First Britain, and now the US. As we see increasing evidence that governments have borrowed too much, bond markets are beginning to rebel against the prospects of even more debt. Here’s Bloomberg: A Bloomberg index shows liquidity in the Treasury market is worse now than during the early days of the pandemic and the lockdowns, when no one knew what to expect. . . . What should be most concerning to the Fed and the Treasury Department is deteriorating demand at US debt auctions. A key measure called the bid-to-cover ratio at the government’s offering Wednesday of $32 billion in benchmark 10-year notes was more than  one standard deviation below the average for the last year, according to Bloomberg News. Demand from indirect bidders, generally seen as a proxy for foreign demand, was the lowest since March 2021, data compiled by Bloomberg show. Although the Treasury is in no jeopardy of suffering a “failed auction,” lower demand means the government is paying more to borrow. All this is coming as Bloomberg News reports that the biggest, most powerful buyers of Treasuries – from Japanese pensions and life insurers to foreign governments and US commercial banks – are all pulling back at the same time. “We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left,” Glen Capelo, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mischler Financial, told Bloomberg News. I opposed German fiscal stimulus at a time when most pundits were demanding that Germany do more.  Even before Covid, I called America’s fiscal policy “reckless”.  When Covid hit, our pundits were falling all over themselves demanding ever more fiscal stimulus.  Our public debt is now over 100% of GDP.  If you raise interest costs on that debt from 1% to 4.5%, you’ve added an interest expense equivalent to the entire military budget.  Yes, it doesn’t happen all at once (due to some long-term bonds), but this is the direction we are headed.  Here’s what I said in March 2020: We are now seeing renewed calls for fiscal stimulus. This is a terrible idea. . . . Instead of blindly throwing money at the problem, we need a smart response to the coronavirus epidemic.  It would contain the following components: 1.  An immediate shift by the Fed to level targeting, combined with a commitment by the Fed to buy whatever it takes (of any asset necessary) to quickly return to its price level (or NGDP) target path after the immediate crisis is over. 2. Fiscal programs strictly targeted to meet humanitarian needs, such as extending the unemployment compensation program beyond 26 weeks if the coronavirus epidemic lasts for more than 26 weeks.  Perhaps the weekly payments could also be boosted during this crisis, as the “moral hazard problem” is secondary for the immediate future.  Extra spending should be paid for with a higher payroll tax on upper income salaries. Fiscal policy over the past few years has been perhaps the most reckless in all of American history, with an exploding budget deficit even as unemployment falls to 3.5%. The budget deficit is already over a trillion dollars; we certainly don’t need more deficit spending right now. We are beginning to pay the price for the past 4 years of reckless borrowing under the Trump/Biden regime.  Now do you see why I favor monetary stimulus over fiscal stimulus?  And why NGDP level targeting is so important?   Debt may seem free when interest rates are near zero, but rates don’t stay near zero forever. PS.  It’s not all Covid.  Here is the CBO projection from 2019.  (The subsequent reality was far worse.)  Notice how the deficit worsened during the peacetime boom of the late 2010s.  That’s never supposed to happen.  (Both political parties were largely silent.  President Trump got away with a Liz Truss fiscal policy because our debt was much smaller at the time.) (0 COMMENTS)

  Properly interpreted, the DPS data suggests that illegal immigrants in Texas are convicted of homicide and sexual assault at higher rates than the state average. So write Sean Kennedy, Jason Richwine, and Steven A. Camarota in “Misuse of Texas Data Understates Illegal Immigrant Criminality,” Center for Immigration Studies (CIS), October 2022. DPS is the Texas Department of Public Safety. Their short report is a critique of earlier work that found lower rates of serious crime among illegal aliens in Texas. One of the studies they criticize is by Alex Nowrasteh of the Cato Institute. (Disclosure: I donate a small amount of money annually to Cato, which gave me my start as a policy analyst in 1979, and I consider Alex Nowrasteh to be a friend.) Nowrasteh has responded that the three authors made two mistakes in computing the homicide rate for illegal aliens. According to Nowrasteh, they overestimated the numerator and underestimated the denominator. Nowrasteh discusses both in detail. I don’t know enough to judge his analysis of the raw homicide numbers, but he does make a strong case that they underestimated the denominator, that is, the number of illegal aliens in Texas. Nowrasteh writes: The CIS crime report uses the second lowest available estimate of the illegal immigrant population in Texas provided by the Center for Migration Studies(CMS), which also produces the lowest nationwide estimate. A lower illegal immigrant population mechanically results in a higher illegal immigrant crime rate by reducing the denominator (assuming the numerator stays the same or increases). Oddly, CIS did not use their own estimates of the illegal immigrant population that they produced elsewhere and instead chose to rely on the far lower CMS population estimates. What’s even more odd about CIS’s choice to ignore their own pure population research on the number of illegal immigrants in their crime paper is that both pieces of research are coauthored by Steven Camarota. CIS’s own research on the size of the illegal immigrant population in their pure population research paper estimates a nationwide illegal immigrant population of 11,390,000 in 2018 and 11,480,000 in 2019, compared to CMS’s estimate of 10,565,000 in 2018 and 10,348,884 in 2019 – a difference of 825,000 in 2018 and over 1.1 million in 2019. In other words, in its paper focused on illegal immigrant population estimates, CIS estimates a nationwide illegal immigrant population that is eight percent higher than CMS in 2018 and 10.9 percent higher in 2019. Yet, the CIS authors used CMS’ lower illegal immigrant numbers for its paper on illegal immigrant crime rates in Texas. CIS’s pure population estimates imply a Texas illegal immigrant population of 1,940,000 (what DHSfound using the same methods) but CMS found 1,781,752. CIS thus used a population estimate for the number of illegal immigrants in Texas that is 7.5 percent below their pure population estimates in 2018 and 8.9 percent lower in 2019. He later writes: In their pure population research, CIS bragged that their estimates of the illegal immigrant population were in line with DHS’s own population estimates. CIS’s pure population research didn’t break out their estimates by state, but DHS did. Since the DHS and CIS methods are nearly identical (they use different data sources), I can use DHS’ Texas‐​level estimates in the following example. CIS’s slightly higher counts of illegal immigrant crime, coupled with with CIS’s pure population research that implies a Texas illegal immigrant population of 1,940,000 in 2018, reveals that illegal immigrant homicide rates are below what Cato’s illegal immigrant population estimation methods would have been if compared to CIS’s crime data (Figure 1). CIS’s pure population research, combined with their illegal immigrant homicide convictions data, produces a homicide rate of 2.9 per 100,000 illegal immigrants compared with Cato’s three per 100,000. Both rates are below Cato’s native‐​born American homicide rate in Texas in 2018. DHS is the Department of Homeland Security. You might wonder why the focus on Texas. The main reason is that their data are more finely divided. See this October 2020 paper co-authored by Alex Nowrasteh for an earlier comparison of various serious crime rates. (0 COMMENTS)

In the Appendix of his dystopian novel 1984, George Orwell explained: The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees of Ingsoc [“English Socialism” in Newspeak], but to make all other modes of thought impossible. We are not there yet, but in The Fatal Conceit (University of Chicago Press, 1988), Friedrich Hayek wrote expressed a related idea: The inadequacy of the terms we use to refer to different forms of human interaction is just one more symptom, one more manifestation, of the prevailing, highly inadequate grasp of the processes by which human efforts are coordinated. A story in the Financial Times illustrates how approaches that are not informed by economics and its individualist methodology can produce faulty interpretations of reality and of policy proposals. The story reports on the fear that, in face of the reduced gas supply caused by Vladimir Putin’s government, the German government, by supporting its businesses and consumers, will harm poorer countries (“EU Leaders Fail to Reach Deal to Cut Energy Prices,” Financial Times, October 7, 2022): Italy and several other countries squared off against Germany at a summit in Prague on Friday, in a spat that mirrors clashes from past crises. Heavily indebted countries fear that their wealthier neighbors will gain an unfair edge by supporting their businesses and consumers. Although this paragraph may not look like Newspeak, nearly everything there is strange. It is not “countries” that subsidize and clash, but their governments. Someone insisting that a country is the same as its government should be puzzled by a statement such as “this country has nice mountains.”  If the “country” is viewed instead as composed of all businesses and consumers, that is everybody, we cannot properly speak of “its” businesses and consumers without a self-referential nonsense: businesses and consumers support their businesses and consumers. Finally, a state s that subsidizes “its” businesses and consumers in country S does not harm the individuals in country P, except in the very indirect sense that making individuals poorer anywhere reduces other individuals’ opportunities for exchange. On this last point, consider the following. If the German government subsidizes some German energy consumers with the money (the resources) of some German taxpayers, this is merely a transfer: it makes some Germans richer and other Germans poorer (granted,  plus some deadweight loss caused by taxation). But if German taxpayers are obliged to subsidize some German energy businesses, the increased production of the latter and the resulting lower price of energy can only benefit energy consumers including those in other countries. So why would an Italian worry about German taxpayers subsidizing German energy producers and thus, indirectly, Italian energy purchasers? Don’t Italians and Frenchmen and many others individuals usually love to be subsidized by somebody else? The only rational reason for Italian wrath would be if the German government also forbade German energy producers from exporting their products to Italy, that is, established actual trade barriers (stopping trade) around Germany. If, as Eurocrats do, we extend the concept of “protectionism” to whenever a state in the world internally redistributes money or make its own subjects poorer (say, through deadweight losses), we have to find another word for what used to be called “protectionism,” that is, your own government forbidding you to import or export or do it at terms it does not like. (See my EconLog post “Taking Comparative Advantage Seriously,” November 17, 2017.) Non-sensical ideas often don’t come alone. From the first FT story cited, we learn more about Eurocrats’ and politicians’ thinking: One area of convergence appeared to be a growing interest from member countries in working together to negotiate better prices for gas, some officials said, an approach the EU has previously suggested as a way to boost its collective bargaining power and avoid having countries bid against each other. This project is actually being pushed by the European Commission (“EU Looks to Enforce Mandatory Co-Operation on Gas Purchases,” Financial Times, October 11, 2022). But what could it mean for “countries” to bid against each other? If it means anything, it is that rulers of each country do the bidding over and above the heads of their individual subjects. On a free market, on the contrary, a German person bids as much against other Germans as against Italians. He can stop his implicit bidding and he will simply not get the stuff, which goes to individuals who pay the bid-up market price. A free market is a continuous auction where every individual is equally free to bid.  If the countries’ rulers create a cartel of states to do the bidding, it will still be over and above the head of their respective individual subjects. Moreover, since all European utilities and businesses (including those outside the European Union) consume only 14% of the world production of gas, it is not sure that the cartel would have enough market power to push down prices significantly. Going back to the first quote, we may add that if the politicians of poor countries had not pushed their governments into debt in order to bribe their voters with apparently-free goodies, other countries could not now “gain an unfair edge”—even assuming that shuttling money inside Germany or subsidizing some German producers gave Germans any edge over non-Germans. And I haven’t talked about the price controls that the German government will impose, like other European governments already do and like the EU government is pushing at its level. (I mentioned this problem in a recent post.) All that suggests that a different way of thinking is sorely needed.   (Featured Image: Wikipedia Commons,  https://en.wikipedia.org/wiki/File:Le_penseur_de_la_Porte_de_lEnfer_(mus%C3%A9e_Rodin)_(4528252054).jpg) (0 COMMENTS)

On September 23rd, Britain’s ex-Chancellor of the Exchequer, Kwasi Kwarteng, announced a mini-budget containing a range of tax cuts intended to boost the country’s sluggish productivity and economic growth. Sterling quickly fell from $1.13 to $1.08 and yields on British government debt spiked. Kwarteng’s mini-budget was widely blamed for this, but sterling was losing value against the dollar before that: it stood at $1.35 on December 31, 2021. There are other factors driving sterling’s fall and, while it might be the most acutely affected so far, what largely ails it is ailing other currencies – and economies – too. When Covid-19 hit in early 2020, the British government, like others, shut down its economy and locked down its people to slow the spread of the virus. Like other governments, Boris Johnson’s Conservatives – with overwhelming cross-party support – passed vast spending packages to fund support payments. As a result, ‘Public sector net borrowing’ – the budget deficit – came to 14.4% of GDP in 2020/2021, its highest level since World War Two. The government was concerned that this surge in the amount of borrowing would push the cost of borrowing up, a concern shared with the fiscal and monetary authorities in other countries. So, as in other countries, to avoid the doomsday scenario of the amount and cost of borrowing rising at the same time, the Bank of England opened up a direct line of credit to the Treasury. Total government borrowing between March 2020 and July 2021 was £413 billion and the Bank of England purchased 99.5% of that – £412 billion – with newly printed money. As in other countries, the result of this newly printed money entering an economy whose capacity to produce the goods and services available for it to buy had been battered by COVID-19 and surging inflation. Britain’s Consumer Price Index rose by 0.4% in the year to February 2021: in the year to July 2022, it rose by 10.1%. The Bank of England, mandated to keep inflation at 2%, was forced to act, but it has done so slowly when compared to other central banks. While the Federal Reserve has raised the Fed funds rate by 75 basis points in its last three hikes, the Bank of England stuck with hikes of 25bp until June, when it increased the base rate by 50bp. It was expected to raise the base rate by 0.75bp at its meeting on September 22 – the day before Kwarteng’s mini-budget – but only did so by 0.50bp, surprising markets and signaling that it would maintain a relatively tolerant stance towards inflation. Even so, these rates hikes have, as in other countries, pushed up borrowing costs. The yield on 10 year gilts has risen from 1.809% on August 1 to 4.282% at present. This is happening just as the government has announced a cap of £2,500 on the typical household energy bill until 2024, a measure which could cost up to £150 billion. That doomsday scenario of the amount of borrowing rising at the same time as the cost that all that money was printed and inflation generated to avoid, is here all the same. The vast money printing of 2020 did not ‘prevent economic disaster’, as some recent commentators have suggested, it merely postponed it. The Bank of England needs to drop its dovish stance and raise interest rates faster. It shouldn’t do this to hit the external target of a particular exchange rate – within a week after the mini-budget, sterling had regained the ground lost against the dollar – but to meet the internal target of low inflation. A not insignificant part of the story of sterling’s weakness is the dollar’s strength – the euro, for example, has fallen from $1.14 on January 2 to 0.96 currently. Targeting the exchange rate with a strengthening currency would be to repeat the error of sterling’s last crisis, its disastrous membership of the ERM in the early 1990s. These are grim times for sterling but the story that brought it to this pass – vast government borrowing, monetization of this debt, rising inflation, and increasing interest rates – is not unique to Britain. Other currencies could soon be joining sterling in the tank.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

I wrote a syndicated column this week that left me with very mixed feelings about many positions I previously took for granted. I am usually a big fan of divided government; I am still a fan, to some extent. But this year I’m not as eager to see a Republican victory that brings about divided government. Here’s my dilemma. I absolutely hate the thought of Democrats not getting booted out of Congress, but also hate many of the specifics and consequences that would following if such booting were to occur this election year. In the past, I’ve made the case that divided government, while not a silver bullet for protecting free markets, is a means of slowing, if ever so slightly, the growth in government. My colleague Jack Salmon wrote a few years ago: If we look back over the past three decades, when the president was a Democrat and the Senate was controlled by Republicans, average annual spending growth was 4.1%, and just 3.4% during the six years of divided government under the Clinton administration. By contrast, periods of divided government with a Republican president and Democratic Senate oversaw average annual spending growth of 6.2% (not adjusted for inflation). This reality doesn’t make Republicans look great. In fact, back in 2008, right after the election of Barack Obama as President, I looked at that same data and concluded that: If limited government is the goal, history tells us we should root for Democratic presidents and Republican Congresses. And regardless of party, Texans should be kept far away from the White House. Intuitively, one senses that unified government gets us the worst from both sides, especially when it comes to the administrative and regulatory state. And in that sense, I favor the friction that come from divided government. Besides, I have always associated bipartisanship with “both sides agreeing to do things that extend the government’s inference into our lives”. I am not a fan of that either. The last two years gave us many good examples of what I mean. I haven’t changed my mind about these issues. What has changed, though, is the fact that a 2022 election that brings divided government means possibly not only strengthening Donald Trump’s grip on the Republican party, but also the election of many unfit candidates who are neither free market nor have any policy ideas except their opposition to wokeness and the left. Opposition to wokeness may be enough for some, but I can’t ignore that it comes with an eager support for bad policies, including welfare-for-all handouts, industrial policy, and general disdain for free markets. When it comes to policy, the two parties are united only in loathing of each other and in an insistence on using taxpayer funds to bribe the populace for allegiance to their respective big-government agendas. Don’t get me wrong, the alternative to divided government would be awful, too. If the Democrats manage to keep the Senate or only lose a few seats in the House, they will be bolstered in the idea that progressivism, policymaking through executive orders, student-loan forgiveness, eviction moratoria, 40-year high inflation rates, and government budget deficits as far as the eye can see are all A-Okay. That’s why I tried to soothe myself into thinking that if we had divided government, maybe, just maybe, we could get these politicians to make at least some policy changes that would ease some severe injustices, and to end some unforgiveable government intrusions into our lives and the economy. They could, for instance, pass immigration reform, legalize marijuana at the federal level, and lift all the barriers to building infrastructure and housing. Since I wrote, and struggled with, my column I have thought that the best to way summarize my hopeful thinking here is this: Basically, on the spectrum between left and right, I am in the center (neither right nor left). But on the spectrum that goes from less to more freedom, I am a freedom super-fan. So, the goal is to get politicians in the center pushing for freedom-enhancing policies.  How do we do that? A mix of persuasion and good will, I guess. One final thought. I expect that if we do get divided government, the media will immediately start whining about gridlock and about how nothing gets done save by unified government. Don’t buy it. When you look at the growth of government spending since 1980 it is hard to tell when government was divided or unified: Adjusted for inflation, the numbers don’t tell a different story.   Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (1 COMMENTS)

Yesterday, I flew back home from Europe. On the flight, I read Brad DeLong’s Slouching Toward Utopia, a narrative of the political economy of the period from 1870 to 2010. DeLong views this period as a sort of extended 20th century, during which accelerated economic growth had all sorts of unforeseen effects.Flying to the west, I had an extended October 12th, with 9 extra hours. I am a slow reader and I was dead tired on the final leg of the trip. Yet I somehow managed to finish the entire 540-page book just as I landed in Orange County, which wouldn’t have been possible if DeLong hadn’t written an unusually absorbing account of this period. Everyone else seemed to be watching inflight movies.From reviews, I had assumed the book would be an account of how three major factors supercharged growth after 1870: globalization, the industrial research lab, and the rise of the modern corporation. Those ideas are certainly discussed, but DeLong’s real interest is in the way that ideology helped to shape the events of the past 150 years. I’ll focus on areas where I disagree with DeLong, but I agree with most of his analysis.  Don’t let my quibbles dissuade you from reading this engrossing narrative.  DeLong sees many of the problems of the 20th century as being caused by people having blind faith in ideologies.  While individuals have committed crimes in all times and places, only ideology can motivate the sort of mass crimes committed by communist and fascist regimes during the 20th century.  DeLong actually sees three ideologies that people adhere to despite the evidence being overwhelming against them; communism, fascism and extreme laissez-faire.  I think he’s right about the first two, but mostly (not entirely) wrong about the third.  Most of my reservations boil down to one issue.  I am a libertarian economic historian and DeLong is a center-left economic historian with a deep skepticism of libertarian ideology.   Throughout the book, DeLong frequently refers to “really-existing socialism” in order to distinguish regimes such as the Soviet Union and Mao’s China from idealized versions of socialism dreamed up by intellectuals.  Of course it’s easy to find examples of really-existing socialism and really-existing fascism.  It’s also easy to show how these ideologies led to fanatical political movements that caused great destruction.  Indeed, the examples are so obvious I don’t even need to recount them here.  But what about the third ideology—libertarianism?  Presumably, DeLong also believes there are lots of examples of libertarianism run amok, but I’m not so sure that’s right.  Who are the Stalins and Hitlers of libertarianism?  Which countries are the spectacular failures of libertarianism? To be clear, I accept that the real world is messy and that “true libertarianism” has never been tried.  I am perfectly willing to consider partly libertarian cases.  For example, let’s think about the most libertarian economic models in the world today, keeping in mind that all countries have large and intrusive governments, at least to some extent.  How do those relatively extreme cases compare to their neighbors?  Do they go too far? In Europe, most economic freedom rankings view Switzerland as the most free market economy.  In the Western Hemisphere, the US, Chile, and Canada generally top the rankings.  In the Asia-Pacific region it’s usually Hong Kong, Singapore, New Zealand, Australia, and Taiwan. I’m certainly not suggesting that these countries don’t have problems, or even that they don’t have problems that are in some sense due to right wing economic ideologies.  At the same time, these are clearly some of the most successful countries in their region, by almost any measure.  If you wanted to draw a picture of the evils of communism, it would be easy.  Show the concentration camps.  Show the victims of famine.  The same is true of fascism, but replace famine with bombed out cities.  Libertarianism run amok?  What does that even look like?  A Swiss village? This doesn’t mean that DeLong is wrong about libertarianism, just that a critique requires a more nuanced argument than in the case of communism and fascism.  There are no obvious cases of failed libertarian countries to point to. Many center left people would disagree, arguing that there are two obvious examples of libertarian failure.  One is historical.  Prior to WWII, free market ideologies led many nations to reject government programs like unemployment compensation, disability insurance, universal health care and old age pensions.  In addition, regulatory agencies such as the EPA, FDA and OSHA did not exist.  The second seemingly obvious example of libertarian failure is financial crises that are widely attributed to deregulation and/or, and unwillingness of governments to adopt appropriate fiscal stimulus after the damage is done.  These are the examples that DeLong focuses on. Once again, this anti-libertarian argument is not as strong as it looks.  Yes, governments were much smaller in the 19th century. And yes, living conditions were much worse.  But to draw any causal connection between those two facts you’d need to do some cross sectional comparisons.  DeLong does a good job of showing that the entire world was much poorer in the 19th century.  If excess libertarianism was the problem, then you might have expected a mass migration of people from free market dystopias to the less laissez-faire parts of world.  Just the opposite occurred.  The migration was primarily to the relatively capitalist countries such as the US, despite our lack of welfare programs. [As an analogy, it’s awkward for intellectuals on the center left to watch large numbers of working class Americans moving each year from blue states to places like Texas and Florida.  Indeed, this fact explains their sudden interest in zoning reform, which is (ironically) a longstanding cause for libertarians like me.] That’s not to say that the US might not have been better off with more welfare spending in the 19th century, just that it’s not an obvious example of the failure of  extreme libertarianism. Indeed, I’d go even further.  At the (cross sectional) level, I don’t believe world history offers any obvious examples of the failure of libertarian ideology.  Not one.  If I am wrong, which country is the failed libertarian model? On the other hand, from a time series perspective there are some seemingly obvious examples of libertarian excess, including the Great Depression of the 1930s and the more recent Great Recession that followed the 2008 banking crisis.  While those events certainly look like failures of libertarian ideology, on closer inspection they are both examples of the failure of government monetary policy.  Nonetheless, here I believe DeLong is partly correct, as while I see these events as representing government policy failure, I accept DeLong’s view that they largely reflect government policy failures caused by ideas popular among many libertarians, such as opposition to stimulus when NGDP has fallen.  So I certainly don’t wish to suggest that our hands are clean.  Libertarians are like anyone else; they often hold incorrect and even morally objectionable views.   [BTW, throughout the book DeLong sprinkles in a few embarrassing quotes from libertarians like George Stigler and Friedrich Hayek.  In contrast, one finds almost no examples of embarrassing quotes from intellectuals on the center-left, even though if you go back in history you can find plenty of such examples on issues ranging from race to gay rights.  Whole books have been written documenting the left’s embarrassing excuse making regarding communist regimes.] DeLong views Herbert Hoover as an example of how laissez-faire ideology can lead to disaster.  The truth is more complicated.  At the time, Hoover was regarded as being much more interventionist than Coolidge.  DeLong correctly lists some of Hoover’s mistakes, but only those that would be viewed as mistakes by a center-left economist.  Thus Hoover favored high tariffs and opposed devaluing the dollar.  But DeLong doesn’t discuss the many (ineffective) actions that Hoover took to ameliorate the Depression.  Nor does he discuss Hoover’s decision to dramatically raise income taxes on the rich (from 25% to 63%), or his success in jawboning corporations to avoid the sort of deep nominal wage cuts that allowed for a fast recovery from the 1921 deflation.  That’s not laissez-faire.  I’m not one of those libertarians that believe these policy errors caused the Great Depression—tight money was the main problem—but these mistakes made it somewhat worse.  (As did FDR’s NIRA wage shock.)  I suspect that most center-left economists support higher taxes on the rich and oppose nominal wage cuts in a depression, so perhaps this explains DeLong’s oversight. Like most Keynesian economists, DeLong sees the collapse of aggregate demand as an example of the inherent instability of unregulated capitalism, although in my view the decline in AD was caused by a tight money policy adopted by the Fed in 1929 (and also the Bank of France.)  Again, at the time many right wing intellectuals supported this policy, so I’m not trying to let them off the hook.  But given what we know now, the cause of the Great Depression was clearly government failure. Many libertarians oppose central banking.  I find many of their arguments to be quite weak, as I’ve explained in previous posts.  But even if it were true that abolishing the Fed would be a policy disaster, I don’t see how any center-left economist can claim that mistakes made by actual real world government central banks constitute a failure of laissez-faire.  Maybe we need a central bank.  Maybe laissez-faire in money won’t work.  But if we have a central bank and it screws up, that’s not a failure of laissez-faire.  Show me the Great Depression of the pre-Fed era. The counterargument from mainstream Keynesians is that the Fed didn’t cause the Depression; it merely failed to prevent it.  That issue gets bogged down in two areas–semantics and counterfactuals.  It’s not even clear what the term “cause” means in macroeconomics.  If a central bank could have prevented disaster X with policy Y, does not doing policy Y mean it caused disaster X?  I’d say yes, but others might say no.  In practice, not much is at stake on the semantics question.  I imagine that DeLong and I mostly agree on how Fed policy during the 1930s and 2010s could have been much better, even if we disagree as to how much good that would have done. Similarly, we both agree that the housing bust did not cause the Great Recession.  DeLong makes the same sort of argument that I made in my book on the Great Recession.  Here’s DeLong: By November 2008, there was no sense in which construction employment “needed” to fall.  It had managed to make its adjustment from its boom-bubble 2005 high back to normal and even subnormal levels in 2006 and 2007 without a recession.  By November 2008, employment in construction nationwide—and in Nevada— was well below its normal and average share of the US workforce. Take out the term “bubble” and that’s exactly my view. But whereas I then pivot to the view that it was tight money (not housing) that caused NGDP growth to collapse, DeLong thinks it was a Minsky issue; too much demand for safe assets.  And swapping bank reserves for T-bills would not solve that problem.  I address the myth of central banks running out of ammunition in the book I have coming out later this year, but let’s step back and consider what’s at stake in this debate.  Basically, I believe the Great Recession was much worse than otherwise because the Fed did the wrong monetary policy, whereas DeLong thinks it reflected the fact that an unregulated economy is unstable and the government did the wrong fiscal policy.  By the intellectual rules of the game, monetary policy rules such as the gold standard, money supply targeting, price level targeting, NGDP targeting, etc., are viewed as being consistent with libertarianism, whereas activist fiscal policy is not.  And yet from 64,000 feet up, if that’s the only distinction between libertarianism and pragmatic center-left ideology, it’s a fairly minor one.  Especially given that one can have an activist fiscal policy without making government any bigger at all; you merely need to make the budget more countercyclical (without altering the average ratio of G/GDP.) The world is very complex, so people can interpret facts in different ways.  DeLong focuses on how industrial policies helped East Asian countries grow fast, whereas I see East Asia as a free market success story, with institutions such as Japan’s MITI being a net drag on growth. This is partly because the more free trading examples of East Asia (Singapore, Hong Kong) actually did a bit better than the East Asia countries with more subsidies and tariffs.  And it’s partly because export subsidies and import tariffs tend to partly neutralize each other, leaving overall East Asian trade regimes more open than they might appear when looking at one sector at a time.  And it’s partly because East Asia did better than Latin American countries that relied more heavily on import substitution.  But I can see how others might view the picture differently—the world is messy. I am not interested in defending libertarianism in all its forms.  For instance, I am disgusted with the new leadership of the Libertarian Party.  I strongly disagree with many libertarians on monetary policy issues. I favor carbon taxes and progressive consumption taxes.  But I cannot accept DeLong lumping libertarianism in with communism and fascism as being one of three fanatic ideologies that ignore the evidence provided by the real world.  He’s right about communism and fascism, but wrong about libertarianism.  Yes, we make mistakes, but no more than the typical center-left or center-right economist. The best parts of the book are the sections looking at ideologies such as nationalism, communism and fascism.  On those issues, I am in complete agreement with DeLong.  His chapter on “inclusion” discusses issues such as race and gender, mostly from an American (moderate woke) perspective.  My views are somewhere between DeLong’s and those of American conservatives.  On the one hand, I think many conservatives underestimate how much things like tighter voting rules are aimed at suppressing African-American turnout.   On the other hand, while the left is correct about the pernicious effects of racism (residential zoning is another example), they underestimate the extent to which differences in pay between ethnic groups and genders (both in the US and in other countries) is caused by factors other than current discrimination–particularly cultural differences.  So I found the chapter on race and gender to be less persuasive than other parts of the political analysis–too much of the overly simplistic progressive “victims and villains” perspective.  DeLong also takes a few jabs at critics of the welfare state, but I think he underestimates the disincentive effects of social welfare programs.   The programs may be worth doing, but it’s disingenuous to dismiss libertarian concerns about work incentives.  Marty Feldstein was at least partly correct.  (Indeed, DeLong himself used to be a bit of a supply-sider.) The book has a rather sad ending.  DeLong sees the neoliberal era as ending around 2010 and mentions the recent rise of illiberal ideologies such as populist nationalism.  My sense is that his views have shifted somewhat to left since 2007, for two reasons: 1. The Great Recession looks like it was caused by laissez-faire, and many laissez-faire proponents advocated bad policy responses.  2. In recent years, we’ve seen an increasing number of dangerous right wing demagogues in various countries.  My views are: 1. The Great Recession was caused by bad monetary policy, and many laissez-faire proponents advocated bad policy responses.  2. In recent years, we’ve seen an increasing number of dangerous right wing demagogues in various countries. Unlike DeLong, my economic policy views have not shifted to the left.  But regarding the political changes now happening all over the world, I increasingly align with the left.  In my view, DeLong recent pessimism about neoliberalism puts too much weight on time series evidence.  Yes, growth often failed to improve during the neoliberal era, and even slowed in some cases.  (I’d argue that’s for reasons explained by Robert Gordon–fewer promising new technologies.)  But from a cross sectional perspective, neoliberalism looks much better.   The countries that did more neoliberal reforms tended to do better than the more statist models.  Few people in the UK, Sweden, Estonia, Chile, Australia or New Zealand wish to go back to their 1970s economic model. Slouching Toward Utopia is a hard book to describe.  The subtitle is An Economic History of the 20th Century.  But it’s much more than that.  Some of the best parts cover areas such as political ideology, diplomacy and military history.  By conventional standards, DeLong probably tries to do too many things.  But he has an extraordinarily wide range of knowledge, a sharp analytical mind, and an engaging style.  So whatever the book is, I’m very glad I went along for the ride. (0 COMMENTS)

I love ska punk. The horns, the guitar parts, the lyrics, the mosh pits filled with people frenetically skanking to the beat. I’ve long been a fan of third wave ska bands like Reel Big Fish, Mustard Plug, The Mighty Mighty Bosstones, and Streetlight Manifesto. Lately I have been getting into more recent ska punk bands, especially those around Bad Time Records, an independent ska record label. These include Catbite, JER, We Are the Union, The Best of the Worst, Abraskadabra, and Kill Lincoln. But where did this wonderfully upbeat, aggressively danceable music come from? Answering that question can help us understand some key insights from economics. Welcome to e-ska-nomics 101. Our story begins in Kingston, Jamaica. As Evan Nicole Brown explains: Toward the end of the 1950s, “there was quite a bit of rural to urban migration … and as more people transitioned to the city there were some shifts [away from mento and calypso music, the more folk styles in Jamaica],” says [Nina] Cole. Local musicians married the African rhythms of Caribbean mento, a genre all Jamaicans would have been familiar with, with the popular beats of R&B and jazz music: sounds more closely linked to the black American experience. Though sound systems were getting these American records shipped to the island, they were generally limited and severely delayed (sometimes arriving up to three years after they had peaked in the States). The working-class people of Kingston could not afford radios, which effectively cut off their access to non-local music, and the prices American record manufacturers demanded from DJs to import R&B records to Kingston grew increasingly steep. Sound system operators like Clement “Coxsone” Dodd and Duke Reid recognized this gulf, and filled it by using nearby music studios to record a new sound that blended elements from both local and imported music to create ska—an undeniably new sound with familiar enough influences to make it an instant success. As an economist, a couple of things stick out to me here. One is that ska was developed in the city. This is an example of what economists call agglomeration effects. As Harvard economist Edward Glaeser explains, “Agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters. These benefits all ultimately come from transport costs savings: the only real difference between a nearby firm and one across the continent is that it is easier to connect with a neighbor.”  In other words, when people are closer together it is easier for them to cooperate. We see this in many commercial contexts, such as the concentration of tech companies around Silicon Valley. We observe this quantitatively in the fact that population density is correlated with higher wages. But we also observe it in the emergence of music scenes within cities, whether that’s New Orleans jazz, Seattle grunge, L.A. nu-metal, D.C. hardcore, or Kingston ska. The second thing that sticks out to me is that the high price of American records created entrepreneurial opportunities for DJs and musicians to produce affordable substitutes for the masses. Today’s failures are tomorrow’s profit opportunities, and alert entrepreneurs seize those opportunities. Or, in this case, they see the opportunity and pick it up, pick it up, pick it up! (0 COMMENTS)

This is another in my series of favorite passages from Atlas Shrugged. Hank Rearden has just triumphed at his trial in which he was charged with unfair competition for producing a high-quality product and selling it at a low price. He returns to his factory where the government worker installed at his factory to make sure he complies with government edicts, whom Rearden refers to in his brain as the “Wet Nurse,” congratulates him. The Wet Nurse asked him at the mills, “Mr. Rearden, what’s a moral premise?” “What you’re going to have a lot of trouble with.” The boy frowned, then shrugged and said, laughing, “God, that was a wonderful show! What a beating you gave them, Mr. Rearden! I sat by the radio and howled.” “How do you know it was a beating?” “Well, it was, wasn’t it? “Are you sure of it?” “Sure I’m sure.” “The thing that makes you sure is a moral premise.” Note: Here’s the scene from the movie Atlas Shrugged in which Rearden meets the Wet Nurse. Coincidentally, the movie was released 10 years ago yesterday.   (0 COMMENTS)

We certainly know that violence has a long history. Chris Blattman, well known to EconTalk fans for his work on poverty, was struck that conditions in post-conflict situations look remarkably similar to other poor places. In looking for an answer to how to relieve poverty, Blattman’s work led him to ask why people fight. Who participates? Why do people fight? Why are individuals violent? And, then more and more, he asked: Why are groups violent? In this episode, host Russ Roberts welcomes Blattman back to talk about his new book, Why We Fight. Roberts introduces the conversation by noting, “This book is in a tradition that I both love and am suspicious of, which is using the economist’s toolkit to understand various forms of human behavior.” The conversation centers around the five reasons Blattman has identified that lead people to go to war. Both Roberts and Blattman agree that peace is preferable, so what sorts of incentives might lead to the costliest option of war. As Blattman says, “if we always assume everybody’s crazy, we’re not going to be very good at preventing future wars.” Let’s hear what you think about Blattman’s reasons. Use the prompts below to start a conversation, either here in the comments, or else offline.     1- The first reason Blattman cites he describes as a problem of imperfect information or miscalculation. What does this mean, and what examples does he use to illustrate this case?   2- The second reason for going to war Blattman describes as a commitment problem. Again, what does this mean, and what illustrative examples does he use? What does he mean when he claims there is “no passion” in either of these first two cases? Both Roberts and Blattman point out there are more conflicts that don’t happen than do. So why don’t we study or pay attention to these?   3. The third cause relates to unchecked leaders- when a leader doesn’t bear the costs of war or they have their own personal incentives to go to war. Why do leaders in democracies tend to be more accountable, and perhaps then less likely to choose war? What are some examples of this you can add to those discussed in the episode?   4. Blattman prefaces reasons 4 and 5 by asserting they are both overlooked and understudied by game theoreticians and economists. Why does this seem to be the case? What does Blattman mean by “differing stable preferences” (reason four)?   5. The final reason Blattman suggests for going to war he characterizes as mistakes and misperceptions, or persistent erroneous beliefs about the other side. Why is it so difficult for the parties involved to assess the relative strengths of their perceived opponents and the costs of war? To what extent do you agree that this is the most common error leading to war? Explain.   Bonus: Which of the five reasons for going to war as described by Blattman comes with the greatest chances of preserving peace? Why do you think so? (0 COMMENTS)

National Pork Producers Council v. Ross may be one of the most consequential cases of the Term, and I don’t just mean for the price of pork chops. A few states, most importantly California, are such large markets that—if the Supreme Court does not intervene—they can impose their notions of proper standards of production on every other state in the Union, at little cost to themselves. Because nationwide producers often cannot segment their markets, producers will be forced to follow California rules for the whole country, or face the crippling consequence of exclusion from the California market. Add to this the fact that these large states—California, Texas, New York—are also one-party states, whose views on social policy are often at one or another extreme. More moderate Americans in other states will be governed by laws they would not vote for, if they had a chance. This is contrary to the democratic postulates of our federal system. This is from Eugene Volokh, “From Prof. Michael McConnell (Stanford) on the Dormant Commerce Clause,” The Volokh Conspiracy, October 11, 2022. Professor McConnell, as Eugene Volokh points out, “is one of the top constitutional law scholars in the country.” On this one, though, I wonder. My disagreement has nothing to do with whether the law in question is a good one; I think it’s bad and I voted against it. But sometimes federalism allows bad laws. In reading over this brief, I was reminded of the great title that James Buchanan chose (I assume he chose it) for his critique of the first edition of Richard Posner’s Economic Analysis of Law. The title: “Good Economics–Bad Law.” Except in this case I’m not even sure it’s good economics; more on that anon. The Law But now to the law. If it were true that the California law “forced” (McConnell’s words) producers in other states “to follow California rules for the whole country,” then he would have a point. But nothing in the law forces them to do that. I use the term “forced” literally; McConnell apparently does not. Producers in other states are free to produce for 49 states plus D.C. and not sell to consumers in California. He calls this a “crippling consequence,” but is it really? McConnell notes that Californians “consume 13 percent of all pork produced in the United States.” Is is really crippling to forego 13 percent of a large market? I don’t see it. The essence of federalism is that voters and politicians in various states get to decide on the regulations and laws in that state. There are certain constraints, of course, that the U.S. Constitution imposes. But McConnell doesn’t succeed at saying why the U.S. Constitution forbids California voters from voting to allow only certain products to be sold in the state. It’s not as if the California government is discriminating against out-of-state producers; it applies the same rules to all pork sold in California. McConnell does make one possibly good legal argument. He writes, “California regulators will roam the land inspecting farms in other states to enforce the law.” If that were true, then he would be right: this would be a state restriction on interstate commerce. It’s hard to see, though, how it would be true. Wouldn’t every pig farmer outside of California be legally able to say, “Get the hell off my land.” Notice that McConnell tries to bolster his argument by pointing out, correctly, that California is a one-party state in which many people’s views are “at one or another extreme.” Don’t I know it, having lived in this wacky state continuously since 1984. But why should that matter under federalism? Isn’t one of the major points in favor of federalism that it allows for diversity of policies? The Economics Now to McConnell’s economics, which I think is suspect on two counts. First, monopsony. McConnell writes, “Once California is green-lighted to use its monopsony power to pressure businesses all over the country to comply with Californian social preferences, there will be no end to it.” But does control over 13 percent of a market constitute monopsony? I think that’s a reach. Second, on who will pay the cost. McConnell writes, “A few states, most importantly California, are such large markets that—if the Supreme Court does not intervene—they can impose their notions of proper standards of production on every other state in the Union, at little cost to themselves.” Elsewhere McConnell argues that this law will substantially raise the price of pork. My guess is that he’s right. So how, exactly, is it that we Californians will bear little cost? Note to Commenters: I have found, when I’ve commented on legal issues, that people, especially lawyers, tell me to stick to economics. But that’s not an argument. Notice that I didn’t say that McConnell shouldn’t make economic arguments. Rather, I challenged his arguments, showing how weak they are.There’s a reasonable chance that I’m wrong about the constitutional issues here. If so, say why. (0 COMMENTS)