A few months ago, Mike Huemer published a pithy defense of business in general, and big corporations in particular.  Some highlights: Now, I have had personal experience with individuals, corporations, and government. All three are, of course, sometimes unsatisfactory. But my experience with large corporations is way better than my experience with either individuals or government — better from the standpoint of my ending up feeling satisfied, or being made better off by interacting with them. Thus: Customers of big corporations are often unreasonable and disagreeable, and the company puts up with it and bends over backwards to make the customers happy. Example: I buy a product at a big chain store, take it home, cut off the packaging, then decide, for no particular reason, that I don’t like it anymore. I take it back to the store to return it. Dialogue: “Is there anything wrong with it?” “Nope, I just don’t want it anymore.” “We’re very sorry, sir.” Then they give me my money back. That’s the sort of interaction that I typically have with big corporations and their representatives. (In case this isn’t obvious: in that story, I’m the one who’s being a jerk.) And: The attitude conveyed by most businesses is “You’re the boss.” “Welcome!” “We’re so happy to see you!” “Thank you, and have a nice day.” “Let us know if anything about your experience is not to your liking.” Etc. Sure, the employees are not really sincere in these expressions of emotion. But at least the business thinks they should act like they care about you. The government has no such idea. The attitude conveyed in everything they do is “We’re the boss,” and they have no interest in pretending to care about you. Do what we say, give us your money, then get out. If there’s anything about your experience that is not to your liking, you can go **** yourself. (Note: Not actual quotations.) Sometimes, you see an irate and unreasonable customer loudly berating an employee of some business over the business’ perceived failure. The employee generally listens patiently and tries to fix the problem. Try doing that to one of the government agents who are there to “serve and protect” you. You’ll probably wind up in jail, if not in the hospital. Since I’ve made similar arguments in the past, my admiration for Mike’s essay is no surprise.  Yet as I read, counter-examples and complexities sprang to mind.  When is business unresponsive?  When is government responsive?  And why?  My thoughts, in no particular order: 1. Though I’m homeschooling all four of my kids now, I’ve often interacted with public school teachers and administrators in my parental role.  And I couldn’t help but notice: Almost all K-6 teachers are excruciatingly nice.  Not a one has ever told me to “go **** myself.”  Indeed, I routinely got good results from a single phone call or email.  In my experience, if you don’t care for a teacher, public schools swiftly reassign your child.   Furthermore, if you ask them to go easy on your kid, they will. 2. Still, there are plenty of things you can’t get public schools to do by asking.  You can’t get them to spend more time on math and less on music and art.  You can’t get them to focus more on learning and less on kids’ feelings.  You can’t get them to harshly punish trouble-makers so the rest of the kids can learn in peace.  My point is simply that on some dimensions, public schools were genuinely eager to please me. 3. The same holds in public universities.  If college students complain to their professors or ask for special treatment, we usually appease them.  And said students are rarely afraid to ask. 4. Mike focuses heavily on customer service, where business has a blatant edge over government.  Government workers, on the other hand, usually have a much better deal than similarly qualified private-sector workers.  Compared to the private sector, for example the average U.S. federal worker has similar pay, much better explicit benefits (insurance, pension, vacation), and awesome implicit benefits (job security, low standards). 5. We all know a few notoriously unresponsive businesses.  Verizon is infamously frustrating to deal with.  T-Mobile overcharges me a few dollars every month; they fix it when I complain, but there’s no cure in sight.  Expedia makes is so hard to redeem your COVID-19 flight credit that I’m tempted just to give up. 6. On reflection, even these aggravating companies do a great job on most dimensions.  FiOs works well.  T-Mobile is still cheap after they overcharge me.  And in normal times, Expedia is fantastic.  But these shortcomings still confound me.  Why can’t every business work as seamlessly as CostCo and Amazon? 7. Why does government ever seem to work well?  The best story: Tax funding gives government immense slack.  They get paid almost regardless of what they do, and almost never go bankrupt.  This is ordinarily a recipe for crummy behavior.  However, if you combine defective incentives with strong intrinsic motivation, the picture changes.  Most bosses, for example, want their workers to like them.  In the public sector, bosses can pursue this goal with little fear of losing money or worse.  And so they do, leading to grossly inflated compensation – and lifetime employment of incompetents. 8. Public schools, similarly, can stonewall parents.   To take one glaring example, they can take their normal budget, then decline to deliver in-person classes.  Still, if you ask a nice person – like a kindergarten teacher – to do a nice thing that doesn’t cost them anything, they do it.  Perhaps the most extreme example is the lavish funding for special ed.  No one enjoys saying “No” to handicapped children – and if tax-payers pay your bills, you never really have to say it. 9. Flip side: If you ask a nice person to do good thing that doesn’t sound nice, the fact that it doesn’t cost them anything doesn’t help you.  As a parent, I tried to get public schools to give my kids more math and less music and art, but they refused with beatific smiles.  “Oh, well we believe in educating the whole child…” Question for discussion: What exceptions to Huemer’s rules have you experienced? (0 COMMENTS)

Last week, for the Nth time, the Wall Street Journal had a story about shortages of Covid-19 tests ( “Covid-19 Testing Is Hampered by Shortages of Critical Ingredient,” September 25). An important topic. The journalist notes: According to a survey last month by the American Association for Clinical Chemistry, which represents commercial, hospital and public-health laboratories, 67% of labs are having issues getting both reagents and test kits—the highest level since the group started querying labs in May. Shortages of test kits have persisted for seven months. And there is apparently no explanation in sight. The president of the Riverside Health System in Virginia, Dr. Michael Dicey, echoes the general puzzlement: This is a big country, and we still haven’t been able to settle the testing issue. It doesn’t make any sense. In fact, it makes a lot of sense for anybody who knows something about economics—and does not push it under the rug for ideological reasons. During these seven months, prices of most goods produced in America have been under the legal threat of states’ “price gouging” laws and of the federal Defense Production Act. The latter does not formally control the prices of testing supplies, but the federal government has been doing it indirectly through the FDA, the CDC, and a few commissars who control the allocation of many Covid-19 related products. Among them are Peter Navarro, the so-called “equipment czar” (“‘This Is War’: President’s Equipment Czar to Use Full Powers to Fight Coronavirus,” Wall Street Journal, March 28, 2020), Admiral Brett Giroir, the “testing czar” (“Trump’s Covid-19 Testing Czar Claims Administration Is Doing ‘Everything That We Can Do’ to Increase Testing Capacity,” CNN, August 14, 2020), and Moncef Slaoui, the “vaccine czar” (“Trump Vaccine Czar Will Not Be Required to Disclose Pharma Ties, IG Rules,” The Hill, July 17, 2020). The Soviet Union was also a big country and they too were unable to settle similar issues, such as shortage of automobiles, pharmaceutical products, or bread. It took between 8 and 12 years for an ordinary citizen to take delivery of a car after he ordered it. Shortages also hit pharmaceutical products; a New York Times story of 1977 (“Soviet Medicine Mixes Inconsistency with Diversity”) gives many examples. Another New York Times story, published a few years later, focussed on food shortages (“Soviet Food Shortages: Grumbling and Excuses,” January 15, 1982; OCR errors corrected): The situation in late summer looked so bleak that the Kremlin began a nationwide campaign for the conservation of bread, and there are many cities and towns where bread purchases are restricted. … In Moscow there is de facto rationing, limits set by store managers on the quantities that shoppers can buy. … For years, top Soviet officials have attributed the nation’s poor agricultural performance to bad weather, and the leadership’s official New Year greeting to the people this year again stressed the climatic blight. Legion of examples are available. Strangely—for those who ignore standard price theory—shortages persisted until the whole system crashed. It was not because of a lack of commissars. Could the situation, by any chance, have something to do with the substitution of government allocation for free-market prices? And is it possible that what does not work in the United States right now is also, on a lower scale, the consequence of government interference in prices and allocation? Economic theory and observations strongly point to a positive answer. The efficiency of decentralized markets and free prices in the allocation of resources was first clearly demonstrated by Adam Smith in his 1776 classic The Wealth of Nations. The invisible hand of voluntary cooperation works better than the visible fist of the state. (The featured image of this post shows Smith’s statue in Edinburgh.) The well-known story reported by Philip Coggan in his recent book More (which I review in the current issue of Regulation) illustrates the incapacity of the collectivist mind to understand or to acknowledge that decentralized and free markets are more efficient than government price controls and allocation: In the aftermath of the Soviet Union’s break-up, the economist Paul Seabright was contacted by a Russian official who was keen to learn about the workings of the markets. “Tell me, for example,” he asked “Who is in charge of the supply of bread to the population of London?” (0 COMMENTS)

“In the near future, the world may need to resort to lockdowns again — this time to tackle a climate emergency.” Certainly, Mariana Mazzucato has a taste for striking words. In her latest column for Project Syndicate, Mazzucato argues that Shifting Arctic ice, raging wildfires in western US states and elsewhere, and methane leaks in the North Sea are all warning signs that we are approaching a tipping point on climate change when protecting the future of civilization will require dramatic interventions.   This is the scenario Mazzucato works with. What are the odds it will come by? When could that happen? What are the events that may trigger it? Mazzucato seems to assume that this is almost inevitable if things “go on” as they did in the past, namely if we continue to have economic growth dependent on fossil fuel. Still, more than a scenario this looks like the background story of the movie “Interstellar”: in that movie, a team of scientists was (treacherously) contriving to send some humans up in space in order to perpetuate humanity. Here we have Mazzucato suggesting governments should work to “limit private-vehicle use, ban consumption of red meat, and impose extreme energy-saving measures, while fossil-fuel companies would have to stop drilling.” That the private sector can cope with such a challenge is a hypothesis Mazzucato does not even consider. Such a sad scenario cannot possibly be affected by human ingenuity, at least if supported by private shareholders. Mazzucato’s piece is simply an exercise in “never letting a good crisis go waste”. She maintains that Covid-19 is “itself a consequence of environmental degradation: one recent study dubbed it the disease of the Anthropocene.” Moreover, she says, “climate change will exacerbate the social and economic problems highlighted by the pandemic. These include governments’ diminishing capacity to address public-health crises, the private sector’s limited ability to withstand sustained economic disruption, and pervasive social inequality.” The key sentence in the article is: “These shortcomings reflect the distorted values underlying our priorities.” Virtually all problems, in Mazzucato’s worldview, reflect the fact the priorities in the world of production are attuned to people’s demands. In a capitalist system, there are no other “values underlying our priorities” than the perceived necessities of people which become demand for goods and services. This is the essence of Mazzucato’s view: Addressing this triple crisis requires reorienting corporate governance, finance, policy, and energy systems toward a green economic transformation. To achieve this, three obstacles must be removed: business that is shareholder-driven instead of stakeholder-driven, finance that is used in inadequate and inappropriate ways, and government that is based on outdated economic thinking and faulty assumptions. Corporate governance must now reflect stakeholders’ needs instead of shareholders’ whims. Building an inclusive, sustainable economy depends on productive cooperation among the public and private sectors and civil society. This nicely summarizes the evolution of Mazzucato’s views, from her first to her second book. In her first book, she advocates an “entrepreneurial state”. In the second she does call for going beyond capitalism founded upon “shareholder value”. I think this makes sense. If the state is going to fund or sponsor innovative companies, they will nonetheless have to compete in a world of private business seeking positive profits — and that may show either the virtues of government-led capitalism or its weaknesses. So, why not allow both the government and the private sector reject the profit motive, which means the traditional metrics of success and failure too? Note that in Mazzucato’s piece there are no words of concern for low-income countries, where relatively more “polluting” technologies may be the only ones available, let alone economical, for the time being. I think this piece is very useful. It perfectly epitomizes an attitude which is spreading in some intellectual quarters: use the Covid19 crisis to make some changes permanent, hoping for a world in which people travel less, trade less, rely more on the government. Those on the other side of the debate should take any available opportunity to emphasize that the quarrel is not between those who want to use government capital to satisfy people’s needs, and those who want to use private capital to satisfy people needs: but between those who want the economy to serve the needs of the people, and those who want the economy to supply those goods and services some rulers believe the people should consume. (1 COMMENTS)

Where do our deepest personal values come from? Can we choose those values? Philosopher and author Agnes Callard of the University of Chicago talks about her book, Aspiration, with EconTalk host Russ Roberts. Callard explores the challenge of aspiration–who we are versus who we would like to become. How does aspiration work? How can we […] The post Agnes Callard on Aspiration appeared first on Econlib.

Over at The Money Illusion, fellow EconLog blogger Scott Sumner lays out 21 characteristics of a banana republic. He points out that it’s not a complete list. I agree. In particular, there’s one characteristic missing, a characteristic that has been quite relevant in the United States and in major parts of the world since early April. It is this: Does the government prevent people from practicing their occupation and shut down huge parts of the economy based on the idea, not that people are sick and might spread their sickness to others, but that people might be sick, even though most of them aren’t, and might spread their sickness to others? And relatedly, does it threaten people who could easily prove themselves not to be sick with fines and/or jail sentences for not complying? Also, related, does the government keep changing its rationale for the shutdowns.   (0 COMMENTS)

Doctor He Jiankui was sentenced to a three year prison term, fined $430,000, and fired from his academic position as Associate Professor at the Southern University of Science and Technology in Shenzhen, China. Did he engage in groping a patient? No. Poisoning a client? Again, no. According to the official Chinese Xinhua News Agency, Dr. He and two others, Zhang Renli and Qin Jinzhou, were convicted of gene editing fetuses. His clients were a healthy mother and a father who was HIV positive. Dr. He engineered the genes of their twin girl babies so they would be resistant to HIV.. At the outset, this appears to be an agreement between consenting adults to engage in a capitalist act. The couple knew of the risks involved in this new medical technology. According to the defense, He did not hide these from the mother and father. They agreed to the procedure since they weighed the dangers of AIDS for their daughters more heavily than the perils of the new, unproven, technique. Why, then, were He and his two colleagues arrested and convicted? It is all too easy to surmise that this was done because it occurred in China, withits reputation as a lawless country. The fact of the matter is that if He had performed this CRISPR-Cas9 gene-editing operation in the United States, a similar fate would have befallen him. This is because the Food and Drug Administration has not yet approved of this technique for human beings in terms of reproduction. What are we to make of all of this? Let us adopt a set of private property rights economic freedom spectacles through which we can best perceive all such controversial acts. We start by asking, who were the owners of the property in question? This, presumably, would be the parents. Did they receive informed consent from the supplier of the service? Not according to the local Shenzhen court. Let us, however, abstract from this finding. Instead, we adopt a Platonic perspective. This is because although we are indeed interested in this one case, we also want to derive a principle to deal with all such violations of the law. So let us assume that there was no fraud involved here. Should He and his colleagues have then been found guilty? Well, they did break an extant law. This leads to another question: is it a proper law that prohibits voluntary trades of this or any sort? The answer emanating from the free enterprise philosophy is a clear “No.” Rather, this would be a victimless crime, and all those even properly found guilty of violating it, should be set free. Was there a victim here? Yes, possibly. If the dangers of this procedure were indeed of greater moment than these two children suffering from AIDS, then, yes, they might be considered victims. After all, one day that now manageable disease might be fully cured. But this is clearly a judgement call upon which reasonable people can disagree. The parents would certainly not be guilty of child abuse even were this contrary to fact conditional to come into being. They were doing what they thought best for their children. What of the doctors involved? It is difficult to see them in any other way than as heroes. They put their careers and their freedom on the line, in order to help this mother and father be good guardians. Yes, Dr. He jumped the legal gun, whether that of the FDA in the United States, or its Chinese counterpart. But the monopoly powers of these government bodies are incompatible with the free enterprise ethic through which we are viewing their behavior. These organizations, too, can err. But when they do (thalidomide, anyone?) they carry on merrily into the sunset. They cannot be bankrupted through erroneous decisions. That is no way to run a railroad. Walter E. Block is the Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans. (0 COMMENTS)

Fifty years have passed since Milton Friedman’s article in the New York Times Magazine on “The Social Responsibility of Business.” This anniversary has been widely remembered- though perhaps more vilified than celebrated ( David Henderson was among those celebrating it, here).   As Friedman is considered such a champion of “shareholder value”, I found very interesting that Luca Enriques, on Promarket, comments that ‘Friedman’s essay assigned a totally passive role to what he calls the corporation’s “owners” or “the employers”—that is, the shareholders. They are merely the beneficiaries of directors’ duty to increase profits, but they have no role to play in pursuing that very goal other than (as he notes in passing) when they elect the board.’Friedman’s article (actually, he was restating ideas he had put forward before in Capitalism and Freedom) is supposed to be at the heart of a theory of “shareholder value” which many, on the left and also the corporatist right, nowadays oppose. Friedman’s point was mainly that businesses should focus on making profit for their shareholders. The main reason for that is what I’d call transparency: assessing the performance of a business’ managers in reaching this goal is a much more straightforward affair. Other standards tend to be more opaque, and more difficult to assess, giving managers more latitude vis-à-vis the owners of the company. Of course Friedman is often misinterpreted as if he maintained that corporations should be focused on making profits regardless of the law, of basic human rights, et cetera. He did not. Friedman claimed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” He never thought companies could do anything beyond the rules of the game. Instead, as Enriques writes: When Friedman wrote his piece, the shareholders of US companies were mostly individuals and rarely voted at annual meetings other than to rubber-stamp managers’ proposals. Today, a large majority of listed firms’ shares are held by institutional investors—that is, managers of other people’s funds. Institutions have become key players at US (as well as non-US) listed corporations (e.g., this OECD study with data from across the world), because they regularly vote portfolio shares at shareholder meetings. And their pro-management vote is nowadays anything but certain. Read the whole thing. Though the corporate world has changed in the last fifty years, significantly, Enriques maintains that Friedman’s paper ‘still provides a useful framework for understanding the implications of managing companies for one purpose or another. And perhaps also for answering the reframed question of whether corporate managers should cater to the preferences of their portfolio-value-maximizing indexing investors when making decisions on behalf of their corporations.” (0 COMMENTS)

  Me: I want to go to there. INDIANAPOLIS (AP) — Most of Indiana’s coronavirus restrictions on businesses and crowd sizes will be lifted this weekend, but people will still be required to wear masks in public for another three weeks, Gov. Eric Holcomb said Wednesday. Holcomb, a Republican running for reelection, has faced discontent from some conservatives over coronavirus restrictions. He said he would lift statewide capacity limits for restaurants and bars and crowd limits for social events beginning Saturday because he says the state has made progress in recent weeks in slowing the spread of COVID-19. The mask requirement will be extended until Oct. 17. This is from Tom Davies, “Indiana governor keeps mask order, drops other virus limits,” Associated Press, September 23, 2020. Why Holcomb’s sudden change of heart? Davies writes: The mask order first took effect July 27 and has drawn ire among conservatives who believe his executive orders in response to the pandemic have gone too far. That has complicated his reelection campaign against Democratic challenger Woody Myers, with some saying they would support Libertarian candidate Donald Rainwater. So Holcomb appears to be losing support to the Libertarian Party candidate, who, I assume has criticized the lockdowns.           (1 COMMENTS)

The Joint Economic Committee in Congress put out its annual report on the economy, written by Alan Cole. My overall impression is that the JEC has a better grasp of real world macroeconomics than many people at top 10 econ departments. Let’s start with their diagnosis of the Great Recession: Unfortunately, Federal Reserve policy from 2007-2018 erred too far towards curbing the growth of nominal spending—a stance known colloquially as “too tight” monetary policy. The result was a long, persistent “output gap,” or shortfall in GDP relative to what the economy could have produced with more ample nominal spending. While not the only policy problem of the time period, the output gap was a clear consequence of the Federal Reserve’s choice of policy anchor and its level of commitment to the anchor. The mass unemployment that followed the 2008 financial crisis was an economic disaster whose effects will be felt for years to come. Americans lost trillions of dollars of income and tens of millions of years of work. The job losses were also concentrated among disadvantaged groups, increasing inequality along the dimensions of both education and race. This era is useful to study because it can inform policy in future recessions, including, to some extent, the current one. A well-chosen and consistent monetary policy anchor will not solve every problem—and certainly not ones directly related to public health—but it can facilitate the execution of financial and business contracts and shore up the social contract by lowering uncertainty about the future. How many macroeconomists understand that the Great Recession was caused by a tight money policy by the Fed?  You could almost count them on one hand. The report cites Kevin Erdmann’s excellent book on the housing crisis: [I]n his book Shut Out, Kevin Erdmann notes that the Federal Reserve as a whole would issue statements describing the weakness in the housing market as a “correction,” suggesting a kind of normative view that housing prices should fall.31 The Federal Reserve kept this language even well into the decline of employment measures. The focus on moral hazard and housing prices largely detracted from attention to an ailing labor market. Most economists believe the Fed was “doing all it could” in 2008.  The JEC reports understands that actual policy was quite schizophrenic, both expansionary and contractionary at the same time: Taken separately, the bailout and interest rate decisions are coherent. But together, it is difficult to square them. As the Federal Reserve told it, spending enabled by emergency below-market-rate liquidity injections to Bear Stearns was good spending that helps Main Street, while spending enabled by a federal funds rate of (for example) 1.75 percent would have been bad spending that would spur inflation. This pattern of easier credit for troubled financial institutions but tighter credit than necessary for the rest of us continued throughout 2008: as George Selgin documents, the Federal Reserve actually took care to offset its emergency operations’ effect on overall demand. Increases in credit to troubled banks were matched with corresponding decreases in credit elsewhere in the system.34 In Bernanke’s words, this was done to “keep a lid on inflation.”35 One tool in this offsetting process was interest on excess reserves (IOER). In October of 2008, the Federal Reserve began paying IOER.36 This policy induced banks to hold reserves and earn interest from the government rather than lending to private-sector individuals or institutions. This constrained credit for the private sector, outside of the banks that were rescued with below-market-rate lending.37 It’s as if the Fed simultaneously believed the economy faced a danger of too little spending and too much inflation—-which is literally impossible!! The report also correctly describes how the Fed completely screwed up its forward guidance: But there was a problem with forward guidance in the 2010s: Federal Reserve communications often described a hawkish reaction function—an inclination to run monetary policy relatively tightly. Consider the Federal Reserve Board’s projections from January 201240, when interest rate predictions (often known as “dot plots,” for the way they were frequently charted) had just been issued for the first time. The projections told us that the median participant in the exercise believed that 2014 was the appropriate year for interest rates to rise. They also told us some other things about 2014: that participants believed Core PCE inflation would be below-target in the range of 1.6 to 2.0 percent, and that participants believed the unemployment rate would be in the range of 6.7 to 7.6 percent. Put together, these predictions paint a clear picture of extraordinarily tight monetary policy. They told us that a Federal Reserve faced with an economy with elevated unemployment and below-target inflation would act to curb spending by tightening credit. There’s also a recognition that the unemployment rate is often a useful warning sign of recessions—the Sahm Rule: Recent work by the Federal Reserve has affirmed this view of employment measures. Economist Claudia Sahm devised an algorithm colloquially known as the “Sahm Rule,” which treats sudden rises in the unemployment rate as reliable early warning signs of a contraction.44 While the Sahm Rule is based on the official unemployment rate for simplicity’s sake and to facilitate comparability across time, it is likely that other employment measures, such as payroll surveys or unemployment claims, could be used as additional data points to scan for early signs of recession. Most economists put too much weight on interest rates as an indicator of the stance of monetary policy, which led them to (wrongly) assume that policy was accommodative during 2008.  The JEC report understands that rates are not a good policy indicator: FOMC statements have frequently identified low interest rates as a sign of accommodative policy. This is not always and everywhere correct. Neither is the converse: that high interest rates are a sign of tight policy. As Milton Friedman observed in his famous American Economic Association presidential address: As an empirical matter, low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly.45 This observation—made in 1968—has largely held up, and in fact predicted to some degree both the late 1970s (when, despite high interest rates, inflation soared to record levels) and the early 2010s (when, despite low interest rates, inflation remained persistently below target and unemployment remained elevated.) They suggest that NGDP growth is a superior policy indicator: Scott Sumner phrases it in an improved and more modern formulation.46 Interest rates are not a reliable indicator of the stance of monetary policy. On any given day, an unexpected reduction in the fed funds target is usually an easing of policy. However, an extended period of time when interest rates are declining usually represents a tightening of monetary policy. That’s because during periods when interest rates are falling, the natural rate of interest is usually falling even faster (due to slowing NGDP growth), and vice versa. The natural rate of interest is another economic abstraction that is hard to pin down precisely, but Sumner can be loosely translated as follows: during periods where the central bank is cutting interest rates, the risk-adjusted attractiveness of private-sector investments is falling even faster, so savers are still crowding into government bonds even at the lower rates. Sumner considers the growth rate of NGDP a better guide to the stance of monetary policy. A policy that enables an acceleration in spending—however it is implemented—is loose, and one that forces a deceleration or contraction—however it is implemented—is tight. This formulation—based on effects—seems more appropriate than a measure based on interest rates alone. The report then explains why measuring the policy stance correctly is so important: Why are the semantics here important? First, because effects matter. Monetary policy stances are named after their intended effects; loose or accommodative or expansionary monetary policy should presumably be loosening, accommodating, or expanding something. Tight or contractionary policy should presumably be tightening or contracting something. Second, semantics are important because names have an effect on the policy’s politics. The Federal Reserve in 2015 had essentially achieved some relatively-normal results for years: steady improvement in the employment rate, steady (though below-target) core inflation, and steady four percent growth in NGDP, which is also a normal result. However, it labeled these policies “accommodative.” This lent credibility to the plausible-sounding-but-wrong critique that the low interest rates at the time were “artificial” in a way that higher interest rates would not have been. It put the FOMC under pressure to “normalize” policy by tightening, which it did by the end of the year. Third, a results-based measure of the stance of monetary policy, such as NGDP growth, appropriately captures the effects of policies that do not involve the setting of short-term interest rates: for example, quantitative easing or forward guidance. The report also contains excellent policy suggestions: A number of market indicators can help the Federal Reserve make good predictions about the future. Mechanically tying Federal Reserve actions to market data is largely not a reasonable policy option, but markets can help the Federal Reserve predict the consequences of policy. And: The dual mandate leaves much room for ambiguity in terms of how to weight unemployment and inflation concerns; however, it is possible to integrate inflation and unemployment data into a single mandate that implicitly contains both components. The most promising methods for this begin with the observation that inflation is a price, and employment is a quantity. Therefore, they look to measures of price multiplied by quantity. Fortunately, many such metrics exist. One of the most obvious of these is nominal GDP. The idea of targeting nominal GDP originated with monetary economist Bennett McCallum,48 but also has been advocated by other economists such as Scott Sumner, Christina Romer,49 Jan Hatzius,50 and Joshua Hendrickson.51 While there are some technical issues implementing a nominal GDP target in real time, economist David Beckworth, another advocate, proposes methods to predict nominal GDP more quickly, including the use of new data sources or futures markets.52 At a minimum, stable nominal GDP growth is an excellent medium- and longer-run measure of central bank performance. Level targeting is especially important: Level targeting is perhaps the single most effective zero lower bound policy, and likely has benefits even outside of the zero lower bound. The idea of “level targeting” is to have a consistent long-run growth path in mind for the target variable, not just growth rate to target anew each period. There are two strong reasons to believe a level target would be effective. The first is that level targets would do a better job of anchoring expectations for long-term contracts, such as mortgages. For example, it is considerably easier for a mortgage lender to operate if she has at least a general sense of what nominal incomes in America will look like in the 30th year of the loan. Will they double? Will they triple? A nominal income level targeting regime can actually provide an answer to that question, making long-term contracts considerably easier to write. Similarly, if a pension plan were interested in implementing a cost-of-living adjustment to benefits based on inflation, it would be easy to make long-run projections under an inflation level targeting regime. The second reason for believing in the effectiveness of a level target is that a level target constitutes a kind of forward guidance, which—through its impact on expectations, can actually work backwards in time. In promising a steady long-run path, it encourages people to invest more steadily in the present, knowing that over the long run, rough patches will be smoothed out. Nominal GDP level targeting, or NGDPLT, is one of the most popular uses of the level targeting idea. Level targeting dovetails particularly well with NGDP targeting because it turns the target into a long-run goal. In a level-targeting regime, short-run blips like revisions to GDP data are understood to be less consequential; instead the central bank maintains focus on keeping the long-run path steady. Honestly, this report is far better than 90% of the articles one reads in top level economics journals.  Its fine to be able to write down highly mathematical models of the economy, but one also needs to have an intuitive grasp of which economic concepts are relevant to the sort of macroeconomic problems faced by real world economics.   Alan Cole definitely understands the role of monetary policy in business cycles. 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To understand my story, you first need to understand Friedman’s basic point. Here it is in a nutshell: Managers are employees of corporations. In the decisions they make with corporate resources, they should be responsible to the corporation. That means being responsible to the stockholders, who, after all, are the corporation’s owners. The vast majority of stockholders want the corporation to, in Friedman’s words, “make as much money as possible.” Thus Friedman’s claim that the social responsibility of a corporation is to make money. Friedman was clear that he wasn’t advocating breaking the rules. He stated that the managers should conform “to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” I learned Friedman’s point in a personal way when I was eleven. My mother had raised us to help others. I liked doing that and didn’t see it as a heavy obligation. But when I was eleven, my brother, Paul, who was fourteen, bought a cheap set of golf clubs and hired me to caddy for him. When we were on the eighth hole of a nine-hole course near our summer cottage in Minaki, Ontario, we saw a golfer hunting in the rough for his lost golf ball. I thought I should stop and help, so I did. Paul had a different view: he wanted to play through and I was working for him and so I should do what he asked. We had a big argument and I finally gave in. When we got home, my brother complained to my mother that I hadn’t kept my side of the bargain. I was sure my mother would support me. She didn’t. “When Paul hired you,” she said, “you were working for him. When you’re on your own you can stop and help someone find his ball, but when you’re working for someone, he has the right to decide whether to let you.” The lesson stung, but I ended up agreeing. That’s why the most important part of Friedman’s essay spoke to me. It’s simply wrong, when you’re working for someone, to use his resources for your ends when they don’t promote his ends. In the case with my brother, I was using my time to help others but my time was really his time: he was paying for it. In the case of corporations, managers might be using both their time and the corporation’s resources to help others even though shareholders own those resources and own the manager’s time that they are paying for. This is from David R. Henderson, “Friedman’s Critics Miss the Mark,” Defining Ideas, September 24, 2020. I was one of the 20 people asked to comment on passages of Friedman’s famous 1970 NY Times essay, “The Social Responsibility of Business Is to Increase Its Profits. Hoover colleague and EconTalk host Russ Roberts was another. One of the strangest comments was by Felicia Wong. I write: Commenter Felicia Wong, president and CEO of the Roosevelt Institute, notes that Friedman wrote when America’s “overwhelmingly white” fears were about Watts, Detroit, Vietnam, Kent State, Jackson State, and the assassinations of Martin Luther King Jr. and Robert Kennedy. Hmm. I recall that when King and Kennedy were murdered a lot of black people were upset, too, particularly by King’s murder. I did note an irony in Friedman’s original essay though: I’ll end by noting an ironic argument in Friedman’s essay that I don’t agree with and I wonder if even he would agree with today. Fortunately, it doesn’t undercut his case against corporate social responsibility. In stating that managers shouldn’t use corporate resources at the expense of shareholders, even for purposes that a huge percentage of us would agree are good, Friedman argued that we should leave those functions to the government. He wrote: On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary, and judicial provisions to assure that taxes are imposed so far as possible in accordance with the desires of the public—after all, “taxation without representation” was one of the battle cries of the American Revolution. That ignores what we have learned, and Friedman learned, from the “Public Choice” school of economics, led by James Buchanan and Gordon Tullock. Government’s incentives are usually perverse and we see the bad results almost daily. There’s much more hope, and I think Friedman shared that hope, for private voluntary activity. Read the whole thing.   (0 COMMENTS)