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Last Build Date: Sun, 10 Dec 2017 15:22:23 -0500

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A Man Called Ove, by David Henderson

Sun, 10 Dec 2017 15:22:23 -0500

I rarely recommend movies on EconLog but this is an exception. My wife and I saw A Man Called Ove last night and loved it. I would give it a 9 on a scale of 1 to 10. It's a familiar story line: a gruff old man (actually younger than me, though) who has a grudge against the world loosens up in response to a family with 2 delightful young daughters who move in next to him. But what makes it special are three things:
1. It isn't at all maudlin.
2. There are so many interesting twists in the plot and in the way his history is revealed, many of which caught me by surprise.
3. Finally, the reason I'm posting on EconLog, which is a site in which a major theme is liberty: the bureaucrats who messed with his life earlier and try to mess with his neighbor's life, and, in the last 20 minutes, the action they take against a state-enabled for-profit meddler. He calls them "white shirts." Related to this, somewhat earlier in the movie, the way he takes private action at his own expense to make a job work for someone who is handicapped.

Please, if you comment, either don't give spoilers or, if you give them, put a big warning in capital letters.


What if I didn't favor NGDP targeting?, by Scott Sumner

Sun, 10 Dec 2017 13:27:39 -0500

For the past nine years I've been promoting market monetarist ideas in the blogosphere. How important is NGDP targeting to the MM agenda? Much less important than many people assume. Kurt Schuler left the following comment in response to my previous post: Nominal GDP targeting has not yet been implemented anywhere. Accordingly, you have the luxury of comparing an untested policy whose defects (if any) have not yet been revealed in practice with well-tested policies whose defects are a matter of record. Advocates of inflation targeting were in the same position when it was first widely discussed. Then it was implemented, and after some years of apparent success came the Great Recession. If you are plan to advocate nominal GDP targeting in your book, you should specify what results (if any) would lead you to revise your favorable opinion of it. Let's suppose I switched my view away from NGDP targeting, and moved toward the Fed's current "dual mandate" approach, which aims at 2% inflation and high employment. What then? How much would change? The first thing I'd do is create a single variable that incorporates both of the policy goals in the Fed's dual mandate. After all, the Fed can only hit one target at a time. That variable could be set up in a wide variety of ways, but here's one very simple example: AD = PCE inflation plus employment gap. Where the employment gap is defined as the percentage difference between actual employment and the Fed's best estimate of the natural rate of employment. Thus if inflation were 2.7% and employment were 1% above the natural rate, then the AD variable would come it at plus 3.7%. Next I would have the Fed try to target AD at 2%, that is, I'd have them set policy at a level where expected future inflation plus the employment gap equaled 2%. Here I'd like to emphasize that there are many other ways of doing this. For instance, you could put a coefficient of 0.5 on the employment gap, not 1.0 as in the example above. Indeed there is a whole class of dual mandate targets, which share certain common characteristics. I don't currently have strong views as to which one is best. So let's suppose the Fed sets up the formula, and then I blindly adopt it. What then? How much does that change my blogging over the past 9 years? Hardly at all; these formulas are different from NGDP growth, but not radically different. In either case, money was far too tight during late 2008, and in subsequent years. In either case the Fed was failing to target the forecast. We didn't have a Great Recession because the Fed was targeting inflation and employment instead of NGDP; we had a Great Recession because the Fed was setting policy far too tight to hit its own inflation and employment composite goal. If you compare NGDP targeting to the ECB's single inflation mandate, then the differences are a bit larger. But even in that case, ECB policy has often been too tight to hit their 1.9% inflation target. (But not in 2011, when inflation targeting really was a big problem.) Don't get me wrong, I definitely believe that NGDP targeting is superior to the Fed's flexible inflation targeting. But that's not the core problem here, the core problems are: 1. Failure to target the forecast 2. Failure to rely on market forecasts 3. Failure to do level targeting (at least at the zero bound, as recently recommended by Bernanke.) What would make me change my mind about NGDP targeting? I suppose if it were adopted and employment became more unstable (than under recent policy) then this would tend to refute the notion that NGDP targeting is superior to the Fed's current policy. How much data would we need? That's a judgment call, which would actually involve two variables---the number of years operating under the new system, and the extent to which employment became more unstable. The greater the increase in employment instability, the more quickly NGDP targeting would be discredited. I can't give you an exact number, like most things in economics it's a matter [...]

My Excerpt in The Atlantic, by Bryan Caplan

Fri, 08 Dec 2017 00:24:32 -0500

I'm on vacation, but I'm delighted to announce that an excerpt from The Case Against Education has just appeared in the latest issue of The Atlantic.  Enjoy!


Cutting Corporate Tax Rates in 2018 or 2019: It Matters, by David Henderson

Thu, 07 Dec 2017 14:12:56 -0500

The important effect of incentives on allocation over time.

One of the differences between the House and Senate versions of the tax cut is whether the corporate tax rate falls in 2018 (House) or 2019 (Senate.) It might look as though it's no big deal. It might well be a big deal, partly economically and, deriving from the economics, partly politically.

You're someone deciding whether to start a new business that you think will make money the first year. Under the House version, the corporate tax rate falls to 20 percent in 2018. So if that provision is kept, you know you'll pay the corporate tax rate of 20 percent on your profits. But if the Senate version is kept, you'll pay, the first year, at 35 percent.

Hmmm. What to do if the Senate version is kept? Wait to invest until 2019. So, to whatever extent the tax cut does increase economic growth, some of that growth will wait until 2019. Why does that matter politically? The midterm elections.


What's my core message?, by Scott Sumner

Thu, 07 Dec 2017 12:16:03 -0500

I am currently working on the final chapter of a book manuscript, tentatively entitled "The Money Illusion: Market Monetarism and the Great Recession." I am trying to identify my core message. What is the essence of my critique of mainstream macroeconomics? And why should anyone believe me? I'll offer a few thoughts, but I'd be very interested in your outside perspective. BTW, one thing is very clear to me----NGDP targeting is not at all a part of my core message, it's totally compatible with mainstream macro. It seems to me that market monetarism has two components, the market part and the monetarism part. In my view, monetarism is the school of thought that says shifts in the supply and demand for money drive the most important macro phenomena, including key nominal variables like inflation and NGDP growth, as well as business cycle movements in RGDP and unemployment. More importantly, monetarism argues that other schools of thought reify various contingent epiphenomena, confusing side effects with core mechanisms. Thus non-monetarists are inclined to look at phenomena like inflation through the lens of changes in interest rates, bank credit, and/or the Phillips Curve. To a monetarist, those epiphenomena are the side effects of changes in the supply and demand for money, in an economy with sticky wages and prices. But they are not the core mechanism. Increases in the money supply and/or decreases in money demand are inflationary even if they don't move interest rates at all, and even if they don't result in product or labor market tightness. In two recent posts, I explain this idea with a parable of an island economy lacking a financial system, where prices are flexible and the economy is always at full employment. So that's the core of the "monetarism" part of market monetarism. But what about the "market" part of the theory? I believe that the flaw in modern macro is that the efficient markets hypothesis is not deeply embedded into all of our models. Thus when there is a policy initiative such as QE, mainstream economists take a "wait and see" attitude. They say that after observing a year or two of macro data, we will have a better idea as to the policy's effectiveness. A market monetarist says that within 5 minutes we'll know everything that we will ever know about the effectiveness of the policy move. Inflation, RGDP and NGDP futures will immediately adjust to reflect the optimal forecast of the effect of the policy initiative. If those markets don't exist, then other proxies such as TIPS spreads, exchange rates, commodity prices and stock prices will tell us all that we can know about the effectiveness of the policy. The future performance of the economy will be affected by that policy, but also a myriad of other factors. Waiting and observing the future course of events won't tell us anything that we don't already know. Market monetarists see market driven regimes for "targeting the forecast" as a sort of "end of (macroeconomic) history". They are the final stage in the long process of discovering an optimal policy rule. How can any policy ever be better than "the policy stance expected to reach the policy goal?" And how can any macro model's forecast ever reliably beat the market forecast? Not occasionally, but reliably. And of course we argue that market forecasts of the goal variable are the most useful measure of the stance of monetary policy. Other economists look at a wide variety of epiphenomena, especially interest rates. But the response of interest rates is dependent on any number of contingent factors, and can't possible serve as a reliable indicator of easy and tight money. In the end, the only useful definition of easy and tight money is relative to the policy stance expected to achieve the policy goal---is money too easy or too tight? And again, it's market expectations that will ultimately provide the optimal forecast. Armed with this market monetarist p[...]

The Shining City on a Hill: Commentary on Reagan, by Bryan Caplan

Thu, 07 Dec 2017 11:11:41 -0500

While wrapping up my graphic novel, I wound up reading Ronald Reagan's famous Farewell Address - his "Shining City on a Hill" speech.  Given my broader views, I obviously have some objections.  But I was amazed to read an actual presidential speech where I agreed with entire paragraphs.  Here's the abridged speech, with my commentary.  Reagan's in blockquotes, I'm not. My fellow Americans: This is the 34th time I'll speak to you from the Oval Office and the last. We've been together 8 years now, and soon it'll be time for me to go. But before I do, I wanted to share some thoughts, some of which I've been saving for a long time. [...] You know, down the hall and up the stairs from this office is the part of the White House where the President and his family live. There are a few favorite windows I have up there that I like to stand and look out of early in the morning... I've been thinking a bit at that window. I've been reflecting on what the past 8 years have meant and mean. And the image that comes to mind like a refrain is a nautical one--a small story about a big ship, and a refugee, and a sailor. It was back in the early eighties, at the height of the boat people... As the refugees made their way through the choppy seas, one spied the sailor on deck, and stood up, and called out to him. He yelled, "Hello, American sailor. Hello, freedom man." Notice that Reagan is reflexively pro-refugee.  He doesn't wonder if the refugee is a Communist spy, warn that he's likely to go on welfare, or fret about a "clash of civilizations."  A small moment with a big meaning, a moment the sailor, who wrote it in a letter, couldn't get out of his mind. And, when I saw it, neither could I. Because that's what it was to be an American in the 1980's. We stood, again, for freedom. I know we always have, but in the past few years the world again--and in a way, we ourselves--rediscovered it.If you're inclined to treat Reagan's praise of "freedom" as platitudinous, read on. It's been quite a journey this decade, and we held together through some stormy seas. And at the end, together, we are reaching our destination. The fact is, from Grenada to the Washington and Moscow summits, from the recession of '81 to '82, to the expansion that began in late '82 and continues to this day, we've made a difference. The way I see it, there were two great triumphs, two things that I'm proudest of. One is the economic recovery, in which the people of America created--and filled--19 million new jobs. The other is the recovery of our morale. America is respected again in the world and looked to for leadership.[...]Well, back in 1980, when I was running for President, it was all so different. Some pundits said our programs would result in catastrophe. Our views on foreign affairs would cause war. Our plans for the economy would cause inflation to soar and bring about economic collapse. I even remember one highly respected economist saying, back in 1982, that "The engines of economic growth have shut down here, and they're likely to stay that way for years to come." Well, he and the other opinion leaders were wrong. The fact is, what they called "radical" was really "right." What they called "dangerous" was just "desperately needed." On the economy: It's always good to see the "This time, the recession is permanent" crowd served a good helping of crow.  On foreign policy: Growing up in the 80s, many people took Reagan's warmonger status for granted.  But it's striking how few people the U.S. military killed on his watch.  Perhaps he moved the world a lot closer to nuclear war, but got lucky with Gorbachev; I honestly don't know.And in all of that time I won a nickname, "The Great Communicator." But I never thought it was my style or the words I used that made a difference: it was the content... They called it the Reagan revolution. Well, I'll accept that, but for me it a[...]

Average Federal Tax Rates by Income Quintile, by David Henderson

Wed, 06 Dec 2017 18:27:49 -0500

A number of friends on Facebook have been discussing whether the federal tax system is "progressive." That word has emotive content--"progressive" seems good--but all it means is that the higher your income, the higher your tax rate. One economist friend argued that bringing in the Social Security tax (FICA) and the Medicare tax (HI) makes the system less progressive than otherwise. That's absolutely true for Social Security. The tax rate for Social Security is a flat 12.4% (6.2% for employer and employee each) for earnings up to $127,200 and zero thereafter. (In 2018, the threshold will be $128,400.) It's probably true for Medicare. One factor makes the Medicare (HI) tax a regressive tax and one factor makes it progressive. I don't know which dominates. The factor that makes it regressive is that the tax is just on earnings and higher-income people have a higher percent of their income that is not classified as earnings--dividends, interest, rents, royalties, and capital gains, to name five. The factor that makes it progressive is that Obamacare added 0.9 percentage point to the HI tax for individuals making more than $200,000 and for married couples filing jointly making more than $250,000. The net effect of all federal taxes is that the higher your income, the higher your average tax rate. (The CBO produced the graph below--see its Figure 4 on page 11.) Of course, we can't simply look at whom the tax is imposed on to know who bears the burden. It is a virtual certainty, for example, that some of the corporate income tax burden is borne by workers. This means, of course, that the cut in corporate income tax will help workers. We use the term "tax incidence" to describe who bears the burden of a particular tax. In the study from which the figure above is taken, here's the CBO's explanation of how it allocated tax incidence. As it makes clear, these are assumptions. They may not be true. CBO allocated individual income taxes and the employee's share of payroll taxes to the households paying those taxes directly. The agency also allocated the employer's share of payroll taxes to employees because employers appear to pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO also added the employer's share of payroll taxes to households' earnings when calculating before-tax income. CBO allocated excise taxes to households according to their consumption of taxed goods and services (such as gasoline, tobacco, and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household's spending on taxed goods and services was the same as that reported in the Bureau of Labor Statistics' Consumer Expenditure Survey for a household with comparable income and other characteristics. Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of corporate income taxes to owners of capital in proportion to their income from interest, dividends, rents, and adjusted capital gains; the adjustment smooths out large year-to-year variations in actual realized gains by scaling them to an estimate of their long-term historical level given the size of the economy and the tax rate that applies to them. CBO allocated the remaining 25 percent of corporate income taxes to workers in proportion to their labor income. My gut feel is that the allocation of 25 percent of corporate income taxes to workers is too low. But it's only a gut feel. (20 COMMENTS)[...]

Why Addicts' Deaths Are Not a Social Cost of Opioid Consumption, by Contributing Guest

Wed, 06 Dec 2017 16:26:54 -0500

by Pierre Lemieux ...what does it mean to say that the loss of life is a cost for an individual? The report published last month by the Council of Economic Advisers (CEA) on the cost of the opioid crisis raises more questions than it answers. Mainly because it incorporates the estimated value of the lives lost through overdose (using the "value of a statistical life," in the standard cost-benefit jargon), the reports reaches a humongous figure of 2.8% of GDP, as much as 44 times previous estimates. The major problem is that the CEA estimates the social cost of opioid consumption without even mentioning its benefits. Cost-benefit analysis, whose methodology the report claims to follow, has no meaning if only the social cost is calculated. The social benefit, which is the sum of individual benefits, must also enter into the calculation. Opioids must have some perceived benefits, and even perceived net benefits, for otherwise nobody would take the risk of consuming the stuff. It is reasonable to think, as Gary Becker's theory of rational addiction proposed, that an addict does not enjoy his addiction per se, but that it helps him face pre-existing personal problems that would otherwise be even more difficult to support; which is to say, it provides utility. The standard objection is that the consumer (of opiods, in this case) does not "internalize" all costs. Unaware of what he is doing, he ignorantly imposes part of the cost on himself as if such costs were negative externalities (cost imposed by others). Exaggerating a bit (perhaps), we must assume that an addict knows what he is doing to himself at least as well as a typical politician understands what he is doing to others. At any rate, one cannot just ignore benefits. A voluntary loss of life, including through freely assumed ex ante risk, cannot be counted as a cost if the corresponding benefits are not included in the calculation. It is like calculating the cost, but not the benefit, of the "automobile epidemic," or the cost of life (everybody dies at some point) without including its benefits. Cost are incurred to obtain benefits and lose all meaning if the latter are excluded. Can we go farther? Looking at the problem ex post, what does it mean to say that the loss of life is a cost for an individual? Since the individual is no more (at least in this life, outside of which costs presumably don't matter), it would seem that his lost utility is a sunk cost that should not enter into any current calculation. Of course, the future possibility of losing utility through death does matter for the victim. This is precisely why living individuals typically support criminal laws that deter murder - but not laws that deter them from doing what they want with their own lives. A murder ban deters murderers from making trade-offs between life and death for other people. There is a big difference between a risk freely incurred by the individual himself and a risk imposed on him by others. Lost productivity (which means lost production) raises similar issues. For example, a smoker who knows that smoking increases his risk of illness and thus of lower productivity and income, and still chooses to smoke, obviously judges that the benefit of smoking is higher. Many old studies on the "social cost of smoking" neglected this. If we take seriously the basic principles of cost-benefit analysis, an individual's death is a cost to himself, not to "society." It can only be conceived as a cost to society in the derived sense that social costs are the sum of individual costs, but then individual benefits must also be incorporated in social benefits. If a slave-master owns a young, productive slave, the latter's death is a cost to the former. But if the individual owns himself, his death or lost production is a cost only to himself. The normative assumption of self-ownership is a natural one t[...]

The Unbearable Arbitrariness of Deploring, by Bryan Caplan

Wed, 06 Dec 2017 14:02:44 -0500

As a self-identified non-Neurotic man, I'm not surprised by the social ubiquity of anger, sadness, and fear.  When something bad happens, my instinctive reaction is to say, "Calm down, it's OK" - especially if it doesn't personally affect me.  But I recognize that I'm odd.  When something bad happens, a psychologically normal person's instinctive reaction is to say, "Oh my God, that's terrible!" - whether it personally affects them or not.  At this point in my life, I'm almost inured to the anger, sadness, and fear that normal people chronically express.  They're clearly just built differently than I am.  While I suspect they could markedly improve their outlook if they wanted to, they don't want to.  Pride, I guess.  But while I've grown to accept their general negativity, I'm still astounded by what people choose to be negative about.  To my eyes, the specific items that people deplore look deeply arbitrary.Let's start with the latest scandal.  People all over the country - indeed, the world - have recently discovered that many celebrities are habitual sexual harassers.  Each new expose leads to public outrage and professional ostracism.  Why does this confuse me?  Because many celebrities do many comparably bad things other than sexual harassment, and virtually no one cares.  Suppose, for example, that a major celebrity is extremely emotionally abusive to all his subordinates.  He screams at them all the time.  He calls them the cruelest names he can devise.  He habitually makes impossible demands.  He threatens to fire them out of sheer sadistic pleasure.  But the abuse is never sexual (or ethnic); the celebrity limits himself to attacking subordinates' intelligence, character, pride, and hope for the future.  I daresay the average employee would far prefer to work for a boss who occasionally pressured them for a date.  But if the tabloids ran a negative profile on the Asexual Boss from Hell, the public wouldn't get very mad and Hollywood almost certainly wouldn't ostracize the offender.  A similar point holds for celebrity gropers.  When exposed, lots of people proclaim it "unforgivable."  But if a celebrity repeatedly got into same-sex bar brawls, there would be no outcry.  Even if the celebrity received probation after paralyzing an innocent stranger for life, he could probably keep working in show business.  Or to take a far more gruesome case: When the Syrian government last used poison gas, killing roughly a hundred people, the U.S. angrily deployed retaliatory bombers, to bipartisan acclaim.  But when the Syrian government murdered vastly more with conventional weapons, the U.S. government and its citizenry barely peeped.  The unbearable arbitrariness of deploring!In the past, I've made similar observations about Jim Crow versus immigration laws, and My Lai versus Hiroshima.  In each case, I can understand why people would have strong negative feelings about both evils.  I can understand why people would have strong negative feelings about neither.  I can understand why people would have strong negative feelings about the greater evil, but not the lesser evil.  But I can't understand why people would have strong negative feelings about the lesser evil, but care little about the greater evil.  Or why they would have strong negative feelings about one evil, but yawn in the face of a comparable evil.Well, I'm not at a total loss.  Perhaps strangely, I can explain what I cannot accept.  When I witness the unbearable arbitrariness of deploring, two unsympathetic types of explanations come to mind.  First, people's negative emotions depend far more on the vividness of the evil than its badness.  A hundred stories about [...]

What does it mean to say "The Fed did too much"?, by Scott Sumner

Tue, 05 Dec 2017 16:37:21 -0500

MRU has a video entitled "When the Fed Does Too Much". That led me to wonder, "too much what"? Too much discretion? Too much regulation? Too expansionary a policy? So I decided to watch the video. By conventional standards the video is perfectly fine. But then I'm not a conventional economist, and I disagree with several parts of the video. It begins by discussing the theory that the Fed helped to inflate a housing bubble with a relatively low interest rate policy during the period from 2003-05. Later in the video it suggests that monetary policy is a blunt instrument, and that it might have been better to address the housing issue with regulation rather than with tight money--which affects the entire economy. That was my favorite part of the video. Even later, there is discussion of cases where the Fed did too little, as during the Great Depression. It concludes with a look at whether monetary rules such as NGDP targeting could have prevented the Great Recession. Here are some reservations that I have with the video: 1. No persuasive evidence is presented in favor of the claim that there was a housing bubble. There is no discussion of the fact that Australia, New Zealand, Canada and the UK all had similar home price run-ups during the housing bubble, or that in those countries prices remained high after 2006. No discussion of the recent sharp recovery in housing prices, which have erased much of the post-2006 decline. 2. There is no discussion of what it would mean to claim that the Fed created the housing bubble. Does that mean there is some other Fed policy that would have prevented a bubble? Or that the Fed adopted a policy that was too expansionary for its own dual mandate, and the bubble was a side effect of that overly expansionary policy? Those are two vastly different claims. For instance, in their discussion of the Great Depression, Alex and Tyler omit any mention of the fact that the Depression was triggered by a tight money policy expressly aimed at restraining a stock market "bubble". Surely that case is relevant to the issue of whether the Fed should have adopted a more contractionary monetary policy to prevent the 2006 housing bubble! In the case of 1928-29, the Fed discovered that a somewhat tighter policy was unable to restrain stock prices, and that only a highly contractionary policy that tanked the entire economy was able to end the stock boom. In fairness, this dilemma is alluded to in the part of the video that views the Fed as a blunt instrument, but unfortunately this problem leaves the opening section somewhat incoherent. What would it mean for the Fed to have caused the housing bubble? Would it mean they failed to create a depression? (Presumably not.) Perhaps that there was some slightly more contractionary policy that would have prevented a bubble, while still keeping us within shouting distance of the dual mandate? (I doubt that would have been possible.) If the video had been entitled "Was Fed policy too expansionary?", then the meaning would have been clearer. Then evidence could have been presenting showing inflation and employment data during the bubble period, and comparing the actual performance to the Fed's dual mandate. Without that data, we have no way of evaluating whether Fed policy helped fuel the bubble. 3. Part of the problem with the opening section is that "monetary policy" is implicitly equated with "interest rate policy". The authors don't say this explicitly, but the viewer is led to believe that a more contractionary policy path during 2003-05 would have been a path of higher interest rates. As we saw in the eurozone after 2011, however, that is not necessarily the case. In my view, the adoption of a tighter monetary policy in 2003 would have created a double dip recession (just as in the[...]