I learned from Don Boudreaux this morning that Walter Williams died either this morning or last night. For those of you who don’t know, he was a long-time economics professor at George Mason University. I’ll have more to say later but I want to give one appreciation. Walter liked smoking and he also hated the TSA. Some years ago, the combination of no-smoking regs on planes and intrusive groping by the TSA caused him to vow never to fly by commercial airline again. When he received offers to give speeches  that were far enough away that driving was infeasible, he negotiated for a private airplane to take him there. In February 2013 Armen Alchian died and there was a memorial service for Armen at UCLA in March. I arrived hours early because I didn’t want to take the chance on a later flight. (Flights between Monterey and LAX do not have a good on-time record.) One of the earliest people to arrive, as I tell here, was Walter Williams. Walter was an even bigger fan of Armen than I was. When I heard Walter was there, I walked out to say hi and he was sitting in his rental car trying to figure out where to park. (This was UCLA, after all.) “Walter,” I said, “I’m surprised to see you here. I’m sure no one paid for you to fly by private jet. You must have flown commercial.” Walter smiled that beautiful smile and said, “I had to do it for Armen.” (0 COMMENTS)

  Lisa: Where does a man get inspiration to write a song like that? Jeff: He gets it from the landlady once a month. The above answer from Jeff (Jimmy Stewart) to Lisa (Grace Kelly) in Rear Window, which I rewatched on Thanksgiving weekend, is one of my favorite lines from a great movie. I think it’s self-explanatory. I thought of it when I read the following: While President-elect Biden’s choice to chair his Council of Economic Advisors [it’s actually spelled “Advisers,” as I was told regularly when I worked there], Cecilia Rouse, didn’t call for canceling student debt, she expressed awareness of the impact debt has on borrowers in a 2007 research paper. Rouse, in a paper co-authored with Jesse Rothstein, now a public policy and economics professor at the University of California, Berkeley, found that holding student debt made it more likely for students to choose high-paying careers and eschew lower-paying ones like teaching. In the study, Rothstein and Rouse, who is now dean of Princeton University’s School of Public and International Affairs, examined students at an anonymous university that had stopped giving out loans and only gave students financial aid through grants. They found that every $10,000 in debt reduces by 5 to 6 percent the chances that a student at the university would take a job at a nonprofit, in the government or in education. This quote is from Kery Murakami, “Biden’s Pick to Head Economic Advisors Seen as Sympathetic to Loan Borrowers,” Inside Higher Ed, December 1, 2020. Murakami’s tone suggests that he thinks it’s bad that students in debt would focus more than otherwise on getting a high-paying job. He also seems to think, possibly correctly, that Rouse and co-author Rothstein think it’s bad. But is it? If graduates are choosing higher-paying jobs rather than working in nonprofits, government, or education, there’s a higher probability that they are serving people. Huh? Isn’t it the opposite? Haven’t we been told incessantly that those in government are public servants and that people in nonprofits are pursuing noble goals? Yes, we have. But repetition doesn’t make those claims more likely to be correct. How do we know when people are serving others? There’s one main test: are those others willing to pay for the service? Because the vast majority of government workers are paid by taxes, we don’t have a good market test. Postal workers are the rare exception: most of their pay comes from stamp and shipping revenue, not from taxes. And people who work for nonprofits, while they are serving the donors, are not necessarily serving others. Education is more mixed. In private non-subsidized schools, there is a market test. For the vast majority of schools, K-12 and college, a large percent of salaries is paid for by taxes. By the way, Murakami’s news story is nicely balanced, something you can’t always expect nowadays. (Maybe you never could.) He writes: The idea of canceling student debt, however, remains controversial. In a working paper released Sunday, researchers at the University of Chicago’s Becker Friedman Institute for Economics argued that widespread debt cancellation would primarily help higher-income borrowers, because those on income-driven repayment plans will have their remaining balances forgiven anyway after about 25 years, depending on the plans. Expanding income-driven repayment plans to more people, they wrote, would be more likely to help lower-income borrowers than widespread debt cancellation. When that’s taken into account, researchers Sylvain Catherine and Constantine Yannelis said, the top-earning borrowers would receive $5,944 in forgiveness, while those with the lowest incomes would receive $1,070 in forgiveness.     (1 COMMENTS)

After his visit to America in 1831, Alexis de Tocqueville returned to France and published the first volume of Democracy in America in 1835, and the second in 1840. The work is remarkably timely. Here I have selected a few words from the final pages. The work is full of warning, especially toward the end of the second volume. In what follows, one sees how he inspired Friedrich Hayek’s title The Road to Serfdom. But the final words also sustain a note of hope. When Tocqueville speaks of certain “more enlightened” people, it is with irony:   Among our contemporaries, I see two contrary but equally fatal ideas. Some perceive in equality only the anarchic tendencies to which it gives birth. They dread their free will; they are afraid of themselves. Others, fewer in number, but more enlightened, have another view. Next to the route that, departing from equality, leads to anarchy, they have finally discovered the path that seems to lead men invincibly toward servitude. They bend their souls in advance to this necessary servitude; and despairing of remaining free, at the bottom of their hearts they already adore the master who will soon come. The first abandon freedom because they deem it dangerous; the second because they judge it impossible. If I had had this latter belief, I would not have written the work you have just read… Let us therefore have that salutary fear of the future that makes one watchful and combative, and not that sort of soft and idle terror that wears hearts down and enervates them… As for myself, having come to the final stage of my course,…I feel full of fears and full of hopes. I see great perils that it is possible to ward off; great evils that one can avoid or restrain, and I become more and more firm in the belief that to be honest and prosperous, it is still enough for democratic nations to wish it.   Dan Klein is professor of economics and JIN Chair at the Mercatus Center at George Mason University. (0 COMMENTS)

I’ve promised to write a post on Klaus Schwab’s “great reset” but the truth is that I’m a bit uneasy about writing it now. The term has elicited the attention of people willing to see cabals and plots everywhere, as Oliver Kamm aptly writes here. Kamm is certainly right: the global economy is too complex a matter to be managed by whatever malign elite. And yet a well-meaning, and good-hearted, elite sometimes may speak in ways that suggest they would love to be able to manage the global economy themselves. Consider this article by Professor Schwab for Time magazine. Here’s a passage that sounds exactly like Rahm Emanuel’s “we should not allow a good crisis to go waste”: Since those early moments of the crisis, it has been hard to be optimistic about the prospect of a brighter global future. The only… …immediate upside, perhaps, was the drop in greenhouse-gas emissions, which brought slight, temporary relief to the planet’s atmosphere. It shouldn’t have come as a surprise that many started to wonder: Will governments, businesses, and other influential stakeholders truly change their ways for the better after this, or will we go back to business as usual? Looking at the news headlines about layoffs, bankruptcies and the many mistakes made in the emergency response to this crisis, anyone may have been inclined to give a pessimistic answer. Indeed, the bad news related to COVID-19 came on top of the enormous economic, environmental, social and political challenges we were already facing before the pandemic. With every passing year, these issues, as many people have experienced directly, seem to get worse, not better. It is also true that there are no easy ways out of this vicious cycle, even though the mechanisms to do so lie at our fingertips. Every day, we invent new technologies that could make our lives and the planet’s health better. Free markets, trade and competition create so much wealth that in theory they could make everyone better off if there was the will to do so. But that is not the reality we live in today. Schwab is a spectacularly capable intellectual entrepreneur, who put Davos on all the world grandees’ map. He provided corporate CEOs and politicians with an important forum to meet at and had great success in developing a staggering network and exporting his own model. I should confess I am not familiar with his first book, published in 1971, but Wikipedia (not always the best of sources) describes it as foreshadowing the now popular idea of “stakeholder capitalism”. I think that is the key point of Schwab’s great reset. Schwab is the siren of a world where “rather than chasing short-term profits or narrow self-interest, companies could pursue the well-being of all people and the entire planet. companies must be freed from economic calculation”. Their performance ought then to be measured not only on profits but also on “nonfinancial metrics and disclosures that will be added (on a voluntary basis) to companies’ annual reporting in the next two to three years, making it possible to measure their progress over time”. For Schwab, the rethinking of the capitalist system is not necessarily more urgent because of the pandemic crisis, but it becomes easier, more within our reach, because of the growing role that governments have taken on in recent months. So, let’s not waste a good crisis. While seeing this as a conspiracy just because “it comes from Davos” is ridiculous, I would appreciate if people could read Schwab with a bit of realism. Profit is not only a motive but also a yardstick. It is the yardstick against which shareholders can measure directors’ actions. The latter know the company much better than the former. Having to make a profit, having a clear objective, makes it easier for the owners of companies to evaluate their performance. We know this is never easy: scandals and fraud remind us of it. But what would happen if the directors could really say that they are operating, not to make a profit for the benefit of their shareholders, but in the name of some higher ideal? Why should those “nonfinancial metrics” benefit the company as a whole? It is not clear. If a company is profitable, it is more likely to be able to maintain employment levels and afford to constantly renew its technologies, thereby reducing its environmental impacts. But if a director claims to have given up a share of profits today in the name of a desirable social purpose, who can be sure that this is true? It seems to me that Schwab’s “improvable capitalism” is above all a more manager-friendly capitalism: managers like those who attend the Davos meetings and who certainly, like each of us, prefer to have a free hand in their decisions as much as possible. “Stakeholder capitalism” sounds nicer than “managerial capitalism” but it is difficult to tell the difference between one and the other. Increasing shareholder value is certainly a clearer formula: it gives you something to assess management’s performance against. But what is stakeholder value? Who are the most relevant stakeholders; whose interests should be prioritized? What if the interests of one group of stakeholders (say, suppliers) are actually in conflict with those of another (say, all those who inhabit a given territory, that risks depletion because of the above-mentioned suppliers)? Why should the managers of a corporation play the umpire between such conflicting interests? I would be content with this point being clearer in the public debate: if you prioritize other objects than profit, you are actually giving more latitude to managers. This should not ignite crazy conspiracy theories but help us in having a more vigilant public opinion. It is quite bizarre that we tend to divide the world between awful private interests and those who use glowing words. Perhaps glowing words can be aligned with some private interests too. (0 COMMENTS)

We’ve heard these words so many times: We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. The idea of happiness plays a central role in our personal and public lives. But what does it mean? And what does it mean to have a right to it? And should we have such a right? Questions like these are what you get when EconTalk host Russ Roberts welcomes philosopher Daniel Haybron to the show to talk about his new book, Happiness: A Very Short Introduction. In this episode, Roberts and Haybron attempt to unpack this “suitcase word.” We hope you’ll spend some more time thinking about this conversation with us. Use the prompts below to spark new thoughts, or better yet- a new conversation. As always, we love to hear from you.     1- Consider Haybron’s views on happiness survey research. To what extent it is possible to measure happiness? In doing so, should we focus on the (lack of) negatives or on the presence of positives?   2- How should research on happiness be used in the policy world? What does Haybron mean when he says, “The important thing for policy that science can do is just–really, for the public mind and for the culture–is help us change the lens through which we think about how our society is doing and where we want to go?”   3- What’s the difference between being a “consumer” and being an appreciator? Which one are you most often?  How can you make a culture “healthier,” allowing people to focus less on the material? (And again, should we?)   4- What does Haybron mean when he says, “What makes living with each other bearable, and civilization possible, is the willingness of all parties to limit the exercise of their rights.” What’s the appropriate relatonship between legality, morality, and happiness?   5- Roberts shares what he would tell his younger self today. What would you advise YOUR 21 year-old self with regard to the pursuit of happiness?       (0 COMMENTS)

Economist and author Emily Oster of Brown University talks with EconTalk host Russ Roberts about the challenge of reopening schools in a pandemic. Oster has been collecting data from K-12 schools around the country. Her preliminary analysis finds little evidence that schools are super-spreaders of COVID. She argues that closing schools comes at a high […] The post Emily Oster on the Pandemic appeared first on Econlib.

I see three statements repeated by Modern Monetary Theory proponents, almost like mantras: 1. Money is endogenous 2. Banks don’t loan out reserves 3. There is no money multiplier All three of these statements are either false, misleading, or meaningless, depending on how you define terms. 1. Endogeneity: Everyone has their reasons When economists say a variable is endogenous, they mean it is explained by other variables in the model. Endogeneity is not an intrinsic characteristic of a variable, in the way that an apple is red or water contains hydrogen and oxygen atoms. Rather we find it convenient to regard variables as endogenous for the purposes of a certain analysis. Thus one should never say, “You’re wrong; money is endogenous”, rather you might want to claim that, “For the purpose of your analysis, it is more useful to regard money as endogenous.” Monetarists often view the monetary base as being determined exogenously by the central bank, that is, at the bank’s discretion. At the same time, they understand that if the central bank is pegging some other variable, say exchange rates or interest rates, then the central bank has no discretion to adjust the money supply independently. They might still believe that changes in the money supply under that regime are very impactful, but there is no policy discretion for the quantity of base money.  Base money is endogenous. Keynesians often regard the monetary base as being endogenous during a period of interest rate targeting, although with the advent of IOER the central bank can target the base and the interest rate independently. In Singapore, the central bank targets the exchange rate, and regards both interest rates and the monetary base as endogenous. Things change if the central bank stops pegging interest rates at a constant level and instead targets them at a level that is frequently changed. While in that case the base can still be viewed as endogenous for the period when rates are fixed, it’s equally accurate to argue that the central bank adjusts its target interest rate in such a way as to allow desired changes in the base. Thus a central bank intending to do an expansionary monetary policy might cut the interest rate target in order to increase the monetary base. In that sense, they still do have some control over the money supply.  The money supply can be viewed as exogenous over a period of months. All of this nuance is lost in MMT descriptions of monetary policy. Interest rates are viewed as exogenous and the base as endogenous. Any alternative approach is viewed as unthinkable. To an omniscient God, everything in the universe in endogenous. Everyone has their reasons.  Claiming that something is “exogenous” is equivalent to claiming that we don’t fully understand the process by which it is determined. Thus interest rates might look exogenous to one economist, while another sees them as being determined by the central bank’s 2% inflation target. Indeed, the entire “Taylor Rule” literature can be described as an attempt to model interest rates endogenously. 2.  It’s a simultaneous system When a bank makes a loan, it typically gives the borrower a bank account equal to the value of the loan. If the borrower withdraws the money and spends it on a new house, the seller typically takes the funds and deposits them in another bank. That’s the sense in which MMTers argue that banks don’t loan out reserves; the money often stays within the banking system. The exception would be a case where the borrower withdrew the borrowed funds as cash. My problem with the MMT analysis is that it often seems too rigid, with claims that the banking system has no way to get rid of reserves that it does not wish to hold. That’s true of the monetary base as a whole (cash plus reserves), which is determined by the Fed.  But it is not true of bank reserves in isolation. There are two ways for banks to expel undesired excess reserves, a microeconomic approach and a macro approach. The micro approach is to lower the interest rate paid on bank deposits and/or add service charges of various sorts. This encourages the public to hold a larger share of its money as cash and a smaller share as bank deposits. On the other hand, it’s not clear that this process would constitute “lending out reserves”. The macro approach better describes what economists mean by lending out reserves.  Assume the economy is booming and people are borrowing more from banks.  Continue to assume a fixed quantity of base money.   If the borrowed money comes back to banks as increased deposits, then banks can make even more loans and create even more deposits.  Over time, this will increase the aggregate level of both deposits and loans, putting upward pressure on NGDP. In the 106 years after the Fed was created at the end of 1913, the currency stock grew by 516-fold, (not 516%, it’s actually 516 times as large.)  NGDP was up 549-fold.  The currency to GDP ratio does move around over time as tax rates and interest rates change, but clearly the demand for currency is at least somewhat related to the nominal size of the economy.  When NGDP grows, currency demand will usually rise. Thus, in aggregate, a banking system that makes lots more loans will gradually lose reserves as NGDP rises, holding the overall monetary base constant. As is often the case, Paul Krugman expressed this idea more elegantly than I can: When we ask, “Are interest rates determined by the supply and demand of loanable funds, or are they determined by the tradeoff between liquidity and return?”, the correct answer is “Yes” — it’s a simultaneous system. Similarly, if we ask, “Is the volume of bank lending determined by the amount the public chooses to deposit in banks, or is the amount deposited in banks determined by the amount banks choose to lend?”, the answer is once again “Yes”; financial prices adjust to make those choices consistent. Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment. MMTers have a bad habit of assuming that mainstream economists are clueless, just because we use a different framework. 3.  There are a million money multipliers Krugman’s explanation also helps us to understand the confusion over money multipliers.  Injecting more money into the economy sets in motion forces that boost the nominal quantity of just about everything, not just bank loans and bank deposits.  An exogenous and permanent doubling of the monetary base will double the nominal value of every single asset class, from one carat collectable diamonds to Tesla common stock to inventories of soybeans to houses in Orange County to rare stamps. And it will also double the monetary aggregates.  That’s because money is neutral in the long run, so doubling the money supply leaves all real values unchanged in the long run. So the money multiplier for any asset class is merely the nominal stock of that asset dividend by the monetary base.  No serious economist believes the M1 or M2 money multiplier is a constant, and indeed textbooks usually explain it this way: mm = (1 + C/D)/(C/D + ER/D + RR/D) It’s one plus the ratio of cash and bank deposits divided by the cash ratio plus the excess reserve ratio plus the required reserve ratio.  Then economists model the money multiplier by describing the factors that cause these three ratios to change over time.  In my view, the money multiplier model is pretty useless, as I don’t view M1 and M2 aggregates as being important.  Your mileage may vary.  But there’s nothing “wrong” with the model; the question is whether it’s useful or not. The one money multiplier that does matter is NGDP/Base.  Unfortunately, both IOER and the recent zero interest rate episodes have made that multiplier more unstable.  I favor a monetary policy where the NGDP multiplier (aka “velocity”) would be more stable.  No more IOER and fast enough expected NGDP growth to assure positive interest rates. 4.  Beware of “realism” and the fallacy of composition Sometimes you’ll encounter an economist who is very proud that he or she understands how the financial system works in the “real world”.  And obviously that knowledge can be useful for certain purposes.  But the banker’s eye view often misses what’s most important in macroeconomics, the general equilibrium connections that Krugman alluded to in his “simultaneous system” remark. If the Fed gave me a check in exchange for an equal quantity of T-bonds, I’d be no richer than before, no more likely to go out and buy a new car.  And if I took that check and deposited it in a bank, that bank might be no more likely to make a business loan.  They could simply buy a bond, or lend the reserves to another bank.  But as everyone tries to get rid of the base money they don’t want, subtle changes begin to occur in a wide range of asset prices, which will eventually push NGDP higher.  If wages are sticky then the extra NGDP will lead more people to go out and buy cars. Just not me, not the person who first got the new Fed-created money. (1 COMMENTS)

Joe Biden has suggested that as our next president, among his first acts would be to boost the minimum wage level to $15 per hour. In so acting he will be relying on the theory that this law is akin to a price floor. Raise it, and the compensation of all those now standing on it (those now being paid less than this amount, often at the $7.25 level mandated by present federal legislation) will in effect be able to hitch-hike on the increase, and now be paid at the rate of the aforementioned $15. Not that this level of remuneration is anything to write home about, but at least it beats the roughly half that amount, presently proscribed by law. Why do most dismal scientists dismiss this justification as blithering economic illiteracy? This is because, if it were but the case, why stop the elevator at the 15th floor?  Why not raise the minimum wage, instead, to $150 per hour, or $1,500, or $15,000? If this theory were correct, if people could be made wealthy beyond the dreams of avarice by mere legislative enactment, why in bloody blue blazes settle for $15? If this theory were true, the entire case for foreign aid would vanish in smoke. Instead of shipping goods and services and money abroad, all we need to do is advise present recipients to implement a minimum wage law, and keep raising its level until poverty were ended in these countries. Yet no one, not even Bernie Sanders, advocates any such crazy thing. Clearly, this theory is nonsense on stilts. What then is the correct way to look at this matter? It is to see such legislation not as a rising floor, but rather as a hurdle over which a person has to jump in order to be employed in the first place. Why is this? What determines wages? In a word, productivity. LeBron James and Michael Milken earn high wages because they are tremendously productive. Hire one of them, and your revenues shoot through the roof. Middle class people also contribute to the GDP, but at a much more modest level. And the person who asks if you “Want fries with that?” or pushes a broom? He or she also does so, but again less so. Suppose a firm has 100 workers, and shows receipts of $10,000 for a certain time period. They hire the 101st employee, and total revenue rises to $10,010. The company properly attributes this rise to that additional member of the staff. His productivity is thus $10/hour. What will his wage likely be? Well, there are only three possibilities. Either he will earn more than that, say, $12 per hour, exactly that amount, e.g., $10 per hour, or less than that, for example, $4 per hour. We can easily eliminate the first possibility. Any business paying $12 hourly to all their employees who bring in only $10 will face bankruptcy; they will lose $2 every hour, multiplied by their entire staff. But the $4 wage is not sustainable either. The firm will then garner a pure profit of $6 from his labor. Some competitor will offer $4.25; another $4.50 and we will be off to the races. No, the only equilibrium wage rate will be $10. This gives rise to the economic law that compensation tends to equal productivity. Will all those who contribute at that level earn exactly that amount? No, of course not. This theoretical bidding war is not costless. But there is a continual grinding market force that pushes wages in the direction of productivity. The two cannot long remain too far apart. With a minimum wage of $7.25, will this person who can improve your bottom line by $10 get a job? He certainly has a good chance to do so. But what will ensue with a minimum wage of $15? Any firm foolish enough to hire him will now lose $5 per hour. Bankruptcy will ensue for such an employer, and unemployment for the would-be market participant. This legislation does not undergird wages, precluding very low compensation. Productivity, alone, does that. Before the advent of this law in 1938, people were earning compensation in accordance with their contribution to the bottom line. It is no accident that the unemployment rate for teenagers is double that of people in their middle years. The former can undoubtedly jump higher over physical hurdles than the latter, but the reverse is true for economic barriers such as productivity levels. Also, black unemployment due to this law is twice that suffered by whites. Joblessness for black teens is quadruple that of white middle-agers. This has nothing to do with “privilege.” These statistics did not exist before this legislation was passed. Should the minimum wage remain where it is at $7.25? No. Because the exact same analysis applies to those (mainly the mentally handicapped, but some severely physically handicapped), whose hourly productivity is $2, $4 or $6. They are now in effect totally frozen out of the labor market. Why does this law exist given that it is so deleterious for the weakest economic actors? Northerners favor it since it enables them to better compete with lower skilled southerners. Labor unions support minimum wages since they can use it to compete with the unskilled more effectively. Racists want it since it plays havoc in the black community. The “educated” suffer from invincible ignorance on this matter since instead of enrolling in economics 101, they took courses in sociology, history, philosophy, political “science,” et cetera. The minimum wage is a vicious, nasty, depraved law. It negatively impacts the “least, last and lost” amongst us. It ought to be repealed, and salt sowed where once it stood. (0 COMMENTS)

I hope the contents of this post live up to the intellectual pretension of a term like ‘meta-theory’. You be the judge. During the interwar period, John Maynard Keynes wrote three books on money/macro: 1.  A Tract on Monetary Reform (1923) 2. A Treatise on Money (1930) 3. The General Theory of Employment, Interest and Money (1936) The first book was written in the early 1920s, in the midst of highly unstable price levels in many countries, notably Germany. The second was mostly written at the end of the 1920s, a period of relative stability. The third was written in the midst of the Great Depression, when interest rates were close to zero. A lot happened in that relatively brief 13-year period. Each book clearly reflects the period in which it was written.  The Tract is basically a monetarist book, focusing on how printing lots of money can lead to high inflation.  It covers the Quantity Theory of Money, as well as related concepts such as the inflation tax, purchasing power parity, and the interest parity condition.  These are the issues that economists focus on when inflation is very high and/or unstable. The Treatise is probably best thought of as a sort of “New Keynesian” book.  Not literally—Keynes doesn’t assume rational expectations or develop DSGE models of the economy—rather in spirit.  He suggests that the central bank can and should stabilize the price level (not much different from the NK 2% inflation target.)  He suggests that monetary policy is generally enough, but one could conceive of an extreme case when fiscal actions would be needed.  He talks about forward guidance as an additional policy tool, a promise to hold interest rates low for an extended period.  It’s very moderate book, which seems compatible with the consensus view of monetary policy during the 1990s and early 2000s.  While the Tract also advocated price stability, in the Treatise there is clearly a move away from the quantity theory and toward a focus on interest rates as the instrument of monetary policy. The General Theory is a complex book, and also much more radical.  While monetary policy ideas continue to be covered, the real energy in the book is associated with the more extreme versions of Keynesianism—the paradox of thrift, liquidity traps, favoring fiscal policy over monetary policy, etc.  It represents a move toward ideas associated with post-Keynesianism, or even MMT.  That’s not to say there aren’t mainstream ideas as well; I agree with those who claim that the IS-LM model is pretty clearly envisioned in certain parts of the book. And yet, to suggest that Keynes’s ideas changed with the times is certainly not much of a meta-theory.  But there’s more. Other economists went through similar changes.  Knut Wicksell was a famous exponent of a non-quantity theoretic monetary model, which focused on interest rates as the instrument of central bank policy.  And yet just as with Keynes, Wicksell switched to a quantity theoretic approach during the early 1920s.  And just as with Keynes, many economists favored having the central bank target the price level (or occasionally NGDP) during the latter 1920s.  And just as with Keynes, many economists became skeptical of the efficacy of monetary policy during the 1930s, and switched from a quantity theoretic approach to an income/expenditure approach. OK, so lots of economists shifted with the times.  That’s still not much of a meta-theory.  But there’s more. It all happened again!  By the early 1980s, much of the world had experienced several decades of high and unstable rates of inflation.  Monetarism was riding high. By the early 2000s, the world had experienced a “Great Moderation” and New Keynesianism was riding high. By the early 2010s, many countries were at the zero bound, and various more extreme versions of Keynesianism came back into style, including post-Keynesianism and even MMT.  The paradox of thrift, fiscal stimulus, currency manipulation and other discredited ideas were in vogue. Here I’ll ask readers to put aside whatever you think of any of the ideas, and view the situation from 64,000 feet.  Isn’t it obvious that this state of affairs is deeply embarrassing for the field of macroeconomics?  Doesn’t this provide ammunition for those who claim that economics is “not a science”?  (A debate I believe is basically meaningless, as “science” has never been clearly defined.) Suppose that journals like Science and Nature printed lots of global warming pieces during warm years, and lots of global cooling pieces during relatively cool years.  Wouldn’t you want and expect climate scientists to take the long view, and not change their models every time the US and Europe were hit by heat waves or cold winters? If this cycle had only happened once, say during the interwar years, it would be mildly embarrassing.  But this entire cycle has now happened twice, in an almost identical fashion.  Even worse, the second cycle was accompanied by almost all the top economics departments dropping economic history and/or history of thought from their course requirements.  Whereas this embarrassing state of affairs should have taught us to put more emphasis on learning about how policy mistakes and theoretical modeling interacted in previous cycles; we reacted in exactly the opposite direction.  Our modern economics grad students know even less of economic history than those who studied decades earlier. We need monetary models that work fine regardless of whether the nominal interest rate is 0% or 100,000%.  For me, that model is market monetarism, but your mileage may vary. PS.  I’m not an expert on Keynes’s later work, but I’m told that late in his life he shifted back toward the center.   (0 COMMENTS)

Today, the Trump campaign lost another election fraud case, in Pennsylvania. It reminded me that, in my recent economic explanation of why this alleged fraud is highly implausible, I forgot one factor: election rigging is usually committed by the government in power, because it is the only group that has the necessary resources and control over election processes. Indeed, election laws and procedures are mainly designed to prevent fraud by governments, which is the main danger. The fraud claimed by the Trump campaign would probably be the only one in the history of democracy to have been committed by the opposition against the government in power. The White House, the Senate, and most state governorships were held by Republicans and Trump allies. This strange fact makes the hairy fraud and conspiracy theories promoted by the Trump campaign even more implausible. Other interesting issues are raised by the Wall Street Journal story (“Court Denies Trump Campaign’s Appeal in Pennsylvania Ballot Challenge,” November 27), when it reports: “Calling an election unfair does not make it so,” wrote U.S. Circuit Judge Stephanos Bibas, a Trump appointee, for the three-judge panel. “Charges require specific allegations and then proof. We have neither here.” Judge Bibas was joined by Judge Michael Chagares and Chief Judge D. Brooks Smith, both appointees of George W. Bush. (A non-gated story about today’s decision is available from AP: “Appeals Court Rejects Trump Challenge of Pennsylvania Race.”) Note that the Pennsylvania ruling was signed by a “Trump judge,” not an “Obama judge” as Trump used to say about judges who made decisions he did not approve. This suggests that many of Trump’s judicial nominations were surprisingly well chosen, as I argued in another post earlier today. The claim of “unfair” election by the Trump crowd is also interesting because that’s how they also attack international trade. They don’t want free trade and free elections, but fair trade and fair elections. I suspect they also want fair speech instead of free speech and fair enterprise instead of free enterprise. As Anthony de Jasay suggests in his book Social Justice and the Indian Rope Trick (see my review in Regulation), fairness resembles social justice: it is now so empty a concept that it just means “nice”—nice from the point of view of the person who invokes it. Perhaps “fairness” is becoming, or has become, the rightists’ magic, sacramental key that corresponds to the left’s “social justice.” (0 COMMENTS)