Matt Yglesias has a very good post where he casts a skeptical eye on some of the proposals for infrastructure spending. Something like the Silver Line in D.C. has been much more of a mixed bag. Not only did it cost a lot of money, but it’s just a poorly conceived project that’s actually reduced capacity on the Blue Line and therefore made transit service in the region worse in some ways. The Obama era brought us a lot of mixed-traffic streetcars that do absolutely nothing to improve transportation, and I suspect in many cases diverted local funds from what could have been bus lines. There are various useful things one could do in intercity passenger rail. But is Amtrak actually prepared to do any of them? My broad view is that on the transportation side, despite endless rhetoric about “crumbling bridges,” we mostly have structures in place where either significant expansion is undesirable (highways) or the existing institutions are mismanaged or incompetent. At the same time, he’s not particularly concerned about financing issues: I acknowledge that this is a somewhat pedantic point, but I do want to insist on it. If you want to renovate your house but you don’t have the cash, there’s a difference between getting a renovation loan and hiring contractors who you then stiff. Paying for things with borrowed money is a way of paying for things, not an alternative to paying for them. King put it more squarely, which is that the difference between debt financing and tax financing is whether you try to constrain current consumption to pay for investment or future consumption. And I think the right answer is future consumption. Another thread of progressive thought focuses on the downside of laissez-faire economic policies.  Progressives often cite a 2013 study by Autor, Dorn, and Hanson, which showed that freer trade with China may have led to painful economic restructuring in industrial areas that compete with imports from China.  Subsequent studies have questioned certain aspects of this research, but the basic finding seems intuitively plausible. Those who accept this critique of import competition often conclude that public policy should aim to reduce the trade deficit.  To do that, you need to either reduce domestic investment of increase domestic saving.  That’s because the current account balance is equal to domestic saving minus domestic investment. In fact, all the recent energy among progressives has been in exactly the opposite direction, that we should borrow more to finance current consumption.  In the very short run, those policies might boost real output.  But over any meaningful period of time an expansionary fiscal policy will boost consumption at the expense of investment, or else create a larger trade deficit.  And that’s what pundits are currently predicting: The US macroeconomic policy stance is more aggressive than elsewhere. The Organisation for Economic Co-operation and Development estimates that President Joe Biden’s $1.9tn American Rescue Plan could raise US output by around 3% to 4% on average in the package’s first full year. Many forecasters project US growth of 6% to 8% in 2021. . . . The US was running current account deficits of around 3.3% of gross domestic product in the second and third quarters of 2020. Its merchandise goods deficit was nearly two percentage points of GDP higher. The OECD has estimated Biden’s fiscal package could raise the US current account deficit by three-quarters of a percentage point through the first quarter of 2022. That could mean a US current account deficit around 4% of GDP in 2021. Suddenly all this hand ringing about free trade costing jobs in manufacturing seems to have gone by the wayside.  Progressives have a bad habit of focusing on an outcome that seems “nice” in isolation, without considering the opportunity cost of various public policies.  That’s one reason I liked the Yglesias post; he discusses how the Silver Line expansion hurt commuters on competing lines.  But I wonder if Yglesias fully understands the opportunity cost of focusing public policy on boosting current consumption.  I don’t doubt that more consumption makes us happier in the short run, but what about the long run opportunity costs?  And why have progressives stopped talking about deindustrialization?  Is the trade deficit no longer a problem? PS.  In past posts I’ve argued that trade imbalances are not a problem.  For me, the actual cost of budget deficits is higher future taxes, which slow economic growth.   (0 COMMENTS)

I never worked harder than I did in the summer of 2016 at the John Locke Institute‘s summer seminars in France.  One day I gave nine hour-long lectures, and had several more hours interacting with students throughout the day.  But it was great fun; the students were full of curiosity and enthusiasm, and candor ran high.  And the reason I gave so many lectures was that every class was very small – often just five students. This year, COVID policy permitting, I’m rejoining the John Locke Institute’s summer program.  Now, however, both seminars are in Oxford.  I’ll be doing the Politics, Philosophy, and Economics Summer School from July 18-31, followed by the Humanities Conference from August 12-21.  (Bonus: My sons will be math econ tutors).  In between, we’ll be touring the UK. If you’re interested in attending, please apply now.  And if you’d like to meet up in Oxford or elsewhere in the UK, let’s try to make it happen! (0 COMMENTS)

In yesterday’s post on Alan Blinder and inflation-induced bracket creep, I promised to tell this story. At the American Economic Association meetings in New York in December 1988, there was a session on economic policy and the economy. A number of major economists presented, but the two I remember clearly, because I asked them both questions, were Alice Rivlin and Joe Pechman. I’ve sometimes referred to Alice as “my favorite liberal economist” because she had a no-nonsense, clear-eyed view of things (although I think she never gave supply-side cuts in marginal tax rates their due.) But that was after I started following her work during the Clinton administration, when she was deputy director and then director of the Office of Management and Budget. In her talk at the AEA meetings, Alice noted that there just hadn’t been nearly as much controversy about raising taxes to prevent major federal budget deficits in the late 1970s, when she was director of the Congressional Budget Office, as there had been from the mid-1980s to the year we were in, 1988. She stated it as if it were a puzzle. To me, it wasn’t a puzzle at all. So I stood up and asked the following (of course I’m going from memory here): Dr. Rivlin, You stated that there wasn’t nearly the controversy about raising taxes to reduce the deficit in the late 1970s as there is now, but isn’t there an obvious answer? Inflation in the last half of the 1970s averaged high single digits and the federal income tax brackets were not indexed for inflation. So inflation plus non-indexing assured that federal government revenues grew substantially every year, even without explicit legislated tax increases. She answered, “Well, there’s that.” When I had a chance to talk about this in my class when it was relevant to our discussion of bracket creep, I quoted her “Well, there’s that.” Funny story: The next day after I quoted her in class, a sharp student caught me out on some important causal factor that I had left out of another discussion unrelated to bracket creep. I hesitated, thought through it, and then admitted his point. Another student piped up, “Well, there’s that.” We all got a good laugh. (0 COMMENTS)

On Project Syndicate, Lars Feld, Peter Jungen, and Ludger Schuknecht have a long article on Ordoliberalism and its enduring influence. The article is important, not least because two of the authors, Feld and Schuknecht, had important responsibilities in the recent past: Schuknecht was chief economist of the German Ministry of Finance, Feld was until the end of February chairman of the German Council of Economic Experts. I am not sure that either of them actually had much responsibility in shaping public policies, but their appointments certainly signaled, if not a real commitment, at least a degree of respect for the Ordoliberal tradition by Mrs Merkel’s Christian Democratic Party. The article is rich in information and gives, for once, a sensible definition of what the label “social market economy” stands for: The “social” element of the social market economy, then, is not about state ownership or state direction, as under socialism. Instead, it refers to a rules-based economy in which social interests are properly accounted for. The authors argue that though Ordoliberalism originated in specific circumstances and the German “social market economy” was built “under unique conditions – namely, out of the ruins of the most devastating and destructive period in human history- “it is well suited for any country that is committed to pursuing patient, secure economic development.” To provide readers with a glimpse of the kind of choices that were made after WWII, the authors use an anecdote that Larry White also quotes in his The Clash of Economic Ideas: The postwar German Wirtschaftswunder (economic miracle) was born. By unleashing the market to revitalize a moribund economy, German policymakers pursued a course that may seem obvious today but certainly didn’t at the time. Ironically, those who were most skeptical of the ordoliberal reforms included representatives of the US, the world’s leading market economy. Though what is apocryphal and real are now impossible to reconstruct, there is an anecdote that General Lucius D. Clay, the military governor of the US-controlled zone, summoned Erhard and told him that he must not alter the rules of price administration: “Mr. General, I have not altered the rules, I have lifted them,” Erhard replied. “Professor Erhard, all my advisers tell me that a market economy in Germany will never work.” “Don’t worry,” Erhard assured him, “all my advisers are telling me the same.” The article ends with some examples of the lasting influence exerted by Ordoliberalism over public policy: Ordoliberal thinking has also strongly influenced what one might call Europe’s “financial constitution.” It was the German Bundesbank that provided the model for the European Central Bank and other independent central banks across the Union. Likewise, the Maastricht deficit and debt rules that laid the foundation for the euro were a clear reflection of ordoliberal thinking. And the same can be said of the German deficit rule – the “debt brake” that allowed Germany to reduce its public debt after the global financial crisis and thus be well prepared to handle the fiscal challenges of the pandemic. Ordoliberalism’s central tenets also underpin the European Stability Mechanism – which adheres to the IMF’s principle of conditional financial support to ensure solidarity within the EU – and the EU Treaty’s requirement of “subsidiarity,” or decentralized decision-making. (…) policymaking in Germany is not a perfect incarnation of ordoliberalism. Political compromises have had to be made in the face of diverging interests. The state’s continued ownership stake in Volkswagen and a few other companies comes to mind. But these examples are exceptions to an otherwise private-sector-driven growth and innovation model. Germany thus stands in stark contrast to countries that have engaged in “industrial policy,” aiming to identify the most promising industries to promote. This reflects the conviction that successful innovation policy does not pretend to know what the future will bring. Instead, it maintains institutional openness to ideas that no one today could even imagine. Indeed, no government could have foreseen that mRNA technology developed by a German startup (BioNTech) to fight cancer would be used to create a vaccine against the coronavirus in record-breaking time. Finally, in fostering more green innovation, Europe has deployed rules- and market-based emissions trading schemes as the foundation of its decarbonization strategy. This, too, represents another win for ordoliberal thinking. It shows that the social market economy remains the framework for tackling our most pressing challenges today. The social market economy model endures because it supports consumer interests before those of producers, just as it positions citizens, rather than the state, as the true sovereigns. At its heart is a commitment to constitutional and system-level thinking, not piecemeal, discretionary policymaking. I wonder how much of this is holding in the Covid19 world. I suspect that Feld, Jungen and Schuknecht would agree that monetary policy in the Eurozone is no longer sticking with a “monetary constitution”-like approach. It seems to me that fostering green innovation requires precisely some kind of “industrial policy”, wherever it is happening, with some pretty strong convictions about what successful innovation policy should hold in store. The “debt brake” in Germany is gone because of the pandemic: will it ever be back? Feld, Jungen, and Schuknecht’s piece is a good antidote against the prevailing rhetoric. We certainly need a better, more widespread understanding of the success of Ordoliberalism. But we also need some ideas to go back to rules, after all the discretionary measures taken because of the pandemic. (0 COMMENTS)

The most neglected psychological phenomenon in the world has a name, and that name is Social Desirability Bias.  Long story short: When the truth is ugly, people lie – and get angry at those who refuse to play along.  When the dosage gets high enough, lies and anger morph into self-righteous absurdity.  SDB illuminates a wide range of issues: diction, demagoguery, public goods theory, intelligence research, the rhetoric of freedom, abortion, vegetarianism, self-help, and much more. A while back, I wrote my social class autobiography – and persuaded a bunch of fellow bloggers to do the same.  The underlying idea: Each of us comes to the table with a different experience with social class. Think deeply about your own story with social class… By taking time to analyze your own story, you may find a level of understanding and acceptance that you had not previously recognized. Moreover, by sharing our personal stories, we refuse to share in the “code of silence” around social class. In your own social class autobiography, making sure to link your experiences to class privilege or deprivation (or both), as well as to connect it explicitly to some of the ideas we have discussed in class like poverty, wealth, education, mental illness, violence, prison, and the American Dream. Finally, reflect on what you have learned from the experience of examining your personal “Social Class Autobiography.” Although I discovered academic research on Social Desirability Bias less than a decade ago, I now see that it’s been a constant companion throughout my life.  In an effort to understand its power more deeply, I’m going to write a short SDB autobiography.  Proceeding chronologically, I’ll discuss the forms of SDB I experienced, how I reacted, and how the people around me reacted to my reaction.  I’ll ponder the extent to which I submitted to, challenged, and enforced SDB. If I’m lucky, this exercise will inspire others to write their own SDB autobigraphies.  I will gladly link to anyone who does!     (0 COMMENTS)

Psychologist and author Sherry Turkle of MIT talks about her book, The Empathy Diaries, with EconTalk host Russ Roberts. The Empathy Diaries is a memoir about Turkle’s secretive family and how that secrecy turned Turkle into an acute observer, skilled at revealing the story behind the story. She also chronicles the early days of artificial […] The post Sherry Turkle on Family, Artificial Intelligence, and the Empathy Diaries appeared first on Econlib.

The government of New Zealand recently added housing prices to their central bank’s mandate. (I put the mandate at the bottom of this post).  Previously, the RBNZ mandate was pretty similar to that of the Fed, 2% CPI inflation and maximum sustainable employment.  Not surprisingly, I don’t believe adding housing is a good idea. Nonetheless, it is possible to address the government’s request in a way that would actually improve monetary policy. I’ve never understood why central banks target consumer prices.  Why not all prices?  Thus during 2002-06, the CPI did not reflect the fast rise in house prices, because houses are considered an investment good.  Then, between 2006 and 2012 the CPI did not reflect the huge decline in house prices.  Indeed during some of those years the CPI actually reported housing prices rising faster than the price of other goods, even as the price of new homes was plunging rapidly.  Consumer prices are not a good indicator of the state of the economy, to put it mildly.  They aren’t even a good indicator of the price of domestically made goods. Instead of targeting the CPI or the PCE, why not target the GDP deflator, which includes the prices of all goods produced in the domestic economy—including new homes?  This sort of index would call for slightly tighter policy during dramatic housing price bubbles, and slightly easier policy when house prices are plunging.  This might slightly moderate the volatility of house prices, which is consistent with the goals of the new government policy. Of course the RBNZ has a dual mandate, and thus also cares a lot about employment and hence real GDP growth.  Thus they might want to consider a target that somehow incorporates both the rate of growth in the GDP deflator and also the rate of growth in real output. Questions for readers:  Can you recommend a new target for the RBNZ that would reflect both changes in consumer prices and changes in new home prices, as well as changes in output/employment.  Any ideas? New Zealand was the first country to adopt inflation targeting; maybe they can once again lead the world to a new era of improved monetary policy PS.  Here’s a home in beautiful Queenstown NZ: Operational Objectives 1. For the purpose of this remit, the MPC’s operational objectives shall be to: a. keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent midpoint. This target will be defined in terms of the All Groups Consumers Price Index, as published by Statistics New Zealand; and b. support maximum sustainable employment. The MPC should consider a broad range of labour market indicators to form a view of where employment is relative to its maximum sustainable level, taking into account that the level of maximum sustainable employment is largely determined by non-monetary factors that affect the structure and dynamics of the labour market and is not directly measurable. 2. In pursuing the operational objectives, the MPC shall: a. have regard to the efficiency and soundness of the financial system; and b. seek to avoid unnecessary instability in output, interest rates, and the exchange rate; and c. discount events that have only transitory effects on inflation, setting policy with a medium-term orientation; and d. assess the effect of its monetary policy decisions on the Government’s policy set out in subclause (3). 3. The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers. (0 COMMENTS)

I’m taking Jeff Hummel’s Masters’ course in Monetary Theory and Policy. Two lectures ago, he discussed the costs of inflation and highlighted Greg Mankiw’s discussion of it in Greg’s Intermediate Macro text. Greg covered many of the bases but the tone of his treatment suggests that he doesn’t think high inflation, even when it exists, is much of a problem. He compares the views of the public and the views of economists on the issue and finds the views of the public deficient. Jeff disagreed and highlighted three areas that Greg left out. One is that inflation presents a “signal extraction” problem, making it difficult for people to know whether and by how much relative prices have changed. The second is that high inflation virtually always tends to be variable, and for a given mean inflation rate, variable inflation is more destructive than constant inflation. The third is that inflation is a tax. Greg dealt with that issue but focused on the deadweight loss from the tax rather than the DWL plus government revenue from the tax. When you look at how non-economists think about other taxes, you see that they care about the fact that the government is getting revenue from them. That seems like a reasonable concern, whether the revenue generator is a sales tax or an inflation tax. Greg did note that inflation creates apparent capital gains (I call them “phantom gains”) that are not gains at all. You buy a stock for $100, inflation is 10%, you’re in a 20% capital gains tax bracket, the stock holds its real value at $110 a year from now, you sell the stock for $110, and you pay $2 in capital gains tax. You’re left with $108, which, inflation-adjusted, is worth $98.18, which is less than what you paid for it a year ago. I assume that Greg focused on the capital gains tax rather than income taxes because Reagan and Congress, in the Economic Recovery Tax Act of 1981, implemented indexing of tax brackets for inflation, effective in 1985. But there are a few things to note. First, other things besides the capital gains tax are not adjusted for inflation. The thresholds after which you pay taxes on your Social Security income have not been adjusted for inflation in 3 decades. Second, the income cutoff beyond which you can’t contribute to a Roth IRA is not adjusted for inflation. Third, many state governments have not adjusted their tax brackets for inflation. The discussion in class reminded me of two people. The first is Princeton University economist Alan Blinder. Blinder, even more than Greg Mankiw, missed people’s upset about inflation in his 1987 book, Hard Heads, Soft Hearts. I reviewed it in Fortune, November 9, 1987. Here’s part of what I wrote on the issue. In discussing employment and inflation, Blinder says we worry too much about inflation. He estimates that for every percentage-point reduction in the inflation rate, we must accept a two point or so increase in the unemployment rate for one year. Blinder says that is too high a price to pay, and launches into an argument about the true cost of inflation, which, he says, noneconomists tend to exaggerate. If inflation is running at an 8% rate while real wages are rising by 2%, people’s money wages will increase by 10%. The noneconomists among them will attribute the whole 10% gain to their own increased productivity [DRH note: I’m not sure he’s right; I never met this mythical non-economist] and will feel that inflation robbed them of the other 8%. They weren’t robbed at all, Blinder argues: 2% is all they were entitled to, and 2% is what they got. That argument is incomplete, however. Before 1985 people were being robbed because individual income taxes were not indexed: Inflation kept bumping people into higher margin tax brackets, thus enabling the Treasury to steal some of the income they were entitled to. Blinder acknowledges this difficulty and says at one point that a failure to index the tax system can impose “sizable costs.” But then he turns around and says that unless you are an economist or accountant, this cost “will leave you yawning.” Where was Blinder during the late 1970s? I knew people with only a high school education who noticed instantly that an 8% increase in their hourly rate translated into only a 6% or so increase in their take-home pay, not enough to stay abreast of inflation. They didn’t yawn when that happened–they got mad, which is one reason taxes ended up being indexed. By the way, in writing this, I had in mind a discussion I had with a high school graduate named Chrissy Morganello, who was a secretary to three other faculty members and me from 1975 to 1979, when I was an assistant professor of economics at the University of Rochester’s Graduate School of Management. Here, by the way, is Blinder’s first rate article on “Free Trade” in David R. Henderson, ed., The Concise Encyclopedia of Economics. Next up: Alice Rivlin’s blasé attitude about high inflation in the 1970s.       (0 COMMENTS)

The pandemic evolution now appears to be more worrying in Europe than in America, as illustrated by the graph below reproduced from yesterday’s Wall Street Journal (Marcus Walker, Bertrand Benoit, and Stacy Meichtry, “Europe Confronts a Covid-19 Rebound as Vaccine Hopes Recede,” March 12, 2021). In France, for example, after two very long and restrictive (even tyrannical) national lockdowns, ICUs are close to 80% capacity. The Wall Street Journal explains: Europe’s efforts continue to suffer from the EU’s slowness in procuring and approving vaccines, production delays at vaccine makers, and bureaucratic holdups in injecting available doses. The “production delays at vaccine makers” are most likely due to the fact that the EU government has not purchased them in time while, of course, there as in America, individuals and private organizations cannot purchase them. Those who have read Ayn Rand’s famous novel may wonder if Atlas is shrugging more visibly in Europe than in America. As for those Europeans who put all their faith in an omniscient and all-powerful welfare state, they seem deeply disappointed (although they may be asking for more). In Germany, 30% don’t trust the competence of Angela Merkel’s center-right government and trust even less her center-left parliamentary allies. The progression of new covid variants in Europe may be an immediate culprit, but a major reason for that is that European governments, under the punctilious EU government, have been slower than the US government in making vaccines widely available to the public. Yet, the vaccine rollout in America has not been a marvel of federal or state planning. Four months after Pfizer announced the completion of its clinical trial, three months and a half after it started delivering doses to the United States, and three months after the vaccine was approved by the FDA, only 10% of Americans are fully vaccinated and another 10% have received a first dose (according to data from the Wall Street Journal). As far as we can see, this was, although not exactly warp speed, fast enough to prevent the variants from outrunning the building of herd immunity. This relative American success was achieved with much fewer restrictions to individual liberties than in most European countries. Federalism and popular resistance have been a big advantage. It is notable that Pfizer and its partner BioNTech were not full-fledged participants in Operation Warp Speed. Pfizer did not accept research funding to develop its vaccine. The New York Times explained (“Was the Pfizer Vaccine Part of the Government’s Operation Warp Speed?” November 10, 2020): In July [2020], Pfizer got a $1.95 billion deal with the government’s Operation Warp Speed, the multiagency effort to rush a vaccine to market, to deliver 100 million doses of the vaccine. The arrangement is an advance-purchase agreement, meaning that the company won’t get paid until they deliver the vaccines. Pfizer did not accept federal funding to help develop or manufacture the vaccine, unlike front-runners Moderna and AstraZeneca. Pfizer CEO Albert Bourla made that clear (see “Leading Covid-9 Vaccine Makers Pfizer and Moderna Decline Invitations to White Summit ‘Vaccine Summit’,” Stat, December 7, 2020): Bourla later defended the decision to decline federal research and development funding, citing a desire to “liberate our scientists from any bureaucracy” and “keep Pfizer out of politics.” Except perhaps for that, the pandemic does not provide a strong confirmation of the benefits of American free enterprise. There may be more free enterprise in America than in Europe, but it’s a matter of degree. In America too, the distribution of the vaccines has been basically a governmental affair. And think about the “price-gouging” laws that have prevented market price adjustments in 42 states, not counting the Defense Production Act at the federal level. (See Rik Chakraborti and Gavin Roberts, “Anti-Gouging Laws, Shortages, and Covid-19,” Journal of Private Enterprise 35:4 (2020), pp. 1-20.) Perhaps the administrative-welfare state, in both Europe and America, is not as good as we thought? (0 COMMENTS)

The rich! Who gains under price rationing? The rich.  And everyone else as well. The economy is not a zero sum game.  Under a price rationing system, the vaccines will get out to the public more quickly and fewer people will die.  It’s true that many of the first doses would go to wealthier individuals, but that’s also true of non-price rationing.  In practice, states spent so much time fighting over how to distribute the vaccines in a “fair” way that they slowed the rollout of vaccines, leading to many needless deaths. PS.  Of all the head-scratching decisions made by the US government during the past year, it’s hard to top the one described in this new Alex Tabarrok post.  Imagine being a government official making a decision that costs thousands of lives, and has precisely zero benefit to anyone. (0 COMMENTS)