Rumors of war (think Ukraine) in a complicated world suggest that we look at a simple model of war and peace. Consider a world with two countries, Borduria and Syldavia. State propagandists as well as diplomats often say things like “Borduria has asked Syldavia to respond in writing to its demands.” In reality, it is the government of Borduria that asked something to the government of Syldavia. The government of each country is made of an assemblage of politicians, bureaucrats, and institutions; the latter may include voters or not, or include them to a variable extent. Economist Jack Hirshleifer’s article “The Dark Side of the Force” reviewed individual incentives in the use of violence in general. Here we are just doing the same for the individual as a participant in a collective decision about the use of violence. In each of our two countries, the incentives of the individuals manning the government and its institutions depend on each one’s self-interest and, crucially, on one’s influence in the process governmental decision-making. The “head of state” or prime minister has much influence and therefore strong incentives to push for war or peace depending on whether one or the other is in his own best interest. The individual voter’s influence is infinitesimal and generates little incentive for him to use resources to defend his self-interest through smart voting or just voting. Let’s define “the ruler” as the group of individuals who have decisive influence on the government’s decision. (The King of Prussia and his generals appear on the featured image of this post.) Borduria and Syldavia can be very different countries if power is distributed differently within them and if the incentives of individuals manning governing institutions consequently differ. In a country where widespread voters’ dissatisfaction—dissatisfaction strong enough to bring voters to follow the crowd at voting polls—has a chance to throw the rascals out, the ruler has comparatively more incentives to avoid war. Hence, the frequent observation that democratic governments go to war less often. Similarly and probably more importantly, the more a government is constrained on the use of its “human resources” (subjects or citizens), the lower the incentives of the ruler to wage war, ceteris paribus. Let’s assume that in both Borduria and Syldavia, the only constraint on government action is its need for popular support, either through formal elections or less formal means. At least in contemporary times, where a large number of people (it is hoped) understand that blowing up capital (factories, bridges, etc.) is not the road to prosperity, the ruler of Borduria, who wants to keep or increase his power, will normally want peace in order that his subjects be prosperous and happy, that is, content and quiet. It is the same in Syldavia. If his subjects are restless and currently threaten his power, the ruler of Borduria will have more incentives for war, ceteris paribus. War will distract and occupy the subjects and allow the ruler to increase his control over them, not counting his possible glory if he wins the war. War will also generate more identification of his subjects to “Borduria” and its flag: it’s “us Bordurians against them Syldavians.” Whether the incentives of the Bordurian ruler will go more toward war or peace will depend on where his personal expected net gain is the largest, or where the minimization of his expected net cost is the smallest. Again, the same incentives play in Syldavia. In this simple model, war happens when the ruler (as defined) calculates that it is in his best (probabilistic) interest give his social, political, and economic constraints. He may be pushed into war by mobbish nationalism but, most of the time, he or his predecessor is the one who has inflamed it. Assume that the government of Borduria declares war. What will be the position of a Bordurian classical liberal or libertarian in Borduria is quite obvious: he will oppose a war that responds to the ruler’s self-interest. It is not as obvious what will or should be the position of a Syldavian classical liberal or libertarian. There are many ways to bring this simple model closer to reality. Other countries than Borduria and Syldavia exist in the world, including “allied countries.” If the Bordurian government starts military operations, the Syldavian government may, as a substitute for war, impose economic sanctions on its own subjects in their dealings with Bordurian entities. Or perhaps the Bordurian or the Syldavian ruler is a Madisonian angel, morally detached from his personal self-interest? Another complication is whether we may consider a “country” as a protection club against foreign tyrants, as James Buchanan’s constitutional political economy and other classical-liberal theories would suggest (in certain circumstances). But which country today fits this model except (perhaps) for the strange case of Switzerland? (0 COMMENTS)

He also blamed PG&E for its “deep-rooted obsession for keeping power flowing,” which he said could be blamed for allowing its equipment to ignite wildfires despite forecasts for hazardous weather and, starting in 2019, a power shutoff strategy. This is from Julie Johnson, “Judge fires parting shots at PG&E as the utility’s probation comes to end,” San Francisco Chronicle, January 19, 2022. “He” in the above is U.S. District Judge William Alsup, pictured above. PG&E is Pacific Gas and Electric, which provides much of the natural gas and electricity between central California, where I live, and northern California. Alsup’s upset is about PG&E being obsessed with providing something that it has promised to provide its customers, something that we customers really value. I get that Alsup is upset that PG&E hasn’t cleared brush and trees as much as he would like. I don’t know if he knows that with all the state and local regulations, that’s often easier said than done. Years ago, when a branch on our tree was rubbing against our power line, I called PG&E and asked them to come out. The guy was very nice and cut a couple of small branches, telling me all the while that he might be breaking the law, and encouraging me to pay a couple of hundred dollars to the Pacific Grove city government for permission to cut the branches further myself. That was about 15 years ago. Maybe the regulations have been loosened since then, but I doubt it. Beyond that issue, though, I found Alsup’s comment stunning. I don’t know about him. Maybe he has solar panels that provide enough electricity for all his house uses. I don’t. And solar is not a sure thing. So I appreciate PG&E’s obsession “for keeping power flowing” just as I appreciate my local Safeway’s and Lucky’s obsession with stocking their shelves.     (0 COMMENTS)

Back in 2009-10, I did a number of posts criticizing the theory that rising house prices in the early 2000s represented a “bubble”.  In one post, I pointed to an article in The Economist that criticized Eugene Fama, and bragged that they had presciently foreseen the housing bubble.  In fact, the specific predictions they cited (from an 2003 advertisement for The Economist, since deleted) turned out to be almost entirely wrong, indeed wildly off base. The Economist did not take kindly to my post: Mr Sumner disagrees. He seems to think it’s funny that The Economists pent much of the last decade warning that, globally, home prices were rising in a troubling manner. Contrarianism is fun and all, but this strikes me as an odd way to process the experiences that led us to this point. I responded:  I would note that Free Exchange seemed to enjoy making fun of Fama’s views. Now The Economist has seen the light: Perhaps it is just a matter of time before the house of cards collapses. But as a recent paper by Gabriel Chodorow-Reich of Harvard University and colleagues explains, what might appear to be a housing bubble may in fact be the product of fundamental economic shifts. The paper shows that the monumental house-price increases in America in the early to mid-2000s were largely a consequence of factors such as urban revitalisation, growing preferences for city living and rising wage premia for educated workers in cities. By 2019 American real house prices had pretty much regained their pre-financial-crisis peak, further evidence that the mania of the mid-2000s was perhaps not quite so mad after all. Fundamental forces may once again explain why house prices today are so high—and why they may endure. Three of them stand out: robust household balance-sheets; people’s greater willingness to spend more on their living arrangements; and the severity of supply constraints. I’d add permanently low real interest rates. I would like to take credit here, but I was just shooting from the hip when I questioned the housing bubble view that was so popular after 2006.  Credit should go to Kevin Erdmann, who produced a mountain of evidence against the bubble hypothesis in two very impressive books on housing.  His view, which was once highly contrarian, has now been completely vindicated.  Indeed, I don’t see how any fair-minded person reading his books could still believe in the housing bubble theory.  Unfortunately, he’ll probably be ignored.  The media tends to focus on academic research from top schools like Harvard, not unaccredited individuals working on their own.  Better to be famous than to be right. (0 COMMENTS)

Agricultural Productivity and Standards of Living There was a time not too long ago when most people understood that comparative advantage, trade, the division of labor and specialization delivered greater agricultural productivity and standards of living. Perhaps because they or members of their extended family weren’t all that removed from quasi-subsistence farming, they saw the virtues of specializing in the production of “cash crops” for which there were lucrative and often distant urban markets. By participating in a larger division of labor in which they concentrated on what their land was best suited for, commercial farmers achieved a much higher standard of living for themselves and others. A well-documented historical case in the transition from subsistence to exchange is ancient Athens and its back country of Attica. Although a large plain in the context of Greece’s overall topography, like much of the Greek mainland Attica has relatively poor soils and highly variable annual rainfalls. Before the explosive growth of Athens over two and a half millennia ago, local farmers grew mostly a variety of grains and some vegetables with the help of hand tools, although in the better areas larger fields were worked with ass or ox-drawn ploughs. Low and erratic precipitations resulted in a rather high probability of crop failures, perhaps as much as one year out of four for wheat and one out of twenty for barley. Despite these odds, grain cultivation was typically the most sensible option because of its nutritional value and ease of production and storage. Fortunately, Athenians had ready access to sea travel. As they progressively integrated into regional trading networks, they finished clearing up marginal lands in their backcountry to obtain trees for firewood and to build and manufacture houses, ships and other implements and items of commerce. Meanwhile, in various locations around the Mediterranean and the Black Sea, Greek colonists and local populations developed large-scale productions of cereal grains (especially the more lucrative soft bread wheat) and other foodstuffs for the specific purpose of supplying Athens and other urban markets. In time, non-local producers supplied at least half of Athens requirements, especially as its residents became fond of wheaten bread. To distant suppliers, Athens was a prime market because it was the largest, wealthiest and most stable Greek city at the time. It offered foreign traders good port facilities, safe passage, a valuable return cargo (from manufactured goods to silver) and at some point in time special courts devoted to maritime commerce. In light of the abundance and affordability of foreign wheat shipments, Attica producers focused their efforts on growing barley and replanted some lands formerly devoted to grain production with vineyards and olive and fig orchards. There is, however, some controversy as to how much intensive local farming that included crop rotations with legumes and the raising of livestock took place. Be that as it may, Athenians might have become net food importers as early as the sixth century BC and were certainly regular and substantial grain importers in the following centuries. Needless to say, food markets during this time period were never completely free. To summarize, the exportation of local grain from Athens was prohibited at all time and punishable by death. Officially sanctioned grain buyers were authorized to raise public subscriptions and use private money to secure foreign supplies. Commanders of Athenian ships leaving a foreign port were compelled to carry grain as ballast and to leave two-thirds of their grain cargo in Athens (the rest could be sold or re-exported at their discretion). Despite these bureaucratic impediments and the somewhat primitive nature of the transportation and preservation technologies of the time, Athens’ food supply proved generally sufficient, except in times of war. There is also no question it was more diversified and affordable than in previous centuries or would have been in the absence of long-distance trade. As could be expected, much evidence suggests that throughout history urban dwellers everywhere acquired as much cheaper or more exotic foodstuff produced in more distant locations as was practical and politically feasible. For instance, The Thousand and One Nights list some of the items available to wealthy Baghdad consumers, from wine, olives, dry fruits and meats of all kinds to Syrian apples, Othmanee quinces, peaches of Oman, cucumbers of the Nile, Egyptian limes and Sultanee citron. In his A tour thro’ the Whole Island of Great Britain published in the mid-1720s, Daniel Defoe observed that “this whole kingdom, as well as the people, as the land, and even the sea, in every part of it, are employed to furnish something… to supply the city of London with provisions.” As a result, his country was the most “flourishing and opulent” in the world. In most parts of the world, however, bad inland transportation infrastructure meant that significant local self-sufficiency was more the rule than the exception. Reflecting on his early nineteenth century youth in northeastern Ohio, the San Francisco Chronicle agricultural writer, editor and ardent anti-socialist Edward Francis Adams described a world where “transportation was slow and expensive, and the products of each district mostly consumed therein.” It was inhabited by “thrifty 100-acre farm” families made up mostly of “jacks of all trades” who exchanged surplus meat and butter with neighbors and nearby villagers. They brought their grain to the local mill and the leather of the cow killed for family consumption to the local tanner. They sold their extra eggs and maple syrup to the local store where they bought their few good pieces of clothing. The local boys “got their spending money by picking up nuts in the woods and from the sale of the fur of an occasional mink or muskrat.” The area specialists (millers, tanners, doctors, ministers and others) purchased a combination of locally produced and imported items at the local store while “the small surplus” of extra grain and barrels of pork which had been “accumulated painfully” by local farmers found “its way to the seaboard” in exchange for things locals couldn’t produce. In this context, the hard working local farmer “received very little money, and kept it almost no time at all.” There as elsewhere, trade was never entirely absent, but when it was insignificant, farmers had no capacity to accumulate savings and to invest in equipment and inputs. Fortunately, the advent of the coal-powered steamship and railroad soon made long-distance trade and regional specialization more viable. Writing in the pages of The Popular Science Monthly in 1890, J. J. Menzies observed that “[e]xperience keeps constantly adding to our knowledge of the special advantages of each locality, and every free movement of trade and industry increases the sum of their usefulness to the human race. Scarcity of food can no longer exist among nations that have kept abreast of this economical revolution.” Menzies added that “[t]hose who doubt the advantages of this universal, world-wide intercourse and exchange are bound in consistency to advocate the reversion of society not merely to any earlier stage in its development, but to that state of things which preceded its initiation – that is, to pure and simple cannibalism; for an argument that is good against one step in this march of progress is equally good against another.” In his high school textbook, economic geographer Charles Morris wrote in 1910 that “some parts of the earth are fitted to produce certain special thins and some to produce other things. None of us can produce all the things we need, unless our wants are very simple indeed.” For instance, the “cattle and sheep-raisers of the western plains must buy wheat for their bread from farmers. These, in turn, need to buy ploughs and harvesting machines from the manufacturers. The latter have to buy iron and wood from the miners and foresters. These need to buy meat from the cattle-raisers. Thus the circle of trade is complete.” Regional specialization at home was mirrored between countries. For instance, the varieties of American corn available at the time “will not ripen in the British Islands or Northern Europe, and much is sent there for cattle-food.” Much American wheat was also exported to Europe at the time, while, on the other hand, America got “great part of its sugar, and all of its coffee, tea and spices, from foreign lands.” At about the same time the social reformer Frederic Clemson Howe could observe that the “desires of the city direct the life of the shepherds on the mountain-side, the fishermen in Alaska, the pearl-divers of India, the plantations of the tropics, the wheat-fields of America and Russia… the sheep and cattle ranges of Australia and Argentina [and] the wine-growers of France.” A decade ago agricultural economists Jayson Lusk and F. Bailey Norwood felt compelled to restate these arguments on this website in light of the increased popularity of the local food movement. They argued that “local food is generally more expensive than non-local food of the same quality. If that were not so, there would be no need to exhort people to ‘buy local.’” But what about keeping the money in the local community instead of sending it to distant corporate headquarters? The economists pointed out that paying more for a comparable local item means that there is less money left in the pockets of consumers to purchase other things – “the very definition of wealth destruction.” But what about all the greenhouse gas emissions of long-distance transportation? Not so fast, for the “truth is that the energy expended transporting food is relatively unimportant” when you look at the whole life-cycle. Growing pineapples in energy guzzling greenhouses in North Dakota is possible, but importing them from locations where nature gives you the heat free of charge is preferable for both your wallet and the planet. In the end, as one analyst put it, subsistence farming and regional quasi self-sufficiency always and everywhere delivered “low yields, low productivity and paltry incomes.” In other words, “stagnation – just enough to survive on, but never enough to improve one’s lot.” Alternative food system activists who believe the time to make excuses for agri-business is over and that we must radically change the way we do things should perhaps ponder a bit longer why countless people worked so long and so hard to develop our globalized food supply chain.     (0 COMMENTS)

“This is a great suppressed topic. It was absolutely mainstream from the start of World War II until the Reagan administration.” This is a quote from “Price Controls Set Off Heated Debate as History Gets a Second Look,” a January 13 New York Times article by Ben Casselman and Jeanne Smialek. The speaker quoted is James (Jamie) K. Galbraith, a left-wing economist at the University of Texas. The “this” in the quote refers price controls, which Galbraith appears to favor. He comes by it honestly. His father, the late John Kenneth Galbraith, was a high-level official in the Office of Price Administration during World War II, and he sometimes reflected fondly on the power that he exerted over the US economy. I disagree with Galbraith that the topic has been suppressed. We opponents of price controls have been quite willing to discuss why they’re a bad idea. If he were to be more accurate, Galbraith would have to say that the idea has been rejected. Indeed, the heartening point of the Times article is that the vast majority of economists, including left-wing economists such as Paul Krugman, reject the idea of comprehensive government controls on prices. But sometimes it’s hard for people who are losing a debate to admit that they’ve lost, not because the topic has been suppressed but because their idea has been analytically crushed. It’s worthwhile, therefore, to say why they are such a bad idea. Price controls cause shortages, waste people’s time in line, sometimes lead to favoritism by suppliers, and, as in the case of oil and gasoline in the 1970s, can lead to harmful regulation that lasts for decades. This is from David R. Henderson, “Price Controls: Still a Bad Idea,” Defining Ideas, January 20, 2022. The problem with the “smashed thermometer” analogy: When University of Chicago economist Harold Demsetz gave a talk in the winter of 1970 at the University of Winnipeg, where I was an undergrad, he used an analogy that many critics of price controls still use. Demsetz told his audience that using price controls to reduce inflation is like responding to cold weather in Winnipeg by breaking the thermometer. His point was that just as thermometers respond to temperature, prices are an indicator of underlying economic phenomena, namely supply and demand. Breaking a thermometer doesn’t cause the temperature to rise; controlling prices doesn’t cause inflation to fall. But it’s worse than that. When you break the thermometer, you don’t make the weather worse. But when a government controls prices, it makes the economy worse by causing shortages. “Greed” What’s wrong with attributing price increases to “corporate greed”? The problem with that explanation is not that corporations aren’t greedy. If we take “greed” to mean “wanting to make as high a profit as possible,” then yes, most corporations are greedy. But those same corporations often cut prices. Have you noticed that the prices of wide-screen televisions have fallen regularly over the past fifteen years? Does that mean that the corporations producing those TVs have steadily become less greedy? Unlikely. So greed is not a good explainer of price increases. A good rule for thinking, as Charles L. Hooper and I pointed out in our book, Making Great Decisions in Business and Life, is that to explain a change in one variable, you need to point to a change in another variable. Because greed (however defined) is relatively constant, it’s not a good way to explain a change. Read the whole thing. (2 COMMENTS)

Is graffiti an art? Is alcoholism a disease? Is economics a science? Is bombing cities during wartime terrorism?Who cares? Art, disease, science, terrorism are just words. How I feel about graffiti, alcoholism, economics, and bombing doesn’t depend in any way on how society labels those activities. Words are just words.I base my judgment on other factors. Do I like graffiti? How do I believe alcoholism should be addressed? Do I believe economics is useful? Do I support bombing cities during wartime? Labeling those activities one way or another does not in any way influence the way I evaluate those things. David Henderson has an excellent post on the question of whether we are subsidizing the fossil fuel industry. I agree with the post, but have a slightly different take on the final sentence: Note: There is an issue, especially for libertarians, about whether preferential tax treatment constitutes a subsidy. I’m always a little torn about this. Yes, it’s unclear whether the term “subsidy” is appropriate for a tax preference. I’d add that it is also unclear as to whether the sort of tax preference David describes is appropriate. But I don’t believe the issue for libertarians is whether the activity should be called a subsidy. As with bombing cities during wartime, the real question is whether it is a good or a bad thing.  I’m not going to let the way Webster defines “subsidy” in a dictionary determine how I feel about a particular public policy.  (Or how Webster defines art, disease, science, terrorism, etc.)Consider the following information in David’s post: The biggest single item (see his Table 5-1) is $13.9 billion over 10 years for oil drillers being able to expense, rather than depreciate, intangible drilling costs. But the 2017 tax cut permitted expensing for investments in short-lived assets such as machinery and equipment. So the preference for the oil industry suddenly fell. That would make the $13.9 billion for, say 2021, fall, possibly all the way to zero. In my view, all investment should be immediately expensed.  So in one sense the oil industry preference is a good thing; this is how the tax code should work.  But we’d also like to see each industry treated equally.  So the favoritism shown to the oil industry before 2017 distorted the flow of capital, directing it to uses less productive than in other industries.  Does the good outweigh the bad?  I don’t know, but I’d say the answer does not depend on whether we decide to apply the term “subsidy” to this sort of tax preference. [Of course there’s also the question of externalities from burning fossil fuels, which makes the issue even more complicated.  But I’ll ignore that complication, as the main point I’m making applies even if there are no externalities involved.] The Atlantic has a very good article on the problems faced by electric car companies that try to sell directly to consumers.  They point out that New York has lots of subsidies for electric cars, whereas Florida does not.  But electric car sales are far higher in Florida, partly (not entirely) because Florida’s car dealership rules are far less restrictive. Even if New York’s subsidies and restrictions in some sense were to “balance out”, neither favoring nor impeding electric car sales, the policy regime would still be quite inefficient.  It’s not a zero sum game.  Both the purchase subsidies and the dealership restrictions are costly policies, considered in isolation.  It seems crazy to spend public funds that are raised by distortionary taxes in order to promoting electric car sales, while at the same time restricting those sales with barriers to direct sales to consumers.  It’s like driving with one foot on the accelerator and one on the brake pedal.  That wastes gasoline (or electricity.) PS.  The Atlantic article is worth reading.  I especially liked this paragraph: “If you want to see more rapid market penetration of electric vehicles, then prohibitions on direct sales are a major barrier,” he said. Crane frequently testifies on Tesla, Rivian, and Lucid’s behalf, but he says that he’s never accepted money from any of them. He wants to make clear that this is a no-brainer issue. “Whether you’re free market or pro-consumer or pro-environment or pro-competition, there’s something here for everyone,” he said. One of his proudest moments was getting the Sierra Club and the Koch brothers to sign a letter opposing the same law. PPS.  Taxation is theft?  Affirmative action is discrimination?  OK, but what do you think about the policies?  Utilitarians spend more time enjoying eating tomatoes that worrying about whether they are a fruit or a vegetable. (1 COMMENTS)

Adam Tooze has a remarkably thorough Substack post on the upcoming presidential election in Italy, which complicated mechanisms will set in motion on January 24. This is not a direct election but an indirect one. Italy is a parliamentary democracy and the President is elected, on a secret ballot, by the House, the Senate and a number of regional delegates: a total of 1,009 people. In the first three rounds of votes, the President needs a two-thirds majority to be elected; after that, a bare majority is enough. This year, Covid-positivity may be a factor for attendance. As a rule, the election of the President of the Italian Republic does not attract much of international attention, but this time is. As Tooze puts it, “the question has arisen of whether Mario Draghi should remain as Prime Minister for a limited term that expires in 2023 at the latest, or gamble on his elevation to the Presidency, which would keep him in power for seven more years”. The New York Times also has a piece by Jason Horowitz on the matter. Why is this election that relevant? Italy’s debt to GDP ratio is, after the pandemic, 162.5%. The country recorded strong growth in 2021 (6.2%) after a tragic 2020 (-8.9%). Moreover, it is the major beneficiary of the “Next Generation EU” program. “Having that money in the hands of Mr. Draghi has reassured global markets and European Union leaders and given Italy its best shot at modernization in decades.”, writes Horowitz. Its international credibility is good at the moment (such things in Italy come and go), largely because of former ECB Chairman Mario Draghi, who was appointed prime minister one year ago. Draghi’s government is supported by all major political parties, with the exception of the right-wing, nationalist “Fratelli d’Italia” (Brothers of Italy). The rationale for Draghi’s appointment is so explained by Tooze: How can Italy be steered through the rapids and set on a more positive course of development? Since this is a hard task for elected politicians, five times in recent decades the job of Prime Minister has been handed to a non-parliamentary figure. The most recent parachutist is Mario Draghi, recently retired from the ECB. He took office in January 2021 to oversee the spending of the NextGen EU package. This allocates over 200 billion Euro to Italy in grants and credits. This, if you like, is Europe’s gamble on using investment to accelerate Italian growth. Tooze is referring to governments led by former Bank of Italy governor Carlo Azeglio Ciampi (1993), former Bank of Italy General Director Lamberto Dini (1995) and former European Commissioner Mario Monti (2011). I guess the fifth PM Tooze has in mind is Giuseppe Conte, who headed the last two governments before Draghi’s. But though a non-parliamentary figure, Conte, a university professor who is now the head of the Five Stars Movement, cannot be considered a technocrat. Ciampi’s, Dini’s and Monti’s cases are quite different from each other. Let’s stick with the last two. Dini was called to form a government after Silvio Berlusconi had his first stint at governing the country for six months. One of the parties supporting Berlusconi, the Northern League, left its coalition. Hence Dini was entrusted with a caretaker government, which was not supported by Berlusconi and the right. In that circumstance, he succeeded in reforming the pension system and implemented a number of less visible reforms. Likewise, Monti was appointed after a Berlusconi’s government, in 2011. Italy was in the midst of a financial storm. Berlusconi’s credibility was very low, largely because a number of the most controversial aspects of his private life had emerged. Monti was supported by everybody but the “nationalist” right: Salvini’s Northern League opposed his administration and a group of right wingers left Berlusconi’s party, to establish Brothers of Italy, to be led by Giorgia Meloni. Monti reformed again the pension system (which had been “reformed back” after the Dini reform), increased taxes to cope with the financial crisis, and attempted some liberalisation. Draghi’s circumstances are quite different: he was appointed to spend money, not to put a check on spending. In the last year there weren’t many reforms which he can claim to his credit, though he can certainly claim a very successful COVID vaccination campaign. Other than this, his management of the pandemic has been “in line” with his predecessor, the Five Stars prime minister Conte, which is hardly surprising since they both counted on the same Health Minister, Roberto Speranza. The Draghi government was certainly less eager to renationalise everything than its predecessor, but it too emphasized the importance of public investment too and did not stop any of the nationalisations which begun with Conte. Why should Draghi become Head of State? Those who support him see this move as instrumental, leveraging his reputation for the next seven years. As a prime minister, he has another year ahead of himself, before elections are due in 2023. Very broad coalitions are seldom well behaved and, particularly in election years, they tend to create trouble, as all the parties will be busy finding ways to make their constituencies happier. Is the Head of State role non-executive and, thus, a bit detached from the possibility of having an impact over policies? Tooze mentions a very good article by Carlo Fusaro, that explains the importance of the President of the Republic. Such office is hardly merely ceremonial: Italy’s President is not Queen Elizabeth. In part, because of recent constitutional reforms, the office has increased its powers over time. In part, because, as Fusaro writes: …a political system that for years has not been able to bring forth stable governments and that appears to be in permanent evolution, ends up thinking that much (if not everything) may depend on who will be its guardian. The President is supposed to be the guardian of the Constitution, but is also the guardian of the political system. Italy’s political system has experienced a number of crises in the last few years, which coincided with the appointment of non-parliamentary figures as prime ministers that Tooze refers to. These crises were in part triggered by financial problems, but were also genuinely political crises: in 1994, Berlusconi looked inadequate to govern the country but the left did not feel like they could reorganise and win elections if they were called. The Northern League (that “seceded” from the Berlusconi coalition) did not want to go to the ballot, because, as a consequence of a pre-election deal with its former coalition partner, it was over-represented in Parliament. In 2011, the left again would have been a major beneficiary of the breakdown of the Berlusconi government, but no one wanted to be responsible of governing a country which appeared on the brink of default. In the last parliamentary term, things were a bit different: the absence of a clear parliamentary majority, together with the electoral success of the populists of the left and the right, made strange bedfellows. So we got first a government that put together left and right populists and then a government supported by the moderate and the populist left (ironically, the prime minister was the same). Then, on the one hand, the pandemic weakened the social fabric and advised for a larger majority; on the other, the fact that Italy was to benefit from “European solidarity” with the Next Generation EU fund created the conditions for a wider agreement among political forces, as the social groups supporting them each wanted to get their slice. But in a much embittered political scenario (like in the US, there is no question that the political rhetoric is far more destructive now than it was in the 1990s), for harmony to be engineered you needed a highly credible prime minister. Hence, Draghi. In his piece, Tooze sees a Draghi presidency as a stabilizing factor for Italy’s EU relationships, therefore pretty much in Brussels’s interest. The idea is that if Draghi were made President, in the event of a right-wing populist electoral breakthrough, he would have the authority to resist a government that embarked on an aggressive nationalist course that put Italy’s euro membership in doubt, thus risking a devastating sovereign debt crisis that through its entanglement with the Italian banking system would spill over into a banking crisis. For Europe this doom-loop is ominous. That is true, but you can look at it from another perspective. it is almost inevitable that the right will win the next elections. I see a Draghi Presidency not as a safeguard against such an event, but somehow as a life jacket for those very right wing politicians. Those who would gain the most out of a Draghi’s presidency are the right wing leaders Salvini and Meloni: they become far more plausible (or, at least, less alarming) candidates for the prime minister office, with such a pro-Europe champion as head of state. A man who is so internationally reputed as Draghi could not so much prevent the right from forming a government, but rather help them in adjusting their agenda and convince European partners that they are not so threatening as they seem. This explains why both Salvini and Meloni do actually look favorably at a Draghi presidency, though they have problems in openly advancing the hypothesis (at least, as of today) because it clashes with their rhetoric. Isn’t Draghi, after all, the “eurocrat” par excellence? Tooze makes much of President Mattarella’s (his mandate is due to end in a few days) veto on Paolo Savona as a Treasury Minister. Savona is a senior Italian economist, not necessarily right of center, who flirted with the idea of quitting the euro. He was not appointed Treasury Minister but was appointed European Affairs Minister, and later he was made President of the Italian SEC. In 2018, the veto by President Mattarella changed the composition of the first Conte government, the one supported by the populists of the right and of the left at the same time. Tooze sees the matter in terms of protection of Italy’s euro-membership and devotes much of his article to the nature of the EU/Italy relationship. I think perhaps some more context here is needed. The 2018 elections saw the the Five Stars Movement and the Northern League emerging as the two winners. They did not campaign on the possibility of a mutual alliance and, in spite of being the two main anti-system parties, they ended up forming a majority in Parliament, in perfect accord with the system’s rules. The President had the very difficult task of exploring different majority possibilities and arranging such a marriage. While both the Five Stars Movement and the Northern League were largely euro-skeptic, they did not campaign on a program for Italy to leave the euro (the League brought some strong eurocritics in Parliament, but that’s another matter), nor their electoral alliance was predicated on such an explicit platform. The Northern League was in an electoral coalition whose other main pillar, Forza Italia, was certainly committed to defend euro-membership. The President was concerned with the financial turmoil that the appointment of Paolo Savona, since the latter played with the idea of euro-exit in books and articles, might have triggered. The President’s concerns were more immediate and they, again, had a largely political background: a euro-skeptic government was not the outcome of elections in which this issue was in any way central to the debate. The main themes of that election round were immigration, security, tax reform. So, I do not consider this reading as particularly “kind” to President Mattarella. Plus, as said, Savona was made Minister for European Affairs: certainly not a portfolio as important as Treasury, but nonetheless one which brought him in touch with the European institutions. Sure enough, Italy’s President is more of an alchemist of the political system, particularly because the latter is often in a situation of instability with an inability to produce effective government coalitions. This increases the latitude of its power. A Draghi presidency would have its main strength in the fact that Draghi is personally credible with Brussels and other EU member states. But how big should a single man’s shoulders to be, to support a three trillion euros debt? Italy is “too big to fail and too big to bail”, as Tooze writes. Plus, its political system has problems in bringing together consensus and ability to govern: the people who have votes tend not to have much of a policy agenda, nor very visible administrative skills. How much of problem the country can represent for the Eurozone, we will see in the coming years. (0 COMMENTS)

Are California taxes too high? Well, seven members of California’s Legislative Assembly and five  members of the Senate think they’re not high enough. These 12 politicians have co-authored a bill to amend the California constitution to make tax rates permanently higher and impose an excise tax, payroll taxes, and a special income tax. These are the opening paragraphs of my short piece for the Institute for Policy Innovation. The piece is titled “Will California’s Government Raise Taxes Even More?” and appeared on January 19, 2022. I then very briefly lay out the proposed permanent tax increases that would be locked into the California constitution and briefly analyze them. Read the whole thing, which is not long. (0 COMMENTS)

I often see people claim that Modern Monetary Theory is increasingly influential.  I see no evidence for that claim. One problem is that people use the term MMT is two very different ways.  In some cases, MMT refers to a theory of how the monetary system works. It’s a model. In another context, MMT refers to a bundle of policies such as combined fiscal/monetary stimulus, the belief that Congress (not the Fed) should control inflation, job guarantees, a “Green New Deal”, etc.  As an analogy, the term ‘monetarism’ originally described the views of people like Milton Friedman on monetary policy.  But during the Thatcher years, I often saw people use that term to describe a pro-free market ideology.  Those are two very different definitions. The monetary model version of MMT has virtually no support among influential economists, on either the right or the left.  The right is almost unanimously opposed, and on the left the supporters are primarily little known economists at smaller schools.  That doesn’t mean MMT is wrong (I’m a little known economist who taught at a smaller school), but it does suggest that MMT is not influential.  People like Larry Summers, Paul Krugman, Janet Yellen, Greg Mankiw, etc., tend to be highly skeptical of MMT. One problem is that the MMT theoretical model is pretty incoherent.  Unlike most economists, I spent many hours reading a major MMT textbook, and I saw almost nothing in the model that would appeal to mainstream economists.  (See here and here.) Consider the following thought experiment.  In 1998 (when the economy is booming), the Fed suddenly does a big enough open market purchases to cut interest rates from 5% to 0%.  The MMT model implies that this has almost no impact on the economy, as you are just swapping one government liability (base money) for another (T-bills). Mainstream economists will never accept a model that produces that sort of implausible claim. A slightly more plausible case can be made for MMT having boosted the case for combined fiscal/monetary stimulus.  But even here, I don’t see much support for the claim of influence.  In 1999, Ben Bernanke recommended this policy to the Japanese.  Paul Krugman has discussed this option.  Indeed, when the economy is at the zero lower bound, combined fiscal/monetary stimulus is a fairly mainstream policy recommendation. MMT is almost universally viewed as a left-wing theory.  In that case, what should we make of the policy views of Donald Trump?  He presided over what was at the time perhaps the most recklessly expansionary fiscal policy in US history, which dramatically boosted the size of the budget deficit when the economy was already booming (in 2019).  In addition, he appointed Jay Powell to be chair of the Fed, and then complained that Powell’s policies were not expansionary enough.  And yet I hardly ever see people claim that Trump was an MMTer, instead they warn of MMT influence within the Biden administration.  But if MMT is to be defined as combined fiscal/monetary stimulus, then why wasn’t President Trump an MMTer? In the end, the false perception of MMT influence comes from lazy reasoning.  Real interest rates on government debt have been trending downward for 40 years.  Not surprisingly, governments have responded by increasing their borrowing, and economists have raised their estimates of the maximum safe level of debt as a share of GDP.  That’s just an empirical judgment, it has nothing to do with the acceptance of a radically different model of monetary economics. Now that inflation has become the number one problem, MMT seems to have faded away.  All of the focus is on what the Fed will do to bring inflation back to 2%, or lower.  But in the MMT model the Fed has no ability to control inflation; only Congress can do so (with tax increases or spending cuts.)  So the renewed focus on the Fed’s need to control inflation is an indication that MMT never seriously challenged mainstream economics.  It was just a fad, like the brief mania for price controls during the 1970s. (0 COMMENTS)

Back in 2011, many futurists expected online education to give traditional four-year colleges a run for their money.  I demurred, arguing that: Education is not primarily about teaching concrete skills.  It’s a stably wasteful way to sort people according to their intelligence, conscientiousness, conformity, etc. So what happens when an innovator claims to have a cheaper, easier substitute for traditional education?  The lazy and the weird gravitate to Cheap Easy U like moths to the flame.  As a result, employers correctly infer that graduates of Cheap Easy U are sub-par – and Cheap Easy U captures, at best, a niche market.  A sustainable business model, perhaps – but no real threat to the Expensive Painful Universities that blanket the land. As usual, I was happy to bet on my forecast – and the noble David Henderson agreed.  The terms: I propose that we use the official numbers from the National Center for Education Statistics’ Table 212.  2009 is the latest available year of data.  29.6% of 18-24 year-olds were enrolled in 4-year institutions.  I bet that in 2019, that percent will be no more than 10% lower.  Rounding in your favor, I win if the number is 26.7% or more.  If the number is lower, you win.  If the data series is discontinued, the bet is canceled.  Stakes: $100 at even odds. The 2019 numbers are now in.  Result: The relevant number rose from 29.6% to 30.4%.  David has already conceded.  To be fair, if the bet was based on 2021 data, I might have lost due to Covid.  And since I re-made this bet with other partners in later years, defeat may still be in the cards.  However, since those bets depend on 2025 data, I’m probably still safe. This brings my betting record to 23 wins, 0 losses. (2 COMMENTS)