Author and economist Emily Oster of Brown University talks about her book, The Family Firm, with EconTalk host Russ Roberts. Oster argues that running your family life the way you’d run your own business makes for a better family in today’s crazy world. And where possible, the myriad of decisions you make should be based […] The post Emily Oster on the Family Firm appeared first on Econlib.

About a month ago, economists on Facebook were talking about whether Friedrich Hayek’s classic 1945 article “The Use of Knowledge in Society” was taught in many Ph.D. economics programs in the United States. The consensus was that it isn’t. I have a personal experience from my Ph.D. program and a conversation with professors from more-mainstream Ph.D. programs to report. My Experience at UCLA In my first year of the UCLA program, 1972-73, Hayek’s article was on 3 syllabi. One was Armen Alchian’s first-quarter price theory course. A second, I think, was on Axel Leijonhufvud’s and Robert Clower’s 2-quarter macroeconomics sequence. I don’t remember the 3rd. Mainstream Schools In June 1998 I was at a 14-person seminar in Tokyo run by David Weinstein of Columbia University and a University of Michigan finance professor. If I remember correctly, the U of Mich professor was E. Han Kim. Each of us had written a paper on some aspect of government controls on international capital movements or was a discussant of someone else’s paper. With a group that small, we got into a lot of interesting side discussions. More than one participant commented on how eye-opening Hayek’s article had been. No one seemed to disagree. So one of the participants asked for a show of hands from the various academics about whether they covered Hayek in their classes and/or whether Hayek’s article was covered in the classes they took as Ph.D. students. If I recall correctly, I was the only one who had the article on any of the syllabi of courses I took as a Ph.D. student. One person, not me, said that it was a bad idea not to cover such an important article. I’ll never forget the response of Jagdish Bhagwati of Columbia University, one of the 14 participants. He agreed that the article was important, but, he said, he and his colleagues expected the students to cover it on their own The participant who said it should be covered asked Jagdish how he and his colleagues expected the students to know about the article. He said he thought they would know but admitted that he never even mentioned it to students. Note: If  you think I have an axe to grind against Jagdish, keep in mind that I thought that because of his work in trade and protectionism, especially in the 1960s and 1970s, he should have shared with Paul Krugman the 2008 Nobel Prize in economics. I still think Jagdish is long overdue. The picture at the top is of Hayek and me at the second Austrian economics conference in Hartford, CT in June 1975. (1 COMMENTS)

As Matt Yglesias recently pointed out, the term ‘panic’ has a negative connotation: I’m not going to quibble with Yglesias’s claim, as he correctly describes how people think of this term.  Nonetheless, I do insist that panic is often appropriate, if we define ‘panic’ in the way that the state uses the term.  Indeed throughout history, states often justify evil policies by claiming that they are lying to the public in order to prevent “panic”, as if the state is somehow smarter than the public. In most cases, the opposite is true. Lots of old people living in the New York/New Jersey area died because the Trump administration (and to be fair, local Democratic leaders as well) tried to prevent panic.  Here’s Politico: The emails and transcripts detail how in the early days of 2020 Trump and his allies in the White House blocked media briefings and interviews with CDC officials, attempted to alter public safety guidance normally cleared by the agency and instructed agency officials to destroy evidence that might be construed as political interference. The documents further underscore how Trump appointees tried to undermine the work of scientists and career staff at the CDC to control the administration’s messaging on the spread of the virus and the dangers of transmission and infection. . . . Several former high-level Trump officials who worked on the administration’s response have said publicly after the fact that they did not want to panic the American public. The specific worry of the Trump administration was that panic would cause people to stop going out in public and pull back on consumption, perhaps driving the economy into a deep recession.  Eventually the truth came out and the public did exactly what was feared.  And not just in the US, but also in most other countries, including Sweden.  By this time, however, thousands of older residents of nursing homes in New York and New Jersey had already become infected and needlessly died. My mother and stepfather are still alive, because their apartment complex in Tucson (which caters to the old) did understand the risk of Covid in time to panic, to take precautions.  As a result, only a handful of the hundreds of people in their complex became infected, right up until today. I’ve read a number of articles where the reporter interviews doctors and nurses who have treated Covid patients.  The doctors and nurses often complain that even many people in intensive care claim that Covid is just a hoax.  A bit more panic would have been helpful for those patients. On the other hand, last spring I predicted that just as we underreacted at the onset of Covid, we would overreact toward the end of the pandemic.  Sure enough, excessive Covid restrictions remain in place in many areas, despite the widespread availability of vaccines.  So not only can we have too little panic, we can also have too much panic. I always try to adopt just the right amount of panic. (0 COMMENTS)

Inspired by Graham McAleer’s review of the new James Bond, No Time to Die, I streamed the film from Amazon Prime Video. Ever since with my young sons decades ago I watched James Bond films, I have always liked them for the action and the guns, although I now find Jason Bourne more congenial and more realistic. On Law and Liberty, our sister website, philosopher McAleer writes under the title “James Bond, Christian Knight”: During the Enlightenment, David Hume sought to replace the ideal of the Christian knight with that of the gallant. He was sure that a military with baggage trains stocked with champagne would prevail against enemies with less refined tastes. Rustic soldiers, minds stuffed with superstitions, should be supplanted by the scientific soldier, the officer and gentleman. Ambassadors of the refinement of the arts and sciences, a new model army would deliver a revolution in military affairs to the battlefield. For the first sixty years of his film life, Hume’s fellow Scot, James Bond was the definition of the gallant. With suavity to disarm the ladies and the latest refinements in weapons and spy trickery to dispatch enemies, Bond was the lethal edge of the Enlightenment. In No Time to Die, the Christian knight makes a comeback. … In traditional moral theology, the Bible’s greater love hath no man [than this, that a man lay down his life for his friends—John 15:13] is a call to solidarity, in a strict order of obligation: family, nation, and humankind. Bond is bent on saving his family, but he will lay down his life for his country, and humanity, too. One might empathize with McAleer’s claim that James Bond has become a “Christian knight,” but perhaps the professor of philosophy has partly seen in the film what he wanted to see. Did the evil villain’s first name, Lyutsifer, provide an irresistible temptation? If the hero died for a former lover and the baby girl they made together (out of wedlock) as well as for mankind, it is not as clear that he sacrificed his life for his “nation.” The modern state, sovereign and omnipotent, and consequently inefficient and corrupt, appears nowhere in the Bible, even if tribes prefigure nations. Besides Jason Bourne who fights that sort of runaway state, another film to watch is Three Days of the Condor (1975), directed by Sydney Pollack and starring Robert Redford and the beautiful Faye Dunaway. Don’t trust the government of your “nation” too much! This being said, I admit that the new James Bond is morally more sympathetic than his previous incarnations. The student of economics will wonder how villains such as Lyutsifer Safin can marshal the enormous resources necessary to staff and equip private armies, build secret bases on isolated islands, and manufacture biological weapons of mass destruction. Only states can do this. Safin-like villains strain credulity if not, perhaps, for the fact that they sell their services and products to nation-states, which have taxpayers to pay the bill. To add further realism to the plot of No Time to Die,  the infected-nanobot technology used by Safin was stolen from a British government laboratory. As another antidote to state idolatry, I will invoke James Buchanan and Gordon Tullock who explained in The Calculus of Consent (1962; available on Liberty Fund’s Online Library of Liberty) that the Christian ethics has to be tempered by individualism (p. 301): Christian idealism, to be effective in leading to a more harmonious social order, must be tempered by an acceptance of the moral imperative of individualism, the rule of equal freedom. The acceptance of the right of the individual to do as he desires so long as his action does not infringe on the freedom of other individuals to do likewise must be a characteristic trait in any “good” society. The precept “Love thy neighbor, but also let him alone when he desires to be let alone” may, in one sense, be said to be the overriding ethical principle for Western liberal society. Nothing shows that gallantry and the liberal Enlightenment on the one hand and morality on the other hand are mutually exclusive.  On the contrary, classical liberalism offers the promise of both. Perhaps the My Lai massacre would not have happened if American soldiers had had champagne in their rations. There might be a bit of faith involved here, but the good life in a market society and the pleasures of life are probably a big reason why liberal societies have been able thus far to keep barbarians at bay. (0 COMMENTS)

Many people, even sophisticated political commentators, think that libertarianism is internally inconsistent. How else could you assess this philosophy, they plaintively ask? After all, supporters of this view favor the legalization of prostitution, certainly a left-wing position, as well as elimination of the minimum wage law, a stance not only associated with conservatives, but the far right. Libertarians favor the legalization of gay marriage, again a left-liberal position, alongside opposition to rent control, a view held by most right-wingers. These seeming contradictions can be multiplied almost without end. For example, supporters of the freedom philosophy want to legalize drugs, all of them, pornography (except for children) and gambling, along with their “progressive” cousins, and, also, in step with the right, get rid of the Federal Reserve, the FDA, and privatize the post office. Political scientists have concocted a left-right spectrum according to which libertarians register as moderates. This is because they tend to answer all the personal liberties questions as do those on the left, and all economics queries along with members of the right. And, yet, take it from me, libertarians are not moderates by any stretch of the imagination. Rather, they are extremists on both sides of this political spectrum. What is going on here? What is going on is that libertarians are the only logically consistent group in the entire realm of political economy. They support liberty in both the personal and the economic realms, whereas socialists and conservatives register on the liberty scale in only one of these dimensions, one each. Oregon is the only state to have legalized addictive drugs, in addition to marijuana. They vote overwhelmingly blue. They see so clearly that it is unjust to stop adults from placing substances in their bodies which may well be harmful. But they do not at all appreciate the fact that prohibiting consenting adults to enter into a labor contract stipulating pay of less than $7.25 per hour is also a violation of liberty. Red state voters see so clearly that it is impermissible to prevent consenting adults from conducting commercial exchanges through the financial intermediation of gold, not fiat currency. They appreciate that profit maximization benefits society and that forced redistribution of money from rich to poor does not. But when it comes to the right to provide sexual services for pay, these insights pale into insignificance. Only libertarians favor all sorts of economic and personal rights without exception. But are not some of these practices vices? Of course they are. Some people consider excessive profit making and addictive drug taking as evils. But the law, at least from the libertarian point of view, is not supposed to stop all of immorality. We all have iniquitous thoughts do we not? If the police could require all of us to be entirely moral in thought and deed, we would all be in jail, including them, of course. Mere vices should not be considered crimes. Our legal system should be a more limited one; it should only stamp out crimes with victims, such as murder, rape, arson, theft, assault and battery, etc. Another problem with the one-dimensional left-right spectrum is that it is supposed to place people and institutions whose views are similar close to each other, and place great geographical distance between those who diverge in this manner. But what to do about Hitler an extreme rightist, and Stalin, a man of the left? There may not be a “dime’s worth of difference” between the two of them in terms of rhetoric, but on the basis of action, they are identical twins in terms of mass murder. Mother Teresa must be placed on the left side of the one-dimensional left-right spectrum. So must we place her cheek by jowl with Stalin? Perish the thought. Ditto for Ron Paul and Hitler; both can be placed on the right, an inaccurate a placement as can be imagined. A much better way of looking at political economy than a one-dimensional left right spectrum is a two dimensional cross. The vertical axis indicates “good” at the top (adherence to libertarian principles) and bad at the bottom (utter rejection of them). The horizontal axis is the usual left right spectrum. Then, we can place Stalin at the lower left, Mother Teresa at the upper left, Ron Paul in the upper right, and Hitler at the lower left. Then and only then can geographical placement be congruent with political philosophy and behavior. Chemists have a table of the elements. Biologists divide up what they study into genus and species. Political scientists need a far more accurate organizational tool than the one which now misleads them. Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans (0 COMMENTS)

Interviewers at campusreform.org often go on campuses to interview college students about their knowledge of various current issues. There has been a lot of talk lately about whether “the rich” in the United States pay “their fair share” in taxes. Of course, “fair” is almost never defined. That’s part of what makes this 5-minute video, titled “WATCH: Students stunned when they hear how much ‘the rich’ already pay in taxes” so interesting. When many of the students hear how much “the rich,” which in this video is taken to mean high-income people rather than wealthy people, pay, some actually advocate cutting taxes for “the rich.” Notice that up to about the 2 minute point, most of the students they show don’t have a clue about the threshold for the top 1% of income earners. Most of the interviewees dramatically overstate it, in a few cases by one to three orders of magnitude. Then at about the 2:10 point, the interviewer informs them. Watch from about 2:48 on, when the students give their estimates of the percent of income the rich pay in taxes now. Watch how they switch, based on this information, at about 3:17. Watch the guy who wanted to tax them more who switches to wanting to cut their taxes (at about 3:26.) Watch the woman who wants to force people making $750k a year to pay only 5 to 10 percent of their income in taxes (at about 3:48.) The interviewer, Addison Smith, has a nice soft touch. Watch the whole thing.   (0 COMMENTS)

The Economist has an interesting story about a rising star on the Spanish political scene, Madrid mayor Isabel Diaz Ayuso: Ms Ayuso’s victory came with a slogan simple to the point of crudity: “Liberty or communism”. But freedom is a note she sounds again and again. “Madrid is liberty, or else it isn’t Madrid,” she tells The Economist, returning to the theme no matter what she is asked about. Madrid prospers when people are left alone to run businesses, do with their property as they will and live as they choose. Asked what government can do besides get out of the way, her answer is to give people more freedom of choice, for example in work schedules. . . Asked whether she supported Mr Sánchez’s proposal to ban prostitution, her criticism of the government included the line “They only want to destroy jobs.” Although she is in Spain’s conservative party, she is actually a liberal: Just 43, childless, churchless, single (so “you can tell the market is bare,” she has joked) and even bearing a tattoo on her forearm, she is hardly an obvious leader of Spain’s traditional conservative party. But she proudly declares herself a liberal, not a conservative, saying the PP has room for both. This got me thinking about the relationship between conservatism and freedom.  What do conservatives actually believe about freedom? Let’s start with a simple comparison, vaccine mandates and pot prohibition. At a superficial level there are some similarities.  Both regulations are partly justified in terms of paternalism, protecting people from hurting themselves.  If someone claims that it’s their own body and they should be able to do what they wish, the argument often switches over to externalities.  Drug addiction can also hurt your family members.  Being unvaccinated makes it more likely you transmit the virus to others. While at a superficial level these two issues have some similarities, the politics are radically different.  Conservative politicians are far more likely to oppose vaccine mandates than pot prohibition.  How can we understand this difference? Here’s the wrong way; ask people to justify their beliefs.  I often see conservative people citing this or that piece of empirical evidence on vaccines, or masks, or pot, of LSD, always in support of their political view.  But if liberals and conservatives are looking at the same empirical evidence, why should they reach different conclusions? Proust said, “It is desire that engenders belief”.  Don’t focus on what people believe; focus on what they desire.  Their empirical beliefs will conform. Conservatives often speak of faith, family, country.  (Today I’d add “natural born gender identity”.) Conservatives put a lot of weight on tradition.  They seem less likely to choose a religion in the way that one orders food off a menu than is the case with liberals.  They are less likely than liberal Americans to say, “I’ve looked around and it seems that Canada, not America, is actually the best country in the world.  Proust (actually the character in his novel) said his friends were his family, presumably referring to the fact that his friends were chosen, but no one gets to choose their family.  In contrast, family ties are extremely important to a conservative, despite this lack of choice.  Ditto for one’s natural born gender identity. When I examine political discourse, I see conservatives being far more likely than liberals to use the term “freedom” or “liberty” as justification for a particular political position.  But I don’t see that rhetorical difference being reflected in actual policy views; at least it’s not obvious to me.  How can we explain this paradox? Let’s assume that American “liberals” (who I’ll call progressives, as they aren’t actually liberals) are utilitarians that don’t place any special weight on freedom.  On some issues, such as pot legalization, progressives will take a pro-freedom stance, while on others they do not. Conservatives need to respond to progressives.  But what is their most effective rebuttal?  It’s obviously not sensible to be blindly anti-utility.  Even non-utilitarians acknowledge that utility is often a good thing.  So they need to be for something. In my view, the thing they are for is tradition.  But it doesn’t sound cool to be for tradition, and indeed certain conservative views that were once motivated by tradition (say a ban on interracial marriages) have now been discredited.  Instead, when conservatives defend tradition they often do so using the language of freedom.  Even better for American conservatives, the term “freedom” comes out of classical liberalism, which is one of America’s traditions. So let’s say that conservatives don’t actually favor freedom, but use the term as justification for defending tradition.  In that case, you’d expect conservatives to favor pro-freedom public policies that preserve traditions, but not pro-freedom public policies that allow for unconventional lifestyles. Conservatives would favor freedom to drink alcohol (a tradition), but not to smoke pot, which is not an American tradition.  Guns are a tradition, as is freedom from mask mandates.  Driving big cars with gasoline engines is a tradition.  Stand-up comics making fun of minorities, gays and women is a tradition, while kneeling during the national anthem at a football game is not. It took conservatives longer to embrace gay marriage, and when many of them did, it was due more to their belief in the value of marriage as an institution than from sympathy for the gay lifestyle. Conservatives have long favored restricting freedom when it comes to social issues such as drugs, prostitution, gambling, pornography, physician-assisted suicide, abortion, etc.  In recent years, conservative American politicians have also grown increasingly supportive of zoning restrictions, trade restrictions and immigration restrictions.  In each case, their “anti-freedom” views are motivated by a belief that change is threatening American traditions.  They fear the traditional suburban lifestyle becoming more “urban” (sometimes a code word for racial change as well.)  They also fear traditional American culture being affected by immigration.  And just to be clear, traditional American culture does not mean (Hispanic) El Paso, or (Asian) Irvine, or (black) Detroit, or (Native American) northeast Arizona.  They fear that globalization and trade will destroy tightly knit communities with factory jobs and create huge anonymous cities full of information workers linked to the global economy. Of course there is a third group that really does believe in freedom, the libertarians.  Because we have a two party system, this group may ally itself with Republicans on some issues and with the Democrats on others.  This is the only group that truly believes in freedom for its own sake, freedom for others, not just freedom as a rhetorical tool to preserve one’s own lifestyle.   And it’s a rather small minority of voters. PS.  There’s an even smaller group—utilitarians who happen to have mostly libertarian policy views because they believe that a minimal government maximizes aggregate utility.  That tiny group includes me and a handful of other people. (0 COMMENTS)

Is failure to tax a subsidy? In a comment on Bryan Caplan’s recent blog post titled “I Win My Climate Shock Bet,” November 9, 2021, better Daniel Reeves writes: They [Wagner and Weitzman] do spend a lot of time in the book on the absurdity of the current fossil fuel subsidies, which I’m sure you also despise. Reeves is right that they do spent a lot of time on it. What the authors don’t do, though, is tell the reader how their huge estimates were reached. They state on p. 22, “The world subsidizes fossil fuels at a rate of over $500 billion per year.” If you look at the notes at the back, you see a long discussion of this number on pp. 171-172. But the discussion doesn’t tell you how the number was reached. Instead, it gives a source. In the Bibliography, on p. 212, you can find the source and, fortunately, accompanying the source is a link. I went to the link and started reading. What I noticed right away was that the authors, Clements et al, didn’t define a subsidy the way we normally define a subsidy. You can check that for yourself on pp. 5-8. Here’s a highlight from pp. 5-6: Consumer subsidies include two components: a pretax subsidy, if the price paid by firms and households is below supply and distribution costs, and a tax subsidy, if taxes are below their efficient level. Box 2.1 describes the calculation of these two components. Most economies impose consumption taxes to raise revenue to help finance public expenditures. Efficient taxation requires that all consumption, including that of energy products, be subject to this taxation. The efficient taxation of energy further requires corrective taxes to capture negative environmental and other externalities owing to energy use, such as global warming and local pollution. In other words, failing to tax energy at the level that the authors think is needed to internalize the externalities that fossil fuels create amounts to subsidizing these fuels. Clements et al could make a case for this. But there are two problems. First, it’s classic question-begging. Clements et al take as given that fossil fuels should be stiffly taxed. But in the discussion between Caplan and Reeves, that’s one of the major items at issue. Second, even if you think, as Scott Sumner does, that taxing carbon is low-hanging fruit, if you use the Wagner/Weitzman estimate to make your case, you’re misleading almost everyone. (I’m not saying that Scott is misleading everyone: he argues independent of the current level of subsidy.) Nowhere in Climate Shock could I find any hint that the authors count failure to tax as a subsidy. That’s not what most people mean and it’s not what 99 out of 100 readers would take way from Wagner’s and Weitzman’s discussion.   (0 COMMENTS)

Huemer’s new Justice before the Law is full of memorable passages, but this is the one that stayed with me: There are few threats more frightening to Americans than the threat to embroil someone in legal trouble. An illustrative case occurred at a nursing home in California in 2013. An 87-year-old woman living at the facility had stopped breathing, and a nurse on staff called 911, the local emergency services. The 911 dispatcher pleaded with the nurse to start CPR, knowing that the resident would not survive without immediate assistance. The nurse refused, citing company policy. The dispatcher assured the nurse that she could not be sued if anything went wrong during the resuscitation attempt and that the local emergency services would assume all liability, yet the nurse remained unpersuaded. The resident died soon after. The dispatcher’s assurances to the nurse reflect common knowledge of American culture: Americans have come so far in our fear of our own legal system that a nurse might plausibly be deterred from trying to save someone’s life by the fear of a lawsuit. Americans do not only fear losing a legal dispute; we fear getting involved in a legal dispute in any manner, whether one is in the right or not. As soon as one is sued, let alone prosecuted, whether rightly or wrongly, one expects to endure months or years during which the legal threat hangs over one’s head, and one is almost guaranteed to lose thousands to tens of thousands of dollars, no matter the outcome. The key insights: 1. Virtually everyone in the United States, no matter how innocent, would be terrified to be sued or charged with a crime. 2. Virtually no one, if sued or charged, would say, “I have nothing to worry about, because we have a well-functioning system that prevents the punishment of innocent people like me.” In fact, guilty people would plausibly be less anxious about being sued or charged, because they are usually more experienced at gaming the system.   Which raises an obvious question: Why do people tolerate – and even energetically defend – a system of justice that virtually everyone thinks would hellishly mistreat them if they were innocent? The best response is something like: “Sure, almost any innocent person would be terrified if they were accused.  However, innocent people rarely worry that they will be accused of anything, for the obvious reason that innocent people are hardly ever accused of anything.” Yet on reflection, this is still pretty damning.  It amounts to, “While we have a rotten system for assessing guilt, we’re good at avoiding unreasonable suspicion.”  Especially when the main mechanism for avoiding unreasonable suspicion is simply flying below radar.  If a plaintiff or a prosecutor ever realizes you’re alive and decides to make you suffer, your innocence will not save you from a world of pain. (0 COMMENTS)

With the 12-month rate of CPI inflation now at 6.2%, inflation is once again in the news. Should we worry about inflation? If so, why? I have what might seem like contradictory views on inflation. On the one hand, I’m an inflation hawk who came of age in the 1970s and I view the high inflation of that decade as a major policy mistake. On the other hand, I’ve argued that inflation doesn’t really matter, that the so-called “welfare costs of inflation” are better measured by looking at NGDP growth. And a model produced by David Beckworth suggests that NGDP is back on track: Of course, the 1970s didn’t just have high inflation, that decade also saw wildly excessive NGDP growth (11%/year from 1971-81), so there were good reasons for inflation hawks like me to worry about high inflation even if in some sense inflation doesn’t matter.  The metric we prefer was just as excessive. If you ask the average person why they worry about inflation you quickly realize that their actual concern isn’t inflation; it’s something more like falling real GDP.  Thus they might fear that higher prices will cause a fall in their living standards.  But higher prices are a zero sum game; they do not directly reduce the living standards of Americans.  At this point some will shift the argument to “distributional effects”, and claim that some people are getting rich while the poor are being hurt by inflation.  As Matt Yglesias pointed out today, however, the poor are seeing their incomes rise faster than any other group: Real GDP growth has been lower than normal over the past 7 quarters, but growth is far better than in 2008-10, and that’s because the Fed switched to a monetary policy closer to what market monetarists like myself recommended back in 2008-09.  At the time, we were told that a commitment to return prices or output to the previous trend line would make no difference at the zero lower bound.  In fact, quickly bringing NGDP back to trend has resulted in a much better performance for RGDP, and hence living standards, relative to what we saw in 2008-10. So why is inflation bad?  After all, if one person pays more for a good, another receives more.  And there’s really no evidence that the distributional effects favor the rich.  The stock and bond markets did horribly during the high inflation 1970s.  So why is inflation bad? The textbooks say that one problem is menu costs, the cost of changing prices in menus, but those are pretty trivial.  The main cost of inflation is that raises nominal interest rates.  One cost of higher nominal rates is that people go to the ATM machine more often, but again that cost is pretty trivial.  The main cost of higher nominal interest rates is that they distort the tax system.  Higher inflation raises the nominal return on investments, which causes the real tax rates on investment to be higher than otherwise.  I used to teach my students that if the nominal interest rate were 12% and the inflation rate was 10%, then the real rate of return would be 2%.  If you then added a 50% tax on investment income, the real rate of return falls to minus 4% ((0.5)*12% – 10%).  That’s a real tax rate of 300%.  Thus inflation discourages saving and investment. But note that the mechanism by which inflation discourages saving and investment is by raising nominal interest rates.  In the previous example, in an economy without inflation the after-tax real rate of return would be 1% (50% of 2%), not minus 4%.  Oddly, the recent bout of inflation has not raised nominal interest rates.  The nominal rate on 5-year Treasury bounds is about 1.2%, while the real return on 5-year TIPS is negative 1.9%.  Read that again, you earn negative 1.9% per year by investing in Treasury notes.  And the TIPS inflation adjustment is also taxable. Thus while the stock market did horribly from 1966-82, stocks have done very well in recent years.  This time around, inflation has not resulted in high nominal returns on risk-free investments, and thus has not distorted our tax system to anywhere near the extent it did in the 1970s and early 1980s, when yields on Treasury bonds rose to nearly 15%. So how should we think about the “inflation problem” that most consumers worry about?  It’s not really an inflation problem; it’s a real GDP problem caused by supply chain disruptions.  So yes, some people are suffering, but it’s not useful to think that “inflation” is the source of their problems; rather it’s a lack of real GDP growth.  If you thought inflation was the source of the problem, then you’d advocate that we switch back to the failed policies of 2008-10. But the solution is not tighter money, it’s supply-side reforms. This is not to say that we don’t have any inflation problem at all, i.e. an excessive rate of NGDP growth.  While NGDP is roughly back on track, it now looks to me like we are going to overshoot what David Beckworth and I view as “neutral”.  The TIPS spreads are too high.  So I favor the Fed tapering, and indeed would like them taper even faster. PS.  After linking to Beckworth’s graph, Matt Yglesias had this to say: I’m increasingly worried about the fact that I find myself agreeing with Yglesias more and more often.  Hopefully, this is because he’s moving in my direction.  I’d hate to think that I’m moving in his direction.  🙂 (0 COMMENTS)