A friend with a high-priced one-year-old Hyundai recently had a flat tire. When he looked in the trunk, he was surprised to see that he had no spare tire. In an article I wrote thirty-seven years ago, I explained why station wagons were disappearing and would likely never return. In the 1990s, auto companies began to produce millions of SUVs annually. These three phenomena may seem unrelated. They’re not. They are all consequences of regulations that the federal government imposed in a 1975 law in the midst of the energy crisis. The regulations mandate something called Corporate Average Fuel Economy, CAFE for short. At first those regulations made cars lighter and more fatal to their occupants in the event of a crash. Now they are lighter and, though safer than their lighter counterparts of decades ago, are still more dangerous than heavier vehicles. The rules also make cars look more and more alike. Have you ever looked for your Toyota Camry in a large parking lot and instead found yourself heading toward a Honda Accord or even a Chrysler? I have. The regulations also cause engineers in the United States and other countries, many of whose employers want to produce for the US market, to put a large percent of their effort into compliance. And, most important, beyond the other negative consequences, the CAFE regulations have substantially reduced the freedom of producers and car buyers. These are the opening 2 paragraphs of my latest article for Hoover, “Wake Up and Smell the CAFE,” Defining Ideas, February 3, 2022. Another excerpt: But whether the goal is to rein in global warming or to reduce dependence on foreign supplies, there’s a big problem with the regulations even beyond the ones I’ve discussed above: they don’t reduce fuel usage as much as advertised because of two factors: the “rebound effect” and what might be called the “older car effect.” Read the whole thing. (0 COMMENTS)

To which extent is private morality (moral rules not enforced by government) necessary in a free society? This is one of the many interesting questions raised by James Buchanan in his 2005 book Why I, Too, Am Not a Conservative. A tyrannical government faces a very different question: How much, and what sort of, morality will sustain or threaten its rule? This question is illustrated by the new purification campaign launched by the Chinese government (Ryan McMorrow, “China Launches Internet ‘Purification’ Campaign for Lunar New Year,” Financial Times, January 26, 2022): The Cyberspace Administration of China, the country’s top internet regulator, has instructed officials to sweep away “illegal content and information” and target celebrity fan groups, online abuse, money worship, child influencers and the homepages of media sites. … The edict is the latest step in Beijing’s clampdown on the entertainment industry as authorities purge content deemed immoral, unpatriotic and non-mainstream from online culture. The concept of private morality is fuzzy under a totalitarian government, which naturally wants to control all morality and shrink the private domain in that area too: President Xi Jinping has unleashed a broader effort to reshape Chinese social mores and culture, diminishing materialism and western influence in favour of a more nationalistic and homegrown approach. The most controlled societies typically show an austere and prudish ethics. The poverty that usually goes hand and hand with tyranny is an explanation. Yet, it is not clear that an austere morality is the only sort compatible with tyranny. The panem and circences (“bread and circuses”) offered by Roman emperors may be helpful to other tyrants. In the (literary) literature, we meet both the austere life of Orwell’s 1984 (although gin provides a security valve) and the medicated dolce vita of Huxley’s Brave New World. Our own soft tyrannies, as Alexis de Tocqueville foresaw for democratic regimes, are more of the brave-new-word kind. Can the state lead to Nirvana? What we can say is that the more totalitarian is the political regime, the more everything, including morality, must be oriented towards achieving Leviathan’s goals: Censors have also escalated their culling of content deemed to be misaligned with the Communist party’s priorities. It is a safe conjecture that publicly imposed morality undermines private morality, including habits of honesty, fair dealing, and trust. Generalized cheating and stealing were endemic under the Soviet empire. Those lucky enough to own a car, it was reported, had to remove their windshield wipers at night lest they were stolen (see Nina and Jean Kéhayan, Rue du Prolétaire Rouge (“Red Proletarian Street” [Paris: Seuil, 1978]). The tyrant can’t have both obedient and honest subjects. (0 COMMENTS)

A recent article on Sarah Bloom Raskin, who was recently nominated to be the Fed’s lead bank regulator, made these claims: “To the extent that her confirmation is viewed as a referendum on getting central banks involved in climate-related risks, it’s possible there’s going to be a lot of controversy surrounding that,” said Richard Berner, an Obama-era director of the Treasury Department’s Office of Financial Research. He currently co-directs New York University’s Volatility and Risk Institute. But ultimately, Berner added, “Ms. Raskin’s outspokenness on climate is completely legitimate because it is an existential threat, and because climate-related shocks do pose threats to financial stability, and to the safety and soundness of financial firms and markets.” Here are some of my views on climate change:1. Global warming is real and it is mostly man-made.2. Global warming is a very big problem.3. Governments should aggressively address global warming with policies such as a revenue neutral carbon tax.Based on these views, you might expect me to support Fed efforts to address climate change.  Not so.  To begin with, it’s absurd to claim that climate change is an existential threat, at least for humans over a time horizon relevant for current policy decisions.  (Some animal species might become extinct due to global warming.)  Even experts that worry about global warming typically predict only modest reductions in real GDP over the next 100 years.   Of course, even a small percentage decline in global GDP is a bad thing, and there are other factors such as distributional effects and impact on the natural world that deserve some consideration.  But it isn’t even close to being an existential threat.  It is discouraging to see the left, which has been so critical of anti-scientific vaccine opinions among some on the right, have such disregard for studies of the impact of global warming. Because climate change will not have a major impact on our economy for many decades, if not centuries, it makes no sense to try to figure out its impact on financial stability.  Most of the instability in our financial system comes from two factors, government-created moral hazard (FDIC etc.), and unstable monetary policy (i.e. unstable NGDP.)  All other factors, including climate change, are relatively unimportant for financial stability.  Furthermore, no one really knows how climate change would affect financial stability. I suspect that people who worry about climate change are using it as an excuse to inject the Fed into a policy area that should be the responsibility of Congress. PS.  While I’m skeptical of Raskin’s views on the Fed’s role in climate change, this particular post addresses the views of Richard Berner, as reported in the media. PPS.  In the past, I’ve advocated separate boards for monetary policy and banking.  I still hold that view, indeed now more than ever.  All Federal Reserve Board members should be outstanding experts on monetary policy.  Unfortunately, neither political party in America looks at things that way. (0 COMMENTS)

I promised last week to post some further highlights and thoughts on co-blogger Bryan Caplan’s recent 2.5 hour session with Agnes Callard at the University of Chicago. Here they are: About 42:00 to 46:00: Bryan wisely suggests that students who have interests talk to the most interesting faculty at the college they attend and makes the point that even at low-level schools there are interesting faculty just dying to share what they know. He tells a great story about Soviet historian Richard Pipes. I’ve already told mine about an early interaction with the great economist Arnold Harberger. Around 47:30: Bryan asks the students how many of them had a teacher before college who motivated them. We don’t see their hands but Bryan’s reaction suggests that many did. I couldn’t think of a single teacher, from Grade 1 to Grade 12, who motivated me about the material taught. The closest I came was Mr. Brian Parker, who noticed that it was April 1967 and I hadn’t even applied to college even though I was planning to attend in the fall. He hauled me into his office and we sat down and together we filled out the application forms to the University of Winnipeg and the University of Manitoba. I was accepted, with some of the remaining scholarship money, to both. Somewhere later, I can’t remember where, when Bryan was talking about the strong pressure to get a degree even when one isn’t needed for a person to do the work well, I thought of a true story and I wonder how it fits his signaling model. The daughter of a friend of mine finished high school but didn’t go to college. Instead she joined the Navy for 4 years and came out of it as a pretty self-confident woman. She worked her way up in a firm and they said a number of times that her work was very good. But she hit a glass ceiling. No, not the female one, but the “absence of a degree” one. They told her that if she wanted to be promoted further, she would have to get a bachelor’s degree and that they would give her time off so that she could attend college part-time. How does that fit Bryan’s signaling model? She sent a strong signal by lasting 4 years in the U.S. Navy. Once the firm had that signal and even admitted that she could do the next higher job, why put her and them at great cost so that she could get the job instead of simply promoting her? Were they simply on automatic pilot? Maybe, but I wonder. 1:09:00: No caste system and no underclass in Germany or Switzerland. And not a big prison population of young males. And the reasons why. I found this one of the most exciting and informative parts of the whole Interview. 1:22:00 to 1:24:00: Agnes Callard mistakenly says that people are “deprived” of the best things and Bryan corrects her: they aren’t deprived; they just don’t choose those things. Notice how Agnes still returns to the “deprived” language. 1:25:00: The impressive things people did in their teens 50 years ago. Why? They had time. They weren’t all going off to college. I remember thinking something similar when I used to read the local newspaper regularly 15 to 20 years ago. I noticed the amazing story about a 12-year-old girl flying an airplane from coast to coast, and similar stories. One day when I was reading such a story, the reason hit me like a ton of bricks. All these stories happened over the summer, when the kids were free to, pun intended, spread their wings. 1:50:00: Back to Bryan’s point just above. Read bios of people from 50 years ago and see the amazing things they did while young. When I was 16 and about to start college, I read Sammy Davis, Jr.’s autobiography, Yes I Can. I found it very inspiring. Also, he started working at age 2.5. I’m not recommending that, but it did have huge upsides: he learned the world of work and built some serious dancing skills at an early age. In my education chapter in The Joy of Freedom: An Economist’s Odyssey, I talked about a question on Sammy Davis’s child labor that I asked a bunch of education scholars at a Hoover Institution conference in the mid-1990s. Here’s the question I posed: One of my heroes when I was a teenager was Sammy Davis, Jr. In his autobiography, Yes I Can, he tells of going on the road with his father and uncle as a performer starting at age two-and-a-half. Sammy Davis, Jr. never went to school. But in every state today, governments require attendance at school. They enforce that requirement by threatening noncomplying parents with prison sentences. My question for each of you is, if you were in charge back then, would you have been willing to send Mr. and Mrs. Davis to prison? Three of them–Paul Petersen, Herb Wahlberg, and Williamson Evers–said they would not have been willing to send Sammy Davis, Jr.’s parents to prison. The other eight–John Chubb, Chester Finn, Jr., Eric Hanushek, E.D. Hirsch, Paul Hill, Caroline Hoxby, Terry Moe, and Dianne Ravitch–said that they would have sent his parents to prison. One of the eight, Dianne Ravitch, said, “For every Sammy Davis, Jr., there would be one thousand kids whose parents didn’t care.” The purpose of compulsory attendance, she implied, was to keep the parents in line. 1:51:00: Bryan’s tips sound like my tips to undergrads that I often give at the end of talks to undergrads: don’t automatically go to graduate school, law school, or an MBA. Many of your professors will try to lead you there, especially graduate school, but part of the reason is their own love for scholarship and the other part is that most of them don’t know much else about the world of work. 1:52:00: Low-skill jobs are NOT disappearing. 2:05:50: Bryan actually considered working at Target during lockdown. I get that. 2:10:00: When you’re reading a book or article, highlighting doesn’t work. I remember seeing a student from my class when I was over in the library just before class started. I went over to talk to him and saw that he was doing the reading for the class. I saw that he was highlighting. I had already graded enough of his work to see that he was not a strong student. So I thought I would try to build his morale by asking him a question in class, just 15 minutes later, the answer to which I had just seen him highlight. He had no clue. That was my ah-hah moment. (1 COMMENTS)

I get the impression that some people read works of economics, political science, sociology, philosophy, and political theory largely through the lens of who is on their “team.” There are some people you read because they’re on your side and you want to better understand the case for your own views. There are others who are your opponents and you read them as a sort of opposition research. You read them with the goal of fighting them or refuting them. This seems like a generally counterproductive way to engage with the world. Instead, I think it’s often best to read works with an eye towards the following: What analytical or methodological tools does this give me for understanding the world & learning more in the future? One reason that this question matters is that even if an author doesn’t reach the right conclusions, they may offer you useful tools for thinking about the world. Suppose you ultimately disagree with Bryan Caplan’s conclusions in The Case Against Education. Even if you’re unconvinced that the social costs of colleges and universities outweigh the benefits, reading the book will give you a clearer understanding of concepts like signaling and human capital. Those economic concepts have many applications, so learning about them is useful even if you’re not ultimately convinced by Caplan’s argument. And those concepts aren’t the only analytical tools you’ll learn by carefully reading Caplan. He also examines a body of evidence to try to evaluate what proportion of the increased wages associated with having a college degree results from signaling and what proportion results from human capital. Even if you are unconvinced by his analysis, reading his argument may offer you helpful insights about how to think through messy empirical evidence and adjudicate between competing theoretical explanations of observed reality. What description of the world does this offer me, and is this description true? That said, methodological and analytical insights aren’t the only things you are looking for when you read. Books and articles make claims about the world. They describe the world around you. The description they offer could be true, or it could be false. There are several ways to evaluate whether claims are true. One is how plausible they sound given the rest of your knowledge. But if that’s your only criteria, you’ll likely be quite resistant to changing your mind. So you should ask other questions as well. Are the arguments that are made in the text logically valid? Once you’ve determined that, you can ask whether the arguments are based on true premises. If the premises are true and the arguments are logically valid, then the arguments are sound. Often, however, a text may not give you a definitive logical argument. Instead, they may present a body of evidence. It’s worthwhile to consider the strength of that evidence. How credible are the sources the author cites? What methods do they use to gather and evaluate any empirical evidence they examine? These types of questions can help you figure out whether what you are reading is true. Does this offer compelling reasons to change my mind on some important issue? Sometimes our beliefs can feel like cherished friends. They’ve helped us interpret the world. They’ve guided us and shaped our actions. It can be hard to part with a belief we’ve had for a while. But none of us are infallible. We’re all wrong about at least some things. But we don’t know what we’re wrong about. So it’s worth asking whether what we’re reading should motivate us to change our mind. Does this offer compelling reasons for me to act differently or reconceive what is normatively desirable? Sometimes, this might happen because of a specific moral argument that the work we’re reading makes. For example, reading Michael Huemer’s Dialogues on Ethical Vegetarianism might convince you to stop eating meat, eggs, and dairy. But a book might also convince you to change your actions or your normative views by helping you learn something new about how the world works. For example, reading about the economics of housing may convince you that land-use regulations increase housing prices, reduce economic mobility, and substantially reduce GDP. This is a description of the world. It need not imply any normative judgement. But learning these facts may convince you that zoning laws are undesirable or that YIMBY activism is desirable. These aren’t the only questions to ask, but they seem like questions that are more aimed towards tracking truth than asking, “Is this author on my team?”  If we simply read to confirm our priors or do opposition research on our opponents, we miss opportunities to learn.   Nathan P. Goodman is a Postdoctoral Fellow in the Department of Economics at New York University. His research interests include defense and peace economics, self-governance, public choice, institutional analysis, and Austrian economics. (0 COMMENTS)

Continuing from earlier this week.  Military rivalry combined with economic cooperation is hard – but not impossible – to reconcile with “grand strategy.” Of course, in neither case were those who advocated for economic ties with the Soviet Union or China, or their intellectual opponents, devoid of rational arguments. Indeed, the similarities between the two cases are striking, with many in the United States calling for a civilizing mission toward the communist rival. Yet I show in this chapter that this makes little sense as motivation for American policy. In the case of the Soviet Union, the view that trade with that nation was good was not shared by those at the top of the government; they simply failed to prevent it from happening. When faced with the rise of China, American leaders did emphasize that worldview, and business was actively encouraged to engage in trade. But if you look more deeply, the attempted reconciliations just reveal total incoherence: Yet this theory of the world, that engagement with potential rivals is better than isolation, has not been applied to other countries. If trade and economic openness would make China into a capitalist democracy, why could US engagement not do the same in the post- Cold War era for North Korea, Iraq, and Iran? Incoherence, again: The public choice perspective presents one possible solution. In this framework, there is no need for different components of American foreign policy to be tuned toward achieving the same goals. Domestic interest groups have a stake in trade liberalization, particularly businesses seeking out financial profit. They do not have to compete for influence with the groups that have a more direct role in the outcome of issues such as those surrounding American military posture. The national security bureaucracy and government contractors want money funneled to them. In theory, a foreign rival of the rising power might seek to lobby the American government to prevent the United States from trading with it, but the rising power itself will be just as able to lobby, and its stake in the outcome of the policy decision should be greater than those of its rivals, who would at most be trying to head off a potential threat. Once that country rises, however, one of two things happens. First, geopolitical events may force a temporary grand strategy on the United States, and it either allies with the rising power or treats it as a rival. If this does not happen and things proceed as normal, then concentrated interests have an incentive to engage in threat inflation. They should recommend and advocate dealing with the threat they have emphasized in ways that benefit themselves: doubling down on military alliances and larger military budgets rather than trying to, for example, undo the economic gains that the rival has made. Thus, a schizophrenic policy develops in which the United States allows rivals to rise economically while seeking to prevent an increase of diplomatic power and military capabilities proportional to their new economic status. While such policies are incoherent from the perspective of a grand strategy pursued by a unitary actor, they make sense from the public choice perspective. As will be seen, the cases of the Soviet Union and China both support the public choice rather than grand strategy framework. More: [T]he idea that trade leads to liberalization was applied by American leaders in a way that was extremely selective. With the end of the Cold War, the United States faced a series of challenges from “rogue regimes” who stood opposed to American interests by oppressing their people, threatening their neighbors, and developing weapons of mass destruction. In each major case – for example, Cuba, Iran, Iraq, Libya, and North Korea – few top officials ever had the conception that the best way to change behavior was to delink these issues from that of economic engagement, and hope that greater wealth would automatically cause target countries to become democratic, peaceful states. In fact, the logic of sanctions makes the exact opposite assumption. When the rival country in question is not China, sanctions are said to make it more likely that the problematic regime will be replaced by leaders more amenable to American interests and values ( Solingen 2012 ; Niblock 2002 ). Whatever the plausibility of the theory of how China’s greater wealth would influence its internal politics, the fact that the idea was applied so selectively casts doubt on the importance of ideology as a causal factor. American leaders have simultaneously been able to believe both that sanctions and economically harming a regime would lead to democratization, and the same for economic growth, depending on the nation in question. This shows how ideological justifications can be post hoc rationalizations for what leaders want to do anyway. (emphasis original)   (0 COMMENTS)

with Lynne Kiesling   One of the few things that has made this particular bleak midwinter bearable has been the sudden rise of the viral game Wordle. For those who have not yet been initiated, Wordle offers a single puzzle each day. The goal is to guess a 5 letter word. You have only 6 guesses to get it right. After each guess, color coded squares indicate which letters are in the secret word and in the right place, which are in the word but in the wrong place, and which are not in the word at all. It’s a charming little game, made all the more fun by the restraint it imposes (Only six guesses! Only one puzzle per day!) and by the ease with which one’s success–but not the solution–can be shared on social media. The game has spawned imitators of all sorts: an equation based version called “Nerdle,” a version called “Absurdle” where the secret word changes as you play the game, and a four-letter word version called “Sweardle.” Others are certainly being created as this post is being written. You can even play Wordle in French, si vous voulez. On January 31st, The New York Times announced that it had purchased Wordle for a price in the low 7 figures.  Naturally, we’re pleased for the game’s creator. But the flurry of concern this has raised among Wordle fans reminds us of nothing so much as the 18th and 19th century debates over enclosure in England.  Enclosure is the practice of privatizing land that has been held in common by a community. These commons and customary rights dated from the time when farming best practices involved rotating crops among fields and leaving one field unplanted to regenerate. That field was available for grazing livestock. In the 17th century, enclosures were motivated by improvements in agricultural technologies and practices that could increase yields and output, although the magnitude of that actual effect is still a matter of debate among economic historians. These “first round” enclosures were typically governed in communities by using a unanimity rule, which almost certainly meant that those being dispossessed of customary grazing rights had to be compensated for the loss. The most fertile fields were the first to be enclosed, and by the 18th century many of the most mutually-beneficial enclosures were complete. In contrast, 18th century enclosures, backed by new Parliamentary legislation passed by landowner MPs, required only a community majority rule rather than unanimity.  Land that was formerly open for small tenant farmers and others to graze their animals was closed off from that use and reserved for private use by larger landowners with larger flocks and more political power. As enclosure became an increasingly common practice and was backed by this increasingly heavy handed use of political clout, protests grew and even became violent. Read more on the history of enclosure from Deirdre McCloskey here, here, here, and here. See also the entry on Tragedy of the Commons in the Concise Encyclopedia of Economics. Obviously, the owner and creator of Wordle can sell it to whomever he likes. He made it. It’s his. Private property for the win. We’re not objecting to the sale. But we are noticing that, because Wordle has been free to play and easy to share, and because The New York Times requires a subscription for its most popular games and puzzles, people are very worried that an enjoyable game that has been treated as a common pool resource is about to be enclosed. As of this writing, the NYT has said that “At the time it moves to The New York Times, Wordle will be free to play for new and existing players, and no changes will be made to its gameplay.” But no assurances have been given about Wordle remaining free to play in the future. If the NYT is going to leave Wordle free to play, why would they pay a seven-figure sum to acquire it? Are they planning to enclose the commons and remove the perceived customary rights of incumbent Wordle lovers? We’re fascinated by how quickly people become invested in something they consider a common pool resource. When we talk about the kerfuffle over enclosure in the 18th and 19th centuries, we tend to focus on how enclosure overturned centuries worth of assumptions about the ways that land holding, animal husbandry, and English culture worked. Wordle has only been around for 6 months or so. We’re also interested to see that concerns over enclosure don’t just arise over vital resources for sustaining human and animal life. They can crop up over a word game.  We haven’t seen any Wordle riots yet. And we’re certainly hoping that we don’t. But for students of economics, or for teachers of economic history, Wordle makes an interesting object of study, as well as a good way to kill time on a coffee break. (0 COMMENTS)

During my recent visit to Austin, I interviewed Richard Hanania for the Salem Center’s podcast.  Very wide-ranging, hence the title: “The Politics of Everything.”  Enjoy! (0 COMMENTS)

In a recent tweet, George Selgin pushes back against the view that the Fed creates asset price bubbles that persist for more than a decade.  But then why do these theories keep finding support? The basic problem in economics, especially in macroeconomics, is that people tend to believe what seems plausible, not the view supported by scientific theory and evidence. The field is so complex that many interpretations are possible. This is why macroeconomics is cyclical, much like many of the arts, or like the hemline of women’s dresses.  Theories go in and out of fashion for one simple reason—their plausibility varies with the state of current events. There are three true facts that give the hypothesis of Fed created asset price bubbles a superficial plausibility: 1. Over the very short run, the Fed controls short-term interest rates via monetary policy. 2.  When the Fed cuts its interest rate target, asset prices often rise immediately on the news. 3.  Market interest rates have been trending lower for more than 40 years, and asset prices have risen sharply. An average person looking at those three true facts might be inclined to reason as follows: “The Fed has been reducing interest rates on and off for 40 years.  We know that asset prices rise when the Fed reduces interest rates.  Asset prices have rising sharply in recent years, far faster than the overall rate of inflation.  Hence asset price bubbles are being created by expansionary Fed policy.” Here’s why this view is a cognitive illusion: 1. Real interest rates have been trending lower for 40 years for reasons essentially unrelated to monetary policy.  The Fed has cut its target rate in response to falling equilibrium interest rates. It’s a follower, not a leader. If that were not the case, inflation would have been accelerating over the past 40 years. There is absolutely no mechanism by which money can “go into” asset markets but not goods and services markets.  Monetary policy is either inflationary, or it isn’t. [BTW, money doesn’t actually “go into” markets, it goes through them.  For instance, did lots of money “go into” the stock market on October 19, 1987, when stocks crashed by 22% on record volume?] 2. When the Fed cuts its target short-term interest rate by more than expected, long-term real interest rates sometimes rise.  But even in those cases, stock prices often rise sharply (for instance, on January 3, 2001.)  The mostly likely explanation is that both stock prices and long-term real interest rates rose on expectations that monetary easing would lead to higher economic growth. These facts lead to a situation where people are especially likely to see imaginary “bubbles” after long periods of a depressed economy—a cognitive illusion.  During these periods, news of monetary stimulus may boost asset prices for reasons essentially unrelated to lower interest rates—expectations of faster growth.  Interest rates become a mere epiphenomenon.  At the same time, “secular stagnation” leads to lower equilibrium real interest rates, which means future expected rents and dividends are discounted at a lower rate.  That makes the equilibrium level of house and stock prices unusually high relative to rents and dividends, looking to the average person like a “bubble”. Many years ago, I predicted that people in the 21st century would be obsessed with “bubbles”, a topic hardly even mentioned by economists during the first 30 years of my life (1955-85).  It’s an endless battle, because most people will always go with the view that is intuitively plausible. HT:  Patrick Horan (0 COMMENTS)

  The interview is here. It’s about 5 minutes. I think John looks good with a beard. (0 COMMENTS)