street Journal op-ed (Steve Milloy, “David Malpass’s Climate-Change Lesson for GOP Candidates,” Wall Street Journal, September 26, 2022) mischievously recalls that Supreme Court nominee Ketanji Brown Jackson declined to define the word “woman” in her confirmation hearings, pleading, “I’m not a biologist.” To keep our heads cool, we should also remember that climate change followed the “population bomb,” the “hole in the ozone layer,” and “global warming,” among other scares. But we should  of course keep our minds open (see my review of Tyler Cowen’s Stubborn Attachments, where I was perhaps not critical enough). Another thing to remember is that the World Bank is already helping the governments of poor countries to mitigate, or adapt to, the presumed consequences of climate change. A World Bank report published in 2021, under Mr. Malpass’s watch, The World Bank NDC Support Facility: Impacts and Lessons Learned Supporting NDC Implementation (NDC stands for Nationally Determined Contribution under the 2015 Paris Agreement), boasted: The World Bank Group is the largest multilateral funder of climate investments in developing countries, having committed $83 billion to climate-related investments over the last five years. In a scathing editorial on the attempts to deepen the submission of the World Bank to the environmental activists’ agenda, the Wall Street Journal reminds us what is the main function of the World Bank (“A Gore-Kerry Political Climate Hit,” September 25, 2022): The World Bank’s main job is to alleviate poverty. This requires energy, which today is still most efficiently and affordably provided by fossil fuels. Yet Mr. Kerry [Joe Biden’s Special Presidential Envoy for Climate] recently cautioned African leaders against investing in long-term natural gas production, as if they have an alternative if they want to develop. … The World Bank has had enough problems over the years lending to corrupt governments and failing projects. But if it is going to exist, it should stay focused on its mission of promoting growth in poor nations to alleviate poverty. It shouldn’t be hijacked by rich-country climate lobbyists for their own political ends. It does seem that the attack against Mr. Malpass is neither scientific nor rational. We may add that if all poor countries had had laissez-faire governments and proper legal institutions like Hong Kong benefited from after 1945, they would likely now be at least as rich as Hong Kong (about 92% of real US GDP per capita, according to the Maddison Project) and would not need the World Bank’s handouts to face any possible catastrophe. (0 COMMENTS)

Ringed by public housing projects, Richmond Community consists of little more than a strapped emergency room and a psychiatric ward. It does not have kidney or lung specialists, or a maternity ward. Its magnetic resonance imaging machine frequently breaks, and was out of service for seven weeks this summer, said two medical workers at the hospital, who requested anonymity because they still work there. Standard tools like an otoscope, a device used to inspect the ear canal, are often hard to come by. Yet the hollowed-out hospital — owned by Bon Secours Mercy Health, one of the largest nonprofit health care chains in the country — has the highest profit margins of any hospital in Virginia, generating as much as $100 million a year, according to the hospital’s financial data. This is from Katie Thomas and Jessica Silver-Greenberg, “How a Hospital Chain Used a Poor Neighborhood to Turn Huge Profits,” New York Times, September 24, 2022. What’s the key to Bon Secours’ success? The U.S. government’s 340B program. It’s been well known for some time what a scam this program is. The two reporters explain: When Bon Secours bought Richmond Community, the hospital served predominantly poor patients who were either uninsured or covered through Medicaid, which reimburses hospitals at lower rates than private insurance does. But Bon Secours turned the hospital’s poverty into an asset. The organization seized on a federal program created in the 1990s to give a financial boost to nonprofit hospitals and clinics that serve low-income communities. The program, called 340B after the section of the federal law that authorized it, allows hospitals to buy drugs from manufacturers at a discount — roughly half the average sales price. The hospitals are then allowed to charge patients’ insurers a much higher price for the same drugs. The theory behind the law was that nonprofit hospitals would invest the savings in their communities. But the 340B program came with few rules. Hospitals did not have to disclose how much money they made from sales of the discounted drugs. And they were not required to use the revenues to help the underserved patients who qualified them for the program in the first place. That’s arbitrage, but not in a good way, backed by the federal government. The authors note: Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center. But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course. Read the whole thing. HT2 health economist John C. Goodman, who wrote the point up more briefly. (0 COMMENTS)

Quantitative easing is often described as printing lots of new money and using it to buying back government debt. It sounds too good to be true. And yet until recently there was relatively little inflationary consequence from all of this money printing. And even the recent spike in inflation could have been prevented if the central banks had raised rates a bit sooner.But when something is too good to be true, there’s usually a catch. For the most part, central banks weren’t actually “printing money”.  Rather they were buying longer-term bonds paying 2% interest with newly issued interest bearing reserves, which at the time paid almost no interest at all. Central banks were essentially operating the world’s largest hedge funds. Borrowing short-term at low rates and lending long-term at a higher rate.  But that carry trade remains profitable only so long as short-term rates stay lower than the rates on previously issued longer-term bonds. The vast profits earned by central banks over the past 13 years would turn into losses if short-term interest rates rose sharply. So perhaps it is only fair that central banks now earn some losses.  But not everyone wants the central banks to pay up.  Here’s The Economist: Another option is to find a way for central banks to pay less interest on reserves. A recent report by Frank Van Lerven and Dominic Caddick of the New Economics Foundation, a British think-tank, calls for them to pay interest on only a sliver of reserves that affects their decision-making, rather than the whole lot. The ECB and the Bank of Japan already have such a “tiered” system. It was designed to protect commercial banks from the negative interest rates they have imposed in recent years. Using tiering to avoid paying banks interest while their funding costs went up would be a tax in disguise. Banks, considered together, have no choice but to hold the reserves QE has force-fed into the system. Compelling them to do it for nothing would be a form of financial repression which may impair banks’ ability to lend. It would “transfer the costs [of rising rates] to the banking sector,” Sir Paul Tucker, a former deputy governor of the Bank of England, told parliament in 2021. Maybe I’m missing something, but I have trouble following their argument.  It’s hard to see how banks could be induced to maintain their large holdings of excess reserves if the reserves did not earn interest while other risk-free assets such as T-bills earned a positive rate of interest.  Back in 2007, short-term interest rates in the US were about 5% and thus banks held only a tiny amount of excess reserves.  Today, excess reserves are now roughly 1000-fold higher than before the Fed began paying IOR in 2008.  There’s a reference to the tiered system in Japan and Europe, but that involved paying a higher interest rate on the infra-marginal reserve holdings (that is zero interest instead of the negative interest rate on the marginal holdings.) It’s also a bit misleading to suggest that banks, in aggregate, are somehow “forced” to hold reserves injected through QE programs.  One problem is that banks could make deposits less attractive and a portion of the reserves would leak out as currency.  But even if you assume a world without currency, where 100% of the monetary base is bank reserves, it is still misleading to suggest that banks are forced to hold excess reserves just because the central bank injects them into the system. Here it is useful to recall the distinction between the nominal supply of bank reserves and the real demand for bank reserves.  Central banks determine the nominal stock of reserves, while the commercial banking system determines the real stock of reserves.   To be sure, central banks can induce commercial banks to hold a very large stock of reserves—even if real terms—if they are willing to pay sufficient IOR.  But if you assume that no interest would be paid on most bank reserves, why would banks choose to hold large a real stock of excess reserves? If all banks simultaneously tried to get rid of excess reserves, this would lead to changes in the prices of goods, services, and assets.  Eventually, the price level would rise high enough so that banks were holding their desired real stock of reserves.  But when you consider that excess reserves in America are roughly 1000-fold higher than in 2007, the required price level increase would presumably be very large.  (It’s difficult to say how large, as there have also been some regulatory changes since 2007 that have boosted the demand for bank reserves.)  I suspect that the UK would face a similar problem.  Ultimately, someone must pay the cost of financing the public debt.  If the central bank buys back the government’s debt in QE programs, then there are three options: 1.  Have the central bank pay IOR indefinitely, which is costly. 2.  Impose an implicit tax on the banking system with regulations that require banks to hold large quantities of reserves that pay no interest. 3.  Impose an inflation tax on the public by not requiring banks to hold large quantities of reserves, but also not paying interest on those reserves. I fail to understand the rationale for imposing a tax on banks during periods when QE results in losses for the central bank.  As an analogy, imagine if the Prince of Monaco visited the casino of Monte Carlo every so often.  On some days he ended up winning money.  Other days he would suffer losses.  Now suppose that on days when his luck was bad the prince imposed an ad hoc tax on the casino equal to his losses.  That doesn’t seem fair! Central banks have essentially been running a giant hedge fund.  Why should commercial banks have to pick up the tab on those occasions when the bets of the central bank turn sour? (0 COMMENTS)

Another favorite passage of mine from Atlas Shrugged that doesn’t qualify for the blockbuster category is a statement by Francisco d’Anconia. Jim Taggart, who is about to enter his senior year of college, tells Francisco that the millions of dollars he’s about to inherit are not for his personal pleasure but, rather, are a “trust” that should be used to benefit the underprivileged and the poor. Francisco replies: “It is not advisable, James, to venture unsolicited opinions. You should spare yourself the embarrassing discovery of their exact value to your listener.” I’ve almost never appreciated unsolicited advice. I try to model that by not giving advice without first asking whether it’s welcome. The passage tangentially reminds me of an Allan Sherman song titled “Good Advice.” I still remember the refrain: And that was good advice, good advice, Good advice costs nothing and it’s worth the price.     (0 COMMENTS)

The “Yes In My Back Yard” movement in favor of more housing construction recently notched a big win in California. One bill (AB 2011) upzones many commercial areas to allow for construction of multifamily apartments. Another bill (AB 2097) eliminated the requirement that developers provide parking spaces in developments near mass transit, even if they prefer not to.  A recent blog post by Darrell Owens discusses the political economy of these changes: The [building] Trades knew the legislature was desperate to pass a housing bill and made clear that all new housing needed to be built by unions exclusively. In 2020, they demonstrated their seriousness by single-handedly smoking the entire housing agenda that year and threatened to do so again by opposing AB 2011. But this time more unions got into the game: the Carpenters union, which also represents many construction workers, supported AB 2011 and rallied loudly. In the legislature, there’s a world’s worth of difference between supporting a bill on paper and mobilizing for a bill you support. The Carpenters and SEIU did the latter, which made all the difference. The Carpenters’ perspective was that the lack of housing construction led to the decline of construction worker unions and that it was in unions’ best interests to keep housing supply up so that there’s demand for jobs. The other big union supporters of SB 2011 weren’t construction unions at all—it was SEIU, the public workers union, and the school workers union. They supported AB 2011 because their workers were harmed by the housing shortage. This was a profound entry of non-construction unions into the land use debate. Note:  The Owen’s blog post provides more detailed information on what’s in the two housing bills. This reminds me a bit of the deregulation of transportation in the 1970s and the 1980s.  Over time, regulations had become so burdensome that they imposed major costs on the economy.  While there are losers from deregulation, it is not a zero sum game.  When regulations are extremely counterproductive, it eventually reaches the point where the winners from deregulation are in a position to gain far more than the insiders would lose.  Indeed, in some cases the regulations can become so burdensome that even the insiders gain from removing them.  I suspect that many communist party insiders gained from market reforms in the 1990s, as they were well placed to take advantage of the new (and much more efficient) market economy. In recent years, the California construction industry has shrunk dramatically from its heyday in the second half of the 20th century.  It appears that things have reached a tipping point in recent years, where the political coalition for YIMBYism has started to win battles against the still powerful NIMBYs. PS.  While progress is being made, I won’t be satisfied until a 50-story condo tower is built right next door to my lovely home in a quiet portion of Orange County. (0 COMMENTS)

Adam Smith would smirk.  The latest iteration of old-fashioned mercantilism now links, in a ludicrously appropriate way, the fecal matter of Kansas cows with the green activism of California legislators.  In a “we-shoulda-seen-it-comin’” development, California’s Low Carbon Fuel Standard plan is incentivizing  Kansas dairies to sell—no bullshit-–cow methane to California industrialists.  Talk about a (ahem) windfall… The idea, though technically feasible, is not what you might hope–i.e., a rational market use of an otherwise wasted by-product.  No, this scheme is instead the result of purely artificial market tinkering by fatally conceited bureaucrats prosecuting a self-declared crusade on carbon emissions. And, not surprisingly, some businesses are complicit, crudely exemplifying Smith’s warnings about the eagerness of business to collude with government rule-makers: To widen the market and to narrow the competition, is always the interest of the [business] dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.  It’s a bit unclear exactly how (or if) businesses and policy makers colluded, but the end result is clear enough: taxpayers will shoulder an enormous price tag, politicians will get credit for “tackling” the climate problem, and big business will do fantastically well pretending to do its part.   Here’s how it works: California has imposed carbon emissions caps in an effort to reduce greenhouse gas emissions to politically determined targets (never mind these targets’ dubious efficacy, that’s another story). Knowing, however, that mandatory reduction quotas would further debilitate California’s business environment, it instead allows a nominal “free-market” trading scheme in which high-emitting industries purchase offsetting “credits” from other agents who can prove to be lowering their emissions by a commensurate amount. For a truly frightening look inside the belly of this beast, MIT’s Technology Review has done a deep dive—spoiler alert, many of the programs actually incentivize the increase in emissions.  That aside, in some ways the program sounds vaguely sensible in theory: the rise in total gas emissions gets flatlined.  Such a scheme, after all, arguably helped reduce sulphur dioxide emissions a generation ago (a much clearer threat than carbon dioxide, but again, that’s a different story). The real question here, however, is not so much about carbon emissions reductions but at what cost and who is benefitting?  Enter the humble Kansas dairy cow.  For certain scales of industrial livestock producer, the California carbon credits are juicy enough to warrant spending the significant sums required to install digester-tanks that can collect, break down, and siphon the methane that would otherwise be lost to the atmosphere in traditional manure lagoons.  The captured methane gets compressed and ultimately injected into natural gas networks which link, however tangentially, to the Golden State’s targeted reductions. All of this would be fine if it actually made some kind of broad financial sense.  But like the riddle wrapped in an enigma, this is a Ponzi scheme wrapped in a shell game.  In this case, an actual, literal Shell game.  Shell, U.S.A–subsidiary of the former Royal Dutch Shell oil conglomerate—has been credibly accused of a vigorous greenwashing campaign, spending $55 million a year on “eco-branding” its image.  It is, in fact, the source of capital investment for the Kansas methane concentration plant, part of its “Downstream Galloway” biomethane program.  Shell is no fool: it will sell the credits from its carbon offset program (“Renewable Compressed Natural Gas”) on the California exchange, thereby greenwashing its image at California taxpayer’s expense while recouping its capital outlay in just a few short years (I tried to call their information line to find out how long exactly, but it’s been disconnected…) The deception, such as it is, is in the fleecing of California citizens to “fight climate change” while lining the pockets of large midwestern agriculture syndicates and their partners in the oil industry.  Not that I blame the dairy operators or oil companies, mind you: as businesspeople, they respond to price signals and opportunities, however ridiculous, as much as any of the rest of us.  Rather, I blame legislators for failing to see the absurd implications of their feel-good policymaking.  And, to the extent that corporate interests were involved in promoting the legislation, for failing to heed Adam Smith’s advice to “carefully examine…with the most suspicious attention” schemes that invariably deceive and oppress the public. It is ironic, perhaps, that California’s climate policy is incentivizing further industrialization and centralization of an ever-more consolidated agricultural industry.  Now we have a heavily subsidized milk industry, paid at taxpayer expense to develop ever-larger dairies that create (among other things) ever-larger disposal problems like giant manure lagoons.  Now these same dairies can extract further taxpayer funds by collecting the gas from these lagoons, and selling it back to oil companies so that the companies can comply with a taxpayer-funded climate cap.  It’s hard to tell anymore who’s milking whom. The only thing that seems certain in this convoluted mess is Adam Smith’s centuries-old warning: “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”   Paul Schwennesen is Director of the Agrarian Freedom Project and is a PhD candidate in 16th Century New Spain at the University of Kansas. Paul holds a Master’s degree in Government from Harvard University and studied History and Science at the United States Air Force Academy. (0 COMMENTS)

Neuroscientist Erik Hoel talks about why he is not an “effective altruist” with EconTalk host, Russ Roberts. Hoel argues that the utilitarianism that underlies effective altruism–a movement co-founded by Will MacAskill and Peter Singer–is a poison that inevitably leads to repugnant conclusions and thereby weakens the case for the strongest claims made by effective altruists. The post Erik Hoel on Effective Altruism, Utilitarianism, and the Repugnant Conclusion appeared first on Econlib.

Ash Navabi, a friend who was born in Iran and is a dual citizen of Iran and Canada, sent me a present a few weeks ago. It’s pictured above. It’s the Iranian version of my Concise Encyclopedia of Economics. Here’s the story he told me. This summer he visited Mashhad, Iran. It’s Iran’s second-most populous city, with a population of about 3 million. He came across a tiny bookstore. Let’s have Ash tell it: I asked the staff there if they had an economics section, and to my surprise, they did. Out of the approximately 30 books in the section, I noticed 2 by one [here he spells out my name in Farsi]–“David Henderson!” In short, this is a copy of your Concise Encyclopedia, translated in Persian. The front page says this is actually the second printing of the book, from 2018, with 500 copies. I bought it for the cover price of 155,000 Tomans, roughly $5.   I told Ash that since 2008 I’ve sold rights to translate into various languages but, unless my memory is bad, I had not sold rights to translate into Persian. [My records on sale of rights, and this is uncharacteristic of me, are not good.] If I’m remembering correctly, this is a bootleg copy. But I’m not upset. Iran’s economy needs all the good economic thinking it can get.         (0 COMMENTS)

Over at Reason, Christian Britschgi writes about how federal money meant to encourage zoning reform ended up in the hands of those who want to further restrict housing construction. If you want a recap of why land and zoning deregulation is one of the most important policy matters that no one cares about, read Bryan Caplan on this issue and watch this. As Caplan notes, “we’re talking trillions of dollars of annual gain, implying an astronomical present value” that would materialize from even just modest housing deregulation (and immigration liberalization). Housing deregulation would increase the supply of housing, which in turn would lower the cost of housing, and allow workers in low-productivity regions to move to higher-productivity regions. One idea that has been offered by my colleagues at the Mercatus Center, but also by other scholars, is to use federal funding to incentivize states to loosen zoning rules. The Biden administration tried to do something similar with grants to state transportation departments and port authorities: The White House made a big splash in May 2022 when it announced that its Housing Supply Action plan would use competitive transportation grant programs to reward jurisdictions that remove regulatory barriers to new housing construction. The $1.2 trillion Infrastructure Investment and Jobs Act, enacted in November 2021, also dramatically boosted funding for these grant programs—giving the feds a lot more carrots with which to reward governments for removing red tape on new development. However, in practice it didn’t work all that well. Britschgi explains: But as the grant awards from these retooled transportation grant programs trickle out, there’s little evidence the money is going to reformist jurisdictions. Late last week, the U.S. Department of Transportation announced the recipients of $1.5 billion in grants from the Infrastructure for Rebuilding America (INFRA) program—one of five grant programs the administration said would be used to encourage zoning reforms. Of the 26 INFRA grant awards this cycle, 19 are going to state transportation departments or port authorities that don’t set zoning regulations or issue residential building permits. These bureaucracies can’t be incentivized to change regulations they don’t have any power over in the first place. He adds: It was a similar story with $2.2 billion in RAISE grants awarded last month, another one of the programs the Biden administration said it would retool to encourage zoning reform. Few of the awards appeared to have much to do with zoning. One of the largest RAISE awards went to San Francisco, which is currently being investigated by California’s state government for shooting down new housing in violation of state law. I can’t say that I am surprised.   Before I explain why, I want to offer two caveats. I totally get why this idea is appealing—it’s not as if we have been very effective at convincing politicians to put an end to most zoning rules the old fashioned way- despite some bipartisan support from scholars—and I also don’t have any idea if there are other instances outside of the ones mentioned in the piece where this approach has worked. That said, there is always a danger in using government funding—in addition to the money spent—to create incentives to deregulate rather than press for deregulation directly. That’s in part because the incentives within government are rarely the ones that appear on paper. Obviously, public choice economics has a lot to say about this. Unlike in the marketplace, the incentives for government officials to manage public funds prudently are very weak, not least because personal accountability for bad decisions or misspent money is almost nonexistent. In addition, the pressures are intense on government officials to reward both their friends and special interests. After all, it’s not their money. To be fair to scholars who suggested using government to create incentives for zoning reforms in the first place, they are explicit about the fact that the grant program must be specifically designed to achieve zoning reforms. The Biden grants were set to incentivize zoning reform- alongside many other goals. Unfortunately, the “if only we could get the right design, it would work” assertion is omitting the reasons why it is unlikely for the government to produce and to stick to the necessary design for this plan to succeed. In other words, there is a reason why the grants weren’t designed simply to encourage a loosening of zoning rules. That’s the same reason why bills meant to reduce inflation or at keeping the government from being shut down are always loaded with pork barrel projects. Incentives to add all that junk are powerful. The same is true in many other areas. For instance, the literature of austerity tells us exactly what a government should do when it wants to reduce its debt-to-GDP ratio. The legislature must adopt a fiscal adjustment package that is mostly based on spending cuts – including cuts to entitlements – rather than tax increases. However, researchers have shown that 80 percent of the fiscal adjustment packages that are adopted are based on tax increases or the so-called balanced approach (which in practice means that taxes are raised, and spending doesn’t get cut). That’s because the special interests that help to fuel the fiscal problems in the first place still exert influence on legislators and stop them from cutting spending. Now, it’s not as if I have great ideas about how to get zoning reforms pronto, except to continue fighting the battle of ideas and trying to convince the American people – who could eventually put pressure on those who rule us. This is what has happened in some states with occupational licensing, Certificates of Needs restrictions, and school-choice reforms. Hope springs eternal…   Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (0 COMMENTS)

Equilibrium is an extremely important concept in economics, but with a somewhat ambiguous meaning.  Thus macroeconomists might speak of a “disequilibrium” outcome, where nominal shocks distort labor and goods markets due to sticky wages and prices.  But from the perspective of a more complete model of behavior (including price setting), a recession might be viewed as an “equilibrium” outcome. The “natural” or equilibrium interest rate also has multiple meanings, but generally refers to the interest rate that provides for some sort of macroeconomics equilibrium, such as stable prices.  Throughout most of the world, the equilibrium interest rate has been trending lower since the early 1980s.  Until now. . . . A more complete model of the equilibrium interest rate might also account for the political economy of fiscal policy.  Suppose that the natural interest rate falls so low that politicians become tempted to run larger budget deficits.  Eventually, the deficits become so large that the equilibrium interest rate begins rising again. Under recent US administrations, fiscal deficits have become much larger than usual (even before Covid.)  With interest rates so low, there is little to restrain politicians that have a short run focus. During the late 2010s and early 2020s, warnings that the debt might eventually have to be rolled over at much higher interest rates fell on deaf ears.  (I gave that warning several times, but couldn’t find many other pundits who agreed.) This past week, the media is full of reports that British bond yields are soaring in response to Prime Minister Truss’s bold package of tax cuts, which will be financed by borrowing.  There are also rumors that the next Italian government (likely headed by right wing populists) might boost government borrowing. All of this makes me wonder whether ultra-low interest rates are not a stable equilibrium, at least in most places.  I still believe that low rates are a technically feasible equilibrium, but perhaps it is inevitable that politicians in many countries will abuse the privilege of almost costless borrowing—right up to the point where that privilege is removed. One can also apply this argument to other cases.  Perhaps a 2% inflation rate is not politically stable in the long run.  After a long period of low and stable inflation, policymakers begin to (wrongly) assume that the low inflation is “structural”, or inevitable.  They come to believe that they can stimulate the economy without the risk of inflation. Perhaps this even applies to cycles in crime.  During periods when crime rates have fallen to relatively low levels (say the early 1960s or the early 2010s), politicians come to believe we can be a bit softer on criminals.  They reduce the rate of incarceration, which leads to an upward spike in crime.  Eventually, there is another tough on crime phase in the crime cycle. Or perhaps all of this speculation is just the musing of an old guy that just retired, worried about fading into irrelevance.  An aging boomer hoping that his memories of the policy mistakes of the 1960s still have some relevance to younger readers. (0 COMMENTS)