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Last Build Date: Mon, 24 Apr 2017 21:50:22 -0500

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Score One for United Airlines, by David Henderson

Mon, 24 Apr 2017 21:50:22 -0500


With all the negative publicity United Airlines has had lately, I want to share a positive. Yesterday morning, I was flying from Washington Dulles to LAX, with a short time for my connecting flight from LAX to Monterey. We boarded late because one of the runways at LAX was closed for construction and the LAX air traffic controllers were rationing landings. Our pilot explained that to us when we boarded and told us that even though we were not allowed to take off until about 9:50 a.m. (the flight was scheduled to leave the gate at 8:30 a.m.) he was going to go out and hope for a slightly earlier takeoff. We got near the runway and then he announced that we would wait 15 to 20 minutes, the seatbelt light would be turned off, and the flight deck was open for those who wanted to come up. There were about 30 New Zealand boys on the flight from some sports team and I thought there would be a rush to the cockpit. There wasn't. I'm convinced that almost no one listens to announcements any more because so much of it is boilerplate. Somehow I've trained my ear to not listen to boilerplate but to hear the new stuff. I quickly unbuckled my seat belt and headed to the front. I was the first one there. I talked to the pilot and second officer, who were both friendly, and took some pictures. The pilot invited me to sit in his seat and wear his hat. Thus the picture above.

I wanted to make room for other people in line--as it turned out, there was only one--and so after a minute or two, I headed back. I saw almost everyone in first class as I walked back to coach grinning at me and I assumed that they were just enjoying my enjoyment of the opportunity. Wrong. The pilot came on the PA system and announced that his hat was missing. Sheepishly, I walked back and returned it. I'm so used to wearing a Golden State Warriors hat, especially during the playoffs, that I had only minutes earlier taken it off and put it in my backpack. So the hat on my head didn't feel unusual.

We landed at LAX at about 11:45 and I got on my phone and found out that my Monterey gate for my flight leaving at 12:20 was 88, and that the gate we were landing at was 70A. That meant a long walk, but I know the airport well and knew I could do it. The problem: another United flight was at our gate. So we didn't get to the gate until about 12:07 p.m. So when I saw this coming, I asked the flight attendant if she could announce that some people have tight connections so if you don't, please stay seated for a few minutes. She said she would and she did. But notice what I said above: few people listen. So, sure enough, as soon as the seat belt light went off, almost everyone in front of me stood, many in the aisle. I politely explained to those ahead of me that my flight was leaving in 10 minutes (it was now about 12:10) and asked if I could get ahead. One guy got defensive but, because I didn't get angry back, cooperated. I got off the flight at 12:12 p.m. and ran through the airport. The gate agent at 88 was waiting for me and I got on at 12:20 p.m. The big burly guy sitting next to me hogged the arm rest but I didn't care. I would be home by 2 p.m. and have the afternoon with my wife.

When we got off the plane, I thanked the flight attendant and pilot for waiting.

HT to my friend Eric Garris for using photoshop to lighten the picture.


Trump and Le Pen, by Scott Sumner

Mon, 24 Apr 2017 17:00:52 -0500

The stock market behaved rather strangely in the period before and after the November elections. Before the election, stocks reacted negatively to each Trump surge in the polls, and stock futures fell late in the evening of November 8th, immediately after it became clear that Trump would win. Stock investors normally "root" for the GOP candidate. Indeed a GOP win in the presidential elections usually boosts stock prices by about 2% (although stocks actually have not done very well during GOP administrations.) To make matters even more confusing, stocks rallied strongly in the days and weeks after the election.

One possibility is that prior to the election investors were worried about Trump's call for protectionism and expelling illegal aliens. After the election, they were reassured that Trump would behave more pragmatically, and heartened by expectations that Trump would sign GOP tax cuts and also engage in deregulation.

A similar pattern occurred in the UK after the recent Brexit vote, where stocks initially fell and then rallied strongly.

One can discern two types of Trumpism. One type is very populist and nationalistic. Trump adviser Steve Bannon has been pushing for nationalistic economic policies and FDR-style spending programs to boost the economy. In contrast, Jared Kushner and Gary Cohn have a more internationalist perspective, and are more aligned with both Wall Street and the free market wing of the GOP.

Last night, Emmanuel Macron came in first in the French presidential election, and is now widely expected to win in the second round against Marine Le Pen. Think of Le Pen as being like the Steve Bannon side of the Trump administration. Le Pen is like Trumpism without the attachment of the GOP (or the UK Tories.) Like Trump, Le Pen is a nationalist on economics and immigration. Unlike Trump, she's also very left wing on broader economic issues.

The French stock market is up over 4% as I write this post, reflecting relief that Le Pen is not likely to win. While the election outcome was in line with the polls, the recent surge of a far left socialist had led to some concern that Macron would not even make it to the second round. Indeed four candidates ended up bunched together in the 19% to 24% range, with Macron being viewed as the most electable alternative to Le Pen. If Macron had not made it to the second round, the French stock market might well have plunged sharply, especially if the only two choices had been on the extreme right and the extreme left. (Le Pen is viewed as being on the right, despite her vaguely socialist views on government spending.)

To summarize, the recent market response to the French elections helps us to better understand the previous market reactions to Trump (and perhaps to Brexit.) Investors are less concerned by moderate nationalism if it is embedded within a "conservative" administration that it sees as relatively business friendly. But there is one additional factor in the French election that differs from the earlier US and UK votes. France is part of the eurozone, and a win for Le Pen might have cast doubt on the future of the single currency project. This may explain why markets rallied strongly all across the eurozone. Indeed, stocks in Italy rose even more sharply than in France, as Italy has been widely viewed as a potential domino if the euro should start to unravel.


Earth 2.0?, by Bryan Caplan

Mon, 24 Apr 2017 13:37:48 -0500

The latest Freakonomics Radio is on "Earth 2.0: Is Income Inequality Inevitable?"  I'm pleased to be prominently featured alongside Jeff Sachs and Alice Rivlin.  A few highlights:

And we'll remember to keep our eye on the economic ball:

CAPLAN: Any time you're trying to analyze a complex problem, just forget all the other stuff at first, and just say, "Well, what does this do to the productivity of mankind?"

But not everyone shares Kanter's views on inequality.

CAPLAN: It's definitely the kind of problem that we should worry a lot less about.

Bryan Caplan is an economist at George Mason University.

CAPLAN: The main predictor of living standards of not just most people but the poorest people in the country is productivity in that country. Countries that produce a lot of stuff aren't just good places to be rich or middle class; they're good places to be poor. So when people complain about people being left behind ... China's got 1.3 billion people. Sure, someone's going to be left behind in there. But is it better to be poor now in China than it was 20 or 30 or 50 years ago, when people were starving to death? There is no question. It is only by going and forgetting history, forgetting comparisons, and then searching through a vast number of people to find a sad story that we can forget the big picture. What is the big picture? Not that we can find something that happened that is bad in the world so vast we can't even imagine it, but seeing what is happening overall. What is the general trend, and how can we keep the general trend good?

I even get to make the case for not just open borders, but desert itself:
CAPLAN: I am old-fashioned enough to like the distinction between the deserving and the undeserving poor. Right now, we have a lot of very expensive government programs that give money to everybody eventually. Old-age programs. Social Security writes checks to Bill Gates like anybody else. Again, to me, this is insane! Why tax everybody to pay for them in a situation that everybody knows they'll eventually reach, as long as they don't die young? Thinking about kids and the elderly in the same breath is crazy. You're born an orphan and there's nothing you could have done about that. That's totally not your fault. But if you are starving when you're elderly, then there's a question: why didn't you plan for this, which was totally foreseeable in every way?
Hear the whole show.


Bretton Woods as a "guardrails" approach to monetary policy, by Scott Sumner

Mon, 24 Apr 2017 12:09:38 -0500

I now favor a monetary policy rule that I have dubbed the "guardrails" approach, although a more accurate metaphor might refer to the beeper you hear if you are about to hit a car in the front or rear when parallel parking. Under this approach, the Fed would offer to sell unlimited NGDP futures contracts at a price featuring 5% growth, and also offer to buy unlimited NGDP futures contracts at a price featuring 3% NGDP growth. Someone expecting more than 5% NGDP growth would buy these contracts from the Fed, and profit if growth did indeed exceed 5%. A bearish investor would sell 3% NGDP futures contracts to the Fed, anticipating sub-3% growth. Because this is an unfamiliar concept, I'd like to compare it to the Bretton Woods regime. Under that system, central banks promised to keep the foreign exchange value of their currencies within a band of plus or minus 1% around the official par value. To make things simple, let's suppose the Canadian dollar had been pegged to the US dollar at one for one. Then the Bank of Canada (or their Treasury) would promise to sell unlimited US dollars at a price of $1.01 Canadian, or buy unlimited US dollars at a price of $0.99 Canadian. As long as the actual exchange rate was within the band, traders would have no incentive to buy and sell US dollars with the Canadian government. But the plus or minus 1% exchange rate band would provide "guardrails" or limits on the amount of exchange rate volatility that the Canadian government would tolerate. Now let's compare the two approaches, Bretton Woods and NGDP futures guardrails: 1. Under both systems, the central bank would be completely free to conduct discretionary monetary policy as they saw appropriate, as long as they adhered to their promise to buy and sell their currencies at the specified guardrails. Despite this flexibility, these are clearly rules-based approaches, which put important limits in discretionary policy. (Just as the US government promise to buy dollars at $20.67/oz. allowed some flexibility, but also put clear limits on discretionary monetary policy during the 1920s.) 2. Under both regimes the system can be "calibrated" to become either more discretionary or more rules based by widening or narrowing the width of the guardrails. 3. The Bretton Woods regime can be regarded as a wager that the Canadian economy would perform best if the exchange rate were kept roughly stable vis-a-vis the US dollar. My guardrails proposal is a wager than the US economy would perform best if NGDP futures prices remained close to a 4% growth target. That wager has two components; the assumption that 4% NGDP growth expectations are desirable, and the assumption that the market price of NGDP growth contracts is close to the market expectation of NGDP growth. 4. Neither system requires the central bank to do anything, unless asked to by the public. Thus the Fed would not have to set up a NGDP futures market, and it would not matter at all if no such market existed. The Fed would not have to watch for fluctuations in NGDP futures prices. They could simply sit back and wait for traders to approach them with offers to buy and sell NGDP futures contracts at the specified price. 5. Both regimes expose the central bank to investment risk, but only if they allow the future value of their target to move outside the guardrails. Thus if the Canadian dollar were to fall to below 99 cents, the Canadian government would suffer losses on the Canadian dollars they had purchased to prop up the exchange rate. If the future level of NGDP fell below 3% growth, then the Fed would lose money on its purchases of 3% NGDP contracts. 6. Neither regime is susceptible to the zero bound problem. The Swiss recently pegged their currency to the euro for a period of over three years, despite being hard up against the zero bound (actually negative rates.) They could have chosen to do so for much longer. At the time, speculators were also buying the Danish krone, a[...]

Adam Smith's pins, by Alberto Mingardi

Sun, 23 Apr 2017 07:02:23 -0500

Any book is the child of its own times, rather obviously. This means that sometimes parts of even great books do not necessarily age well. Examples the author uses to make his case may appear rather obvious to the contemporary reader, but alien to posterity.

Some examples are immortal, such as Leonard Read's magnificent little story, "I, Pencil", which resembles Walter Lippmann's breakfast and Adam Smith's woolen coat. But, giving lectures to high school students in Italy and using "I, Pencil" regularly, I can tell you that sometimes I have the impression that youngsters today find the very idea of talking about pencils so...exotic. Well, they have still seen pencils, and some of them still use them, so in a way that adds up to the power of Read's story: see the marvels of cooperation in objects of sheer simplicity.

But what about Adam Smith's pin factory? What are pins really for? I can picture a young kid asking this question, particularly as she may have never seen her grand-mother working at her sewing machine or mending clothes (a far more common picture just a few years ago; my grand-mother always had a sewing machine in her apartment).

Virginia Postrel has a great article on Reason on what pins were, at the time Adam Smith picked the pin factory example to explain a more and more complex division of labour. She explains:

Nowadays, we think of straight pins as sewing supplies. But they weren't always a specialty product. In Smith's time and for a century after, pins were a multipurpose fastening technology. Straight pins functioned as buttons, snaps, hooks and eyes, safety pins, zippers, and Velcro. They closed ladies' bodices, secured men's neckerchiefs, and held on babies' diapers. A prudent 19th century woman always kept a supply at hand, leading a Chicago Tribune writer to opine that the practice encouraged poor workmanship in women's clothes: "The greatest scorner of woman is the maker of the readymade, who would not dare to sew on masculine buttons with but a single thread, yet will be content to give the feminine hook and eye but a promise of fixedness, trusting to the pin to do the rest."

Read the whole thing.



Crash Pad, by David Henderson

Sat, 22 Apr 2017 09:52:45 -0500

On a United flight from San Fran to Washington Dulles yesterday, I found the flight attendants particularly professional and courteous. When I went to the back to stretch my legs, I did what I often do: asked a flight attendant where she was based. This particular one answered that she's based in San Fran but lives in Miami. So she arranges her schedule so that she is in San Fran for 3 weeks and Miami, with her boyfriend, for 5 weeks. I asked her how that works: where does she stay in San Fran?

Her two word answer: crash pad. I didn't know what that was. She explained that 18 flight attendants share a 3-bedroom apartment near SFO. She said it's illegal, but I don't know whether that means that the local government has a regulation forbidding it or it means that it violates the rental contract. I asked her what the maximum number of people sleeping overnight it is at any one time. The most she's seen is 7: two in each bedroom and one on the couch. Her share of the rent: $420.

I love hearing about the various ways people with unusual schedules adjust to high housing costs in the Bay Area.

On a later stretching-my-legs trip to the back, I asked another flight attendant what she did. She led by saying that she doesn't have a "crash pad." Her familiarity with the term made me think that it must be a common living arrangement. She lives in Fresno and drives to San Fran.

I've categorized this under "Revealed Preference," but it's really about people doing the best they can, given their knowledge, within constraints, in ways that no central planner would be able to figure. So I've also added "Central Planning vs. Local Knowledge."


The "national defense" argument , by Scott Sumner

Fri, 21 Apr 2017 10:26:03 -0500

The Financial Times reports that the Trump administration is considering steel tariffs: The US has set the stage for a global showdown over steel, launching a national security investigation that could lead to sweeping tariffs on steel imports in what would be the first significant act of economic protectionism by President Donald Trump.  The decision to use a 1962 law allowing the US government to limit imports that threaten its security readiness is intended to deliver on Mr Trump's campaign promises to bolster heavy industry and "put new American steel into the spine of this country", officials said on Thursday. A few observations: 1. Congress erred in delegating to the executive branch the power to set national security tariffs. Almost any industry could be deemed essential for "national security". 2. The US steel industry currently produces about 80 million tons per year. That's more than enough to meet our essential military needs. And this doesn't even account for the fact that steel production could be increased, as we are not operating at capacity. Yes, it might take a bit of time to bring mothballed plants back online, but as the following quotation suggests, new weapons now take far longer to develop than they did back in WWII: Civilian manufacturing capacity is now ALMOST ENTIRELY USELESS for defense purposes. Whereas in WWII, auto assembly lines could be used to make planes & tanks, and Singer made guns instead of sewing machines... Now all but the most basic defense products (personal firearms, sewing of uniforms, etc) must be made by specialized expert-firms. Super-weapons such as the F-22/F-35, M1A3 Abrams (it's under development now), and whatever we make when we finally field a next-generation artillery piece (cancelling the Crusader was a mistake, btw) require such a specialized knowledge-base & facilities, that they MUST be made by a dedicated defense industry - something we have (on a best-in-the-world level). Re-purposing a factory that built 2-ton SUVs to build 70-ton tanks just isn't happening. Even if it could, how much experience does your average auto-worker have in assembling uranium-ceramic-steel-composite armor properly, so as to maintain it's ability to take 125mm KE hits? A final point on this issue, is that modern war moves to fast to 'develop and manufacture new products after the fact, using civilian industries'. It's a 'run what ya brung' sort of affair And this doesn't even account for the fact that the US would likely have access to steel produced in friendly countries such as Canada, Mexico, Brazil, Japan and Germany. Sure, one could construct scenarios where some of that steel is cut off in a war (i.e., Japanese exports are disrupted by a war with China, or German exports in a war with Russia), but unless the US is fighting the entire world at once, we'd surely have access to at least some markets. And if steel imports really were cut off, where would we get our iron ore? Today we don't need much iron because of our use of scrap metal. But if we stopped building cars during a war, then far less scrap metal would be available. This also fails to account for the fact that warfare in the modern world tends to be asymmetric. The threat of nuclear annihilation means that we fight small countries, not large nuclear powers. The development of missile technology tends to make steel-intensive weapons (such as ships and tanks) more of a "sitting duck" than in the old days. I recall that a single Argentine missile took out a British destroyer in the Falklands War--and that was way back in 1983. Think about today's cruise missiles, and also consider that the sort of powerful adversary that would require the US to have a massive steel industry would be far more militarily advanced than Argentina in 1983. I'm not expert on modern weapons, but I'd wager that in today's warfare a big steel industry is less impor[...]

Ed Lopez is an Hungarian University, by Alberto Mingardi

Thu, 20 Apr 2017 15:27:04 -0500

The late Kenneth Minogue was a forceful advocate of universities being and remaining peculiar institutions. Their peculiarity should include independence and pluralism for universities to become the instrument of ideological homogeneity, or of political power generally speaking, meant to become something other than what they traditionally were and were meant to be. In these days, the newspapers are paying much attention to what is happening in Hungary, where the government passed a law aimed to change the requirements for foreign universities operating in that country. Such a move is by and large considered an attempt to shut down the Central European University, set up by George Soros in the early Nineties to help the development of a new Hungarian intellectual elite. The President and rector of the university is a distinguished scholar, Michael Ignatieff. The New York Times has a pretty good and comprehensive piece on the matter. Bloomberg points out that the Orban government has also "filed a separate bill to force civil society groups funded from abroad to be labeled as "foreign" agents. That bill mimics a 2012 law in Russia that was the first step in an exodus of U.S.-based and other non-governmental organizations there. It aims to "stigmatize" groups and to silence criticism, according to Soros's Open Society Foundations, which has given $400 million since the 1980s to Hungarian civil society groups. A group of classical liberal/ conservative think tankers signed a letter protesting against these new rules a few weeks ago. I am sure few of them have sympathies with most of the initiatives George Soros funds, but they all recognize the importance of a free, pluralistic and competitive public debate. But to have a public debate worth of its name, you should begin with a belief in the fact other people may have something to say which is worth listening too. What is so tragic of attempts to shut independent universities, or think tanks for that matter, is the fact that societies renounce sources of possible new wisdom, information, and ideas. Answers (and questions!) that may be worth listening to. Attending the APEE annual meeting recently, I learned of the initiatives of a group aiming to "unKoch your campus". I shall confess I didn't pay much attention to their activities before. The more I learned, the more I was shocked. Check out this article, particularly the little bit devoted to Ed Lopez, a scholar and educator who has been at the center of a smearing campaign. These people purport to reveal whatever "inconvenient" truth about the Koch family's donations to universities and the alleged strings attached to them (you know, they may actually suggest students read Ayn Rand...), and to counter the influence exerted by these arch-libertarian billionaires. The Koch brothers have long been important donors to libertarian organizations:* think tanks, grassroots groups, university centers. They operate like many other foundations which support research programs that they consider promising in addressing questions they consider important. Whatever their influence, they are far from having any hegemony in the academic world, which is predominantly hostile to limited government and free market ideas. On the background of this anti-Koch protests, you should really read this great piece by Phil Magness. These "unKoch my campus" people think differently and they think they're unveiling a terrible conspiracy. But make no mistake. What these people are trying to is not "unKoch my campus" but, in the case of Western Carolina University, to "unLopez" it. It sounds much better to say "refuse that money" than "fire that professor" but at the end of the day the two things are appallingly similar. In the case of CEU, we have a government declaring war on a private university and attempting to close it down. The enemies of a c[...]

Two Cheers for Fox News Channel, by David Henderson

Thu, 20 Apr 2017 02:45:07 -0500

Fox News Channel's decision to fire Bill O'Reilly caused me to reread a piece I wrote about Fox back in 2004. Were I to grade Fox, now, independent of O'Reilly, I would give them 1.5 cheers.

An excerpt:

Back to foreign policy, where Fox fails to earn the third cheer. Even here, though, there is some good news, and it's mainly due to Bill O'Reilly. O'Reilly is neither liberal nor conservative nor neo-conservative. Rather, he is a populist. Night after night he talks about how he's looking out for "the folks," a term I've never heard him define. I get the impression that "the folks" means, to O'Reilly, what former President Richard Nixon referred to as "the silent majority," a large group whom Nixon imagined populated the United States and favored the Vietnam war, but, somehow, never bothered to speak up in favor of it.

So what is the good news? Simply this. O'Reilly is neither incisive nor particularly thoughtful. But O'Reilly seems to have a high opinion of his own intellect. Because of that, he often hosts smart guests whom, I get the impression, he thought he could refute, but sometimes can't. Moreover, these are often guests who are more articulate and whose views are fresher, than the guests and views you typically see on the liberal networks. In December, for example, he hosted a University of Chicago law professor named Geoffrey Stone, who argued that U.S. defeat in Iraq would be good. O'Reilly regarded this as traitorous and that was about the extent of his argument. But Stone pointed out that if the U.S. government responded to defeat by exiting Iraq, many American lives would be saved. O'Reilly became muddled when faced with this argument -- he didn't know what to do with it. And millions of Americans got to see a guy with some gravitas saying, without animus, that the U.S. government should be defeated.

Don't miss the part about NBC fraudulently blowing up a GM truck and getting caught.


More Highlights from Hayek, by David Henderson

Wed, 19 Apr 2017 20:59:11 -0500

As I promised, here are some more highlights from Friedrich Hayek's The Constitution of Liberty.

The Role of Accidents:

Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.

The endnote at the end of this quote is great. Hayek quotes J.A. Wheeler from an article in American Scientist, 1956: "Our whole problem is to make the mistakes as fast as possible."

The Gain to Unfree Societies from Relatively Free Societies

There can be no doubt that in history unfree majorities have benefited from the existence of free minorities and that today unfree societies benefit from what they obtain and learn from free societies.

On this latter, I thought of China and Iran.

A Subtle Implication of the Above Quote

The significant point is that the importance of freedom to do a particular thing has nothing to do with the number of people who want to do it; it might almost be in inverse proportion. One consequence of this is that a society may be hamstrung by controls, although the great majority may not be aware that their freedom has been significantly curtailed.

Think, for example, of the developer in coastal California who has great difficulty getting permission to build a residential development. Many people are not aware of this, but it certainly hurts them if they are renters. Also, homeowners might not be aware but when they go to add that extra bedroom or bathroom and learn that they can't do it without permission and that permission isn't always straightforward, they learn something about the importance of this freedom to build.

Hayek's Overly Pessimistic (I think) Conclusion

There can be little doubt that man owes some of his greatest successes in the past to the fact that he has not been able to control social life [DRH note: that is, the lives of others.] His continued advance may well depend on his deliberately refraining from exercising controls which are now in his power. In the past, the spontaneous forces of growth, however much restricted, could usually still assert themselves against the organized coercion of the state. With the technological means of control now at the disposal of government, it is not certain that such assertion is still possible; at any rate, it may soon become impossible. We are not far from the point where the deliberately organized forces of society may destroy those spontaneous forces which have made advance possible.

Certainly the government's ability to exercise control and surveillance over us has increased. And yet we still see spontaneous forces all around us. It's a race.