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Last Build Date: Mon, 24 Oct 2016 16:01:32 -0500

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Canada Can't Dodge Two Bullets, by David Henderson

Mon, 24 Oct 2016 16:01:32 -0500

At this writing, the odds that Hillary Clinton will defeat Donald Trump for the U.S. presidency are very high.

If your concern is trade between Canada and the United States, Canada dodged a bullet. Donald Trump is hostile to trade, mainly with China but also, it appears, with anyone outside U.S. borders. He has never shown an inkling of understanding about the benefits of trade and, although he's inconsistent on many things, Trump has been a steady opponent of foreign trade.

I recall a news item about a speech he gave against NAFTA in Fresno, California in 1993 or 1994. He told his audience that Mexican businessmen favoured NAFTA and, therefore, it couldn't be good for the U.S. This showed that he didn't understand the basic economics of trade. In any trade, both sides gain or, at least, expect to gain. And unless what they get in return is a big disappointment, they do gain. Otherwise, they wouldn't trade. And if they got disappointment after disappointment, they wouldn't keep trading. Trump didn't understand that.

So the good news is that Canada will likely dodge the Trump bullet. The bad news: Canada won't dodge the Hillary Clinton bullet.

This is from my "Canada can't dodge two 'trade' bullets shot from the U.S." Fraser Forum, October 24, 2016.

Read the whole thing.

I would add, by the way, that Canadians, like the rest of us, should be very worried about the military policy of both major candidates, and possibly especially of Hillary Clinton, given her pro-war views. There are many bullets.


The WSJ's odd critique of the Fed, by Scott Sumner

Mon, 24 Oct 2016 11:06:15 -0500

This article in the Wall Street Journal left me scratching my head: The Fed, Not the Market, Is Stifling Growth That's the title, and I eagerly looked forward to an explanation, perhaps a criticism of the Fed rate increase last December. Instead I found this comment: Fed policies of zero interest rates and bond buying--quantitative easing--have not only failed to stimulate business investment. They have discouraged it through the misallocation of capital. This is contractionary because it starves entrepreneurship and thus productivity growth. Well that's certainly an unconventional hypothesis. But being unconventional doesn't make it wrong--lots of my ideas are also unconventional. At this point a good newspaper would normally provide an explanation for their unconventional claims. This is what we get instead: The North American Free Trade Agreement (Nafta) opened the Mexican economy to Canadian and U.S. imports in 1994. Many Mexicans lost jobs. Yet the country gained access to what it needed to modernize. Running water, salmon entrees, California wines and air conditioning were not standard fare here on the Mayan Riviera in 1985. They are now, and tourism has boomed. Elite newspapers generally have editors. I wonder how the WSJ editor could have let that slip by. It does not seem to support the unconventional claim regarding monetary policy. Further along the essay does return to the Fed: Left out of their analyses is the gargantuan role of the Federal Reserve's antigrowth monetary and regulatory policies. Mr. Trump argued in September that the Fed's eight-year policy of cheap credit is generating asset bubbles. But if he understood the problem he wouldn't rail against Nafta. So is that the explanation--an appeal to authority? Because Mr. Trump said so? But then why follow it up by disparaging Trump's knowledge of economics, which suggests that he is in fact not an authority? And even if Trump were right, why would an asset bubble reduce investment? The usual theory of asset bubbles (which I do not buy) says they boost investment (tech in 2000, housing in 2006, etc.) Again, no explanation. Conventional wisdom holds that the Fed has flooded the market with credit by aggressively buying bonds and creating bank reserves on the Fed balance sheet. Yet when the Fed buys assets--such as government debt or mortgage-backed securities--it only records a short-term liability on the balance sheet. The reserves are on the books but don't create any more credit in the real economy than if the Fed never made the purchase. Meanwhile it creates shortages of medium- and long-term assets in the market. Finally there is an acknowledgement that the conventional wisdom is different. But still no explanation of how Fed policy is discouraging investment. Plus there's a weird comment about a shortage of long-term bonds. Yet that's clearly false---I can go out and buy a Treasury bond any time I like. And even if we generously assume that the author is confusing "shortage" with "reduction in supply", there is no explanation as to why this would hurt investment. The standard textbook theory says investment is hurt when there is an increase in supply of government bonds. Indeed this theory, often called "crowding out of investment" is popular with conservative newspapers like the WSJ. So I'm still waiting for an explanation of how the Fed's policy is reducing investment. If there were a glut of credit in the real economy it would likely show up in bank lending as expanding businesses clamored for low-cost loans. Yet credit growth "has been dismally slow," wrote David Malpass, president of the consulting firm Encima Global in a recent note to clients. So credit growth has been slow. OK, but why link this to Fed policy? After all, haven't we just a massive banking crisis? Haven't banks just tightened their loan standards in the wake of the crisis? Haven't we had Dodd-Frank---a regulatory monstrosity? Why single out the Fed. In the very next sentence, the author seems to agree with me: The[...]

The Huemer Graph, by Bryan Caplan

Mon, 24 Oct 2016 00:08:53 -0500

The latest reply from Mike Huemer on the ethical treatment of animals, this time with a cool graph.Bryan Caplan posted this further comment on animal welfare arguments on his blog. I didn't have time to address this earlier (partly because I was traveling for the talk that, coincidentally, Bryan Caplan invited me to give at GMU, on an unrelated topic). I have a few comments now. My main reactions: I. The argument from insects has too many controversial assumptions to be useful. We should instead look more directly at Bryan's theoretical account of how factory farming could be acceptable. II. That theory is ad hoc and lacks intrinsic intuitive or theoretical plausibility. III. There are much more natural theories, which don't support factory farming. I. To elaborate on (I), it looks like (after the explanations in his latest post), Bryan is assuming: a. Insects feel pain that is qualitatively like the suffering that, e.g., cows on factory farms feel. b. If (a) is true, it is still permissible to kill bugs indiscriminately, e.g., we don't even have good reason to reduce our driving by 10%. (a) and (b) are too controversial to be good starting points to try to figure out other controversial animal ethics issues. I and (I think) most others reject (a); I also think (b) is very non-obvious (especially to animal welfare advocates). Finally, note that most animal welfare advocates claim that factory farming is wrong because of the great suffering of animals on factory farms (not just because of the killing of the animals), which is mostly due to the conditions in which they are raised. Bugs aren't raised in such conditions, and the amount of pain a bug would endure upon being hit by a car (if it has any pain at all) might be less than the pain it would normally endure from a natural death. So I think Bryan would also have to use assumption (c): c. If factory farming is wrong, it's wrong because it's wrong to painfully kill sentient beings, not, e.g., because it's wrong to raise them in conditions of almost constant suffering, nor because it's wrong to create beings with net negative utility, etc. So to figure out anything about factory farming using Bryan's approach, we'd first have to settle disputes about (a), (b), and (c), none of which are obvious, and none of which is really likely to be settled. So this is not promising. II. What would be more promising? Let's just look at Bryan's account of the badness of pain and suffering. (Note: I include all forms of suffering as bad, not merely sensory pain.) I think his view must be something like what the graph below depicts. As your intelligence increases, the moral badness of your pain increases. But it's a non-linear function. In particular: i. The graph starts out almost horizontal. But somewhere between the intelligence of a typical cow and that of a typical human, the graph takes a sharp upturn, soaring up about a million times higher than where it was for the cow IQ. This is required in order to say that the pain of billions of farm animals is unimportant, and yet also claim that similar pain for (a much smaller number of) humans is very important. ii. But then the graph very quickly turns almost horizontal again. This is required in order to make it so that the interests of a very smart human, such as Albert Einstein, don't wind up being vastly more important than those of the rest of us. Also, so that even smarter aliens can't inflict great pain on us for the sake of minor amusements for themselves. Sure, this is a logically possible (not contradictory) view. But it is very odd and (to me) hard to believe. It isn't obvious to begin with why IQ makes a difference to the badness of pain. But assuming it does, features (i) and (ii) above are very odd. Is there any explanation of either of these things? Can someone even think of a possible explanation? If you just think about this theory on its own (without considering, for example, how it impacts your own interests o[...]

Two approaches to macroeconomics, by Scott Sumner

Sun, 23 Oct 2016 11:10:49 -0500

Here's an abstract from a paper by Erich Pinzón-Fuchs: This paper discusses a longstanding debate between two empirical approaches to macroeconomics: the econometrics program represented by Lawrence R. Klein, and the statistical economics program represented by Milton Friedman. I argue that the differences between these two approaches do not consist in the use of different statistical methods, economic theories or political ideas. Rather, these differences are deeply rooted in methodological principles and modeling strategies inspired by the works of Léon Walras and Alfred Marshall, which go further than the standard opposition of general vs. partial equilibrium. While Klein's Walrasian approach necessarily considers the economy as a whole, despite the economist's inability to observe or understand the system in all its complexity, Friedman's Marshallian approach takes into account this inability and considers that economic models should be perceived as a way to construct systems of thought based on the observation of specific and smaller parts of the economy. Over the years, I've read lots of articles by people who think macroeconomics is making lots of progress. They are almost all macroeconomists. I'm not sure I've ever met a non-macroeconomist with a high opinion of the field. I am also a skeptic. It's not that macroeconomists don't know a lot of useful things. I think they do. But their attempt to create general equilibrium models of the economy doesn't seem to be getting us anywhere. The abject failure of the profession to respond appropriately to 2008 (where were the calls for easier money?) and the Neo-Fisherian boomlet are recent manifestations of the problems with modern macro. I've always liked Friedman's work because he seemed to reduce macroeconomics to smaller bite-sized chunks, which can be more easily digested. Let's use a few simple (partial equilibrium) models that we do understand, and try to see how far they can take us in explaining the economy. He relied on two key models, both based on well-established micro principles: 1. A monetary model of nominal aggregates 2. A labor market model This is also the approach I took in my book on the Great Depression (The Midas Paradox). Only instead of looking at the monetary aggregates, I looked at the global market for gold. But the basic idea was the same. Gold was the medium of account during most of this period; hence determining the value of gold was tantamount to determining the price level. In other words, I had an essentially microeconomic model of the price level. I modeled the value of gold using simple supply and demand, and then recognized that the price level was the inverse of the value of gold. In contrast, modern models try to directly model real GDP, and then assume that if RGDP "overheats" it will put upward pressure on prices. But that theory of inflation is not well grounded in microeconomics. In micro, rapid growth in the quantity of a product does not cause its price to rise; it entirely depends on whether the rise in quantity is due to supply or demand-side factors. Better to start with a monetary model of NGDP. Friedman and I ground our theory of employment in basic microeconomic concepts. High unemployment can occur for one of two reasons: 1. Government policies that artificially raise the cost of labor (minimum wage laws, etc.) or discourage people from working (high implicit marginal tax rates.) 2. Unexpected declines in the price level/NGDP, due to a tight money policy, combined with sticky wages. These are two simple tools, the S&D for money and the S&D for labor. They are pretty well grounded in basic economic theory. There is a mountain of economic evidence in favor of each view. If there is a big rise in unemployment, then one of the two factors above is almost certainly to blame. In my work on the Great Depression, I found both of these tools to be extremely useful. Not only is the Great Depression itself not at [...]

Krugman's Strange View About Planning for the Future, by David Henderson

Sat, 22 Oct 2016 15:05:06 -0500

Paul Krugman, in a post today titled "Debt, Diversion, Distraction," argues, as his title implies, that we get diverted and distracted from more important issues if we worry about the coming high deficits and debt. His reasoning is faulty.

First, and this is not the faulty reasoning part, he uses data from something called the CBPP without ever identifying that organization. A quick Google shows that CBPP stands for the Center on Budget and Policy Priorities. Here's the study that he must be referring to. It does, as he says, show that the future outlook on federal government looks rosier than the CBPP's projection looked 6 years ago.

But why not use data from the Congressional Budget Office? All projections of the future turn out to be wrong, but the CBO probably has less of an axe to grind than the CBPP. And, while the CBPP study claims that in 2046, the ratio of debt to gross domestic product will be 113 percent, the CBO's projection, as of July, was a higher ratio: 141 percent. That's a pretty big difference.

Now to the faulty reasoning part. Krugman writes:

So proposals to "deal with" the supposed debt problem always involve long-term cuts in benefits and (reluctantly) increases in taxes. That is, they don't involve actual policy moves now, or for the next 5-10 years.

So why is it so important to take up the issue right now, with so much else on our plate?

Put it this way: yes, it's possible that we may at some point in the future have to cut benefits. But deficit scolds talk as if they offer a way to avoid this fate, when in fact their solution to the prospect of future benefit cuts is ... to cut future benefits.

But is there no difference between putting in place now policies that would cut benefits from, say, 10 years on, and Krugman's apparently preferred alternative of waiting 10 years and then cutting benefits immediately? Any person who plans his future will tell you that there's a huge benefit. If I can know that my Social Security benefits 10 years from now will be, say, 20% lower than I had thought due to means testing, I can plan my saving now. But if I simply think that the government will cut benefits 10 years from now and I don't know whether that's true and even if I think it's true, I don't know who will get cut and by how much, it's harder to plan.

Krugman seems to anticipate that objection, because here is his next paragraph:

If you try really hard, you can argue that locking in policies now for this future adjustment will make the transition smoother. But that is really a second-order issue, hardly deserving to take up a lot of our time. By putting the debt question aside, we are NOT in any material way making the future worse.

Does it look as if I tried "really hard" to do the reasoning in my paragraph immediately preceding this quote? And how he does he know that it's second-order? To a lot of people currently aged 45 to 65, it's pretty important.


Bio of Paul Krugman, by David Henderson

Fri, 21 Oct 2016 17:20:15 -0500

In 2008, U.S. economist Paul Krugman won the Nobel Prize in Economic Sciences. Krugman, one of the best-known economists in the world, is familiar to the public mainly through his regular column in the New York Times and for his New York Times blog titled "The Conscience of a Liberal." Besides being an original theorist in international trade, economic geography, and macroeconomics, Krugman has been one of his generation's best expositors of good economics. His excellent book Pop Internationalism and his popular articles of the 1990s, many of them in the web publication Slate, make a strong case for free trade.
This is from my bio of Paul Krugman in the on-line Concise Encyclopedia of Economics. Read the whole thing.

One of my projects since publication of the print version in 2007/2008 has been to catch up on bios of Nobel Prize winning economists. There will be more to come.

Because space on the web is not a constraint the same way space in a print version is, the bios that are just on the web, like Krugman's, are often longer than the bios in the print version.

Here's one of my favorite paragraphs:

One of Krugman's most powerful articles is "Ricardo's Difficult Idea." In that piece, Krugman shared his frustration, one that many economists have felt, that the vast majority of non-economist intellectuals do not understand the insight that david ricardo had about free trade almost 200 years ago. Ricardo's insight was that people specialize in producing the goods and services in which they have a comparative advantage. The result is that we never need to worry about low-wage countries competing us out of jobs because the most they can do is change the items in which we have a comparative advantage. Krugman pointed out that, although we can explain Ricardo's insight to our economics students, most non-economist intellectuals are unwilling to take even ten minutes to understand it. But that does not stop them from writing about trade as if they're informed. Krugman singled out Robert Reich's 1983 article, "Beyond Free Trade." The article, wrote Krugman, "received wide attention, even though it was fairly unclear exactly how Reich proposed to go beyond free trade."


How the EMH can reduce government spending, taxes, and inequality, by Scott Sumner

Fri, 21 Oct 2016 14:51:55 -0500

Long time readers know that I am a huge fan of the Efficient Markets Hypothesis, mostly for pragmatic reasons. (As with all social science theories, I do not believe it is literally true---just approximately true.) Now it appears that the EMH might be even better than anyone had imagined. In economics, there can be an "efficiency/equity trade-off". I believe that most economists overstate how often this trade-off occurs, but it can certainly arise in some situations. The nice thing about EMH-based policies is that they improve both efficiency and equity. Patrick Sullivan sent me to this WSJ article, which provides a good example: Steve Edmundson has no co-workers, rarely takes meetings and often eats leftovers at his desk. With that dynamic workday, the investment chief for the Nevada Public Employees' Retirement System is out-earning pension funds that have hundreds on staff. His daily trading strategy: Do as little as possible, usually nothing. The Nevada system's stocks and bonds are all in low-cost funds that mimic indexes. Mr. Edmundson may make one change to the portfolio a year. So far his approach seems successful, just as predicted by the EMH: From his one-story office building in Carson City, Mr. Edmundson commands funds whose returns over one-year, three-year, five-year and 10-year periods ending June 30 bested the nation's largest public pension, the California Public Employees' Retirement System, or Calpers, and deeply-staffed plans of many other states. Nevada's $35 billion plan is "dramatically smaller" than California's roughly $300 billion, notes Calpers spokeswoman Megan White. "That said, Nevada demonstrates the benefits of reducing the complexity, risk, and costs in a portfolio." His success is being copied by others: Now many public pension funds are embracing Nevada's do-nothing approach as they wrestle with dwindling cash and low interest rates. Calpers is severing ties with roughly half the firms handling its money. New York City this year slashed its hedge-fund commitments. And it's paying off by reducing government spending in Nevada: When Mr. Edmundson joined the Nevada plan in 2005 as an analyst, roughly 60% of its stocks were in indexes. He turned it even more passive after becoming chief investment officer in 2012. He fired 10 external managers, and, by 2015, all of its stock and bondholdings were in passively managed funds. Its outside-management bill is about one-seventh the average public pension's, according to Nevada plan documents and Callan Associates, which tracks retirement-plan expenses. If Nevada consumed a typical Wall Street diet, it would pay roughly $120 million in annual fees. In 2016, Nevada paid $18 million. When thinking about that $102,000,000 annual savings, keep in mind that Nevada has less than 1% of the US population. We are talking serious money. So that's the efficiency part---what about equity? A number of people on the left have pointed out that the growing importance of our finance sector has contributed to increasing inequality in America. As states switch from hedge funds to index funds, the finance sector will earn less money. This will allow states to reduce taxes, and/or boost spending on more worthy projects, such as infrastructure. The WSJ portrays Steve Edmundson as a modest fellow: He brings lunch in Tupperware. "Great days," he says, are when his wife makes lunch--a BLT or tuna-fish sandwich. Otherwise, it is leftover fish or salads. "I don't want to spend $10 a day for lunch." . . . He generally doesn't work outside 8 a.m.-to-5 p.m. hours. He commutes in a 2005 Honda Element with over 175,000 miles on it. His 2015 salary was $127,121.75, according to a Nevada Policy Research Institute database. With no one else on his investment staff, Mr. Edmundson rarely uses his conference table and four extra chairs. He volunteered his office to pension-fund employees who w[...]

I Want to Know How the Transporter Works, by Bryan Caplan

Fri, 21 Oct 2016 00:44:53 -0500

In our debate, Robin bemusedly observed that I'm one of those odd people who wouldn't step into a Star Trek transporter.  My actual view is more moderate: Before I'd use the transporter, I'd like to know how it works. Does it move my actual body?  Or just create a copy out of new materials, and destroy the original?

If you think it makes no difference, this video explains it better than I ever could.

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What Has Congress Ever Done for Us?, by David Henderson

Thu, 20 Oct 2016 19:13:19 -0500

I've been catching up on Wall Street Journal issues that piled up over the summer. One particularly good unsigned editorial (the Journal calls these "Review and Outlook") was the July 19 (July 20 print edition) editorial titled "What Has Congress Ever Done for Us?"

Here's a slice:

The talk radio crowd has so fed the narrative of GOP "betrayal" in Washington that even many Republicans believe Congress has accomplished nothing since they took the House in 2010 and the Senate in 2014. The truth is that while the GOP Congress can't match the Romans [in the Monty Python skit about what the Romans have done for us], it has achieved far more than the critics claim.

Here are some specifics:
Start with everything the GOP Congress has prevented. Universal pre-K, gun regulation, a $15 national minimum wage, an ObamaCare bailout for insurers, equal pay regulation, more disclosure of campaign donations, "free" community college, a new "infrastructure bank," closing the prison at Guantanamo Bay, among many others. President Obama proposed each of those, often more than once, but they vanished faster than Martin O'Malley's presidential campaign thanks to the GOP Congress.

Other than preventing the closing of the Gitmo prison, these were good accomplishments.

Rush Limbaugh, on his radio show, often talks about "low-information voters." He uses the term as a putdown of people who generally vote Democrat. That many of his listeners don't know about these accomplishments suggests that they also are low-information voters.

Of course, that's a problem with the political system in general. People simply have little or no incentive to get information.


Is the Fed a firefighter or an arsonist?, by Scott Sumner

Thu, 20 Oct 2016 13:20:17 -0500

Most economists view the Fed as a sort of firefighter, an institution that pushes back against "shocks" that mysteriously arise in the private sector. Bob Hetzel and Josh Hendrickson have a different view. Here's Josh: The predominant difference between this view and the Taylor view presented above can be expressed in terms of whether the Federal Reserve can be seen as an inflation fighter or an inflation creator, as summarized by Hetzel (2008a). The inflation-fighter view suggests that ''inflation shocks are the initializing factor in inflation'' and ''explanations of inflation stress FOMC failure to respond aggressively to realized inflation'' Hetzel (2008a, 273). The inflation-creator view of monetary policy emphasizes that the central bank influences the price level through the control of a nominal variable. . . . According to the Taylor view, the change in post-1979 policy was the more steadfast commitment to respond to inflation. The Federal Reserve became an effective inflation fighter. The alternative view put forth in this paper suggests that the change in policy was not simply a renewed commitment to fighting inflation, but rather an acceptance of the Federal Reserve's role as inflation creator. The nominal variable that the Federal Reserve sought to control to influence the price level was expected inflation and the means of doing so was a commitment to low, stable rates of nominal income growth. I agree with Hetzel and Hendrickson. Alex Tabarrok and Saturos directed me to a Kevin Grier post: After the events of the great recession, it's just amazing to me that people think the economy is a steak, the Fed is a precision sous-vide machine, and all we have to decide is medium-rare or well-done. For the millionth or so time, the models implying the Fed can do this, completely and utterly failed during the great recession. There is also evidence that a large part of the good outcomes credited to the Fed during the great moderation were actually due to exogenous forces (i.e. good luck). Neither the Fed nor the President "runs" the economy. There is no stable, exploitable Phillips Curve / sous vide machine that lets us cook at a certain temperature. This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that the Fed's power over the economy is quite limited and tenuous. Let's start with the question of what it means to "control" an entity called "the economy". What does 'control' mean, and what is "the economy?" If the economy means real GDP (and that's usually what people mean when they say "the economy") then Kevin might be right. If 'control' means move RGDP where it wants, then he is clearly right. He's also correct that the Phillips Curve is not a useful model for controlling "the economy." That's why I oppose Yellen's suggestion that we might want to run the economy hot for a while to fix labor market problems. Please Fed, just refrain from causing more problems. You've done enough damage already On the other hand, while the Fed cannot control RGDP in the sense of moving it where it wishes, it can destabilize RGDP through unstable monetary policy. Fed policy during the Great Moderation did not stabilize the economy by fixing problems, or pushing RGDP to the right position, rather it reduced instability by refraining from introducing as many monetary shocks. While the Fed has only very limited ability to influence RGDP, one variable that it absolutely can control is expected growth in NGDP. Although the terms NGDP and RGDP sound similar to the uninitiated, they are actually as different from each other as a poem and a cement truck. One is a way of describing a vast real, physical economy, and the other is a way of describing the value of the medium of account. During the G[...]