When I was in the UCLA Ph.D. program, one of the readings in my Monetary Theory course with Ben Klein, if I recall correctly, was Milton Friedman’s 1953 classic, “Commodity-Reserve Currency.” It was a chapter in his Essays in Positive Economics but originally appeared in the Journal of Political Economy in 1951. It was that article, more than any other, that convinced me that a gold standard was too expensive. Friedman had shown that the annual cost of maintaining a gold standard would be 2.5 percent of GDP. That’s huge. I now know that Friedman was wildly wrong. He greatly exaggerated the resource cost of a gold standard. I learned that in my Monetary Theory and Policy course, taught by Jeff Hummel at San Jose State University. In his 1999 book, The Theory of Monetary Institutions, the main textbook for the course, Lawrence H. White goes through the math. The important point, though, before we get to the math, is that Friedman got his estimate by assuming that banks would hold 100 percent reserves of gold against demand deposits and time deposits. That assumption is wildly unrealistic and so his estimate of the resource cost of the gold standard is way too high. Friedman gets his estimate as follows: Delta G/Y = Delta G/Delta M * Delta M/M * M/Y where Delta G is the dollar value of the annual change in the stock of gold, Y is annual national income, M is the size of the money stock M2, and Delta M is the annual change in M2. For M/Y Friedman took M2/NNP (where NNP is net national product). That was 0.625, which White says is roughly right today. What is Delta M/M? White and Friedman assume that the purchasing power of gold remains constant as money demand grows. So the money stock must grow to maintain a constant price level (zero inflation). Using the dynamic equation of exchange (which I used to call the “quantity equation” until Jeff said the “equation of exchange” is more precise), Delta M/M + Delta V/V = Delta P/P + Delta y/y, Where V is velocity, P is price level, and y is real income. Friedman estimated Delta V/V to be -1% annually and Delta y/y, the growth rate of real income, to be 3% annually. With a zero inflation rate, therefore, Delta M/M =4% annually (0 + 3 -(-1)) With Friedman’s earlier mentioned 100 percent reserve requirement, Delta G/Delta M = 1. So now plug into: Delta G/Y = Delta G/Delta M * Delta M/M * M/Y Delta G/Y = 1(0.04)(0.625) = 0.025. In short, the annual cost of maintaining a gold standard is a whopping 2.5% of GDP.   But White considers the actual history of reserves against deposits under the gold standard and gets a very different answer for the ratio of gold to money, G/M. G/M = (R + Cp)/M, where R = bank reserves, Cp is gold coins held by the public, and M is M2. (R + Cp)/M can be rewritten as R/(N +D) * (N + D)/M + Cp/M. R/(N + D) is the ratio banks maintain between their gold reserves and their demand liabilities, which are N (currency notes) and D (demand deposits.) In 19th century Scotland, which had a gold-based banking system and no legal reserve requirements, R/(N +D), was 2% or 0.02. (N +D)/M is the ratio of M1 to M2. Coins in 1999 United States were 8 percent of currency, currency was about 51% of M1, and M1 was about 32% of M2. So Cp/M = 0.08 * 0.51* 0.32 = 0.013 Since M1 is 32% of M2, and coins (Cp) are 1.3% of M2, currency notes and demand deposits must equal 32% – 1.3% = 30.7% of M2 Therefore, R/(N +D) * (N + D)/M = 0.02 * 0.307 = 0.00614 So (R + Cp)/M  = 0.00614 + 0.013 = 0.01914. The ratio of gold to the money stock is therefore about 2%, which is 1/50th of Friedman’s estimate. So the annual resource cost of the gold standard, as a fraction of GDP, equals: 0.02 * 0.04 * 0.625 = 0.0005. So that’s 0.05 percent of GDP.  QED.                   (0 COMMENTS)

In my previous post, I pointed out that the unusually generous unemployment benefits being paid out until early September were likely to depress employment of lower skilled workers during the summer months. You might wonder if there is any research that supports this claim. It turns out that there is.  A 2016 NBER study by Marcus Hagedorn, Iourii Manovskii & Kurt Mitman found that the expiration of the extended unemployment benefits at the end of 2013 led to an unusually large jump in employment during 2014.  Here’s the abstract: We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by Congress’ failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized. You may recall that Keynesian economists predicted the exact opposite, that cutting off benefits would reduce spending and thus reduce employment.  Yes, demand matters.  But so does supply. One point I forgot to mention in the previous post is that the artificially created labor shortage this summer is likely to lead to more illegal immigration. (0 COMMENTS)

At Law and Liberty, Daniel Mahoney has an interesting and often challenging article on Bertrand de Jouvenel. Mahoney, like Jouvenel, tries to reconcile the danger of the state (“the Minotaur” in Jouvenel’s terms) with the ancient philosophical ideal of a “common good” that political authorities are supposed to protect. My own reading of Jouvenel, specifically of his book On Power, has been mainly classical-liberal or libertarian, although I have emphasized the contradictions that professor Mahoney claims to resolve. One fundamental problem, which Mahoney does not discuss in his Law and Liberty article, is: What is the “common good”? Can you find many trade-offs or values on which everyone in society agrees? If not, who does the agreeing, who makes the choice? I remember Anthony de Jasay asking about Jouvenel, with insistent puzzlement, “What does he mean?” (0 COMMENTS)

In response to my ageless hypothetical, Jeremy Horpedahl raises some empirical doubts about the relative value of life for the young and the old: Surprisingly, though, roughly equally valuing all lives is actually the answer that a normal economic calculation, willingness-to-pay for risk reduction, would give you! Or at least roughly. I haven’t seen an estimate for a 10-year-old, but estimates of the Value of a Statistical Life for 20-year-old is roughly equal to an 80-year-old. I’ve written about this before, and here’s a summary of a working paper by Aldy and Smyth that I am drawing on. Middle age lives are worth more, using this method, though perhaps just 2-3 times more. Here’s the relevant graph. My main response: This result is more than merely “surprising.”  It’s positively insane.  If this graph is right, then the value of life from the age of 20 to the age of 50 is actually negative!  You burn a year of life, and at the end of the year the total value of your life is somehow greater.   What then should we conclude?  There are two main possibilities: 1. There’s something deeply wrong with the method used to calculate the value of life. or; 2. People are very foolish indeed.  So foolish, in fact, that their revealed preferences are a terrible measure of their actual well-being.   In the real world, both (1) and (2) are at work.  To give just two examples: On the methodological front, young people are usually liquidity constrained, so their measured value of life usually fails to account for most of their anticipated earnings. On the folly front, young people are notoriously myopic, so they take bone-headed risks even though they have more to lose than the rest of us. The severity of these problems would be even more obvious if we were talking about 10-year-olds rather than 20-year-olds.  I wouldn’t be surprised if their measured VSL was under $100,000, or even $1000.  Why?  Because they have almost no money, and they’re immature enough to run into traffic to save Pokemon cards.  Fortunately, their elders know better. Jeremy continues: So who is right? Caplan’s intuition? Or the modeled VSL calculations? For surely these are miles apart, and they can not both be correct. As an economist, I have a strong preference in favor of willingness-to-pay over our intuitions. Indeed, Caplan himself as defended the VSL approach quite forcefully! For the record, the piece Jeremy links to rejects a bunch of bad but popular complaints about VSL.  I leave open the possibility of good but unpopular complaints.  Starting with: Slightly different methods of measuring VSL could easily yield radically different answers.  Measuring the “overall value of life” probably implies very different results than measuring the “value of an hour of time” and multiplying it by expected time lost.  Measuring VSL using compensating differentials for jobs probably implies very different results than measuring VSL using willingness to follow unpleasant medical regimens.  And so on. In any case, it’s a odd to describe my view that one 10-year-old life is worth 100 or 1000 80-year-old lives as merely “my intuitions.”  I base my numerical answers on three virtually iron-clad reasons why the value of life has to decline sharply with age.  To repeat: 1. When the young die, they lose far more years of life. 2. When the young die, they are far more likely to lose healthy years of life. 3. When the young die, the people who survive them miss them much more – and miss them for a much longer time.   (1) and (2) are beyond debate.  Who would seriously deny that more years of life are better than fewer?  Who would seriously deny that healthy years are better than unhealthy years? (3) is slightly debatable, but Darwin should resolve any lingering doubt.  The genes of animals that prefer their parents to their offspring soon perish – even in cultures that officially put the aged on a pedestal.  Taken individually, each of these premises is stronger than any empirical paper I can recall.  Taken together, these three premises are stronger than any empirical paper we’re ever going to see. (0 COMMENTS)

Stanley Park is one of the most beautiful recreational centers in Canada. It is, if I may be permitted to say so, the Jewel in the Crown of Vancouver, British Columbia. I am a race walker and I’ve entered dozens of 5k, 10k, and half marathons there. The outer track is about 6 miles; while walking, running, skating or biking around it, you can view the majestic Grouse Mountain, English Bay, the Vancouver skyline, numerous beaches, the Lion’s Gate Bridge, a statue of the mermaid, the University of British Columbia, North and West Vancouver, and much much more. It is truly a trip worth taking. But all is not well in what would otherwise clearly be considered this environmental heaven. There are coyotes at large in in Stanley Park, and some of them are not at all that friendly. To wit, several joggers, passersby, tourists- over a dozen- have already been bitten and more of the same would appear to be in the offing. Say what?! Let me repeat that: in this case, man doesn’t bite coyote, but coyote bites man. This species is not as dangerous as is the wolf, but if you are on the receiving end of their attentions, you’ll soon realize that they are not cuddly dogs either. One woman had her hamstring tendon detached as a result of an attack. No one, yet, has been killed by any of these predators, but if these depredations continue, such a tragedy should not occasion any great surprise. Especially vulnerable would be the elderly and children. Should a baby ever be bitten, its life would be at grave risk. Are we going to wait around for that to occur? What have the authorities done so far to quell this abomination? (Is that too harsh a word? Not if you are on the receiving end of one of these beasts’ attentions). In late January of this year conservation officers captured and killed two of these vicious animals. But there are an estimated dozen of them living and marauding in Stanley Park, and the authorities have taken no further action to quell this menace. Please be sitting down when you read this, otherwise you might keel over. How would a private owner of this precious real estate deal with this threat? It doesn’t take an entrepreneurial genius to appreciate that one of the very first steps of a Stanley Park Corporation would be to round up all of these predators, and either place them in a zoo, or release them into the wilds where they could do no harm. Profit and loss considerations would dictate this. Apart from a few weird masochists, no one likes to be bitten by a wild animal. Before you scoff at the idea of privatizing this vast area (1,001 acres) realize that private enterprise has successfully owned and operated other large attractions. For example, Disney World is 25,000 acres. If there are any coyotes there, you may be sure they are kept behind bars. Would the private owner of Stanley Park place high-rise buildings in its midst, thus risking what makes this area so attractive in the first place? Unlikely. Disney World, Six Flags, none of the rest have done any such thing. Further, this could be legally precluded by the transfer agreement. But, horrors, the SP Corp would charge admission! You think you don’t already pay for the care and mismanagement of this splendid park through taxes? Given the greater efficiency of the private vis a vis the public sector, it would be exceedingly likely that the costs would fall. I tell you this! I’m not entering any more races in Stanley Park until this threat is ended. I’m pretty fast for an old codger, but I can’t out-run or out-walk a hungry coyote. (0 COMMENTS)

Sociologist and author Mark Rank talks about his book, Poorly Understood, with EconTalk host Russ Roberts. Rank looks at a wide variety of aspects of poverty. He argues that many widely-held views on poverty are inaccurate, and in particular he argues that most Americans will be poor at some point in their lives. This is a wide-ranging […] The post Mark Rank on Poverty and Poorly Understood appeared first on Econlib.

Sociologist and author Mark Rank talks about his book, Poorly Understood, with EconTalk host Russ Roberts. Rank looks at a wide variety of aspects of poverty. He argues that many widely-held views on poverty are inaccurate, and in particular he argues that most Americans will be poor at some point in their lives. This is a wide-ranging […] The post Mark Rank on Poverty and Poorly Understood appeared first on Econlib.

Sociologist and author Mark Rank talks about his book, Poorly Understood, with EconTalk host Russ Roberts. Rank looks at a wide variety of aspects of poverty. He argues that many widely-held views on poverty are inaccurate, and in particular he argues that most Americans will be poor at some point in their lives. This is a wide-ranging […] The post Mark Rank on Poverty and Poorly Understood appeared first on Econlib.

This will be a very weird summer. By June 6th, everyone who wants a vaccine will have had at least one shot. People will still be dying of Covid, but the situation will seem much different. People will begin to act like the pandemic is over. But what will the new normal look like? We won’t know for an additional three months, not until the extended unemployment compensation expires on September 6th. Until then, we’ll have a very unusual period for the US economy. Here are some predictions. 1. Because millions of unemployed workers in low pay service sector jobs earn more on unemployment than they did on their previous jobs, and because most of those jobs are unpleasant, employment will likely remain quite depressed all summer, before bouncing back in the fall. That’s not to say the economy won’t grow.  The end of Covid makes it likely that sectors such as travel will pick up, but the quality of service will be lousy, perhaps the worst of my entire life. 2.  America will become more corrupt, with more work being done “off the books” in small businesses.  People will collect both wages and unemployment comp.  Is there “hysteresis” in corruption? 3. In a macro sense, this is like the federal government hitting the accelerator and brake at the same time. The results will be interesting–perhaps a temporary spike in inflation. The RGDP numbers will look better than the employment numbers. Productivity will look good (relative to 2019), but the productivity figures will be unsustainable. 4. For many lower-skilled younger people it will be the best summer of their life. Three months without having to work and without the fear of Covid, all paid for by Uncle Sam. 5. There’s always a price to pay for unsustainable good times, and thus I expect the public’s mood to turn sour in the fall and winter, even as employment recovers—indeed because employment recovers.  Someone has to do all those crappy jobs. PS.  Least I sound like a grouchy old guy, let me say that while the public policy here is not optimal, I’m not displeased to see young people have some fun.  Over the past year they sacrificed a lot for older people like me. Enjoy the summer everyone! PPS.  But stay off my lawn. (0 COMMENTS)

Berlin rent controllers: tear down those rent controls! Karlsruhe, Germany (dpa) – A controversial rent cap to control soaring rents in the German capital Berlin has been scrapped by the country’s Constitutional Court. The legislation had been welcomed by tenants, but panned by developers and landlords since it came into force in February 2020. Since then, the rents of around 1.5 million flats in Berlin had theoretically been frozen at June 2019 rates. The court ruled on Thursday that the Berlin government had overstepped its powers in introducing the law, as federal law governing rents was already in place. Previous federal laws had “attempted to ensure a fair balance between the interests of tenants and lessors, interests that are protected by fundamental rights” meaning that “the [German states] are precluded from passing rent legislation in this regard,” an English statement from the court said. The Berlin rent cap was therefore “void in its entirety.” This is from Robin Powell, “German Constitutional Court scraps controversial Berlin rent cap,” DPA International, April 15, 2021. HT2 Jon Miltmore. As the article makes clear, this doesn’t mean there’s no rent control in Germany. What it means is that this particularly harsh freeze on rents was found unconstitutional. In his article, Jon Miltmore writes: To make matters worse, in the absence of a free market, a “grey market” had emerged, reports say. To compensate for lost rent, landlords had begun demanding tenants pay ridiculous prices for furniture, kitchen appliances, and other basic amenities as a condition of renting, Bloomberg reported. “For example, there’s a chair here; it’ll cost you 15,000 euros,” said Thomas Schroeter of ImmoScout24, an online platform for residential and commercial real estate; “or this stove, it’ll be 10,000 euros.” I do take issue with his first four words: “To make matters worse.” The measures he discusses make matters better. When buyers and sellers figure out ways around price controls, markets come closer to clearing. It would be better, of course, not to have the rent controls: these ways around are inefficient. But they are more efficient than a passive response to rent controls. In one of the first lectures I ever saw by UCLA economist Harold Demsetz, one he gave at the University of Winnipeg in January or February 1970, he reported a study he had done of rent control in the Chicago market during World War II. One of the standard ways around rent control, he found, was to insist that the tenant buy the furniture. That was way better than the other typical response: discriminating against black people. Miltmore, by the way, lays out other bad, though entirely predictable consequences of the Berlin rent control law. (0 COMMENTS)