Ever since 2000, American’s views on the economy have been heavily shaped by two ideas: 1. There was clearly a big tech stock bubble in 2000. 2. There was clearly a big house price bubble in 2006. It’s possible that there was some sort of a bubble in each case. But as of today, there is no strong evidence for either proposition. It is not true that tech stocks were clearly overvalued in 2000, and it’s not true that house prices were clearly overvalued in 2006. The tech bubble theory was based on the assumption that stock prices had gotten so high that they could only be justified in the tech industry went on to dominate the US economy, and at least some tech stocks would have to become massive successes, in order to offset the inevitable attrition of tech start-ups that did not do well. Today, it seems like the optimistic forecasts were basically correct. Not necessarily exactly correct, but close enough that one can no longer claim that the extreme optimism of 2000 was clearly unwarranted. Big American tech companies completely dominate our stock market, and indeed they dominate the global stock market in a way that was almost unimaginable in 2000.  At least unimaginable to most individual humans; the “wisdom of crowds” somehow foresaw this future. The same is true of housing. Real housing prices are now just 1% below their 2006 peak. So it’s no longer clearly true that houses were greatly overvalued in 2006. Instead, other theories are equally plausible. Perhaps NIMBYism combined with permanently lower interest rates does justify permanently higher real house prices in the 21st century.  Perhaps the 2006 immigration crackdown and the subsequent tightening lending standards and the steep drop in NGDP during 2008-09 caused the slump, and house prices are now returning to their appropriate level. The new normal of the 21st century.  Or maybe this is another bubble.  Who knows? But as of today, we can see that real house prices were not clearly overvalued in 2006. It’s at least debatable. The two theories that have been discredited played a major role in shaping the views of Americans, including economists.  Now that these theories have been discredited, Americans should revise their view of what happened to the economy over the past 20 years.  Will they do so?  Probably not. This is an invitation for bright young academics that are not blinded by popular prejudice to take a fresh look at the whole bubble theory, especially the way these ideas shaped our view of the business cycle. PS.  Ever since I began blogging more than 11 years ago, I claimed that bubble theories were wrong.  But I’m not going to take credit for predicting the strong surge in tech stocks and house prices—I did not anticipate this. (1 COMMENTS)

An important lesson from both economic analysis and economic history is that when people are relatively unregulated and free to adjust, they can adjust quickly to various economic shocks, even large ones. But when governments heavily regulate people’s economic activities, these governments slow and often prevent adjustments. The good news is that in 2020, the federal government and many state and local governments have temporarily relaxed regulations to make adjustment easier. The bad news is that many of these same governments have added regulations that make adjustments difficult or impossible. And the further bad news is that many pre-existing regulations have not been loosened and, therefore, act to slow adjustment. One of the most extreme regulations is the Food and Drug Administration’s heavy requirements that limit testing for the Covid-19 disease. This is from “Managing (and Mismanaging) the “Covid Shock,” my latest article on Defining Ideas, October 22, 2020. Another excerpt: However, there’s a responsible solution for restaurants and bars that want to serve drinks: insist that they serve people outside and insist that they require people to stay seated and socially distanced. But governments seem to have problems with letting people have fun. The California Department of Alcoholic Beverage Control insists that bars may open only if they offer “bona fide meals.” Those meals cannot be pre-packaged sandwiches and salads, side dishes like fries and chicken wings, bagged pretzels or popcorn, or, the horror, dessert. And then one of the worst: In the midst of a pandemic, one of the things we would like most to know is whether we have the virus. Testing can tell us that. But existing tests are expensive. After recently traveling, I decided, at my wife’s urging, to get tested. I paid $180 for results within twenty-four hours and got them in six hours. I can afford that. But that’s a lot of money for many people, and six hours is still a lot of time. Wouldn’t it be nice if we could have even cheaper tests that we can conduct on ourselves and get fast results? That way, each of us would know whether to isolate or go to work, bars, football games, or restaurants. Actually, we can, but we may not, because the FDA stops us. These tests cost under $10 and give results within fifteen minutes. But the FDA won’t allow them because they’re not as accurate as tests it does allow. Read the whole thing. (0 COMMENTS)

Polarized is perhaps the best way to describe our current political landscape heading into the home stretch of the 2020 election, and I have consciously tried to select five books that both provide some immediate historical context to help readers understand how we got here.  However, I also wanted to add a few historical texts to remind everyone that the political rhetoric and posturing we are experiencing today isn’t new in American history.  It is distinctly different from recent American history, but even at the beginning of political life under the Constitution, things were heated, personal, contentious, and ugly.  So while this run up to our next Presidential election is ugly, it’s not unique if you look back far enough.  I also added one book to make readers feel absolutely fine if they decide to sit this election out, and considering the world today, staying at home on election day may make more practical sense than ever before.   A Magnificent Catastrophe – Edward J. Larsen – America is a relatively young country, but relatively young is still 244 years old.  While it seems like 2020 has been the worst year imaginable with the worst Presidential campaign ever, the good news is that we have had worse years and much worse elections.  In 1800, two of the Founding Fathers, John Adams and Thomas Jefferson squared off in a contentious, ugly, and ultimately foundational election for President, as fans of Hamilton will know.  Larsen is a wonderful writer, and this book is a bracing reminder that politics has always brought out the worst in everyone, even the people who brilliantly crafted the United States. Plunkett of Tammany Hall – William L. Riordan – From the election of 1800 we jump to another helpful reminder that elections and politics haven’t always been unicorns and rainbows.  Tammany Hall was the famed political club and home to the leaders of New York City’s political machine during the late 19th and early 20th centuries.  Plunkett was a prominent member of that club, and he sat down to give an entertaining and thought-provoking defense of why people get into politics, what the day to day life of a big city political leader was like during this time, and some philosophical insight into human nature generally.  As Plunkett famously said “I seen my opportunities and I took ‘em”   Coming Apart – Charles Murray – To get some perspective on 2020, I think it’s important to understand how President Trump won in 2016, and no book is better at explaining this than Charles Murray’s.  First, Murray doesn’t mention Trump at all, because he wrote this book in 2012 with a focus on the growing divide among white Americans.  He convincingly shows how working class whites have been left behind by more affluent whites geographically, educationally, economically, and spiritually.  It’s a powerful reminder of how radically different the lives of rural and working class Americans are from their parents and how much more challenging their futures are unless their circumstances improve.  Their support of President Trump has to be understood through the lens of Murray’s important book.   The Lost Majority – Sean Trende – I reviewed this book when it first came out, and again I think it provides a great context to our current political climate.  During the run-up to 2016, a number of prominent writers argued that demographics made it inevitable that the Democratic party was heading toward a sort of permanent majority status.  This became a popular talking point in intellectual circles.  Trende’s book showed the flaws in that thinking as he drilled down much more deeply into the congressional and local level data.  He showed the problems that ignoring rural America would create, a warning that rang very true in 2016.   Myth of the Rational Voter – Bryan Caplan – In case you were unaware, there’s a book someone named Bryan Caplan wrote that is worth a read this election season.  (In fact, there’s a three week long discussion on this books in our #EconlibReads Facebook Group going in right now.) Full disclosure, I have a fair amount of issues with the text, most notably Caplan’s unrelenting pessimism about the current state of democracy.  As several of the books I’ve listed above show, it’s not obvious that things today are “worse” by any objective measure.  But he provides a very provocative argument against the current system, and if any election deserves to be seen in the context of what’s wrong with our political leadership, decision-making process, and media, this is the one.   G. Patrick Lynch is a Senior Fellow at Liberty Fund.   As an Amazon Associate, Econlib earns from qualiyfing purchases. (1 COMMENTS)

Terms like “progressive” can be defined in a variety of ways. One common theme is that progressives are relatively optimistic that governments can solve economic problems. We normally think of conservative Republicans as being on the other end of the spectrum, opposed to government meddling in the economy. President Trump is a bit unusual in that he is a Republican who is skeptical of the free market. He used a combination of subsidies, bullying and tariffs to try to bring back manufacturing jobs. Overall, this approach was not successful. Some manufacturing jobs were created (in 2017-18) in companies supplying the booming fracking industry, but large subsidies given to firms like Foxconn were not effective, and the trade war negatively impacted manufacturing in 2019, even before Covid-19. None of this was a surprise to a Chicago school economist like me. But what did progressives expect to come out of the Trump administration’s industrial policy”? After all, progressives believe that activist governments can solve problems. This Ezra Klein tweet caught my eye: I’m sure that progressives would deny any responsibility for failures such as the Wisconsin Foxconn plant.  They might argue that Trump didn’t know how to do industrial policy.  That’s a fair point; Foxconn is not their fault.  But a similar fiasco occurred under the Obama administration. Governments simply are not very good at creating economic growth.  Some of the more famous cases of industrial policy are not what many people assume.  The most successful parts of the Chinese economy are the private firms, not the big state-owned enterprises.  Some of the most successful Japanese firms got that way by ignoring the recommendation of government bureaucrats.  Germany has one of the world’s most successful manufacturing sectors, without relying heavily on subsidies and tariffs.  (They do have good technical training programs.) When I first heard that the Trump administration planned to bring back jobs though a mix of subsidies, bullying and tariffs, I was immediately skeptical.  The fact that many progressives seemed nervous that he might succeed tells us a lot about the way they believe that economies work.  There was no need for them to be “nervous” that Trump would bring back manufacturing jobs with subsidies. This also explains why I’m not a progressive. (0 COMMENTS)

Last month, I asked readers for a “Great Reconciliation” of three popular beliefs: 1. Risk mitigation should be directly proportional to risk severity. 2. Medically speaking, COVID is 2-5x as bad as flu. 3. Our COVID mitigation efforts should be much more than 5x our flu mitigation efforts.   The most theoretically compelling resolution I’ve encountered maintains that contra (1), our response to risk should be strongly non-linear. On the surface, this is a plausible story.  Consider: How much money would someone have to pay you to endure a 1% chance of death today?  Suppose your answer is $100,000.  Does logic compel you, then, to accept a 100% chance of death today for 100*$100,000=$10M? That’s plainly absurd.  Indeed, unless your loved ones prefer fat stacks to your continued company, dying for cash is an exercise in futility.  And since the value of risk is clearly non-linear, the value of risk mitigation must be non-linear, too. Should we infer, then, that the War on COVID is prudent after all?  Hardly.  Sure, non-linearity makes sense when you raise a high risk.  But approximate linearity still makes sense when you raise a low risk.  If you disvalue a 1% risk of death at $100,000, would you really require far more than $110,000 for a 1.1% risk?  Would you really require far less than $90,000 for a .9% risk?  Remember, non-linearity is symmetric: If X increases faster than linearly, X should also fall faster than linearly. Remember, moreover, that you face a long list of risks.  They add up to a scary sum, but taken individually, even broad risks (e.g. “all accidents” or “all contagious disease”) are typically modest.  So while it might be wise to take great efforts to halve your total risk, taking great efforts to halve any specific risk remains foolish. Indeed, assigning non-linear weights to specific risks readily leads you to choose higher overall risk over lower overall risk.  Suppose you face three risks: death by accident, death by contagious disease, and death by other.  These initial annual risks are .1%, .1%, and .8%, initially disvalued at $10,000, $10,000, and $80,000.  Now suppose that doubling the first two risks (to .2% and .2%) will reduce the latter risk by three-eights (to .5%), slashing your overall death risk from 1% to .9%.  If you value each specific risk quadratically, you will disvalue these three risks at $40,000, $40,000, and $31,250.  Upshot: Non-linearity counter-productively leads you to disvalue the safer package over the riskier package, merely because of the composition of danger. Too abstract?  What would you think about someone who categorically refused to drive on rainy days because inclement weather raises his accident risk by 25%?  “Eccentric,” if you’re kind. If non-linear risk valuation doesn’t explain the gargantuan global response to COVID, what does?  I’ve invoked them before, and I’ll invoke them again: hysteria and herding.  Novel, vivid risks lead to wildly innumerate overreactions, especially when all the other kids are overreacting too. Alas, that’s human nature.  Yet you can and should rise above such feelings and calmly tell the herd: You will not stampede me. And take comfort in the fact that ADHD shall save us – indeed, is saving us already.   (1 COMMENTS)

A group of researchers, spearheaded by Brown University Professor Emily Oster, have created and made available the most comprehensive databaseon schools and Covid case rates for students and staff since the pandemic started. Her data—covering almost 200,000 kids across 47 states from the last two weeks of September—showed a Covid-19 case rate of 0.13% among students and 0.24% among staff. That’s a shockingly and wonderfully low number. By comparison, the current overall U.S. case rate is 2.6%, an order of magnitude higher. Other research has shown that hospitalization and fatality rates for school-age children are also extremely low. People 19 and younger account for only 1.2% of Covid-19 hospitalizations in the U.S. during the peak of the pandemic. The Centers for Disease Control and Prevention report that of all Covid-19 deaths up to Oct. 10, only 74 were of children under age 15. During the 2019-20 flu season, the CDC estimates, 434 children under 18 died of the flu. Yet we don’t shut down schools over the flu. This is from David R. Henderson and Ryan Sullivan, “End the School Shutdown,” Wall Street Journal, October 20 (print edition: October 21). 30 days from now, which is November 20 (the day before my 70th birthday),  I’ll post the whole thing. A friend on Facebook asked me about the issue of compulsory schooling. He knows I oppose compulsion. I don’t know my co-author’s view on that and I wanted to stick with issues we agree on. So I didn’t raise it. But my view is that any parents who want to keep their children out of school should be able to do so. I predict that this will be under 10 percent of parents. (1 COMMENTS)

You might not realize from EconLog or my academic work, but I love crafting and sharing stories.  Some are true, at least as far as memory serves.  I’ve told my kids hundreds of stories over the dinner table, most revolving around absurd events of my childhood.  I’ve also written a pile of fiction, mostly for my artisanal role-playing games.  I’ve explored almost every genre that’s game-worthy: high fantasy, superheroes, crime, dystopian, absurdist comedy, conspiracy, war, westerns, and even Bollywood.   And as you might guess from my Open Borders, I am also a huge fan of the graphic novel format.  Indeed, years earlier I wrote a fictional graphic novel, Amore Infernale; you can check out the storyboards here. Since Open Borders has done well, I’m now trying to get my earlier book illustrated and published.  Making the transition from non-fiction to fiction is, however, harder than it looks, so I’ve decided to simply find and hire an illustrator on my own.  My search process is quite involved, but years ago my friend Dave Hedengren sponsored an illustration contest for me, so I decided to do the same.  Overall, running my own illustration contest was a great experience.  Here’s what I learned along the way. 1. Many Western artists have a strong norm against contests.  Why?  As far as I can tell, critics deem contests “exploitative” because a lot of entrants work hard for zero pay. 2. You don’t have to be a free-market economist to see how absurd this norm is.  Most artists “work” for free anyway, because no one on Earth is ready to pay them for their efforts.  So why would it be bad to at least give such artists a chance to earn some money doing what they love?  Artists with good outside options can and will opt out.  Artists who really need the money or don’t love art that much can have a day job.  Contests are a good option for the artists who remain. 3. There’s a close analogy between contests and unpaid internships.  In both cases, workers who aren’t worth training at the minimum wage can practice their skills and make connections by working for free.  This in turn (a) tells people whether they’re cut out for the career they’re trying, and (b) paves the way to a better future. 4. Are opponents of contests (and unpaid internships, for that matter) deliberately trying to hobble the next generation of competition?  I doubt it; their complaints seem impulsive, not strategic.  When they say, “It’s not fair!” they’re blurting out their unschooled opinions, not crying crocodile tears. 5. My prize was $400 to draw pages 4, 5, 6, 7, and 8 of my storyboards.  For Western artists, this would be a modest payday even if they were sure to win, just $80 a page.  In the end, however, 53 artists tried their luck.  As the basic economics of immigration predicts, almost all of the entries were from developing countries.  Naive observers might assume that the internet has already integrated global art markets, but this is plainly not the case.  (Along the same lines, you might think that the internet would allow programmers to earn the same pay from any location on Earth, but Indian programmers get a huge pay increase if they reach the U.S.). 6. I was a little disappointed during the first two weeks of the contest.  No one even seemed to be trying to draw more than one or two pages.  But artists picked up the pace at the end.  On the last day of the contest, I had to choose between five great takes on all five pages. 7. Despite everything I’ve said, choosing the winner was painful for me.  I really did get invested in the artists’ dedication to their craft, as well as glimmers of their personal stories.  I spent more time visualizing the disappointment of the near-champions than the elation of the actual winner.  Running the contest make be feel like a boss – which made me start feeling responsible for everyone working for me.  Perhaps that shows that I’m not cut out to be a boss. 8. The winner of my contest is a promising young artist from the mountains of the Philippines, who works under the name Aljon Dave D. (or just “Dave”).  He’s a classy guy; just read his victory statement: 9. I’ve never tried self-publishing before, but since this is a work of fiction, I’m willing to give it a try.  Publisher certification must matter less when readers are looking for entertainment alone, rather than a mix of entertainment and truth.  If I do self-publish, Jason Brennan and Peter Jaworski’s work on commodification has inspired me to try to monetize this project to the hilt.  I won’t just sell autographed hard copies and ads; I’ll sell product placements, and auction off the chance to select the model for minor characters.  If you want the Mayor of Verona to look like you, I will make it happen. 10. My two favorite pages are below.  You can see Dave’s entire winning entry here, along with the rest of the competition.  The decision was tough, but Dave won me over with his creativity and the expressiveness of his characters.  I still haven’t settled on an illustrator for this project, but Dave is a prime contender. (0 COMMENTS)

  It has been commonplace lately to complain about censorship conducted by Twitter, Facebook, and YouTube. Here’s the problem: they can’t censor. What they can do, and do do, is prevent users from posting things. Do they have an agenda? Sure they do. And it often sucks. But that doesn’t mean that what they’re doing is censorship. George Washington University law professor Jonathan Turley, whom I respect a lot, writes: Xi’s coughs came to mind as Twitter and Facebook prevented Americans from being able to read the New York Post’s explosive allegations of influence-peddling by Hunter Biden through their sites. Notice how Turley misstates the issue to make his point. Twitter and Facebook did not prevent Americans from being able to read the New York Post. The New York Post has a presence on the web and people who are not particularly facile with the web, and that includes me, found it easily. Moreover, what Twitter didn’t take account of is the “Streisand Effect.” My guess is that even more people saw the Post article because of Twitter’s thumb on the scale. But even if the reference had been to something not on the web so that people would have had huge difficulty in finding it, that doesn’t mean that Twitter censored. I gave a talk at a Hillsdale College event in Omaha earlier this month and on the panel with me were Dr. Jay Bhattacharya and Dr. James Todaro. Both were excellent. Dr. Todaro was a last-minute replacement and a fine replacement he was. He laid out how he had smelled a rat in the Lancet study of hydroxychloroquine. That was the study that purported to show that hydoxychloroquine actually was unsafe (as opposed to ineffective) for people with COVID-19. He investigated and, lo and behold, found a rat. Lancet retracted the study. Dr. Todaro noted that after Elon Musk posted Todaro’s findings on Twitter, he had tens of millions of views. Then Twitter took it down. Dr. Todaro noted other similar incidents, specifically the Bakersfield doctors and the White Coat Summit. Both were on YouTube and YouTube took them down. Dr. Todaro said that this was censorship. Each speaker was given a minute to respond to the other speakers and I took my minute to take issue with Dr. Todaro’s claim. I granted that what happened sucked and that the social media decision makers who took these things down acted badly. But, I said, they weren’t censoring. Then I said: Hillsdale College did not invite a Marxist to be on this panel. Does anyone hear think that Hillsdale is censoring? No. Hillsdale is using its private property as it wishes. Moreover, if James is saying that he wants the government to step in to deal with this censorship, I can almost guarantee that he’ll like the result even less.   (2 COMMENTS)

. . . then you are not taxing who you think you are taxing. I was reminded of this point by a recent tweet I saw: Progressives tend to favor higher income tax rates on the rich.  I prefer a progressive consumption tax.  It might be worth noting that if the top rate of income tax were increased, President Trump still would have paid roughly $750 in income taxes in 2016.  In contrast, he probably would have paid much more in taxes with a progressive consumption tax, at least if his lifestyle is as lavish as has been reported. Just to be clear, I don’t believe that tax policy decisions should depend on how it impacts Trump—that would be absurd.  My point is that when people get outraged about what they see as a gross inequity, it’s important not to just lash out blindly, rather one should think clearly about who actually bears the burden of different types of taxes.  In general, it’s NOT the person (or company) that writes the check. There are technical problems with taxing consumption.  But there are often even bigger technical problems in taxing income, wealth and other alternatives.  For instance, there is the question, “Is X a consumer or an investment good?”  But the exact same dilemma crops up with income taxes.   (0 COMMENTS)

A Wall Street Journal story of last week, “The Verdict on Trump’s Economic Stewardship, Before Covid and After,” makes many good points. It also falls into some popular economic errors. Here is an obvious one: Trade itself turned out to be a drag on the economy. U.S. export growth slowed starting in 2018 as Mr. Trump’s tariff battles ramped up. The U.S. trade deficit, reflecting an excess of imports over exports, grew to $577 billion in 2019 from $481 billion in 2016. We are told that imports or a trade deficit necessarily constitute “a drag on the economy.” This elementary error stems from the misunderstanding of a national-accounting identity: GDP = C + I + G + X – M. This identity is often misunderstood as meaning that M (imports) constitutes a “drag” on GDP because it subtracts from GDP measured as the sum of personal consumption expenditures (C), gross private investment (I), government expenditures for goods and services (G), and exports (E). I have blamed the Wall Street Journal and other journalists before for repeating this myth: see my Regulation article, “Are Imports a Drag on the Economy,” Fall 2015. Perhaps one can find a serious economic argument to the effect that imports reduce GDP—although I and most economists since David Hume, Adam Smith, James Mill, or Jean-Baptiste Say don’t think so. But if such a serious argument exists, it is not that the trade deficit (X-M) subtract from GDP in an automatic, accounting, arithmetical manner as some people imagine is shown by the accounting identity above. The demonstration is simple. National statisticians (the Bureau of Economic Analysis in the United States), in one of their ways of measuring GDP (from the expenditure side), subtract M because it is already included in their measures for C, I, and G. Consumption expenditures, as measured in the national accounts (in the United States as elsewhere) already incorporate imported consumption goods; investment expenditures already incorporate imported capital goods; and government expenditures already incorporate imported goods and services (foreign consultants, for example). Why do statisticians subtract M? Because imports, by definition, are not part of GDP (gross domestic product) and must not be included in any measure of the latter. M cannot reduce the measure of GDP because it is not part of it. For another statement of my argument, see my “A Glaring Misuse of GDP,” Regulation, Winter 2016-2017. In still another Regulation article (“Peter Navarro’s Conversion,” Fall 2018), I summarize and illustrate the argument: Imports have to be removed because they are not part of GDP, which is gross domestic production. … Think about the guy on the scales who subtracts 1 lb. to factor in the weight of his shoes; his weight doesn’t change if instead he subtracts 2 pounds because on that day he is wearing heavier shoes. Likewise, American output doesn’t change because more imports are both added and subtracted. An economist with the Federal Reserve Bank of St. Louis, Scott Wolla also pointed out this misleading error: I reported on, and linked to, Wolla’s article in another Econlog post: “The St. Louis Fed on Imports and GDP,” September 6, 2018. Many former college students who took a macroeconomic class and glanced at the accounting identity GDP = C + I + G + X – M in a (perhaps not so good) macroeconomic textbook make the same error. The Wall Street Journal should not. (3 COMMENTS)