At least that’s the claim of the US government. Today, the US government accused Switzerland of artificially depressing the value of its currency in the foreign exchange market. This is rather odd, as Switzerland is generally considered to be the country with the strongest currency in the entire world. Since 1971, the value of the Swiss franc has soared from 23 cents to $1.12: The US government might argue that this is the nominal exchange rate, and what matters is the real exchange rate.  I agree. But most measures of the real exchange rate (such as The Economist’s’ Big Mac index”), also show the Swiss franc to be the strongest currency in the world.  The “real exchange rate” is just a fancy term for the relative cost of living.  So to put this claim in terms that average people can understand, the US government is claiming that the cost of living in Switzerland is being held too low.  Have you ever taken a vacation is Switzerland? If you want to understand the US claim in graphical terms, look at the Economist’s Big Mac index graph.  The Swiss franc is the blue dot on the far right, 21% “overvalued” versus the dollar.  The US is essentially claiming that the Swiss have manipulated that dot too far to the left.  No, I’m not joking. The US government might argue that while Switzerland has the strongest currency in the world, it should be even stronger.  But what evidence do we have for this claim?  The Treasury department would cite Switzerland’s large current account surplus.  But a current account surplus does not mean a currency is overvalued.  Many American states run current account surpluses with other states.  Does that mean the Massachusetts dollar is undervalued relative to the Texas dollar?  Switzerland’s current account (CA) surplus is merely an indication that the Swiss save more than they invest. The US government might argue that the Swiss CA surplus is unusually and unjustifiably large.  But most northern European countries run CA surpluses. Switzerland is significantly richer than other European countries, and the Swiss are also unusually thrifty.  It’s exactly the sort of country one would expect to run an especially large current account surplus, even if there were no manipulation. The US government might argue that the Swiss saving rate is artificially inflated by government intervention in the foreign exchange market.  But the Swiss purchase of foreign assets is motivated by a huge rise in the demand for Swiss francs, which has caused the Swiss National Bank’s balance sheet to balloon to well over 100% of GDP.  There are not enough Swiss government bonds for the SNB to purchase.  A failure to meet that demand for francs would result in deflation and depression. In fairness, you could argue that the Swiss should set a higher inflation target, and/or engage in price level targeting.  But that’s true of the EU and Japan as well.  And it’s also true of the US.  Or the government might argue that Switzerland should run massive budget deficits.  In other words, the Swiss should abandon the economic system that produced arguably the most successful small country in human history, and throw in their lot with the MMTers. I’m guessing that the Swiss will say, “No thanks, we are doing just fine without your advice.” PS.  Keep in mind that the US government is currently run by a team that launched a trade war because its economists told them that trade barriers would reduce the US trade deficit.  The deficit actually increased, just as most sensible economists predicted. PPS.  The report actually named two countries as currency manipulators, Switzerland and Vietnam.  When we put tariffs on China it caused some low wage industries to move to Vietnam.  The game of trade “whack-a-mole” continues. (0 COMMENTS)

I got my Ph.D. in economics from Princeton in 1997.  Twenty-three years after graduation, I remain a professor at a mid-ranked school.  The odds that I’ll ever get a job at a top-20 department look awfully low.  How do I feel about this situation? The socially approved response, at least within social science, is to feel and express deep admiration for the plainly superior researchers at top schools.  I’m supposed to defer to their judgment on not only (a) which research methods are kosher, but also (b) what research topics are worthwhile.  If I apply myself, perhaps I can usefully, if humbly, extend their work. The more common responses of lower-status academics, of course, are jealousy and laziness.  Jealousy, because faculty at higher-ranked schools so out-shine the rest of us.  Laziness, because deep-down faculty at lower-ranked schools know they lack the skills to do real research.  Most aren’t even good enough to usefully, if humbly, extend the work of their betters. Call it sour grapes, but I don’t respond to my situation in any of these ways.  With rare exceptions, I don’t admire researchers at top schools – or try to humbly build on their work.  At the same time, I’m not lazy.  And in all sincerity, I am not jealous. Why not?  To be blunt, I deny the value of almost all of the social science research going on at top schools.  My reaction to 95% of the articles published in top economics journals isn’t so much “That’s wrong!” as “So what?”  I recognize that getting accepted by these journals requires enormous intelligence, training, and effort.  Unless you believe in the Labor Theory of Value, however, the cost of creating top publications implies nothing about the value of creating top publications.  And in my considered judgment, the value of top publications is low.  When I was in grad school, economists won big for pure – and utterly irrelevant – mathematical theory.  These days, economists win big for running bullet-proof randomized controlled trials on trivial topics.  Yes, there are exceptions.  Phil Tetlock, Ed Glaeser, Lant Pritchett, and Richard Thaler leap to mind.  Yet the rule remains: The intellectual value of top publications is low. Does anything better exist?  Definitely.  What is it?  The kind of research I do, of course.  Plenty of scholars do what I consider “my kind of work,” but let’s focus on me.  False modesty aside, I judge my work better than most of the work done by researchers at top schools.  Indeed, I judge my work to be vastly superior.  That’s why I do it. How so?  At minimum, books like The Myth of the Rational Voter and The Case Against Education attempt to answer social questions of great significance.  Why do democracies choose bad polices?  Why is there a gulf between learning and earning?  I say struggling with a great question is better than definitely answering a trivial one.  And since I predictably think my books actually deliver high-quality answers to these great questions, my sense of self-satisfaction with my intellectual output is through the roof. In fact, I’d go further.  Call me a megalomaniac, but in my heart of hearts I deem dozens of my blog posts to be more valuable intellectual contributions than the typical article published in top social science journals.  Consider my “The Public Goods Model vs. Social Desirability Bias.” This wee article shows that the so-called tell-tale signs of public goods – people collectively voting for goods they don’t individually purchase – could just as easily reflect Social Desirability Bias.  A simple point?  Yes.  But I don’t think I’ve ever heard another economist clearly acknowledge this observational equivalence.  So what?  This simple point calls into question the efficiency of many trillions of dollars of government spending all around the world.  Few economists at top schools have written anything to rival this solitary blog post. You could retort, “OK, then why aren’t you seething with jealousy?”  Simple: I’m not jealous of researchers at top schools because I would hate to trade places with most of them.  I would rather do what I do at George Mason than do what Harvard researchers do at Harvard.  Indeed, it’s not even close.  Yes, I would prefer a world where Harvard placed supreme value on my kind of work.  After all, I am a chronic daydreamer.  Yet long ago, I hedonically adapted to society’s wretched priorities.  Instead of feeling mad at the world, I rejoice that I get paid to do the work that means the world to me. P.S. If you have tenure at a top school, none of my negativity should depress you.  Today is the first day of the rest of your career.  Why not chuck conventional standards and start doing research that really matters to you and the world?  If you want to chat about how to get started, just email me. (0 COMMENTS)

250 years ago today Ludwig van Beethoven was born. Beethoven’s greatness is quite too obvious to comment on it. The great composer had liberal sentiments; he had great hope in the French Revolution and in Bonaparte as a liberator, yet he was disappointed by the Napoleon crowning himself and came to resent him. Jim Powell had an amusing profile of Beethoven for the liberty-minded, here. Sometimes people remark that Beethoven “wrote only one opera” and could not really play with the human voice as well as he did with music. True, Beethoven wrote only one opera, but it is “Fidelio”. “Fidelio” is first and foremost about marital love, something Beethoven did not enjoy himself. It is the story of the absolute commitment of a wife, Leonore (hence the title of the first version), a noblewoman of Seville who disguises herself as a boy to find her husband, Florestan, a political prisoner. This sort of story, set in a prison, was actually not uncommon during the French Revolution. Jailing opponents happened during the ancien regime and likewise in revolutionary times. Fidelio adapts “Léonore ou l’amour conjugal”, a work by Jean-Nicolas Bouilly, who worked as a prosecutor in the city of Tours during the Reign of Terror. Leonore/Fidelio wasn’t the luckiest, commercially speaking, of Beethoven’s works. It premiered right after the French army occupied Vienna. The local aristocracy had fled the Austrian capital and the mainly French audience was not particularly receptive to the story. Beethoven kept writing and rewriting it, so we have four magnificent overtures. But to many, the highlight is the chorus of the prisoners. Fidelio/Leonore convinces the jailer, Rocco, to allow the other prisoners a few moments of fresh air in the courtyard. The chorus movingly conveys the emotion brought up by this fleeting glimpse of freedom. It is hardly original to comment that 2020 was a sad year for most of us. For music fans, it was also sad that we could not enjoy the many beautiful concerts that the Beethoven anniversary had in store for us. To remember Beethoven, my Institute has published (alas, only in Italian) a short piece written in 1953 by Epicarmo Corbino, an Italian liberal economist (and, briefly, Finance Minister after WWII) who fancied writing something on Beethoven. It is a short essay that proves that a social scientist may have some thoughts on music, too. We have also put together a playlist of Beethoven pieces, highlihgting those in which you can better sense his love and passion for liberty. It is accessible here. (0 COMMENTS)

To a large extent, people do what is generally expected from them, simply because it simplifies their lives in society. This is how and why rules develop that facilitate social coexistence. The danger is that these rules turn out to be stifling and economically inefficient, which means that they impede trade, innovation, and prosperity. Primitive tribes provide an extreme example. The opportunity is that some social rules–and institutions, which are sets of rules–may allow a large measure of both individual liberty and social regularity. A long tradition of (classical) liberal thinkers, often economists, from David Hume to Friedrich Hayek, has emphasized the benefit of evolved social conventions, as opposed to diktats from political authority. Such conventional rules, in large part based on trade and trust, have been responsible for the development of individual liberty, the Industrial Revolution, and the escape from poverty of a large share of mankind. I was reminded of the importance and perhaps fragility of good institutions by a piece by Steven Greenhut reproduced in Reason Magazine. Greenhut asks: What can you say when a major political movement (Trumpism) finds it easier to believe that every major American institution is potentially corrupt than it is to think that a president with a history of telling whoppers is being dishonest again? What we have seen in the 2020 presidential election and its aftermath is, as far as we can tell, a defeated president (by about seven million votes) trying to stay in power by claiming, on the basis of absurd conspiracy theories, not much better than those of Alex Jones, that he actually won a majority of the votes. But note how election officials (probably nearly all of them, from the lowest to the highest), judges including some nominated by Mr. Trump, state officials including Republican ones, and even some officials of the Trump administration, honestly did what was expected of them and, at each stage of the long post-election process, contributed by words or deeds to ensure that the election was free of fraud and to defend it against unsubstantiated and self-serving accusations. This, of course, is not to deny that the state is dangerous and far too powerful. It must be continually held in check, both by private institutions and by its own institutions. The hope of classical liberalism is that this is not impossible. An optimist may hope that the 70 million Americans (or perhaps half of them if we exclude those who just voted against the Democratic party) who voted for Trump after having been officially and openly lied to by him and his sycophants during four years, will wake up to the danger of Leviathan. (0 COMMENTS)

Matt Yglesias has a post advocating fiscal stimulus in the form of checks sent to all Americans. While discussing the bonds that would be issued to finance the increased deficit, Yglesias makes this claim: The federal government needs to pay interest on the bonds, but that interest becomes Fed profits which are rebated to the Treasury so there’s no actual cost. Of course, the total federal debt will go up, but the more important “debt held by the public” will not since the extra debt will, by law, be perpetually held by the Fed rather than by the public. That would be true if the bonds were bought with zero interest currency notes, and the currency notes stayed in circulation forever.  Most of the debt, however, will be purchased with interest-bearing bank reserves.  This is because a large permanent increase in the stock of zero interest currency would likely cause the Fed to overshoot its 2% inflation target.  Maybe not right away, but certainly after the economy recovered and interest rates rose above zero. So let’s assume that the deficit is financed by issuing Treasury debt, and the Fed buys the debt with interest-bearing bank reserves.  In that case, there is not likely to be much Fed profit to offset the interest burden on the Treasury.  Yes, the Fed will earn interest on the bonds it purchases, but it will pay interest on the bank reserves that it injects into the economy. In general, the interest rate on bank reserves is roughly equal to the interest rate on T-bills.  While it is usually (but not always) the case that interest rate on bank reserves is below the interest rate on longer-term bonds, that sort of “profit” could be earned simply by shortening the maturity of the Treasury’s outstanding debt.  For various reasons, the Treasury prefers to borrow by issuing bonds of a wide range of maturities.  If the Fed bought longer-term bonds with bank reserves they would probably earn a profit, but there is risk involved. It’s also possible that interest rates will stay at zero forever.  But in that case there would be no cost in financing the deficit even if the debt were not purchased by the Fed.  So money creation does not perform any fiscal miracles. On the other hand, because the demand for currency rises over time, the Fed earns a certain amount of seignorage from adding to the stock of currency.  But that profit (sometimes referred to as the “inflation tax”), occurs regardless of what fiscal policy is doing.  And it’s a very small share of GDP, relative to the entire federal budget. PS.  Some might argue that the US should copy Japan’s “zero interest rates forever” policy.  But Japan did not achieve that outcome with easy money; they did so by producing ultra-slow NGDP growth, which drove the Japanese natural rate of interest down to zero.  People who favor proposals to monetize debt and/or permanently hold interest rates at zero, are generally people who favor expansionary policies regarding aggregate demand.  Anyone in that camp should NOT be citing Japan, which among the major economies has the worst performing aggregate demand growth in modern history.  That’s why Japanese interest rates are stuck at zero.  Nonetheless, I recall seeing a few MMTers cite Japan as an example of a zero interest rate policy. (0 COMMENTS)

A few days ago the Wall Street Journal ran an op-ed of mine, on the new Christmas restrictions that the Italian government passed for coping with Covid19. Here’s a link (gated). I am not a fan of the restrictions. Italians are no longer free to move through the country; they may travel only within their respective regions or between regions rated as having a similar risk status. Regions are classified according a “color code”, depending from their infection rate and an assessment for their healthcare capabilities and response. On the webpage of Istituto Bruno Leoni, you can see the “barometer of liberty”: how constitutional rights are curtailed in different areas, and how the situation has changed over time. No region is free of restrictions and we have a national curfew. Movie theaters, theaters, and gyms are closed everywhere; most schools and all universities have adopted a regime of remote teaching. The government is forecasting that in a matter of days, since the contagion situation is improving, all regions will be “yellow” (the lower level or risk) but they’ll be all treated as red (the higher level of risk). Between December 20th and January 6th nobody will be able to leave their own regional territory. On top of that, on December 25th and 26th and on January 1st, regardless of the level of risk in their region, Italians will be confined to their respective municipalities. I was impressed by the comments by WSJ readers, and found rather amusing the one that pointed out it was clear I wasn’t a good Catholic, since I did not figure out that Midnight Mess should end 3,5 hours ahead of the usual time and not 2 (indeed, I did not account for people going back to their places). More generally speaking, however, from comments and Twitter I got the impression that the people sympathizing with my irritation were more right-leaning. For once, I do not think that this has to do with the WSJ readership. In the last few months, people critical of lockdowns and many other Covid19 restrictions tended to be mostly from the right. The left has been generally supporting restrictions. Perhaps some left-wingers (the cosmopolitan or “well-read” left?) are more confident in expert judgment than conservatives are, re perhaps because the discussion has been framed as a conflict between “health and the economy” and do-gooders of all persuasions couldn’t possibly side with the economy. Before Covid19, I was beginning to believe those who were foretelling a political realignment (for example, the always insightful Steve Davies) were right. The old coalition between conservative leaning and  libertarian leaning people was about to collapse, after Trumpism and Brexit. Many distinguished between “anywheres” and “somewheres-” people with roots and people with cosmopolitan attitudes, country and city. Identity politics was also making things more complicated, but seemed a force to reckon with – and, for the few libertarians, to compromise with. Has the pandemic changed that? Will Covid19 be a defining moment, politically speaking? If so, what about political realignment? Will lockdowns and restrictions become the defining issues, dividing us politically according to our degree of enthusiasm for them? It seems to me that people on the conservative side were both more skeptical of experts and more hostile to restrictions to their own personal liberty. Is this an attitude libertarians share? Will it affect the way in which any of us sees herself politically? Or we will all be so eager to forget about Covid19 that we will go back to the same old political agreements and disagreements we had before. (0 COMMENTS)

My friend Ross Levatter sent me a thoughtful email challenging some aspects of my posts (here and here) on the risks we should fear. He gave me permission to post the whole thing. I also shared it with co-author Charley Hooper, who emailed me his thoughts. I’ll answer, and give Charley’s answer, after his letter. Here’s Ross’s letter: I briefly skimmed your posts on what people are frightened of, where you note that many are frightened about rare events rather than more common causes of death or injury. You write “What should we fear? What threats are most likely to kill us?” Your underlying assumption is that the answer to the latter should strongly inform us in answering the former. But I don’t think that’s right. The fact is, most adults have made peace with the fact they’re going to die at some point. Most people are not scared of dying per se. They go through the 5 stages, ending with acceptance. You don’t find massive amounts of fear in hospices. It seems your paper’s underlying assumption is that FEAR of death by X should track LIKELIHOOD of death by X. But I don’t think that’s correct. What ARE people frightened about? 1. UNEXPECTED deaths. Cardiovascular disease kills lots of people. Cancer kills lots of people. Shark attacks DO NOT kill lots of people. One might be frightened to anticipate dying of something that hardly kills anyone. 2. PAINFUL deaths. Here’s an Anthony Jeselnik joke: “My grandmother died last year. Initially, we all thought she died in the best way possible. What’s the best way possible? Right, in her sleep. But then we had an autopsy and we found grandma died in the worst, most gruesome way possible. During an autopsy.” In fact, numerically, dying in one’s sleep is orders of magnitude more likely than dying during an autopsy (which I doubt has actually ever happened unless you count vivisection.) But it’s hopefully understandable why the thought of the latter is more frightening than the thought of the former. 3. SUDDEN deaths. The *novel* coronavirus infection is very unlikely to kill you, especially if you’re under 70. But unlike dying of cardiovascular disease, this is not a death you’ve given any thought to up until a year ago. So it’s more frightening. A *NEW* way to die. 4. UNFAIR deaths. The odds of dying of a terrorist attack are extremely low. But to most people it seems very UNFAIR to be a perfectly healthy, active individual with decades of life ahead of him in the morning and dead in the afternoon. I’m sure if I gave it more than casual thought I could come up with other distinctions, but I hope my point is clear. The belief that fear of death from X should track likelihood of death from X is an assumption that is not obviously true—it needs at least to be argued for—and is most likely, IMHO, false. I basically agree with most of what he said because Ross keyed in on our words “fear” and “afraid.” I think we should have focused not on fear but on what things it makes most sense for a person to invest in preventing. Terrorism? No. Shark attacks? No. Being killed by a policeman while unarmed? No. Living a life to avoid heart attacks or delay them by 5 years? Yes. Being cautious around social groups to avoid COVID-19? Yes. Charley put it better. He wrote: His [Ross’s] points are correct and we did use the word “fear,” but what we were getting at isn’t fear as much as being smart about risks. If you want to live a long life, what should you think about and do? To summarize his points, if we make peace with a manner of death, we no longer fear it. We fear those deaths that are sudden, painful, and unexpected. We could have used “being smart about fatal risks” instead of “what fatal risks to fear.” But at some point, we start sounding like Star Trek’s Spock. Now back to me: Consider the hospice point. If you’re in a hospice, then, if it was a good decision for you to be there, you have exhausted the alternative ways of preventing, without great discomfort, the thing or things that you’ll die of. It makes sense both not to fear the thing that will kill you and also not to invest further in preventing it. The time to act would have been much earlier when possibly a change in life style could have given you a couple more years of good life. Ross then added a short additional point: BTW, here’s another (I think incorrect) implication of this line of reasoning. Assume “Dying in your sleep” and “Dying from shark attack” are statistically exactly equally likely. Does it then follow that one should be equally frightened at the two prospects? I suspect most people, told they are equally likely, would still more greatly fear dying of shark attack. I answered Ross as follows: Yes, I would much rather die in my sleep, as my grandfather did, rather than dying in sheer terror, as his passengers did. But seriously, folks, it is true that if you  choose between two ways of dying that have equal probabilities, the one that is more painful is the one to avoid. You could alter our analysis by scaling the numbers, though, and in many cases that won’t matter. For instance, imagine that you would hate being killed by a shark 1,000 times as much as dying in your sleep. The odds of being killed by a shark are still so low that it doesn’t make sense to take account of that in deciding whether to swim in the ocean.     (0 COMMENTS)

IUPUI‘s Scott Pegg assigned Open Borders this semester, and kindly gave me permission to post the following essay questions on the book.  Enjoy! Please answer one of the following four questions. Because this is an open book, open time assignment, I expect to see some detail and specificity in your answers. References to Caplan and Weinersmith’s book Open Borders: The Science and Ethics of Immigration should be made whichever question you choose. Your answers should be somewhere in the vicinity of 3-5 pages double-spaced typed in Times New Roman 12 point font. Take as much time as you need to answer the question. This is not a timed exam. 1) Explain why Caplan and Weinersmith believe that “open borders has jaw-dropping potential to enrich migrants and natives alike” and “is a shortcut to global prosperity.” Upon what causal logic or what empirical findings do they base these claims? How does open borders compare in this regard to other potentially enriching policy changes like freer trade or greater global financial integration that we could pursue? Indicate whether you find Caplan and Weinersmith’s arguments that open borders potentially offers the prospect of “trillion-dollar bills on the sidewalk” convincing or not. 2) In 2016, Americans elected Donald Trump as their president. One of his central campaign promises was to restrict immigration into the United States and build a wall to keep immigrants out. In 2020, President Trump faces a tough re-election battle but will likely carry the state of Indiana where we live easily. Given that, it’s probably not unreasonable to assume that give or take a majority of students in this class share views on immigration that are closer to President Trump’s than they are to the views expressed by Caplan and Weinersmith in Open Borders. Highlight which arguments put forward in Open Borders you most disagree with or find the most problematic and explain why. Make, develop, and support the best critique of the ideas put forward in this book that you can. 3) In attempting to make their case for a more open and less restrictive system of immigration, Caplan and Weinersmith consider several objections to open borders including immigrants threats to low-wage workers, freedom, our government’s fiscal position, our culture or way of life and even lowering our average national intelligence (IQ) score. Give specific examples of how Caplan and Weinersmith undermine these critiques or sources of opposition to their ideas or what they suggest as solutions to overcome these fears. Indicate which criticisms, if any, you think they effectively address and which criticisms, if any, are still strong or effective arguments against open borders. 4) Open Borders is premised upon the idea that “we live in a world of global apartheid. An apartheid based not on the race of your parents but on the nation of your parents.” Caplan and Weinersmith go on to argue that “It’s wrong to tell people where they can live or work because they are black… or women… or Jews. Why isn’t it equally wrong to tell people where they can live or work because they were born in Mexico, Haiti or India?” While these sentiments appeal to our better angels, they are completely unrealistic at a time when the US doesn’t even have open borders with Canada. Explain why Caplan and Weinersmith believe that “even if open borders never wins, the ideal can still serve as our moral compass.” What kind of progress can we or should we make short of fully opening borders? (0 COMMENTS)

Why is affordable housing in such short supply? Author and political scientist Katherine Levine Einstein of Boston University talks about her book Neighborhood Defenders with EconTalk host Russ Roberts. Einstein focuses on the ability of local residents to use the zoning and permit process to prevent development of housing or to reduce the amount of […] The post Katherine Levine Einstein on Neighborhood Defenders appeared first on Econlib.

What is the great the illusion of education? How do both the Left and the Right perpetuate myths that harm the most vulnerable participants in the system- the students? In this episode, EconTalk host Russ Roberts welcomes author Fredrik de Boer to discuss his book, The Cult of Smart. A terrific conversation ensues, featuring areas of both agreement and disagreement between Roberts and de Boer. Now we’d like to know what you think. Use the prompts below and share your answer in the comments, or use them to start your own conversation offline.   1- What are the different myths that the Left and the Right lean on with regard to education, according to de Boer? What do they have in common, and how do they diverge?   2- Roberts pushes de Boer, suggesting he gets close to saying schools achieve nothing. How does he respond? What does de Boer mean when he says that different schools make no difference?   3- De Boer asks a trenchant question: To what extent is educational mobility even desirable? How would you answer this question?   4- In discussing the “monolith” of American K12 education, Roberts and de Boer talk about the role of standards. Why does de Boer insist it’s a mistake to measure gains in learning?  To what extent do you agree that standards are the opposite of innovation in education?   5- Both Roberts and de Boer emphasize their concern for those at the bottom- whether  income distribution or academic achievement. Compare their suggestions regarding how best to help those with the lowest academic achievement. Who’s more convincing? What do you think can be done to help those at the bottom? (0 COMMENTS)