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Last Build Date: Mon, 21 Aug 2017 11:02:16 -0500

Copyright: Copyright 2017

New Reflections on the Evolution in France, by Bryan Caplan

Mon, 21 Aug 2017 11:02:16 -0500

I just returned from a month in France.  I stand by everything I said during my last visit in 2008, but have plenty to add:1. The biggest change is the ubiquitous police and military presence.  Teams of militarized police and policified military patrol every tourist site and every public function, plus numerous random locations.  It wasn't just Paris; even small cities like Bayeaux were on guard.  I've never seen anything like this in the United States, even on September 12, 2001.2. France's massive effort still looks like security theater to me.  None of the major terrorist attacks of recent years targeted high-profile locations, and endless unguarded targets remain.  Any fanatic who can drive could kill dozens of people with ease.  So why isn't it happening every day?  Because suicidal fundamentalists are thankfully very very rare.  3. The behavioral economics of crime inspires some lingering doubt.  If ordinary people can be fooled by security theater, could would-be terrorists be fooled as well?  But given recent high-profile vehicular attacks, I can't take my lingering doubt seriously.  Terrorists may be dumb, but they're not that dumb.4. This visit, I noticed many more biracial French families - about 90% of them black-white pairings.  This wasn't just Paris; I saw the same pattern even in small towns in Normandy and Brittany.  Overall, French blacks seem markedly more assimilated than American blacks.  If they had a distinctive accent, I couldn't detect it.5. On my earlier visits to France, their grocery stores seemed to have markedly higher-quality food than in the U.S.  At least in the D.C. area, however, I'd say that France has actually fallen behind the U.S.  During an entire month in France, we never found bread better than what my neighborhood Wegmans sells every day.  Quality pastries and cheese are definitely cheaper in France (though even that partly reflected the strong U.S. dollar), but the best U.S. grocery chains have leapfrogged over their French counterparts.6. What I'd call France's "convenience gap" doesn't seem to have narrowed at all.  You don't have to look any further than a French hotel bathroom.  Most showers lack soapdishes.  Half of the toilets have seats so flimsy they wobble or fall off.  The median amount of counter space is under one square foot.  So many minor annoyances could be fixed for a few Euros, but they haven't been fixed.  7. I spent fifteen days teaching high school students at the John Locke Institute's Summer School.  The students - most from British boarding schools - were brilliant and enthusiastic.  Many of the students from British boarding schools were not actually British, but even the Nigerians, Spaniards, and Romanians seemed fully Anglified.  The biggest surprise: The students accepted one-on-one face-to-face essay feedback with good humor.  If they were American, I think many would have been on the verge of tears.  In strange contrast, the British students were visibly nervous during their mock interviews.  Weird.  8. I taught at two separate sessions of the summer school on a wide range of topics, including open borders.  The first group of students seemed to take cultural objections very seriously.  The second group barely mentioned culture; their most common objections revolved around brain drain.  Random variation?  Group dynamics?9. I also lectured on my case against education.  As usual with lay audiences, almost no one questioned the descriptive accuracy of the signaling model of education.  Instead, students' modal objection was distributional: Whatever the efficiency gains of budget cuts and vocationalism, the poor would lose out.10. I met an American student whose family probably survived World War II thanks to heroic Japanese non-conformist Chuine Sugihara.  If you don't know Sugihara's story, you should. (6 COMMENTS)[...]

All That Glitters Is Not Gold: A Parable, by Scott Sumner

Sun, 20 Aug 2017 19:37:31 -0500

Atlantis is on the gold standard. The unit of account is called the "dollar" and it's defined as one gram of gold. Atlantis has a state-owned gold mine with a monopoly on gold production, near limitless reserves, and a very low cost of production. The gold mine is charged with the responsibility of keeping the value of the Atlantis dollar stable, by adjusting the quantity of gold it sells (or buys) each month. There are also privately produced metals such as silver, palladium and especially platinum, which are close (but not perfect) substitutes for gold. When the gold mine injects gold into the economy, they typically buy platinum, which is considered a relatively safe asset (in case the gold mine later has to sell assets to keep gold from losing purchasing power.) All goes well until Atlantis is hit by a financial crisis, caused by reckless lending (ultimately caused by an ill-fated attempt by the Atlantis government to insure bank deposits--but that's another story.) The panicking residents scramble for any sort of safe asset they can find, and now gold and platinum become virtually perfect substitutes, and even palladium and silver are being considered pretty close substitutes. Open market purchases of platinum for gold don't have the usual impact on the price level. The state-owned gold mine struggles to stabilize the value of gold, which is gaining purchasing power (i.e. prices of goods and services are falling.) Unemployment is rising. The gold mine doesn't want to buy all the platinum, as it worries that market efficiency might be reduced. (Although if gold and platinum really are perfect substitutes, it's not clear why this would be so.) There are calls for the mine to buy palladium and silver, even . . . gasp . . . copper and zinc, but those purchases are viewed as excessively risky. Some radicals even call on the gold mine to start giving gold away, but the conservatives who run the mine wonder what would happen if prices started rising and they had to buy back lots of gold. Wouldn't the gold mine go broke without (platinum) assets on its balance sheet, or at least fail to achieve its mandate of stable prices? A Swedish mining engineer named Lars Svensson comes along with a "foolproof" plan to stop the deflation. He proposes reducing the gold content of the dollar. Instead of a dollar representing one gram of gold, henceforth it would be defined as 0.90 grams of gold. This would cause the dollar to lose purchasing power; even if gold itself remained as valuable as before. Then a very old historian recalls that something similar was proposed about 80 years ago by Irving Fisher, the last time Atlantis had a big financial crisis. And Fisher discovered that there were more than a dozen still earlier proposals of this type, going all the way back to the deflation of the 1820s. Unlike Atlantis, America is not on a gold standard. So I ask you, dear readers, what would be the fiat money equivalent of this foolproof escape from deflation? PS. Did you notice that I wrote a parable about liquidity traps without even once alluding to such a thing as "interest rates"? PPS. Svensson's plan worked at ending the deflation, but it led to court cases as to whether debts should be repaid in dollars as currently defined, or with dollars as defined at the time the loans were incurred. In a shocking (and legally dubious) 5-4 decision, the Atlantis Supreme Court allowed debts to be discharged using current dollars, even when the original contract specified payments in grams of gold. But the public didn't care; prosperity was returning to Atlantis. (2 COMMENTS)[...]

Prices and Your Pocketbook, by David Henderson

Sun, 20 Aug 2017 02:02:22 -0500

This is another in the series of NBC radio broadcasts that involved Milton Friedman as one of the three panelists. See here and here for earlier posts on the NBC shows. This one shows both Friedman and George Stigler to be believers in fiscal policy to control inflation and advocates of high taxes for the war effort. The three participants are Leo M. Cherne, executive director and editor-in-chief of the Research Institute of America, Milton Friedman of NBER and on leave in the Division of War Research at Columbia University, and George Stigler, associate professor of economics at the University of Minnesota and at the time visiting professor in the department of economics at the University of Chicago. The show is titled "Prices and Your Pocketbook." The date is June 27, 1943. Recall that the United States was in the midst of a relatively comprehensive regime of price controls at the time. Some highlights follow. Stigler introduces the show with typical Stigler humor: America, gentlemen, really is pretty lucky. It has about one hundred million military experts and one hundred million economists. The hundred million military experts are pretty well satisfied with the conduct of the war, and, as a matter of fact, I think one could even charge that they are a little complacent about the early day of victory. As one hundred million economists, though, they are not quite so happy. They, as consumers, claim that their prices are going up a good deal faster than their pocketbooks are growing. Friedman makes a point about the amount of production going to the war effort: approximately half of GDP: The point there is that only one of out of every two people who is producing goods these days is producing goods he himself can buy. The other people are producing instruments of war that they cannot purchase. Later, Stigler and Friedman discuss briefly how rationing distorts the statistics on pricing: Stigler: We can, therefore, say that, on the average, costs are up 25 per cent. It takes a dollar and a quarter to do what a dollar did only a couple of years ago. But that is not the whole story. You still have to be able to get the goods. ... Friedman: Try to buy an automobile these days unless you happen to have a ration coupon. Stigler on how price controls cause producers to reduce quality: Stigler: Let us add just one item to this background material of obvious information, but, nevertheless, things we ought to keep in mind for perspective. I have in mind quality degradation--houses are not heated so well or repaired so often; clothes are not so good; meats seem to be fatter in spite of anything steers can do; and so forth. Later, Stigler discusses how to reduce inflation: Stigler: The general picture is pretty clear. While we were cutting down on the amount of goods or at least not increasing the amount of goods, we were giving more and more dollars to consumers. The simplest way to stop it, and the sensible, fundamental way, is to take dollars away from people by withdrawing income from individuals, so that they cannot bid up prices. On price controls and rationing: Friedman: That is not quite so much an attack on a symptom really. Starting by fixing prices and saying that prices shall not be higher than a certain amount, we shortly found ourselves in the difficulty that people could not buy things at those prices because just saying that prices should not go up in no way increased the supply of goods available and in no way reduced the amount of money people had available. The only answer to that, unless we were willing to go to the fundamental cause and remove the excess purchasing power, was to try to ration the goods. [Notice that he doesn't mention another fundamental cause, at least of the shortages: the price controls.] Stigler: I think that we can say, by and large, in the field of rationing that we have done a very mixed job. On some commodities like sugar and like coffee, I think we have done a satisfactory bit of work. Then Friedman makes a point (pun not in[...]

Worstall on Robots and Jobs, by David Henderson

Sat, 19 Aug 2017 09:16:48 -0500

Tim Worstall, referring to my article that I posted on yesterday, makes an important point I should have made. Here are two highlights:

The Keynes point is here in Economic Possibilities for our Grandchildren. What Henderson says about it is entirely true, but it's incomplete, as was Keynes on this. As I say, both will go "Ah, yes" when bearded on this (well, maybe the ghost of Keynes). The biggest change in working hours over this past century is the fall in household working hours for women. I've seen one estimate which says that it took 60 hours of drudge work back in 1930 to run a household, today it's about 15 hours. I tend to think both those numbers are a little exaggerated, the first up, the second down, but still roughly correct.

What happened to all that work? We automated it. Ha Joon Chang and Hans Roslin refer to it as the "washing machine" but they mean that grab all of domestic technology, not just the washing machine, but the gas or electric stove, the microwave, the vacuum cleaner and on and on to the Roomba and the takeaway restaurant and the chilled prepared food aisle at the supermarket. It's precisely this which enabled the economic (near if you want to still complain about it) equality of women. Once that household work was automated then they could, and did, righteously, come out into the world of market paid work. Do note that this rise of female market work is only the second largest change in working hours over the past century--that decline of household work is larger than the rise of paid. This must be so as leisure hours have increased over the same time.

The whole article by Tim, which is not long, is worth reading. It's "The Robots Stealing Human Jobs--Bring It On,", August 19, 2017.


Henderson on Robots, Jobs, and Productivity, by David Henderson

Fri, 18 Aug 2017 14:25:15 -0500

If you're still worried that robots will be too human-like, consider what happened to men's jobs when women, who not only are human-like but also are actual humans, increasingly entered the labor force. Men's jobs didn't decline; they increased. In 1950, before the large entry of women into the U.S. labor force, 43.8 million men and 18.4 million women were employed. By 2015, women's employment had skyrocketed to 78.0 million, while men's employment, far from shrinking, almost doubled to 84.4 million.

The simple fact is that the amount of work to be done in the economy is unlimited. What's limited is the number of humans, which is why the late population economist Julian Simons called humans, in a book by the same name, the "the ultimate resource." There's a story--perhaps apocryphal but no less insightful for that--about an American engineer visiting China in the 1960s, when the Chinese government was building a dam. The American, noting the large number of workers digging with shovels, told his Chinese host that the digging could be done more quickly if the Chinese used steam shovels. "Oh," answered the host, "but then there would be fewer jobs." "I didn't realize that was the goal," answered the American, "but if your goal is jobs, you might consider replacing the shovels with spoons."

What this story illustrates is that although jobs are important for creating value, if we can create the same amount of value with less input, it's wise to do so. Who, for example, wouldn't want an innovation that allowed them to do their current job and be paid just as much, while working half the time? This is not a fantasy. Pay is closely tied to productivity. The hypothetical innovation would destroy "half a job." And we would love it. We would use that freed-up time for leisure, or, more likely given our unlimited wants, for doing other work that gives us pecuniary rewards. That is the story of economic growth.

This is from David R. Henderson, "Will Robots Steal Human Jobs?" Defining Ideas, August 17, 2017.


Fifty years ago, by Scott Sumner

Thu, 17 Aug 2017 15:52:09 -0500

Fifty years ago, the Red Guards were rampaging through the streets of Beijing. Chairman Mao issued weird, over-the-top statements about the evils of American capitalism. Free markets were seen as exploitation, as a sort of winner-take-all. Meanwhile, the US was trying to promote the ideology of open markets, emphasizing that trade is mutually beneficial.

So how about today? The FT quotes one of Trump's top advisors:

Steve Bannon, the brains behind Donald Trump's nationalist economic agenda, added to tensions roiling the White House by pouring scorn on his colleagues, rubbishing US policy on North Korea and pressing for the administration to be "maniacally focused" on "economic war with China". . . .

Mr Bannon said US defence and security officials were "wetting themselves" as they urged a softer line on China in order to secure its help in curbing Pyongyang's nuclear missile programme. North Korea was a "sideshow" in the context of a winner-takes-all competition between the world's two largest economies. . . .

Mr Bannon claimed he was working to place anti-China hawks in key positions at the defence and state departments.

"We're at economic war with China," Mr Bannon said. "One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path.

And here's how the Chinese responded:

China's foreign ministry responded by saying that the China-US economic relationship was "mutually beneficial" and there could be "no winner from a trade war". It added: "We hope that people will not use 19th- and 20th-century perspectives and measures to address 21st-century problems."

PS. In his later years, Mao became somewhat mentally unstable. His pragmatic advisors tried to moderate his policies, but his instincts were with the radical advice he was getting from the "Gang of Four".

PPS. This post is about rhetoric, not policy.


Hummel on the Curse of Cash, by David Henderson

Wed, 16 Aug 2017 21:57:03 -0500

In "Anti-Paper Prophet: Comments on The Curse of Cash." Jeff Hummel has written an excellent response to Ken Rogoff's response to Hummel's review of his book The Curse of Cash. The whole thing is well worth reading. Here are the parts I found most striking. When Rogoff gets to bona fide predatory acts within the underground economy, such as extortion, human trafficking, and violence associated with the drug trade, he descends primarily into lurid anecdotes. He fails to give even crude quantitative estimates to buttress his claim that eliminating cash would curtail these activities. As for corruption and bribery, Rogoff admits that they are really serious only in poorer countries--precisely where he also concedes that a premature elimination of cash would have dire economic consequences. In his discussion of terrorism, he admits that eliminating cash would have at best trivial impacts. Nor can Rogoff demonstrate any increased revenue for the U.S. government from phasing out large denomination notes. Relying on IRS estimates of the legally earned but unreported taxes in 2006 and extrapolating forward to 2015, he puts the potential gains to the national government at $50 billion annually (or less than 0.3 percent of GDP), along with approximately another $20 billion gain for state and local taxation. Yet his most comprehensive estimate of the seigniorage the government would lose from phasing out cash is $98 billion, or over 0.5 percent of GDP. Add to that the $32 billion annual cost of free electronic accounts for the poor, and Rogoff has failed to make a credible case that his proposal would create a net gain for the U.S. government, much less a net benefit for society overall. Here's Jeff's accomplishment in affecting Rogoff's own views: Rogoff's response to my review is quite respectful. He clearly wishes to encourage a civil dialogue on this question. Indeed, much of his response consists of amplifying details of his proposal. He does accuse me of "polemic exaggeration" because I titled my review "The War on Cash," but that hardly seems unwarranted given that the title of his book is The Curse of Cash. More important, Rogoff's response exhibits a shift in emphases [sic] in order to make his proposal appear still more tentative than in his book. Thus, he includes "many years of discussion and analysis" before any "advanced democracy is likely to start down the less cash-road." And he pushes the "ultimate move to coins only (which I throw out as a very long-run idea ...)" to "a time frame on the order of half a century or more." Although I have only skimmed Rogoff's book, I have read a number of reviews and the distinct view I got was that Rogoff wanted substantial moves to coins in a decade or two rather than in 5 decades. That's a huge change. Another insight from Hummel: However these shifts introduce some additional tensions into Rogoff's case. By admitting that phasing out cash is less of a priority for the U.S. than for other countries, especially those with high levels of tax evasion, he in essence is saying that his scheme is least needed where it is least onerous to implement and most needed where it is premature or dangerous to impose. And yet another great point: By adding emphasis to how slowly he is willing to implement his proposal, Rogoff also undercuts the urgency he has attached to overcoming the zero lower bound, which in his book he characterized as having "essentially crippled monetary policy across the advanced world for much of the past 8 years" (p. 4). Indeed, if he is really willing to wait "at least a couple decades" for the phasing out of large denomination notes, why not just rely on market processes and technological innovations already in play to achieve a less coerced transition? Rogoff even predicts in his response that "the use of cash in the U.S. in legal tax-compliant transactions will be well under 5 percent ten years from [...]

Can the left and the right agree on a monetary reform plan?, by Scott Sumner

Wed, 16 Aug 2017 02:33:06 -0500

In recent years, the political situation in the US has become highly polarized. But I'm not convinced that this necessarily prevents the two sides from coming together on monetary policy. Consider:

1. The idea of NGDP targeting has considerable (and growing) support on both the left and the right.

2. David Beckworth recently interviewed Matt Yglesias (who might be described as center-left), and at one point David read from a piece Yglesias wrote in 2011:

Most important, for all the flaws in the right's current critique of the Fed, they're correct to point to the need for accountability. The idea of a central bank that's "independent" of day-to-day politics is a good one, but too often that's come to mean a central bank that's immune from criticism or meaningful supervision. The Federal Reserve System's current vague mandate needs to be replaced with a specific target, defined in law. The public and the politicians we elected need to be prepared to hold the system accountable for achieving the target, and Congress needs to accept responsibility for picking a target that leads to good outcomes. Most of all, progressives need to start caring about the Fed and engaging in the debate over what it does.
3. Later in the interview (after the 40 minute mark), Yglesias expressed some views on Fed accountability that are quite similar to what I've been advocating. He referred to the need for the Fed to "look back" and evaluate past decisions, suggesting the Fed needed to ask these questions:
OK, in 2015, did that go the way we [the Fed] wanted it to? Heading into the year, what did we think we were going to achieve? Did we achieve it? And if we keep failing to achieve our goals, do we need to change our strategy? (Approximate quotation)
I've made similar proposals for more Fed accountability, and when I talk to conservative policy types in DC, I sense there is a lot of interest in moving in that direction. (3 COMMENTS)

War Crimes and the Long Run, by Bryan Caplan

Tue, 15 Aug 2017 09:39:57 -0500

Economists often sing the praises of credibility, also known as "time consistency."  When Kydland and Prescott won their Nobel Prizes in 2004, their citation gives this work pride of place:
Finn Kydland and Edward Prescott have been awarded the 2004 Bank of Sweden Prize
in Economic Sciences in Memory of Alfred Nobel for their fundamental contributions to
two closely related areas of macroeconomic research. The first concerns the design of
macroeconomic policy. Kydland and Prescott uncovered inherent imperfections-credibility
problems-in the ability of governments to implement desirable economic policies.
But what does credibility mean in practice?  One common objection to the Nuremberg trials was that they gave bad incentives to future war criminals.  If war criminals know they'll be tried and executed if they lose, self-interest urges them to fight to the bitter end.  From this perspective, the trials were short-sighted.  They satisfied the impulse for revenge, but extended the duration of future wars.

On reflection, however, that's only a medium-run view.  The apostle of credibility could easily retort, "Yes, the Nuremberg trials encourage future war criminals to fight to the bitter end.  But they also discourage future leaders from committing war crimes in the first place.  We should take a truly long-run view." 

In politics, the masses are highly impulsive.  They favor whatever feels good at the moment; medium- and long-run effects are usually too dull and remote to contemplate.  Elites, however, often want to claim the mantle of credibility - and deride their opponents' short-sightedness.  If you're paying attention, however, the real elite debate is rarely Credibility Versus the Easy Way Out.  Instead, it's Medium- Versus Long-Run Credibility.  Should the U.S. reach a new understanding the Russia?  In the short-run, it wounds U.S. pride.  In the medium-run, it helps resolve a bunch of pressing global issues, like the Syrian Civil War.  In the long-run, it encourages countries to act like Russia.

What's the prudent course?  Economists' rhetoric suggests that we put the long-run uber alles.  But a real answer requires a massive detour into the psychology of history.  How long do world leaders even know what other countries did in the past?  How long will they remember?  And how much does this knowledge affect their expectations?  Personally, I don't know - and I doubt many people who pontificate on the value of credibility know either.


The Ethics of Charles Koch, by David Henderson

Tue, 15 Aug 2017 00:05:21 -0500

Charles [Koch] is a true believer, whose free-market beliefs are unquestionably self-interested--but also undeniably sincere. His value system is apparent in all aspects of his company, including Koch's lobbying operation. Until the early 1990s, the company didn't have a Washington presence; this, one former Koch lobbyist said, reflected Charles's inherent distrust of politicians and his anti-government bent. Once it did open a Washington office, prompted by the wave of government investigations and the bad PR stirred up by Bill Koch, the company's lobbyists operated differently than the K street-hired guns that stalk the halls of Congress for their corporate clients.

Koch lobbyists don't shift their positions based on the political headwinds. According to one Senate Republican leadership aide, they won't be found pressing for subsidies in one bill and opposing them in another. "They're not rent seekers," he said. The overriding factor guiding the company's lobbying agenda is not whether a legislative proposal will be good or bad for Koch Industries, but whether it is consistent with Charles's libertarian beliefs.

Richard Fink, Charles's top advisor, enforces ideological consistency across the spectrum of Koch business units, and he frequently intercedes to prevent them from inadvertently transgressing Charles's free-market creed. Such was the case when one Koch business unit, which had developed an environmentally sensitive incinerator, sought permission to work with regulators to strengthen environmental rules. This might have improved the company's competitive position, but it went against Charles's overarching philosophy. Fink spiked the idea.

This is from Daniel Schulman, Sons of Wichita. I posted about it yesterday.

It speaks for itself.

I'm a footnote and endnote reader. When I read something interesting, I want to see the source. Unfortunately, in this heavily endnoted book, there are huge holes. There are lots of interesting stories and stated facts without any endnote telling the source.