If you’re currently parenting a 5-year old or remember what that was like, you can skip over the next few paragraphs. You’ve lived this story before. For the rest of you, here’s the scene. It’s 6:30 on a school night. Daniela has finished her dinner. (And, no, the names have not been changed to protect the innocent. There’s nothing innocent about a 5-year old before bedtime.) The next hour and a half is critical. She needs a bath, book, and all the other items on the pre-bed checklist. School starts tomorrow morning at 8:30. If Dani is not in bed by 8 pm, tomorrow morning will be a desperate struggle with a tired cranky kid, likely ending in a late arrival and the dreaded Walk of Shame past the office of the Head of School. The next few minutes play out in an entirely predictable way. Dani bounces down from her chair, announces she’s ready to play and vanishes into the family room. If she’s strategic, she’ll seize on some diversion—spilled milk, misbehaving cats, something like that—to make her escape before we can get her heading for a bath. I mention the strategic behavior not as some whimsical observation on family life. This is solid evidence that our 5-year old can connect current events, and future events. She’s beginning to reason temporally. When I finally catch up to her, she will be fully engaged with one of the many toys scattered about the family room. I will tell her it’s time for her bath. She will resist. I will insist. What happens next depends. Parenting is exhausting. Sometimes I’m too tired to behave like an economist and will just demand compliance. That seldom ends well. Sometimes, though, I’ll try to pull some tools out of my Econ 101 tool bag. That seldom ends well either, but it gives me a chance to think about what parenting can teach me about economics. When I’m in economist mode, I will ask her to make a choice involving intertemporal substitution. I’ll say something like “Ok, you can play in here for another 10 minutes but that means less time playing in the tub. Do you want me to set my timer?” She will always take the deal. And she will always renege. When the timer goes off, she’ll beg for another 5 minutes. If I’m still in the mode of an optimistic economist hopeful for a Pareto optimal solution, I’ll agree. But I’ll carefully explain that extra time playing with her magnetic blocks now means less time playing with her bath sharks later. I’m indifferent to that tradeoff. I only want her decontaminated and in bed by 8 pm. And so it goes. When it’s time to get out of the tub she’ll beg for a few more minutes. I will say no. She will complain. Whining will happen. Tears may be shed. Later, I’ll wonder why I bothered to give her choices. Contracts, Choice and Imagination The answer, of course, is that learning to make choices, especially choices involving intertemporal substitution, is one of the most important skills a kid needs to master. I give her choices because she needs the practice. “The kind of mutual good will that permitted you and your partner to capture the gains from specialization and enjoy sharing the crossword over Sunday brunch will not work with kids.” All families began as socialist institutions, but once kids arrive, the happiest families become rigid communist states. The kind of mutual good will that permitted you and your partner to capture the gains from specialization and enjoy sharing the crossword over Sunday brunch will not work with kids. Your kids will love you, but they will not cooperate with you. You will need to create a centralized, command-and-control hierarchy. A benevolent hierarchy, of course, but one in which the grown-ups are clearly at the top. That last bit is important. But even good communists rely on markets. They negotiate, offer tradeoffs, and come to terms. The contracts formed in a collectivist enterprise may not look like the explicit contracts that develop in a market economy, but they do the same things. And so one question for an economist to ponder is: Why is it so difficult to form efficient contracts with your kids? It’s a real puzzler. You and your kid know each other better than any commercial counterparties can know each other. No need to waste time haggling over terms that don’t matter to either of you. (In econ-speak, you both know the core of the bargaining set.) What’s more, you’re plugged into the biggest repeated game ever. This should work to minimize opportunistic behavior. Yet, it is still very hard. The reasons for this are something I might ponder in some other essay. But I actually think the bedtime dilemma helps us think about an even more interesting economic problem. It also suggests ways I might become a better teacher and, more importantly, help me understand how to better help Dani grow up into a flourishing adult. Parents worry a lot about certain developmental milestones—when did the baby first smile, when did she speak her first word, when did she begin reading to herself, and so forth. But we largely ignore another important class of milestones: the development of preferences. It’s an easy thing to miss since it happens so naturally. Around two months of age many babies show a preference for their mother. Not long after that kids typically develop a deep affection for one or two toys, usually a stuffed animal or lovey. Once they start eating solid foods, they will have favorites. Our 5-year-old is the very model of a rational consumer. I mean that literally; she is the rational consumer of our models. If you confront her with bundles of goods that are well understood (no ignorance or uncertainty) and immediately in front of her (no time lag as to when they will be consumed), she can provide a ranking. What’s more, those rankings will be consistent with the axioms you see described in all the best textbooks: the choices are transitive, consistent with non-satiation and so forth. I’m not going to claim that I can write down her utility function, but I could easily determine her marginal rates of substitution. And that’s a good thing. Despite her complete indifference to calculus, Daniela has mastered constrained optimization. If we take time to learn her preferences—if, figuratively at least, we map out her indifference curves over these sorts of goods—we can predict some of her choices. Even better, we can begin to nudge her into all sorts of behaviors we think appropriate. She’s 5. We control the budget constraint. But parenting is about more than incentives and constraints. And economics should be too. Both parents and economists need to understand that all choices require an exercise in imagination. When Daniela chooses to dress Barbie in pink rather than purple, she’s imagining which outfit will be more appropriate for the gala to follow. When you choose to snack on a Snickers instead of a Milky Way, you’re imagining the taste of each treat. The thing is, though, some choices require more imagination than others. Economists should pay more attention to those differences. I know in one sense microeconomics does this already by distinguishing different kinds of decision-making environments (certain v. uncertain, static v. dynamic and so forth). But we mostly use the same framework—constrained optimization—to analyze choice. We focus on the optimization process, usually making some not particularly helpful suggestions about how the problem can be modeled and solved. But we mostly ignore the cognitive demands that choices place on the decision maker’s imagination. I’m still working all this out in my own imagination, but I wonder if paying more attention to the way we imagine things can help economists better understand the kinds of choices people make. I wonder if doing so might help us better support our kids, and perhaps even help us make better choices for ourselves. Towards a Hierarchy of Choice And so at the risk of stating what may be obvious to any decent psychologist, let me suggest some categories of decisions that are distinguished by the kinds of imagination required of the decision maker. This may be more a multi-dimensional continuum than a set of discrete buckets, but I think it’s a good way to frame our understanding. At the most basic level we have the pink gown/purple gown and Snickers/Milky Way kinds of choices. These decisions don’t require much imagination. The goods are ordinary, well understood kinds of things—little girls know the difference between pink and purple. And, since the goods will be consumed very soon after making the choice, it’s easy to imagine the consequences of the decision. These are the hypotheticals we present to undergraduates taking intermediate microeconomics. We stick with the simplest kinds of choices because we don’t care all that much about whether economics majors understand decision making, we want them to understand constrained optimization. Shame on us. A second tier of choices demands a significantly higher level of imagination. These are the ones where we know our preferences but we have to imagine some important aspects of the experience on offer. Think, for example, about what goes through your mind when you’re dining in an unfamiliar restaurant and the server asks whether you’d like the soup or the salad. You know how to rank certain types of soup and certain types of salad—you can easily imagine your preferences—but you also have to imagine the quality of soup that will be served. I suspect that many economists who’ve managed to read this far are thinking: All he’s talking about here is decision making under uncertainty. This is part of a huge literature stretching back to the Bernoulli boys in the 17th Century. This talk about ‘imagination’ and 5-year olds is just a distraction. I hope not. I teach a class called “Decision Making Under Uncertainty” and I worry about whether I’m leaving my students with the idea that the key to making better decisions is getting more information to help you come up with a better stochastic representation of outcomes. If it’s a cold winter’s day and you don’t want lukewarm soup, does better information about the distribution of serving temperatures lead to a better decision? Sure. But that obsession with a better stochastic representation misses what matters more: your imagination of outcomes. I’m not saying we should ignore the stochastic element of decision making—it’s helpful to be able to calculate the moments of the Bernoulli distribution. I’m just saying we can’t pretend that once we’ve got that we’re all good to go. Decisions over murky outcomes aren’t just an exercise in statistics, they’re an exercise in imagination. Now once again, I can hear the voices of all those grumpy decision theorists muttering in the background about how this is not at all an original concern. Decision theory, they will assert, isn’t just applied statistics. Good economists don’t just work lottery-like problems with cleverly measured probability distributions spread over known domains. They’ll talk about known unknowns and unknown unknowns. They’ll affectionately cite Frank Knight’s famous distinction between risk and uncertainty. A few of the braver ones may even grudgingly acknowledge Nassim Talib and his aviary of black swans. Is all this literature just a fancy way of telling people to use their imaginations? I hope so. But I’d like to see some evidence that it’s working. The way the Masters of the Universe in finance evaluated risk during the financial crises should be an embarrassment to every right-thinking business school professor. That wasn’t a failure to properly calculate “value at risk” or some similarly silly thing. That was a failure of imagination. The third tier of decision problems is, in some sense, a mirror image of the second. Here, the choices are well understood and easy to imagine. The challenge is imagining how you will feel about those outcomes when they occur. I put this on a higher tier of decision making because I think the cognitive demands are much higher. And I think it explains why it’s hard to get your kid to bed on time. Remember, the deal I offered Daniela involved intertemporal substitution: more time in the family room for less time in the bath. You and I make tradeoffs like that every day. And most of these seem like straight-forward choices. That’s because we can imagine the preferences of our future selves. I know that if I eat pizza for lunch, I won’t want pizza for dinner. I don’t know much about the cognitive ability of other animals, but I wouldn’t be surprised to learn that this is something only humans can do well. I do know we’re not born with that ability. I know that because I know that my perfectly normal, imaginative 5-year old can’t imagine how she will feel about things in the future. She can imagine the future—remember, I said earlier she can think strategically—but she doesn’t yet seem very good at imagining her future preferences. She knows that dinner will follow lunch, but she doesn’t know that pizza at lunch will make pizza night less satisfying. There is a fourth tier of the imagination, one that I’m almost reluctant to bring up since I’m not even sure this one belongs as part of a discussion on decision making and preferences. But it’s really interesting and important. So here goes. Some people believe that we have the capacity not just to imagine what our future preferences will be, but to imagine what our future preferences should be. The philosopher Agnes Callard uses the word “Aspiration”—she actually wrote a book with that title—to mean “the rational process of values acquisition.” Professor Callard thinks that we’re capable of aspiration. Others disagree. But what matters is that I want Professor Callard to be correct. I want my daughter to be able to imagine different versions of herself. I want her to imagine how different kinds of values can give her life different kinds of meaning. I want her to want to be kind and generous, not because people tend to be nice to nice people, but because kind and generous people flourish in ways that selfish people don’t—even selfish people who make lots of money by convincing people that they’re nice. I want her to want to value transcendent things—art, music, nature—that she’ll pick. So What? I titled this essay “Parenting Tips.” I’m not going to pretend to be an economist version of Dr. Spock, PhD, bringing wisdom from the Kingdom of Experts. I’m not even going to pretend to be an ersatz Emily Oster, bringing hard data to help you figure all this out. I’m just going to end by telling you how thinking about all of this may change the way I do things. I’ll get to the parenting in a moment, but let’s start first with teaching. Is it helpful to tell our students that choice is an exercise in imagination? Does it help to encourage them to think about the kinds of imagination demanded by certain sorts of choices? If we can’t find data on imagination, should economists think about it at all? Is imagination such an elusive concept—something so difficult to measure and quantify—as to make it impossible to study, or should we encourage them to expand their imaginations? I think we should, and I’ll be looking for ways to do just that. For example, if I’m brave enough, maybe I’ll give the MBA students taking my class in risk and uncertainty a bit less expected utility theory and a bit more fiction. It’s been years since I’ve read Joseph Conrad’s short novel, Typhoon, but maybe that’s a good way to think about risk management. When I was a kid I thought I loved Jack London’s The Sea Wolf because I loved adventure stories. But maybe I loved it because the aggressive Wolf Larsen forced the bookish Humphrey van Weyden to imagine himself as a different sort of person. That could be a good lesson for business students who imagine themselves as leaders. Now for the parenting tip: Pay more attention to two very important tigers, Daniel and Hobbes. Daniel Tiger is the character imagined by the late Fred Rogers for his path-breaking show, Mr. Rogers’ Neighborhood. Hobbes is the tiger imagined by Calvin, a 6-year boy imagined by Bill Watterson as the star of his comic strip, Calvin and Hobbes. If you were a fan of the comic strip, you probably remember it as being reliably funny, sophisticated, smart, and thought-provoking, a comic about kids, not for kids. If you remember Mr. Rogers’ Neighborhood, you probably remember it as a sweet—maybe treacly—show for preschoolers; a show that delivered useful lessons in a package far less dreadful than the typical kid’s show. I’m not sure that Calvin and Daniel could have become best friends (although it’s fun to imagine that playdate), but I’m quite certain that Fred Rogers and Bill Watterson could have found lots to talk about. That’s because they both understood that imagination is central to our humanity. The most important moments in Calvin and Hobbes happen when the grownups disappear, allowing Calvin’s imagination to transform a stuffed toy into an endlessly fascinating (and funny!) creature. The most important moments in a 4-year old’s time spent watching Mr. Rogers’ Neighborhood happen when the trolley goes to the Neighborhood of Make-Believe, validating the child’s own imagination. For more on these topics, see the Library of Economics and Liberty articles “How Should Econ 101 Be Taught?”, by Donald J. Boudreaux, Jan. 6, 2020; and “Adam Smith, Ayn Rand, and the Power of Stories” by Caroline Breashears, Mar. 2, 2020. See also the EconTalk podcast episode Emily Oster on Cribsheet. Imagination is not just another perk that comes from being human, some cognitive appendix that helps a few special people compose glorious operas and others write bawdy limericks. Imagination is the essential element in decision making. Without imagination rationality has no meaning. Without imagination we can’t choose the sorts of creatures we aspire to become. So to finish, let me just repeat. It’s important that economics students work through challenging analytical puzzles and do complex statistical analysis. But as teachers and parents we need to imagine how their lives might become, and we need to cultivate their imaginations. That’s not only important, that’s one of the greatest joys we can experience. * Michael L. Davis is a senior lecturer in business economics at the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business, and the Bridwell Institute for Economic Freedom at Southern Methodist University. For more articles by Michael L. Davis, see the Archive. (0 COMMENTS)

In all the fields touched by the six boomers profiled here—technology, entertainment, economics, academia, politics, law—what they passed on to their children was worse than what they inherited. Helen Andrews, Boomers: The Men and Women Who Promised Freedom and Delivered Disaster, p. 196.1 Helen Andrews passes her verdict on the Baby Boom generation after presenting essays about several prominent figures who were born between 1946 and 1964. She argues that in middle age, the boomers were saved from the worst consequences of their excesses by the very institutions that they were rebelling against. She worries that the Millennial generation has the same iconoclastic mentality in an environment that is less institutionally robust. One of the institutions that has decayed is journalism. Media scholar Andrey Mir says that we are in an era of “post-journalism,” in which the attempt to pursue truth wherever it leads has been replaced by the activist goal of dictating a narrative, even if that requires distorting the facts. In an essay devoted to Mir’s thesis, Martin Gurri tells the story of how the New York Times descended into post-journalism in response to business needs and pressure from Millennials on its staff and on social media. Gurri recounts a melodrama over standards at the Times, featuring a conflict between radical young reporters and befuddled middle-aged editors. In a crucible of pr oclamations, disputes, and meetings, the requirements of the newspaper as an institution collided with the post-journalistic call for an explicit struggle against injustice. 2Gurri and others lament the absence of any authoritative source for truth. In fact, trust in the authority of mainstream news sources has fallen so low that polls showed that at the end of 2020, millions of Americans agreed with former President Donald Trump that November’s Presidential election was “stolen.” Our political divisions are accentuated by different perceptions of reality. During the Trump era, readers of the New York Times or the Washington Post were fed the story that Donald Trump as a candidate and President conspired with Russia’s Vladimir Putin against American interests. At the same time, listeners of conservative talk radio were fed the story that the FBI and the CIA conspired with mainstream media to take down Mr. Trump against American interests. We used to rely on journalism and academia to paint a realistic picture of our world. As these institutions have eroded and our trust in them has declined, what will replace them? One thought that occurred to me is that public intellectuals could compete for rankings, the way that chess players do. The highest ranking for a chess player is “grandmaster.” In my scheme, the best public intellectuals would be grandmasters of wisdom. “Helen Andrews portrays the prominent boomers as anything but wise. The talent they share is a talent for gaining attention and recognition.” Helen Andrews portrays the prominent boomers as anything but wise. The talent they share is a talent for gaining attention and recognition. They are grandmasters of self-promotion. Her first essay discusses Steve Jobs, the co-founder and CEO of Apple. Apple’s products had an image of attractive design. Jobs himself had an image of being a hippie CEO. Many Silicon Valley origin stories are made up by publicists, and there was an element of that to the legend of the garage. The PR maven Regis McKenna, who signed Apple as a client in 1976 before the articles of incorporation were even filed, knew from the moment the two Steves [Jobs and Wozniak] walked into his office that their story could make the company. (21) Andrews credits Jobs with being relatively true to his hippie image. But she contrasts the humanitarian, anti-establishment rhetorical stance of Silicon Valley with its actual economic effects. All of America’s coastal cities have become playgrounds for well-credentialed meritocrats and the casual workers who serve them… … The fastest-growing jobs in America are in “wealth work,” that is, the servant class for the metropolitan elite. (30) Another essay looks at Jeffrey Sachs, a prominent economist who styles himself an expert on economic development. Andrews writes, Sachs, like most other Americans working in what we have learned diplomatically to call the underdeveloped world, believes that his work is like the nasty old imperialists’ but with the bad bits thrown out. The first half of that is true; the second half is almost the opposite of the truth. From Eastern Europe to Africa, Sachs has talked leaders into attempting grandiose schemes for development. Critics see him as having left a trail of disastrous failures in his wake. Many economists have served as advisers to leaders of underdeveloped countries, usually with mixed results. What is unique about Sachs is his cultivation of a superstar aura. When he launched an African development initiative called the Millennium Villages project, Andrews writes, He introduced his project to the wider world with the MTV documentary The Diary of Angelina Jolie and Dr. Jeffrey Sachs in Africa. He campaigned for donations with Hollywood stars like Sharon Stone, Richard Gere, and Madonna, who gave $1.5 million of her own money, some of it earmarked to build a school in Malawi that would teach, among other classes, Kabbalah spirituality. Other aid projects claim to alleviate poverty. Sachs claimed that the Millennium Villages model would quite literally end extreme poverty within the present generation. (85) Andrews selected Al Sharpton as representative of political leaders of the boomer era. She distinguishes between two approaches to leadership. Transactional leaders engage in the mundane give-and-take of everyday politics. Transformational leaders promise to “change the course of history,” in Sharpton’s words. Andrews writes, Sometimes transactional leadership can be the more noble type. The transformational mentality looks at opposition and sees nothing but reactionary holdouts who don’t deserve to be accommodated, only defeated. A transactional leader sees potential allies whose cooperation could be gained if their concerns were placated. (127) For more on these topics, see the EconTalk episodes Martin Gurri on the Revolt of the Public and Jeffrey Sachs on the Millennium Villages Project. See also “Political Romance in the Internet Age”, by Arnold Kling, Library of Economics and Liberty, Aug. 5, 2013. Sharpton’s stance as a transformational leader comes across as a pose. The same appears to hold for many of the leading political figures of the Boomer generation. Again, the pattern is one of self-promotion in lieu of achievement. Presidents Clinton, Obama, and Trump all were the center of attention while in office, and yet they made little impact on the direction of the country and were unable to achieve results comparable to building the Interstate Highway system or passing Civil Rights legislation. As the availability of information rises exponentially, the competition for attention becomes increasingly intense. To succeed in this environment, boomers mastered the art of self-promotion. Andrews effectively contrasts triumphant boomer self-hype with dismal boomer results. We need to find a cultural adaptation that works in the other direction. Footnotes [1] Helen Andrews, Boomers: The Men and Women Who Promised Freedom and Delivered Disaster. Sentinel, 2021. [2] Martin Gurri, “Slouching Toward Post-Journalism,” City Journal, Winter 2021. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

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)