A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition. —Balaji Srinivasan, The Network State1 Balaji Srinivasan’s The Network State (TNS) is filled with provocative arguments and insights. I strongly recommend TNS for your book discussion group. It can fit into either the fiction or the non-fiction category. Like Neal Stephenson or J. K. Rowling, TNS uses original linguistic expressions that create a sense of an alternate universe. As just one example, you probably know that the Democratic Party once represented the white racists of the South, and the Republican Party was stronger in the more racially progressive Northeast, but that these positions have switched. In TNS, this is termed a “flippening.”2 Substantively, TNS also struck me as fictional, in that it does not address the issue of how people can extricate themselves from existing states in order to join a Network State. Suppose that my house is located in Silver Spring, Maryland, in the United States, and I wish to join Balaji-land. How do I get out of paying taxes to my county, state, and the U.S. Treasury? Which regulations of my local jurisdiction am I able to jettison? I do not think that my neighbors will be content to let me say that because my house is in Balaji-land, I do not have to pay taxes to help pay for the playground that my children use, the roads that I drive on, and other local amenities. I do not think that they will want to exempt me from laws forbidding commercial establishments in residential areas, or laws pertaining to drug or alcohol sales. Such matters have to be negotiated with each legacy government in order for people to switch over to a network state. Otherwise, if all of one’s obligations to the territory in which one resides remain in place, a network state is nothing more than an add-on set of norms and rules. It is an international club or affinity group or corporate loyalty program. However eloquent TNS may be at describing how network states could be feasible if human social arrangements were starting from scratch, it is silent on what I see as important issues pertaining to getting from here to there. As a non-fiction book, TNS describes the predicament that we are in with the existing state system and the potential superiority of a network state system. The rest of this review will discuss a few of the many insights TNS has to offer on these topics. Governments justify power by amplifying threats and preying on people’s fears. Srinivasan writes,3 Somewhat toned-down versions of the atrocity story are the go-to technique used to justify expansions of political power. • If we don’t force people to take off their shoes at the airport, people will die! • If we don’t stop people from voluntarily taking experimental curative drugs, people will die! • If we don’t set up a disinformation office to stop people from making hostile comments online, people will die! In order to expand their power, rulers distort history. But there are limits to this, because there is an objective source of truth, which TNS refers to as technology. Technological history is the history of what works; political history is the history of what works to retain power. TNS argues that encryption is a fundamental revolution in the distribution of power. When there is strong encryption government can’t crack, that means communications states can’t eavesdrop on, transactions they can’t intercept, and digital borders they can’t penetrate. It means nothing less than the ability to organize groups outside state control, and thus a diminution in the power of states to control.4 The state also is weakened by the way that the Internet erodes the importance of physical geography. When the network identity is more salient than the neighbor relationship, it challenges the very premise of the Westphalian state, which is that (a) people who live geographically near each other share values and (b) therefore laws should be based on geographic boundaries. The alternative is that… the laws that govern them should be based on network boundaries. The distinction between the state and the network seems blurred in America today, because the same faction currently exercises power using both. In a passage that illustrates the flavor of linguistic expression in the book, Srinivasan writes, There are different names for this left-authoritarian network that controls the state from outside by “holding it accountable.” We can call it the Paper Belt (which emphasizes their Rust-Belt-like technological backwardness), we can call it the Cathedral (which emphasizes their holiness), we can call it the regime (which emphasizes their illegitimacy), or we can call it simply the American establishment (which emphasizes their enduring power). Later we will call it NYT/USD, to emphasize their source of truth and digital economy relative to BTC/web3 and CCP/RMB. It’s important to understand that the power of the left-authoritarians comes from getting the officials of the centralized American State and (more recently) the executives of the centralized Big Tech Network to crush their enemies. But TNS is optimistic that a portion of the political left is inclined toward libertarianism. The left-libertarian subgroup of blues has begun to flirt with decentralized media and web3, because they’re realizing the Network could be more interesting than the declining American State. Could Substack be more remunerative than Sulzberger? Could Satoshi’s community deliver more for them than Bernie’s? If they need to redefine all that as “socialism,” so be it! And if their funding stream is changing, their ideology is slowly shifting too. Yes, they may have started as mere pawns of America’s left-authoritarian establishment, but what they value is increasingly coming from the decentralized global Network rather than the centralized American State. So they are beginning to uncouple. And that’s the emerging Network-vs-State division within blue tribe. TNS also sees a libertarian faction on the right. He calls them “international capitalists.” He claims that their belief in free markets and global markets will lead them to gravitate toward Bitcoin, and hence toward the Network and away from the State. I have doubts about these libertarian cadres on the left and the right, particularly the latter. Capitalism depends on strong property rights, and so far these seem to be better protected by government than by software algorithms. Commerce today is facilitated by banks, which are adjacent to government. Bitcoin and other cryptocurrencies are adjacent to criminal activity. The prospects for changing this, which I never thought were very good, have only fallen with the various hacks, frauds, and collapses that took place in early 2022 in the crypto world. In fact, Srinivasan says, … crypto made progressives more libertarian and libertarians more progressive. Progressives discovered that you can build stateless money. Libertarians discovered that you then need to rebuild something much like a state: identity, reputation, anti-fraud, custody, trust, community, and the like.5 “TNS foresees a conflict between people who turn to the Network to solve problems through innovation and people who turn to the state to solve problems through legislation.” In any event, TNS foresees a conflict between people who turn to the Network to solve problems through innovation and people who turn to the state to solve problems through legislation. In this regard, TNS reminded me of the distinction between dynamists and stasists drawn by Virginia Postrel in The Future and its Enemies: Both outside and inside the US, there’s the sense that the US-dominated postwar order is either on its last legs or already over, and that the ancient legislators and endless remakes reflect a fading culture trying to hang on by its fingernails to prevent what comes next.6 To wield its power, TNS argues, the state must spin a narrative that distorts the truth. But now these distortions are being exposed. Why do we know about these distortions of the present? It’s again because of a collision of Leviathans, because the Network routed information around the State, giving people actual rather than ostensible freedom of speech. TNS makes the case for Network states as a means to promote moral innovation. As with technological innovations, moral innovations should be tested experimentally and evaluated by the people who are affected by them. Backers can fund startup societies using the mechanisms of tech, out in the open, with explicit contracts, and consent by all citizens. But they can also achieve the moral innovation desired by the political revolutionaries. And if these startup societies are built out on the frontier, whether digital or physical, then the moral innovations are no longer imposed top-down, but adopted bottom-up by the people who opt in. That gives a better way to achieve the goals of ambitious young political reformers. For more on these topics, see “Networks, Hierarchies, and History,” by Arnold Kling. Econlib, March 5, 2018. Marc Andreessen on Software, Immortality, and Bitcoin. EconTalk. “Libertarians and Group Norms,” by Arnold Kling. Econlib, September 9, 2012. TNS says that we should envision a future of many new Network states, with each state based on a single moral innovation that is a single principle to which all members adhere but which differs in some way from the social morality that prevails elsewhere. As these states rise and fall, we can hope for moral progress, just as we enjoy economic progress from the process of creative destruction among firms. TNS hopes that this will lead to … the Recentralized Center: a circle of startup societies and network states built by pragmatic founders, a group of high-trust communities architected as intentional alternatives to failed states and surveillance states alike.7 In short, TNS offers a rich set of ideas. Even if its vision for the future is merely fictional, it is still an important thought-experiment. Footnotes [1] Balaji Srinivasan, The Network State: How To Start a New Country. Also available via TheNetworkState.com. [2] “Left is the New Right is the New Left.” TheNetworkState.com [3] “Political Power and Technological Truth.” TheNetworkState.com [4] “God, State, Network.” TheNetworkState.com. [5] “On Network States.” TheNetworkState.com [6] “If the News is Fake, Imagine History.” TheNetworkState.com [7] “Decentralization, Recentralization.” TheNetworkState.com *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

IBM’s super-computer Watson was a runaway success on Jeopardy! But it wasn’t nearly as good at diagnosing cancer. This came as no surprise to Max Planck Institute psychologist Gerd Gigerenzer, who argues that when it comes to life-and-death decisions, we’ll always need real, not artificial, brains. Listen as the author of How to Stay Smart in a Smart World tells […] The post Gerd Gigerenzer on How to Stay Smart in a Smart World appeared first on Econlib.

The Economist of last week reviews the latest book of Henry Kissinger who, at 99, does not seem to have changed intellectually (“The Vision Thing: Henry Kissinger Explains What He Thinks Makes Great Leadership,” July 21, 2022): In his latest book, Mr Kissinger, an unofficial adviser and friend to many presidents and prime ministers, considers how six leaders from the second half of the 20th century reoriented their countries and made a lasting impact on the world. These leaders are Konrad Adenauer, Charles de Gaulle, Richard Nixon, Anwar Sadat, Lee Kuan Yew, and Margaret Thatcher. I would say it is not clear what most of of them, if any, did besides “reorienting their countries” or “their societies,” as The Economist writes, which means bossing people around. It is not clear how these leaders have contributed to advancing the liberty and dignity of individuals. Perhaps Margaret Thatcher is the exception, but we may have doubts that the world would be much different or worse if she had never existed. One can argue that these statocrats at least prevented worse people for getting in power, but that does appear to be Kissinger’s argument. It seems that, for Kissinger, history is and should be the product of the actions of good and bad leaders. We can hope that God will give us good ones. Since I haven’t read the book, I am open to surprises, but this impression, as conveyed by the Economist’s reviewer, looks consistent with what a casual observer of Kissinger’s career and occasional reader of his newspaper articles can gather. The reviewer ends by quoting what he says is the book’s warning: No society can remain great if it loses faith in itself or if it systematically impugns its self-perception. What does that mean? How can society lose faith in itself? How could it first obtain faith in itself? How can society impugn anything? Where do you find society’s self-perception? Does she reveals it through our collective mouth? Whom does she speaks to? I suspect that the answer to the last bit is: to the great leader (flectamus genua), who, Kissinger suggests just after (thanks to Amazon’s “Look Inside”!), represents “the generosity of public spirit which inspires sacrifice and service.” Like, say, Nixon ordering a break-in into the Watergate building? Many of Kissinger’s half-dozen rulers, if not Nixon himself, have done worse. I suspect that Dr. Kissinger has no knowledge of the welfare-economics and social-choice literature that have, at the very least, thrown substantial doubts on the usefulness and even the mathematical possibility of conceiving society as something like a big individual of which we are the cells and the leader is the brain. This line of reflection, I think, points out to the fundamental difference between, on the one hand, the socialist and the conservative, who both favor collective choices over individual choices; and, on the other hand, the classical liberal and the libertarian, who (1) understands that we can only analyze society with methodological individualism, and (2) accepts that, from a normative viewpoint, only human individuals ultimately count and that they count equally. (0 COMMENTS)

It is often argued by the classical liberal thinkers that ideas of individual liberty were the driving force behind the Industrial Revolution. Intellectuals like Steven Pinker and Deirdre McCloskey see the revolution in a very linear fashion. They argue that people lived in pitiful conditions before the great industrial revolution came as a knight in shining armor to lift them up. However, the Industrial Revolution also provided newer tools which acted as catalyst for the exponential growth of colonialism, which curtailed individual liberty across the continents. Can we then, as classical liberals/libertarians, claim the credit of the Industrial Revolution, but choose to overlook the loss of liberty in the colonies established by the newly industrialized nations? It is time for the libertarians of the 21st century to acknowledge the elephant in the room:  colonialism. It’s essential because many argue that the Industrial Revolution or even the ideas of Liberty—that Pinker and McCloskey cherish—were the causal forces behind colonialism. I am not suggesting that these people are correct; however, their point resonates favorably among a sizable population group, even beyond the former colonies. If the history of enlightenment and Industrial Revolution has to be seen in a linear fashion, what should we make of colonialism? A part of the linear transformation towards the Liberal world order? If liberty should be valued for its consequences, why should postcolonial thinkers go down the path? History, as some argue, perhaps, is the history of discourse and discourse, in itself, is a game of articulation. If we as libertarians lose the game of discourse and articulation, what lies ahead for the movement? When the British—who kick-started the Industrial Revolution—became better-off and moved to distant lands for more opportunities to trade, they forgot the values of liberty. In my country, India, they stole over 45 trillion dollars over the years of their rule. Not only that, they went on to acquire the forests by alienating local communities and forest dwellers, who lived there for centuries. Throughout, they acted as if the notion of property rights was not relevant in colonial India. Let’s not forget that property rights are intrinsic to the ideas of liberty. Libertarian thinkers like Murray Rothbard consider property rights as the sine qua non of Human Rights. There may be an argument that the ideas of liberty helped in the development of countries which went through the industrial revolution. As per McCloskey, the ideas of liberty allowed the English people “for the first time to experiment, to have a go, and, especially, to talk to each other in an open-source fashion about their experiments and their goings, rather than hiding them in posthumously decoded mirror writing out of fear of theological and political disapproval.” Furthermore, others argue that the Industrial Revolution could very well have happened in China, but it didn’t, because the rulers there did not support innovators and in fact restrictive on them when they started attaining success. China did not have an Industrial Revolution and the British did. However, we must note that China—at that point—did not go on to take away resources of people across the globe, but the British did. Business is not a zero-sum game of resources, but a positive-sum game instead. While exploring the newer lands for business opportunities, had the British adhered to their liberal principles, the British would still have grown, and so would have been the other countries. Liberty, we must remember, is not relative. If the ability to choose is violated, even for a single human being, there is no liberty. It is still not late. Libertarians of the 21st century should stop resting on the laurels of the ‘Industrial Revolution’, and look into the degeneration of newly industrialized nations into illiberal colonial powers. We should do some soul-searching and try to understand these ideas of the Enlightenment- what was their soul, what went wrong, and why it went wrong. This will help us to present a strong narrative about a world based on the soul and principles of liberty for all.    Adnan Abbasi is currently pursuing Bachelor of Arts (Hons.) degree majoring in Social and Political Science from Ahmedabad University. He is a Writing Fellow at Students for Liberty’s Fellowship for Freedom in India. (1 COMMENTS)

According to the WSJ, the proposed “Inflation Reduction Act” will lead to higher taxes on business investment: Start with the 15% minimum tax on corporate book income over $1 billion, which Democrats claim will raise $313 billion through 2031. This new alternative minimum tax will slam businesses whose taxable income is lower than the profits on their financial statements owing to the likes of investment expensing, tax credits and business deductions. Many companies pay less than the 21% corporate tax rate because they can expense investments under the tax code up-front. Hence, the new tax will increase the cost of business investment The media often report this sort of policy change as representing higher taxes on “the rich.”  But investment is a key factor in boosting productivity, which is what ultimately determines the living standards of ordinary workers.  Taxes on investment have the effect of taxing future consumption at higher rates than current consumption, which reduces saving and investment and slows economic growth. I am trying to get up to speed on the rest of the bill.  Price controls on the purchase of drugs by Medicare might be beneficial in reducing federal spending, or they might be detrimental in slowing the development of new drugs.  More money on IRS enforcement might be beneficial in terms of reducing tax fraud, or it might be costly by adding to the number of aggravating tax audits.  Environmental provisions might help to reduce global warming, or they might lead to wasteful pork barrel spending.  In almost every case, better alternatives were available.  Tax code simplification would make existing IRS resources go much further.  A carbon tax is superior to a complex mixture of subsidies.  I understand that the actual bill was the option that was politically feasible, but it is still disappointing to see so many missed opportunities.  (I suspect the next GOP administration will restore expensing of investment.) On the brighter side, the carried interest loophole that benefits rich hedge fund managers was somewhat reduced in size.  I’ve never understood the rationale for that tax loophole.  And Senator Manchin suggests that there are vague promises to reduce regulatory barriers to new projects in areas like energy and infrastructure.  I’m not optimistic that this will be a game changer, but it’s certainly a hugely important issue.  Thus it’s nice to see an indication of at least some movement on that front. I don’t know enough to have a firm view on the overall bill.  My instincts are usually to be skeptical of change, as almost everything Congress does seems to make things worse.  The same issue of the WSJ has an article pointing out that it’s the 20th anniversary of Sarbanes-Oxley, which was supposed to fix accounting fraud.  It seems to have done more harm than good: A 2009 study by the Securities and Exchange Commission found that smaller public companies have cost burdens more than seven times those of large ones. The disproportionate burden on small and midsize companies has spurred bipartisan criticism of Sarbanes-Oxley. As the Obama administration council noted: “Regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies.” There’s always so much optimism when Congress does something big and complex, and then years later there is disappointment over the results. I recall when “environmental impact statements” were seen as something that would help the environment.  Today, they are widely used to block projects creating clean energy or housing and transportation projects that reduce urban sprawl. Senator Manchin gets a lot of criticism from progressives for being an “obstructionist.”  Ironically, he may have saved the Democrats from electoral disaster this fall by refusing to go along with a far more massive spending proposal last October, before the scale of the inflation problem was fully recognized. PS.  Progressives sometimes taunt the GOP for “defunding the tax police”, due to the GOP cutting spending on the enforcement of tax laws.  I’ve seen conservatives respond that the IRS often hassles small business owners with intrusive audits.  I’ve also seen progressives argue that big city cops hassle young black men with stop and frisk policies.  It’s worth thinking about how different people focus on different types of government abuse.  Might their focus have something to do with which party each victim is likely to vote for?  What type of victims do you tend to focus on?  How does that shape your political views? I’m a utilitarian, so I favor funding all types of police as long as the extra resources produce greater benefits that exceed costs.  Unfortunately, in the real world it’s hard to know what level of spending is optimal.  In my view, the best way to reduce government abuse is to have fewer laws (especially regarding drugs), fewer regulations, and a less complex tax code. (1 COMMENTS)

A popular idea today is the concept of worker cooperatives, or co-ops. These are often brought up in discussions regarding mistreatment of workers, and increasingly, c-suite executives allegedly profiting at the expense of the working class. Proponents posit that worker co-ops serve as a means of putting power back into the hands of the working class, and as a result, workers will be made better off. Worker co-ops do currently exist in the American economy, but are rare to come by.   What are worker cooperatives, and how do they differ from a typical company? In this piece a worker co-op will be defined as a business that is owned and run entirely by workers; there is no hierarchy among anyone part of the company, all decisions are made collectively, and profits are evenly distributed to each and every worker.  There may be other variations of worker co-ops that people support, but since this is the system I have most often heard advocated, I will focus on this for the purposes of this piece.  Owners of a standard company maintain shares of said company, which fluctuate based on its assets and profits. If the company does well, the owners’ shares will appreciate in value, but if the company were to undergo severe losses, the owners’ shares would significantly depreciate.  Shareholders are able to sell shares at any point, providing them with liquid money. On the contrary, laborers in a standard company receive a cyclical W-2 income, regardless of the well-being of the company, assuming employment is maintained.  In the setting of a worker cooperative, laborers take on the added role of being an owner of the company, thus entitling them to holding shares. This now means they are dealing with a level of uncertainty in their pay that they would not have faced in a standard business. While it’s easy to say that being a part of the decision making process and being granted an equal share of profits is attractive, we should ask whether this added uncertainty is worth those benefits.   Would workers really want to be part of a cooperative? In my experience, and many of my peers, we were often advised to go to college so that we could enjoy a stable future with consistent and steady income. Whether that’s the reality or not is another discussion, but this is what was pushed by adults throughout K-12 education. For this reason, careers in medicine, law, and IT will always be sought after, as such industries will continue to need workers in years to come, regardless of trends and the health of the economy. These are industries where one knows if they work hard, they will be compensated not only well, but in a consistent and stable fashion. In my view, the vast majority of individuals desire a job where they receive a steady paycheck so that they are always able to provide for their families and themselves at any time. Of course, there are always exceptions to every generalization, and thus we are left with many risk-takers that wish to be the fruitful entrepreneurs that drive our economy. But when considering that roughly 20% of businesses fail during their two years, 45% during the first five, and 65% during the first ten, many people that would like to steadily provide food and shelter for their families, would feel uneasy knowing that their only source of income may quickly disappear if their business ordeal fails, which is clearly quite likely. Given these circumstances, it may be rational for an individual to forgo such uncertain forms of payment for a stable income, even in spite of the added power one may receive over their work life.  All that being said, even if the assumptions I laid are disputed, or someone were able to convince most workers to support partaking in a worker cooperative, worker cooperatives still may not serve as an efficient means of doing business.    The lack of an entrepreneur inherently sets back co-ops In a worker cooperative, all workers take on the role of being owners of the business, and essentially become entrepreneurs. Although this may sound empowering, this is not effective when getting into the nitty-gritty. It may be that a hierarchical structure is needed to allow the entrepreneur’s unique role. First, an entrepreneur has a good or service that they believe others desire, and thus would like to provide it for them, at a reasonable price. The time of that individual is scarce, so if they would like to produce enough for many people to be able to purchase the good/service, they must utilize the labor of other individuals.  Now the question arises of how they are to fairly compensate those who are selling their labor to the entrepreneur at hand.  As explained above, most workers desire some sort of steady income, as opposed to an uncertain wage fluctuating with the success of the company. But how can an entrepreneur pay a steady wage to numerous workers, when they themselves are unsure of the profits they will be making? Frank Knight answers this best: “with human nature as we know it[,] it would be impracticable to or very unusual for one man to guarantee to another a definite result of the latter’s actions without being given power to direct his work.”  In essence, if the entrepreneur is to guarantee the laborer’s wage (the result of the laborer’s actions) considering the uncertainty surrounding profits, then the trade-off is that the entrepreneur must be able to dictate the terms of what the laborer ought to do, and how much they are compensated. For this reason, the laborer whose service was purchased cannot be treated the same as that of the entrepreneur. In a system where all workers are meant to be equal, hierarchy is lacking, and all profits are shared; there is no room for the necessary, distinct entrepreneur.  While the intentions behind improving a worker’s influence in a company may be in good faith, worker cooperatives are not a favorable nor effective means of doing so. In order to truly enhance working conditions, we must allow markets to be unhampered, and competition to reign so that companies must attract workers in order to put out their best product.    Siddharth Gundapaneni is an Economics and Math major at Binghamton University. His research interests lie around monetary theory & asset bubbles, spending restraint, and Public Choice Theory. In his free time, he maintains a monthly blog on substack titled “Macroscope – The Bigger Picture.”  (0 COMMENTS)

Regular reader Kevin Corcoran sent me another email that’s worth posting as a standalone blog post. Here it is: Earlier this morning I decided to re-read Ludwig von Mises’s book Theory and History: An Interpretation of Social and Economic Evolution. (I know it’s considered bad manners to flaunt my crazy, party-hard lifestyle like this, but hey, it’s the weekend and I like to indulge.) I first read it nearly 20 years ago, and thought it was worth revisiting as I suspect I’ll be able to understand and engage with it much better this time around. Mises begins by defending the idea of methodological dualism – the idea that the study of social sciences like economics requires a fundamentally different approach than is used in the physical sciences. He points out that physical sciences give way to regularity and prediction that simply isn’t available in social sciences. He writes “Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions towards definite goals…A stone is a thing that reacts in a definite way.” However, Mises argues, there is a crucial difference between the things studied by the physical sciences and the subject of social sciences – humanity. “Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.” Mises doesn’t think this means social sciences are incapable of making predictions of any sort – only that these predictions are only vaguely definable and partly knowable. In his words, “This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent.” But this partial understanding and vague predictability makes attempts at applied social science fundamentally different from other applied sciences. One lesson I think we can take from this as economists is to temper the specificity of our predictions to policy changes. For example, when asked what to expect from a binding wage floor, many economists (I count myself among the guilty) have a knee-jerk reaction to just say “increased unemployment.” [DRH note: I always say “reduce employment” because of how unemployment is measured. To be unemployed in the official statistics, you must be out of work and looking for work. The minimum wage law may discouraged those whom it puts out of work, to the point where they don’t bother looking.]  But we also realize that this is just one of many ways employers can react. Employers might cut jobs or hold back on creating new positions they otherwise would have. But they often can, and do, respond in other ways. They might cut hours. They might reduce benefits. They might put less effort into providing a pleasant working environment. I thought back to 2014 when minimum wages were being pushed up in the SeaTac area in Washington, and the experiences being described by some workers who “benefitted” from that wage increase: “Are you happy with the $15 wage?” I asked the full-time cleaning lady. “It sounds good, but it’s not good,” the woman said. “Why?” I asked. “I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added. The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay. What else? I asked. “I have to pay for parking,” she said. I then asked the part-time waitress, who was part of the catering staff. “Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking. These kinds of experiences are overlooked when economists are too quick to predict unemployment. And when unemployment is given as the predicted cost of binding wage floors, rather than described as one of a variety of different ways employers might respond, situations like the one described can be overlooked. Skeptics might look around, see that technically no jobs were lost, and conclude that economists are wrong to warn about the costs and tradeoffs of this kind of wage setting. It would be more accurate, and more honest, for economists to say “There are a lot of different ways the labor market might adjust. Here are several different ones. I don’t know which employers will react in which ways, and neither do the advocates of this policy. But these increased costs are going to have to be borne by someone, and though the legal incidence of the cost increase is on the employer, much of the economic cost will be borne by the employees, whatever form that cost may take.” [DRH note: As I have often put it, employers adjust on many margins.] Granted, this doesn’t make a quippy sound bite for talk radio, but it has the virtue of being true. Here is the biography of von Mises in David R. Henderson, ed., The Concise Encyclopedia of Economics and the pic above is of von Mises. (0 COMMENTS)

It’s based on my article. Here it is. I think the people at Hoover did an excellent job.     (0 COMMENTS)

Behavioral economists Richard Thaler and Cass Sunstein are known for advocating a sort of “paternalistic libertarianism.” The basic idea is to nudge people toward more rational behavior through non-coercive means. Indeed, their book on the subject is entitled “Nudge“. While there is much to be said in favor of this idea, especially when compared with more coercive governmental alternatives, this approach is not without risks.  Joshua Madsen and Jonathan Hall studied the effect of electronic highway signs designed to frighten motorists into driving more carefully.  The Economist reports that their study found some unintended consequences: The study focused on Texas, where the year’s cumulative death toll from road accidents was displayed on highway signs one week in four. The authors found that, between 2010 and 2017, there were more accidents in the weeks when death counts were shown. Most excess crashes happened in the kilometre after a sign, but for several kilometres there was still an elevated risk (see top chart). . . . The authors think that the sombre messages may be distracting drivers. Luckily, the story has a happy ending: The study highlights how seemingly innocuous “nudges”, used by governments to try to change behaviour, can backfire. Luckily America’s government has given a nudge of its own. Last year the Federal Highway Administration released a memo clarifying that it was inappropriate to use electronic highway signs to display death tolls.  (0 COMMENTS)

Prices are rising at the highest rates in 40 years. The Federal Reserve’s overly expansionary policy is the main culprit. Yet the Fed has taken only minimal actions to address this issue. After more than a year of inaction, the Federal Open Market Committee (FOMC) finally started raising interest rates. It increased its federal funds rate target by 25 basis points in March, 50 basis points in May, 75 basis points in June, and another 75 in July.   However, these rate increases were too late and too small to stem the current wave of inflation. The FOMC will need more drastic actions to get inflation down and signal to the public that it is taking inflation seriously. They should also seize this opportunity to implement long-term policy reforms. Consumer price inflation Over the past year, the consumer price index (CPI) has risen by 9.1 percent, while the personal consumption expenditures price index (PCEPI) is up 6.3 percent. Americans face ever rising prices for regular living expenses like food, gas, housing, and clothing. Fed officials have come to accept monetary policy as a major cause of recent high inflation. Auto computer chip and raw material shortages played a role in the early stages of recovery and high oil prices have contributed more recently. However, price increases have been widespread. Core PCEPI inflation, which excludes food and energy prices, is far above the Fed’s long-term target of two percent. The inflation problem appears to be persistent, not “transitory” as Fed officials had previously claimed. Despite the recent rate hikes, inflation remains elevated. The FOMC projects inflation will be above target through 2024. Financial markets’ implied expectations of future inflation have declined over the last month, but still suggest inflation will exceed 2.5 percent per year over the next five years. The Fed’s inaction The widespread and persistent price increases appear to be a symptom of monetary policy. Why didn’t the Fed respond sooner to the threat of inflation? First, Fed officials relied too strongly on their technical models, which predicted that inflation was transitory. They failed to learn from their mistakes in the Great Recession of 2007-2009, when overreliance on faulty models prevented the FOMC from cutting interest rates fast enough, which amplified the magnitude of the recession. Second, the FOMC adapted the interpretation of its mandate in ways that allowed more inflation. It changed from an inflation target of two percent per year to an average inflation target of two percent over time (so they claimed), which delayed its response to high inflation. It reinterpreted its full employment mandate to be more inclusive and promised not to raise interest rates until the economy reached this expanded conception of maximum employment. In addition, Fed officials prioritized nonmonetary goals like inequality, climate policies, and emergency lending to nonfinancial companies, diverting its attention from the core task of keeping inflation low. Third, the Fed monetized the fiscal deficit on an unprecedented scale. On its own, debt-financed government spending has little effect on total spending. The additional government spending enabled by newly issued bonds tends crowd out private sector spending, as businesses and consumers face higher interest rates. When the Fed monetizes those bonds, however, the new money boosts total spending and, with it, prices. In response to the pandemic, Congress increased fiscal spending by $5 trillion. The Fed purchased around $3.4 trillion in U.S. Treasury bonds. In other words, the Fed monetized roughly 68 percent of the debt required to finance the fiscal policy response.   What can be done? In the short run, the Fed must address the inflation problem. Increasing interest rates may not be enough. The Fed should adopt a monetary policy rule in order to increase their credibility and minimize uncertainty about their policies. As Scott Sumner and others have argued, a nominal spending rule might be the most effective way to achieve neutral, predictable monetary policy. In the long run, the Fed should get back to basics. Fed officials must prioritize monetary stability over political objectives such as inequality and climate policy. To simplify its operations, the Fed should consider returning to the pre-2008 corridor system of monetary policy. Thomas L. Hogan is senior research faculty at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs. (0 COMMENTS)