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Henderson Review of Build, Baby, Build

  Often when I advocate abolishing a particular regulation, I’m accused of thinking that my proposal is a panacea. Usually, that’s false: I point out that it would move things in the right direction but that it’s not close to being a panacea. I’m guessing that for most policies he advocates, Bryan Caplan has the same reaction I have. But he makes the case that housing deregulation is indeed a panacea. He argues strongly, with data, that deregulation would reduce the cost of housing, and thereby reduce poverty, reduce income inequality, reduce traffic congestion, restore the geographic mobility that we older people experienced in the 1970s when we were younger, provide construction jobs, and even reverse the decline of fertility. A conservative estimate, states Caplan, again backing it up with data in the footnotes, is that housing deregulation would reduce the cost of housing by approximately 50 percent. Because housing costs are about 20 percent of the average American household’s budget, the cost of living would be 90 percent of what it is now, which means that the standard of living would increase by 11 percent (100 divided by 90 = 1.11.) The effects of deregulation would be bigger for lower-income people, notes Caplan. The reason is simple: lower-income people spend a bigger share of their income on housing. That means also that deregulation would reduce income inequality. This is from David R. Henderson, “Build, Baby, Build,” Defining Ideas, June 20, 2024. It’s my review of Bryan Caplan’s book of the same name. Read the whole thing. (0 COMMENTS)

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The French, the Americans, and the Plague of Politics

The upcoming legislative election in France (on June 30 and, for the second round, July 7) tells us much about politics. It also suggests some comparisons between American and French politics. The parties of the left vying for a majority in the National Assembly have built a populist coalition, the New Popular Front (Nouveau Front Populaire) or NPF, which temporarily unites in the pursuit of power both left and extreme-left parties, including the Communist Party. In each circumscription, NPF is running a single candidate of the left. The extreme-right National Rally (Ralliement National) or NR, and the more center-right Republicans (Les Républicains or LR) have agreed on a similar coalition. Renaissance, the center-right party of the current president, Emmanuel Macron, is running candidates in a loose alliance with a few small parties. “Extreme” is a matter of degrees. Many Americans do not realize that the typical Democrat in America would be called center-right in France. A detached analyst would be hard-pressed to find a difference between, say, Barack Obama and Emmanuel Macron. The political extremes are less extreme in America than in France, but that may have started to change a few years ago. In the current French election campaign, it has been observed that the only program elements on which all parties of the NPF really agree is to increase taxes and transfers- that is, to redistribute more money and benefits in kind to favored political clientèles. The redistribution is basically to the poor and the modest middle-class, at the cost of “the rich” or, in fact, the less rich. It is a general political phenomenon that, whether on the left or on the right, those who want to re-engineer society have problems agreeing among themselves about what sort of utopia they want. Interestingly, the program of the far right is as populist as the far left and targets the same clientele with similar goodies such as more “social” expenditures, also financed by the “rich,” and some price controls. The far right does add its dada of less immigration and more protectionism. The left adds “ecological planning” and a higher minimum wage. As Anthony de Jasay would say, in line with public choice theory, a political party that wants to get elected pursues the votes of the poorest 50%+1 of the voters with the promise to loot on their behalf the richest 49%. More generally, and whatever the reasons why the rationally ignorant voters support one party or another, the essence of politics or how politics works consists in harming some individuals in order to benefit others. At least, this is politics as we know it. Mr. Macron’s “center-right” is just more prudent than the extremes, if only because it has already boosted the annual budget deficit to 5% of GDP. Besides the general workings of politics, a major political similarity between France and America—after the Enlightenment, since America had a very short history before—is that most citizens in each place think that freedom (“liberté”) has been born and dwells in their own country. In reality, liberty has been battered in both places, often in the very name of its defense, by their respective glorified political authorities, only earlier and more decisively in France than in America. In America, the worst is yet to come; over the long French history, it has come many times. Marianne is a fictitious attractive woman who has historically symbolized the French Republic. Her image or bust has taken different aspects over time–recently, those of French actresses such as Brigitte Bardot. The featured image of this post reproduces the current Marianne logo of the French state. Some may think that Marianne is a sexist symbol, but it certainly illustrates how efficient the French government has been in government propaganda and imagery for fueling national pride and obedience. Classical liberals and libertarians are rightly suspicious of state glorification. The imminent French legislative election (like the forthcoming American presidential one) illustrates how escaping the plague of politics is as difficult as it is required. How to stop governments from competing to discriminate against some citizens in order to favor others? Nobel laureate economist James Buchanan and the school of constitutional political economy he inspired have proposed subjecting politics to unanimously chosen rules at a superior “stage,” the constitutional stage. At that abstract stage, politics is tantamount to mutually beneficial exchange, while it is discrimination and exploitation in the realm of day-to-day politics. (See my Econlib review of James Buchanan and Geoffrey’s book The Reason of Rules.) Anthony de Jasay, another economist and political philosopher worth consulting on these matters, proposed a more radical solution: abolish politics; that is, completely substitute individual choices for collective choices. (De Jasay’s book The State and his Against Politics are good entry doors to this radical theory; the links are to my Econlib reviews.) The pessimists will opine that either ideal is a long shot. I would counter that considering something along those lines is required for the future of individual liberty and prosperity. (0 COMMENTS)

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The wisdom of Janan Ganesh

Janan Ganesh is probably my favorite news commentator.  In a recent column, he pushes back at the widespread belief that the global rise of the hard right is a reaction to neoliberalism: Rightwing populism is ascendant in France, which might be the least economically liberal country in the rich world. Government spending there accounts for well over half of national output. The component that goes on social protection — cash benefits and so on — is likewise OECD-topping. On the other side of the Alps, the Italian state is not far behind on either overall or social spending. The hard right is not just successful there. It is the power in the land. Meanwhile, in Australia, where the government is smaller, the mainstream political parties are holding up. The centre-left governs. Ganesh also discusses the view that the loss of manufacturing jobs is the problem.  He points out that the extreme right has recently gained a lot of ground in Germany, where manufacturing is a far higher share of GDP than in other western countries.  He then adds: And if that is odd, consider next door Austria, which might be the most confounding case study in the west. It has one of the highest levels of public spending and a manufacturing sector almost as large as Germany’s and a rampant hard right. Ganesh then raises some interesting questions regarding the politics of neoliberalism in the US: What possessed the Democrats to think America wanted or needed a statist economic transformation? The slogan “Build Back Better” implies a widespread unhappiness with the pre-Covid world that didn’t exist. On the eve of the pandemic, economic confidence was at an high not seen since the millennium. There is much more of interest.  Read the whole thing. PS.  He doesn’t discuss the developing world, but the shift of politics to the right in India and China also fits his hypothesis.  It seems rather far-fetched to view the rise of Modi and Xi as a reaction to “neoliberalism” in India and China. (0 COMMENTS)

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The Problem With AI Is the Word “Intelligence”

As a Financial Times headline says, “AI in Finance Is Like ‘Moving from Typewriters to Word Processors’” (June 16, 2024). But, I think, not much further, despite all the excitement (see “Ray Kurzweil on How AI Will Transform the Physical World,” The Economist, June 17, 2024). At least, doubts are warranted regarding the “generative” form of AI. (IBM defines generative AI as referring to “deep-learning models that can generate high-quality text, images, and other content based on the data they were trained on.”) The conversational and grammatical capacities of an AI bot like ChatGPT are impressive. This bot writes better and appears to be a better conversationist than what must be a significant proportion of human beings. I am told that he (or she, except that the thing has no sex and I am anyway using the neutral “he”) efficiently performs tasks of identification and classification of objects and that he does simple coding. It’s a very sophisticated program. But he crucially depends on his humongous database, in which he makes zillions of comparisons with brute electronic force. I have had occasions to check that his analytical and artistic capacities are limited. Sometimes, they are astonishingly limited. Very recently, I spent a couple of hours with the latest version of DALL-E (the artistic side of ChatGPT) trying to have him understand correctly the following request: Generate an image of a strong individual (a woman) who walks in the opposite direction of a crowd led by a king. He just could not understand. I had to elaborate, reformulate, and re-explain many times, like in this modified instruction: Generate an image of a strong and individualist individual (a woman) who walks in the opposite direction of a nondescript crowd led by a king. The woman is in the foreground and walks proudly from west to east. The crowd led by the king is in the close background and walks from east to west. They are going in opposite directions. The camera is south. (By “close background,” I meant “near background.” Nobody is perfect.) DALL-E was able to repeat my directives when I tested him, but he could not see the glaring errors of his visual representations, as if he did not understand. He produced many images where the woman on the one hand, and the king and his followers on the other hand, walked in the same direction. The first image below provides an intriguing example of this basic misunderstanding. When the bot finally drew an image where the woman and the king walked in opposite directions (reproduced as the second image below), the king’s followers had disappeared! A toddler learning to dry recognizes his errors better when they are explained to him. I said of DALL-E “as if he could not understand,” and that is indeed the problem: the machine, actually a piece of code and a big database, simply does not understand. What he does is impressive compared to what computer programs could do until now, but this not thinking or understanding–intelligence as we know it. It is very advanced computation. But ChatGPT does not know that he is thinking, which means that he is not thinking and cannot understand. He just repeats patterns that he finds in his database. It looks like analogical thinking but without the thinking. Thinking implies analogies, but analogies don’t imply thinking. It is thus not surprising that DALL-E did not suspect the possible individualist interpretation of my instruction, which I did not spell out: a sovereign individual declined to follow the crowd loyal to the king. A computer program is not an individual and does not understand what it means to be one. As suggested by the featured image of this post (also drawn by DALL-E after much prodding, and reproduced below), AI cannot, and I suspect will never be able to, understand Descartes’s Cogito ergo sum (I think, therefore I am). And this is not because he cannot find Latin in his databases. Nowhere in his database could DALL-E find a robot with a cactus on his head. The other Dali, Salvator, could have easily imagined that. Of course, nobody can forecast the future and how AI will develop. Prudence and humility are required. Advances in computation will likely produce what we would now consider miracles. But from what we know about thinking and understanding, we can safely infer that electronic devices, as useful as they are, will likely never be intelligent. What’s missing in “artificial intelligence” is the intelligence. ****************************** DALL-E’s wrong illustration of a simple request from P. Lemieux Another wrong interpretation by DALL-E of a simple request   Self-portrait of DALL-E, under the influence of your humble blogger   (0 COMMENTS)

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Should Advising Clients on How to Find Customers for a Legal Good Be a Crime?

  The Wall Street Journal reported in April that the Justice Department would conduct a “criminal investigation into consulting firm McKinsey related to its past role in advising some of the nation’s largest opioid manufacturers on how to boost sales.” According to the WSJ report, “McKinsey consultants advised the company [Purdue] on how to increase sales of its flagship drug, including suggesting that Purdue’s sales team make more calls to healthcare providers it knew wrote high volumes of OxyContin prescriptions and spend less time on doctors who prescribed the opioid medication the least, the records showed.” Oxy Imagine that. McKinsey allegedly tried to help Purdue tailor its sales efforts to doctors who already prescribed oral opioid drugs. There’s nothing mysterious or nefarious about this. It is standard and economically rational. To do otherwise would be inefficient and wasteful. Some consultants do this sort of work virtually every day. The small consulting company, Objective Insights, Inc. (co-owned by one of the authors) has performed it a handful of times. This is from David R. Henderson and Charles L. Hooper, “Is Promoting to Customers a Crime?” American Institute for Economic Research, June 18, 2024. Read the whole thing, which is not long. (0 COMMENTS)

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Rights and the Principle of Charity

In his book Word and Object, W. V. Quine describes the problems that arise when one is attempting to translate an entirely unfamiliar language. Among the ideas he raises in his discussion is that when attempting to translate what someone is saying, one should employ the principle of charity, by which Quine meant we should assume “assertions startlingly false of the face of them are likely to turn on hidden differences of languages.” If your translation implies your interlocutor has said something patently absurd, you should assume that something has been lost in translation rather than assume you’re speaking with a fool. And Quine points out that this isn’t limited to translating from unknown languages – the same problem can arise “in the domestic case” as a result of “linguistic divergence.” I try, however imperfectly, to apply this idea when talking to other people. And recently, I wondered if such a “linguistic divergence” might, if properly accounted for, help me form a more charitable understanding of how some people talk about rights.  The view in question has been described by Michael Huemer as the Legalist View of rights. (Of note, in that paper Huemer is talking specifically about property rights, but the same view is often taken about rights more generally.) As Huemer puts it, in the Legalist View,  Property rights are in every aspect and detail dependent on government-created laws. (N.B., property rights are not only legal but also moral rights; this is why theft is not just illegal but unethical. The Legalist View is not merely that certain legal rights are dependent on laws, but that the relevant moral rights are dependent on laws.) This is a line of thought I’ve heard in various forms over the years. Its proponents will often say “Rights exist only to the extent that they are established by a society and/or enforced by the state. To speak of something that has no social enforcement behind it as a ‘right’ is a confusion. If it’s not upheld and enforced by a state or by society, then it’s not a right.”  Now, this line of thought has always struck me as, in Quine’s words, startlingly false on the face of it, because it has rather absurd implications. For example, I take it as given that slavery represented the greatest institutionalization of human rights violations in history. But on the “rights only exist when enforced by a state” view, slavery wasn’t a rights violation at all. If rights only exist if a state (or sufficiently strong social conventions) recognize and enforce them, then it simply follows that whenever and wherever slavery is enforced by the state and considered generally acceptable by citizens, no enslaved person experiences any violation of their rights – because genuinely they have none. On this view, the infamous Dredd Scott decision declaring that African Americans “had no rights which the white man was bound to respect” wasn’t a grave error – it was an unambiguously factual statement (at least at the time). If your theory says slavery doesn’t violate anyone’s rights as long as society approves of it and the state enforces it, you need a better theory.  Or so it always seemed to me. But I now wonder if, perhaps, there is a hidden difference of languages, or a linguistic divergence, that might cast this in a different light. I recently recalled a back and forth from the comment section on this blog on the nature of rights from a few years back (yes, I can remember things like this but can’t usually remember when my sibling’s birthdays are!). One commentator defended a legalistic view of rights, saying that if one believes “rights exist and can be ‘negated’ even when the social context clearly doesn’t recognize those rights, then I won’t agree with that bit of the argument. There are many rights that I think societies should create and protect; but they don’t exist before the society goes and does that.”  But I realized from something else the commenter said that maybe his view might be salvageable. Also discussed in that post was the Loving v Virginia case that overturned bans on interracial marriage. On the legalistic view defended by this commenter, one would have to say that such laws, before they were struck down, didn’t violate anyone’s rights. And this commenter accepted that implication – although he also added his belief that “the Lovings *should have had* the right to marry.” Nonetheless, before the court rulings were issued, they had no such right.  So here’s my suggestion that might bridge the gap. This commenter affirmed that he believed the Lovings should have had the right to get married. This in turn entails that it was wrong for the state to prevent them from getting married. Well, saying “it’s wrong for the state to prevent people from X” is, to people like me, simply what it means to say people have a right to X. If I say “people have a right to free speech,” I’m saying that it’s wrong for the state to forcibly silence people from speaking. It’s a prescriptive claim, which in turn allows us to evaluate what kinds of laws are appropriate or inappropriate. On this view, laws and conventions can be rights violations. By this other definition of rights, saying “people have a right to free speech” is a descriptive claim, and as such it may be true or false depending on the laws and conventions in any given society. Thus, on this view, laws and conventions cannot violate rights, because “rights” simply means “whatever is recognized and enforced by laws and conventions.”  Consider, then, when this commenter also said “There are many rights that I think societies should create and protect; but they don’t exist before the society goes and does that.” This is affirming the view that there is something out there, existing prior to and independently of social enforcement, and that particular something ought to be protected and recognized. To the extent that society or the state should protect these things but does not do so, that is a failing and should be corrected. To people like me, that prior thing is what we speak of when we talk about rights, and what we mean when we say rights exist prior to and independently of being formally recognized and enforced by the state or social conventions. This commenter and I both agree that there is something existing prior to state policy and social conventions that prescribes what such policy and conventions should be. It’s just that I call this prior existing something “rights”, and he does not.   As a further example, here’s another thought experiment Huemer offers in the previously cited paper, where I toss in an additional caveat: Suppose you are exploring a remote wilderness region outside the jurisdiction of any government, when you come upon a clearing containing a rude hut. The hut appears to have been built by a hermit, who is its only inhabitant. Since property rights depend entirely upon governmental laws [or social conventions – KC], and none are in force here, you determine that the hermit does not own the hut. Over his vociferous protestations, you decide to spend the night in the hut, eat some of the food that the hermit has grown and gathered, and then paint the hut lime green. You don’t need to do any of these things; you just do them for fun. In this thought experiment, the hermit is not under the jurisdiction of any government, nor are there any reigning social conventions. Still, it seems obvious that you would be doing something wrong to the hermit if you carried out these acts. And I think almost everyone who accepts the legalist view of rights, if pressed, would acknowledge that it would be wrong to do these things to the hermit. Well, the wrongness of those actions is, to people like me, simply what it means to say the hermit has property rights here and that you’ve violated them. If you agree that it would be wrong to do these things to the hermit, then you agree with the substance of what people like me mean when we say the hermit has rights even in the absence of the state and social enforcement, even if you would describe the situation with a different vocabulary.  My point in this post is not to argue that one definition of “rights” is the objectively correct one, or that one is pragmatically superior to the other. (I may come back to that point in a future post, but let’s table it for now.) My point is simply that it’s possible much of the disagreement about whether rights exist prior to or independently of the state may simply be turning on a linguistic divergence over what the word “rights” is meant to designate.   (0 COMMENTS)

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Reasoning from a Price Change: Trade Edition

An important statistic in international trade economics is the “terms of Trade.”  The terms of trade is the ratio between export prices and import prices.  In other words, the terms of trade is a relative price telling us how many imports we can buy per dollar of exports.  A country’s terms of trade improves (gets larger) when export prices rise relative to import prices; people can now purchase more imports from abroad while giving up fewer exports.  Conversely, a country’s terms of trade decreases (gets smaller) when the price of imports rises relative to the price of exports; people have to pay more in exports to import the same value of imports. For example, let’s say we have two countries: Whitebreak and Faltera.  Whitebreak exports wheat and imports artwork (and vice versa for Faltera).  Wheat sells for $1 and artwork sells for $1.  The terms of trade in this initial state is 1.  Now let’s say the price of wheat doubles to $2.  Whitebreak’s terms of trade improves to 2 ($2 for wheat / $1 for art).  Selling the same amount of wheat can now buy 2 pieces of art.  Whitebreak’s terms of trade has improved. Conversely, Faltera now must give up two pieces of art to buy the same amount of wheat. The terms of trade have improved for Whitebreak, but are the residents of Whitebreak made better off?  It may be tempting to say, “Yes!  They can buy more with the same amount of resources.  Of course they are better off!”  As readers of the title of this piece have likely already deduced, that answer is incorrect.  Why prices changed tells us more about whether or not the people of Whitebreak are better off.  As Scott Sumner would say, never reason from a price change. There are two reasons why the price of a good can change: an change in demand for that good or a change in supply.  If demand increases and the price of wheat rises, the people of Whitebreak are made better off: the quantity of wheat consumed in the world increases and the economic surplus generated in the wheat market increases.  Further, since Falterans are buying more, they are selling more art to Whitebreak, so Whitebreakian residents enjoy more decorations for their homes.  In this case, the terms of trade increase correlates with Whitebreak being better off.  Note that the Falterans also are better off even though their terms of trade have fallen because they increase the consumption of the goods they want. But let us say that, rather than an increase in demand for Whitebreakian wheat, there is a blight that decimates the crop.  This decrease in supply would cause the price of wheat to rise.  Again, this increase in price for wheat would improve Whitebreak’s terms of trade with Faltera, but in this case the people of Whitebreak are certainly made worse off: they have less wheat to consume (and, consequently, less wheat to trade for art).  Their economic wellbeing deteriorates.  In this case, the terms of trade improvement does not signal improvement in the living standards of Whitebreakians. In real life, both the price of exports and the price of imports are constantly changing.  Since the terms of trade is a ratio, it can also change depending on the percentage changes of prices.  For example, let’s say there is a recession and the prices for both Whitebreak wheat and Faltera art fall due to declining demand.  Art is a luxury good, so the decline will likely be more substantial for artwork rather than wheat.  If, say, wheat prices fall 3% but art prices fall 20%, the terms of trade will improve.  Again, this improvement is misleading regarding the wellbeing of Whitebreakians and Falterans. Understanding this limitation to the terms of trade, or any statistic, is important for discussing trade policy.  Judging a policy’s success or failure by a single (or even a basket of) metrics can lead to incorrect reasoning if one does not understand the underlying data influencing the metric. None of this is to say we need to abandon terms of trade.  It is a useful statistic.  But just like any statistic, we must be cautious in its use and interpretation.  Ultimately, the answer to whether a terms of trade improvement (or deterioration) is a good thing or a bad thing is: “it depends.”   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

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Nominal GDP as an indicator

Many of my contrarian opinions derive from my focus on a single macroeconomic variable—NGDP. Consider the recent period of high inflation. Almost all economists believe the inflation was caused by a mix of supply and demand side shocks. In contrast, I believe the high inflation was all demand-side, with supply shocks playing no role at all, at least over the 2019-24 period as a whole.Consider some data from the past 4 1/4 years:Under 4% NGDP targeting, NGDP should have risen by 18.1% between 2019:Q4 and 2024:Q1. Actual increase was 29.0%.Under 2% PCE inflation targeting, prices should have risen by 8.8% between January 2020 and April 2024. Actual increase was 17.8%.Note that NGDP rising by an excessive 11% led to 9% above target inflation. That means supply shocks explain none of the total cumulative excess inflation.  Yes, supply shocks clearly played a role during certain months back in 2022.  But those negative shocks were offset by positive supply shocks during other months. The economy’s supply side has been strong—real GDP has risen more rapidly than expected, mostly due to immigration.  Indeed, given the rate of NGDP growth, we are lucky that inflation was not even a bit higher.  A positive supply shock (a surge in immigration) held inflation to a level slightly below what one would have predicted based on NGDP growth alone. My contrarian views on the role of monetary policy in the recent inflation mirror some similarly heterodox views of the Great Recession.  I argued that the Great Recession was caused by a tight money policy in 2008.  Extremely few economists agree with me.  When I argue that the Great Recession was caused by a big fall in NGDP, people accuse me of engaging in a tautology.  In their view, a big fall in NGDP is a recession.  They confuse nominal and real GDP.   The past 4 1/4 years clearly demonstrate that real and nominal GDP are not identical—a big NGDP overshoot showed up as excess inflation, not very fast RGDP growth.  So much for the “tautology” theory. Another complaint is that while falling NGDP was a problem back in 2008, there was nothing the Fed could have done about it because we were stuck at the zero lower bound.  But we were not at the zero lower bound in 2008–the Fed was doing normal conventional monetary policy.  Indeed in October 2008 they instituted IOR to keep interest rates from falling, i.e., to prevent the economy from overheating. Why do my views diverge so sharply from those of my colleagues?  I see several factors. 1. If you didn’t expect an inflation surge, it’s natural to look for some sort of unexpected factor to explain the result.  Supply shocks are a handy excuse, especially given that for a brief period they were contributing to higher than normal inflation.  But this is motivated reasoning.  Economists often overlook the fact that the economy is also continually hit by positive supply shocks, such as the surge in immigration, or the repairing of supply lines after the disruption of Covid abated.  They correctly saw negative supply shocks during certain months, but failed to see that for the past 4 1/4 years as a whole the supply situation has been excellent.  2. Most economists are relatively supportive of the Fed’s monetary policy stance.  Thus when NGDP deviates dramatically from the 4% growth path, they are reluctant to blame monetary policy.  That would be almost like blaming the economics profession for the policy disaster.  It is much more satisfying to look for explanations that involve mysterious “exogenous shocks”. 3. The stance of monetary policy is often very different from how it appears when looking at indicators such as interest rates.  Rates were falling in 2008 even as money was getting tighter.  Rates rose dramatically in 2022 even as monetary policy remained quite expansionary (albeit arguably slightly less so than in 2021.)  If you misjudge the stance of monetary policy, you are far more likely to misdiagnose the cause of recession or high inflation.  This mistake is especially likely to occur when an exogenous factor (such as a housing slump) causes a big change in the natural interest rate, making the Fed’s policy rate a highly inaccurate indicator of the actual stance of policy. My focus on nominal GDP also explains why I am not impressed by unconditional forecasts.  I notice that lots of people that were right about the inflation of the early 2020s were wrong about the effects of the previous QE programs under Bernanke.  (And vice versa.)  I am far more impressed by conditional forecasts.   What do you think would happen if the Fed allows 29% NGDP growth in the 4 1/4 years after 2019:Q4?  That’s the sort of question we should be thinking about. While NGDP is a useful indicator, inflation and interest rates are not.  If you tell me that inflation is rising, I don’t know what that means for the economy without knowing whether the increase was due to supply or demand shocks.  If you tell me that interest rates are going to be lower, it means nothing unless I know whether the fall in rates is due to easy money or a weak economy. Only NGDP gives an unambiguous indication of the current state of the economy.  It doesn’t tell us everything we need to know, especially in the long run.  But over the short to medium run, no other variable comes close as a way of understanding current macroeconomic conditions. There are times when economists are tempted to ignore the signals being sent by NGDP.  Don’t do that!  Back on June 28, 2021, Jason Furman was being interviewed by David Beckworth.  Here’s Furman: So I have some sympathy for nominal GDP targeting. . . . If we were following it now, we would already have lifted off interest rates. And we’re going to, with extreme likelihood, overshoot the nominal GDP target we were on. So under your [Beckworth’s] framework, you’d have to make up for that with a sustained period of lower than trend on nominal GDP growth. I don’t mean that to pick on you, this experience has destroyed anyone’s plans that they wrote down before. It’s such a weird period. But to me, that says, “I’d like the Fed, if the unemployment rate a year from now is still 5.5%, I’d like the Fed to take that into account, regardless of what’s happening to nominal GDP or prices as an independent problem and issue that they need to take into account.” So I think that anything has to have a dual mandate, but do you look at nominal GDP and the like, instead of inflation? Maybe. Ouch!  June 2021 is when NGDP was just returning to the pre-Covid trend line.  In retrospect, it was the perfect time to tighten policy to prevent an NGDP overshoot.  To his credit, Furman correctly surmised that tightening would be required to prevent an NGDP overshoot, but for other reasons he thought that was an unwise idea.  He thought NGDP was sending a misleading signal, that we should have looked at the unemployment rate (which actually is an unreliable indicator.) With the benefit of hindsight, we can clearly see that the NGDP signal was exactly right and Furman was wrong.  It was time to tighten.   Ignore NGDP at your own risk. (0 COMMENTS)

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Does Market Failure Justify Government Intervention? (with Michael Munger)

Economics students are often taught that government should intervene when there is market failure. But what about government failure? Should we expect government intervention to outperform market outcomes? Listen as Duke University economist Michael Munger explores the history of how economists have thought about this dilemma and possible ways to find a third or even […] The post Does Market Failure Justify Government Intervention? (with Michael Munger) appeared first on Econlib.

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Bonus Weekly Reading for June 16, 2024

  Two more articles, one I read late in the week and one I read this morning, are too good to pass up. The Dark Side of Alexander Hamilton by Jeffrey Rogers Hummel, Reason, July 2024. This is Jeff Hummel’s review of William Hogeland, The Hamilton Scheme: An Epic Tale of Money and Power in the American Founding. Excerpt: Hamilton was one of the prime architects of the Constitutional Convention, held in secret. There he revealed himself as a closet monarchist: Expressing his admiration for the British system of government as the world’s best, he declared that he preferred a lifetime president with an absolute veto over all legislation. He was appalled that senators would be chosen by the states; indeed, he wished to see the states and their militias virtually obliterated. Yet some increase in central power was better than none, so Hamilton was willing to disguise his actual views when contributing to the Federalist Papers. Many historians have dismissed Hamilton’s convention remarks as a mere aberration, but Hogeland reveals that these extremely oligarchic inclinations informed Hamilton’s efforts throughout his career. And: By the time Washington had called out 12,000 militia [to end the Whiskey Rebellion], which would march under Hamilton’s effective command, overt resistance had subsided, mainly due to the calming influence of Gallatin, Findley, and even Husband. To buy time, the government had sent commissioners to negotiate and promise amnesty to any who signed a loyalty oath. Much of the area’s population did so—but when the militia arrived, that didn’t matter. Hamilton presided over a reign of terror in which the government’s men broke into houses and many Americans were arrested without charges and held for long periods under degrading conditions. Hamilton was attempting to gather evidence to drag perpetrators back to Philadelphia for trial, in violation of the Bill of Rights’ guarantee that all criminal trials be conducted in the district in which the crime had been committed. Hamilton hoped to find enough evidence to hang Gallatin, Findley, and Husband. By the way, when I used to walk by the front of the Treasury Building on Pennsylvania Avenue, when I was a summer intern at the Council of Economic Advisers in 1973, I noticed a statue and finally asked someone who it was of. It was of Albert Gallatin, a Treasury Secretary after Hamilton. Jeff Hummel has told me in private conversations that Gallatin was a financial genius who put his talents to noble ends, something that comes across in Jeff’s review.   Biden Keeps Blaming Others for His Economic Mistakes by Veronique de Rugy, Reason, June 13, 2024. Excerpt: Government overspending, an activity the Biden administration has taken to a new level, has sent the country into an inflationary spiral. Through trillions of dollars in COVID-19 relief programs, infrastructure spending, vote-buying student loan forgiveness programs, and a political “Build Back Better Agenda,” the White House has flooded the economy and decimated consumers’ purchasing power. We’re paying more and getting less for everything from energy to food. According to the House Budget Committee, the average family of four is paying around $1,143 more each month than it was in early 2021 for the same goods and services; this includes increased gasoline costs. Rather than reversing course, President Joe Biden is telling voters the private sector is to blame and that he has the answers. He’s doubling down by proposing more stifling, job-killing regulations to “fix” the problem—regulations which will inevitably send inflation to new heights. And: Once again, however, the Biden administration found a convenient and private sector scapegoat. It has unleashed the power of the Department of Justice on RealPage, a U.S. software provider that helps landlords determine market pricing for their rental properties. The existence of a company like this shouldn’t be controversial. Almost every industry today uses a similar tool, from grocery stores to airlines, to make better decisions about pricing their inventory based on supply and demand. But the administration needs someone to blame, and there are not many other viable targets for it to shoot at.   (0 COMMENTS)

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