Tyler Cowen and Alex Tabarrok, the two bloggers at Marginal Revolution, are rightly impressed with GiveDirectly. In a post yesterday, Alex points out that four economists started GiveDirectly. That’s figuratively putting their money where their economists’ mouths are because economists tend to believe that the most efficient way to help people is to give them money and let them spend according to their priorities. I basically agree. I think some people will spend it on drugs and alcohol and not on their children but that doesn’t mean that the government’s choices would have been better: I think that a lot of people who get money spend it well, where “well” is vaguely defined as spending it on things that will enhance their families’ lives longer term. In his post yesterday, Alex Tabarrok reports that the city government of Chicago is getting GiveDirectly to administer a program “that will give $500 a month to each of 5,000 households in Chicago as soon as the end of June.” The city government is getting those funds from the federal government. I see two problems that could well cause this plan to end badly. I’m leaving aside the issue of whether a Universal Basic Income is a good idea. I think it’s not, for reasons I laid out at length in an article in 2015. The sense in which I think this could end badly is that the $31.5 million is a large enough number that it could distort how GiveDirectly functions. There will potentially be two levels of oversight from government officials: oversight from federal officials and oversight from Chicago city government officials. Governments tend to like to get their hands in things, dictating how various recipients of aid will act. They could do so in two ways: (1) by regulating how GiveDirectly acts and (2) by regulating how the recipients of the funds act. My bigger concern is (1). If the government intrusion is large enough, it could turn GiveDirectly into something quite different from the organization that the four founding economists envisioned. (0 COMMENTS)

Many progressives view global warming as a looming catastrophe, justifying a major change in our lifestyle. Some conservatives regard global warming as a hoax.  Most, however, acknowledge its reality, while arguing that economic models often show only a very modest hit to global GDP over the next century.  (Large in dollar terms but quite small in percentage terms.) I lean a bit more toward the conservative view, although I also worry about damage to the animal kingdom that may not be picked up in GDP statistics.  Also, there may be a cost to human utility that doesn’t show up in the data, perhaps due to a more uncomfortable climate.  And there will be some severe regional impacts.  So on balance I still favor policies such as a carbon tax, a policy that I do not view as being costly. Today, I’d like to challenge the framing that both sides of the debate seem to have accepted, the view that addressing global warming requires major sacrifices.  I suspect that the problem does requires major changes, but I see no reason to assume these changes would be sacrifices. The following tweet caught my eye: France is not some sort of special case like Iceland, where it’s easy to generate clean energy.  It’s Europe’s second biggest economy, and a fairly normal developed country.  And yet 99% of its electricity is zero carbon.  Yes, they still have cars and trucks consuming gasoline, but electric cars are on the way. One argument against copying France is that clean energy is really costly.  That’s the implicit assumption in this whole debate, isn’t it?  But is it costly?  Consider electricity prices in various developed countries: France is not the cheapest, but it has lower electricity prices than all of the other major Western European countries (Germany, UK, Italy, Spain.) France relies mostly on nuclear, but also a mix of wind, solar, hydro and other low carbon energy sources.  The big nuclear (and hydro) capacity provides a buffer for periods when it’s cloudy or the wind is calm.  Once France switches to electric cars and trucks, it will have mostly solved its carbon emission problem, at very low cost.  And their fast trains are already electric.  (Heating and industry are also carbon emitters, but I suspect there are low cost solutions there as well.)   In contrast, Germany is shutting down its nuclear industry and replacing the energy with coal-fired plants. This post is not about progressives and conservatives; it’s about the fact that the developed world’s response to global warming has been pathetic when you consider how little it costs to effectively address the issue.  There’s plenty of blame to go around. (0 COMMENTS)

I recently ran across a couple of tweets that look at the pros and cons of inflation. This one seems to accept the Philips Curve as a way of framing the issue: This one opposes higher inflation: I am not a fan of either tweet.   It’s true that using monetary policy to suddenly move inflation up or down can produce a negative short run correlation between inflation and unemployment.  But we learned in the 1970s that the Philips Curve is not a useful way of thinking about inflation, for all sorts of reasons.  Rather than approach the inflation issue on an ad hoc basis, we need to think about an optimal monetary policy regime.  The analysis should be time consistent.  For instance, suppose you adopt a more expansionary monetary policy to avoid a rise in unemployment, and this leads to higher inflation.  That sounds like a pretty clear example of a policy trade-off, right?  Actually, this trade-off is largely illusionary, as it ignores the long run effects.  If the more expansionary monetary policy reduces unemployment then you have two choices, continue with a higher inflation rate forever, or bring inflation down at a later date. With a permanently high inflation rate, you are buying a few years of lower unemployment against an infinite number of years of higher inflation, not at all what readers of the tweet poll might have assumed.  If inflation is reduced after remaining high for just a couple of years, then you are merely postponing the high unemployment for a few more years.  Again, that’s not what the poll question seems to imply. The second tweet is also misleading.  If the Fed raised the target inflation rate from 2% to 3%, the public would hardly notice.  That’s because the Fed achieves its goals by influencing aggregate demand.  Because AD affects both wages and prices, modest demand-side inflation is not all that unpopular.  The current inflation is highly unpopular because supply shocks are reducing living standards (especially food and energy).  But using monetary policy to change the inflation target from 2% to 3% would have no impact on that sort of highly unpopular supply-side inflation. To be clear, I don’t support raising the inflation target from 2% to 3%, which I see as a slight net negative.  But the current unpopularity of inflation has little bearing on the merits of that proposal.  Inflation was roughly 4% during 1982-90, and it was not a big issue.  If inflation had been 3% during 1982-90 it would have been an even smaller issue.   A better reason to keep inflation at 2% is that monetary policy is more effective when it has credibility.  A credible monetary policy is better able to prevent business cycles.  Suddenly shifting to 3% inflation would reduce the Fed’s credibility (which is already on shaky ground.)  That’s why it’s a bad idea. (0 COMMENTS)

A century ago, many of the world’s great statesmen gathered in the Italian city of Genoa to build a monetary order for the post-war world. Before 1914, the world’s leading economies had been on the classical gold standard. This was based on convertibility between paper money and gold at a fixed parity price and the free export and import of gold. If a central bank set a parity price of £5 per ounce of gold, for example, an expansion of the money supply relative to gold reserves would push the market price up to, say, £6 per oz. In this case, it would make sense to take a £5 note to the bank, buy 1 ounce of gold, and sell it on the market for £6. During monetary contractions, the process worked in reverse. If the market price fell to, say, £4 per ounce it would make sense to buy an ounce of gold on the market for £4 and sell it to the bank for £5. In each case convertibility corrected monetary expansion or contraction. In an expansion, gold would flow out of banks forcing a contraction in the currency if they wished to maintain their reserve ratios. Likewise, a contraction would see gold flow into banks which would expand their issue of currency. The First World War shattered this system. Countries financed their war efforts by printing money and convertibility and exportability were suspended. Between 1914 and 1918, total metallic reserves as a share of bank notes plus deposits fell from 63 to 1 percent in Austria-Hungary, 57 to 10 percent in Germany, 60 to 9 percent in Italy, 64 to 17 percent in France, and 40 to 33 percent in Britain. This caused rampant inflation, followed by a bust. In 1920, the League of Nations reported: “Everywhere currency and exchange disorder is hampering trade and retarding reconstruction. In some countries it is a prime factor amongst those which are causing a breakdown of the economic and social system.” After the war most countries wished to return to the gold standard but faced a problem: there was now much more currency relative to their gold reserves. The parity prices of gold were far below the market prices, which would lead to massive outflows of gold once convertibility was re-established. To solve this problem, among others, the statesmen gathered in April and May 1922. Their solution was the gold exchange standard. The gold exchange standard would solve the imbalance between currency and gold reserves by increasing reserves. But the gold stock could not be expanded beyond new discoveries so the gold exchange standard allowed central banks to add to their gold reserves the assets of countries whose currency was convertible into gold. In practice these were sterling and dollars. By 1927, foreign exchange accounted for 42% of the total reserves (gold and foreign exchange) of twenty-four European central banks, up from 27% in 1924 and 12% in 1913. But sterling assets were no longer deemed as ‘good as gold’. In 1925, Britain’s Chancellor of the Exchequer, Winston Churchill – against his better judgement – re-established sterling convertibility at the pre-war parity. This was too high and helped cripple British exports. Attempts to drive wages down in an internal devaluation provoked the General Strike in 1926. Countries like France and Germany began to switch their sterling for gold. From 1924 to 1928, foreign exchange fell from 59% of Germany’s total reserves to just 8%. Sterling couldn’t cope; liabilities stood at $2.5 billion, nearly four times the Bank of England’s gold reserves. In 1927, Montagu Norman, Governor of the Bank of England, persuaded his friend Benjamin Strong, Governor of the Federal Reserve Bank of New York, to cut the Fed funds rate in the hope of relieving pressure on sterling. Whatever relief this action bought sterling, some economists have seen it as a cause of the stock market bubble that burst so spectacularly in 1929. The Wall Street crash and its aftermath wrecked the gold exchange standard. As budget deficits grew, sterling came under renewed pressure in 1931. Unable to enact ‘austerity’ measures, the Labour government collapsed and was replaced by a National Government which promptly devalued (an external devaluation): “`Nobody told us we could do that”, one Labour politician observed. With a core country severing its link to gold others soon followed. By the end of 1932 32 countries had gone off gold. ‘Beggar-thy-neighbour’ devaluations would continue through the 1930s. The gold standard is sometimes blamed for the Great Depression but the classical gold standard was history by then: as economist Richard Timberlake notes, “The operational gold standard ended forever at the time the United States became a belligerent in World War I”. The flaws in its successor, however, the gold exchange standard, designed a century ago, carry much more culpability. John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

President Biden’s attack on oil refiners illustrates why efficient government economic planning is impossible, including and perhaps especially in a democratic regime. Except if he is a saint or if he is restrained by strong moral principles and a binding political philosophy, a democratic ruler focuses on the next election—or, at best, on the next few elections, but that amounts to the same for a gerontocrat. He would typically risk the future of his country if not of the planet if necessary to win the next election. Biden’s immediate political interest is that his party controls Congress after the mid-terms and allows him to exercise more power. He rightly fears that the voters, many of whom think that the president is omniscient and omnipotent, will punish him for the high fuel prices due to a war launched by his Russian counterpart. The Financial Times reports (“Joe Biden Tells US Oil Refiners Rising Profits ‘Not Acceptable’ as War Rages,” June 15, 2022): US president Joe Biden on Wednesday took aim at refiners for not producing more petrol, saying their rising profit margins “at a time of war” were “not acceptable”. In letters sent to seven oil companies including ExxonMobil, BP, Shell and Valero, Biden called for “immediate actions” to supply more fuel, and said the administration was prepared to use “all reasonable and appropriate” tools to help increase supply in the near term.” Use the Defense Production Act? Decree price controls that would generate shortages and socialist waiting lines? Ask the army to take over gasoline production? The only way private oil companies can find it profitable to increase production is if the price they get and their profits rise in the short term. In the long term, of course, their excess profits will be competed away on a free market. If they fear that their temporary excess profits will be expropriated, they will never increase production, neither today nor at the next emergency; or they will do it out of fear of “their” government, but don’t expect much efficiency from coercion. President Biden’s letter to refiners does a bit more than reveal his economic ignorance and the impossibility of democratic economic planning. It is also cartoonish: “I understand that many factors contributed to the business decisions to reduce refinery capacity, which occurred before I took office,” Biden wrote in his letters. It is not clear what Biden is blaming his predecessor for. What is clear is what he wants to do: both to reduce oil  production in the long term, a kernel of the Democratic environmentalist wishes, and to increase it in the short term when his political interest requires it. Like his predecessor, he is willing to say anything, however incoherent, to promote his political interests. (0 COMMENTS)

The economy is booming, with unemployment near a 50-year low. Yes, there is high inflation, but NGDP is up 10.6% over the past 4 quarters, easily outpacing the rate of inflation. Nonetheless, the public feels horrible: US consumer sentiment plunged in early June to the lowest on record [since 1978] as soaring inflation continued to batter household finances. The University of Michigan’s preliminary June sentiment index fell to 50.2, from 58.4 in May, data released Friday showed. The figure was weaker than all estimates in a Bloomberg survey of economists which had a median forecast of 58.1. That is rather surprising, given that the economy presents a mixed picture with both good news and bad.  Why so glum? In April of last year, I predicted that the public’s mood would turn sour.  When discussing the massive fiscal stimulus, I made this observation: There’s always a price to pay for unsustainable good times, and thus I expect the public’s mood to turn sour in the fall and winter, even as employment recovers—indeed because employment recovers.  Someone has to do all those crappy jobs. My point was that people would be working much harder, but not earning much more money.  At the time, some workers earned more on unemployment than they had earned on their previous jobs. Is there any data to support my claim?  I mentioned above that NGDP was up 10.6%.  In most cases, that figure is highly correlated with changes in personal income.  But not this time.  Personal income is up only 2.6% in the twelve months to April 2022, far below the rate of inflation.  This reflects the withdrawal of fiscal stimulus.  No wonder the public is so grouchy.  (The unexpectedly high inflation made things even worse than I expected last April.) To be clear, I don’t think this fully explains the public’s extremely bad mood.  Consumer sentiment was far higher (71.8) back in April 2020, when the unemployment rate was 14.6%.  The public has clearly become grouchier due to factors beyond just the economic situation.  But it’s a big part of the story. PS.  Interestingly, consumer sentiment in June 2008 (56.4) and February 2009 (56.3) were virtually identical (at a very low level).  But look how different the two economic situations were! June 2008:  Unemployment = 5.6%, 12-month inflation = 4.9% February 2009:  Unemployment = 8.3%, 12-month inflation = 0.01% What did Tolstoy say about unhappy families?   (0 COMMENTS)

In a nine-minute video, Swedish statistician Hans Rosling, who died in 2017, shows just how dramatic the washing machine was to his family. It freed his mother to do other things and his grandmother found it so fascinating that she just sat and watched it perform its tasks. In one of my classes at the Naval Postgraduate School in the late 1990s, I was laying out the data on the entrance of women into the US labor force after World War II. A particularly curious student asked me why that had happened, and I pointed to washing machines, driers, automatic dishwashers, and a range of labor-saving devices that had freed up time mainly for married women. I also referenced a chapter of Robert Caro’s magnificent first book on Lyndon Johnson, The Path to Power. The chapter, titled “The Sad Irons,” told of the incredibly taxing work women in the Texas hill country did to wash laundry before they had electricity: hauling water uphill from a well, hauling wood to burn in a stove, firing up the stove in the middle of hot summers to heat water, and keeping it fired up to heat irons to press shirts. Washing machines were a huge boon to families, especially to women. This is from David R. Henderson, “What Causes Economic Growth?” Defining Ideas, June 16, 2002. Another excerpt: An example of a more recent major breakthrough is Zoom. Zoom has made it so much easier for large groups to communicate remotely. Last fall, I gave a speech in Washington in which I asked the audience of about fifty to raise their hands if they used Zoom a fair amount. Virtually every hand shot into the air. I then asked them to raise their hands if they valued it a lot. Almost every hand stayed in the air. On this point about Zoom, I didn’t put in the article, because it didn’t nicely fit, the reason I had raised the Zoom example. I was giving a talk to a number of Republican politicians and wanna be politicians who tended to be pro free market but at that point in the talk were pushing back on my pro-immigration views. I asked them if they knew how many times Eric Yuan, the creator of Zoom, had applied to immigrate to the United States before finally getting permission. Of course, they didn’t know. Why would they? I pointed out that it took him 9 tries. I asked if any of them would have wanted it to be easier for him and people like him. Some of them did. One last excerpt: What has been particularly important for poorer countries since World War II has been a substantial reduction in trade barriers. Moving toward freer trade causes people to produce the items in which they have a comparative advantage and buy other items from lower-cost producers in other countries. In “Does Trade Reform Promote Economic Growth? A Review of Recent Evidence,” a 2019 PIIE study, Dartmouth economist Douglas A. Irwin, arguably the leading trade economist in the United States, shows that between 1983 and 2009, developing countries dropped their average tariff rate from over 35 percent to about 10 percent. He reports on a range of studies whose answer to the question in the title is “yes.” In a table in the article, Irwin cites studies that find anywhere from a 1 percentage point increase in annual growth up to a whopping 2.7 percentage point increase in annual growth due to reductions in trade barriers. Either of those annual increases, over a decade, leads to a major increase in economic well-being. Read the whole thing.   (0 COMMENTS)

Last year, Matt Yglesias did a post suggesting that all news is bad news.  Allowing for hyperbole, I think that’s roughly true.  But I recall a time when it was not true, when much of the news was good.  To be fair, Yglesias is mostly considering a certain type of popular headline news, which has always been dominated by bad events.  There have always been many more stories of houses that burned down than houses that did not burn down.  But today, even the more intellectual news sources are dominated by bad news.  That was not true in the 1980s and 1990s. In the last part of the 20th century, I greatly enjoyed reading news outlets such as The Economist, the Financial Times, the Wall Street Journal, and the Far Eastern Economic Review.  These news sources focused on public policy issues, especially economic and political issues. Those decades were dominated by good news, as one country after another abandoned authoritarianism and moved toward democracy.  Almost every developed country did major tax reform.  Many developed countries privatized state-owned enterprises and deregulated prices and production.  Free trade agreements were announced.  Immigration was liberalized.  There was one economic reform after another.  Inflation was brought down.  Democracy was on the march in Latin America, Eastern Europe and elsewhere. Now I pick up these news outlets with weary apprehension. I know there is unlikely to be a single piece of good news, just endless stories about the rise of nationalism, authoritarianism, militarism, statism, xenophobia, etc.  One counterproductive economic policy after another.  The world still progresses in terms of technology, with nifty inventions like the iPhone.  But on political and economic issues it seems like the news is unrelentingly bad. In the rare cases where I see a positive headline, even the good news turns out to be bad. Even economics is going rapidly downhill.  I consider myself a late 20th century economist, and have little in common with today’s economists. Back in the 1960s, I used to watch Star Trek in TV.  The future looked bright.  I never imagined the 21st century would be a dark irrational place, regressing from the reform era of the 1980s and 1990s.   Younger people might live long enough to see the cycle swing back to good news.  (It happened after 1914-45.)  I don’t expect to live that long. Or am I just getting old and grouchy?  Please tell me if I’m missing all the wonderful policy news. PS.  Back before the Great Recession, when it was still possible to be optimistic about the world, I did a long paper on neoliberalism.  I discussed three model countries: Denmark, Switzerland and Singapore.  They differed in numerous ways, but all had one thing in common—they are number one in the world in one important category (values, politics, and technocratic policy, respectively).  Tim Peach sent me to a Bloomberg article that shows that 15 years later these three have emerged as the world’s three most competitive economies.  Hmmm, maybe I was on to something.  If the world descends to a new dark age, perhaps these three will be the countries that hold out the longest.   (0 COMMENTS)

In yesterday’s (June 15) print edition of the Wall Street Journal, economists Mickey D. Levy and Charles I. Plosser, in “Inflation Demands Bold Fed Action,” write: Strikingly, many [state and local governments] are now providing financial subsidies to offset higher gasoline costs, which may buy votes for local elected officials but also contributes to demand for energy and thus to inflation. If the subsidies are given conditional on incremental usage of gasoline and other energies, then they’re correct. However, the one I’m most familiar with, the one that Governor Newsome has proposed for California, would give a $400 debit card or check to an owner of a registered vehicle. There is no requirement that it be spent on fuel. Will this, if passed into law, add to generalized demand? Yes. Would that then cause a slight increase in the demand for fuel? Yes. But their sentence would have been more on target it they had written: Strikingly, many are now providing financial subsidies to offset higher gasoline costs, which may buy votes for local elected officials but also contributes to overall demand. (0 COMMENTS)