Whether the accusations of sexual harassment and racism levied against the World Economic Forum (WEF) are true or false, they teach some lessons. It is worth reading the investigation report of the Wall Street Journal (Shalini Ramachandran and Khadeeja Safdar, “Behind Davos, Claims of a Toxic Workplace,” WSJ, June 29, 2024) and its follow-up (“World Economic Forum Opens Board Probe of Workplace Culture,” July 19, 2024). To summarize the investigation report in the WSJ’s own terms: Under Schwab’s decadeslong oversight, the Forum has allowed to fester an atmosphere hostile to women and Black people in its own workplace, according to internal complaints, email exchanges and interviews with dozens of current and former Forum employees and other people familiar with the Forum’s practices. To the extent that the accusations are true, they will show how hypocritical men can violate the faddish DEI (diversity, equity, and inclusion) ideology they proclaim. To the extent that they are false, they will show how a groupist and victimization ideology can incite immoral or resentful employees to falsely accuse innocent individuals. One way or another, the WEF will have been hoisted by its own ideological petard. The World Economic Forum of Davos fame is “economic” only in the sense of being a cartel of business leaders, rent seekers, and politicos who, to summarize without nuances, generally want to use the coercive power of the state to swindle ordinary people. Its unifying idea seems to be that collective choices have absolute priority over individual choices and that its own shade of mushy statism is the one to be imposed. The organization jumps on any fad—one of them being DEI—that can contribute to increasing their standing and the power of their ideal rulers. Its founder and current chairman, Klaus Schwab and a co-author wrote, among other clichés (Klaus Schwab and Thierry Malleret, Covid-19: The Great Reset [Forum Publishing, 2020]): In the post-pandemic world, questions of fairness will come to the fore, ranging from stagnating real incomes for a fast majority to the redefinition of our social contracts. … We are now at a crossroads. One path will take us to a better world: more inclusive, more equitable and more respectful of Mother Nature. (To further illustrate their chameleonic mushiness, they even speak of “societal equality,” which feels  more scientific and serious than the standard “social equality,” apparently old-fashioned and perhaps too tainted by spontaneous-order connotations.) The Wall Street Journal investigation observes that The Forum has sometimes struggled to live up to ideals it preaches about promoting diversity, equity and inclusion. In 2020, for example, the WEF released Diversity, Equity and Inclusion 4.0: A Toolkit for Leaders to Accelerate Social Progress in the Future of Work. Its 2020-2021 annual report boasts about “embedding diversity, equity, inclusion and social justice,” boasting of its racial conscience: Over the past year, in the wake of the Black Lives Matter protests in the United States and around the world, the Forum also set up the Partnering for Racial Justice in Business initiative. Nearly 60 companies joined the alliance and pledged to take immediate action on racial justice in their own organization and to work together to drive systems change. Consider sexual harassment, which the zeitgeist of our time often confuses with non-vulgar and non-bullying compliments. As long as men and women work together, flirting innuendos and tensions cannot be avoided. Harassment and bullying are another matter. Just as economics prevents one from neglecting individual choices, classical liberalism promotes a culture of individual respect and dignity. Its positive and normative theoretical background is based on individual consent. It is more unlikely for a culture of individual contempt to develop when the individual is conceived as freely choosing or declining his acts of exchange and possessing a theoretical veto right over collective choices. The same applies to racial matters. If we believe the WSJ’s examples, WEF management seems to have better reacted to vulgar racism in its work environment. The organization is still likely be sued or perhaps prosecuted for private discrimination, which is consistent with its preference for government solutions to all problems. It is not difficult to conceive how, in an ideological environment of power-broking and disregard for individuals, discrimination based on mere group membership, a sequel of tribalism, would be more rampant than under a culture of individual dignity. Libertarianism and classical liberalism constitute the only political philosophy favorable to DEI in the sense of free Diversity, formal Equality, and Individualism, as opposed to forced and artificial diversity, arbitrary equalization, and authoritarian inclusion. The WEF stands on the latter side. (0 COMMENTS)

Whether the accusations of sexual harassment and racism levied against the World Economic Forum (WEF) are true or false, they teach some lessons. It is worth reading the investigation report of the Wall Street Journal (Shalini Ramachandran and Khadeeja Safdar, “Behind Davos, Claims of a Toxic Workplace,” WSJ, June 29, 2024) and its follow-up (“World Economic Forum Opens Board Probe of Workplace Culture,” July 19, 2024). To summarize the investigation report in the WSJ’s own terms: Under Schwab’s decadeslong oversight, the Forum has allowed to fester an atmosphere hostile to women and Black people in its own workplace, according to internal complaints, email exchanges and interviews with dozens of current and former Forum employees and other people familiar with the Forum’s practices. To the extent that the accusations are true, they will show how hypocritical men can violate the faddish DEI (diversity, equity, and inclusion) ideology they proclaim. To the extent that they are false, they will show how a groupist and victimization ideology can incite immoral or resentful employees to falsely accuse innocent individuals. One way or another, the WEF will have been hoisted by its own ideological petard. The World Economic Forum of Davos fame is “economic” only in the sense of being a cartel of business leaders, rent seekers, and politicos who, to summarize roughly, want to use the coercive power of the state to swindle ordinary people. Its unifying idea seems to be that collective choices have absolute priority over individual choices and that its own shade of mushy statism is the one to be imposed. The organization jumps on any fad—one of them being DEI—that can contribute to increasing its standing and the power of its ideal rulers. Its founder and current chairman, Klaus Schwab, and a co-author wrote, among other clichés (Klaus Schwab and Thierry Malleret, Covid-19: The Great Reset [Forum Publishing, 2020]): In the post-pandemic world, questions of fairness will come to the fore, ranging from stagnating real incomes for a vast majority to the redefinition of our social contracts. … We are now at a crossroads. One path will take us to a better world: more inclusive, more equitable and more respectful of Mother Nature. (To further illustrate their chameleonic mushiness, they even speak of “societal equality,” which feels  more scientific and serious than the standard “social equality,” apparently old-fashioned and perhaps too tainted by spontaneous-order connotations.) The Wall Street Journal investigation observes that The Forum has sometimes struggled to live up to ideals it preaches about promoting diversity, equity and inclusion. In 2020, for example, the WEF released Diversity, Equity and Inclusion 4.0: A Toolkit for Leaders to Accelerate Social Progress in the Future of Work. Its 2020-2021 annual report boasts about “embedding diversity, equity, inclusion and social justice,” boasting of its racial conscience: Over the past year, in the wake of the Black Lives Matter protests in the United States and around the world, the Forum also set up the Partnering for Racial Justice in Business initiative. Nearly 60 companies joined the alliance and pledged to take immediate action on racial justice in their own organization and to work together to drive systems change. Consider sexual harassment, which the zeitgeist of our time often confuses with non-vulgar and non-bullying compliments. As long as men and women work together, flirting innuendos and tensions cannot be avoided. Harassment and bullying are another matter. Just as economics prevents one from neglecting individual choices, classical liberalism promotes a culture of individual respect and dignity. Its positive and normative theoretical background is based on individual consent. It is more unlikely for a culture of individual contempt to develop when the individual is conceived as freely choosing his acts of exchange and possessing a theoretical veto right over collective choices. The same applies to racial matters. If we believe the WSJ’s examples, WEF management seems to have better reacted to vulgar racism in its work environment. The organization is still likely be sued or perhaps prosecuted for private discrimination, which is consistent with its preference for government solutions to all problems. It is not difficult to conceive how, in an ideological environment of power-broking and disregard for individuals, discrimination based on mere group membership, a sequel of tribalism, would be more rampant than under a culture of individual dignity. Libertarianism and classical liberalism constitute the only political philosophy favorable to DEI in the sense of free Diversity, formal Equality, and Individualism, as opposed to forced and artificial diversity, arbitrary equalization, and authoritarian inclusion. The WEF stands on the latter side. (0 COMMENTS)

Let’s go ahead and get this out of the way: nothing will ever be “adequately funded.” In pretty much any circumstance, someone somewhere will have at least some idea of what else they could do with an extra dollar or two. The fact that they have to forsake something because they have limited resources means that, in their eyes, the problem is simply that the world is not “adequately funding” whatever initiative we think is important. There is a subtle social danger here: it is easy, therefore, to think that social problems are not because we face unavoidable trade-offs but because bad people out there have the wrong values and are thwarting the march of justice, prosperity, and equality for likely venal reasons. You’ve heard that a task tends to expand to fill the allotted time. The same is true of budgets and spending: a project expands to fill the resources allotted to it, and it is easy from that point to say, “if only we had more resources.” We see this in public policy all the time. Bad roads? They need more funding. Lousy schools? More funding. Illness? Funding again. There are a couple of problems, though. Roads and schools could always be better. People could always be healthier. Blaming problems on inadequate funding stubbornly refuses to acknowledge that trade-offs exist and are inevitable. When someone says they have “inadequate funding,” what they really mean is, “I could do a little more of what I find important if I had a little more money.” There are three problems. First, people can always do something with a little more money, even if they’re just insuring against a future calamity by adding it to a rainy-day fund. Second, funds for one thing can’t be used for another, and since we don’t have infinite resources, we have to make hard choices about when to say “yes” and when we say “no.” Third, even when a cause is adequately funded–or at least funded well enough to win a particular crusade, it usually doesn’t dissolve but moves on to a different crusade because we look harder to find the chaff among steadily-growing piles of wheat. A former colleague used to say, “the older I get, the better I was.” It’s easy and tempting to think there was once a golden age when we did things the right way. There are a few things wrong with this way of thinking. First, it’s simply false to think we’ve shortchanged things like education. Inflation-adjusted spending on K-12 education was 280% higher in 2020 than it was in 1960. The idea that education is being “de-funded” is simply false. Second, golden ages can be deceiving because of politicians’ incentives. When you’re spending future generations’ money and you know you will have moved on by the time the bill comes due, it’s easy to spend lavishly on public services and delay unremarkable things like maintenance. By the time the bill comes due, you’ve advanced in your career, and some other schmuck has been stuck with the bill. We shouldn’t blame problems on “inadequate funding.” Nothing will ever be “adequately” funded if we can think of something else to do with the next dollar–and people will always be able to think of something else to do with the next dollar.   Art Carden is Professor of Economics & Medical Properties Trust Fellow at Samford University. (0 COMMENTS)

  This is the second of my series of posts on Jonathan Lipow’s 2023 book, Pubic Policy for Progressives. In “Economics without Apology,” a subsection of Chapter 1, Jonathan addresses his concern about progressives rejecting economics, writing: Now, lamentably, many progressives regard economics with great suspicion.  Indeed, instinctual hostility towards economics is a textbook example of the Left’s tendency to take automatic positions without reference to either basic moral principles or scientific evidence.  For example, many progressives believe that Adam Smith, the founder of the field that later came to be known as economics, invented capitalism or justified its excesses.  This is simply untrue.  Smith’s seminal contribution, The Wealth of Nations, described the systemic features of the capitalist institutions that were already emerging a hundred years earlier to replace the feudal order in Europe, and analyzed both their virtues and vices.  And far from preaching that greed is “good,” Smith, in The Theory of Moral Sentiments – the book that laid the intellectual foundation upon which Wealth of Nations was built – strongly associated “good” with social solidarity and concern for the plight of others. He then follows with one of my favorite quotes from The Theory of Moral Sentiments: How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. He also gets the origin of the term “Dismal Science” right: The early economists pressed for freedom of religion and conscience, argued for women’s rights, and, above all, took an uncompromising stand hostile to the institution of slavery.  All this long before any of it was fashionable with the cool kids.  In fact, the reason why economics is often called “the Dismal Science” is that early economists had a bad habit of ruining dinner parties by lecturing the other guests about the profound evil of forced servitude. The nickname was actually coined by Thomas Carlyle, who was trying to delegitimize economists opposed to his “visionary” proposal to reintroduce slavery to the United Kingdom. I’m not sure about the “dinner parties” part but he correctly identifies the originator of the term and Carlyle’s reason for coining the term.   (0 COMMENTS)

In recent years, I’ve become depressed by the state of research in macroeconomics. I find many new research papers to be almost unreadable. Perhaps this reflects the fact that my own work is increasingly outside the mainstream. Thus I was very pleasantly surprised to see a new paper by Tom Holden that embraces many of the themes that I have been emphasizing.  Even better, the paper is extremely well written (unusual for a macro theory paper) and is forthcoming in the highly prestigious journal Econometrica. Before discussing Holden’s paper, let me be clear that I’m not suggesting that he necessarily agrees with my overall view of macro. He uses more of a New Keynesian approach whereas I am a monetarist, and he advocates inflation targeting while I prefer NGDP targeting. But on a number of important points we end up in the same place, even if we arrive there by different routes. Consider the following claims, which sound vaguely monetarist: In this model, only monetary policy shocks affect inflation. Of course, if there is a nominal rigidity in the model, monetary shocks may have an impact on real variables. But as long as the central bank follows a rule like this, these real disruptions have no feedback to inflation. Causation runs from inflation to real variables, not the other way round. We can understand inflation without worrying about the rest of the economy . . .  This is consistent with causation only running from inflation to the output gap, not in the opposite direction.  Likewise, Miranda-Agrippino & Ricco (2021) find that a contractionary monetary policy shock causes an immediate fall in the price level, while impacts on unemployment materialise more slowly. Again, this suggests that causation runs from inflation to unemployment, not the other way round. In the traditional Keynesian model, causation runs from real shocks (more physical purchases and more hiring) to nominal outcomes (higher wages/prices.)  Milton Friedman saw causation running from nominal shocks (money and inflation) to real effects (more jobs and output).  Both views of causation are consistent with the correlations observed in Phillips Curve studies, but the monetarist interpretation tends to nudge people more toward monetary policy as the key stabilization tool. Here is Holden’s policy proposal for stabilizing inflation: Unlike with previous Taylor Rule proposals, Holden envisions deriving the real interest rate from inflation-indexed bonds, i.e. “TIPS”.  In the past, I’ve argued that economists focus too much on the public’s inflation expectations, and that the key to successful monetary policy is stabilizing the expectations of financial market participants.  Here’s Holden: The only expectations that matter are the expectations of participants in the markets for nominal and real bonds. It is much more reasonable to assume financial markets lead to prices consistent with rational expectations than to assume rationality of households more generally. This is all music to my ears.  Here’s another gem: Real rate rules also have a second source of robustness: they do not require an aggregate Phillips curve to hold. The slope of the Phillips curve can have no impact on the dynamics of inflation. If a central bank is unconcerned with output, they do not even need to know if the Phillips curve holds, let alone its slope. Nor does it matter how firms form inflation expectations. The Fisher equation and the monetary rule pin down inflation, so while non-rational firm expectations could affect output fluctuations, they will not alter inflation dynamics. I’ve also argued against using the Phillips Curve in monetary policy.  I favor stabilizing market expectations of NGDP, while Holden is proposing the stabilization of market inflation expectations, but the underlying approach is the same—stabilize market expectations of a nominal macro goal variable.  Don’t try to manipulate the Phillips Curve. I’ve emphasized that any successful monetary policy regime leads to almost complete monetary offset of other demand side factors, such as tax cut-financed fiscal stimulus.  Holden goes even further with monetary offset, as he is proposing an inflation target.  So his proposed policy rule also offsets supply side influences on inflation, although he later argues (correctly) that policymakers may wish to adjust their target when there are supply shocks. In my own work, I’ve strongly criticized the view that monetary policy works by changing interest rates, at least in the Keynesian sense of impacting the economy through changes in both nominal and real interest rates.  I’ve created various thought experiments where prices are flexible and the effects of monetary policy on nominal aggregates cannot possibly derive from changes in real interest rates.  Holden makes a similar claim: An even more fundamental question of monetary economics is “how does monetary policy work?”. The traditional answer involves movements in nominal rates leading to movements in real rates, due to sticky prices. But this cannot be the transmission mechanism under flexible prices, as then real rates are exogenous. Nor too can it be the transmission mechanism under a real rate rule, as then real rate movements are irrelevant. In these cases, monetary policy works exclusively through the Fisher equation’s link between nominal rates and expected inflation. Since we will see that dynamics under a real rate rule are qualitatively so similar to dynamics under a traditional rule, it would be surprising if monetary policy worked by a fundamentally different channel under a traditional rule. Instead, this suggests that the main channel of monetary policy in New Keynesian models is the one also present even under flexible prices, via the Fisher equation. Rupert & Šustek (2019) draw the same conclusion based on the observation that contractionary (positive) monetary shocks can lower real rates in New Keynesian models with capital. I have argued that a contractionary monetary shock actually lowered real interest rates in 2008, but it also lowered NGDP—creating a severe recession.  During the 1980s, a number of economists including Earl Thompson, Robert Hall, David Glasner, Robert Hetzel and myself proposed policies that would effectively target the financial market forecast of inflation or (in my case) NGDP growth.  Holden suggests that his real rate rule is in that tradition: Additionally, in older work, Hetzel (1990) proposes using the spread between nominal and real bonds to guide monetary policy, and Dowd (1994) proposes targeting the price of futures contracts on the price level. This has a similar flavour to a real rate rule, as these rules effectively use expected inflation as the instrument of monetary policy. Forecast targeting has also been proposed by Hall & Mankiw (1994) and Svensson (1997), amongst others. In the past, I’ve suggested that the Fed’s interest rate target should be adjusted daily, not every 6 weeks.  Here’s Holden: Note that while under conventional monetary policy, nominal interest rates are approximately constant between monetary policy committee meetings, this may not be the case here. . . . the central bank’s trading desk could have to continuously tweak the level of [interest rates] . . . While this is a departure from current operating procedures, there is no reason why holding [TIPS spreads] approximately constant should be any harder than holding [interest rates] approximately constant. This is thanks to the real-time observability of [real interest rates] via inflation-protected bonds. I’ve argued that central banks should determine the strategy of monetary policy (i.e. whether to target prices or NGDP, and whether to target levels or growth rates), whereas market expectations should be used to actually implement the policy.  Holden concludes his paper with a similar observation: We have presented a design for the practical implementation of a real rate rule with a time-varying short-term inflation target. Under this proposal, central bank boards keep the crucial role of choosing the desired path of inflation. Only the technical decision of how to set rates to hit that path is delegated to the rule. The rule embeds no politically sensitive views about the slope of the Phillips curve or the costs of inflation. And the rule can be implemented using assets for which there is already a liquid market: either nominal and real long-maturity bonds, or inflation swaps. In my recent book, I steered clear of the issue of “indeterminacy” (i.e. multiple possible equilibria), which is an issue where I don’t have expertise.  Based on what I have read, however, it seems to be a bigger problem with interest rate targeting than with monetary regimes that stabilize a price, such as the gold standard or a fixed exchange rate regime.  I suspect that indeterminacy is less of a problem with a real rate rule because TIPS spreads are analogous to a CPI futures contract, and hence stabilizing TIPS spreads is akin to targeting the price of a CPI futures contract.  A gold standard avoids indeterminacy because gold prices are visible and controllable in real time.  The same is true of CPI futures contract prices.  If this is inaccurate, please correct me in the comment section. Although I favor NGDP targeting, I believe Holden is wise to frame his proposal as an inflation-targeting regime.  Unlike with NGDP expectations, we already have deep and liquid TIPS markets, and real world central banks have opted for inflation targeting over NGDP targeting.  Framing the proposal as an inflation-targeting regime is the best way of moving real world policymakers toward the broader goal of targeting market expectations of the goal variable.  (0 COMMENTS)

In a recent interview with Tyler Cowen, Nobel Prize winning economist Joseph Stiglitz stated his opposition to housing deregulation: One person’s freedom is another person’s unfreedom. That means that what I can do . . . I talk about freedom as what somebody could do, his opportunity set, his choices that he could make. And when one person exerts an externality on another by exerting his freedom, he’s constraining the freedom of others. If you have unfettered building — for instance, you don’t have any zoning — you can have a building as high as you want. The problem is that your high building deprives another building of light. There may be noise. Stiglitz is no doubt right that increased construction creates negative externalities. But he’s wrong to suggest that this settles the matter. For one, increased construction creates positive externalities that likely exceed the negative ones. Increasing the supply of housing makes it easier for workers to move to better jobs, which accelerates economic growth. And denser cities reduce the need for cars, which in turn reduces carbon emissions. But another reply to Stiglitz spotlights a point that’s often overlooked in discussions of negative externalities—sometimes you have the right to create them. Take a simple case inspired by the philosopher Robert Nozick. Carl proposes marriage to the love of his life, Alice. While Alice is mulling it over, Bob proposes and Alice accepts. Crucially, Alice would have accepted Carl’s proposal were it not for the one made by Bob. So Carl lives out the rest of his life alone and miserable thanks to Bob. Bob’s proposal to Alice, then, creates a grave negative externality. Indeed, the harm that Carl suffers is far worse than the harm suffered by those whose view is blocked by a freshly built high-rise. Still, Bob has the right to marry Alice even though doing so harms Carl. In short, he has the right to propose marriage and Alice has the right to accept. Moreover, Carl does not have a right that Alice accept his marriage proposal. So while the outcome is regrettable for Carl, he has no grounds for interfering with it because no one’s rights were violated.  In the same vein, the mere fact that a new high-rise makes a resident worse off doesn’t justify blocking its construction. To sort out that question we’d need to sort out the relevant rights claims. Assuming that the property used to build the high-rise has been acquired justly, then its construction is at least presumptively permissible. The developer has the right to use her property as she sees fit, including using it to build something tall. Of course, not everything you might do with your property is permissible. You can’t use your baseball bat to kneecap the opposing pitcher. But that’s because the pitcher has a right of bodily autonomy that protects his knees from being smashed.  Is there a similar right in the case of building that could void the developer’s property rights? I’m skeptical. At first blush, the best candidate is something like a right to not have a desirable view be obstructed. Unfortunately for the opponent of housing deregulation, this sort of right simply doesn’t seem plausible.  To see why, suppose you adore the sight of my hair. Suddenly I decide to start wearing a hat. I’ve obstructed a view that you find desirable, but clearly you have no right to stop me from doing so. At the very least, the idea that you have a right to an unobstructed view needs some refinement. Maybe idea can be salvaged by restricting it to cases of severe harm. Plausibly, the harm you suffer from an obstructed view of the sunset is greater than the harm you suffer from an obstructed view of my hair. But the severity of the negative externality alone isn’t enough to show that someone isn’t within their rights to impose it. The harm Carl suffers as a result of Bob’s marriage proposal is greater than he harm he suffers as a result of a new high-rise. Since Bob may propose to Alice, it seems as though he may also build a high-rise near Carl. After all, it would be strange to allow Bob to impose the more harmful negative externality (a life of solitude and misery for Carl) but not the less harmful negative externality (an obstructed view of the sunset for Carl). Or imagine that Carl owns a small bookstore and Bob moves in next door with a Barnes & Noble. Bob might end up running Carl out of business, but he’s still allowed to do it. The broader point is that an actor may be free to act even in cases where the action creates a negative externality. At most, the presence of a negative externality starts a conversation, but it doesn’t end it.   Christopher Freiman is a Professor of General Business in the John Chambers College of Business and Economics at West Virginia University. (0 COMMENTS)

    At its core, the Woke are building a movement that subverts the Left and renders it impotent in the face of its very real theocratic and fascist enemies.  It sets male against female, straight and cis-gendered against queer, Black against white, and the working class against the intelligentsia.  It debases science with various offshoots of the meaningless pseudo-science known as “critical theory” – a field so rigorous that one of its leading journals published a (fabricated) paper that purported to chronicle endemic rape culture…at a dog park.[1]  Above all, however, the Woke teach young and idealistic students that they should seek refuge in “safe places” rather than learn how to overcome their fears…and their enemies. It is almost as if our enemies invented this thing. [1] Lindsay, James, Peter Boghassian, and Helen Pluckrose. “Academic Grievance Studies and the Corruption of Scholarship.” Areo, 10 February 2018. This is from Jonathan Lipow, Public Policy for Progressives, 2023. Jonathan is a professor of economics at the Naval Postgraduate School. He’s in a different part of the university than the one I was in but we interacted as colleagues for many years. Jonathan is a progressive and he wants to talk to other progressives who he thinks, correctly, need to hear his economic message. Jonathan and I don’t agree on everything, of course. Remember that he’s a progressive. But we agree on a number of things. In the next week or so, I’ll have a few more posts about content in his book. Here’s one more excerpt, with my brief commentary, for now: Yet, as we shall see, logic and evidence strongly suggest that some policies currently popular among American leftists are indeed literally ridiculous, such as opposition to charter schools and nuclear energy.  Meanwhile, other policies widely advocated by progressives – such as a $15 minimum wage – are not silly, but large bodies of evidence suggest that they are ineffective and essentially a waste of time.  [DRH note: I wish they were just a waste of time rather than a policy that makes it more difficult for young unskilled workers to get on the first rung of the economic ladder.] On the other hand, readers might be pleased to know that progressives’ instinctual support for universal health insurance [DRH note: hmmm] and liberal immigration policies [DRH note: yes] are well supported by both logic and evidence. More to follow. Postscript: Here’s a post I did in 2016 about a previous book by Jonathan in which he said nice things about me: he did so to argue that my libertarian views wouldn’t work in the world nearly as well as I thought they would.   (0 COMMENTS)

There are credible theories, bolstered by the public choice analysis of bureaucracy, that the administrative state is economically inefficient and politically dangerous—“politically dangerous” meaning a risk of growing or feeding Leviathan. (For an overview, see Gordon Tullock, Bureaucracy, Liberty Fund, Inc., 2004]; and Dennis C. Mueller, Perspectives on Public Choice [Cambridge University Press, 1997].) At the opposite end of the democratic power spectrum stands the political state or politicians’ state, where elected officials can overrule the state bureaucracy at will. Many critics of the administrative state, even when they make good points, often ignore the drawbacks of the politicians’ state (see for of “Philip Hamburger on the Threats of the Administrative State,” a Future of Liberty podcast with host Mitch Daniels). If we can think of the administrative state as equivalent to the “administrative despotism” that Alexis de Tocqueville described in Democracy in America (Chapter 6 of Volume 4), the politicians’ state is not without resemblance to the whimsical aspect of the French political scientist’s description of ancient and arbitrary tyranny.  Although I did not always think so, the whimsical tyranny of the politicians’ state is at least as bad for liberty and prosperity as the administrative state’s despotism. This is exemplified by a fact revealed in the prosecution and trial of Senator Sen. Bob Menendez, whom a New York federal jury condemned on several charges of bribery and corruption on July 16 (“Sen. Bob Menendez Found Guilty of Corruption Charges,” Wall Street Journal, July 16, 2024). The Wall Street Journal previously reported (“Menendez Declared His ‘Resurrection.’ Then He Fell in Love,” July 10, 2024), speaking of a Wael Hana, a New Jersey businessman who was simultaneously condemned for paying bribes to Menendez and his wife: Hana had been seeking a lucrative export contract from Egypt for his halal business—despite having no experience in the field. Menendez called a U.S. agriculture official whose agency had raised concerns about the monopoly the contract would create. “Stop interfering with my constituent,” Ted McKinney, the agriculture official, recalled Menendez saying on the call. The US Department of Agriculture’s large bureaucracy is of course representative of the administrative state, which administers laws voted by elected officials in Congress. It also indirectly influences legislation through its regulations if not its influence on the political agenda. I don’t know why exactly the USDA had intervened in Hana’s exports to Egypt, for the monopoly of halal beef kidneys imports into that country had been granted by the Egyptian government. The Washington Post suggests the reason was that Hana’s monopoly would cut other American exporters of this product from the Egyptian market, as happens every time a foreign government so decides for whatever reason. (See also “Menendez Bribery Trial Witness Details Egyptian Halal Beef Monopoly Scheme,” Courthouse News Service, July 3, 2024.) Matters political and bureaucratic being what they are, it would not be surprising if Hana needed some license or unofficial nod to export his beef kidneys to Egypt. But my point is that, notwithstanding the supposed rule of law, an elected official was able to impose his whim, whether corrupted or not, on civil servants. How is that better than the administrative state? The fact that under secretaries of agriculture, Mr. McKinney’s then position, are political appointees does not change the inherent opposition between the administrative state and the whimsical state. It just shows that the administrative state is less autonomous, more subject to the whimsical state in the United States, than in many, if not all, large Western countries. Many other examples could be found, perhaps more potent. There are good arguments suggesting that a central bank is detrimental compared to free banking and private currencies. But given that government exists with a partial monopoly on issuing domestic currency, who would argue that this power would be less dangerous in the hands of the president or Congress as opposed to an independent bureaucracy such as the Fed? Tariff policy is another example: Congress set the tariffs in the 19th century, and its political horse-trading was not exactly a success (see Doug Irwin’s Clashing Over Commerce), and recent presidents have been, if anything, even worse. What is the bottom line? When the state has the power to confer great privileges (money or other sorts of advantages) to some citizens at the expense of others, we must expect that rent-seekers will spend resources to get their hands in the treasure chest, including with informal or (like in the Menendez case) formal bribes. There is no way an ambitious, activist, nosy government can exist without a large administrative apparatus or whimsical and arbitrary political rulers, or a combination of both. The basic problem is not the administrative state or the politicians’ whimsical state, it is the powerful state. Worship of elected officials is as bad as the administrative state. These general results do not depend on the ideological shade of the party in power nor on the country considered. ****************************** The whimsical politician state. By DALL-E under the influence of your humble blogger (0 COMMENTS)

If you read the supplemental material to which I link with the diligence I expect and require, dear reader (tongue is firmly in cheek here!), you will have read this paper I referenced that examines proposed symmetry breakers between the modal ontological argument for the existence of god and the reverse modal ontological argument against the existence of god. One of the symmetry breakers, and the response to it, reminded me of something F. A. Hayek said when evaluating the concept of “social justice.”  The symmetry breaker in question is the deontic symmetry breaker, which deals with deontic properties. Deontic properties are properties related to what ought to be the case, “properties of obligation and permission (e.g., rightness, wrongness, oughtness, etc.)”, which are distinct from evaluative properties that deal with “properties of value and disvalue (e.g., goodness, badness, etc.)” The deontic symmetry breaker goes as follows (with citation removed): God is defined as a most perfect being. But a most perfect being ought to exist. So, God ought to exist. But what ought to be the case is possibly the case. Hence, God possibly exists. Therefore, according to this proposed symmetry breaker, we have reason to prefer premise 1 of the modal ontological argument over premise 1 of the reverse modal ontological argument.  One objection to this comes from William Vallicella, who argues that deontic properties can’t sensibly be applied to non-agential contexts. That is, it doesn’t make sense to speak of what ought or ought not be the case in situations that are not under the control of any agent:  As Vallicella puts the worry, “every state of affairs that ought to be or ought not to be necessarily involves an agent with power sufficient to either bring about or prevent the state of affairs in question.” But if deontic properties are inapplicable to non-agential contexts, then it is not true that God ought to exist—there is no agent with the power to bring about or prevent God’s existence, and so the context at hand is non-agential. This notion of the inapplicability of deontic properties to non-agential contexts reminded me of Hayek’s criticism of social justice, an idea idea he maintained “does not belong to the category of error but to that of nonsense, like the term ‘a moral stone.’” To Hayek, the reason “social justice” was nonsense is because the outcomes of social processes are non-agential. There are no agents with sufficient knowledge and power to bring about or prevent specific end results of social processes. As Hayek put it in The Mirage of Social Justice, the second volume of Law, Legislation, and Liberty: “If we apply the terms to a state of affairs, they have meaning only in so far as we hold someone responsible for bringing it about or allowing it to come about…Since only situations which have been created by human will can be called just or unjust, the particulars of a spontaneous order cannot be just or unjust.” And the inability of agents to control the outcomes of social processes isn’t exactly an idea that’s only held by those on the political right – Friedrich Engels likewise said “What each individual wills is obstructed by everyone else, and what emerges is something that no one willed.” So you can be on the left, even the very far left, and still acknowledge that the outcomes of social processes are beyond anyone’s control. To use an analogy, suppose there is a father who deliberately favors some of his children over others. He deliberately showers his favored child with love, attention, and resources, while outright neglecting and ignoring his other children. This, Hayek would say, is unjust, because the outcomes experienced by the children are entirely agential. But the outcomes of vast and complicated social processes are non-agential, and to speak of those outcomes as just or unjust, as if they were analogous to the hypothetical father above, is nonsensical.  But not everyone shares Hayek’s take that the outcomes of social processes can’t be controlled in a reliably agential way. Jeffrey Friedman wrote extensively of people who hold to a “simple-society ontology” and who believed that certain actors (politicians, technocrats, etc.) can reliably control social outcomes in a way that is analogous to the hypothetical father’s ability to control the way he treats his own children. Thus, the more one holds to a simple-society ontology, the more likely they are to embrace “social justice” and find it a meaningful project, because they believe social outcomes are in fact under reliable agential control. Friedman described how such people expressed themselves in political polling data: Conversely, as Hibbing and Theiss-Morse show with focus-group and survey evidence, disillusionment and anger can follow from the perception that government is failing to act. The authors’ angry, disillusioned respondents did not allow that inaction might be caused by arguments about which actions will succeed or what their effects might be, let alone that such arguments might be justified. On the contrary: they seemed to agree that, as one put it, all it would take to solve the extant problems is for the two parties’ leaders to get together and say to each other, “There’s a problem. We won’t leave this room until it’s fixed.”…The respondents’ chronic dissatisfaction with elected officials was due, it would seem, to the conviction that the officials had bad intentions, not inadequate knowledge, such that they deliberately, willfully declined to solve problems they knew how to solve. These voters believed that “the reason social problems persist is that elected officials have ‘the ability but not the will to take care of the nation’s problems.’ The ability was, for them, the easy part, or so it seems; the hard part was the will.” But if you think that politicians and technocrats haven’t solved social problems because they simply don’t know how to do so, then you lose the ability to meaningfully ascribe deontic properties. This doesn’t mean one can’t still ascribe evaluative properties to certain outcomes, and speak of the goodness or badness of such outcomes. If a landslide that nobody created and nobody could have prevented wipes out a village tomorrow, I can ascribe evaluative properties to that event (“it’s a tragedy this happened”) even though it makes no sense to ascribe deontic properties to that event (“all those rocks and mud ought not to have overrun that village.”) But people who harbor a simple-society ontology can lose sight of the distinction between evaluative claims and deontic claims – leading them to believe that an outcome that is evaluatively bad is therefore deontically unjust. But this is a mistake, and we should resist falling into it.  (0 COMMENTS)

In a previous post, I argued that more than 100% of the inflation since late 2019 has been demand side. There were some adverse supply shocks around 2021-22 that led to significant inflation, but there have also been major positive supply shocks (notably immigration) that have tended to depress inflation. In net terms, the cumulative inflation is all demand sideI regard nominal GDP growth as a useful proxy for the contribution of demand. Because real GDP tends to rise at about 2%/year, on average, a 4% NGDP growth rate is a useful benchmark for appropriate monetary policy. Since late 2019, there’s been roughly 11% cumulative excess NGDP growth (i.e., above 4%), which can more than fully explain the roughly 9% cumulative excess PCE inflation (above 2%).Most economists clearly don’t look at things this way. Most economists seem to regard the high inflation of 2020-24 as resulting from a mix of supply and demand shocks.  A recent San Francisco Fed working paper by Adam Hale Shapiro provides a decomposition of supply and demand side inflation this is broadly consistent with estimates I’ve seen from a number of economists: Notice that both negative supply shocks and positive demand shocks play a major role, with negative supply shocks being especially important for headline inflation (which includes food and energy prices.) Shapiro uses an interesting technique to tease out the contributions of supply and demand shocks: Since inflation is constructed as the weighted sum of category-level inflation rates, it is straightforward to divide inflation by category, or groups of categories. I separate categories each month into those where prices moved due to a surprise change in demand from those where prices moved due to a surprise change in supply. The methodology is based on standard theory about the slopes of the supply and demand curves. Shifts in demand move both prices and quantities in the same direction along the upward-sloping supply curve, while shifts in supply move prices and quantities in opposite directions along the downward-sloping demand curve. To say I have mixed feelings about this is an understatement.  I strongly support the technique of looking at co-movements of prices and output to identity supply and demand shocks, but I strongly oppose making inferences about aggregate price changes by aggregating sectoral price changes. One of my first published papers (JPE, 1989, co-authored with Steve Silver) looked at real wage cyclicality.  We tried to estimate how real wage cyclicality depended on whether the economy was hit by supply shocks or demand shocks.  We identified these two types of shocks by looking at periods where prices and employment went in the same direction (demand shocks) and periods where prices and employment went in opposite directions (supply shocks). So I’m completely on board with that sort of identification strategy.  One can also compare changes in inflation with changes in real GDP growth rates.  Indeed my view that 2019-24 is all demand side inflation is due to the fact that growth was above trend—both prices and output were moving in the same direction. Shapiro looks at price and output data for more than 100 categories of goods and services.  This is the part I don’t agree with (or perhaps don’t adequately understand.)  In any complex economy, some markets will show positive price/output correlations and some markets will show negative price/output correlations.  I fear that this technique will lead to overestimates of the role of supply, as even in an economy where 100% of inflation was demand generated you would find individual markets with negative price/output correlations (indicating supply shocks.) Consider a thought experiment with an economy featuring stable but high rate of inflation, generated by fast money growth.  Also assume the public has become used to the rapid inflation, so wage and financial contracts factor in the inflation.  I.e., assume that money is roughly neutral.  You could imagine an economy where the money supply doubled every 12 months, and all wages and prices rose at a similar rate.  Output is (by assumption) at the natural rate.  By assumption, this would be an economy where almost 100% of inflation is demand side (from monetary policy).  And yet the price/output correlations would vary a great deal between sectors, as you would still have all sorts of changes in relative prices due to a variety of local supply and demand shocks.  In other words, the factors that affect relative prices in individual markets are radically different from the factors that affect the overall price level (monetary policy in this case, although velocity is another possibility.) Shapiro directed me to a new study of Turkish inflation that leads me to believe that my thought experiment is more than just a hypothetical concern.  Before considering their study, think about how much inflation is likely to result from supply side factors.  If monetary policy generates 4% NGDP growth, then you will end up with 2% inflation if output grows at its 2% trend rate.  But if adverse supply shocks reduce output growth to negative 1%, and NGDP continues growing at 4%, then inflation will rise to 5%.  Thus I have no problem with the claim that supply shocks could briefly push inflation 3 percentage points above trend.  But what would it take for supply shocks to add 30% or 50% to a nation’s inflation rate? The Turkish study by Okan Akarsu and Emrehan Aktu ̆g produced this graph: Notice that Turkish inflation peaked at about 80% in 2022, and generally runs well ahead of the US.  Also note that the proportion attributed to supply and demand shocks is similar to the estimates shown in Shapiro’s graph for headline inflation.  You might think that fact is not surprising–the Turkish authors used a similar model—citing Shapiro’s work.  But I’d expect the contribution of supply shocks in an absolute sense to be relatively similar in the two countries—say low to mid-single digits.  Then if Turkey has a monetary policy that generates extremely high NGDP growth, I’d expect almost all of the inflation in Turkey to be demand side. Here’s the abstract of the Turkish paper: We document the demand and supply-driven components of inflation in Turkiye by following the decomposition method of Shapiro (2022). The results suggest that the recent hike in inflation, which started with the Covid-19 pandemic but deviates significantly from global inflation rates, was initially driven by supply factors, but over time it transitioned into an inflationary environment predominantly driven by demand forces. Consistent with theory, oil supply and exchange rate shocks increase the supply-driven contribution, while monetary policy tightening reduces the demand-driven contribution to inflation. This decomposition can potentially serve as a useful real-time tracker for policymakers. Perhaps the phrase “exchange rate shocks” is one source of disagreement.  In my thought experiment where the money supply doubled each year, I assumed that wages and prices also doubled.  And one very important price is the price of foreign exchange—aka “the exchange rate”.  Thus one year it might take 100 Turkish lira to buy a US dollar, then a year later 200 lira, then 400 lira, then 800 lira.  I suppose that could be viewed as an “exchange rate shock”, but to me it is just one aspect of demand side inflation—which pushes all prices higher, including the price of foreign exchange. We are so far apart that I wonder if the problem here is terminology.  The terms “supply” and “demand” were developed to explain relative price changes in specific markets for goods and services, not aggregate price changes.  There’s always been a split between those who prefer to think about inflation as depreciation in the purchasing power of money, caused by shifts in money supply and demand, and those who think about inflation more in terms of the sum of individual price rises, caused by supply and demand factors in a wide range of markets.  I’m on the monetarist side of that divide. For the concept I’m interested in, we might be better off using entirely different terminology.  Thus I could use the term “nominal inflation” for any variation in inflation associated with variations in NGDP growth.  And I could use the term “real inflation” for any variations in inflation caused by real output changes, holding NGDP constant.  Of course, these terms would then merely represent accounting, and have no causal implications.  I do think that NGDP growth is ultimately determined by monetary policy (including monetary policy errors of omission), but that sort of causal claim does require evidence, it’s not just a tautology. In any case, I might be missing something obvious here, and would be interested in how other view claims such as the estimate than half of Turkey’s 80% inflation in 2022 was supply side.  Does that seem plausible?  If so, what’s your definition of “supply driven”? I’ve never seen a clear definition of supply side and demand side inflation.  In the absence of a consensus view, each empirical study of the question becomes a de facto definition.  Perhaps there’s no real debate at all, just differing definitions. PS.  There is a method that makes supply inflation seem even lower than my estimates.  There’s an argument that any increase in real output tends to depress prices.  Thus if RGDP rises by 2% and NGDP rises by 4%, you could argue that the supply side has depressed the price level by 2%, ceteris paribus, and the demand side has raised prices by 4%, yielding 2% net inflation. (0 COMMENTS)