New York magazine has a good article on Covid-19: “Basically, going back to January, they’d be like, ‘China’s not going to control it; 80 percent of the population is going to get it; all efforts to contain it are going to fail; we have to learn to live with this virus; contact tracing and testing make no sense; this is going to be everywhere; right now we need to build up hospitals’ — which they didn’t even do. But they really didn’t think it was stoppable,” she says. “And then all of a sudden you started to see, in February, South Korea stopping it, Taiwan stopping it, and China stopping it. Then, in March, New Zealand. And then Australia. And then there’s this realization of, ‘Oh, wow. Actually, it is controllable.’” At the beginning of March, South Korea was averaging more than 550 new daily confirmed cases, compared with just 53 in the U.K. At the end of the month, South Korea had 125; the U.K. was at 4,500 and climbing. “In the UK we have had nine weeks to listen, learn and prepare,” Sridhar wrote angrily in the Guardian, berating the British regime for failing to establish basic systems for supplies, testing, and contact tracing. Later they point out that things are not quite that simple: Francois Balloux, an infectious-disease epidemiologist and computational geneticist at the University College of London, goes further. “It’s not obvious that different measures taken in different places have clearly led to different outcomes,” he says. “There’s a lot of idiosyncrasy, and I think it’s simplistic to say that the countries that have controlled or eliminated the virus did things extremely differently. If you just list, for instance, the interventions that places like New Zealand or Australia have implemented, they’re not drastically different — in stringency nor duration — than in some other places. The country that had the strictest lockdown for longest in the world is Peru, and they were absolutely devastated. I think the slightly depressing message,” Balloux says with a sigh, “is that there is not just a set of policies that will bring success and can just be applied to any place in the world.” So how can we reconcile these two conflicting narratives?  First we need to distinguish between public policy and behavior.  I suspect that the relatively low level of Covid deaths in some areas of the US (Washington, Oregon, Utah, Northern New England and even the SF Bay area of California) has more to do with culture than public policy.  People behave differently in different parts of the US.  If death rates in the Pacific Northwest and northern New England are similar to those in Canada, is it so far-fetched to believe that their culture also resembles Canada more than it does much of the rest of the US? But the big international differences may require an additional explanation.  Reading the article, I was immediately reminded of the global recession of 2008-09.  I’ve argued that the recession was caused by tight money policies, especially in the US and Europe.  But why was Australia able to avoid a recession?  Their central bank didn’t do any QE, and didn’t even cut interest rates to zero. In fact, what to the average person looks like an “easy money” policy is often the exactly opposite.  It’s precisely because Australia had a more expansionary policy early in the recession that they were able to avoid some of the more “reactive” policy measures employed elsewhere during the 2010s.  Similarly, the US was a bit more (proactively) aggressive than the ECB during 2009-10, and as a result the ECB ended up being forced to do aggressive (reactive) QE and negative interest rates in the middle 2010s. So if you see news stories of positive interest rates in Australia during the global recession of 2008-09, do not conclude that easy money is not stimulative.  And if you see news stories of restaurants being open in Taiwan, Australia and New Zealand during the Covid pandemic, do not conclude that social distancing is not helpful.  Rather the positive interest rates are a sign that Australia took proactive steps to prevent a deep fall in NGDP growth, and the open restaurants are a sign that they got on top of the pandemic early on, with an aggressive policy aimed at driving Covid rates down close to zero. There’s another interesting comparison between Covid and the 2008-09 recession.  In both cases, bloggers were often ahead of the experts in diagnosing the problem and recommending appropriate policies.  Bloggers pointed out that the Fed’s October 2008 decision to begin paying interest on reserves would have a contractionary effect.  Today, that criticism is widely understood as being correct.  Indeed in his memoir, Ben Bernanke acknowledges that monetary policy was too tight after Lehman failed.  Similarly, bloggers like Alex Tabarrok and Tyler Cowen have been consistently right in their criticism of the public policy response to Covid. PS.  The US is currently at 1670/million Covid deaths.  Canada is at 595/million, or halfway between Utah and Oregon.  Here are the lowest 7 states: Note:  The 15 highest Covid death rates are in both northern and southern states, as well as both urban and rural. (1 COMMENTS)

Academia has been good to me so far.  For as long as I’ve been a professor, I have tried to speak politely, thoughtfully, and candidly –  privately as well publicly.  From where I’m sitting, the system treats me quite well. Perhaps, however, I’ve simply been lucky.  Or perhaps the system is swiftly decaying right before my unperceiving eyes. In case either of these pessimistic scenarios turn out to be correct, I am now making a precommitment.  Namely: I will never apologize for politely saying or writing anything that seems reasonable to me… except under extreme duress. So if I ever do so apologize, please assume extreme duress. P.S. If I politely say or write something that seems reasonable to me, but later conclude is false, I will acknowledge and correct my mistake.  But as long as one has applied this due diligence, error is not blameworthy and warrants no apology. (3 COMMENTS)

What does it mean to really be happy- to experience what the Greeks called eudaimonia? And how can a centuries old text help you achieve it? In this episode, EconTalk host Russ Roberts welcomed a long-time teacher-and reader- of classic works, Leon Kass, to explore this question. The conversation revolves a great deal around Aristotle’s Nicomachean Ethics, which Kass describes as Aristotle’s attempt to answer the question, what’s a good human life? Have you yet read Aristotle’s masterpiece? If not, what would it take to get you to do so? Kass is convincing in his advocacy of it- especially as he confesses to having hated it on his first encounter. Until we can read it together (we should, don’t you think?), let’s continue the conversation here. You might even want to start your own conversation offline using the prompts below.     1- What are the four different types of lives, according to Aristotle? How do they relate to one another, and which should be the most esteemed?   2- How are virtues acquired, according to Aristotle? What does Kass mean when he refers to happiness as activity– to have to be “at work” to flourish? What sort of freedom arises from the ability to act “without impediment”?   3- What distinguishes the intellectual from the moral virtues? What does Kass mean when he says the the virtues of intellect need the virtues of character?   4-  Why are “epitomes of virtue” important? Kass says, “to be in touch with greatness, to admire it, to really admire excellence, pays tribute also to the appreciator as much as it does to the ones who are excellent.” How? Roberts and Kass discuss Winston Churchill as one such example; what other(s) would you offer? Explain.   5- Roberts asks Kass how teaching and reading Aristotle has changed how he lives? How does he reply? What’s a book that has changed the way you live, and in what way(s)? (0 COMMENTS)

Turkey’s authoritarian leader sacked the central bank head just months after appointing him to the position: When Turkey raised interest rates more than market expectations last week, Naci Agbal was cheered by investors who viewed the move as more evidence that the central bank governor was willing and able to pursue a conventional monetary policy. Two days later, he was out of a job — the third governor President Recep Tayyip Erdogan has sacked in less than two years — and the currency was set to tumble as much as 14 per cent. The shock decision announced in the early hours of Saturday has rattled investors who hoped the appointment of Agbal, a market-friendly economist, four months ago meant Erdogan was ready to cede a degree of autonomy to the bank. The fact that Turkey’s currency depreciated does not necessarily mean it was a bad decision.  It would be good news if the yen depreciated 14% on news of new leadership at the Bank of Japan, an indication that the new central bank chief was likely to make progress toward Japan’s 2% inflation target.  But Turkey has 15% inflation, and doesn’t need monetary stimulus. Sahap Kavcioglu, who has replaced Agbal, said in a statement on Sunday that monetary policy instruments would “continue to be used in an effective way towards the fundamental goal of a permanent decline in inflation”. He said the Monetary Policy Committee would meet as scheduled on April 15, suggesting there would no extraordinary MPC meetings. But Kavcioglu, a little-known professor of banking, shares the president’s unconventional view that high interest rates cause inflation. High interest rate don’t cause inflation, just as low interest rates do not cause inflation. It’s one thing to advocate NeoFisherian ideas as a college professor.  But markets are quite efficient, too smart to engage in the fallacy of “reasoning from a price change”.  Mr. Kavcioglu is about to discover that the world doesn’t work the way he thinks it works. (0 COMMENTS)

One of the main problems with selling housing deregulation is the perception that new construction “only benefits the rich.”  Rich developers of course, but also rich home-buyers.  It’s easy to see where casual observers get this idea.  New housing is usually nice housing, because over time technology improves and capital depreciates.  Since richer people are more willing to pay the upcharge for nicer housing, the future residents of new construction are usually well-to-do. So what do casual observers miss?  They miss the big picture: People who move into new construction are moving away from older construction.  When they move, those older units become available for others.  While those others probably won’t be drastically poorer than those they replace, they tend to be slightly poorer.  Think: “one rung down.”  When these slightly poorer people move, their prior dwellings will tend to be taken over by those who are a further rung down.  And so on, in a great chain reaction.  Allowing new construction really does help the whole income distribution. Since this is hard to visualize, picture a game of musical chairs.  With one key difference.  A normal game of musical chairs starts out with one chair per person, then subtracts a chair every turn.  The result: Faster, aggressive kids push out everyone else, until the fastest, most aggressive kid wins.  In my variant game, we start out with fewer chairs than people, then add a chair every turn.  The result: Slower and more pacific kids start getting places to sit, until there are enough chairs for everyone. Both games feature a competitive scramble.  In conventional musical chairs, however, the competition gets more and more cutthroat and in the end almost everyone loses.  In my reverse musical chairs, in contrast, competition gets milder and milder and in the end everyone wins. I don’t advocate playing reverse musical chairs at children’s birthday parties.  Games and stories where everyone wins are notoriously dull.  The struggle is part of the fun.  In real life, however, the Alice in Wonderland outcome of “All have won, and all must have prizes” is a dream come true.  Deregulating construction won’t instantly deliver high-quality, affordable housing to everyone.  Instead, it’s like my game of reverse chairs.  Every new structure built makes the competition for housing a little milder, until practically everyone comes out a winner. (0 COMMENTS)

Whether it’s a pandemic or a Texas-sized ice storm that leaves millions of people without power, we’d like to avoid a repetition. Megan McArdle of the Washington Post talks with EconTalk host Russ Roberts about the challenge of learning the right lessons from the current crisis in order to prevent the next one. McArdle argues […] The post Megan McArdle on Catastrophes and the Pandemic appeared first on Econlib.

There appears to be something basic that most people in most of human history don’t understand. Or is it me (along with a lot of economists)? Here is the argument. It would be better if our car were chosen democratically. A democratic referendum could ask voters to choose which car will be available to consumers. (How individual purchases would be financed, either with private money or by government, does not matter at this point.) Assume the voting system is the one you prefer and that the number of choices or write-in options is also what you think is most democratic. The voters are asked to vote for the single brand and model of car to be produced or imported. Each individual has one vote, however “one vote” is defined in your preferred voting system. The economies of scale brought about by a single model would reduce the price of cars compared to the wasteful diversity of the market—the 250 different models available on the American market, not counting the numerous options and colors for each model. Collective rationality would replace individual ignorance and market anarchy. Equality would be promoted: the times would be over when the rich could afford more luxurious and safer cars than the average American. The car manufacturer whose model has been chosen would, in a real sense, be elected democratically. A true collective choice would democratically decide which car we drive. What can be wrong with that? Many things. In fact, this whole argument is invalid. A few reasons: (1) Depending on the voting system (majority, plurality, ranked-choice, Borda, Hare, etc.), a different choice of car would likely prevail, so the person or group that chooses the voting system and the choices to be proposed would indirectly decide, or at least strongly influence, which car you will drive (on voting systems, see, in the forthcoming Spring issue of Regulation, my essay on William Riker’s Liberalism against Populism). (2) Each individual’s vote has an infinitesimal chance of changing the result of the referendum, that is, of getting him the car he wants—or, for the real altruist, the car he thinks is better for the large masses. (3) With only one producer and a lack of competition, including import competition, economies of scale would soon be overcome by reduced incentives, bureaucratic growth, and union power. In between referendums, the main incentives of the chosen producer would be to satisfy a faceless average consumer; or to swindle him if the incumbent thinks it is unlikely to be allowed to put one of its cars among the candidates next time. The consequences would be similar if, in a more complex referendum, a number of producers were chosen to offer, say, a black-made car, a white-made car, a LGBTQ+-made car, or any other stakeholder-made car. History provides us with an example of a near-collective car named Trabant, “a sparkplug with a roof.” (A Trabant model is shown on the featured image of this post.) (4) This reminds us that political processes, even democratic ones, are very rough and imperfect. The most popular car in the American market is a pickup, Ford’s F-150, but only those who individually choose it are obliged to drive it, which is what individual choices are about. (5) Economic efficiency, which is defined as the satisfaction of the varied preferences of different individuals, would be replaced by some common preferences of a centrist group of voters according to the median-voter theorem. (6) Socialism and imposed uniformity in consumption are antithetical to individual dreams and their subjective utility—the sort of car you have wanted to buy for yourself since childhood, for example. I say “socialism” but it is the same in conservative collectivism or the old elitist right. (7) Another obstacle to “collective rationality” would come from the voters’ “rational ignorance.” Since every individual voter knows that his vote has practically a zero chance of delivering the car he prefers, he would have no incentive to buy (if only with his time) information on the referendum alternatives—to subscribe to Consumer Reports, to read car magazines, to google technical terms or watch YouTube videos, to visit manufacturers online or physical showrooms, and so forth. (See also David Henderson, “The Logical Basis is a Difference in Incentives,” Econlog, March 9, 2021; and my own post “One Thing Rationally Ignorant Voters Don’t Know,” September 14, 2020) And if there are many voters whose cognitive limitations or sensibility to propaganda lead each of them to believe that he will decide the vote, how can anybody trust the rationality of such an electorate? Collective rationality amounts to voting blind or, at best, voting with one’s tribe. (8) Market competition, not political competition, is, theoretically and historically, the way to reach economic efficiency. (9) The equality obtained by letting every voter vote on our collective car would be illusory. Even with the ideal referendum, the real influencers would be the car manufacturers’ P.R. departments and popular pundits and media personalities (as well as perhaps QAnon-type websites). (10) Even in this ideal democratic system, political competition would fill the void of economic competition. When economic markets are forbidden to clear, political markets will clear. Rent-seekers would try to influence which models will be put on the ballot, which producers will thus be privileged, and how long the monopoly will last. (11) Consider the financing aspect of car purchases, ignored up to now. This issue would also need to be decided by an equally imperfect referendum. Suppose that “our national car” is to be paid by the government and financed by public debt. All the voters who think that their individual votes count and who want “social justice” hic et nunc would likely vote for Cadillacs to be paid by their descendants. What most people do not understand, even apparently in America and in other sophisticated countries, is that individual choices are preferable to collective choices for both economic and moral reasons. This is true not only for cars but also for most other goods. Only goods or services that must be consumed simultaneously by all—what economists call “public goods”—escape this characterization but a separate argument has to be made for them. (0 COMMENTS)

In Jeff Hummel’s Monetary Theory and Policy class recently, he assigned an interesting computational problem that shed light on the main factors driving the drop in the U.S. money supply between 1929 and 1933. He used a problem from Greg Mankiw’s Intermediate Macro text. The problem didn’t give magnitudes but I assume everything was in billions of dollars. The money supply was $26.5 billion in 1929 and $19.0 billion in 1933. That’s a drop of 28 percent. Here was the first question. What would have happened to the money supply in 1933 if the currency-deposit ratio had risen the way it did but the reserve-deposit ratio had remained constant? (The c/d ratio rose because people tried to convert their demand deposits to currency; the r/d ratio rose because banks were trying to have reserves available for people trying to convert their demand deposits to currency. Both factors caused the money supply to fall.) M = (cr + 1)/(cr + rr) times B, where M is the money supply, B is the monetary base = currency held by the public (C) plus bank reserves (R) cr is C/D, where D is demand deposits rr is R/D. In August 1929, C = $3.9 billion D = $22.6 billion B = $7.1 billion R = $3.2 billion. To make sure the formula worked, I plugged the numbers in for August 1929. cr = C/R = 3.9/22.6 = of 0.17 rr = R/D = 3.2/22.6 = 0.14. So plug and chug. M = (0.17 + 1)/(0.17 + 0.14) times 7.1 = 1.17/0.31 times 7.1 = 3.8 * 7.1 = 27.0 (close enough) By 1933, cr had risen to 0.41 and rr had risen to 0.21. So if rr had stayed at 0.14, the only other thing we need to know is B in 1933. That was $8.4 billion. So M would have been (0.41 + 1)/(0.41 + 0.14) times 8.4 = 1.41/0.55 times 8.4 = $21.5 billion. In other words, rather than falling from 26.5 to 19, the money supply would have fallen to 21.5. Next question: What would have happened to the money supply if the reserve–deposit ratio had risen but the currency–deposit ratio had remained the same? R/D rose to 0.21. Assume C/D stays at 0.17. Then M = (0.17 + 1)/(0.17 + 0.21) times 8.4 = 1.17/0.38 times 8.4 = 3.08 * 8.4 = $25.9 billion. So the money supply would have fallen from 26.5 to 25.9, a drop of only 2.3 percent. In part (c), which mattered more? The increase in the currency/deposit ratio. (0 COMMENTS)

In recent years, the Fed has increasingly adopted the rhetoric of 1960s Keynesianism.  Go for growth.  Don’t worry about a bit more inflation.  Jobs are much more important.  Given that 1960s Keynesianism gave us the Great Inflation, should we be worried about today’s rhetoric? Oddly, at roughly the same time that they adopted all this expansionary rhetoric, the Fed switched to average inflation targeting, which makes 1960s-style expansionary monetary policy totally impossible to implement. So what will the Fed do in the 2020s?  Will inflation average 2%, or will it average 4%, 6%, or 8%?  I don’t know, but my hunch is that a portion of this Keynesian rhetoric is just the Fed trying to be PC, trying to keep up with a generally leftward shift in public opinion on stimulus.  Another part might be the Fed’s perceived need to create “credibility” for its 2% inflation target, given that inflation ran below 2% over the previous decade, and given that (until recently) market indicators have been skeptical that we’d reach 2% inflation, on average. One way or another, we’ll soon find out. Some people seem concerned by the fact that the markets expect interest rates to rise faster than the Fed itself current predicts. But this isn’t actually a problem at all, at least if you take the Fed’s 2% average inflation target seriously.  At the moment, markets expect a modest overshoot of inflation over the next 5 years, to make up for the undershoot during 2020.  Then roughly 2% inflation for as far as the eye can see.  But that’s exactly what the Fed says it wants!  If the markets think that this good outcome will require higher interest rates than the Fed currently expects, that’s not a lack of policy credibility, it’s just a difference of opinion on the future path of the natural rate of interest.  A lack of policy credibility would occur if the markets didn’t expect inflation to average 2% during the 2020s.  More likely, rising rates reflect increased confidence that the Fed will achieve its goals. Don’t confuse the rhetoric with the policy rule.  The rule is the actual Fed policy—the rhetoric is just a bunch of pretty words. PS.  Of course the other problem with the tweet that Yglesias links to is that Perli is reasoning from a price change, assuming that rising longer-term yields reflect predictions of a tighter monetary policy stance. PPS.  People often ask me about “yield curve control”.  That would be like a ship captain announcing “steering wheel control”, a commitment to hold the ship’s steering wheel at a fixed position for days on end, regardless of changes in wind and currents.  What do you think?  Does that sound like a good idea? (0 COMMENTS)

Does poetry matter less than it once did? Poet and author Dana Gioia says America is living a cultural paradox: “There has never been a country in the history of the world that has paid more people to profess poetry.” Yet, it seems we’ve missed the mark. In this episode, EconTalk host Russ Roberts welcomes Gioia to talk about poetry, his new book, his professional trajectory (which includes an abandoning a graduate writing program for an MBA), and what matters in life and literature. Perhaps as evidence of Gioia’s point, many listeners reacted unfavorably to this episode- I think without having listened. Why an EconTalk about poetry, they asked? What good is that? Give it a listen. Trust me, I’m one of you- someone who thinks they just don’t “get” poetry. This episode will change your mind. Gioia describes beautifully what good poetry is and isn’t. The purpose of poetry is not necessarily to understand it, but to experience it, says Gioia. And you don’t want to miss Gioia recite some of his own poems. It works, and I am now the proud owner of- I admit- my first book of poetry, Gioia’s 99 Poems. It’s lovely.     1- Gioia reminds us that poetry was once very much a part of mainstream American culture. What made America lose its mass audience for poetry?   2- Gioia says, “People who are successful in life, they know it’s their own talents and everything else, but they also know that there were people who awakened those talents, refined them, gave them the little push, gave them the advice.” Who was the teacher who most impacted YOU, and how?   3- Why do Roberts and Gioia think you should read books like the Iliad and the Odyssey? What is the difference for Gioia between “disposable books” and literature- like “getting in your kishkes? To what extent do you agree with Gioia that prior to the pandemic, there were too many books, movies, concerts, etc.?   4- Gioia notes that poetry is the fastest growing art in the US among people aged 18-25. Poetry, he says, is “performative, democratic, accessible.” What does that mean? How does Amanda Gorman fit into this story?   5- How might a poem be considered a kind of emergent order? How does the language of poetry and economics compare? (0 COMMENTS)