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EconLog October 17, 2017

Again on the Catalonian secession and the EU, by Alberto Mingardi

Many people have pointed out that the Catalonian secession can trigger an economic shock. The Catalonians say they want to stay in the European Union and keep the euro, but they can't do so. If they secede, they'll need to enter again the EU (and the euro) as an independent state. And Spain would likely veto them out of the EU.

FT columnist Wolfgang Münchau wrote that "Catalan breakaway would make Brexit look like a cake walk", arguing that the main argument against Catalan independence is thus economic.

It may be a matter of words, but I thought that the problem was not "economic." Small states, if they're open economies, can survive and prosper in an era of globalisation. A more extended division of labour doesn't imply political unification, all the more so in an age when transferring information and traveling have never been faster and cheaper.

Rather the problem is political: that is, the European Union doesn't allow for an ordered exercise of the right of self determination. You can consider this inevitable, if you think the EU is nothing but a cartel of states. But it is certainly in striking contrast with that principle of subsidiarity often hailed by the European founding fathers. Or at least so I've argued in a letter to the Financial Times:

Secession from Spain would trigger exit from both the EU and the euro, which may account for a global economic shock. In fact, the Catalans do not want to leave the euro or the single market: only Spain. And yet they'll be forced out of European institutions because the latter are tailored around member nation states.

When you're forced to do something you do not want to, it's not economics, it's politics. And, indeed, the main argument Mr Münchau refers to is not economic, but political. In a globalised world, smaller political units do not need to fear isolation as long as they are open economies. Smaller states are less likely to be tempted by protectionism as its cost will be higher for them.

The problem the Catalans are facing lies with the legal infrastructure of the EU. Though the EU's founding fathers preached the principle of subsidiarity, they didn't allow room for the principle of self-determination of peoples in the treaties. Perhaps it is the political problem that should be tackled, establishing ordered ways of exercising the principle of self-determination at least within the EU. (2 COMMENTS)

EconLog October 16, 2017

Two Texas Talks, by David Henderson

I'll be giving in two talks in Texas this week.

Southern Methodist University, Dallas
Sponsor: O'Neil Center for Global Markets & Freedom
Topic: How Economists Helped End the Draft
Time: Wednesday, 6:00 to 7:00 p.m. (Reception to follow)
Place: Ernst & Young Gallery (Room 220 of the Fincher Building)

Baylor University, Waco
Sponsor: Baugh Center for Entrepreneurship & Free Enterprise
Hankamer School of Business
Topic: Economic Inequality: Popular Misconceptions and Important Facts
Time: Thursday, 4:00 to 5:15 p.m. (refreshments provided)
Place: Hankamer School of Business, Foster 240

If you come, please come up afterwards and introduce yourself.


EconLog October 16, 2017

Rethinking Macroeconomics, by Scott Sumner

I recently attended a conference at the Peterson Institute on "Rethinking Macroeconomics", which mostly meant returning macro to its Keynesian roots. Readers may know that I have a contrarian take on the crisis---I believe it occurred because macroeconomists did not take macro theory seriously enough. We do not need to rethink macro by adding in fiscal policy or paying more attention to the financial sector, rather we need to impress upon the world's central banks the importance of doing whatever it takes to keep aggregate demand growing at an adequate level. The major central banks (except in Australia) did not do that in 2008 (for many different reasons) and hence we had the Great Recession.

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I don't get invited to many left-of-center conferences, for some reason I'm more likely to get invitations from groups like Cato, AEI, Heritage, etc. Thus I thought it might be interesting to provide a few impressions:

  1. At an intellectual level the conference was very impressive---there were many brilliant economists presenting and also in the audience. The overall impression was of a center-left perspective, but hardly monolithic. After Alan Auerbach presented a paper on fiscal policy, several panel members (including Robert Rubin) expressed skepticism---viewing the problems we face as mostly supply-side.

  2. I sometimes had a sort of "Paul Krugman reaction", as the general discussion seemed more grounded in reality than at a right-of-center macro conference. Most speakers seemed very aware of the importance of shortfalls in AD during the Great Recession, a basic understanding that I often feel is missing on the right.

  3. On the negative side, I was extremely disappointed by some of the comments on monetary policy. In response to calls for a higher inflation target to avoid the zero bound problem, Jeremy Stein of Harvard University asked something to the effect "What makes you think the Fed can achieve higher inflation?" (Recall that Stein was recently a member of the Federal Reserve Board.) I was pleased to see Olivier Blanchard respond that there is no doubt that we can achieve 4% inflation, or indeed any trend inflation rate we want. But then Larry Summers also suggested that he shared Stein's doubts (albeit to a lesser extent.)

I kept thinking to myself: Why do you guys think the Fed is currently engaged in steadily raising the fed funds target? What do you think the Fed is trying to achieve? How can a top Fed official not think the Fed could raise its inflation target during a period when we aren't even at the zero bound? Why has the US averaged 2% inflation since 1990---is it just a miracle? When Summers came out for NGDP targeting I briefly wondered whether I'd made a mistake in favoring Yellen for Fed chair, but this comment reconfirmed my initial preference.

  1. While the left is ahead of the right in their understanding of the importance of demand shocks, they lag far behind in understanding the importance of more subtle forces shaping the economy. Thus they are even less likely than the right to blame the Fed for destabilizing aggregate demand, and they almost entirely ignored the problem of moral hazard in a panel on the financial system. On the left there's a reflex to always seek solutions in more government (financial regulation, fiscal policy, etc.), not in removing government policies that cause problems (moral hazard, unstable monetary policy.) Unfortunately the solutions offered by the left do not address the root causes of economic crises, and hence are likely to be ineffective. Banks will eventually find their way around any regulations enacted to limit their risk taking. Fiscal policy has been repeatedly shown to be largely ineffective. (Remember the 2013 recession trigger by "austerity"? Me neither.)

  2. Larry Summers dominated the conference due to a combination of his force of personality and his intellectual brilliance. (That's right, I don't judge intellects based on whether they agree with me.) At one point he was asked what he'd do if put in charge of the Fed. Although Summers had expressed support for a higher inflation target, he was surprisingly cautious in response to this question. He pointed out that it was the job of intellectuals in academia to throw out provocative ideas worth considering, and the job of top policymakers to enact policies based on well-established economic principles. He indicated that he wasn't sure whether it would make sense to use a lot of political capital trying to move the entire Federal Reserve System over to his preferred policy. (This is based on my memory, and may not be precisely correct.)

Summers' comment made me think back to lots of debates I'd had in various comment sections, where I defended Bernanke for trying to nudge the Fed in the right direction. Summers' remarks make me even more confident that I was correct, as if even an "alpha male" like Summers thinks he'd have trouble moving the Fed to his preferred policy regime, imagine the challenge facing a more mild-mannered, consensus-seeking personality like Bernanke (or me!). Summers has worked in the Treasury, and knows how difficult it is to enact policy changes in the real world.

  1. When I proposed negative interest on reserves back in January 2009, the idea was widely ridiculed in my comment section. I recall reporters from the Financial Times suggesting that the policy would actually be contractionary. (They looked at monetary policy from the false "finance perspective", not the true "monetarist perspective".
    Indeed the success of negative IOR helps to confirm the truth of monetarism). On one panel Mario Draghi indicated that negative IOR had indeed been effective, had failed to produce market distortions such as disruption to MMMFs, and had also failed to reduce bank profitability. (Note that an expanding economy is good for banks.) I was very pleased to see that my proposal had worked out so well.

  2. Greg Ip from the WSJ asked a really interesting question. He pointed out that many of the factors cited by Larry Summers in his "secular stagnation" hypothesis also might serve to make recessions much less likely in the future. Previous recessions often occurred either when there had been an inflation overshoot (i.e. 1970 or 1981), or (perhaps) when investment has become excessive (think tech in 2000 or housing in 2006.) But under secular stagnation there are no inflation overshoots, and we also don't see high levels of investment. (Don't be fooled by recently recovering home prices; actual construction of homes remains severely depressed relative to the long run average.) I'm already on record predicting that this will end up being the longest expansion in US history, and Ip's question made me even more confident in that prediction.

Some people responded by pointing to past "this time is different" predictions (i.e. 1929, 1966, 2006), which ended up being overly optimistic. But I don't think that sort of cynicism is an adequate response to Ip, especially in a world where Australia has not had a recession in 26 years.

PS. Even though Adam Posen's views are far to the left of mine, I'd like to thank him for inviting me and for hosting an extremely high quality conference. This site has links to videos of the various panels, so you can check the accuracy of my memory.


EconLog October 16, 2017

Does Trump's Immigration Agenda Harm Democracy? My Opening Statement, by Bryan Caplan

Last Friday, I debated Heritage's Hans von Spakovsky on "Does Trump's Immigration Agenda Harm Democracy?"  The resolution was unusual for me in three ways:

  1. I usually try to stick to timeless issues.  For this debate, I had to discuss and analyze current events in detail.

  2. We were originally going to discuss Trump's immigration policies, but it's not clear that he'll manage to dramatically change immigration policy.  That's why we switched to his immigration agenda - i.e., the policies Trump would like to impose.

  3. Since I put no intrinsic value on democracy, I'd rather argue that immigration policies are harmful, rather than "harmful for democracy."  But I think I learned a good deal from sticking to the agreed topic.  Hopefully you'll agree!

Does Trump's Immigration Agenda Harm Democracy?

Let's start with the big question: What does it mean to "harm democracy"?  It's tempting to cynically say:  "harms democracy" equals "clashes with my favorite policies" or even "fails to give power to my party."  But if you get some distance, there are plenty of plausible standards against which to judge democratic performance.  Above all:

  1. In a healthy democracy, leaders calmly assess the evidence before forming a plan to solve social problems.  They consider costs as well as benefits. 

  2. In a healthy democracy, leaders seek objective estimates of policies' actual effects, even if they don't like the answers.  For example, if they're setting the minimum wage, they'll want sober estimates of the effect of a $1/hour increase on the number of workers hired. 

  3. In a healthy democracy, leaders defuse popular prejudices instead of pandering to them.  If the majority wrongly believes leeches cure cancer, leaders don't advocate a $100B National Leech Fund.  Instead, they politely but firmly refuse to waste of taxpayer money.

These standards aren't Democratic or Republican, liberal or conservative.  They're common sense and common decency. 


Now, you might say, "Common sense and common decency aren't so common." Or even: "I don't know anyleaders of either party who live up to these standards.  Successful politicians are experts at winning and retaining power, not carefully crafting wise policy.  And the way to win and retain power is to tell voters what they want to hear, whether it's true or not." 


If that's your reaction, I completely agree.  I have a whole book - calledThe Myth of the Rational Voter: Why Democracies Choose Bad Policies - on the shortcomings of democracy.  But the fact that politicians routinely harm democracy hardly implies they're all equallyharmful.  And of course, politicians could be better on some issues than others. So how does Donald Trump's approach to immigration policy measure up?


  1. In the real world, politicians rarely calmly assess evidence before offering solutions.  If you know a politicians' ideology, you can generally predict what he's going to say about even the most complex issues.  And immigration is an especially emotional issue.  Even so, Trump's statements about immigration are unusuallyintellectually lazy and irrational.  Consider some of his main public reflections on the topic.


a. He's claimed there are 30-34 million illegal immigrants in the U.S. - roughly triple the number virtually any quant accepts.  When asked for a source, he said, "I am hearing it from other people, and I have seen it written in various newspapers. The truth is the government has no idea how many illegals are here."


b. "The Mexican Government is forcing their most unwanted people into the United States."  Evidence for this strange conspiracy theory?  None.  And: "Likewise, tremendous infectious disease is pouring across the border." 


c. "I will build a great wall -- and nobody builds walls better than me, believe me -  and I'll build them very inexpensively. I will build a great, great wall on our southern border, and I will make Mexico pay for that wall. Mark my words."


d. On deportations: "We're rounding 'em up in a very humane way, in a very nice way. And they're going to be happy because they want to be legalized. And, by the way, I know it doesn't sound nice. But not everything is nice."


Hasn't Trump also made numerous seemingly incompatible statements about immigration?  Sure. Which proves my point: he's so intellectually lazy and irrational he can't keep his own story straight.


  1. Trump's low-quality thinking might be forgivable if his conclusion about immigration were, by coincidence, roughly accurate.  But they're not.  Careful scholars have been studying immigration for decades.  Here are their top discoveries.


a. Contrary to Trump's many claims about the economic damage of immigration, the overall economic benefits of immigration are enormous.  The idea is simple: Immigrants normally move from countries where wages are low to countries where wages are high.  Why do employers them pay so much more in rich countries than in poor countries?  Because foreign workers are much more productive in rich countries than they are in their home countries.  A Mexican farmers can grow a lot more here than he can in Mexico.  When he does so, the immigrant isn't merely enriching himself.  He enriches everyone who eats.  Immigration's gains are so vast that researchers estimate that - in a world where anyone could work anywhere - global production would roughly DOUBLE.


b. Trump has blamed immigration for seriously harming native workers.  Scholarly estimates, however, generally say that Americans workers are, on balance, richerbecause of immigration.  Basic point: Immigrants who sell what you sell hurt you, but immigrants who sell what you buy help you.  Since immigration raises total production, gains naturally tend to outweigh losses. There is debate about immigration's effects on wages and employment of native high school dropouts.  But even estimates of these losses are low.


c. Trump has also argued that immigrants are a clear fiscal burden on native taxpayers.  This goes against the latest National Academy of Sciences report, which finds a long-run average net gain of $58,000 per immigrant.  There does seem to be a net fiscal burden of high school dropout immigrants, especially older high school dropouts.  But even they're a much better fiscal deal than native-born dropouts, because their home countries pay for their education.


d. Trump's claims about immigrant crime have been widely-quoted. But specialists in immigrant crime almost universally find immigrants have lower crime rates than natives - about one-third lower in recent data. 


  1. Is Trump's immigration agenda at least sincere?  Let's look at the problems he says he want to solve and the solutions he proposes to solve them - and see how well they fit together.  If Trump really thought "[T]remendous infectious disease is pouring across the border" with Mexico, you'd expect him to instruct the Centers for Disease Control to prioritize this problem, or impose new health restrictions at the Mexican borders.  He hasn't; in fact, it seems like he's forgotten he ever mentioned Mexican epidemics. Similarly, if Trump were really worried about Muslim terrorists, he would presumably want to extend his high-profile executive order to Saudi Arabia.  After all, 15 of the 19 9/11 attackers were Saudi.  But, no.  The heart of Trump's immigration strategy is to pander to popular prejudices against foreigners, then loudly call for some kind of action.  It's the Activist's Fallacy: "Something must be done.  This is something.  Therefore, this must be done."


But you don't have to believe me.  You can also see what Trump says when he thinks voters aren't watching.  The transcript of Trump's conversation with Mexican President Nieto was leaked a few months ago.  Trump speaking: "Because you and I are both at a point now where we are both saying we are not to pay for the wall. From a political standpoint, that is what we will say. We cannot say that anymore because if you are going to say that Mexico is not going to pay for the wall, then I do not want to meet with you guys anymore because I cannot live with that. I am willing to say that we will work it out, but that means it will come out in the wash and that is okay. But you cannot say anymore that the United States is going to pay for the wall. I am just going to say that we are working it out. Believe it or not, this is the least important thing that we are talking about, but politically this might be the most important talk about." 


In short, Trump doesn't really care if Mexico will pay for the wall, but he really cares if Americans believe Mexico will pay for the wall. 


Which brings me to the one good thing I have to say about Trump's immigration agenda: He's unlikely to actually accomplish much of it.  While he presents himself as a great negotiator, he's primarily an entertainer. When he endorsed the RAISE Act - which really would greatly reduce immigration - even fellow Republican politicians showed little interest.  So Trump got bored and moved on to the next exciting scene on his Presidential Reality Show. 

But aren't other politicians bad, too?  Of course.  Demagoguery is a key ingredient of any politicians' path to power - and scapegoating foreigners is classic demagoguery.  But Trump has taken anti-foreign demagoguery to a new level - or at least a local maximum.  If he had his way, we'd lose most of the tremendous social gains of immigration we've enjoyed over the last fifty years.  And his problem is not that he's made subtle errors.  Trump's problem is that he emoting, not thinking - like a kid who tries to solve algebra problems by asking, "How do x and y make me feel?"  Our problem is that instead of giving him an F, we've made him president.


EconLog October 16, 2017

Fred McChesney RIP, by David Henderson


Law and economics scholar Fred McChesney died last Thursday at age 68. He was a first-rate scholar, a wonderful friend, and an engaging conversationalist. I'm so glad that he called me up when he was in Monterey a couple of years ago. I went to his hotel and had a great visit with him and his lady friend. I remember feeding the parking meter for an hour, thinking that would be enough, and then finding the conversation so interesting and fun that I went out after an hour and a quarter and fed it for another hour.

Here's a great write up of some of his accomplishments.

Fred wrote the antitrust article for The Concise Encyclopedia of Economics. Out of the over 160 entries, it is one of my 20 favorite pieces. It covers a lot of territory succinctly while still giving the essential economic analysis on each issue.

He also wrote 10 articles for the Econlib Feature Article series. My favorite two are "Armen Alchian: An Economist-Lion in Winter" and "Smoke and Errors."

Here's a great paragraph from "Armen Alchian: An Economist-Lion in Winter":

Perhaps no other economist of our time has given as much attention to costs as has Armen Alchian. He discovered, while working at the RAND Corporation after the war, that military engineers and economists disagreed over the efficient ways to produce armaments because their concepts of cost were quite different.6 Engineers registered cost as a function of total output, and so saw costs as generally declining. But to economists, the costs associated with different levels of output depend on the rate at which they are produced: Producing the same volume but in a shorter period of time would be more expensive, ceteris paribus. Moreover, once one recognized the importance of time for reckoning cost, one had also to take into account the present value of the outlays required to produce, outlays that would vary depending on the timing of production. All of this Alchian explained in one of his most important articles.
Here are two great paragraphs from "Smoke and Errors":> In short, good old-fashioned rent seeking accounts for the rise of public fire-fighting. It explains as well the survival of an entity that, more and more, is losing its raison d'être. Modern building materials are relatively fire-proof, while clothing and other fabrics are flame-retardant. Municipal codes increasingly require sprinkler systems, smoke detectors and other devices to reduce the incidence and costs of fire. So today's fireman has much less to do. The number of home and building fires has plunged 40 percent in the past two decades.

With fewer fires to fight, one would expect to find fewer fire-fighters--in a private firm, anyway. But not in a public agency. Despite the 40-percent decline in fires, in the past twenty years the number of paid city fire-fighters has increased by 20 percent. Only in government firms does employment go up as demand and output decline.
HT2 Tyler Cowen. (0 COMMENTS)

EconLog October 16, 2017

Mises was a neocon, and other oddities , by Alberto Mingardi

It is of great comfort to us who share an antiquarian passion for the history of political thought that fundamental questions such as, "What is the state?" invariably come to the surface. But sometimes you get the impression that new interpretations focus more on the 'political' than on the 'thought'. 

I'm referring to a long opinion piece published by Yoram Hazony in The Wall Street Journal. From his byline we know that Mr Hazony, President of the Jerusalem-based Herzl Institute, is publishing a book entitled The Virtue of Nationalism.
dusty book.jpg

His article's political goal is clear: he wants to argue that Donald Trump's blend of conservatism is in line with an old tradition that goes back to Edmund Burke. Trump is thus implicitly considered the torch-bearer of a system of ideas that value the nation-state as providing the soil which allowed Western liberty to flourish. From this comes skepticism towards exporting such values in different cultures and a similar anxiety for opening the door to immigrants that come from illiberal cultures.

But leaving aside what President Trump stands for, or rather represents, Mr Hazony's story is quite problematic.

 He thinks that "Classical liberalism ... offers ground for imposing a single doctrine on all nations for their own good. It provides an ideological basis for an American universal dominion." So, for Mr Hazony it was "liberal abstractions", based upon John Locke's ideas that matured into contemporary neo-conservatism.

Note that for Mr Hazony classical liberalism is "rationalist". I'm not so sure that Locke can be considered a "constructivist", but it is hard to assume that David Hume and Adam Smith were not central to the original arc of liberalism--that is, classical liberalism. Moreover, it could be argued that Burke himself had strong (classical) liberal leanings. On issue after issue, his tendency was usually liberal.

Mr Hazony seems to ignore the extent to which the modern libertarian movement, in the United States, tends to favour anti-interventionism and how skeptical prominent libertarians were of exporting democracy, let alone neo-conservatism itself. 

He quotes from Mises's 1927 pamphlet "Liberalism" to argue that classical liberals are actually internationalist advocates of world government. So writes Hazony:

Ludwig von Mises thus advocates a 'world super-state really deserving of the name,' which will arise if we 'succeed in creating throughout the world . . . nothing less than unqualified, unconditional acceptance of liberalism. Liberal thinking must permeate all nations, liberal principles must pervade all political institutions.Let's read the quotation in its entirety:

> To be sure, the League does hold out, even though very cautiously and with many reservations, the prospect of some future boundary adjustments to do justice to the demands of some nations and parts of nations. It also promises--again very cautiously and qualifiedly--protection to national minorities. This permits us to hope that from these extremely inadequate beginnings a world superstate really deserving of the name may some day be able to develop that would be capable of assuring the nations the peace that they require. But this question will not be decided at Geneva in the sessions of the present League, and certainly not in the parliaments of the individual countries that comprise it. For the problem involved is not at all a matter of organization or of the technique of international government, but the greatest ideological question that mankind has ever faced. It is a question of whether we shall succeed in creating throughout the world a frame of mind without which all agreements for the preservation of peace and all the proceedings of courts of arbitration will remain, at the crucial moment, only worthless scraps of paper. This frame of mind can be nothing less than the unqualified, unconditional acceptance of liberalism. Liberal thinking must permeate all nations, liberal principles must pervade all political institutions, if the prerequisites of peace are to be created and the causes of war eliminated. As long as nations cling to protective tariffs, immigration barriers, compulsory education, interventionism, and etatism, new conflicts capable of breaking out at any time into open warfare will continually arise to plague mankind.

Mises was actually criticising the international body of the time (the League of Nations), but expressed hope for "a frame of mind" that looks to see individual rights protected, not just within one's country but also abroad. I agree that Mises's use of the word 'superstate' is unfortunate, but it is clear that all he is pointing toward is a liberal sensibility that traverses national boundaries. 

The passage is part of the book's section on "a liberal foreign policy". Chapter 3 of that section is a remarkable collection of caveats, against allegedly peace-creating policies that could backfire (from "standardised" education to the creation of "economic areas"). Indeed, Mises thinks that "a world order must be established in which nations and national groups are so satisfied with living conditions that they will not feel impelled to resort to the desperate expedient of war". Such a humanitarian attitude, which is indeed part of the classical liberal legacy, was all the more cogent after the disastrous experience of World War I. Mises was not so eager to buy into "the virtues of nationalism" as he saw Europe on fire because of it - and understood that may happen again, as unfortunately it did.

Can Mises be considered a champion of exporting democracy? "The unqualified, unconditional acceptance of liberalism" was for Mises a cultural goal, not a strategy to be pursued at gunpoint.

When it comes to the issue of national identity, the second chapter in that very section of the book is devoted to the principle of self-determination.

The drift of Mises's discussion is the aim to dilute conflicts and allow for peaceful coexistence. There was no thirst for American 'hegemony': but the idea that people, by having fruitful commercial relationships, will eventually sheathe their swords. Such vision can perhaps be considered naive, but it certainly cannot be considered propaganda for world government.

Mises's liberal vision included the idea of "multi-national" states: states within which multiple national identities coexist, like they did in Europe for centuries before the idea "one state, one nation" became hegemonic. 

Was this nostalgia for the old Habsburg empire? Well, perhaps it was. 

Let's look at conservatives for a minute.  Think about Europe. Those "empirical" conservatives Mr Hazony purportedly admires couldn't be enthusiastic about national identities which were very recent artifacts--in some respects themselves products of constructivist rationalism. Didn't the Congress of Vienna after all have an "anti-national" character? Weren't European conservatives favouring empires or, yes, the "empirical" history of territorial divisions and royal dynasties as principles of legitimization deeply opposed to then emerging idea of the "nation"?

I'll read Mr Hazony's book, about which now I'm truly curious. But on these matters, so far my recommendation would be to go back to good ol' Lord Acton.


EconLog October 15, 2017

Hassett on Tax Cuts and Growth, by David Henderson

On October 5, Kevin Hassett, the new chairman of President Trump's Council of Economic Advisers, gave an excellent talk at the Tax Policy Center. The topic was taxes and economic growth. The transcript of the talk is here. The video is here.

In the talk, Kevin gave some estimates of the effects of cuts in marginal personal and corporate income tax rates on growth. Drawing on the literature, he came up with substantial estimates of both.

A few excerpts follow.

First, his own background on this issue:

Perhaps the reason I hold these beliefs is that I started graduate school back in 1984, and was taking Alan Auerbach's public finance class when the 1986 Tax Act was enacted. At the time, I began working on how the 1986 reforms would affect business capital spending. The literature surprisingly found little effects of tax policy on the economy, often suggesting that tax and interest rate variables did not drive capital spending. But Alan and I noticed something funny in the data. Politicians tended to pass Investment Tax Credits in recessions, then let them expire when the recession was over. Thus it appeared that the economy partly drove tax policy, even if to [sic] tax policy also affects the economy.

EconLog October 14, 2017

1967 and 2008: Two botched policies, by Scott Sumner

I've occasionally done blog posts explaining how it's possible to prevent recessions from occurring, even after they have begun. That's because a recession is dated from the point where output starts falling, but it's not considered a recession unless the decline persists for a considerable period of time. This is one reason why economists are so poor at predicting recessions. During the past three recessions, a consensus of economists failed to predict the recession until it was well underway.

It occurred to me that I failed to provide an example of a recession that was prevented after it had already began. Today I will do so.

In 1966 the Fed tightened monetary policy to slow inflation, which had recently been increasing. As a result, industrial production fell by 1.9% between October 1966 and July 1967.

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But that's much less than the nearly 8% decline observed during the 1970 recession, which was itself fairly mild. We had no recession in 1967 because the Fed sensed a slowdown, and eased policy in the spring of 1967. Because of this action, unemployment merely nudged up from 3.6% in November 1966 to 4% in October 1967, before renewing its long decline.

Now let's look at industrial production during late 2007 and early 2008:

Screen Shot 2017-10-01 at 11.14.38 PM.png
After peaking in November 2007, industrial production fell by only 2.2% over the next 7 months. Then after June 2008, output fell sharply, and by June 2009 was more than 17.3% below pre-recession levels. June 2008 is considered a recession period whereas July 1967 is not, primarily on the basis of what happened later.

EconLog October 12, 2017

Bernanke proposes an inflation/price level hybrid target, by Scott Sumner

I am currently in DC attending a star-studded macroeconomic policy conference at the Peterson Institute. Today's participants included Bernanke, Summers, Blanchard, Draghi, Fischer, and many other eminent economists. Bernanke's paper was by far the most interesting, especially his proposal for addressing the zero bound problem:

So, to be concrete, at some moment when the economy is away from the ZLB, suppose the Fed were to make an announcement like the following:

(1) The FOMC has determined that it will retain its inflation-targeting framework, with a symmetric inflation target of 2 percent. The FOMC will continue to pursue its balanced approach to price stability and maximum employment, meaning in particular, that the speed at which the FOMC aims to return inflation to target will depend on the state of the labor market and the outlook for the economy.

EconLog October 11, 2017

A Protectionist Utopia?, by Contributing Guest

by Pierre Lemieux

If everybody were protected as a producer, nobody would be "protected" as a consumer.

utopia.jpg My previous post argued against the "populist argument" claiming that free trade destroys jobs and thus cannot be beneficial to consumers who have lost their jobs and incomes. The basic answer is that trade does not destroy jobs and, in fact, has little to do with employment.

One could object that this answer does not cover the whole populist argument (as a few commentators did). The broader question may be: Couldn't the individual, who is generally both a producer and a consumer, benefit from price competition on what he buys and, at the same time, get protection against competition in what he produces? Couldn't individuals get both competitive consumer prices and secure jobs against the choices of other consumers (who destroy jobs by switching suppliers)?

The short answer is no. Such a utopian system is impossible. It is impossible for all individuals to simultaneously benefit from price competition as consumers and, as producers, from protection against competition. Price competition requires that firms and workers compete for their markets and their jobs. This competition for the patronage of consumers implies continuous disruption of production. A totally protectionist world cannot enjoy competitive prices because, by definition, people are banned from buying at the lowest prices that can be quoted on the market. If everybody were protected as a producer, nobody would be "protected" as a consumer.

Here are the 10 latest posts from EconTalk.

EconTalk October 16, 2017

Megan McArdle on Internet Shaming and Online Mobs

shaming.jpg Author and journalist Megan McArdle of Bloomberg View talks with EconTalk host Russ Roberts about how the internet has allowed a new kind of shaming via social media and how episodes of bad behavior live on because Google's memory is very, very good. McArdle discusses the implications this new reality has on how we behave at work and how people protect and maintain their reputations in a world where nothing is forgotten and seemingly little is forgiven.


Time: 1:14:32

EconTalk October 11, 2017

Thinking the Unthinkable

future start.jpg Given the scale of the digital revolution thus far, we can be reasonably sure that technological advances will continue to enhance our lives into the future. But how widely will such advances be shared, and why is it up to us? This week, EconTalk host Russ Roberts welcomed author and Silicon Valley guru Tim O'Reilly to talk about his new book, WTF: What's the Future and Why It's Up to Us.

O'Reilly argues that we shouldn't look at technology as being labor-saving. Instead, we should focus on how it lets us do more. Today's companies are "infused with the digital," creating new platforms and redesigning themselves all the time. (Amazon is O'Reilly's prime example.) Now we hope you'll share your reactions to this week's episode with us. We love to hear from you.

  1. Is new technology more likely to replace workers, or make existing workers better? To what extent will workers' lives be equally augmented by such advances?

EconTalk October 9, 2017

Tim O'Reilly on What's the Future

WTF.jpg Author Tim O'Reilly, founder of O'Reilly Media and long-time observer and commenter on the internet and technology, talks with EconTalk host Russ Roberts about his new book, WTF? What's the Future and Why It's Up to Us. O'Reilly surveys the evolution of the internet, the key companies that have prospered from it, and how the products of those companies have changed our lives. He then turns to the future and explains why he is an optimist and what can be done to make that optimism accurate.


Time: 1:02:47

EconTalk October 4, 2017

What a Wonderful World

meditate.jpg EconTalk host Russ Roberts took a deep, different, and quite personal turn in this week's episode, in which he welcomed Robert Wright to discuss his newest book, Why Buddhism is True. Roberts admits to being a regular practitioner of mediation, though having begun the practice with his usual skeptical bent.

Since this week's episode was so different, we thought we'd try a slightly different tack here as well. Rather than reflect on specific topics from the conversation, this week we're more interested in your own experiences with mindfulness and meditation. What does mindfulness mean to you, and how do you strive for it? Is it just a catch-phrase for the self-help section of your local bookshop, or are there real and lasting benefits for individuals? For communities?

  1. Do you meditate on a regular basis? If so, how long have you been practicing? Why did you start? What challenges have you faced, and what benefits have you reaped from the practice?

  2. For those of you who don't meditate, has this week's conversation prompted you to consider it? Why or why not? Are you skeptical about the benefits both Wright and Roberts attribute to the practice, and again, why?

EconTalk September 30, 2017

Robert Wright on Meditation, Mindfulness, and Why Buddhism is True

Why%20Buddhism%20True.jpgRobert Wright, author of Why Buddhism Is True, talks with EconTalk host Russ Roberts about the psychotherapeutic insights of Buddhism and the benefits of meditation and mindfulness. Wright argues our evolutionary past has endowed us with a mind that can be ill-suited to the stress of the present. He argues that meditation and the non-religious aspects of Buddhism can reduce suffering and are consistent with recent psychological research.


Time: 1:06:58

EconTalk September 29, 2017

The Revenge of the Country

When EconTalk host Russ Roberts looks at the series of images in Philip Auerswald's Medium piece on the rise of populism, he sees "a Milky Way of darkness instead of brightness." Auerswald describes the populist phenomenon as a global trend, not at all unique to the United States, and calls it, only slightly in jest, the "revenge of the country," or the emerging tension, caused by voting systems, between urban and rural.

This week's episode takes a deep dive into this phenomenon, which Auerswald arguesis explained by three trends worldwide: urbanization, depopulation of rural areas, and advances in digital technology. How will these trends affect politics and the economy, and your life in particular? We hope you'll take a few moments to share your thoughts with us; we love to hear from you.

  1. Auerswald argues that it's inherently destructive to the community when people move away from small towns and rural areas. Why does he thinks this is the case, and to what extent do you agree?

  2. Have you ever lived in a community like the ones (above) Auerswald is referring to? Anyone from Roberts's dark "Milky Way?" What's been your experience, and how closely does it match Auerswald's description?

EconTalk September 25, 2017

Philip Auerswald on the Rise of Populism

cities%20and%20ruins.jpg Author and professor Philip Auerswald of George Mason University talks with EconTalk host Russ Roberts about the rise of populism in the United States and throughout the world. Auerswald argues that the rise of cities and the productivity of urban life has created a divergence in experience and rewards between urban and rural areas around the world. Auerswald ties these changes to changes in voting patterns and speculates about the sources of the increasing productivity of metropolitan areas.


Time: 1:19:40

EconTalk September 20, 2017

The Rich Get Richer...

income inequality.jpg But is that a bad thing? That may be the central question explored in this week's EconTalk episode with UC Berkeley's Gabriel Zucman. Working with Thomas Piketty and Emmanuel Saez, Zucman explored national income accounts to look for trends in income inequality in the United States since 1980.Their results suggest that the bottom 50% of Americans have seen no growth in income, while a disproportionate share of growth has accrued to the top 1%. How robust are these results, and what policy implications might be suggested? And how does income inequality in America compare to that in other nations? Do you feel richer than you did in the 80s? Share your thoughts with us today... We always love to hear from you.

  1. In terms of income inequality, how are average growth rates misleading about the real state of the economy, according to Zucman?

  2. How does Zucman's analysis differ from previous attempts to measure income inequality? What are the weaknesses of using tax data for such purpose? How might a cross-sectional approach yield different results regarding income inequality?

EconTalk September 18, 2017

Gabriel Zucman on Inequality, Growth, and Distributional National Accounts

rich%20and%20poor.jpgGabriel Zucman of the University of California, Berkeley talks with EconTalk host Russ Roberts about his research on inequality and the distribution of income in the United States over the last 35 years. Zucman finds that there has been no change in income for the bottom half of the income distribution over this time period with large gains going to the top 1%. The conversation explores the robustness of this result to various assumptions and possible explanations for the findings.


Time: 1:12:35

EconTalk September 13, 2017

This is a Job for Super Regulator!

legal infrastructure.jpg What if librarians were charged with coming up with the next search engine? Would the legal infrastructure in place today support, complicate, or even hinder their efforts? Would the American Library Association be of help? Would they be able to do it fairly, allowing open access to others?

This compelling thought experiment closed this week's EconTalk episode with University of Southern California professor of law and economics Gillian Hadfield. Hadfield argues that the US legal structure, while well-suited to the 2oth century, is in need of an update. She has suggestions for this process, which host Russ Roberts says suffer a marketing problem. Can you help?