In 2009, Air France Flight 447 crashed while on route from Rio to Paris.  Data from the flight recorder suggest multiple problems led to the disaster.  In a stressful and confusing environment, one of the copilots moved a control stick in the wrong direction, which worsened the problem of the plane stalling. After a major plane crash, investigators look at the “black box” to determine instruments settings—did the captain make the right decisions?  Thus, suppose the captain insisted that he or she had been unable to lower the flaps, while the flight recorder showed multiple examples of the flaps being raised and lowered throughout the flight.  In that case, one might doubt the captain’s explanation. Similarly, it may be useful to examine central bank “black boxes”.  Do the movements in their policy instruments match the macroeconomic problems they faced and the goals they wished to achieve?  Do they match any explanation they provide for a failure to achieve those goals? During the late 2010s, the Fed was fairly consistently undershooting its inflation target.  This led some observers to speculate that the Fed was unable to raise inflation. This is from a 2017 FT article: Blanchard was prompted to recite his faith in the power of the Phillips Curve by former Fed governor Jeremy Stein, who wondered how central banks were supposed to raise their inflation target to 4 per cent when they are still undershooting the current target of 2 per cent. Stein is implicitly suggesting an inability to raise inflation rates. But if we look at the Fed’s “black box”, we see nine rate increases between 2015 and 2018.  This rules out “instrument failure”, and instead leads to three possibilities: 1. Like the Flight 447 co-pilot, and like the Prime Minister of Turkey, the Fed was horribly confused.  They wrongly believed that raising the policy rate would boost inflation up to their target.  They pushed the instrument in the wrong direction. 2. Fed officials are corrupt, privately aiming for below 2% inflation even as they publicly insisted that they were targeting inflation at 2%. 3.  Fed officials were mistaken in relying on flawed Phillips Curve models that suggested that inflation would soon overshoot the 2% target without further rate increases. In my view, the third explanation is the mostly likely, but at least we can rule out instrument failure as an option. The Fed was perfectly able to adjust its fed funds target. Britney Spears informs us that one romantic affair might be an innocent mistake, but multiple affairs are the sign that you are dealing with a bad girl.  Perhaps this insight can be used when evaluating the black boxes of the Bank of Japan and the ECB. In the early 2000s, the Bank of Japan apologists insisted that there was nothing the BOJ could do to boost inflation despite its valiant efforts.  But in the year 2000, our black box shows the BOJ raising its interest rate target, despite years of deflation.  Why did it do this? The small increase in interest rates might have been an innocent mistake.  But the BOJ again increased its interest rate target in 2006, clearly demonstrating that (as Britney would say) the BOJ is “not that innocent”. ECB apologists insist that the European central bank was unable to prevent the Great Recession.  But the ECB’s black box shows the ECB raising interest rates in mid-2008, right before the economy worsened dramatically.  The black box also shows two rate increases in early 2011, right before Europe fell into a double dip recession. Of course we know that the level of interest rates is not a reliable indicator of the stance of monetary policy, just as the position of a control lever doesn’t tell you how the position of the airliner is changing.  But when we juxtapose the central bank instrument setting against the clear needs of the economy, we do have evidence of intent.  One mistake might be an innocent error, multiple BOJ and ECB mistakes were evidence of an overly hawkish central bank. In 1986, CBS News informed us that Audi cars had a problem with “unexplained sudden acceleration”.  One hint that this was actually human error was the fact that hitting the brake seemed to make the problem worse.  In a car, the brake and drivetrain are completely separate systems, making it very unlikely that a mechanical failure could cause the car to accelerate after hitting the brake.  Investigators later speculated that Audi had placed the brake and accelerator pedals a bit closer than usual, and that some drivers had hit the accelerator while intending to hit the brake. I think of this example when considering Fed apologists who claim that there’s nothing the Fed can do about high inflation, as it’s caused by supply chain problems.  If we look at the Fed black box for 2021, we see a central bank holding their policy rate near zero for the entire year, and continuing (even in 2022!) to inject more and more money into the economy via QE. Central banks often plead innocent when accused of making major policy errors.  Fortunately, we have independent evidence from central banks black boxes, which clearly demonstrate that they are “not that innocent”. (0 COMMENTS)

Scott Alexander just got married!  Congratulations to the happy couple.  And true to form, Scott takes a rationalist approach to the whole thing, starting with a details on his search algorithm: [M] recommendation for those of you in the same place I was ten years ago is: accrue micromarriages. Micromarriages come from this post by Chris Olah. They’re a riff on micromorts, a one-in-a-million chance of dying. Risk analysts use micromorts to compare how dangerous different things are: scuba diving is 5 micromorts per dive; COVID is 2,500 micromorts per infection; climbing Mt. Everest is 30,000 micromorts per attempt. So by analogy, micromarriages are a one in a million chance of getting married. Maybe going to a party gets you 500 micromarriages, and signing up for a really good dating site gives you 10,000. If there’s a Mt. Everest equivalent, I don’t know about it. Chris thinks of micromarriages as a motivational tool. If you go to a party, and you don’t meet anyone interesting there, it’s tempting to get discouraged. If you try again and again, with identical results, it’s tempting to give up. Chris says: instead, think of yourself as getting 500 micromarriages each time (or whatever you decide the real number is, with the understanding that you should update your estimate at some rate conditional on success or failure). All you need to do is go to a thousand parties and you have a 50-50 chance of meeting the right person! Maybe that number would sound more encouraging if it was lower – but it took me twenty years of trying, so I couldn’t have been getting more than a few hundred micromarriages a day, and I wasn’t slacking off. […] Twenty years and exactly one million micromarriages later, I have yet to find any better advice. Gather your micromarriages while ye may, for time is still a-flying. Do annoying things, expect them to fail, and increment a little counter in your head each time, to prevent yourself from going insane. This is the best popularization of search theory known to me.  And once the search process finally worked out, Scott moved on to the economics of optimal contracts: Marriage is a contract, no different in theory than an airline’s contract with an airplane manufacturer. The airline says they’ll buy X planes over the next ten years; the manufacturer says they’ll provide them at such-and-such a price. At the moment of signing, both parties think it’s a good idea. If they both knew it would stay a good idea, a contract would be unnecessary. But something might change. The air travel market might crash, and then the airline would regret having ordered more planes, and want to back out. The price of raw materials might go up, and then the manufacturer would regret offering such a low price, and want to back out themselves. But it would be unfair for the airline to make the airline manufacturer commit to a complicated course of action – building new factories, hiring lots of workers – and then change their mind, leaving them in a worse position than when they started. And it would be unfair for the manufacturer to make the airline commit to a complicated course of action – opening new routes, signing contracts with more airports – and then pull the rug out from under them and demand a higher price. So if you’re committing to a mutual enterprise where both sides are going to make big irreversible changes to satisfy the other, you want a contract where they both agree not to back out, and agree to suffer heavy social and financial sanctions if they do. Details on Scott’s optimal contract: We’re getting married, and doing a prenup, and we’ve worked out some more complicated edge cases just between the two of us. Will it be enough? I don’t know; I’m not sure anyone can know at this point. No snark intended, but Scott’s write-up is a wedding present from him to me.  Why?  Well, some years ago, Scott almost entirely denied the broad applicability of basic economics: I propose that the preference/budget distinction is a bad way of dealing with anything more complicated than which brand of shampoo to buy. We intuitively talk about our choices as if there were some kind of “mental energy” that allows one to pursue difficult preferences, and I discuss some ways this confuses our intuitive notion of budgeting in Parts II and III here. You don’t have to accept any particular framing of this, but to sweep the entire problem under the rug is to ignore reality because you’re trying to squeeze all of human experience into a theory about shampoo. To which I replied: This paragraph is quite a leap.  It’s sometimes hard to distinguish between preferences and constraints, so it’s “a bad way of dealing with anything more complicated than which brand of shampoo to buy”?  How about choosing a career?  Or a house?  Or how many kids to have?  Or what religion to join?  These are all major life decisions, but we readily conceptualize them in terms of preferences and constraints.  And contrary to Scott, this is good philosophy, psychology, economics, and common sense. So what?  Years ago, Scott told us that the “preference/budget distinction is a bad way of dealing with anything more complicated than which brand of shampoo to buy.”  Yet he used this standard economic framework to deal with something vastly more complicated: his quest for a life partner. The preference/budget distinction pervades Scott’s diction.  “If you try again and again, with identical results, it’s tempting to give up.”  “[I]t took me twenty years of trying, so I couldn’t have been getting more than a few hundred micromarriages a day, and I wasn’t slacking off.”  “Gather your micromarriages while ye may, for time is still a-flying. Do annoying things, expect them to fail, and increment a little counter in your head each time…”  Instead of telling people that there’s only one possible outcome because everything is “like a constraint,” Scott acknowledges that all of us have a vast array of choices – and must strategize to make the most of them.  For shampoo and marriage alike. As if that weren’t enough, Scott explicitly declares that, “Marriage is a contract, no different in theory than an airline’s contract with an airplane manufacturer.”  Once again, he’s embracing the standard economic framework of preferences and constraints for life-defining decisions.  Shampoo indeed. Scott Alexander is a great guy.  Other than the New York Times, everyone agrees.  Part of what makes him great is that he teaches us how to make smarter choices.  And a big part of making smarter choices is applying simple principles broadly.  Don’t say, “That works for shampoo, but not dating” or “That works for airplanes, but not marriage.”  Look at Scott: He’s living proof. (0 COMMENTS)

[Annual Listener Survey: https://www.surveymonkey.com/r/CQX28T6. Vote for your 2021 favorites!] Can Israeli society survive the loss of universal military service? Will the deregulation of Israel’s kosher supervision spell the end of its Jewish character? And, speaking of Israel, what is it that makes its television dramas so good? Tyler Cowen discusses these and other subjects with […] The post Tyler Cowen and Russ Roberts on Nation, Immigration, and Israel appeared first on Econlib.

I just finished writing my review of Steven E. Rhoads’s excellent book titled The Economist’s View of the World. It’s excellent. In a longer than usual review, I didn’t have space to highlight his discussion of U.S. government subsidies to fossil fuels. We often hear how high they are. But Rhoads footnotes a Brookings study by Joseph Aldy that estimates those subsidies to total $41 billion over 10 years, for an average of just $4 billion a year. That’s not as high as we often see claimed. All of the subsidies are implicit subsidies in the tax code. That is, they are provisions in the tax code that treat fossil fuels preferentially. The study was published in February 2013. So I’m fairly confident that updating for inflation since then would give a higher number. On the the other hand, there’s an effect that goes the other way. 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. It is true that the expensing provision of the 2017 tax law was temporary. It starts to phase out this year and will be completely gone by 2016. It might be useful for someone to do an update of Aldy’s study. Note: There is an issue, especially for libertarians, about whether preferential tax treatment constitutes a subsidy. I’m always a little torn about this. (0 COMMENTS)

A sad commentary on respect for freedom of thought in Australia. SYDNEY—Australia’s decision to cancel tennis star Novak Djokovic’s visa for a second time was driven by fear that letting him stay could foster antivaccine sentiment during a surge in Covid-19 cases, court documents show. Immigration minister Alex Hawke didn’t dispute Djokovic’s claim of a medical exemption from rules that travelers to Australia must be vaccinated against Covid-19, according to documents made public Saturday. Hawke, who canceled Djokovic’s visa on Friday, said allowing the player to stay could sway some Australians against getting vaccinated. “Mr. Djokovic’s presence in Australia may pose a health risk to the Australian community in that his presence in Australia may foster antivaccination sentiment,” Hawke said in a document detailing his decision. This is from Stuart Condie, “Australia Feared Letting Novak Djokovic Stay Would Fuel Antivaccine Settlement,” Wall Street Journal, January 15, 2022. (0 COMMENTS)

The environmental movement is a puzzling phenomenon. On the one hand, environmentalists frequently claim that global warming is a major problem, perhaps the major problem facing the globe. Yet despite these expressed views, one repeatedly see environmentalists opposing the sorts of steps that would be required to address global warming. Matt Yglesias recently linked to a story where three major environmental groups in Maine succeeded in stopping construction of a power line from Canada that would have brought enough clean hydropower electricity down to America to reduce carbon emissions by 3 million tons per year, equivalent to taking 700,000 cars off the road.In Germany, environmentalists succeeded in getting the government to agree to shut down the entirely nuclear power industry, which will lead to a large increase in greenhouse gas emissions. Elsewhere, environmentalists have succeeded in demolishing clean hydro plants and have prevented the construction of solar and wind power facilities. Many are even lukewarm on carbon taxes. So what gives?In my view, there are two types of environmentalism. Scientific environmentalism looks at issues from a rational cost/benefit approach, always keeping an eye on the bottom line—how do policies affect the natural environment?The bigger and more powerful part of the environmental movement is what you might call “emotional environmentalism”. This movement is centered around the interests of human beings, not the rest of the animal kingdom. Policies that are seen as risky to humans (like nuclear power) are opposed even though they are beneficial to other animals. The focus is on the visible and the local (unsightly power lines), not the unseen and the global (climate change.)There’s nothing strange about political movements working against their own stated interests. Many housing advocates oppose new housing developments and favor rent controls. Nationalists in the US worried about China’s growing power often oppose immigration of high-skilled Chinese people into the US. Those who assert that “black lives matter” try to defund the police.  Proponents of higher interest rates favor tight money policies that reduce interest rates in the long run.  There are numerous similar examples.But even compared to those examples, the environmental movement really stands out. The weakness of scientific environmentalism and the power of emotional environmentalism raises important questions for public policy intellectuals. How can we develop effective public policies in a world where most of our political allies don’t understand how to achieve their stated policy goals? (1 COMMENTS)

Without government, how would we be able to keep the homeless from getting shelter? Temperatures in Gloversville, New York, are expected to fall to -4 degrees tonight. That’s bad news for the roughly 80 homeless people who live in the upstate community, and who have few options for escaping the dangerously frigid weather. About half of those people could be housed on the second floor of a building owned by the city’s Free Methodist Church, where 40 empty beds sit ready to welcome people in from the cold. Stopping that from happening are Gloversville’s zoning officials, who say that the commercial zoning of the church’s property and its downtown location prohibit it from hosting a cold weather shelter. Those empty beds will have to stay that way. This is from Christian Britschgi, “Zoning Officials Stop Church from Opening 40-Bed Shelter in Sub-Zero Temperatures,” Reason, January 14, 2022.   (0 COMMENTS)

A commenter to one of my recent posts blamed me forcefully for suggesting that wokism and fascism “are not so different anyway.” The kinship between wokism and socialism on the one hand and fascism on the other is often blurred by the  fact that they cater to different beneficiaries and pursues different victims; but they demonstrate the same ignorance of economics, the same preference for coercive collective choices, the same hatred for anything that looks like classical liberalism or libertarianism, and, in practice if not in theory, the same attraction for political power. For those interested in the alliance of different totalitarian ideologies against classical liberalism, I cannot do better than recommend Friedrich Hayek’s The Road to Serfdom (University of Chicago Press, 1944 [2007]); my recent review of this important book may serve as a poor substitute. Labels are only labels, but it is often useful to realize that different phenomena with different names share some common denominators. Sometimes and despite political propaganda, they can be seen as different shades of the same color. Consider the following. In 1932, Benito Mussolini, published an article on fascism in the Encyclopedia Italiana. An “authorized translation” soon appeared in English under the title The Political and Social Doctrine of Fascism, first in The Political Quarterly and then as a book (London: Hogarth Press, 1933). Il Duce expressed many ideas that today’s people in the woke and socialist galaxy would not renege, at least once after they get more firmly in power. I am quoting from the book (note that by “Liberalism,” Mussolini broadly means “classical liberalism,” not “liberalism” in the American sense of progressive): Fascism·may write itself down as “an organized, centralized and authoritative democracy.” (p. 16) Fascism has taken up an attitude of complete opposition to the doctrines of Liberalism, both in the political field and the field of economics. (16) For if the nineteenth century was a century of individualism (Liberalism always signifying individualism) it may be expected that this will be the century of collectivism, and hence the century of the State.” (20) Whoever says Liberalism implies individualism, and whoever says Fascism implies the State. (23) [The Fascist State] meets the problems of the economic field by a system of syndicalism·which is continually increasing in importance, as much in in sphere of labour as of industry. (23-24) Fascism desires the State to be a strong and organic body, at the same time reposing upon broad and popular support. (24) The Fascist State organizes the nation, but leaves a sufficient margin of liberty to the individual; the latter is deprived of all useless and possibly harmful freedom, but retains what is essential; the deciding power in this question cannot be the individual, but the State alone. (24) Hayek quotes another reflection from Mussolini (op. cit., p. 91): We were the first to assert that the more complicated the forms assumed by civilization, the more restricted the freedom of the individual must become. In his book The Coming American Fascism (New York and London: Harper & Brothers Publishers, 1936), American fascist Lawrence Dennis explained: The authoritarian state can say ‘Stop” to business or in the market, as the liberal state cannot do.” (p. 102) Social planning is the outstanding imperative of public order and material abundance in the present day and in the near future. (104) Under a fascist State … the property owner or corporate management which contested a new law would not be allowed to advance any argument assessing a private right as superior to the right of the State. (157) Both fascism and communism are, in the technical sense of the term, radical schemes for rationalizing the social machinery, just as engineers have rationalized the machinery and technology of production. (164) Fascism does not accept the liberal dogmas as to sovereignty of the consumer or trader in the free market. (180) My contradictor also accused me of invoking the h-word, which in fact I had not done. But if we forget one specific kind of racism and xenophobia, we can trace the kinship of the wearer of the h-name and his ideology with socialism and thus wokism. The 1920 program of the Nationalist Socialist German Workers’ Party, an interesting document, declared: We demand that the State shall make it its primary duty to provide a livelihood for its citizens. … We demand the nationalization of all businesses which have been formed into corporations (trusts). We demand profit-sharing in large industrial enterprises. We demand … the prohibition of all speculation in land. … The publishing of papers which are not conducive to the national welfare must be forbidden. … Our nation can achieve permanent health only from within on the basis of the principle: The common interest before self-interest. In my review of Hayek’s The Road to Serfdom, I emphasized some ideas from the Nobel economist: Many Nazis or Nazi forerunners came from Marxism or socialism. Professor Werner Sombart, a former Marxian socialist, had welcomed World War I as the “German War” in defense of the “German idea of the state” against the commercial civilization of England. This German state stood over and above individuals, who had no rights but only duties. Nazi philosopher of history Oswald Spengler thought that Prussianism (the German ideal of the state) and socialism were the same. Moeller van den Bruck, whom Hayek describes as “the patron saint of National Socialism,” thought that the classical liberals were the archenemy. Although Hitler was a politician and not a political philosopher by a long stretch (a very long stretch), he was quoted as saying that “basically National Socialism and Marxism are the same.” Hayek tells us that, according to a leader of German “religious socialism,” liberalism was the doctrine most hated by Hitler. On the softer fascist side, Mussolini himself was a former socialist. (0 COMMENTS)

The call for parent volunteers went out at 9 pm on Sunday, reports John Fensterwald on EdSource. By 9 am Monday, 360 Palo Alto (California) parents had offered to work as classroom aides, Covid testing staff, office workers, recess and lunch supervisors, custodians or whatever else is needed to keep the community’s schools open. By Tuesday morning, 1 Palo Alto had 670 recruits, says Superintendent Don Austin. Volunteers — the number has passed 700 — started work today. The schools wills stay open, he pledged. “There is nothing short of a state or county mandate or order that will shut us down. And if they do that they better be ready for a fight too. We are staying open.” This is from Joanne Jacobs, “Will parents help? 670 volunteer in Palo Alto,” Linking and thinking on education, January 12, 2022. Alexis de Tocqueville was the Frenchman who wrote about how Americans always stepped up to handle problems and didn’t wait on government. That has diminished as government has encroached more and more, but it still happens a lot, especially when government employees abdicate their responsibilities. A student of mine from Greece sometime last decade said in class that he was so happy that his young kids got to live in America for 18 months while he was earning his MBA because they got to see how Americans got together to solve problems. I met Joanne Jacobs, if I recall correctly, at a Hoover conference in May 1993 titled “Choice and Vouchers: The Future of American Education?” She was covering the conference for the San Jose Mercury News. Either at the conference, or earlier, or later, she became a passionate and informed advocate of school choice and has kept it up. Here’s her bio.   (0 COMMENTS)

In economics, Randomized Controlled Trials (RCTs) now stand at the pinnacle of the methodological hierarchy.  “Natural experiments” are a distant second.  Work based on old-fashioned observational data is actually hard to publish anywhere prestigious.  For many scholars, RCTs aren’t just the gold standard of research.  Nothing else is even fungible.  This is the Age of the Randomista. Which raises a serious problem: How can researchers address questions where no RCT is feasible?  To do an RCT on national monetary policy, for example, you would have to randomly assign monetary policies to a bunch of countries.  Not gonna happen.  To do an RCT on national disincentive effects of welfare, you would have to randomly assign welfare policies to a bunch of countries.  Again, not gonna happen.  Sure, you could run some RCT laboratory experiments on monetary policy.  But why assume that some silly games in a lab carry over into the real world?  Similarly, you could run a pilot welfare program for a single city and measure the effects.  But perhaps a lot of the labor supply response comes from the society-wide erosion of stigma against idleness.  If so, your pilot program will fail to detect it.  The same goes if a Marxist claims that once capitalism has been eliminated, people will work for the sheer joy of contributing to the community.  You could try running an experiment on a utopian commune, but the Marxist could protest, “Capitalism must be eliminated world-wide before my claim holds.”  And on the flip side, the collapse of Communism wasn’t based on RCTs either.  Critics just said, “This is an awful system and must be dismantled.”  And amazingly managed to get their way in a bunch of countries. The upshot is that, like the US and UK, RCT methodology and the status quo (SQ) have a “special relationship.”  If you take RCTs seriously, you have to label virtually any radical departure from the SQ as “unscientific.”  After all, if the change is radical, it won’t be feasible to run an RCT.  And if RCT is the only scientifically respectable methodology, then every radical departure from the SQ is scientifically baseless.  Ironic, given all the publicity about how wonderfully “radical” the RCTers are. Still, there are multiple ways to interpret the special relationship between RCT and SQ.  Let’s start with the mildest, then intensify, step by step. 1. Big changes from the SQ can’t be justified using RCTs, but neither are they unjustified.  As far as social science is concerned, it’s a “Whereof one cannot speak, thereof one must be silent” situation.  In other words, RCTs tell us to be agnostic about big deviations from the SQ. 2. Big changes from the SQ can’t be justified using RCTs, so we should, by default, be skeptical.  That’s how the FDA would react to new untested pharmaceuticals, right? 3. Big changes from the SQ can’t be justified using RCTs, so we should expect them to fail – and regard their proponents as charlatans.  Even if, by some miracle, they happen to be right, their methodology is reckless. 4. Big changes from the SQ can’t be justified using RCTs, so we should expect them to be disastrous – and regard their proponents as monsters.  You would practically have to be a psychopath to blindly push for big social changes.    If you are a staunch RCT person, however, positions 2, 3, and 4 all suffer from a common problem: None of them has ever been justified by an RCT!   There has never been an RCT showing that big changes sans RCTs merit skepticism.  There has never been an RCT showing that big changes sans RCTs typically fail.  And there has never been an RCT showing big changes sans RCTs typically end in disaster.  Indeed, as far as I know, there aren’t even any old-fashioned observational studies supporting these conclusions. Should we then retreat to position 1?  It too suffers from a dire problem.  Namely: If you don’t believe that changes supported by RCTs are, on average, better than changes not supported by RCTs, why do you support RCTs in the first place?   In short, there’s a dilemma of methodological advocacy: You can be enthusiastic, or you can apply the methodology.  But not both.  The randomista crusade is either hypocritical or stillborn. Is there any way to escape from this dilemma?  Yes, but only with repentant methodological humility.  Admit that the real foundation of science is just common sense.  And common sense tells us that RCTs are the most helpful way to advance our understanding of extremely narrow questions.  But when you ponder bigger questions, RCTs are just one intellectual input out of many.  Including the bigger question of, “When should we dismiss people who fail to use RCTs as charlatans?”  For pharmaceuticals, the right answer is “often.”  For economic growth, in contrast, the charlatans are those who dismiss everything we’ve learned without RCTs. (0 COMMENTS)