Arnold Kling recently posted on the implications of the Modigliani-Miller (M-M) theory of corporate finance for monetary economics. He seems to suggest that open market operations will not significantly affect the price level, even when interest rates are positive. (Although it’s possible I’ve misread his post): The metaphor that I would propose is that a single firm’s changes to its financial structure is like me sticking my hand in the ocean, scooping up water, and throwing it in the air: I don’t make a hole in the ocean. Modigliani-Miller is not strictly true. But it is the best first approximation to use in looking at financial markets. That is, you should start with Modigliani-Miller and think carefully about what might cause deviations from it, rather than casually theorize under the implicit assumption that it has no validity whatsoever. Taking this approach, I view the Fed as just another bank. Its portfolio decisions do not make a hole in the ocean. That heretical view is the basis for the analysis of inflation in my book Specialization and Trade. *Sumner’s response is actually beside the point, in my view. The Modigliani-Miller theorem does not in any way rely on different asset classes being close substitutes. It relies on financial markets offering opportunities for people to align their portfolios to meet their needs in response to a corporate restructuring. I have the opposite view. I believe that money is neutral in the long run and that if you permanently and exogenously double the monetary base through open market operations, this action will double the price level. Consider the following example. Apple decides to exchange tens of billions of dollars of T-bills for another asset, say palladium. Let’s say Apple suddenly buys up 30% of the world’s stock of palladium. As a first approximation, the value of Apple has not changed–they simply exchanged one asset for another at current market prices. But the market value of palladium has likely increased sharply! If palladium were the medium of account when this occurred, then Apple’s portfolio readjustment would be highly deflationary.  Indeed something quite like this caused the Great Depression. You might argue that palladium has nothing to do with M-M, and I’d agree. But my claim is that cash is much more like palladium than it is like stocks or bonds, which are the sorts of assets envisioned when people discuss M-M.  In 1981, $100 bills yielded 0% while one-month T-bills yielded nearly 15%.  These assets are clearly not close substitutes.  When the government exchanges T-bills for T-Notes, the financial markets yawn.  When the Fed (implicitly) announces a plan to exchange T-bills for cash, the global market value of all stocks can decline by trillions of dollars in seconds.  There’s a good reason why stock investors believe I’m right and Kling is wrong; cash and T-bills are not close substitutes. I’ve spent my whole life looking at the impact of open market operations (OMOs) on macro variables, as have much smarter people like Milton Friedman.  There’s no doubt in my mind that exogenous and permanent OMOs have a huge impact on the economy, at least at positive interest rates and very likely at zero interest rates as well.  That’s not in doubt.  The question we need to examine is not, “Does M-M help us to understand monetary policy?”  Rather the interesting question is, “Why doesn’t M-M help us to understand monetary policy?” PS.  At 2:15 on December 11, 2007, the Fed made an announcement.  The didn’t even mention “cash”, but the only way to implement their announced policy was to reduce the growth rate of cash to a level below what the market had expected 5 minutes earlier.  This is how the stock market (DJIA) responded: Stock investors don’t seem to believe that M-M applies to OMOs. (0 COMMENTS)

  Prime Minister Scheer?   Co-blogger Scott Sumner, over at his own blog, themoneyillusion, writes: Other countries generally elect their president by majority vote (although a few “ceremonial” presidents are picked by an EC, as in India). He might be correct if he literally means “president.” But Scott seems to be comparing the United States electoral college to how the rest of the democratic world elects its governments’ main leaders, whether they’re called President, Prime Minister, or something else. The other governments I know best–Canada, where I grew up, eh?, the United Kingdom, Australia, and New Zealand–don’t elect their Prime Minister by majority vote. They have a Parliamentary system and the party with the most seats gets to form the government. In a way, that’s like the Electoral College. Indeed, although in Canada’s 2019 national election no party won a majority of the vote, the party that won the plurality was the Conservative Party. Scheer’s Conservative Party won 34.34 percent of the vote and Prime Minister Justin Trudeau’s Liberal Party won 33.12 percent. If it had been the party with the most votes that determines the Prime Minister, we would be referring to Prime Minister Andrew Scheer.   (0 COMMENTS)

In this video interview, Dr. Joel Kettner, formerly the Manitoba government’s chief public health officer, presents some striking statistics and commentary. I checked his numbers and it’s clear that the interview is current. The interviewer starts by stating the “flatten the curve” rationale. But look at his numbers, which I confirmed here, and see if what’s going on has anything to do with “flattening the curve,” even in Manitoba’s single-payer system of health care. Number of cases: 4,500. (Actually, it’s 4,532.) That’s 1 in 300 population. Number of deaths: 58. That’s 1 in 25,000 population and less than 1% of all deaths. Number of ICU admissions: 15, which is 20% of all ICU beds. In a typical flu season, the majority of ICU beds are taken up by people with acute lung injury or pneumonia. Number of hospitalizations: 83. This is < 3% of all beds. Percent usage of ventilator capacity: < 1%. 80% of deaths in Canada are of people over the age of 85 and residents of personal care homes. (This was right at the end where he felt rushed, so it’s possible that he meant “or,” not “and.”) Watch, at about the point where 2:20 is left, how he makes the point that so many of us have been making: look at the big picture and look at tradeoffs. The lockdowns might well be causing more deaths than they’re saving. (He doesn’t go that far, but I wonder if he would.) Why did I choose Manitoba? The main reason is that that’s where I grew up. The second reason is that Dr. Kettner made his points more clearly and succinctly than I’ve typically seen. HT2 Cameron Neumann.     (0 COMMENTS)

Iskander, a devoted EconLog reader, sent me a fascinating question.  With his permission, I reprint his original email and a followup. Original Email Dear Professor Caplan, I was reading through some old Econlog posts, and I saw one about Hong Kong (“Statist at Heart”) where you attribute rapid post war growth to the free market policies of the British. I tend to agree with this, however I do wonder about why growth was only rapid after 1950. There was next to no institutional/political change as far as I know, yet per capita output growth was not that large in the century beforehand. I can see why wages might be held down by elastic labour supply from mainland China, but not output per capita. In many ways the British Empire acted as if it was ruled by a cabal of free market economists. It should have led to rapid global convergence as modern technology and goods were free to flow from Europe to the rest of the world and it made sure property rights were protected. Not only European property rights, as there were a large number of Indian, Chinese, Jewish and Parsi merchants and businessmen who flourished. If a Indian merchant wanted to set up a modern factory there were very few impediments from the government, which has not been the case post 1947. In addition, taxation was low (India’s tax to GDP ratio was around 5% in the 1920s) and it usually came in forms with low deadweight loss (lump sum land taxes, excise taxes on goods with inelastic demand). The exceptions to this were the settler colonies which were the most badly behaved (especially in South Africa) in terms of economic freedom. Why do you think all this led to very little growth pre-1950, if these policies made Hong Kong rich post-1950? Followup Dear Professor Caplan, I’m not able to find a totally convincing answer to the question myself. That said I can imagine that economic freedom has benefits even if it doesn’t lead to rapid growth. I think that the area of China near Hong Kong was spared from most of the fighting until the 1940s (It was the base of the Kuomintang), even then Hong Kong could have produced goods for more stable South East/ South Asia (or Europe/America given the low level of wages). At least in India, the British only moved away from free trade after WW1. A rearguard action by pro-free trade civil servants meant that tariffs were originally given only if an Industry made the case that it would raise productivity and eventually be weaned off protection, called “discriminating protection”. Under this scheme, perhaps the only successful case of Indian “infant Industry” actually growing up came about, Tata Steel. By the 1930s the rise of nationalism and fiscal pressures (The government was on the edge of bankruptcy) led to the decline of the discriminating part of protection. The Bombay cotton textile industry was being beaten in its home market by Japanese textiles despite cotton being shipped from India to Japan, processed there and shipped back even with 50% tariffs. An interesting thing is that both industries were using the same machines but the Japanese firms had managed to raise productivity thrice as fast as the Indian firms (as far as I can remember, this is from the work of Gregory Clark and Susan Wolcott). This was a inglorious end for the first modern textile Industry in Asia (The imperial connection and an open economy meant that India’s first modern factory came thirty years before Japan’s). Perhaps good economic policies can only go so far without widespread change in attitudes and aspirations. Personally, I’m tempted to blame the chaos in China from the overthrow of the Manchus until the Korean War, but I’m not married to that story.  Iskander’s knowledge of colonial economic policy seems better than mine, but if I were researching this in earnest I would start by nailing down the facts. In any case, what’s the best response to Iskander’s challenge? (0 COMMENTS)

This Matt Yglesias tweet caught my eye: While that sounds plausible, I believe Yglesias is mistaken about how politics works. There’s more to politics than public opinion polling on this or that issue; the intensity of support also matters. Here’s a simply numerical example: Suppose that the GOP contained 50% of the public, and the Democrats were also 50% of the public. (I’m ignoring independents just to make a point.) Also assume: 1. Roughly 25% of the public is religious conservatives. Assume their policy views are endorsed by only 35% of the electorate. In other words, their views are unpopular. 2. Roughly 25% of the public is economic conservatives who oppose high taxes on the rich, higher minimum wages, etc. Again, let’s say only 35% of the public agrees with them. It looks like it would be a mistake for the GOP to adopt conservative positions on religious questions and economic policy. These positions don’t poll well. But that view ignores the intensity of beliefs. Many of the religious conservatives may not agree with economic conservatives on tax issues, but it’s the moral issues that really motivate their voting. Vice versa for the economic conservatives. You could add in a few other issues where GOP voters might have passionate beliefs, such as opposition to restrictions on gun ownership, or favoring a ban on marijuana. Even if the positions don’t poll well, they may offer an opportunity for the GOP to add small but highly motivated voters to their “big tent” coalition. The Democrats do the same. Recent polls in (left-leaning) California suggest that the affirmative action proposition on the ballot is not very popular, but the issue may be important in motivating a significant portion of the Democratic “base”. I think of the GOP as the party of people that resent progressive views on a wide range of unrelated policy questions.  They have “conservative” views on everything from economics to traditional religious values to foreign affairs to criminal justice.”  There are no “rank and file conservatives”. To some extent all parties include “strange bedfellows”, but that seems truer of the GOP than the Dems, and much more true of the GOP than the Libertarians or Socialists.  This tendency might be less pronounced in a multiparty parliamentary system with proportional representation.  But when there’s a two party system, at least one party (maybe both) must include lots of people with little in common. There’s a name for political parties that only adopt highly popular positions: “Losers” PS.  Here’s a general rule of thumb.  Be skeptical when a pundit (including me) says that a political party needs to fix its problems by adopting positions closer to their own view on the issues.  I almost never recall a pundit saying to a losing party, “Your mistake is that you agree with me on this issue; you need to start opposing my view on this issue.” (0 COMMENTS)

  As noted earlier today, Tyler Cowen posted about my critiques of his views on lockdowns. I don’t have time to answer thoroughly but I do think I did him an injustice on one issue. Cowen writes: And my remark about “It just doesn’t seem worth it”, cited by David as me dismissing school reopenings?  Here is what I actually wrote: Indoor restaurant dining and drinking, for example, is probably not a good idea in most parts of the U.S. right now. Yes, many of the Covid cases spread by such activity would be among the lower-risk young, rather than the higher-risk elderly. Still, practically speaking, given America’s current response capabilities, those cases will further paralyze schools and workplaces and entertainment venues. It just doesn’t seem worth it. I am worried about reopening indoor bars and restaurants because I want to keep schools (and other venues) open.  At my own school, GMU, I very much argued for keeping it open, which indeed we have done with success but also with great effort.  My whole point is one about trade-offs. The above three paragraphs are from Tyler. Now the following is David R. Henderson: I did misinterpret him. I thought he was throwing in schools with bars and restaurants and I see now that he wasn’t. My apologies to Tyler Cowen and to my readers. This post is titled “One of Tyler Cowen’s Points is Right.” That doesn’t mean there aren’t others. If I find them, I will post on them. But it won’t be today. I have deadlines. (0 COMMENTS)

  Tyler Cowen posted a response to my critiques of his articles this morning. Unlike Tyler, I will do him the courtesy of linking to his post. Someone named David Henderson responded. If you know me, you know that that’s not me. That’s not my style at all. I did post two comments on Cowen’s post, under my name David R. Henderson, the one I always use to post comments and the one I always use in my articles. I didn’t address the merits of Cowen’s case. I simply posted to let him and his readers know, assuming his readers care (I think Tyler does), that I am not the David Henderson who commented. Update: Tyler Cowen offered to delete the “David Henderson” comments and I thanked him. (2 COMMENTS)

Some historians like counterfactuals. In his book Escape from Rome (Princeton University Press, 2019), Walter Scheidel analyzes counterfactual scenarios about how the Roman empire could have aborted earlier or could have been later succeeded by another European empire. In general, counterfactuals are inseparable from rational understanding. To identify a cause is to know what would have happened if, ceteris paribus, this cause had been absent. Take economics, for example. The law of demand—when the price increases, quantity demanded will decrease—implies that without that price increase, the decrease in quantity demanded (on the same demand curve) would not have occurred. Or consider the economic concept of “opportunity cost,” which is the net benefit  (if positive) that would have been obtained from the next best alternative if the current course of action had not been taken. Back to our historical topic. What would have happened if Hillary Clinton had been elected president instead of Donald Trump in 2016? Reflecting on a likely counterfactual scenario can help understand what were the consequences of the actual election of Donald Trump. Keeping in mind that other counterfactual scenarios are possible, here is one that seems very plausible. Given the Congress that emerged from the 2016 election, Clinton would not have been able to do much even with the large powers of the presidency. Until 2019, both the House and the Senate would have blocked any significant change she could have tried to implement. She might, however, have succeeded generating, like Trump did, a trillion-dollar annual deficit. The economy would probably have continued the Obama recovery, as it more or less did under Trump. The absence of Trump’s trade wars would have compensated for Clinton’s vetoing tax cuts. The 2018 midterms would have probably revealed mounting dissatisfaction with Clinton’s failures and character, so the Senate and the House would have stayed Republican. Given a Republican senate, Clinton would have had to nominate a Supreme Court candidate not very different in his constitutional philosophy than Trump’s actual choice, although his sex and perhaps his race might have been different. (This scenario assumes that Justice Anthony Kennedy would not have resigned; had he still done so, the scenario applies to his replacement too.) With a Republican Senate, Clinton would have been unable to replace Justice Ruth Bader Ginsburg. A big unknown is how successful Clinton would have been at bargaining with Congress. She might very well have been more effective than Trump in the art of the political deal: she would have been more willing to trade votes (I will not veto your pet project if you legislate my pet project). Given the philosophical poverty of the Republicans, this political horse-trading would have been detrimental to liberty and prosperity. The high-profile murders of Black men by White policemen would also have occurred. Clinton might have stoked the racial fires more among the Blacks and the wokes, instead of Trump stoking them more among the Whites. The results would not have been very different. A Clinton administration would not have dealt with the Covid-19 pandemic in a fundamentally different way than the Trump administration. She would no doubt have deferred more to the public health experts, if only because their political agenda is generally very similar. However, since the experts changed track as the crisis developed, the Clinton administration would have provided ongoing advice as incoherent as the Trump administration. The central-planning push would have been similar: use of the Defense Production Act instituting federal price surveillance and allocation of certain products, gauche attempts to control allocation of materials à la Soviet, and no disagreement with the state governments’ own “price gouging” laws. The broad results would have been the same: a hair-raising series of government failures and shortages of many products. One difference, perhaps, is that Clinton would have more consistently and vocally blamed the shortages on “greedy capitalists.” (Trump did not use the expression, but often blamed capitalist behavior such as outsourcing and imports or even not obeying the government more religiously.) Clinton would have blamed the health care system for being not socialized enough. She would have used a more openly redistributionist vocabulary. The big difference, however, between this scenario and today’s reality, would have been the impact on the upcoming 2020 election. Public dissatisfaction against Clinton would run high, just as it does against Trump. Voters would (wrongly) blame her for Covid-19 and (correctly) for the government’s response. (In 1916, Woodrow Wilson lost votes in New Jersey because of shark attacks.) She would badly trail in voting surveys, whatever Republican candidate was running against her. Whether or not the small element of classical liberalism and libertarianism in the Republican Party would have survived the failure of Trump in 2016 is more difficult to ascertain. The answer would affect some components of my counterfactual scenario. But is easy to imagine that, after four years of Clinton, fickle public opinion would have concluded that, after all, socialism does not work—contrary to the current situation in which many people seem to think that capitalism has failed again, even if Trump does not favor free markets. A related lesson is that the results of political processes are often the opposite of what the voter thinks or hopes his vote will bring about. Voting is like trying to buy a bottle of Champagne but getting a Coke instead, or vice-versa, or whatever a majority of the electorate happens to fancy at that moment. (0 COMMENTS)

One popular variant on homeschooling is called “unschooling.”  The practice varies, as practices always do.  The essence, however, is that the student does what he wants.  He studies what he wants.  He studies for as long as he wants.  If he asks you to teach him something, you teach him.  Yet if he decides to play videogames all day, the principled unschooling response is: “Let him.” Almost every parent is horrified by the idea of unschooling.  Even most homeschoolers shake their heads.  Advocates insist, however, that unschooling works.  Psychologist Peter Gray defends the merits of unschooling with great vigor and eloquence.  According to unschoolers, the human child is naturally curious.  Given freedom, he won’t just learn basic skills; he’ll ultimately find a calling. On the surface, unschooling sounds like Social Desirability Bias run amok: “Oh yes, every child loves to learn, it’s just society that fails them!” And as a mortal enemy of Social Desirability Bias, my instinct is to dismiss unschooling out of hand. One thing I loathe more than Social Desirability Bias, however, is refusing to calm down and look at the facts.  Fact: I’ve personally met and conversed with dozens of adults who were unschooled.  Overall, they appear at least as well-educated as typical graduates from the public school system.  Indeed, as Gray would predict, unschoolers are especially likely to turn their passions into careers.  Admittedly,  some come across as flaky, but then again so do a lot young people.  When you look closely, unschoolers have only one obvious problem. They’re weak in math! In my experience, even unschoolers with stellar IQs tend to be weak in algebra.  Algebra, I say!  And their knowledge of more advanced mathematics is sparser still. Staunch unschoolers will reply: So what?  Who needs algebra?  The honest answer, though, is: Anyone who wants to pursue a vast range of high-status occupations.  STEM requires math.  CS requires math.  Social science requires math.  Even sophisticated lawyers – the kind that discuss investments’ Net Present Values – require math. Won’t kids who would greatly benefit from math choose to learn math given the freedom to do so?  The answer, I fear, is: Rarely.  For two reasons: First, math is extremely unfun for almost everyone.  Only a handful of nerds sincerely finds the subject engaging.  I’m a big nerd, and I’ve done piles of math, yet I’ve never really liked it. Second, math is highly cumulative.  Each major stage of math builds on the foundation of the previous stages.  If you reach adulthood and then decide to learn math to pursue a newly-discovered ambition, I wish you good luck, because you’ll need it. What’s the best response?  Mainstream critics of unschooling will obviously use this criticism to dismiss the entire approach.  And staunch unschoolers will no doubt stick to their guns.  I, however, propose a keyhole solution.  I call it: Unschooling + Math. What does Unschooling + Math mean?  Simple: Impose a single parental mandate on unschooled children.  Every day, like it or not, you have to do 1-2 hours of math.  No matter how boring you find the subject, you’re too young to decide that you don’t want to pursue a career that requires math.  And if you postpone the study of math for long, it will be too late to start later on. While most people don’t wind up using much math on the job, ignorance of basic math is still a severe handicap in life.  And when smart kids don’t know advanced math, they forfeit about half of all high-status career opportunities. We should have a strong presumption against paternalism – even the literal paternalism of a parent for his own child.  “Maybe the kid is right and the parent is wrong” is a deeply underrated thought.  The value of math, however, is great enough to overcome this presumption.  To be clear, I don’t mean that the government should force homeschoolers to teach math.  What I mean, rather, is that homeschoolers should require their kids to learn math.  Guilt-free. (1 COMMENTS)

Politics can be very depressing, but a recent Bloomberg article discussing my home state kind of made me smile.  I hope you enjoy it as well: And then there are backers like Derek Orth in Lancaster, Wisconsin, who are sticking by the president. Orth, a 34-year-old dairy farmer, appreciates the financial help Trump has channeled to the agriculture industry. “I can’t think of a single close friend in agriculture that is voting for Biden,” Orth said this month. An active follower of social media posts who doesn’t have cable television, he worries that Biden would institute socialism. I’m going to put this in my “Keep the Government’s Hands Off My Medicare!” file drawer. (0 COMMENTS)