It’s tempting to explain Russia’s invasion of Ukraine with Putin’s megalomania. Economist Chris Blattman of the University of Chicago talks about his book Why We Fight with EconTalk host Russ Roberts. Blattman explains why only a fraction of rivalries ever erupt into violence, the five main reasons adversaries can’t arrive at compromise, and the problem with trying to […] The post Chris Blattman on Why We Fight appeared first on Econlib.

I never have trouble remembering Friedrich Hayek’s birthday (May 8) because it’s the same day as my late sister’s birthday and the same day as VE Day. Here’s a link to some reminiscences of the first time I met Hayek. A highlight from that link: In June 1975, when I attended the second Austrian conference in Hartford, Connecticut, I went up to Hayek, who was attending, and said to him, “Professor Hayek, your analysis in Prices and Production makes sense to me only if we reject rational expectations. Do you agree?” He winced and went on to disagree but I still don’t understand what he said. (By the way, when Hayek’s cab pulled up on the Sunday afternoon before the conference started and the driver pulled Hayek’s large suitcase out of the cab, I looked at a group of fellow graduate students who were more into Austrian economics than I was, figuring one of them would offer to carry his suitcase up the narrow stairs. None of them did, and so I went up and offered to do so. Hayek accepted gracefully. That suitcase was heavy. On the way up the stairs, I said, maybe a little too impudently, “This is heavy; what have you got in here.” Hayek chuckled and answered, “Books.”) One additional story I didn’t tell in the interview from which this is taken is that we got talking about Hayek’s appearance on NBC’s Meet the Press that was televised that morning. I think I said something like “I thought you did a good job.” (I did.) That got us talking about reporters as interviewers. Hayek said, with a twinkle in his eye, that he found it surprising that no U.S. reporter who had ever interviewed him took notes in shorthand whereas it was common for European reporters to do so. He couldn’t understand why a skill that would seem to be so crucial for someone who wanted to do his job well would be so rare. I also remember that the way I saw the interview was that Dr. William Hutt, his wife, and I were going through an airport (I think Cleveland) on the way from a Liberty Fund colloquium, my first, in Athens, Ohio to Hartford. This is vague recall, but I think we saw it on an overhead TV while waiting for our flight. Better than CNN. When researching this post, I found in my home library the transcript of the June 22, 1975 interview on NBC. I had sent my check for 25 cents to NBC and got it in the mail. Here’s an audio recording of the interview, but it misses about the first 3 minutes. Which means it misses one of the best parts: Mr. [Irving R.] Levine: How do you cure inflation? Dr. Von Hayek: You stop printing money. He later goes on to explain it more accurately: In a sense, stopping the printing presses is a figurative expression, because it is being done now by creating credit by the Federal Reserve System.     (0 COMMENTS)

In response to my post titled “Who’s Responsible for Student Loans?” April 28, 2022, frequent commenter Vivian Darkbloom wrote: At the risk of keeping this too simple, I’d say it’s the person(s) signing or co-signing the loan agreement. I LedOL when I saw this. It reminded me of something I read when I was 18 and was reading everything I could find by and about Ayn Rand. I can’t find where the original story was printed but Anne Heller, in her wonderful biography of Ayn Rand, Ayn Rand and the World She Made, tells the story. (Possibly the source is in the footnotes but my copy of Heller’s book is at work and I’m at home.) Ayn Rand had been invited to speak at Yale University in February 1960. Heller writes: To her surprise, and Yale’s, the flyer tacked to the law-school bulletin board attracted the largest audience in the history of the Yale series; the overflow was so great that the school placed loudspeakers in the building entryway and on two upper floors. During the question-and-answer period, one member of the audience shouted from the balcony, “Under your system, who will take care of the janitors?” She sang out, Young man: the janitors!” and the hall erupted in laughter. The thing I like about her answer, besides its terse accuracy, is that she was willing to enter the fray. Some speakers might have stood on ceremony, saying “How dare you question me out of turn?” But she seized the day, with excellent effect.   (0 COMMENTS)

It is an interesting phenomenon that a first-rate financial newspaper can, without adding a big smiley, run a major title like yesterday’s: “US Economy Added 428,000 Jobs in April Despite Worker Shortages.” Imagine the number of new jobs created if there were no “shortage”! At least in the economic sense of the word, there is no shortage of labor more than is a shortage of petroleum, ammo, or diamonds: these things are just expensive and more expensive than they have been in the recent past. One can define “shortage” as one wants, but if is defined as “high price” or “increasing price,” we need another word for “unavailable at any market-determined price,” which is how economics defines it. By promoting the confusion between market unavailability and availability at a price that many deem too high to justify buying, one renounces the possibility of useful analysis. That job openings look larger than job takers at a wage rate lower than the market-clearing rate is not, in itself, a useful bit of information. For example, I have a permanent job opening for a Ph.D. research assistant at $5 an hour. That there is no job taker does not mean that there is a labor shortage; it just mean that I don’t need a research assistant at the price these guys and gals are fetching on the labor market. We may sympathize with Fed chairman Jay Powell’s efforts to continue his crash course in economics since he was nominated by president Donald Trump, but this should not prevent us from realizing that a declaration like he just made does not make much economic sense (quoting the same Financial Times report): Labour demand is very strong, and while labour force participation has increased somewhat, labour supply remains subdued. A “subdued” labor supply is not a technical expression, so let’s try to see what if means. That these slaves don’t work as much as political authorities would like? Probably not. Perhaps Mr. Powell is just trying to dumb down for his listeners the idea that the supply (curve) of labor is not elastic enough and that it would be so nice, it would make employers so happy, if more people were willing to jump in the labor force for wages that they consider wouldn’t compensate for their lost leisure. It would be so good if workers were not such wage gougers! Or perhaps it was simply the way some in the Fed’s army of economists tried to it dumb down for their boss? If there is a market disequilibrium, it would more likely be a surplus of labor created by minimum wages and coercive union privileges, both of which prevent less productive workers from from competitively bidding their own wages down in order to find jobs. But note that the growth in real market wages that accompanied higher labor demand in the post-pandemic recovery (before inflation rose its ugly head) imply that any labor surplus has been reduced, which the low unemployment rate confirms. Inflation, created by the federal government’s high deficit financing is a true but different problem. As the Bureau of Labor Statistics notes, “over the past 12 months, average hourly earnings have increased by 5.5 percent.” Even if we add benefits, the increase in remuneration is probably lower, and certainly not much higher, than the current estimated increase in the general price level (that is, the inflation rate), depending on which index is used. Which suggests another problem in the “shortage” narrative: if the hypothesized temporary gap between quantity demanded and quantity supplied of labor existed, there would be strong upward pressure on real wages. Without such increases in real wages, no wonder that employers have problems attracting wage-gouging toilers. Perhaps the lack of strong increase in (average) real wages just shows a temporary lag, assuming a recession is not on the horizon. One way or another, it seems pretty clear that, at least in the overall labor market, there is no more shortage than in any other relatively free, or not too unfree, market. (0 COMMENTS)

“Something must be done. This is something. Therefore we must do it.” Those are my favorite three linesfrom Yes, Prime Minister, a British comedy series about politics. Most politicians who face a problem think that “something must be done.” Unfortunately, they tend to reach the same conclusion that the adviser reached in the Yes, Prime Minister episode. But in the US economy, in which governments at all three levels tax, spend, and regulate as much as they do, there’s another way to confront problems that does not involving taxing, spending, and regulating more. That way is to reduce taxes, spending, and regulation. In short, some things must be undone. There’s a long list of things that should be undone and that would help ameliorate, rather than exacerbate, some of the problems we face. I’ll settle for five: regulations on home food production, the Jones Act, protectionist trade policies, restrictive immigration policies, and occupational licensing. In each case, I’ll show a particular problem that undoing these policies would ameliorate. These are the opening three paragraphs of my most recent article for Hoover, “Don’t Just Stand There: Undo Something,” Defining Ideas, May 5, 2022. Another excerpt: One of the best sources for information about the effects of protectionism is the Peterson Institute for International Economics (PIIE). In a study published in March, Gary Clyde Hufbauer, a senior fellow with PIIE, and Megan Hogan and Yilin Wang, both research analysts with PIIE, advocated trade liberalization as a way to reduce inflation and increase real incomes for American households. They estimate that eliminating Trump’s trade war tariffs and ending his 25 percent tariffs on steel would achieve the equivalent of a 2-percentage-point reduction in tariffs. Based on this, they estimate, the consumer price index (CPI) would be 1.3 percentage points lower than otherwise. So, for example, if these measures were undertaken this year, and assuming that importers could adjust quickly, the CPI for 2022 would be 1.3 percentage points lower than otherwise. That would not be a permanent reduction in inflation, but it would mean that the CPI would be permanently 1.3 percentage points lower than it would have been. Hufbauer et al. estimate further that relaxing Buy America rules would lead to a further one-time 0.6-percentage-point reduction in inflation. What would that mean for the average American household? A lot. The authors note that in 2020 the average American household spent $61,334 on goods and services. A 1.3 percentage point in reduction in the CPI, due to repealing the Trump tariffs, would save that average household $797. And the saving would be 1.3 percent of spending every year. And a 1.9-percentage-point reduction in the CPI, which would occur if the Trump tariffs were repealed and the Buy America rules were relaxed, would save the average family $1,165 annually. Read the whole thing.   (0 COMMENTS)

It’s easy to end a transitory inflation.  It’s hard to end a persistent inflation.  That’s why it’s essential that central banks engage in “level targeting”.  Level targeting makes all inflation transitory. When the Korean War broke out in June 1950, the US economy was experiencing a period of mild deflation.  By February 1951, the 12-month CPI inflation rate had reached 9.4%.  By February 1952, inflation was back down to 2.2%.  How did the Fed achieve success so quickly, without triggering a recession in 1952? The transitory inflation of 1951 was not a supply shock—NGDP rose at an extremely rapid rate.  Inflation would not end just because the supply shock went away.  There were price controls, but it wasn’t just inflation that declined in 1952—NGDP growth also fell very sharply. So monetary policy did significantly reduce aggregate demand in 1952.  (Contrast this with the 1971-74 price controls.) The key to the Fed’s 1952 success was level targeting.  Between 1934 and 1968, the US pegged the price of gold at $35/oz.  This provided monetary policy with credibility, keeping long-term interest rates at relatively low levels.  As a result, the Fed was able to eliminate the high inflation of 1951 with a relatively small increase in short-term interest rates, as 3-month T-bill yields rose by only about 40 basis points between 1950 and 1952: (A similar small increase in interest rates eliminated the transitory inflation of 1936-37; although that policy was too contractionary, pushing the economy into a deep slump in 1938.) As recently as last September, the Fed’s FAIT policy still had some credibility.  Markets assumed that the Fed would keep inflation around 2%, on average.  Ten year T-bond yields remained around 1.3%.  At the time, markets (wrongly) assumed that the Fed would engineer a 1952-style soft landing. As Fed officials began moving away from their promise to keep average inflation near 2%, long-term bond yields rose sharply. Eliminating inflation will now be much more costly.  Interest rates will have to rise more sharply and the economy will slow by more than if the FAIT policy had been maintained. People often ask me how high the Fed needs to raise rates to control inflation.  The answer depends on the policy environment.  With a credible level targeting regime, only a tiny rate increase is required.  But as we saw in 1981, without policy credibility a dramatic rate increase is required. Right now the Fed is somewhere in between these two extremes.  It has less credibility than in 1951 but more than in 1981.  The longer they wait, the higher the price that must be paid. (0 COMMENTS)

  Seriously, FDA? The Food and Drug Administration decided yesterday to strictly limit”who can receive Johnson & Johnson’s COVID-19 vaccine.” Why? Because of “the ongoing risk of rare but serious blood clots.” How rare but serious? Matthew Perrone and Lauren Neergaard, in “FDA restricts J&J’s COVID-19 due to blood clot risk,” msn.com, May 5, 2022, write: Federal scientists identified 60 cases, including nine that were fatal, as of mid-March. That amounts to one blood clot case per 3.23 million J&J shots administered, the FDA said Thursday. The vaccine will carry a starker warning about potential “long-term and debilitating health consequences” of the side effect. Since 9 out of the 60 were fatal, that amounts to 1 death from a blood clot out of 21.5 million shots. What’s next? The Department of Transportation telling us not to drive because there are 1.34 fatalities for every 100 million vehicles traveled? (0 COMMENTS)

I often use the analogy of steering a bus when discussing monetary policy. A rise in the equilibrium or “natural” rate of interest is like a bend in the road. The Fed must adjust its policy rate to keep the economy from going off into a ditch.  But this analogy only goes so far. The Fed’s most important duty is not to adjust interest rates to changes in the natural rate, rather it’s to reduce instability in the natural rate of interest with a better monetary policy regime.  To return to the bus analogy; it’s as if the bus driver both steers the bus and changes the path of the road. In late 2021, the Fed moved away from average inflation targeting.  The uncertainty created by this policy shift caused the natural rate of interest to become much more unstable than otherwise.  That was by far the Fed’s biggest policy mistake, not its failure to raise rates in a timely fashion. Milton Friedman favored increasing the money supply at a constant rate.  This is not because he believed that velocity was stable; indeed his research showed it was often rather unstable.  Rather he believed that the volatility of velocity was caused by unstable monetary policy.  Friedman hoped that if the Fed stabilized the growth rate of the money supply, then over time the velocity of circulation would also become more stable.  In other words, he wanted to straighten the road.  In this monetarist framework, the instability of velocity plays the same role as an unstable natural rate of interest plays in the Keynesian interest rate approach to policy. I am unimpressed with most of the discussion of what went wrong with monetary policy. I see pundits obsessing over steering mistakes, and overlooking the far more important problem of how the Fed took a fairly straight road and made it much more twisty by abandoning FAIT.  That was the Fed’s biggest policy mistake. The Fed isn’t just making bad decisions; it is making it harder for Fed official to make good decisions.  The Fed is now the Fed’s own worst enemy, creating a macroeconomic environment where it’s much harder to know where to set interest rates or the money supply. In 2021, I thought that the Fed had adopted something like level targeting.  I was wrong.   (0 COMMENTS)

Do the Central Planners Give a Damn? I have a cottage at Minaki, Ontario, which is down the Winnipeg River from the Lake of the Woods. Under a treaty between Canada and the United States, the Lake of the Woods can’t go above a certain level. The reason is that part of the Lake of the Woods is in Canada and part is in the United States. So when it gets close to that level, the government opens the dam at the north end of the lake to let the water flow downstream. We downstream people, therefore, are at the mercy of the authorities who open the dam. What would be a reasonable way to both comply with the treaty and look out for the people downstream? It would be to see what’s happening with snowfall in the winter and, on that basis, predict what will happen to runoff. And then if the estimate is that the spring runoff will be high, start releasing early and not wait until May. But here’s what they’re doing. One quote is precious: Since April 20, water levels on Lake of the Woods have risen by roughly 25”, while levels on the Winnipeg River have risen by about 67” since early April. The rise in levels has been driven by the area breaking numerous precipitation and snowfall records throughout the winter. (emphasis added.) On a site of Minaki residents and cottage goers that I follow on Facebook, a year-round Minaki resident put it well: Yup you could not have had a clue what was going to happen with all the snow last winter, could you? Let’s guess at a dry spring and hold all the water back because the lake is too low. Trust the science. We are in Ottawa and know what’s going on. Well said. The picture above is of the Lake of the Woods, which is partly in Manitoba and Ontario and partly in Minnesota. (0 COMMENTS)

On April 20, I attended a talk given at Stanford University by Canadian psychologist Jordan Peterson. It started with a one-hour taping of an interview of Peterson by master interviewer Peter Robinson. Then it went to Q&A. The interview, part of the series “Uncommon Knowledge,” is here. In a later post, I want to challenge something he said in Q&A that I had thought was in the interview but wasn’t. Here are some highlights. On how we got to wokeness so quickly. 14:15: Two streams of thought. First the post-modern stream, which he agrees with, is one part of it. 17:30: This is the part of the post-modern stream he agrees with: “We see the world through a narrative framework.” Perhaps I missed it, but he didn’t mention the second stream that led to wokeness. Peterson is not that linear and I found it more frustrating than a lot of the audience seemed to. But seeing the video over, I had a very different reaction: I found him charming and lovable. I wanted to hug him numerous times. 19:20: How businesses get diverted by wokesters. 20:55: The weaponization of guilt. 23:00: Science depends on the concept of the divine. 28:20: No difference between free speech and free thought. 41:30: Justin Trudeau is a narcissist. His challenge to Trudeau: What if you don’t know what you’re doing? 42:40: Peterson, as a Canadian, observing U.S. culture and its ability to revive from dark places. You’ve got to watch this. He said it beautifully. I got goose bumps. I whispered to my friend Charley that Peterson had put his finger on why I love my adopted country so much. 43:40: Ray Dalio on China. Yuck! 45:00: Peter Robinson quotes Dostoevsky on why people fear freedom and challenges Peterson to answer it. 45:50: Confronting these challenges is difficult but necessary. 46:50: You need allies, which is what universities are supposed to be giving you. 47:20: Free trade as an eternal verity. 53:45: Peterson has spent time trying to understand what motivated a guard at Auschwitz. He thinks that you can get ordinary people to do those things and even enjoy them. Part of what drives them is envy. 55:00: “Never forget” the holocaust should mean don’t let it happen again. 56:00: Instead of activism put your own house in order. 59:10: In response to Peter’s request for a redemptive sentence to tell 18 and 19 year olds coming into college, Peterson says “Don’t be thinking that your ambition is corrupt.” 1:00:30: “You son of a bitch.” You have to watch this to get it. 1:01:40: In a very emotional ending in which Peterson is on the edge of tears, in talking about what universities are doing with their anti-human messages to young people, he says, “You have no idea how many people that’s killing.”   (0 COMMENTS)