I’ve been watching and enjoying the Agnes Callard interview of Bryan Caplan. I don’t think I had watched a 2.5-hour interview in the last two years, but this was well worth it. I’ll do more posting on it, but I want to highlight one thing that caught my attention and made me think of my own contributions to people’s decisions. At about the 36:25 point, Bryan makes the point that he has created enormous wealth by persuading over 100 parents to have more kids. It got me thinking about my own life. I haven’t done anything as dramatic. It’s hard to measure my effect in the Reagan administration. The odds are reasonable that I lowered the probability of some megadollar spending bills by 1 in 10,000 and these mega dollars would have been annually. So I probably paid my lifetime income in an expected value sense. The closest I can come to saying I had an identifiable impact was on a local issue in 2003. In expected value terms, my activity would have paid over 1/4 of my whole lifetime income. I wrote about it here, here, and here. (In this one, by the way, I talk about how people came out of the woodwork to support me. I take that as evidence of Bryan’s point about social desirability bias. They weren’t outspoken in my favor, probably for obvious reasons: it seems so cruel to say no to a tax increase to pay for a government hospital. But they told me to my face that they liked what I was doing.) So how did Bryan’s point make me think of this? To win the fight against a tax increase of $25 million annually, we needed to get a 33.4 percent or higher vote against. The present value of that increase over, say, 6 years (Why 6? Because eventually, I thought, they would get a tax increase for something) was about $130 million. Let’s say that my activity increased the probability of defeat by 1 percentage point. Then my expected value was $1.3 million. QED. I anticipate that some commenters will argue that this saving in taxes is not a net saving. I disagree. As a result of the defeat, Natividad Hospital brought in consultants who proposed changes that were accepted and saving millions of dollars a year. As we said during the debate, in opposition to the claim of the pro-taxers, without the tax increase, Natividad would still exist 5 years later. It has now been 18 years and it still exists. (0 COMMENTS)

There’s a lot of discussion about how the computer chip shortage is causing problems for US manufacturers. But I rarely see any plausible explanations of why there is a chip shortage.Articles on the subject occasionally mention the fact that auto producers did not order enough chips. But why should a reduced supply of chips cause a shortage? In the standard supply and demand model, a reduction in supply does not cause a shortage; it causes higher prices. I am still able to buy apples at the grocery store when there’s an unusually small apple crop; it’s just that the price is higher than usual. Why doesn’t that apply to computer chips?There could be many reasons, but I suspect one factor is that chip manufacturers and/or wholesalers fear political retaliation if they raise chip prices to market clearing levels: (Bloomberg) — The Biden administration has concluded that a global semiconductor shortage will persist until at least the second half of this year, promising long-term strain on a range of U.S. businesses including automakers and the consumer electronics industry.U.S. officials plan to investigate claims of possible price gouging for chips used by auto and medical device manufacturers, Commerce Secretary Gina Raimondo said Tuesday. Of course formal price controls are very bad. But laws against price gouging are equally bad. Even cultural norms against price gouging are bad. Price gouging is necessary for markets to do their job when there is a steep fall in supply or a steep increase in demand.Foes of price gouging often assume that it’s a zero sum game. In fact, price gouging serves two important roles. First, it boosts quantity supplied. Supply is almost never completely inelastic over a period of several months or years. Second, it leads to the limited supply being allocated to those who place the highest value on the good. Why don’t farmers get accused of price gouging?  One theory I’ve heard is that the public (and hence politicians) tends to sympathize with producers that appear in children’s stories.  Hence politicians favor farmers, teachers, fireman, police, etc. (0 COMMENTS)

In the last few months, news concerning antitrust or competition policy has focused mostly on the change in ideological mood, so to say, in the US. Whatever influence Robert Bork and economists and jurists of the so-called Chicago School ever exerted on antitrust, it is gone. Now it is the time of so-called New Brandesians. People like new FTC chair Lina Khan, who think their mandate extends well beyond the traditional scope of antitrust policy. Recently, Khan said that “Congress wanted enforcers not just to act when you know, the third and fourth companies are merging or the first and second, but actually in the incipiency, when you said see trends towards concentration that those can also be important moments for enforcers to jump in”- a sort of competition Precogs, in a reference to the movie Minority Report. In this context, unexpected news arrives from Europe, where antitrust enforcement traditionally tends to focus more on competitors (and preserving the weaker ones) rather than on consumer welfare. As the Wall Street Journal reports, The EU’s General Court in Luxembourg on Wednesday struck down much of a 2009 finding by the regulator that Intel had abused its dominant position by issuing loyalty rebates and payments that restricted rival chip maker Advanced Micro Devices Inc. from competing. The court said that “analysis carried out by the commission is incomplete” and didn’t make it possible to establish a requisite legal standard for judging the competitive impact of rebates. Significantly, the court said it couldn’t identify the damages linked to Intel’s practices and so completely annulled the portion of the commission’s decision that related to the fine. A central question for the court was whether the commission had completed a sufficient economic analysis to show that Intel’s alleged behavior harmed competition. Although the commission carried out an economic analysis of the case before imposing its fine, that work wasn’t assessed by the General Court when it dismissed Intel’s initial appeal in 2014. Back in the day, I wrote a short piece on the Intel case, published by Economic Affairs, with Luca Mazzone, back then a brilliant youngster, now an economist with the IMF. I think the paper is still informative. The gist of it is that the microprocessor market worked pretty well, supplying consumers with lower prices and better performing goods. The trustbusters’ interest in it can be explained perhaps because of the under quest for “imperfections” in the market, regardless of its successes. Deirdre N. McCloskey analyzed the phenomenon beautifully here. (0 COMMENTS)

Last October, Agnes Callard interviewed me at the University of Chicago on The Case Against Education.  I genuinely think it was the best audience I ever had the privilege to address.  Enjoy! (0 COMMENTS)

At today’s press conference, a reporter asked Fed chair Powell this question: Do you want to go below 2%, so that on average you get a 2% inflation rate? Powell responded: So no, there’s nothing in our framework about having inflation run below 2%.  That we would do that.  That we would try to achieve that outcome.  So the answer is no. What?!?!?  On the face of it, Powell just repudiated the Fed’s new 2% flexible average inflation targeting (FAIT) regime. Then he contradicted himself: What we are trying to do is to keep inflation expectations well anchored at 2%.  That’s always the ultimate goal.  We get to that goal by having inflation average 2% over time.  And if inflation doesn’t average 2% over time, then it’s not clear why inflation expectations would be anchored at 2%. If the Fed is serious about targeting the average inflation rate, then periods of above average inflation must be offset by periods of lower than average inflation.  That’s simple math. You might argue that Powell simply misspoke.  But recent inflation projections from the Fed (assuming “appropriate monetary policy”) foresee inflation not falling below 2% at any time.  So I doubt that Powell misspoke.  In any case, his answer was incoherent, which cannot be helpful when trying to build Fed credibility. Another possibility is that the Fed never intended to adopt average inflation targeting, and actually intends to implement something like Ben Bernanke’s proposal for temporary price level targeting (TPLT).  That would justify the Fed’s plan to bring inflation back to 2%.  But if TPLT is the actual policy, and not FAIT, then I wish they had told us. Most of all, I am disappointed that reporters did not follow up on this issue and ask Powell to explain the contradiction.  Is the Fed committed to FAIT?  If so, doesn’t that require lower than 2% inflation on occasion to offset a period of very high inflation?  So why does he suggest that they would never do that?  And why no follow up questions? (1 COMMENTS)

Most vegans still drive.  Should they?  Driving almost inevitably leads to roadkill on a massive scale.  Not a pleasant way to go.  Via Vox: No one really knows how often animals are killed by cars in the US. But one thing’s clear: it happens a lot. There are about 253,000 reported animal-vehicle accidents per year (that is, accidents that are substantial enough to cause damage to the car). Last year, State Farm estimated that about 1.2 million deer were killed by cars in total.   When you factor in small animals, the number climbs dramatically. No researchers have done a thorough nationwide count, but very rough estimates are that around 365 million vertebrates are killed per year. Never mind the vastly larger number of insects painfully killed by cars, if insects can indeed feel pain. The obvious rebuttal is: “Switching to a vegan diet is easy.  Switching to a carless lifestyle is hard.”  But this is fallacious binary thinking.  Giving up cars entirely may be an enormous sacrifice, but cutting back on your driving by 20% is only a minor burden.  And in the long-run, you can easily cut back much more.  Move from the suburbs to a city, give up your car, and rely on walking, biking, and public transportation.  That should slash your roadkill impact by at least 90%.  And you’re living a lifestyle many strongly prefer to suburban living, so how bad can it be? My point is two-fold.  The first: Most vegans are too hypocritical to follow their own principles to their logical conclusion.  Given most self-identified vegans still eat meat, this is a rather obvious point, but as Herbert Spencer said, “[O]nly by varied iteration can alien conceptions be forced on reluctant minds.” The second: Even morally scrupulous vegans are unlikely to follow their own principles to their logical conclusions.  Which strongly suggests even they don’t find their principles all that convincing.  And as I’ve said before, if even the most admirable advocates of a view ultimately find it unconvincing, that’s probably because the view is wrong. Confession: I am always a little reluctant to point out additional onerous implications of moral views I deem unreasonable.  Part of me says, “Believers are already suffering enough for their mistakes.”  In the end, though, truth comes first.  If causing major animal suffering for the sake of minor personal goal is morally wrong, then we’re driving far too much.  And if you’re protest, “I can’t curtail my driving,” you’re just wrong. (0 COMMENTS)

I’ll soon be discussion leader of a Liberty Fund symposium on Liberty and Power. One of the readings is the correspondence between the famous Lord Action and the less-famous Bishop Mandell Creighton. It’s the first time I’ve read Creighton’s side of things and I’m impressed by his willingness to admit error. Acton takes on historian Creighton’s view of “great men.” In Acton’s letter of April 5, 1887 is the paragraph that contains a few famous sentences. I liked the whole paragraph. Here it is: But if we might discuss this point until we found that we nearly agreed, and if we do argue thoroughly about the impropriety of Carlylese denunciations, and Pharisaism in history, I cannot accept your canon that we are to judge Pope and King unlike other men, with a favourable presumption that they did no wrong. If there is any presumption it is the other way against holders of power, increasing as the power increases. Historic responsibility has to make up for the want of legal responsibility. Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it. That is the point at which the negation of Catholicism and the negation of Liberalism meet and keep high festival, and the end learns to justify the means. You would hang a man of no position, like Ravaillac; but if what one hears is true, then Elizabeth asked the gaoler to murder Mary, and William III ordered his Scots minister to extirpate a clan. Here are the greater names coupled with the greater crimes. You would spare these criminals, for some mysterious reason. I would hang them, higher than Haman, for reasons of quite obvious justice; still more, still higher, for the sake of historical science. I had never known before that this paragraph was in a letter, as opposed to an article. Creighton’s response went beyond civil. He actually admitted error. I particularly liked three passages. The first is Creighton’s opening paragraph: Your letter is an act of true friendliness, and I am very grateful to you for it, more grateful than I can say. It is a rare encouragement to have such a standard set up as you have put before me. Judged by it I have nothing to say except to submit: efficaci do manus scientiae. Before such an ideal I can only confess that I am shallow and frivolous, limited alike in my views and in my knowledge. You conceive of History as an Architectonic, for the writing of which a man needs the severest and largest training. And it is impossible not to agree with you: so it ought to be. Wow! The latin phrase above translates to “I give an effective hand of knowledge.” I don’t quite get it. The second was Creighton’s discussion of Pope Sixtus IV and the Spanish Inquisition: My purpose was not to justify him, but to put him in rank with the rest. I think, however, that I was wrong, and that you are right: his responsibility was graver than I have admitted. I think he knew better. The third is Creighton’s closing paragraph: Will you not someday write an article in the Historical Review on the Ethics of History? I have no objection to find my place among the shocking examples. Believe me that I am genuinely grateful to you. Wow again. The picture above is of Creighton. (0 COMMENTS)

One of the U.S. government’s most popular recent programs is the Paycheck Protection Program, or PPP. Congress authorized $800 billion for PPP to provide loans to companies to help pay wages, rent, interest on mortgages, and utilities during the COVID pandemic. If a firm kept enough workers on payroll, then its loan would eventually be forgiven. Yet as I predicted, the program has been a mess in both its implementation and its results. As is always the case, a certain number of ineligible companies— many of them publicly traded — got large loans approved before many other firms could even get access to a bank in order to apply. Meanwhile, a fair number of self-employed workers — who constitute 81% of all small businesses — could not get a PPP loan because, in the eyes of the federal government, they don’t exist as businesses. Also unsurprisingly, PPP payments mostly benefited those least in need. For example, the study titled “Did The Paycheck Protection Program Hit the Target?” found that the funds didn’t flow to where the economic shock was greatest, as measured by declines in hours worked or by the number of business closures. Another piece of research – this one by MIT’s Lawrence Schmidt and Northwestern University’s Dimitris Papanikolaou – found that the professional and technical services sector received the largest number of PPP loans- around $65 billion in total. This sector also has the highest fraction of workers who are remote and, hence, least exposed to pandemic-related disruptions. These researchers also reported that nonremote, lower-paid workers were 15 percentage points more likely to be unemployed compared with workers in sectors where working remotely is an option. A recent paper by economist David Autor and nine co-authors – a paper titled “The $800 Billion Paycheck Protection Program: Where Did The Money Go And Why Did It Go There?” – presents yet further and fresh evidence that PPP is problematic. Here are the main findings (highlights are mine): “PPP had measurable impacts. It meaningfully blunted pandemic job losses, preserving somewhere between 1.98 and 3.0 million job-years of employment during and after the pandemic at a substantial cost of $69K to $258K per job-year saved. PPP also reduced the rate of temporary closures among small firms, though it is less clear whether it reduced permanent closures. The majority of PPP loan dollars issued in 2020—66 to 77 percent—did not go to paychecks, however, but instead accrued to business owners and shareholders. And because business ownership and share-holding are concentrated among high-income households, the incidence of the program across the household income distribution was highly regressive. We estimate that about three-quarters of PPP benefits accrued to the top quintile of household income. By comparison, the incidence of federal pandemic unemployment insurance and household stimulus payments was far more equally distributed.”   That’s a sample of the academic work. Reporters pretty much came to the same conclusion once they looked at the program’s beneficiaries. For instance, here was the PPP news headline equivalent of “water still wet”: “Small Business Loans Helped the Well-Heeled and Connected, Too.” Now, because PPP was intentionally untargeted, none of this should surprise anyone. The only restriction in the legislation was that the benefits shouldn’t flow to firms with more than 500 employees. But even this rule was later relaxed for some sectors. However, benefits going to big firms and higher income individuals, with plenty of access to capital in the first place, as well and going to less affected areas, are common findings even in the case of more targeted business handouts. Bailouts notoriously benefit shareholders and creditors rather than workers. Also, the high cost of a “job saved or created” is a common feature of most business handouts. Adam Millsap makes that same point about state and local economic development programs for instance. He writes: “A recent paper from economist Timothy Bartik notes that the cost per job created by state and local economic development programs often exceeds $150,000. Other research finds that in addition to being expensive, economic development programs typically fail to generate widespread economic growth.”   But I remember finding similar high costs when looking at the 1705 green energy program and a few others like it. Cost is no object when you are spending other people’s money! And, of course, the bigger companies are the biggest beneficiaries even though most of them have no problem accessing capital. A few examples: 65 percent of the ExIm Bank’s activities benefit 10 major companies, 70 percent of sugar subsidies benefit 3 large companies, most farm subsidies benefit large mega farms, 90 percent of the 1705 green energy loan program went to energy giants, and so on and so forth. The fact that PPP was poorly thought through, recklessly implemented and administered, and ended up benefiting those who are least likely to need it is, for politicians and bureaucrats, a feature, not a bug, and has little to do with the fact that the program was rushed through at the start of the pandemic. This is why I would get rid of all business handouts during good times. During bad times, especially when the government shutdown the economy, I would design a government rescue plan that targets mostly individuals, not businesses. Getting the incentives right is also important. Arnold Kling and I wrote a piece explaining what such a plan might could have look like. And yet, who wants to bet that next time around, Congress will again rush to design a rescue plan that sends billions of dollars to unneedy businesses and bailout shareholders? I am. (0 COMMENTS)

Bryan Caplan has a new post where he suggests that we’d be better off if firms raised prices enough to eliminate shortages. He also suggests that he does not want to raise aggregate demand. I believe his views are sensible, but I don’t entirely agree with his reasoning. Bryan suggests an analogy with price controls in a single market, and that analogy doesn’t hold in a macro context.Here’s a graph showing the impact of price controls in a micro context: When price controls are removed, production and consumption rise from 15,000 to 17,000, while quantity demanded falls from 19,000 to 17,000.  It might seem odd that consumption should rise while quantity demanded falls, but there were 4,000 units demanded at the controlled price that were simply not available to be purchased.  Phantom demand.  Therefore we move from point Eo to E1 when controls are removed, and consumption rises. Now consider what happens when firms raise prices to eliminate shortages in a macro context: In this case, the economy moves from point b (where there is excess demand) to point c.  Unlike in the microeconomic case, consumption falls after the price increase.  At point c there are no longer any shortages, but people are buying fewer goods.  This is because we’ve followed Bryan’s suggestion of avoiding a further increase in AD when prices rise.  (He’s silent on whether to reduce AD, but he clearly doesn’t want an increase.)  In contrast, in the microeconomic case the removal of price controls causes nominal expenditure in the affected market to rise.  Macro is not like micro—beware of economists using analogies. Here’s Bryan: The reason why we need more inflation is simple: ubiquitous shortages.  This problem isn’t merely on the news; at this point, something I want to buy is unavailable practically every day.  Pre-Covid, that would have happened roughly one a month.  So what?  Well, as any standard econ text tells you, shortages exist because at the current market price, the quantity demanded exceeds the quantity supplied.  To solve these shortages, we need market prices to rise.  This discourages consumption and encourages production until everything you want is conveniently available.  Like in the good old days before Covid. Actually, removing price controls encourages consumption, by making goods more available.  (It reduces quantity demanded, but increases quantity purchased.)  I suspect that Bryan believes that if retailers raised prices to eliminate these annoying shortages, he’d end up buying more goods.  And that might be true, especially if Bryan is much richer than the average American.  But if prices rise while aggregate demand (NGDP) remains unchanged, then output will necessarily fall.  The average American will buy fewer goods.  That still might be a good thing, as shortages cause a loss of utility in all sorts of subtle ways not picked up in the government’s real GDP data.  Nonetheless, the microeconomic analogy that Bryan uses doesn’t really apply to the macro case. PS.  The AS/AD graph I used here is not optimal for making my point.  A better graph would have shown no initial change in either AD and SRAS, with LRAS shifting left during Covid.  Then firms raise prices to move the economy up and to the left to the new (reduced) LRAS, eliminating shortages.  SRAS moves left.  The big problem today is unusually low LRAS, not unusually high AD.  But the basic point is the same; holding AD constant, eliminating shortages with higher prices means reducing output.  That’s very different from the effect of removing a price ceiling in a single market. (1 COMMENTS)

Inflation just hit 7%.  But in an important sense, that’s still too low.  Prices need to rise more – and the sooner, the better. I know that sounds crazy, but hear me out.  I’m not saying that we need more monetary or fiscal stimulus.  Quite the opposite.  Aggregate Demand policy has been absurdly expansionary for over a year. The reason why we need more inflation is simple: ubiquitous shortages.  This problem isn’t merely on the news; at this point, something I want to buy is unavailable practically every day.  Pre-Covid, that would have happened roughly one a month.  So what?  Well, as any standard econ text tells you, shortages exist because at the current market price, the quantity demanded exceeds the quantity supplied.  To solve these shortages, we need market prices to rise.  This discourages consumption and encourages production until everything you want is conveniently available.  Like in the good old days before Covid. In the real world, admittedly, prices are never perfectly calibrated.  Some prices are too low, creating shortages.  Other prices are too high, creating surpluses.  Yet in the current environment, prices low enough to create shortages are many times more common than prices high enough to create surpluses.  Nowadays, we need lots of prices to rise, and very few to fall.  And if this happens, inflation – a general rise in prices – is precisely what we will get.  And given our predicament, that’s precisely what we should hope for. If you’re still puzzled that I’m actively wishing for more inflation, let me remind you of an old analogy.  When inflation hits, populists routinely call for general price controls.  Economists’ standard response is to say, “That’s like breaking a thermometer because it says you have a fever.”  My claim is that continuing shortages are a sign that our thermometer has been responding sluggishly to unprecedented Aggregate Demand.  7% inflation has been insufficient to get the economy back on track.  We probably needed more like 10% or 12% for a while. It would have been better if fiscal and monetary authorities hadn’t gotten us into this mess.  Yet given where we are, the best way out is for prices to spike until the shelves re-fill. P.S. If you want to blame “supply-chain issues” instead of insufficient inflation, you’re confused.  Higher prices, as usual, are the remedy for supply problems.  When you’re not producing enough of X, higher prices cut consumption and spur production.  And if price rises enough, everything you want will suddenly be available… if you’re willing to pay the new market price. (1 COMMENTS)