If your resolution for the New Year is to help your friends learn economics, here is an idea. Tell them something like that: “Except if you are venturing into the special fields of monetary or financial economics, rethink and reformulate any economic problem in terms of real resources, that is, actual inputs and the goods and services they serve to produce. Don’t think about, ‘dollars,’ ‘euros,’ or any other national currency.” In his Treatise on Political Economy (1821; original edition: Traité d’économie politique, 1803), Jean-Baptiste Say emphasized that important idea: The valuation of an object is nothing more or less than the affirmation, that it is in a certain degree of comparative estimation with some other specified object; and any other object possessed of value may serve as the point of comparison. A house, for instance, may be valued in corn or in money. To say that it is worth 4000 dollars conveys a more accurate notion of its value, than to say that it is worth 4000 bushels of wheat, solely because the habit of reckoning the value of all commodities in coin makes it easier for the mind to form an idea of the value of 4000 dollars in other commedities, that is to say, of the quantity of other commodities obtainable for that sum, than of that obtainable for 4000 bushels of wheat. Yet, if wheat be 1 dollar a bushel, the degree of value expressed by each is the same. (p. 284) This understanding of relative prices—the price of a house in terms of wheat—will also help your friends grasp what inflation is: the increase in the price of all goos in terms of a certain currency. The basis for understanding wealth and poverty is not that pieces of paper or accounting balances are moving from one pocket or one account to another but that individuals are making choices, exchanging among themselves, and otherwise moving real resources. Quoting a long-dead French economist provides tangential benefits. It is useful to know what intelligent people thought in the past after they raised the same questions as we do. Another tangential benefit is to put the new year in a broader, albeit very short, time-space perspective: it’s already 2022 or, alternatively, it’s only 2022!  Happy New Year! (0 COMMENTS)

In late August and early September 1982, just after I started as a senior economist with President Reagan’s Council of Economic Advisers, Eric Hemel, special assistant to the chairman of the CEA, asked me to work my way through a large part of Martin Feldstein’s published work to help him anticipate “gotcha” questions that Senator Ted Kennedy and others on the Democratic side might use to go after Marty at his confirmation hearing. Going through old memos recently, I found a September 13, 1982 memo to Eric in which I reported on 5 articles that Kennedy and others might use. Although Marty started in the job the day after Labor Day, he officially became chairman on October 14. Here’s my memo: September 13, 1982 From: David Henderson Subject: Questions on Feldstein Material To: Eric Hemel Here are the questions that you asked me to generate on the basis of Martin Feldstein’s main ideas. I did not get into most of his proposals for Social Security reform (with the exception of the trust fund) because I am sure that others will prepare questions on that area. You said in an article in the May 20, 1982 Wall Street Journal that “Unemployment is the price we must pay to undo more than a decade of inflationary policies.” Are you willing to throw people out of work just to reduce inflation? In that same article, you said: “The perception that the government would accept 8% to 9% unemployment–about two percentage points over the natural unemployment rate–for three or four years in order to eliminate inflation would almost certainly bring inflation down so fast that it would be unnecessary to pay such a high cost.” [DRH note in 2021: Marty turned out to be right on this one. Also note how high he thought the natural unemployment rate was.] What if you’re wrong, and it does take three or four years of 8 or 9 percent unemployment to eliminate inflation? Would you, as the Chairman of the CEA, be willing to recommend such a policy to the President? You wrote in an article in the Journal of Political Economy (August 1979) that “if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment.” Does this mean that you would be willing to put 20 million workers out of work for three to four years in order to reduce the inflation rate by one tenth of one percent? [I meant “one tenth of one percentage point” but I was trying to write it the way Kennedy’s staff might.] In an article in the Harvard Business Review (March-April 1975), you stated that “The favorable incentives of experience rating [of unemployment insurance] could be strengthened by removing the ceiling on the employer’s rate of contribution” so that firms with unstable employment would pay more than firms with stable employment. Given that the auto, rubber, and steel industries are all composed of firms with unstable employment, this would mean that if your proposal were implemented today, you would raise taxes on such firms. Do you advocate increasing taxes on firms that are currently in a slump? In that same article, you said: “Because the cost [to an unemployed person] of additional waiting time and search time is so very low, the unemployed worker is encouraged to wait until there is almost no chance of a better job.” Are you saying that American workers are cheaters who would abuse the unemployment insurance system? Try telling that to the unemployed auto worker who would love to get a job but who can’t find one. In an interview with Business and Society Review (Fall 1976), you said that “We could raise the [social security] tax rate over the next, say, five to ten years by more than is necessary to finance current benefits, and use the surplus to accumulate a fund which would be used to retire federal government debt already outstanding in the market.” Do you still advocate such a tax increase? Will you do so within the Administration? A recent article in the Journal of Political Economy (June 1982) by Leimer and Lesson called into question your claim that social security has reduced personal saving by 50 percent. You admitted that you had made an error in your original study, but still stuck with your conclusion. How do you justify that? How to you reconcile your evidence with that of other economists who say that there is little or not effect of social security on saving? I had heard great things about how well Kennedy’s staff prepped him. But as I recall, Kennedy’s gotcha questions were on issues like whether Marty knew his monthly electric bill. (Kennedy was trying to establish that Marty was rich and, therefore, wouldn’t have much sympathy for or knowledge of the average worker’s economic situation.) My gotcha questions were much better. (0 COMMENTS)

And Bryan Curtis on Schumpeterian competition. Millen: I’ll never forget the quote he gave me. I said, “John, how it’s going?” He said, “Matt, let me tell you one thing. If you got one person who wants you, you get a job. If you got two people who want you, you get a great deal. And if you have three or more, you get a bonanza.” This is from a LONG article: Bryan Curtis, “The Great NFL Heist: How Fox Paid for and Changed Football Forever,” theringer.com, December 13, 2018. Millen, who said this, is Matt Millen, former NFL player, former president and CEO of the hapless Detroit Lions, and former NFL announcer. John, who is quoted, is, of course, the late John Madden, who died yesterday. The quote from Madden reminded me of the famous Reuben Kessel study of competition among bond underwriters, a study that George Stigler references in “Monopoly,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. With one underwriter bidding for the business, the spread was $15.74. With two underwriters bidding, it fell to $12.64. With three, it fell a little more, to $12.36. So it wasn’t exactly analogous to the Madden situation. He needed three bidders. The state of California, which issued the bonds, needed only two to get real competition and six to get something close to perfect competition. Although I note above that the article referenced is long, it’s fascinating throughout. It tells with great detail how Rupert Murdoch bid a previously unheard of number to get the NFL’s NFC games away from CBS. Without that, Fox probably would not have been nearly as successful. Here’s the ending quote: Dolgin: If [Murdoch] didn’t make that bet on the NFL and change the character of that weblet to a major, revolutionary network, I’m sure of one thing: Things like Fox News, FX, Nat Geo — the cable empire wouldn’t have been there. I’m not sure that this whole empire wouldn’t have been there. … All of that is traced back to this bet-the-farm, multibillion-dollar Hail Mary to get NFL rights. Because NFL rights were the only thing that was going to get him new stations. … Look, he just sold [the studio] for $70 billion. I guess it was the best $400 million he ever spent. Dolgin is Tracy Dolgin, Fox Sports executive vice president. Once Fox won that bid, it wasn’t that hard a lift to get John Madden: Jerry Jones, Dallas Cowboys owner: If you make that kind of commitment [for the NFC rights], you’ll go after and get the best. That’s [the huge amount paid to hire John Madden] peanuts. That’s arguing about the price of the seasoning after you’ve paid a fortune for the steak. I’m not enough of an NFL follower (although my wife would say I’m too much of an NFL follower) to follow all the ins and outs of NFL television over those almost 30 years. But here’s the thing I like best about what Fox did: “Fox-izing” football meant the pregame show would be about laughs and relationships as much as it would be about sports. It meant the score and clock would be on the screen at all times. It’s the second sentence here. In football, the clock is huge, especially for the last few minutes of each half. When I watch, I want to understand the plays and strategies. Seeing the clock, just as the play planners do, is important for that. Above all, the article about Fox and the NFL is about Schumpeterian competition. Here’s the biography of  Joseph Alois Schumpeter in David R. Henderson, ed., The Concise Encyclopedia of Economics: [What counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which … strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. Fox introduced more cameras, different commentary, and clocks, among other things. (1 COMMENTS)

To me, the answer to this question seems obvious.  The central bank.  But lots of very smart people don’t agree. MMT proponents believe that when inflation is lower than target it can be increased only with fiscal stimulus—monetary policy is ineffective.  Similarly, they believe that high inflation can only be reduced with higher taxes or lower spending. On the right, some economists advocate a fiscal theory of the price level, the view that Congress determines the inflation rate through its spending and tax decisions (including actions that change the future expected path of fiscal policy). Nick Rowe links to a Stephen Gordon tweet showing how inflation averaged 2% after the Bank of Canada adopted a 2% inflation target in 1991: For someone like me, this graph is completely uninteresting.  But for the economists who believe the BOC is unable to control inflation, it calls for an explanation.  Perhaps due to some weird coincidence, Canada’s parliament decided in the early 1990s to adjust its tax and spending policies in such a way as to keep inflation at roughly 2%, on average. (Just kidding) Nick Rowe is alluding to the fact that most central banks have some sort of dual mandate.  Thus the volatility in inflation since 1991 is not necessarily a sign of the BOC’s inability to prevent short run fluctuations in inflation.  However, in this case I suspect that the policy was indeed imperfect, as Nick suggested.  For instance, the brief period of deflation in 2009 was not done to offset excessively high employment levels.  Rather it represented a policy error by the BOC—policy was too tight to achieve either central bank policy goal. PS.  In another tweet, Nick says: Any central bank that wants to maximise sustainable/average employment will need to: 1. Increase employment some times. 2. Reduce employment other times. Grasping that 2nd bit is hard. Figuring out which is which is even harder. (It’s like catching fish, but different.) If you want to see what happens when the second point is overlooked, look at Canadian inflation from 1953 to 1981. PPS.  Whenever I post on MMT, its proponents tell me that I’ve misrepresented their model. (0 COMMENTS)

What’s a good book title for a hard-line Caplanian defense of laissez-faire, centering around the following theses? 1. Textbook complaints about free markets – externalities, monopoly, imperfect information – are overblown in theory, and even more overblown in practice. 2. Real-world markets deliver most of the textbook benefits of perfect competition, PLUS additional big benefits that aren’t in standard models. 3. Real-world government policies are only marginally connected to the textbook complaints. No government is remotely Pigovian. 4. On balance, real-world government policies make market performance much worse.  E.g. immigration restrictions, housing regulation, public education, in-kind transfers, and universal programs. 5. The best case for government regulation is actually consumer and worker irrationality, but voter irrationality is far worse. 6. Free markets are awesome because they give business incentives to do good stuff that sounds bad. Governments are awful because they give politicians incentives to do bad stuff that sounds good. Since the correlation between what IS good and what SOUNDS good is quite low, this is a huge deal. 7. This awesomeness and awfulness are the main reasons most people resent markets and smile upon government. Economists rationalize government as a response to market INefficiency, but the primary motive is actually to force markets to focus on how things sound instead of what works. 8. Everything I’ve said applies for real-world redistribution, not just real-world regulation. Universal programs are absurd, and keeping out immigrants to protect the welfare state is absurd and perverse. The liberaltarian compromise is a terrible mistake. 9. The slippery slope from the most intellectually defensible government intervention to the actual crummy intervention is very real. So even seemingly trivial exceptions to free-market principles are playing with fire. 10. Free market policies deserve to win all over the world, even though they hardly ever do, and that’s sadly unlikely to change. To repeat, for the time being I’m just looking for a good title for this book.  Ideas? (3 COMMENTS)

The online Merriam-Webster dictionary defines “anti-vaxxer” as “a person who opposes the use of vaccines or regulations mandating vaccination.” Where does that leave us? We both strongly favor vaccination against Covid-19; one of us (Mr. Hooper) has spent years working and consulting for vaccine manufacturers. But we strongly oppose government vaccine mandates. If you’re crazy about Hondas but don’t think the government should force everyone to buy a Honda, are you “anti-Honda”? The people at Merriam-Webster are blurring the distinction between choice and coercion, and that’s not merely semantics. If we accept that the difference between choice and coercion is insignificant, we will be led easily to advocate policies that require a large amount of coercion. Coercive solutions deprive us of freedom and the responsibility that goes with it. Freedom is intrinsically valuable; it is also the central component of the best problem-solving system ever devised. These are the opening two paragraphs of David R. Henderson and Charles L. Hooper, “Coercion Made the Pandemic Worse,” Wall Street Journal, December 27, 2021 (December 28, 2021 print edition.) I’ll post the whole thing on January 27, 2022, when my agreement with the WSJ allows me to. I’ve had a lot of fun this morning responding to commenters on the WSJ site. One commenter said: These authors compare choosing whether or not to get vaccinated with whether or not to buy a Honda. Completely inapplicable comparison. Vaccination during a public health emergency is NOT merely a personal choice – never has been. That’s why George Washington successfully forced all his troops to receive the primitive smallpox inoculation in January 1777 and why the US Supreme Court in the historic Jacobson vs. Massachusetts case upheld compulsory vaccinations  —  for the good of the American public. Choosing a Honda has almost no effect on the health of your neighbor. Choosing whether or not to get vaccinated will almost certainly have an effect. He didn’t get it. Commenter Justin Sauerwein replied beautifully: Assuming your response is genuine, you did not understand the article at all. The authors did not compare Honda to anything, they take issue with Webster’s definition that conflates two different things (“blurring the distinction between choice and coercion”) and used Honda to illustrate the concept. The last several paragraphs deal with the problem of externalities in matters of public health and why coercion (including vaccination) is not optimal. I replied to another commenter who showed very little reading comprehension. For that reason, I won’t name him. This commenter wrote: Do we know these two authors are vaccinated or not ? They don’t reveal But judging from their education level and age they are vaccinated, and boosted and yet, they encourage others NOT to do what is best to stay safe these tow [sic] authors just have to do what is best to earn their paychecks, via viewpoints of (anti-science) conservatives I replied: So when we wrote, “We both strongly favor vaccination against Covid-19,” that didn’t tip you off that we would encourage others to be vaccinated? I thought of another response just now dealing with the commenter’s claim that we “just have to do what is best to earn [our] paychecks.” I’ll share it here. When the commenter read, assuming he did read, the statement in the first paragraph, “one of us (Mr. Hooper) has spent years working and consulting for vaccine manufacturers,” did he think that Charley wasn’t earning a paycheck for helping vaccine manufacturers? Surely he must have understood that consultants almost always get paid. And does he think that “encouraging others NOT to do what is best,”  in this case, presumably, getting vaccinated, would be a good way to earn a paycheck from vaccine manufacturers? (1 COMMENTS)

Like many other laws if not most laws, the Racketeer Influenced and Corrupt Organizations Act (RICO) has been used for purposes far different from its professed original goal. Like other ways in which the state tends to grow into Leviathan, this is not a random event or a manifestation of the supposed “law of unintended consequences.” On RICO, the Wall Street Journal just wrote (“Federal Prosecutors Are Using a Law Intended for the Mob in Unexpected Cases,” December 26, 2021): Federal prosecutors around the country are increasingly using racketeering statutes to go after a broader array of criminal activity, applying them in ways that deviate from the law’s original goal of dismantling organized crime. … The law, passed in 1970, was used successfully early on to target the leaders of New York’s five organized crime families. Since then, it has been used effectively to target insider trading, market manipulation and cybercrime, even where defendants in some cases had never met each other. For example: Authorities in Boston pursued RICO charges in a nationwide college admissions cheating scheme … In the trials of Messrs. Raniere and Kelly, viewed by lawyers as novel applications of the RICO statute, both men were accused of leading a criminal enterprise and using their inner circles to engage in illegal activity and recruit women and girls for sex. … [Mr. Raniere’s lawyer] said that the women freely chose to participate in sex acts. … Steve Greenberg, Mr. Kelly’s former attorney, said it was an abuse of the law to call Mr. Kelly’s lifestyle and career a “criminal enterprise.” … “Prosecutors basically said his life was an enterprise,” said Mr. Greenberg. “If they could have, they would have criminalized his going to the bathroom.” That the power of the state tends to grow automatically has been a reason why classical liberals and libertarians thought it was essential to impose strict restrictions on government scope and power. But how does the state act like Leviathan—that is, like a power-hungry state? A state or government is not a single person but an assemblage of political units and bureaucracies. How can all these components more or less consistently act to increase the general power of government? This is a valid question, and the answer has much to do with the structure of incentives in a government organization. Anyone who benefits from an influential participation in the governmental machine has the incentive of choosing, in his daily activities, the alternatives that increase government power. Provided that they keep from openly violating the constitution or other fundamental laws, such a person is unlikely to be blamed for increasing the capacity of government but, on the contrary, is likely to be rewarded with a higher salary, better perks, and more power. Think of the bureaucrat who finds new missions for his bureau or the politician who makes promises or lies that the voters will have forgotten by the next election. Much of public choice economics has been devoted to analyzing these incentives. Why would a politician oppose expansive laws that may eventually be useful in enforcing his own preferred bans and mandates, and which his supporters think will never be used against them? Why would bureaucrats oppose laws that will expand their bureaus and the glorious power for which they work? Exceptions exist, often thanks to countervailing incentives. If they are not removable, judges constitute the major class of exceptions, even if they often fall under the spell of power. In the 2020 American election, they as well as a large number of humble local election officials stood against Trump’s self-interested lies. They were supported by “opinion” in the Hayekian sense but the question is whether we can rely on this dike as opinion seems to be drifting farther towards glorified state power if not towards callous demagogues. The failure of judges to constitutionally challenge laws such as RICO illustrates the current perils. Outside of criminal laws proper, another major way through which Leviathan grows is by welcoming and even encouraging calls for assistance, which leads to increasing requests, further growth in state capacity, and snowballing dependence on government. Politicians and bureaucrats benefit. An interesting model is due to Anthony de Jasay, who showed how political competition to help people, including those harmed or disadvantaged by privileges granted to others, may eventually result in the state limiting political competition and taking in charge everybody’s lives up to a plantation type of state. Most classical liberals had milder but analogous fears. For example, in the first volume of Law, Legislation, and Liberty (University of Chicago Press, 1973), Friedrich Hayek wrote: Since [the legislative assembly] possesses authority to arrange everything, it cannot refuse responsibility for anything. There will be no particular grievance which it will not be regarded as capable of removing; and since in every particular instance taken by itself it will generally be capable of remedying such a grievance, it will be assumed that it can remove all grievances at the same time. However, it is a fact that most of the grievances of particular individuals or groups can be removed only by measures which create new grievances elsewhere. As I am writing this post, another title on the front page of the online Wall Street Journal reads “As Omicron Spreads, Governments Race to Ease Staff Shortages” (December 27, 2021). The state is also expected to keep inflation in check while distributing trillions of dollars, to assist all identity groups, to dispense “social justice,” to reduce polarization, to be a Green Giant, and to make everybody happy. (0 COMMENTS)

There are three kinds of people: 1. People who trust scientists and dutifully do what they are told.  Most are vaccinated for Covid. 2. People who are skeptical of scientists and/or are bitterly resentful at being told they must get vaccinated.  They are often unvaccinated. 3.  People who are skeptical of scientists and bitterly resent authorities telling them they cannot get vaccinated until the FDA approves a vaccine.  Most are vaccinated. As you may have guessed, I’m in the third group.  I suspect that this is by far the smallest of the three groups.  I am also in the tiny group that was pro-mask at a time the CDC was discouraging mask usage.  I’m a rebel. One argument against libertarianism is that people need to be protected from themselves.  I suspect, however, that statists underestimate the extent to which paternalism actually causes bad behavior: 1. A paternalistic policy regime makes people less careful.  Think of moral hazard and bank depositors. 2. Paternalism annoys people, and then their instinct to be contrarian pushed them to engage in self destructive behavior. 3. Paternalism leads to regulation that creates a monoculture, making it more difficult to see what works best. (3 COMMENTS)

After being stranded with a bunch of Brits for eight hours at a German airport in 2016, journalist Megan McArdle felt that Brexit was going to happen. The giveaway? Not the concerns over economics or politics. Rather, it was about something far more elemental: in whom they could place their trust. Join the journalist and […] The post Megan McArdle on Belonging, Home, and National Identity appeared first on Econlib.

No, the title of this post is not the analog of “I, Pencil” for bonds. The post is about a new kind of Treasury bond issued by the feds. Financial economist Burton Malkiel, who wrote the article on interest for David R. Henderson, ed., The Concise Encyclopedia of Economics, has an excellent explainer in the Wall Street Journal. Here’s an excerpt: Is there a solution for this investing dilemma? Unless you have a huge portfolio, the answer is yes: Invest in U.S. Treasury I Bonds. These bonds pay a fixed rate for the life of the bond, plus the annualized CPI inflation rate. With the interest compounded semiannually, these I Bonds will pay a total annualized interest rate of 7.12% through April 2022, well in excess of any other safe yield obtainable. You can never receive a negative real yield, and the combined interest rate can never be less than zero even if the price level declines. If inflation rises, the rate will go up when it resets in April. In other words, you’re safe from the economy’s current monetary woes and any measures the Fed takes to deal with them. This is from Burton G. Malkiel, “The Treasury Has a Bond Bargain for You,” Wall Street Journal, December 15, 2021. Malkiel points out that the returns are exempt from state and local income taxes. The limit per person is $10,000. (0 COMMENTS)