Here’s a tweet by Matt Yglesias: Is it really that “strange”?  Yes, there’s far too much government planning in the housing sector. But housing is a laissez-faire paradise compared to America’s second largest sector—health care. And health care is a laissez-faire paradise compared to America’s third largest sector—education. And then there’s agriculture.  Law.  Transportation.  I could go on and on. To be clear, America is a more free market economy than most other countries.  But how often to you see pundits claim that, “Actually, country X is not a free market economy”, and then cite some intervention that is fairly minor compared to the widespread interventions in America’s second and third largest sectors? (1 COMMENTS)

I’ve mostly completed my study of MMT, although I have a few more papers to read. But I feel like I know enough to draw a few conclusions about how MMT relates to the broader field of economics. When reading the Macroeconomics textbook by Mitchell, Wray and Watts, I was frequently struck by how MMT is almost the exact opposite of Chicago school economics, particularly the monetarist version I studied in the 1970s. On a wide range of issues, MMT is on one end of the spectrum, the Chicago school is on the other end, and the mainstream is somewhere in between. Here on some examples: 1. Chicago economists believe that the supply and demand model is extremely useful for a wide range of markets, even markets that don’t meet the classical definition of “perfect competition”. Mainstream economists believe the S&D model is quite useful, but worry more about imperfect competition. MMTers are highly skeptical of S&D models, viewing the model as only useful in a very limited number of cases. 2. Chicago school economists believe that free market policies are almost always the best. Mainstream economists believe that free market policies are often optimal. MMTers are highly skeptical of what they call “neoliberalism”, viewing it as almost a religion. 3. Chicago school economists don’t believe there is much value in talking to bankers when trying to understand how monetary policy works. MMTers believe that knowledge of the nuts and bolts of the banking industry is highly important when trying to understand monetary policy. 4.  Chicago school economists believe that the concept of opportunity cost is extremely important, and applies to almost all policy debates.  That’s a bit less true of Keynesians, whereas MMTers assume that in many if not most cases the economy is well below full employment, and there is no opportunity cost to additional government expenditure. 5.  Modern Chicago economists are extremely skeptical of the “Phillips curve” approach to macroeconomics.  Earlier monetarists such as Milton Friedman thought there was a short run tradeoff between inflation and unemployment, but no long run trade-off.  Mainstream economists sort of agree with Friedman, but also argue that there might be some long run trade-off due to hysteresis.  MMTers seem to be most enthusiastic about the claim that boosting aggregate demand can boost employment over the long run, highly skeptical of natural rate models that say that AD doesn’t matter in the long run because money is neutral once inflation expectations adjust. 6.  Chicago school economists tend to favor relying on monetary policy to determine AD, and are highly skeptical of the efficacy of fiscal policy.  Mainstream economist favor of mix of the two, whereas MMTers prefer fiscal policy and are skeptical of the efficacy of monetary policy. 7.  Chicago school economists argue that it is most useful to treat money as exogenous, i.e. under control of the central bank, at least under a fiat money regime.  Mainstream economists treat money as endogenous in short run models with interest rate targeting, and exogenous in long run models trying to explain large changes in the trend rate of inflation.  MMTers treat money as being almost completely endogenous. 8. Chicago school economists believe that changes in interest rates primarily reflect the income and Fisher effects.  Thus falling interest rates are usually an indication that money has been tight in the recent past.  Mainstream economists view interest rates as being heavily influenced by monetary policy (the liquidity effect), but also reflecting the income and Fisher effects, especially in the long run.  MMTers see interest rates as almost entirely reflecting monetary policy, at least under fiat money.  They mostly ignore the income and Fisher effects, and reject models of the “natural rate of interest.” 9.  Chicago school economists see investment being determined by saving rates.  Mainstream economists see investment as being determined by saving rates during normal times, but also worry about a “paradox of thrift” when interest rates are extremely low.  MMTers see the paradox of thrift as being the norm. 10.  Chicago school economists believe high inflation is caused by excessive money growth.  Mainstream economists see high inflation as being caused by a mix of monetary policy and supply shocks.  MMTers see high inflation as mostly reflecting aggregate supply problems. Because I’m a Chicago school economist, the MMT model doesn’t have much appeal for me.  That’s especially true because their arguments are often confusing and unpersuasive, even to mainstream economists.  In my view, MMT may have some success promoting ideas such as aggressive fiscal stimulus, due to the worldwide trend toward low interest rates.  I doubt, however, that they’ll make much headway in convincing the profession that their theoretical model makes sense, unless they can find a more persuasive way of explaining their ideas. BTW, I’d say the same about market monetarism.  I expect we’ll have some success convincing the profession that NGDP targeting make sense, but very little success in convincing economists that the monetarist approach to monetary theory has value.  But I’ll keep trying. PS.  It’s not clear to me that all of the ideas in the textbook I read are MMT beliefs.  Thus there may be some MMTers who are more favorably inclined to free market policies. (0 COMMENTS)

I have a confession: I continued working even though I was told not to. I was reminded of this by this article by Mckenna Dallmeyer, Texas Senior Campus Correspondent for Campus Reform. It’s titled “State auditor demands nearly $2k from Ole Miss prof who went on ‘illegal’ strike,” Campus Reform, December 14, 2020. Here’s what happened. I was a visiting assistant professor at Santa Clara University from September 1980 to December 1981. In the spring quarter of 1981, there was a racial incident on campus. I don’t remember what it was, but I think it was someone writing something negative about black people in a place that was visible. The powers that be decided to cancel classes for one day so that people could go to various “teach-ins” about racial discrimination or at least contemplate racial discrimination. I was sympathetic to the cause but I thought that cancelling classes was way too big an overreaction. Of course, that wasn’t my call to make: it was my employer’s. Which is why I’m calling this a confession. Am I proud of what I did? Yes. But it was a breach of a contract and I take contracts seriously. You’ll see below that I didn’t. I was teaching 2 classes. One was an intermediate microeconomics class with over 30 students in it. The other was an elective: a Law and Economics class with about 13 or 14 students. I wasn’t badly behind in the intermediate micro class. But in the Law and Economics class I was behind but for a good reason. The textbook for the class was Richard Posner’s An Economic Analysis of Law. I was a fan after a very quick and somewhat cursory reading and the person who had taught the class the previous year, Henry Demmert, had used it and liked it. (He was on leave in D.C., which is why I had been hired for a year.) So what was the good reason we were behind? It was that in working our way through the chapters, the students (all undergrads, some not even econ majors) and I were finding lots of bad economics. (And no, I can’t tell you what the mistakes were: my marked up copy was destroyed in my 2007 fire.) What started as an upset early in the course, both to the students and me, turned out to be a crusade. It was exciting each day to see if the students had found the mistake in a particular chapter–and they often had. (I’m not saying there were mistakes in every chapter: I don’t recall.) Parenthetically, I later found Jim Buchanan’s review of Posner’s book. The review was titled “Good Economics, Bad Law.” I didn’t feel qualified to judge the law but I was quite qualified to judge the economics. I would have titled my review “Occasionally Brilliant Economics with Occasional Errors that a Good Economics Undergrad Could Have Spotted.” Anyway, when you start working your way carefully through each chapter, you go more slowly. Halfway through the course, I had already given up on covering the whole book, but I wanted to cover at least 80% of it. The class met twice a week and so taking a whole day off–and we were told explicitly not to do makeups–would lose a half week. So I decided to take a risk. I went into the class, which I was running around a rectangular table, and announced that I was required to cancel the next class. The announcement had created a buzz on campus and so everyone knew why. Then I said, “Here’s my problem. We’re so far behind and I don’t want to get further behind. I’m inclined to show up for the next class.” Then I stopped. I looked around to see if anyone would initiate. One of my students who was really enthused about the class was Charley Hooper. He was an engineering major but he had taken my intro micro and was so enthused, and got an A, that I let him into the Law Econ class without his having taken the requisite Intermediate Micro class. Charley said, “I’ll be here.” Then the person next to him said “I’m coming.” Then “I’ll be here.” Every single person in the room said he or she would make the next class. It was like a story I had heard in high school from one of my teachers (I think it was my 9th grade English teacher, Harvey Rosen) about a military officer who asks for volunteers for a particularly dangerous mission. He has them in a long line and tells the men that he won’t put them on the spot and so he will turn his back and whoever wants to volunteer can step forward. He gives it a minute and turns back and sees that they’re all still in a long line, with no appearance that anyone had stepped forward. Crestfallen, he asks “None of you volunteered?” One of the men answers, “No, sir. We all volunteered.” After the students had all volunteered to come, I said, “Ok, because the issue leading to this is a racial incident, and I’m against racism, I’ll spend the last 20 minutes of the next class laying out what economists have to say about the economics of discrimination.” We had a great discussion at the end of the next class about how free markets give employers an incentive not to discriminate on racial grounds. I gave them a verbal version of Gary Becker’s model. And we were probably the only class that met that one day at Santa Clara University.   (2 COMMENTS)

This post was inspired by a recent Tyler Cowen post, entitled “I’m not so worried about inflation”. The post itself is fine and I’m not going to comment on it. Instead, it was the title that sparked my interest. What might a person mean when they say they are not so worried about inflation? I can think of at least 5 distinct meanings: 1. The speaker might be saying that they simply don’t view 4% or 5% inflation as a problem, even if were to occur. Some economists hold this view, as higher prices feed back into higher nominal incomes.  They might believe that this would get us out of a liquidity trap. 2. Or they might mean that while high inflation is often indicative of a policy failure, other measures like NGDP growth are more informative. (That’s my view, and also the view of economists like George Selgin and David Beckworth.) 3. Or they might mean that while high inflation is usually a problem, they currently don’t expect it to occur. (That’s what Tyler meant.) 4. Or they might mean that they are becoming less concerned about inflation being too low, coming in below the Fed’s 2% target. An economist might be likely to look at things this way, as within the economics profession there is a tacit assumption that excessively low inflation has been the bigger problem in recent years.  You’d be more likely to see this interpretation in the Financial Times than in USA Today. 5. Or they might view below 2% inflation and above 2% inflation as being equally bad, and this statement might be expressing confidence that inflation will average right around 2%. A Fed chair might be expressing this view. In one sense this post is merely about the ambiguity of language. But there’s more at stake than just terminology. Some of these differences reflect different worldviews, with important causal implications. Back in 2010, Ben Bernanke expressed frustration that below 2% inflation is not widely viewed as a problem. His comments gave the impression that confusion about the purpose of inflation targeting made the Fed’s job more difficult. Inflation is not like crime, pollution, epidemics, and other societal problems. In those cases, the reasons why the public worries about the problem are almost exactly the same as the reasons why policymakers worry about the problem. That’s not at all the case with inflation. The public thinks inflation is bad because as shoppers they don’t like paying higher prices for goods and services. Policymakers believe that view is wrong; higher prices do not directly reduce aggregate living standards.  One person’s expenditure is another person’s income.  Rather, excessively high inflation, excessively low inflation, and/or excessively unstable inflation may reduce living standards in all sorts of indirect ways, such as discouraging saving and investment, creating financial market instability, or interacting with sticky wages to create unemployment. During WWII, the public was almost completely supportive of the US military as it tried to defeat Germany and Japan.  The Fed does not have such strong support from the public or Congress, and thus its job is more difficult. In the mid-1970s, Gerald Ford said, “Whip inflation now”.  That’s a much more accessible slogan than, “Maintain a symmetrical 2% core PCE inflation target, averaged out over a decade”.  As an analogy, in 1942, “Beat the Huns” was a more accessible slogan than is, “Maintain the appropriate balance of power in the Middle East” or “Find the right mix of engagement and conflict with China” in the year 2020.  As the straightforward problems get solved, we are left with the more complex problems. PS.  Isn’t that sort of like life?  The simple “Find a boyfriend” of age 17 gets replaced by, “Balance the needs of children, husband, parents and in-laws at age 43.   Sigh . . .   (0 COMMENTS)

  Education is not a pure public good. The marginal cost of educating an additional child is far from zero; indeed, the marginal and average costs are (at least for large school districts) approximately the same. And there is no difficulty in charging an individual for use of this service. Those who seek to justify public education in terms of market failure focus on the importance of externalities; it is often claimed, for instance, that there are important externalities associated with having an educated citizenry. A society in which everyone can read can function more smoothly than a society in which few can read. But there is a large private return to being able to read, and even in the absence of government support, almost all individuals would learn this and other basic skills. Indeed, most individuals would go far beyond that. The question is, given the level of education that individuals would privately choose to undertake were there no government subsidy, would further increases in education generate significant externalities? There is no agreement concerning the answer, but the case for government support based on these kinds of externalities seems, at best, unproved. This was written by a very prominent American economist back in the late 1980s. He’s still alive and productive. Who is he?   (4 COMMENTS)

It is not always understood how governments and the public sector more inclined to bow to popular discriminatory bigotry than private businesses, because of the incentives of their respective actors. As Gary Becker argued, private businesses have to pay the cost of their discrimination. Only if their owners, or perhaps a large number of their customers, have a “taste for discrimination” will they engage in it—but competitors will then rush in, with higher prices if necessary, to satisfy the unfulfilled demand of the victims of discrimination. Starting around 1880 Jim Crow laws prevented this discrimination in the South. Historian Leon Litwack writes: Although blacks had previously experienced segregation in various forms, the thoroughness of Jim Crow laws made it strikingly different. What the white South did was to segregate the races by law and enforced custom in practically every conceivable situation in which whites and blacks might come into social contact. (Trouble in Mind: Black Southerners in the Age of Jim Crow, Alfred A. Knopf, 1998, p. 233) Jim Crow laws established apartheid, that is, legally enforced segregation. Railroad companies provide an interesting historical example of business incentives. These private companies were often willing, against the political correctness of the times, to sell tickets to both blacks and whites and to not segregate their customers in different cars or compartments. Poor whites and poor blacks purchased second-class tickets, while rich whites and occasionally rich blacks rode in first-class cars. The situation was far from perfect, and violence sometimes erupted, but it was better than the segregationist state-enforced laws that followed. A historian of populism observes: More than any other institution, train cars and railroad stations exemplified the modern dilemma of the racial order. They were places where mobile, unsupervised, anonymous travelers met in close quarters. Making the situation more explosive, those whites, including most farmers, who could not afford a first-class ticket met blacks on equal terms. In contrast to the workplace where blacks served white employers, or in the supply store where blacks owed debts to white merchants, in a railroad car blacks and whites paid the same fare for the same right to a seat. Accordingly, whites made the railroads a primary target of the new segregation laws. Reform-minded southerners considered these laws a mark of modern and progressive race relations. (Charles Postel, The Populist Vision, Oxford University Press, 2007, p. 178) The railroad companies resisted proposals for laws mandating segregation between or within cars, as explained by another historian: The railroad companies did not want to be bothered with policing Southern race relations and considered the division of coaches into black and white compartments an irksome and unnecessary expense. Despite the railroad companies’ resistance, though, growing tensions about race and gender, anger at the railroads, and political maneuvering pushed toward the separation of the races. In the late 1880s and early 1890s, the railroads became the scenes of the first state-wide segregation laws throughout the South. (Edward Ayers, The Promise of the New South: Life after Reconstruction, Oxford University Press, 1992, pp. 17-18) In the South, there was much “taste for discrimination” and thus private discrimination, but as businesses had to pay the cost of their discrimination in terms of lost customers and higher expenses, they were often reluctant to discriminate. It is virtually certain that laissez-faire would have gradually extinguished racism or at least much attenuated it. But the atmosphere was not one of laissez-faire and railroad companies were blamed for putting their profits ahead of the community values—“putting profits before people,” as we would confusedly say today. Ayers writes: It was clear that white Southerners could not count on the railroads to take matters in hand. Some whites came to blame the railroads for the problem, for it seemed to them that the corporations as usual were putting profits ahead of the welfare of the region. (Ayers, p. 143) Postel explains that ordinary white people, notably members of the populist Farmers’ Alliance, used the non-discriminatory or not-sufficiently-discriminatory behavior of the railroads as another argument for public control or even nationalization: “When it comes to making a separate car for negroes to ride in,” explained a young Texas woman and member of the Farmers’ Alliance, the demand for public control of the railroads would ensure that white farmers “would have our own way” in segregating them. Starting in 1980, white farm reformers would have their way as Alliance-backed “farmers’ legislatures” in Georgia, Louisiana, and other states initiated “separate accommodation” laws on the railroads. (Postel, p. 178) These railroads acted as if they had no social responsibility, as socialists and most intellectuals, as well as confused capitalists, would say today. (See my Econlog post on “The Political Firm.”) Contrary to private businesses, public institutions had no restraints against discrimination because they did not to have to pay a price in reduced profits. The taxpayer would pay, often unknowingly. Litwack writes: It was not uncommon to find a sign at the entrance to a public park reading “Negroes and Dogs Not Allowed.” … With few exceptions, municipal libraries were reserved for the exclusive use of whites. … While some communities limited access of black motorists to the public streets, others placed restrictions on where they might park. … In the town and cities, segregated residential patterns were now legally sanctioned, making it difficult for blacks of any class to move into a white block and accelerating the appearance or growth of a distinct district designated as “darktown” or “niggertown.” … New Orleans went so far as to adopt an ordinance segregating black and white prostitutes. (pp. 234-236) What is surprising is how many people still want government to impose by force whatever value or emotion is in vogue—whether populism, wokeness, or corporate social responsibility, for example—not thinking that the mob will not always be on their side; and how many people think that economic freedom is bad because it often allows an escape from the tyranny of the majority. I suspect that many of today’s Social Justice Warriors would have been on the side of the mob at the time of Jim Crow. (0 COMMENTS)

I told you so. I thought from the getgo that having the federal government, under Operation Warp Speed, monopsonize the COVID-19 vaccine and then use central planning to distribute it at a zero price, was a bad idea. I criticized the central planning way to distribute it in “Vaccines’ Last Hurdle: Central Planners,” Defining Ideas, December 4, 2020. I wrote: If Walmart or Amazon put out a plan to allocate vaccines, I wouldn’t be so concerned. The reason is that they would have incentives for every step of the process. They would fire people for doing it badly and would pay bonuses to, or promote, people who do it well. But this is government. Will any government worker lose his or her job by knocking off at 5 p.m. on Friday instead of staying an extra three hours to get out ten more shipments of the drug? The question answers itself. Well, guess what? The federal government is taking its sweet time. Here’s Ronald Bailey on the issue: In a statement, Pfizer rebuts rumors that there is a shortfall in doses for its vaccine due to production delays. “Pfizer is not having any production issues with our COVID-19 vaccine, and no shipments containing the vaccine are on hold or delayed,” notes the company. “This week, we successfully shipped all 2.9 million doses that we were asked to ship by the U.S. Government to the locations specified by them. We have millions more doses sitting in our warehouse but, as of now, we have not received any shipment instructions for additional doses.” Adds Bailey: Sadly, the federal government appears to be dawdling again while the toll of COVID-19 deaths, hospitalizations, and new diagnoses continues to rise ever higher. It’s not like there’s a pandemic or anything going on. The belief in central planning lives loudly in so many of the people messing this up. (0 COMMENTS)

The earliest Moderna probably would have sold the mRNA-1273 vaccine would have been after it began scaling up manufacturing. A company doesn’t begin manufacturing until it believes in a product. In the timeline above, that’s March 23. But manufacturing takes some time to get going. Let’s assume that by April 1, five weeks from the date the first batch was shipped, Moderna begins offering mRNA-1273 for sale. Sales start slowly. Supplies are limited. Only the bold and brave get inoculated. The rest of us, and Moderna, get some early, albeit messy, safety and efficacy data. This data helps Moderna improve the vaccine, dose, and dosing schedule. Having a ready market and a steady source of revenue, Moderna scales up production faster than in the timeline above. In this scenario, inoculations could have begun at least 8.5 months earlier and, perhaps, the pandemic would have ended 240 days and 240,000 lives earlier. There’s little talk of lockdowns and the economy remains resilient. This is from Charles L. Hooper and David R. Henderson, “The FDA’s Deadly Caution,” AIER, December 16, 2020. In it, we consider various scenarios for what would have happened had we had a truly free market in pharmaceuticals. The one above is the most optimistic. Read the whole thing.   (0 COMMENTS)

Here’s a neat new piece in Social Science Quarterly by Richard Hanania.  The set-up: I conducted a preregistered study with a representative sample of white Americans. The survey asked them how open they would be to accepting certain refugees into the United States. The characteristics of the refugees were changed along the following three dimensions: Race: Refugees were either from the white country of Ukraine, or the predominately non-white country of Venezuela. Although one might suspect that this treatment would invoke stereotypes about Venezuela and Ukraine instead on non-white and white people as such, American ignorance about most of the rest of the world makes this unlikely. Luckily, the study was carried out before Ukraine jolted to the top of the headlines due to Trump’s impeachment. Voting behavior: Respondents were told that the new migrants would settle in Florida, a swing state, and either vote Democrat, like most immigrant groups, or vote Republican, due to previous experience with socialism. Both these stories seem plausible enough. Skill level: Refugees were said to be either high- or low-skilled, that is able to pull their own weight economically or likely to rely on government assistance. Hanania’s punchline: Race had no statistically significant effect on any group. Both conservatives and liberals, however, changed their views based on how they would vote. Only conservatives were affected by whether the refugees were said to be high-skilled and therefore presumably beneficial to the economy, or low-skilled and likely to rely on government assistance. Figure 1 below shows how partisanship, but not necessarily race, matters. The gap between the groups “very liberal” and “very conservative” in support for immigration is cut by around two-thirds when refugees are said to support Republicans instead of Democrats! More striking to me, though, is this graph. Notice: Not only do very liberal respondents like white migrants more than the very conservative do; very liberal respondents like Republican migrants more than very conservative ones do!  To my mind this is strong evidence that Republicans’ core prejudice is not racism but xenophobia.  They’re even relatively hostile to immigrants on their own side of the aisle. No wonder Asians are so Democratic.  Given their traditional values and high income, you’d expect them to be Republicans.  But Asians correctly sense that Democrats respect them more. Years ago, I proposed a simple voting model that I call the Respect Motive.  Long story short: “People vote for whoever respects them more.”  As long as liberals care more about Republican migrants than conservatives, expect migrant Republicans to be few and far between. (0 COMMENTS)

Tyler Cowen’s latest “Conversations with Tyler” is an interview of former CIA Director John Brennan. If you read the whole interview, you see that Tyler has done due diligence by reading background material on Brennan. Unfortunately, Tyler doesn’t ask him a thing about Brennan’s lying to Congress about the fact that his CIA staff, at his behest, spied on Senator Feinstein and other employees of her Senate Intelligence Committee. Conor Friedersdorf lays it out in “A Brief History of the CIA’s Unpunished Spying on the Senate,” The Atlantic, December 23, 2014. A key paragraph from Friedersdorf’s 2014 article: CIA Director John Brennan denied the charge. “Nothing could be further from the truth,” he said. “We wouldn’t do that. That’s just beyond the scope of reason in terms of what we’d do.” It would be months before his denial was publicly proved false. “An internal investigation by the C.I.A. has found that its officers penetrated a computer network used by the Senate Intelligence Committee in preparing its damning report on the C.I.A.’s detention and interrogation program,” The New York Times reported. “The report by the agency’s inspector general also found that C.I.A. officers read the emails of the Senate investigators and sent a criminal referral to the Justice Department based on false information.” Tyler Cowen has written a lot about what he calls “state capacity libertarianism,” which he favors. In this post, he lists 11 propositions about state capacity libertarianism. None of the 11 seems to involve holding government officials accountable for mistakes and lies. But I would think that a state capacity libertarian would see that as important. Apparently not, at least from its main proponent. (0 COMMENTS)