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Recent Posts

Here are the 10 latest posts from EconLog.

EconLog December 10, 2017

A Man Called Ove, by David Henderson

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.


EconLog December 10, 2017

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

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 of degree. (Or you might use Bayesian terminology and talk about changing probabilities of NGDP targeting being superior.)

As far as the use of futures targeting, a refutation would occur if NGDP futures targeting resulted in actual NGDP become more unstable.

PS. Eliezer Yudkowsky left a very interesting comment after my previous post. (A rare comment that I had to read multiple times to fully absorb.)


EconLog December 8, 2017

My Excerpt in The Atlantic, by Bryan Caplan

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


EconLog December 7, 2017

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

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.

EconLog December 7, 2017

What's my core message?, by Scott Sumner

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.

EconLog December 7, 2017

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

cityhill.gifWhile 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."

EconLog December 6, 2017

Average Federal Tax Rates by Income Quintile, by David Henderson

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.)


EconLog December 6, 2017

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

by Pierre Lemieux

...what does it mean to say that the loss of life is a cost for an individual?

drug scales.jpg 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.

EconLog December 6, 2017

The Unbearable Arbitrariness of Deploring, by Bryan Caplan

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 celebrity harassers would upset the world far more than ironclad statistical proof that 10% of celebrities harass.  Indeed, it's likely that one detail-rich story about a celebrity harasser would upset the world more than the best statistical study ever performed.

Second, people's negative emotions are intensely social.  People don't want to rage alone.  They want to get mad with their friends and countrymen.  So when a new round of ugly stories pop up, almost no one asks, "Is this really the best target of our collective anger?"  Instead, they jump on the bandwagon.  Who cares where we're going, as long as we're united in negativity?

You could insist that my ranking of the seriousness of various offenses is wrong - or at least no more judicious than the broader public's.  But even if I'm wrong on the specifics, am I really wrong about the underlying psychology of anger, sadness, and fear?  Whatever vexes you, it's hard to deny that vividness and herding - not intrinsic badness - provide the standard targeting system for human negativity.  And if you want to be upset about what really matters, you must start by deploring vividness and herding, the eternal deceivers of mankind.


EconLog December 5, 2017

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

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.

Screen Shot 2017-12-05 at 2.41.12 PM.png
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 the 10 latest posts from EconTalk.

EconTalk December 7, 2017

Have you worried about your food today?

Do you ever feel a pang of guilt when you throw food scraps in the trash? Do you hear your mother's voice reminding you of starving children in far-flung corners of the globe? Have you ever thought you should be composting? What different sorts of choices have you thought you should make? Counseled others to make? time waste.jpg This week's EconTalk guest, historian Rachel Laudan, argues that food waste has become a moral issue, and that's the wrong way to frame it. Laudan's conversation with host Russ Roberts tries to restructure the argument about food waste and make thinking about our food choices less "neurotic."

What are your thoughts on this week's episode? Are you comfortable in our current (American) food culture, or do you agree that the system is broken? We'd love to continue the conversation.

  1. Laudan says there is "a religious aspect" to the way people think about food choices. Roberts says it's all lexicographical. What do they mean, and what do you think has brought this state of affairs about? To what extent do you think the moralization of food choicesis permanent?

EconTalk December 4, 2017

Rachel Laudan on Food Waste

food%20waste.jpg Historian Rachel Laudan talks with EconTalk host Russ Roberts about food waste. Laudan argues that much of the alleged wasting of food serves a purpose and reducing waste would have costs that exceed the benefits. She also discusses the role of food taboos and moralizing about food. Along the way, Laudan defends the virtue of individual choice and freedom in deciding what to eat.


Time: 1:01:50

EconTalk December 1, 2017

Open for 230 Days

open.jpg How many steps would you have to go through if you wanted to open a new business in the United States? How about India? Venezuela? The difference might be important to more than just you...And that's what this week's episode of EconTalk, filmed before a live audience as part of the Atlas Network's Liberty Forum, was all about.

Host Russ Roberts welcomed the founder of the World Bank's Doing Business Report, Simeon Djankov (who also took a turn as the Minister of Finance for Bulgaria) and Atlas Network COO Matt Warner. Djankov's work in measuring the regulatory burden on business across the world's countries was the focus of much of the conversation, though an interesting turn toward the role of think tanks occurred toward the end.

Now we'd like to hear your thoughts on the conversation. Respond to the prompts here in the Comments, or pose your own questions for thought. We'd love to continue the conversation.

  1. Naturally, Roberts is skeptical of the reliability of the Doing Business Report (DBR) measurement practices. What does he mean when he says he fears that some nations might "teach to the test?" To what extent is this concern valid?

EconTalk November 27, 2017

Simeon Djankov and Matt Warner on the Doing Business Report and Development Aid

econ%20dvpt.jpgSimeon Djankov, creator of the World Bank's Doing Business Report, and Matt Warner, Chief Operating Officer of Atlas Network talk with EconTalk host Russ Roberts about the role regulation plays in economic development and the challenges of measuring regulatory barriers to new business creation.


Time: 1:15:27

EconTalk November 22, 2017

Underrated Transformations- More Than Meets the Eye

elevator.jpg This week, EconTalk host Russ Roberts welcomed back Tim Harford to discuss his new book, Fifty Inventions That Shaped the Modern Economy, based on a BBC podcast series he did by the same name. Their conversation (and Harford's book) is a whirlwind tour of the mundane, and that's exactly what makes it beautiful. According to Harford, his goal with each of his 50 picks was to "teach people a lesson about the way the world economy works through the medium" of each invention. Their chat is full of economic "mysteries," such as, "Why is Manhattan one the greenest cities in America?" And "Why is it better for the environment to ship juice boxes rather than oranges?"

So let's hear what you took away from this week's conversation. Pose a question, suggest a new economic "mystery," or answer one of ours. We'd love to continue the conversation.

  1. Both Roberts and Harford muse that we don't even know that names of many of the people who originated these transformative inventions. In thinking about invention and innovation, why do you think we have a tendency to think in terms of the spectacular?

EconTalk November 20, 2017

Tim Harford on Fifty Inventions That Shaped the Modern Economy

50%20Inventions.jpgFinancial Times columnist and author Tim Harford talks with EconTalk host Russ Roberts about Harford's latest book, Fifty Inventions That Shaped the Modern Economy. Highlights include how elevators are an important form of mass transit, why washing machines didn't save quite as much time as you'd think, and the glorious illuminating aspects of light throughout history.


Time: 1:08:50

EconTalk November 15, 2017

To Tip or Not to Tip

kids tip.jpg Is tipping a relic of the past that has outlived its usefulness? Should restaurant servers work for tips or a living wage? This week, EconTalk host Russ Roberts welcomed back political scientist Anthony Gill to discuss his recent piece on teaching about tipping.

Now we'd like to hear more from you. Use the prompts here to share your reaction to this week's episode, or to spark your own conversation offline. Feel free to post your own questions here, too. We'd love to converse with you.

  1. Did your parents teach you to tip for service? If so, what was their rationale, and was there a guideline for how much to tip?

EconTalk November 13, 2017

Anthony Gill on Tipping

tipping.jpg Why does tipping persist? Despite the efforts of some restaurants to stop tipping, it remains a healthy institution and has recently spread to Uber. Political scientist Anthony Gill of the University of Washington talks with EconTalk host Russ Roberts about why tipping persists and what it achieves despite there being no formal way of enforcing this norm.


Time: 1:05:43

EconTalk November 10, 2017

The Infidel or the Professor?

letters.jpg Longtime EconTalk listeners have had much occasion to consider the influence of Adam Smith. In this week's episode, discussion of Smith takes an interesting turn as host Russ Roberts welcomes political scientist Dennis Rasmussen to the show. Rasmussen's new book, The Infidel and the Professor, explores the deep and enduring friendship between Smith and philosopher David Hume, twelve years Smith's senior. How did their friendship and works influence each other? What circumstances of time and place have made their influence so profound? And how were the two men able to sustain such a meaningful friendship when they spent practically no time together?

As usual, we'd love to hear your own musings and Smith, Hume, philosophy, and friendship. Share your response to any of the prompts here below...Or use them as prompts in your classroom, at the dinner table, or even at Happy Hour. We'd love to hear about your conversation.

  1. We're used to thinking of Adam Smith as a champion of commerce and exchange. Yet Rasmussen argues that Hume may in fact be the greater champion. Have a look at Hume's essay, "Of Refinement in the Arts" On what moral grounds does Hume make the case for commerce? To what extent do you find his case convincing, either on its own or in comparison to Smith?

EconTalk November 6, 2017

Dennis Rasmussen on Hume and Smith and The Infidel and the Professor

Infidel%20and%20Professor.jpg How did the friendship between David Hume and Adam Smith influence their ideas? Why do their ideas still matter today? Political Scientist Dennis Rasmussen of Tufts University and author of The Infidel and the Professor talks with EconTalk host Russ Roberts about his book--the intellectual and personal connections between two of the greatest thinkers of all time, David Hume and Adam Smith.


Time: 1:11:37