Robert Mundell recently passed away at the age of 88. Mundell was one of the most important macroeconomists of the past 100 years, and his work greatly influenced my own research. While he made important contributions in many areas of international trade and macro theory, here I’ll focus on one aspect of his work. There are three basic approaches to monetary economics.  The most famous is the rental cost of money approach, which focuses on the interest rate as a policy instrument and also as an indicator of the stance of policy.  This approach was developed by Knut Wicksell and extended by Keynes.  The second is the quantity of money approach, which was developed by David Hume, among others, and extended by Milton Friedman.  In this approach, monetary policy is all about changes in the quantity of money, which today is controlled by the central bank.  Then there is the price of money approach, based on work by Gustav Cassel, Irving Fisher, and others.  This focuses on the price of money in terms of some other asset, such as gold or foreign exchange.  Robert Mundell is the most important proponent of this approach. Mundell’s work became the basis for the supply side view of monetary policy, and also influenced much of the “New Monetary Economics” of the early 1980s.  I was also heavily influenced by this research, particularly in my work on targeting the price of CPI or NGDP futures contracts.  And my book on the role of gold in the Great Depression is also quite Mundellian in spirit. While I sometimes disagreed with Mundell’s specific policy views, particularly regarding the euro (which he favored), there is no doubt that he was a brilliant economist and that his many important contributions to trade and macro will influence future generations.  He will be missed. PS.  One of my biggest regrets is that I never got a chance to meet Mundell, or to visit his lovely home in Siena, Italy. (0 COMMENTS)

Chang-Tai Hsieh and Enrico Moretti‘s “Housing Constraints and Spatial Misallocation” (American Economic Journal: Macroeconomics) is arguably the single most influential article ever published on housing regulation.  It also contains a few large miscalculations. I noticed them a couple weeks ago, and Hsieh and Moretti have graciously confirmed the mistakes via email.  Since the gracious admission of error was always a rare bird, and practically went extinct circa 2016, I hope readers won’t judge Hsieh and Moretti (henceforth HM) too harshly.  Though my public betting record is 22 for 22, I know I’ve made my share of mistakes, too. Still, our priority should be to set the record straight.  Where did HM go wrong?  On pp.25-6 of their article, they write: Starting with perfect mobility, the second row in Table 4 shows the effect of changing the housing supply regulation only in New York, San Jose, and San Francisco to that in the median US city. This would increase the growth rate of aggregate output from 0.795 percent to 1.49 percent per year—an 87 percent increase (column 1). The net effect is that US GDP in 2009 would be 8.9 percent higher under this counterfactual, which translates into an additional $8,775 in average wages for all workers. On the next page, they re-estimate the results with imperfect mobility: Table 5 shows that changing the housing supply regulation in New York, San Jose, and San Francisco to that in the median US city would increase the growth rate of aggregate output by 36.3 percent (second row). The net effect is that US GDP in 2009 would be 3.7 percent higher under this counterfactual, which translates into an additional $3,685 in average wages for all workers, or an increase of $0.53 trillion in the wage bill. Both tables indicate that HM are covering the period from 1964-2009.  How then can these enormous changes in the annual growth rate, compounded over 45 years, lead to relatively modest changes in total GDP?  Answer: They can’t! The correct estimate to derive from Table 4 is that GDP will be 1.0149^45/1.00795^45=+36% higher, not +8.9%. Similarly, the correct estimate to derive from Table 5 is that growth will be 1.084% per year (.795%*1.363), so GDP will be 1.0108^45/1.00795=+14% higher, not +3.7%. There is a completely distinct error in footnote 28 on p.26, which reads: US GDP in 2009 was $14.5 trillion so a GDP increase of 8.9 percent implies an additional aggregate income of $1.95 trillion. Given a labor share of 0.65, this amounts to an increase of $1.27 trillion in the wage bill… 8.9% of 14.5T is actually $1.29T.  Multiplied by .65, it comes to $.84T, much less than HM wrote.  If they had used the correct +36% GDP estimate, however, they would have reported the much larger figure of +$3.39T ($14.5T*.36*.65). There is a parallel error on p.27.  They say that raising GDP by 3.7% raises the wage bill by $.53T.  But the correct calculation given these numbers is $.35T ($14.5*.037*.65).  And if you replace +3.7% with +14%, the change in the wage bill comes to +$1.32T. Critics may rush to accuse HM of motivated reasoning, but the shoe does not fit.  Their reported figures for the effect of housing deregulation on total GDP and the wage bill turn out to be gross understatements.  The reasonable interpretation, rather, is that authors and referees alike focused so intently on the advanced mathematics that they glossed over some elementary yet crucial errors.  And this is roughly what Hsieh told me: The referees requested some changes to the text (not the tables, which look fine), but these were inconsistently implemented. Is there any meta-lesson?  Perhaps not, but I would definitely like to see top journals audited to discover the frequency of errors of this sort… (0 COMMENTS)

Blogger, author, podcaster, economist Tyler Cowen of George Mason University discusses the lessons learned from the pandemic with EconTalk host Russ Roberts. Appearing roughly one year after his first conversation on the pandemic, Cowen revisits the predictions he made then and what he has learned for the next time. The post Tyler Cowen on the Pandemic, Revisited appeared first on Econlib.

There are good arguments to the effect that nobody should be “canceled”; but if somebody should, it would be Karl Marx. For all we know, he was a bigot and a racist who even used the N-word, something worse for the current dominant culture than what many did who were canceled or will soon be. One of economist Walter Williams’s columns was titled “The Ugly Racism of Karl Marx.” The main economic argument against the cancel culture is that of John Stuart Mill in On Liberty: freedom of speech is necessary in the search for any sort of truth. Not only do mobs historically and literally lynch unpopular individuals, but the fear of the mob also reduces the incentives to look for the truth and turns many people into wimps. Anybody can make youth errors but they are easily forgivable when the author later changes his mind; he should certainly not be punished simply for having been wrong (assuming he did not physically lynch anybody). It is true that free speech does not—or should not—allow one to shout what he wants in somebody else’s living room or on a platform that belongs to somebody else. But we can still forcefully argue that the owners of private “speakers’ corners” should not be intimidated by witch-hunting mobs, especially when these mobs, as they nearly always do, are asking for the support of the government’s armed agents. The universities where the woke-cancel culture thrives do not belong to the wokes. And certainly, the state should not subsidize activism and speech against free speech. The economist’s individualist methodology as well as the individualist values it often nurtures lead to the belief that an individual is not to be judged by the group, racial or whatever, to which he “belongs.” In a New York Times article (“A Profession With an Egalitarian Core,” March 16, 2013), Tyler Cowen illustrated the economists’ individualist values: In 1829, all 15 economists who held seats in the British Parliament voted to allow Roman Catholics as members. In 1858, the 13 economists in Parliament voted unanimously to extend full civil rights to Jews. (While both measures were approved, they were controversial among many non-economist members.) For many years leading up to the various abolitions of slavery, economists were generally critics of slavery and advocates of people’s natural equality. Two economists, David Levy and Sandra Peart, explained that Thomas Carlyle, a 19th-century man of the right, called economics “the dismal science” because economists opposed slavery. Levy and Peart write: Carlyle attacked [economist John Stuart] Mill … for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics “the dismal science.” Carlyle was not alone in denouncing economics for making its radical claims about the equality of all men. Others who joined him included Charles Dickens and John Ruskin. Back to Marx, whose ideas led to the death of tens or hundreds of millions of individuals and to the impoverishment of even more. It is true that (contrary to what the typical woke seems to think) words do not kill; killers kill and rulers impoverish. Marx’s free speech was helpful in the pursuit of truth: without him, how would we know, except theoretically, where theories like his naturally lead? So what did Marx wrote that should kick him out of the New York Times, Teen Vogue, and many places of high dominant culture? But before that, remember how, after a 45-year career at the New York Times, Donald McNeil was recently harassed into resigning for having said the N-word in a conversation about somebody else who had used the word, notwithstanding his apologies. (I can only hope that speaking about somebody who spoke about somebody who used the N-word won’t bring my own cancellation.) In a similar fashion, Alexi McCammond was fired from a new job at Teen Vogue: a decade ago, the young (black) woman had apparently penned racist and anti-homosexual tweets for which she grovelingly apologized before the large masses. Marx did not live long enough to be devoured by his revolutionary comrades as often happens. The French Revolution and Stalins’s multiple “disappeared” comrades provided dramatic illustrations. Wokes are now banning their own comrades from the bien-pensant society. So here is finally (thanks for your patience!) an excerpt of a letter Marx wrote to Friedrich Engels on July 30, 1862: The Jewish nigger Lassalle who, I’m glad to say, is leaving at the end of this week, has happily lost another 5,000 talers in an ill-judged speculation. The chap would sooner throw money down the drain than lend it to a ‘friend,’ even though his interest and capital were guaranteed. … It is now quite plain to me—as the shape of his head and the way his hair grows also testify—that he is descended from the negroes who accompanied Moses’ flight from Egypt (unless his mother or paternal grandmother interbred with a nigger). Now, this blend of Jewishness and Germanness, on the one hand, and basic negroid stock, on the other, must inevitably give rise to a peculiar product. The fellow’s importunity is also niggerlike. This letter, written in Germain, is translated and reproduced in Karl Marx, Frederick Engels, Collected Works (Progress Publishers: Moscow, 1985), pp. 388-391. It is important to note that Marx wrote the N-word in English as reproduced above; he occasionally wrote other foreign words in their original language (see the preface to the Collected Works, p. XXXVIII). The same translation appears on a Marxist website, the Marxists Internet Archive 0r MIA. The site owners explain: The MIA aims to maintain an archive of any and all writings which are Marxist or relevant to the understanding of Marxism and can be lawfully published. In the past, some writers who have contributed to Marxism have expressed racist, sexist or other distasteful views. The MIA generally does not “filter out” such views … The MIA does not endorse any of the views expressed by any of the writers included here, which are provided solely for the information of the reader. A few years before the complete Moscow edition, a different translation of selected letters, including that of July 30, 1862, was made available by an American publisher: Karl Marx, Friedrich Engels, Selected Letters: The Personal Correspondence, 1844-1877 (Boston and Toronto: Little, Brown and Company, 1981), pp. 81-82. When he wrote the incriminating letter, he was angry with his democratic socialist “friend” Ferdinand Lassalle for refusing to lend him money. Lassalle was Jewish and, as far as we know, had no black ancestor. Marx apparently thought or wanted to think the contrary. We can bet that no such excuse would spare any victim of woke cancellation. Moreover and paradoxically, Marx himself was Jewish, but attacking one’s own group identity must be another mortal sin for the wokes. A possible excuse for Marx would be that he was a man of his time and that historical circumstances must be taken into account. Indeed, suppressing history prevents us to learn its lessons. But the cancel culture never accepts this excuse. (0 COMMENTS)

President Biden will soon present his proposal for increasing income tax rates and tax rates on capital gains on high-income people. He also proposes to raise the corporate income tax rate to 28 percent from its current level of 21 percent. I would not be directly affected by the first two proposals: my income, though high, is much lower than the income to which the higher tax rates would apply and although I have substantial capital gains, they are almost all on stocks owned in IRA-type retirement accounts. When I pull them out, they will be taxed at normal income tax rates anyway, and so the current light treatment of capital gains doesn’t apply to my gains. I would be directly affected by the increase in the corporate income tax rate since over half of my retirement savings are in US stocks. But unless it comes to fighting a bill of attainder directed at me (and so far, that hasn’t been a threat), I don’t judge government policy by its effect on me. I judge it in two main ways. First, is it fair? Second, will it have good effects on people’s economic well-being? Judged by both standards, all three tax increases fail. These are the opening two paragraphs of my most recent article at Defining Ideas, “The Case Against High Marginal Tax Rates,” April 2, 2021. In researching this article, I dug up some earlier items I had remembered from the 1982 Economic Report of the President: In the late 1970s and early 1980s, even mainstream economists started paying more attention to the harm that high marginal tax rates did to economies. Two major factors caused their shift in attention. First, inflation from the mid-1960s to 1980 had put even middle-income people in tax brackets that had been designed for high-income people. According to the 1982 Economic Report of the President, a four-person family with the median income in 1980 faced a marginal federal income tax rate of 24 percent, up from 17 percent in 1965. For a four-person family with twice the median income, the marginal tax rate had risen from 22 percent to 43 percent! That caused more economists to pay attention. Second, a group of economists that included Arthur Laffer started arguing in the 1970s that increasing already-high marginal tax rates didn’t yield much revenue because those higher rates discouraged people from working and encouraged them to engage in tax avoidance: taking payment in non-taxed benefits rather than in money and buying more-expensive houses than otherwise to get the benefit of the mortgage interest deduction and the property tax deduction. This group of economists called themselves supply-side economists. Mainstream economists, skeptical of such claims, began to research the issues more carefully. Many actually concluded that the less-extreme supply-side claims had merit. And note the deadweight loss estimates: President Biden is likely to propose raising the top marginal federal income tax rate from its current 37 percent to 39.6 percent. Consider the effect on deadweight loss for a very high earner in the state with the highest state income tax rates: California. That earner, if self-employed, now faces a marginal tax rate of 54.1 percent, composed of the federal income tax rate of 37 percent, the state income tax rate of 13.3 percent, and the Medicare tax rate of 3.8 percent. With the federal income tax rate increase, he would face a 56.7 percent marginal tax rate. His rate would increase by 4.8 percent. But his deadweight loss would increase by 9.6 percent. Read the whole thing. (0 COMMENTS)

Last month, we hosted a Virtual Reading Group on Virginia Postrel’s New book, The Fabric of Civilization. Caren Oberg, an historian of fashion, led our discussion. (Postrel was also recently a guest on EconTalk.) Over the course of the VRG, participants were encouraged to think of questions to ask Postrel; this interview with Oberg was the result: Many of our participants suggested another VRG based on Postrel’s earlier book, The Future and its Enemies. Let us know if you share that interest, and we’ll see if we can get it scheduled. Our next VRG will be led by EconLog’s Alberto Mingardi on Karl Popper’s The Open Society and its Enemies, starting April 19. Consider joining us! (0 COMMENTS)

On his blog this morning, my friend and fellow blogger Donald Boudreaux has given three cheers to Florida governor Ron DeSantis for his opposition to vaccine passports. I would give the governor at most two cheers. Why? Because one type of vaccine passport is horrendous and a huge violation of individual rights. Moreover, even aside from principle, it’s less and less effective as we get closer and closer to herd immunity. That type of vaccine passport is one that governments are considering requiring. That’s the issue on which I agree with DeSantis. But the other type of vaccine passport is one that firms and businesses are thinking of requiring before letting people into their buildings. This raises no issue of individual liberty. Well, actually, it does, but not in the way that opponents of these vaccine passports argue. The issue of individual liberty is whether companies should be free to decide whom they get to deal with. I say they should. I have long been a supporter of freedom of association, even in cases where that view has been unpopular. I wouldn’t require someone to be vaccinated before dealing with that person because I had my second Moderna shot 20 days ago. But other people have different attitudes to risk. And a business needs to take into account the different attitudes people have. Some may decide that they can get more business by assuring the public that anyone who enters their business has been vaccinated. This is a great solution to a tricky problem. It also has the side benefit of giving people an incentive to be vaccinated. We still hear about people who are nervous or hesitant about, or even opposed to, getting vaccinated. They should be free not to be vaccinated. But other people should be free not to deal with them. (1 COMMENTS)

In March, the economy created 916,000 new jobs and the unemployment rate edged down to 6%. At the same time, total employment remains roughly 10 million below trend. This leads some people to assume that the unemployment rate is sort of meaningless, and that the total employment figures show the true state of the labor market. That’s not quite right.  If you want to know how far we are from a full recovery, then the total employment figures are indeed more relevant at the moment.  But if you want to understand how hard it is to find a job, then the unemployment rate is probably the better indicator. When these two series diverge sharply, it is because there has a been a drop in the total labor force.  Million of people who were employed in early 2020 are currently not even looking for a job.  As a result, the labor market is tighter than you’d normally expect from a situation where employment is 10 million below trend, and indeed far tighter than in 2009: A record share of U.S. small-business owners reported unfilled positions in March, and firms are starting to boost wages to attract talent, a report by the National Federation of Independent Business showed Thursday. . . . [A]n overwhelming number of small businesses are having trouble finding qualified applicants to fill open positions. Over 90% of owners looking to hire reported few or no “qualified” applicants for the jobs they were trying to fill last month. “Where small businesses do have open positions, labor quality remains a significant problem for owners nationwide,” said Bill Dunkelberg, chief economist at NFIB. “Small-business owners are raising compensation to attract the right employees.” I’m not sure what explains the recent drop in the supply of labor.  Part of the decline might reflect workers that are skittish about contracting Covid-19.  Some workers may be staying home to care for children, as many schools have closed.  The expanded unemployment program pays some workers more in unemployment compensation than they earned on their previous jobs.  I expect these roadblocks to mostly be eliminated by late in the year, and hence I expect a surge in labor force participation. But as of the moment, it’s easier to find work than would normally be the case when employment is 10 million below trend. The punch line here, as in so many of my posts, is to avoid thinking exclusively in supply or demand terms.  When it comes to the labor market, both supply and demand matter.  Never reason from a quantity change. (0 COMMENTS)

In a recent post, Sarah Skwire argued, quite rightly, that one of the great features of the market is that it makes a lot of stuff she doesn’t like. It also, of course, makes a lot of stuff that she does, including the very specific kinds of weird things that individuals like Sarah might wish to consume. For Sarah, the fact that markets produce things like olives and death metal, neither of which she wishes to consume, is great because it means that other people can get their wants satisfied even if she wants no part of them. All that markets require is a commitment to tolerance. If we want the weird stuff that we like, we have to accept the fact that the very same processes that will produce that stuff will also produce things we can’t stand.  I can assure you from first-hand knowledge that Sarah finds olives highly objectionable. This works to my benefit sometimes, because when they are served at a meal or I buy some at the store, I know they’re all for me, and I really like them. In the market, Sarah is not forced to either buy or consume what she sees as revolting little fruits.  However, this isn’t true of the political process. What Sarah didn’t address is how her examples might play out under a different set of institutions than those of the market. The nature of collective choice in markets, especially the voting process, which most closely mimics choice in the marketplace, is such that we choose among “package deals” and that everyone must accept the choice of the majority. Electoral politics, by its very nature, cannot abide the tolerance of minority tastes the way that markets do. In the most simple case, the candidate getting the most votes (or the amount otherwise dictated by the rules) wins, and he or she is everyone’s president/governor/mayor etc. Those who preferred a different candidate don’t get an opportunity to “consume” their political preference, as there can only be one winner. We are all stuck with that person. When we look at policies, the same sort of story applies. Particular candidates or parties will offer a platform full of a variety of policy proposals. Individual voters might like some of those proposals but also dislike some of them. Some voters might dislike nearly all of a candidate’s positions. Whichever candidate wins, or whichever party wins a majority, everyone will be subject to their attempts to put their preferred policies in place, regardless of whether we liked those policies or not.  Imagine going to the grocery store and rather than picking out the individual items you wish to buy, each store offered a pre-selected bundle of groceries that were available for purchase. Kroger might offer a different bundle than Whole Foods or Aldi, but each store offers only one bundle and you have to buy everything that’s in it. If we push this analogy to its limit, imagine further that you are required to eat everything that’s in the bundle. Similarly, we could imagine restaurants working in this sort of way.  You can easily see the problems. First, the stores would cater to the median shopper and diner, in a pretty good replica of the median voter theorem. Minority tastes would be largely shut out. Second, very few people would be anywhere close to fully happy with their bundle of groceries or their meal. And if you’re required to eat what you buy, some folks are going to be very unhappy about their meals. I would not look forward to watching Sarah try to choke down some olives. (Though she would be looking forward to it even less!) The overall level of preference satisfaction in politics will be far less than in the market because there’s no way to either satisfy minority tastes or offer specialized versions of common goods that better match people’s preferences. This is the problem with the institutions of collective choice: in politics, everyone has to eat the olives. The collective choice processes of politics, by definition, don’t allow for the possibility of the tolerance of others’ preferences that is the foundation of the marketplace. This is why so many political battles, especially recently, seem so high-stakes. It’s a winner-take-all game, so those who perceive themselves in the minority have every reason to fight hard, if not cheat. The more goods and services that are provided through political allocation, the more we will deal with this sort of problem. One need only think about extending the grocery analogy to health care, for example. If we think it’s important that no one is forced to eat the olives, and if we think it’s important that people are able to acquire the particular goods and services they want, we need to rely on markets to the largest extent possible. And doing so requires that we extend a degree of tolerance to the preferences of minorities that politics does not require. As more of our lives are centered around those winner-take-all political choices, the tolerance necessary for markets might become increasingly hard to come by.    (0 COMMENTS)

Or, more accurately, a customs union. With all the proposals for hundreds of billions of dollars in new government spending and new taxes in the United States in recent days, there hasn’t been much good economic news. Alexander C. R. Hammond, of the Institute of Economic Affairs (IEA) and of African Liberty, writes about it in “Africa Tries Free Trade,” Reason, April 2021. He writes: On January 1, the long-awaited African Continental Free Trade Area (AfCFTA) came into effect. Aside from the economic benefits that the arrangement will bring to the continent, Africa’s newfound support for free trade and liberalization marks a clear rejection of the socialist ideology that has tormented African politics for decades. In recent decades Africa has been the sick puppy of the six heavily populated continents. A glance at the Economic Freedom of the World map of economic freedom shows why. Over half of the 50+ African countries are in the least-economically-free quartile of the world’s 190+ countries. Not a single African country is in the top quartile. Hammond calls Nigeria, South Africa, and Egypt “regional economic powerhouses,” but of the three, only Nigeria is in the second-from-the-top quartile, South African is in the second-from-the-bottom quartile, and Egypt is in the bottom quartile. One of the five measures of economic freedom is freedom to trade internationally. With AfCFTA, this will increase for many African countries. This agreement is like NAFTA and its successor, USMCA: it’s a customs union. The idea is to have low or zero tariffs between and among members of the group, but a common tariff rate on imports from outside. Nevertheless it’s a big, if slow, step toward freer trade. Hammond writes: Within 5–10 years, the AfCFTA will ensure that 90 percent of tariffs on goods traded between member states will be abolished. Within 13 years, 97 percent of all tariffs will be removed. By 2035, the World Bank has predicted, this enormous liberalization effort will boost Africa’s gross domestic product by $450 billion, increase wages for both skilled and unskilled workers by 10 percent, and lift more than 30 million people out of extreme poverty, defined as living on less than $1.90 per day. According to the same estimates, by 2035, the AfCFTA will see more than 68 million people rise out of moderate poverty, defined as living on $1.90–$5.50 per day. The “countries with the highest initial poverty rates,” the World Bank says, will see the “biggest improvements.” Given Africa’s flirtation with socialism and protectionism from the 1960s through at least the 1980s, this is a welcome development. For more on Customs Unions, see Douglas A. Irwin, “International Trade Agreements,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. (0 COMMENTS)