Simplistic summary of a long debate on paternalism:   Hard Paternalist: Government should force weak human beings to do what’s in their own best interest. Knee-Jerk Libertarian: No, that’s totalitarian. Soft Paternalist: Government should nudge weak human beings to do what’s in their own best interest. Thoughtful Libertarian: You define “nudges” so elastically that you still end up being pretty totalitarian.   Rizzo and Whitman’s Escaping Paternalism exemplifies the Thoughtful Libertarian position; indeed, as I’ve already said, they’ve probably written the best book on paternalism.  Only after the Book Club ended, though, did the following compromise position occur to me: Instead of using all means at its disposal to nudge people to do what’s in their own best interest, government should limit itself to using the welfare state to nudge its beneficiaries to do what’s in their own best interest. Let’s call this “Ward Paternalism” – paternalism limited to people who are dependents of the government.  For example, rather than give welfare recipients cash to spend, a Ward Paternalist might give them food stamps instead.  Why?  To nudge them into buying groceries instead of alcohol. Key point: Under Ward Paternalism, anyone who doesn’t want to be nudged can simply decline to become dependent on the government.  You can spend their own money your own way, no questions asked.  If, however, you ask taxpayers for help, the help comes with strings attached to encourage you to get your life in order.  He who pays the piper, calls the tune – and why shouldn’t the tune be, “Get your life in order”? Soft paternalists often call their position “libertarian paternalism.”  Ward Paternalism, however, better fits the label, because Ward Paternalism preserves the right of independent adults to do as they please.  The restrictions are limited to those who opt in by pleading inability to support themselves. Why, though, would anyone support Ward Paternalism?  Top two reasons: 1. While irresponsibility is not the sole cause of desperation, it is plainly a major cause.  The very fact that you’re asking for government help therefore raises serious doubts about your own prudence.  And it makes sense to focus paternalistic energy on you. 2. The standard moral constraint to leave others alone does not apply.  “Leave me alone, I don’t want your help” has great force.  “Help me, but don’t presume to tell me how to live my life” has little.   Before you dismiss it as an eccentric or arrogant position, notice that Ward Paternalism is already enshrined in a wide range of government programs.  Governments routinely redistribute in kind; they much prefer to hand out food, health care, schooling, or housing than cash.  Much of the reason, no doubt, is that governments want to make sure that children in poor families get food, health care, schooling, and housing even if their parents have other priorities.  The rest of the reason, though, is that governments are nudging the adults themselves to prioritize food, health care, schooling, and housing over alcohol, tobacco, drugs, and gambling.  The same goes for government pensions; you can’t start spending your retirement when you’re fifty, because the government wants to ensure that you won’t be starving on the streets when you’re seventy.  If an independent adult can fairly protest, “It’s my money and I’ll do what I want with it,” why can’t taxpayers just as fairly protest, “It’s our money and you’ll use it as we think best”? What about the slippery slope?  Rizzo and Whitman powerfully argue for its potency.  Yet in this case, we face multiple slopes.  If we scrupulously avoid the slope where government uses conditional redistribution to dictate our lifestyles, we expose ourselves to the slope where government hands out money like a drunken sailor.  And in any case, attaching endless strings to government money is a sneaky route to austerity, a policy program that deserves our full support.  If government nudges the people aggressively enough to inspire a massive wave of declarations of independence, so much the better. (2 COMMENTS)

One of my book reviews in the Fall issue of Regulation is about Philip Coggan’s More (The Economist, 2020) and has the same title as this post. In the article, I explain what my love and hate story is about: I am certainly not the only one to have a love–hate relationship with The Economist, the venerable magazine created in 1843 to defend free trade. At least over the past 10 years, the magazine seems to have become more tolerant of Leviathan, but it remains a source of serious information and it keeps me up to date on what intelligent social democrats think. I had the same feeling reading Philip Coggan’s new book … The fact that Coggan is a journalist at The Economist may have something to do with this. What I love in More’s book is explained in the review, and so is what I like less. “Hate,” of course, is used metaphorically, although the politicization of everything does generate confrontation, resentment, and, in the worst case, hate. The juxtaposition of love and hate seems to have originated in a love poem by the Roman poet Gallus Valerius Catullus (84-54 BC): I hate and I love. Why I do this, perhaps you ask. I know not, but I feel it happening and I am tortured. Odi et amo. Quare id faciam fortasse requiris.Nescio, sed fieri sentio et excrucior. Coggan’s book, subtitled “The World Economy from the Iron Age to the Information Age,” does not quote Latin poetry but it helps reflect on the economic adventure of mankind. (0 COMMENTS)

The Bureau of Labor Statistics data on employment and unemployment in September were released this morning. It’s not nearly as good news as in the last few months, of course, something you would expect as we get closer to full employment. But it’s good news nevertheless. The overall unemployment rate fell yet again, this time from 8.4 to 7.9 percent. That reflects two facts. The first one, which is good, is that employment increased by 275,000 between August and September. The second fact, which is bad, is that 695,000 people left the labor force. So the main driver of the lower unemployment rate was people leaving the labor force rather than people getting jobs. Beneath those aggregate data are two pieces of good sectoral news: sectors that were hit hardest earlier this year are recovering. Here’s the BLS: Employment in leisure and hospitality increased by 318,000 in September, with almost two-thirds of the gain occurring in food services and drinking places (+200,000). Despite job growth totaling 3.8 million over the last 5 months, employment in food services and drinking places is down by 2.3 million since February. Amusements, gambling, and recreation (+69,000) and accommodation (+51,000) also added jobs in September. Retail trade added 142,000 jobs over the month, with gains widespread in the industry.Clothing and clothing accessories stores (+40,000) accounted for about one-fourth of the over-the-month change in retail trade. Notable employment increases also occurred in general merchandise stores (+20,000), motor vehicle and parts dealers (+16,000), and health and personal care stores (+16,000). Employment in retail trade is 483,000 lower than in February. You might think that the big drop in the unemployment rate for black people and African Americans, from 13.0 percent to 12.1 percent, is wholly good news. What the data show, though, is that this group is treading water. 17.528 million black people and African Americans were employed in August, and 17.537 million were employed in September, an increase of over 9,000 people.   (0 COMMENTS)

There is such a thing as external reality, of which any moral ideal, political goal, or action must take due notice. The revelation today that POTUS has been infected by the coronavirus provides an example. One should want to preserve individual liberty during a pandemic or another natural or man-made catastrophe, but reality must still be acknowledged in a logically consistent way. Restraints to trade are like pandemics: it is important to understand how they work and what are the trade-offs involved. Trade wars are not “good, and easy to win,” as POTUS tweeted on March 2, 2018. An exception would be if “good” means good for special interests (such as domestic steel or washing machines manufacturers) and for the politicians’ interest. And they are not “easy to win,” as Adam Smith knew two and a half centuries ago, except if “winning” means exploiting the consumers of your own country and reducing prosperity. A ruler wants to reduce the trade deficit? He may try to restrain his subjects who want to import or he may try to subsidize those who want to exports, but economic realities, including the reactions of those bossed around, must be taken into account. Ignoring them leads to other results than those expected. In the Summer issue of Regulation, I analyzed the “Trump economy” up to December 31, 2019—that is, before the pandemic. The results of ignoring the economics of international trade were visible: Figure 7 above shows that the U.S. trade deficit on goods and services did not decrease between the last year of Obama’s presidency and 2019; in fact, it increased by 23%. If we consider only the trade deficit on goods, Trump’s preferred metric, that deficit increased by 16%. Moreover, the trade deficit in goods with China, which was his main target, decreased by a mere 0.5%. He has attacked the world trade system, regulated American exporters, and imposed tariffs on American consumers, all for a measly 0.5% reduction in a meaningless number. Of course, it is not because POTUS and FLOTUS have not been prudent enough that NOTUS (the Nth Lady of the United States or anybody else in America) must be coerced into doing or not doing something. Note also that, if the federal and state governments in the US did not interfere with the prices and the allocation of testing equipment and materials, there would be no shortage and NOTUS could get her test results within 24 hours just like people in the White House apparently do: like them, she, the humble NOTUS, would just have to pay the market-clearing price. In the current White House infection, let’s wish the best to POTUS, FLOTUS, and the others, but the pedagogical lessons of this event (as Rahm Emmanuel might say) must not go to waste. (0 COMMENTS)

In the standard Keynesian business cycle model, consumption is driven by changes in disposable income. This underlies the famous “multiplier” concept. But the Keynesian model doesn’t fit this particular business cycle (nor does the monetarist model.) The current condition of the US economy is very weird. Housing is booming and many retailers are doing OK. Meanwhile, many services that involve human interaction are still deeply depressed, and likely to remain so until there is a vaccine or cure (or herd immunity.) Fiscal stimulus can’t fix that, although I believe their is a humanitarian argument for additional unemployment compensation during an unusual crisis like this one. This graph shows the unusual and “unKeynesian” nature of the current business cycle: Those are supposed to be positively correlated.  Disposable income took another dive in August, but consumption actually increased.  The economy is not being held back by a lack of income.  Where people feel they can spend safely, they are doing so.  To get back to full employment we need to address the pandemic.  If we do so, the labor market will recover very quickly (assuming any sort of half decent monetary policy.) Today’s jobs report highlights the weird nature of this “business cycle”.  In October 2009, unemployment peaked at 10.0%.  It took 35 months for the unemployment rate to fall below 8%.  In July, the unemployment rate was 10.2%.  It took two months for the rate to fall below 8%.  And those two months were a period of severe “fiscal austerity” when Keynesian economists told us we could expect the recovery to stall. In fairness to the Keynesians, if the pandemic continues then I expect the unemployment rate to level off soon, as certain service sectors will remain severely depressed. Whatever you want to call this, it isn’t you granddad’s recession. PS.  I agree with Jim Bullard, whose views are discussed in an excellent Tim Duy post. (0 COMMENTS)

In the news this week was the release of a congressional probe into high drug prices, particularly for cancer medications. One of the prime exhibits in the hearings was the drug Revlimid, produced by Celgene. In one sequence, Representative Katie Porter (D-CA) held up a whiteboard showing the increase in the cost of one Revlimid pill from $215 in 2005 to $763 today. Accusations of price gouging and profiting from illness quickly followed. However, the story behind Revlimid and other drugs is a lot more complicated than “evil villain drug companies bankrupt suffering patients.”   I should know. I was on Revlimid for several months in early 2019, and I have dealt with other, similar drugs in my multiple myeloma treatment.   Revlimid is a derivative of thalidomide, the infamous anti-nausea drug that led to so many birth defects in the 1960s. In the early 2000s, Revlimid was found to be an effective treatment for multiple myeloma, and it, along with its cousin Pomalyst, is still taken by patients today. (Because of its history, male patients still have to take a monthly survey making sure we haven’t donated blood or sperm and that we are not having sex with a woman who can become pregnant). For some myeloma patients, Revlimid is part of their first-line treatment. Others, like me, who were candidates for a stem-cell transplant using our own stem cells, get a different combination early on, but use Revlimid as maintenance therapy following the transplant.  I was on Revlimid after my first set of post-transplant maintenance drugs stopped working. Unfortunately, the side effects of Revlimid were particularly bad for me and I had to stop using it after a couple of months. My experience with Revlimid and other high-priced anti-cancer drugs is relevant to the current policy debate.   The two most important things to remember about the prices of drugs like Revlimid are: 1) prices are much higher than they would otherwise be thanks to a variety of poor public policies, from intellectual property protections to our insane system of health insurance; and 2) very few patients pay the sticker price that Rep. Porter was discussing.  The list of policies that keep prices high is a long one, but it certainly starts with a third-party payer system in which demanders are not price conscious and suppliers have no incentive to be transparent about their real costs. When you throw on top of that the large role for Medicare as a third-party payer who does not have to turn a profit, it’s no surprise that prices for drugs and procedures are high. In the case of drugs, intellectual property laws that create patent protection and needlessly extend the time needed to produce cheaper generics are part of the problem, as is the prohibition on drug importation. The various reimbursement systems, both private and public, pay higher fees to medical professionals who use more expensive treatments. And the FDA’s overly cautious regulatory regime adds a great deal of cost to drug research and development. Enabling drugs to get to market more quickly would reduce those costs. In general, this is a market lacking in meaningful competition and prices thanks to poor public policies. The sticker prices of most drugs and medical procedures often mean very little as providers and insurance companies end up negotiating final prices that are below what appears on the first round bill. Beyond that, most patients pay neither the sticker price nor the negotiated price, including for drugs like Revlimid. One general point to keep in mind is that most cancer patients with insurance reach their deductibles and out of pocket maximums very quickly. If their plan has a health savings account, they are paying for those with pre-tax dollars and saving 30 or 40 percent right there.  Because Revlimid is an oral cancer treatment and not a chemotherapy infusion, it’s covered by the drug plan of those with insurance. Myeloma patients will tend to hit their drug maximums quickly too, which means that they face no co-pays for the drug for much of the year. Even so, the costs can be significant. One way that insurance companies are dealing with this is by creating medically integrated pharmacies. I get both of my current cancer drugs this way (one of which is the previously mentioned Pomalyst). It’s a pharmacy run by my insurance company, which enables them to negotiate directly with the manufacturer and creates incentives for the insurance company to keep the cost to the patient as low as possible. It also means that the insurer can combine the insurance, drug provision, and medical care. I cannot get my monthly Pomalyst without speaking to both an insurance representative and a pharmacist, both of whom have access to my complete medical record. This is one strategy that reduces the final cost to the patient and provides better care. And I get the drugs delivered either directly to the house or to my usual CVS location.  But the more important thing to know is that the drug manufacturers themselves offer substantial discounts directly to patients. With both Revlimid and my later use of Darzalex (an immunotherapy infusion), the manufacturers had “means-tested” discount programs that I was encouraged to apply for. Given our household income, which is well into the top 5%, I was skeptical that I would qualify, but I did in both cases. The discount program for Revlimid wiped out all but $25 of what would have been a co-pay of over $4900 on my first month’s supply of the drug. The manufacturer of Darzalex gave me a similar deal. If I qualified for this price cut, there aren’t going to be many people who don’t. It’s hard for me to accept arguments that the companies who developed drugs that have saved my life and who then make them available to me at a mere fraction of their sticker price are greedy SOBs who care little about cancer patients. My experience is backed up by medical data. A 2016 study reported that patients using specialty drugs like Revlimid experienced a median copay of $35. An earlier study in the Journal of Medical Economics concluded, after examining over 80,000 cancer drugs that when financial assistance was accounted for, the median copay was $80, and 91% of patients paid less than $100. In the same way that people who are horrified by the rising cost of college often forget that most students don’t pay the sticker price thanks to financial aid, those horrified by the largely meaningless sticker prices of cancer drugs need to understand that that overwhelming majority of people are not paying those prices. Finally, we need to engage in double-entry bookkeeping here. Even at the high prices some people do pay, these drugs have delivered incredible value. People like me have been given years of life they would not have had otherwise. The monthly Velcade shots I had in my first round of treatment were billed to insurance at over $9000 per injection, though the final cost was less. But if those shots kept me alive to be here writing this, that’s not irrelevant. More generally, if better drug treatments enable myeloma patients to avoid even more expensive in-patient hospital stays, they are saving money compared to a world without the drugs. If Revlimid keeps myeloma under control and prevents metastasis or makes broken bones less likely, it reduces hospitalization costs, and that must be accounted for in thinking through its full costs and benefits.    As is always the case in economics, we have to ask what the value is that we’re getting for the price we pay. There have been amazing advances in the treatment of multiple myeloma, from early drugs like Revlimid and Velcade through to the just approved Blenrep, the first anti-BCMA therapy that promises a whole new set of drugs for patients who have become unresponsive to standard treatments. None of this is cheap, but the longer, better lives it gives patients and their loved ones is of significant value.  When you combine the reality of what most patients pay with the benefits that these drugs deliver, it’s hard to vilify the people who have risked their reputations and their capital in developing them. Demagoguery, unlike developing cancer drugs, is cheap. And attacking drug companies is no less profitable for vote-seeking politicians than selling drugs is for Celgene and the rest. But that doesn’t mean that the story politicians are telling is an accurate one. There are plenty of problems with the way we pay for medical care in the US, many of which could be fixed by better public policy. Unfairly demonizing drug companies for what is largely a problem of poor policies and institutional incentives is not the way to get the constructive change we need.  (0 COMMENTS)

A former nurse at a U.S. Immigration and Customs Enforcement detention center has alleged that hysterectomies are being performed on detainees without informed consent. The problem of medical care within prison environments is always a difficult one, as it’s not clear that meaningful consent can ever be assured under such vulnerable conditions. (Does the prisoner fear punishment or worse if they don’t go along with the procedure?) Yet, denying potentially lifesaving medical interventions is also clearly an egregious abuse of power. The only clear solution to this problem is to take ten giant steps back on the process of incarcerating (or “detaining”) people who do not present an imminent threat to others, starting with those being held for nonviolent offenses. The possibility that detained women are being given unnecessary hysterectomies particularly raises the hackles because of the United States’ history of forced sterilizations. An estimated 70,000 people were sterilized in the United States between roughly 1907 and the mid-1980s. This was usually based on a determination that they were “diseased” in some way, including by being mentally or physically handicapped, and that therefore the powers that be were justified in preventing them from having children. Not surprisingly, racial and ethnic minorities, people living in poverty, and women deemed promiscuous were particular targets. The best book I know of on the policies and beliefs that enabled this disturbing practice is Thomas Leonard’s book on the history of eugenics, Illiberal Reformers: Race, Eugenics, and American Economics in the Progressive Era. Eugenics is often confused with Darwinism, but in fact is almost the opposite. Darwinian natural selection is a scientific theory that predicts that genetic traits that are more supportive of survival and reproduction than others will be more likely to be passed on. Eugenics is a political belief that as societies become wealthier, they will need to take an active role in discouraging the survival of “deficient” people in order to prevent the reproduction of mental and physical weaknesses. The view that eastern European ancestry was a genetic trait worth protecting was a shockingly popular motivation behind a great number of policy decisions in the early 20th century, including minimum wage (to disemploy minorities and lower classes), restrictions on women’s work (to prevent white women from working instead of raising children), and—most germane to this latest ICE scandal—immigration quotas and controls (designed to keep out people from Asia and the “undesirable” parts of Europe, including Italy, Poland, Hungary, Russia, Greece, and pretty much anywhere with a sizable Jewish population). And when I say eugenics was popular, I mean popular. Eugenics was a fashionable belief considered to be based on the latest science. U.S. Presidents (including Teddy Roosevelt, William Howard Taft, and Woodrow Wilson), Supreme Court Justices, prominent intellectuals, progressive activists, and industrialists alike believed in and even advocated for some form of eugenics. It was a matter that crossed the political aisle, uniting conservatives and progressives in a stunning display of illiberality. There are disturbing quotes throughout the book, but perhaps one of the most shocking comes from novelist D.H. Lawrence, who wrote in a personal letter, “If I had my way, I would build a lethal chamber as big as the Crystal Palace, with a military band  playing  softly,  and  a  Cinematograph  working  brightly,  and  then  I’d  go  out  in  back  streets  and  main  streets  and  bring  them  all  in,  all  the  sick,  the  halt,  and  the  maimed;  I  would lead them gently, and they would smile at me” (p. 114). Further, dissent wasn’t easy. Leonard recounts one geneticist having an offer to join the Harvard faculty pulled because he came out against eugenics (p. 111-12). The economist Irving Fisher compared denying the truth of eugenics to denying that the earth orbits the sun (p. 113). Notice that all these example are from just a few pages of Leonard’s book, which is slim but stuffed with evidence. The history of forced sterilization is a cautionary tale for so many reasons. But an underappreciated lesson to take from this episode in history is that even a comfortable, popular belief can over time come to be recognized as deeply flawed, even inhumane. Many otherwise intelligent people were carried away by bad science, bigotry, or a combination of the two. This is an important reminder of the fallibility of scientific consensus and the dangers of using science to justify social control. I can’t think of a single instance where the judgment of history came down on the side of those who were treating any group of people as less worthy of rights, dignity, and respect because the “science” said so. It’s unfortunately easy to neglect basic human rights in the area of immigration policy. People who are in a country but lack access to whatever rights and judicial protections otherwise enable people to defend themselves from political abuse are always vulnerable. This means that even if these hysterectomies are coming from a single bad actor, this is exactly the environment where we would expect that person to be able to do damage. In addition to Leonard’s book, here is another set of useful readings if you’d like to learn more about the history of eugenics. I would also highly recommend Sandra Peart and Daniel Levy’s Escape from Democracy: The Role of Experts and the Public in Economic Policy, in which the eugenics movement is offered as one of many examples of the disastrous results of expert-driven social control.     Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.   As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Next week, I’m touring Texas with my sons.  I’m speaking for Texas Tech’s Free Market Institute in Lubbock on October 5, and at San Angelo State’s Free Market Institute on October 6. Both events are in-person, and the Texas Tech event is, amazingly, open to the public!  (Though you do have to register).  If you come, please say hi.  And you can livestream from anywhere on Earth. My route takes me on a swath from Amarillo, the Palo Duro Canyon, Lubbock, San Angelo, Texas German country, San Antonio, and Austin.  Email me if you’d like to meet up, and maybe we can make something happen. (0 COMMENTS)

Daniel Johnson writes on our sister website, Law and Liberty, on David Hume and cancel culture. The University of Edinburgh “decided to rename the David Hume Tower, one of the best-known landmarks on its campus; it will henceforth be known as ‘40 George Square’.” The decision was taken because what Johnson calls “the fatal footnote – a brief sentence that to modern eyes seems unambiguously racist. His main argument is directed against Montesquieu’s claim that climate and other physical causes determine what we would call culture.” The key argument by Johnson is at the end of his piece: Was Hume more prejudiced than other thinkers of his day? Hardly: Voltaire and Kant, for example, were vicious anti-Semites. Or was he more complicit in the slave trade? No: Isaac Newton had been a large shareholder in the South Sea Company, which supplied slaves to Latin America. Hume’s compatriot, Scotland’s national poet Robert Burns, accepted a post as a slave overseer in Jamaica, though he was unable to take it up. These and many other luminaries of the Enlightenment turned a blind eye to slavery and made no secret of their ethnic or religious antipathies. Yet none of them has been ‘cancelled’—at least, not yet. Hume was unusual in only one respect: he confined his most odious prejudice to a single footnote. This is a point what makes Edinburgh’s decision so astonishing. Hume was a highly original thinker, whose originality has little to do with his argument over persons of color. In a sense, this was actually nothing original: for once, the great philosopher somewhat echoed the prejudices of his time. Plus, nobody is reading Hume for *that* message: you cannot picture a thinker who is less likely to become popular among white suprematists or fascists of any sort. Perhaps even more ironic is the fact that the new name of the building is strictly “geographical”: 40 George Square. But, as a Facebook friend of mine (alas I cannot remember whom!) pointed out, George Square is named after George III, whose reputation is not really that of a committed anti-racist. (0 COMMENTS)

For the past four decades, I’ve been complaining about the way the profession does empirical work on monetary policy. The studies often use “vector autoregressions” to estimate the impact of changes in the policy interest rate. Unfortunately, interest rates are not monetary policy. You can try to estimate the part of interest rate movements that are “exogenous” and hence reflective of monetary policy, but in practice this is almost impossible. So after four decades of VAR studies by the best and the brightest in the economics profession, where are we? Here’s the abstract to a promising new paper by Christian Wolf of Princeton University: I argue that the seemingly disparate findings of the recent empirical literature on monetary policy transmission are in fact all consistent with the same standard macro models. Weak sign restrictions, which suggest that contractionary monetary policy if anything boosts output, present as policy shocks what actually are expansionary demand and supply shocks. Classical zero restrictions are robust to such misidentification, but miss short-horizon effects. Two recent approaches – restrictions on Taylor rules and external instruments – instead work well. My findings suggest that empirical evidence is consistent with models in which the real effects of monetary policy are larger than commonly estimated. Many previous VAR studies have found monetary shocks to have relatively weak effects on the economy.  But these shocks tend to conflate reductions in interest rates with expansionary monetary policy.  In fact, in the vast majority of cases a decline in interest rates reflects slower growth in aggregate demand, not easier money.  So it’s no surprise that lower interest rates don’t seem to provide much of a boost to the economy.  Lower interest rates are not easier money: Sign restrictions, as in Uhlig (2005), are vulnerable to expansionary demand and supply shocks “masquerading” as contractionary monetary policy shocks, which then seemingly boost – rather than depress – output. . . . For monetary policy transmission, my results encouragingly suggest that, first, recent advances in identification effectively address the masquerading problem, and second, even small sets of macro observables may carry a lot of information about policy shocks. Viewed in this light, I conclude that existing empirical work quite consistently paints the picture of significant, medium-sized effects of monetary policy on the real economy. This “masquerading problem” is sometimes called the identification problem; it’s what happens when people engage in reasoning from a price change. After forty years, economists yet to develop a generally accepted VAR model of the monetary policy transmission mechanism.  Like fusion power, there’s a small chance that it may happen some day.  But there’s almost no chance I will live long enough to see this approach yield useful results.  The profession would be much better off switching to an approach that used NGDP growth expectations as the primary indicator of monetary policy shocks, and then develop models to estimate those expectations using real time data from asset markets.  Interest rates are not a useful variable when analyzing monetary policy. (0 COMMENTS)