Why do we like sad music or that poignant feeling that comes from attending a funeral? Author Susan Cain talks with EconTalk host Russ Roberts about her book Bittersweet and the seductive and sometimes deeply satisfying power of melancholy. The post Susan Cain on Bittersweet and the Happiness of Melancholy appeared first on Econlib.

  With SCOTUS, the Statistics Belie the Vibe by Ilya Shapiro, Shapiro’s Gavel, October 21, 2024. Excerpt: The court leans right, yes, but it’s no monolith, and it clips the wings of aggressive conservative litigators and lower-court judges alike. Indeed, last term, for the first time in living memory, the Supreme Court reversed the Texas-heavy Fifth Circuit more than the California-based Ninth Circuit. And in the previous term—which featured historic rulings on gun-rights and affirmative action—the justices least in the majority were Thomas and Alito. As the kids would say, statistics belie the vibe. Only 11 of the 58 opinions in argued cases last term resulted in “partisan” 6-3 splits and nearly half the decisions were unanimous. (The previous term saw only five “partisan” 6-3 votes and a similar rate of unanimity.) There were also five 5-4 rulings in five different configurations, in four of which the liberal trio held together.   The Remarkable Redneck Air Force of North Carolina by Eric Boehm, Reason, October 23, 2024. Excerpt: Less expected is the sight that has accompanied that sound in Swannanoa, North Carolina, for the past three weeks: Helicopters, many of them privately owned and operated, launching and landing from a makeshift helipad in the backyard of the local hog shop. According to the men who organized this private relief effort in the wake of devastating floods unleashed by the remnants of Hurricane Helene, more than a million pounds of goods—food, heavy equipment to clear roads, medical gear, blankets, heaters, tents, you name it—have been flown from here to dots all over the map of western North Carolina. “We’re not the government, and we’re here to help,” says one of the two men standing by the makeshift gate—a pair of orange traffic drums—that controls access to and from the Harley-Davidson dealership’s parking lot and the piles of donated items neatly organized within it. “We can do it quicker, we can do it efficiently, and we genuinely just want to help our neighbors.” He identifies himself only by his first name and later asks that I don’t use even that. It’s an understandable request, as what he’s doing is probably not, strictly speaking, totally legal. (italics mine) DRH comment: The quote that I italicized is obviously a riff on what Ronald Reagan famously said were the scariest 9 words in the English language: “I’m from the government, and I’m here to help.” (Parenthetical note: I miss Reagan.) And: The man largely responsible for organizing the Harley-Davidson airlift is a burly, bearded former Green Beret who goes by Adam Smith—yes, really. And finally: They weren’t the only ones who needed help. Smith’s day job these days is running Savage Freedoms Defense, a training and consulting firm, where he draws on his military experience to help prepare people to take care of themselves and their loved ones under difficult circumstances. Through that business and via connections with other retired special operations veterans in the area, Smith launched what’s been called a redneck air force to get supplies to flooded mountain towns. Smith owns motorcycles and knows people who work at the Harley-Davidson dealership. He also knew it would be a perfect spot for the group’s ad hoc operations: a big parking lot with a single entrance, and a large field out back where the helicopters have been landing. By the end of the first week, they had three civilian helicopters running missions, and it has only grown from there. In addition to food and supplies, the group has carried Starlink devices into places where internet and cell connections were down.   Draghi’s Dirigisme by Samuel Gregg, Law & Liberty, October 24, 2024. Excerpt: Entitled The Future of European Competitiveness, this 404-page document is remarkably candid about Europe’s economic troubles. Draghi acknowledges that Europe “is stuck in a static industrial structure,” increasingly devoid of innovation, unable to resist regulatory creep, weakening in capital markets, experiencing a demographic implosion, enduring accelerating energy prices, and losing some of its best entrepreneurs to America. Thousands of European businesses, reports Draghi, identify “regulatory obstacles and the administrative burden as their greatest challenge.” Then there is Europe’s sclerotic tech sector. “Only four of the world’s top 50 tech companies,” Draghi observes, “are European.” And: One would think that this state of affairs would itself suggest the solution: an aggressive deregulation of European economies at the national and EU levels. Alas, it is a sign of the dirigiste mindset’s iron grip upon wide swathes of the EU’s political class that Draghi’s proposed cure for fading competitiveness amounts to more political centralization and greater state intervention, the exact opposite of what is necessary to make EU economies more dynamic and fitted up for twenty-first-century challenges.   Illegitimate Attacks on the Court’s Legitimacy by John O. McGinnis, Law & Liberty, October 24, 2024. Excerpt: Critics also argue that Dobbs is unique because it represents the first time the Court has overturned a right on which many Americans relied. But this claim ignores history. The Court erased substantial economic liberties when it overruled Lochner v. New York and gutted constitutional protections for contracts in Home Building and Loan Ass’n v. Blaisdell, holding that the Contract Clause could be disregarded during economic emergencies—the very moment when such protections are most critical. These decisions eliminated rights that Americans had depended on, rights that were enshrined in the original constitutional framework. DRH comment: Very good point. I think he and I have a different understanding of rights, though. I don’t think anyone can eliminate a right; he or she can only fail to recognize it. For example, I have a right not to be a slave. If someone made me into a slave, he would abrogate my right, not eliminate it. (0 COMMENTS)

Mancur Olson once argued that Germany and Japan grew rapidly after WWII largely because a great deal of bureaucratic deadwood was removed by the war—allowing these defeated nations to rebuild with a more streamlined and efficient economic system.   A David Brooks column discusses this theory: In 1982, the economist Mancur Olson set out to explain a paradox. West Germany and Japan endured widespread devastation during World War II, yet in the years after the war both countries experienced miraculous economic growth. Britain, on the other hand, emerged victorious from the war, with its institutions more intact, and yet it immediately entered a period of slow economic growth that left it lagging other European democracies. What happened? In his book “The Rise and Decline of Nations,” Olson concluded that Germany and Japan enjoyed explosive growth precisely because their old arrangements had been disrupted. The devastation itself, and the forces of American occupation and reconstruction, dislodged the interest groups that had held back innovation. The old patterns that stifled experimentation were swept away. The disruption opened space for something new. There’s always a danger that these sorts of explanations are merely “just so stories”; intriguing ideas, but ultimately untestable. The Economist has an article entitled: “Why India should create dozens of new states“, which discusses the creation in 2014 of a new Indian state named Telangana.  Initially, people were pessimistic: It was the poorer part of the state from which it was carved out. Unlike other prosperous southern states, it is landlocked. It still has only one airport. With the exception of Hyderabad, it lacks any cities of size. Many foresaw economic difficulties, even unrest. The new government worked hard to make Telangana an attractive destination for investment by cutting red tape: Another advantage of new states is that they may have greater leeway to experiment. Upon creation, Telangana immediately set about making itself attractive to investors. Many Indian states eager to rise up ease-of-doing-business rankings promise “single-window clearance” for businesses to deal with the bureaucracy. But the process is still a painful mess, with multiple departments working to their own timelines. Telangana’s innovation was to do away with many requirements and promise approvals within 15 days. Such ideas were “only possible because we were a new state, and there was no legacy to pull you down”, says Jayesh Ranjan, a senior bureaucrat who was involved in drafting the policies. “Everything was a clean slate.” The phrase clean slate reminded me of the Mancur Olson hypothesis about the recovery of Germany and Japan.  So how have things been going in Telangana?  Was the outcome as disappointing as pundits expected?  Here’s The Economist: A decade ago the Union of India welcomed into the fold its newest member: the state of Telangana. Of India’s then 29 states, it ranked 12th by population, 11th by area and 10th by per-person income. One of those rankings has since changed dramatically. By last year Telangana had shot up to boast the highest per-person income of any decent-size state, behind only tiny Sikkim and Goa. This landlocked state is now richer than coastal states that contain important business hubs such as Mumbai, Bengaluru, Chennai and Ahmedabad. The Economist suggests that several other new Indian states also did a bit better after independence, but nowhere near as well as Telangana.  A clean state may be a necessary condition for radical reform, but it’s not a sufficient condition for successful reform. PS.  If you are as old as I am, you might recall these Indian cities by their previous names: Mumbai (Bombay), Bengaluru (Bangalore), Chennai (Madras) Here’s a picture of Telangana’s largest city—Hyderabad: (0 COMMENTS)

The socialist calculation debate is firmly located within economics. But a look at philosophy can shed light on the kind of insight Ludwig von Mises gave us, and thereby sharpen our understanding of socialism and its problems. It shows what we can know about socialism through conceptual analysis, and what such analysis cannot tell us. Philosophy makes clear that there are analytic truths, which describe that something is true by virtue of its meaning. To see what is analytically true, we need to engage in conceptual analysis, that is, to inquire into the concept and explore what it entails. Having done this, we can also look for implications of the concept. P implies q if it is impossible for p to be true and not q, viz., that q is not the case. So implications also show us what is necessarily true. But why all this fuss about analytic truths? They take on an exalted status because they are irrefutable and do not depend on empirical matters. Let’s turn to socialism, which is an economic system. An analysis of the concept of socialism reveals that it is the economic system in which there is collective ownership of the means of production, which is equivalent to a system in which the collective (or someone else for this collective) plans the use of these means of production, i.e. a planned economy. With this in mind, we can turn to prices. An analysis of the concept reveals that prices are exchange ratios (at least in the sense in which Mises understood the concept and considered it relevant). It follows that you cannot have prices (for the means of production) if you do not have exchange—for an exchange ratio only comes into being when exchange takes place. But if there is collective ownership, this implies that there can be no exchange, since exchange requires that there are at least two parties who each own some means of production. It follows that in socialism there can be no prices. For prices, to put the point positively, in terms of meaning, can only arise when people exchange, which requires that they have several property. Consequently, it is an analytical insight into socialism and prices that there can be no prices in a socialist system. There is nothing empirical or speculative about this insight. Rather, an abstract analysis demonstrates that there can be no prices in socialism. To the extent that my analysis is correct, it follows that this is not open to debate – all that would be possible is to show that I have made a mistake in my analysis of the concepts. But if my analysis is accurate, it provides a value-free and irrefutable insight into what socialism and prices are, and what follows. It is for this reason that Mises chided, among others, Karl Polanyi for his failure to see clearly what socialism is and for vacillating between a socialist and a syndicalist system. “The defect in [Polanyi’s] construction lies in the obscurity by which it seeks to avoid the core question: socialism or syndicalism?”, Mises wrote in response to Polanyi. However, having thus established that there can be no prices in socialism, it is necessary to examine the consequence of such a lack of prices. This is not, or at least not purely, an analytical question. The consequences of the necessary absence of prices for the means of production in a planned economy depend on empirical conditions or factors. This much was already clear to Mises in his 1920 paper. It would not be difficult for a farmer in economic isolation to come by a distinction between the expansion of pasture-farming and the development of activity in the hunting field. In such a case the processes of production involved are relatively short and the expense and income entailed can be easily gauged. But it is quite a different matter when … the conditions necessary for the success of the enterprises which are to be initiated are diverse, so that one cannot apply merely vague valuations, but requires rather more exact estimates and some judgment of the economic issues actually involved. For what else does his acknowledgment that in simple circumstances the absence of prices has no or at most only negligible impact mean? Clearly, then, we need to examine empirical circumstances in order to assess the consequences of the absence of prices. For this purpose, the analytical power of the insight that there are no prices is not enough.   Max Molden is a PhD student at the University of Hamburg. He has worked with European Students for Liberty and Prometheus – Das Freiheitsinstitut. He regularly publishes at Der Freydenker. (0 COMMENTS)

The universe, points out economist Noah Smith, is always trying to kill us, whether through asteroids hurtling through space or our every-few-hours hunger pains. Why, then, should we expect anything but a gravitational pull toward poverty? In this episode, Russ Roberts and Noah Smith reflect on films and TV shows that depict the “good old days-” nostalgia for the particular era of the 1950’s. They end with an exchange about various survival shows, including a Canadian show that was canceled as survival in late 1800’s farming life conditions was simply too challenging for the contestants. Why do people tend to idealize certain historical periods, and how does this affect current views on progress, technology, and economics? We hope you enjoy this exchange of ideas, descriptions and anecdotes about development. As always, your reactions are welcomed and encouraged.   1- Smith refers to poverty as the “elemental foe.” What does this metaphor suggest about the nature of poverty and survival as compared to other foes such as nuclear war or climate change?   2- “Industrial modernity” is described as a “system of technological edifices” that sustain modern standards of living. How did Adam Smith foresee this in his opening of Wealth of Nations about division of labor?    3- The paradox of labor-saving technologies reducing jobs while increasing productivity is an age old phenomenon.  As the discussion continues to evolve about the future of AI, what potential consequences of technological unemployment appear to be underrated or overrated? Why?   4- Both Roberts and Smith express curiosity about why the Industrial Revolution didn’t occur sooner, despite the availability of key technologies in earlier civilizations such as Rome, China, and Latin America. What are some potential explanations for why industrialization took so long, and how does the extent of the market, the institutions of the time, or other economic factors contribute to this delay?   5- Some argue that technological advancements can reduce resource consumption without the need for degrowth, while others believe degrowth is necessary to mitigate environmental harm. To what extent is there hope that Noah Smith’s concept of our “single team” effort in fighting for our future, a way that these two approaches can coexist effectively? (0 COMMENTS)

At the recent vice-presidential debate between Senator J.D. Vance and Governor Tim Walz, both leaders emphasized that families are America’s backbone. However, they erred in their approach by suggesting that more government involvement could solve families’ challenges. From expanding the child tax credit to advocating for new social programs, their solutions imply that the government can strengthen families. This is a dangerous misconception.  Instead of empowering families, government programs often create dependency and stifle personal responsibility. Families thrive when they can shape their futures, not when bureaucratic systems constrain them. Each time the government steps in with a new program or benefit, it diminishes that freedom, replacing it with control.  What begins as well-intentioned assistance often leads to dependence on the state. For example, the expansion of the child tax credit may appear to help families in the short term, but beneath the surface, it’s just another form of wealth redistribution. The government takes from some families to give to others, often with strings attached, reducing overall freedom and fostering a culture of dependency. As Milton Friedman often argued, there is no such thing as a free lunch. Every dollar spent on social programs must come from somewhere—from today’s taxpayers or, worse, future generations who will inherit the debt.  When politicians advocate for more government borrowing, they are not helping families; they are placing a financial burden on the very children they claim to support. These government interventions discourage self-reliance and erode the virtues that strengthen families, such as responsibility and initiative. The real solution to helping families is not more government intervention—it’s less.  Cutting government spending and reducing taxes allows families to keep more of their hard-earned money. When families control more of their income, they can make decisions that fit their unique needs, whether saving for a home, investing in their children’s education, or starting a small business.  Families are far better equipped to allocate resources than Washington bureaucrats. Moreover, reducing the size of government programs fosters independence. Work requirements, for instance, are essential to reducing welfare dependency. When individuals are encouraged to contribute to society through meaningful work, they regain a sense of dignity and self-worth—key elements for the stability and strength of the family unit.  Government handouts that lack work incentives trap individuals in cycles of poverty and dependency. Over time, these individuals lose the motivation to improve their circumstances, weakening the family structure. A critical area where this is evident is in criminal justice reform.  Too many fathers, particularly in minority communities, are imprisoned for non-violent offenses, leaving families without a primary breadwinner and creating emotional and financial strain. This is another case where excessive government intervention—in the form of overcriminalization—has done more harm than good.  Reforming the system to focus on rehabilitation and second chances would do far more to help struggling families than government welfare checks. Strong families depend on having responsible, present role models. Keeping families intact is essential to breaking the cycles of poverty that afflict so many communities. Rising living costs are another major issue for families, but government intervention often exacerbates this problem.  In housing, healthcare, and education, regulations and taxes inflate costs, making it harder for families to get by. For instance, restrictive zoning laws and excessive property taxes increase housing costs. Rather than creating new government programs to subsidize housing, a better approach would be eliminating these regulations and reducing the tax burden, allowing the free market to provide more affordable solutions.  The free market has a proven track record of reducing prices and increasing access, while government involvement often does the opposite. The government should protect individual rights and ensure a fair playing field, not interfere by redistributing wealth or attempting to manage the economy. Personal responsibility and economic freedom are key to prosperity. Families need the freedom to choose how to work, spend, and live their lives.  More government programs won’t strengthen families—freedom will. Politicians like Vance and Walz, though well-meaning, miss the broader point. Families don’t need more government programs; they need more freedom. This includes the freedom to work, to spend their money as they see fit, and to live without excessive regulation. By reducing the size of government, cutting taxes, and eliminating burdensome regulations, we give families the tools they need to succeed on their terms. The key to strengthening families is not expanding government but reducing its role. Families thrive when they have the freedom to make their own choices without the heavy hand of government dictating their lives. The best way to help families is to let them keep more of what they earn, remove the bureaucratic red tape that stifles opportunity, and foster a culture of personal responsibility. The freer families are to pursue their goals, the more prosperous society will become—not just for them but for the entire country.   Vance Ginn, Ph.D., is president of Ginn Economic Consulting, host of the Let People Prosper Show, and previously chief economist of the Trump White House’s OMB. Follow him on X.com at @VanceGinn. (0 COMMENTS)

  4. Econ Log EconLog, run by the Library of Economics and Liberty, includes various contributors sharing ideas on economic theory, public policy, and classical liberal views. This blog offers a place for lively debate and different opinions. (bold in original) This is from Anja Finegan, “The Top Economics Blogs to Follow in 2025,” inomics.com, October 7, 2024. Finegan lists 16. Being #4 isn’t bad. Thanks, Anja. (0 COMMENTS)

Most economists oppose price controls, especially those following a disaster or some other unexpected event (commonly called “anti price-gouging legislation”).  However, UMASS–Amherst economist Isabella Weber objects.  She tweets: “One of the problems with [the supply and demand diagram] is that it is missing a crucial dimension: time. When it comes to price gouging in emergencies, that’s a pretty big problem.”  This tweet has spawned numerous responses from various economists, most pointing out to her that the supply and demand model does take into account time: the x-axis is properly labeled “quantity per unit of time.” (My late, great PhD professor, Walter Williams, would deduct points from anyone who wrote the x-axis as just quantity).  Furthermore, both supply and demand become more elastic over time. These objections are correct, but I think they miss the claim that Weber is making as well as the larger, economic mistake she is making.  Weber is arguing that price controls do not have the negative effects of deadweight loss when the supply of a good is fixed and the timeline for it to become unfixed is long.  Let’s analyze her claim first on its own merits and then from a richer economic lens. Weber is approaching this problem from the perspective of Marshallian welfare economics where the performance of a market is judged by whether or not total surplus (the gains from trade to the producer plus the gains from trade to the consumer) is maximized.  Calculating these gains from trade is fairly easy: for the consumer, it is simply the difference between what a consumer is willing to pay for each unit consumed and what they have to pay for each unit consumed.  For the producer, the gains from trade are the difference between the price the seller receives for each good sold and what they are willing to sell for each good sold.  The total surplus (total gains from trade) are thus consumer surplus (consumer gains from trade) plus producer surplus (producer gains from trade).   Two very important things to note: 1) how much surplus is generated in the market depends on the quantity exchanged in the market.  If the quantity exchanged falls, total surplus will fall (and vice versa)  2) how surplus is distributed between consumers and producers depends on the price.  Generally speaking, a higher price implies lower consumer surplus and more producer surplus (all else held equal). From a strict, Marshallian welfare-economic perspective, Weber’s claim is correct.  When supply is fixed (i.e., perfectly inelastic) and there is no time to either increase supply or get the curve more elastic, then price gouging legislation will not result in deadweight loss.  Since the quantity does not change, putting a price ceiling simply shifts gains from trade from the producer to the consumer.  Total surplus in the market does not change; there is no deadweight loss since the quantity in the market does not change. However, from a broader, richer economic perspective, where we think about how people actually behave when faced with different choices, her point is incorrect.  Price controls will still lead to shortages as the quantity demanded exceeds the quantity supplied.  While there is no deadweight loss, the costs of those shortages still arise: queuing, hoarding, etc.  Furthermore, since the price being kept artificially low disincentivizes the supply curve from becoming elastic and/or growing, the costs of price ceilings persist longer than they would otherwise.  These are very real costs and, taking them into account, shows that even given fixed supply, price controls make everyone worse off. So, by comparison of these two states (price ceilings where producer surplus is transferred to the consumer but the consumer and producer bear much higher total costs over a longer period of time, or prices rise, consumer surplus is transferred to the producer, but these extra costs are not imposed), price ceilings still incur undesirable effects, especially so following a disaster. And there are many other possible objections as well.  In a conversation with me on Facebook, retired Texas Tech economist Michael Giberson pointed out that there is no particular economic justification to prefer consumers over producers in this (or any other) exchange.  Another is that there is no reason to think that the distribution of goods to the consumer will be any more “just.” Furthermore, as Kevin Corcoran recently reminded us, we want to avoid the one-stage thinking permeating Weber’s claim.  Price control legislation has long lasting effects by changing the incentives for suppliers against preparing for a disaster.  As economist Benjamin Zycher shows, price controls in wartime discourage producers from stockpiling war materiel in peacetime.  The same holds true for non-defense goods.  Stockpiling is costly; it takes away storage space from goods that can be more quickly sold.  For firms to stockpile, they need to have the expectation of higher prices in the future.  If they know they will not be able to charge higher prices in the future, then the cost of stockpiling will be higher than the benefits.  Firms will keep fewer goods on hand, so that when the disaster does strike, fewer goods will be available for the aftermath.  The best time to end price controls is before a disaster.  The second best time is now. In sum, Isabella Weber’s tweet is mathematically correct but economically incorrect.  It is internally consistent and logical, but contains no economics.  We must always look beyond just the model to the reality the model is simulating.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

Alex Tabarrok and Tyler Cowen are doing a series of podcasts on the economy of the 1970s. A few weeks back, I commented on one of their previous podcasts, which discussed the tricky problem of establishing causality for changes in inflation. Their most recent podcast discusses oil shocks and the business cycle, an area where causality is even harder to establish: TABARROK: Now, let’s talk about some puzzling economics because the price of oil goes up. War starts in October of 1973. The US goes into a recession in November of 1973. Unemployment doubles from 4.5 percent to 9 percent. Now, I think most of our listeners will say, “Well, what’s puzzling about that? Price of oil goes up and you go into a recession. That seems entirely normal.” Yet for economists, this is still quite puzzling because even though oil is obviously of relative importance, it’s not that big a feature of the economy, and there in fact are pretty sophisticated theorems, which say that if you have—this is Hulten’s theorem—if you have a shock to a sector of say 10 percent, something goes up, productivity goes down 10 percent, price goes up 10 percent or something like that, and that sector is a relatively large share of the economy, say 5 percent, then the effect on GDP should just be those two things multiplied together. Ten percent times 5 percent, which is just 0.5 percent on GDP.  COWEN: Those theorems are wrong, right?  TABARROK: Yes. The link between oil shocks and recessions seems pretty strong.  And yet, I’m not entirely sure that those theorems are wrong.  So how can we explain why recessions often follow oil shocks?  Here are two possibilities: 1. Induced monetary tightening (a nominal shock.) 2. Reallocation of resources (a real shock.) Oil shocks often occur at a time when the global economy is booming.  In many cases, this is preceded by excessively expansionary monetary policy.  In the short run, the oil shock makes the pre-existing inflation problem even worse. Monetary policymakers respond vigorously with tight money, slowing NGDP growth.  With less nominal GDP and sticky nominal wages, unemployment rises sharply.  I call this the musical chairs model of recessions. In this scenario, the actual cause of the recession is tight money, but the oil shock partly explains why policymakers make this mistake.  In a counterfactual scenario where NGDP keeps growing on trend, there is no significant recession after an oil shock. In reality, oil price shocks can have an impact beyond their indirect effect on monetary policy and NGDP growth. As Arnold Kling has emphasized, the public will respond to sharply rising oil prices by re-allocating consumption and production toward less energy intensive parts of the economy.  During the transition period, the unemployment rate may rise.  This is a real shock to the economy, which can affect employment even if monetary policy maintains steady growth in NGDP. How important is the real channel for oil price shocks?  Later in the podcast, Alex and Tyler provide some suggestive evidence provided by the Ukraine War: TABARROK: Yes. A lot of people, including German politicians, predicted that Germany would have to ration gas, that people would freeze to death, that the economy would go into a deep recession. In the end, the German economy adapted to a much lower supply of natural gas by using less and finding substitutes. The spot price of gas rose by a factor of more than eight at peak, but instead of price controls and rationing, the German government let the price rise, but they did protect German consumers with a lump sum transfer based upon the past use of natural gas. That meant everybody had an incentive to listen to the signal of the higher price of natural gas. In the end, the German economy rode out this massive decline in the quantity of natural gas. To me, this is a sign that maybe economists at least have learned some lessons. COWEN: I was shocked that went as well as it did. You may recall, I think it was Deutsche Bank forecast a major recession for Germany. I’m not sure they had a recession at all, but if they did, it was just a marginal recession, and they nailed it. Tyler’s memory is correct; Germany had only a very modest rise in unemployment, from 5% to 6%: Why were the pessimistic forecasts wrong?  Why did Germany experience such a small rise in unemployment?  Monetary policy in the Eurozone remained expansionary, allowing for a strong rise in NGDP: In contrast, large increases in unemployment such as 1980-82 are associated with tight money policies that sharply contract the rate of growth in NGDP. Non-economists tend to underestimate the extent to which free markets can find substitutes when one commodity becomes more scarce.  (Even economists may briefly forget the importance of substitutes, before coming to their senses later in a podcast.) One final point.  In previous posts, I’ve argued that the number of people with the talent to become a great artist or scientist far exceeds the number that actually achieve greatness, mostly because you must also be in the right place at the right time.  This conversation caught my eye: TABARROK: Many of these lessons, which we’ve been talking about in the 1970s, you can say the 1970s led to Milton Friedman. Milton Friedman became a much more important spokesperson, representative of Free to Choose, and so forth, but Milton Friedman’s been dead for some time. People forget. People forget Milton Friedman, and they forget what caused Milton Friedman to come into being, which is all of the mistakes which we made in the 1970s. COWEN: One of my takeaways is simply the 1970s was a great time to learn economics. The lessons were very visible. TABARROK: Yes. I would put it the following way. I think Milton Friedman was not the smartest economist ever. Maybe that’s Ken Arrow, but Milton Friedman was right on the greatest number of things. The reason he was right on the greatest number of things was that he was lucky enough to come to fruition at a time where we were doing everything wrong. COWEN: That’s right. A very astute observation.  Overall, a very insightful podcast. (0 COMMENTS)

The period from 1870 to 1910, which includes the Gilded Age and Progressive era, is depicted everywhere as one where there was rapid economic growth. This growth is commonly seen as rapidly and unevenly distributed with the poorest 90% enjoying far fewer improvements.  This popular conception is probably wrong because of the way we are using the existing data on inequality. In fact, inequality between the top 10% and bottom 90% of the income distribution in America most likely declined.  Let us look at that data. Right now, there are no actual estimates from 1871 to 1909. What there is an estimate in 1870 and another one for 1910.  The estimate for 1870 comes from the work of Peter Lindert and Jeffrey Williamson. They used what is known as a “social table.” This approach estimates income distribution by assigning average incomes to different social or occupational groups based on historical records, such as census data. It simultaneously provides total national income and income inequality.  That estimate is not disputed, and if anything, it probably understates inequality because of the problems of census underenumeration of the poor.  The estimate for 1910 is derived from the work of Thomas Piketty in his famed Capital in the 21st Century, and is not directly based on income data. Instead, he used tax records from 1917 to estimate the top 10% and data from 1913 for the top 1%, then backcasted these figures to 1910.  The problem is that the estimates that Piketty (and his co-author Emmanuel Saez) created for 1913 and 1917 are now known to massively overestimate inequality. In an article in the Economic Journal with Phil Magness, John Moore and Phillip Schlosser and in a companion article with Phil Magness in Economic Inquiry, we corrected for these errors. In fact, we showed that their entire series from 1917 to 1962 was flawed because of the way missing filers were treated, how net income was converted into adjusted gross income, and how they forgot that state and local governments (5% of the workforce with incomes well above the national average income) were not required to file federal taxes until 1938.   We also discovered that Piketty and his co-authors made an incorrect estimate of total income. They arbitrarily defined total income as 80% of personal income (as reported by national accounts) minus transfers. They justified this by claiming that “the ratio between total gross income reported on tax returns and personal income minus transfers in national accounts has been fairly stable since the late 1940s (around 75-80%).” However, according to their own datasheets, the actual average was 82.7%. While this difference may seem small, a higher proportion reduces the income shares of the rich. Using less arbitrary methods, we found a much larger denominator and, consequently, smaller income shares for the wealthiest groups. Overall, we found that the income share for the top 10% was 5 percentage points lower than that of Piketty for 1917. If one uses the exact same backcasting method as Piketty did in his book, you also get a lower share of total income going to the richest 10% of Americans. When this is then combined with the estimates of Lindert and Williamson for 1870, we see a significant decline in inequality as can be seen in the figure below.  This is rich in implications. Consider that economic growth, depending on the data series used, showed that Americans enjoyed income increases that averaged between 1.9% and 2.0% per annum between 1870 and 1910. By that point in history, never had such fast growth been observed. And when there had been growth that nearly matched that one, it was clearly marked by rising inequality.  Finding that the bottom 90% got a bigger part of the pie implies that the bottom 90% probably saw improvements that were larger than the average gains. Given the numbers I obtained, this means that the income of the poorest 90% increased between 2.0 and 2.2% every year.  This difference implies that a period often characterized as one of rising capital concentration and inequality was, in fact, not only the fastest and most sustained growth ever observed by that time but also the first in history where the poor saw their incomes grow faster than average, experiencing significant improvements in their standard of living.  Some contemporary writers of the 19th century noted that there were exceptional gains at the bottom of the income ladder. It seems we overlooked them, in part, because we relied on data that misled us, obscuring the real progress made by those at the lower end of the income  distribution which contemporaries saw with their own eyes.     Vincent Geloso is an Assistant Professor of Economics at George Mason University. (0 COMMENTS)