At 7.40pm on the evening of Wednesday, September 16, 1992, Britain’s Chancellor of the Exchequer, Norman Lamont, gave a televised address announcing the country’s withdrawal from the Exchange Rate Mechanism. Monetary policy announcements rarely get live, prime time coverage, but this came at the end of one of the most remarkable days in British economic history. Getting in, 1978 to 1990 Beliving that exchange rate fluctuations hindered cross border trade, in 1978 the European Community established the European Monetary System, the centrepiece of which was the Exchange Rate Mechanism (ERM). This limited member currencies to a 2.25% band (6% for the Italian lira) either side of their parity with the European Currency Unit, a basket representing weighted averages of member currencies. Britain stayed out. Prime Minister James Callaghan noted that the scheme would “effectively mean Europe becoming a Deutschmark zone,” recalling: “I was sympathetic with the general proposal, but had to make clear that, as proposed, the effect of the scheme would be disadvantageous to Britain, for the strong Deutschmark would have the effect of tugging sterling upwards with deflationary consequences for our economy, unless long-term credit was absolutely unlimited.” Callaghan’s successor, Margaret Thatcher, agreed. Along with concerns for British sovereignty, she regarded the exchange rate as a price like any other to be set by the market. Britain finally joined the ERM in October 1990. Thatcher had lost one Chancellor, Nigel Lawson, over the issue in October 1989. When his successor, John Major, threatened to resign unless Britain entered, the increasingly embattled Thatcher consented and sterling joined the ERM in October 1990 at a rate of 2.95 DM. Thatcher was forced from office the following month and replaced by Major, who appointed Lamont as his Chancellor.   Staying in, 1990 to 1992 What attracted Lawson and Major to the ERM was the opportunity to import Germany’s monetary policy, or, as their detractors would say, to have it to blame for cynical or painful policy choices. In 1985, with sterling at 4.00 DM, loose monetary policy was required. In 1988, with inflation rising, tighter policy was needed and ERM membership offered an attractive cover. Lawson and Major had hiked the Bank of England’s base rate from 7.38% in May 1988 to 14.88% between November 1989 and September 1990. Inflation fell from an annual rate of 9.2% in October 1990 to 3.7% in August 1992. But in October 1990, Germany reunified. Faced with inflationary pressures, the Bundesbank began raising interest rates. Even as British inflation fell, interest rates could not fall commensurately. Callaghan’s forecast and Thatcher’s fears were borne out. Through 1991 and into 1992, doubts grew over whether Britain – and others – could maintain their ERM parities. In June, Danish voters rejected the Maastricht Treaty which had, among other things, set out the path from the ERM to the proposed single currency. This path now looked less navigable and the ERM less purposeful. The parities came under pressure. The situation exploded on September 15, 1992, when Bundesbank President Helmut Schlesinger touted “a wider-ranging realignment” of currencies. Markets sensed an imminent sterling devaluation. The following morning, they began ‘shorting’ sterling: borrowing it, selling it, buying it back for less, repaying the loan, and pocketing the profit. Sterling crashed. To prop it up, the British government started spending foreign exchange reserves buying up sterling. By mid-morning the selling was so intense that Bank of England officials were buying £2 billion of sterling an hour. The Treasury later estimated the losses on the day’s trading at £3.3billion. But there were limits to Britain’s currency reserves. At 11am, Major decided to hike interest rates to 12%, but markets didn’t believe he would inflict the pain on his economy necessary to maintain the parity and the sterling rout continued. TV schedules were interrupted to bring regular updates of monetary deliberations. That afternoon, Lamont called Major telling him that the game was up, but Major disagreed. Instead, he insisted that interest rates go to 15%. Even this didn’t work, and when the market closed sterling was still outside its currency band. At 7:40pm on ‘Black Wednesday, Lamont announced surrender.   Keeping out, 1992 – “You can’t buck the market,” Thatcher once said. Major tried and the market bucked him. Politically, having won a surprise election victory in April 1992, the Conservatives’ polls tanked, never recovered, and the Labour party defeated them in a landslide in 1997. Their core voters, homeowners who had bought into Thatcher’s “property owning democracy,” had been especially hard hit by the ERM debacle. Economically, the British government adopted inflation targeting for want of any other ideas. It worked. Inflation remained low through the 1990s and 2000s and the economy grew until 2008. The prospect of British membership of the euro was effectively dead. Indeed, with hindsight, many came to remember September 16, 1992, as ‘White Wednesday.’   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Assume that Russian czar Vladimir Putin has an ounce of ideology in him, that is, he is not in the job only for his own selfish interest, but he genuinely thinks that “the West” is decadent and evil, and that the Russian civilization can save mankind. In that case, he has a good reason to believe that he cannot really lose the war he started in Ukraine. The reason is that even if his armies lose on the battlefield, as it may very well happen, the Russian czar will have, in the meantime, pushed many Western governments to dramatically increase their own Caesarean powers. The European Commission has just put together a plan for redistributing the energy industry’s “excess profits” to consumers and intermediate users of (natural) gas—as Russian state crony Gasprom has cut nearly all its sales of that product to Europe. The plan will probably be adopted on September 30 when the Energy ministers meet. (See “How the EU Intends to Collect ‘Windfall Profits’ from Energy Firms,” The Economist, September 15, 2022; “EU Seeks to Raise $140 Billion Clawing Back Energy Profits,” Wall Street Journal, September 14, 2022; and “EU Targets €140bn from Windfall Taxes on Energy Companies,” Financial Times, September 14, 2022.) As the plan now stands, the government would seize part of the profits whose pursuit normally lead energy companies to risk investment losses in the hope of making excess profits in the future. It is as if the government capped the “excess prices” paid to producers, disincentivizing them from producing more. On the other hand, by using the confiscated profits to cap the consumers’ energy expenditures at what they now spend, it will encourages them to consume more than they would otherwise do. What is needed given the increased scarcity is exactly the contrary: more production now and in the future, and less consumption now. Furthermore, price caps on gas and electricity are already in force in some countries and may be tightened. A real planning mess! The economic consequences will probably prove disastrous. Governments (the EU government and the national governments) will need correcting interventions in cascades, becoming more dirigiste as they try to solve problems they themselves created. The phenomenon is well known: as central planning fails, arguments are made that more central planning is needed. “Energy czars,” clean or dirty, will gain power in the bowels of Western Leviathans. Energy markets will be blamed as ripe with “market failures.” All these are temporary emergency measures, the EU governments will say. But as usual, once the emergency is over, state power is very unlikely to retreat to its pre-emergency level. It will continue to grow, one emergency after another. (See Robert Hicks, Crisis and Leviathan [Oxford University Press, 1987].) It is an error to think that the rule of law, individual rights, and “political rights” can survive the demise of economic freedom. Milton Friedman’s classic Capitalism and Freedom (University of Chicago Press, 1962), published 60 years ago, remains required reading on this issue. In order to protect their subjects from excess prices, politicians and bureaucrats will accumulate excess power over them. The West will go farther down “the road to serfdom.” It would be surprising if the US government did not follow. The West will be really decadent and evil. Whether by then the old Russian tyrant is still alive or not does not matter from our viewpoint. I am not arguing that nothing should be done. I am arguing against central planning. The least bad solution in the circumstances (thus, the best one) would be to subsidize those households whose misery is deemed unacceptable or would break the public resistance to Putin’s imperial tyranny; and to let prices and profits play their signaling role of coordination without coercion, like in a free society. (See my recent EconLog post “Efficient and Inefficient Rationing.”) (0 COMMENTS)

A number of people who are against high taxes believe, at the same time, in substantial tariffs on goods from other countries. Here’s the problem: a tariff is a tax, a tax on imports. Americans and producers in that country share the burden of the tax. And tariffs, like all other taxes, distort people’s decisions in ways that reduce wealth. This is from David R. Henderson, “A Tariff Is a Tax,” TaxBytes, Institute for Policy Innovation, September 14, 2022. Another excerpt: If we buy a good mainly from China, and the U.S. government imposes a tariff on that Chinese good, the good will be more expensive. So, we’ll buy less from China and more from, say, Vietnam. This isn’t just hypothetical. During his time as president, Donald Trump raised tariffs on Chinese goods four times, raising the average U.S. tariff rate on imports from China from 3.1 percent to 21 percent. One result was that imports of manufactured goods from 14 Asian countries were $90 billion higher in 2021 than in 2018, and approximately half of that increase was from Vietnam. When I did the research for this short piece, I was stunned by the fact that tariff rates on U.S. imports from China increased from 3.1 percent to 21 percent. I guess that’s what can happen when you raise a tax 4 times. Read the whole thing, which is short.   (0 COMMENTS)

The introductory paragraph in this National Review article caught my eye: There’s a game prosecutors play. Let’s say I suspect X committed an armed robbery, but I know X is dealing drugs. So, I write a search-warrant application laying out my overwhelming probable cause that X has been selling small amounts of cocaine from his apartment. I don’t say a word in the warrant about the robbery, but I don’t have to. If the court grants me the warrant for the comparatively minor crime of cocaine distribution, the agents are then authorized to search the whole apartment. If they find robbery tools, a mask, and a gun, the law allows them to seize those items. As long as agents are conducting a legitimate search, they are authorized to seize any obviously incriminating evidence they come across. Even though the warrant was ostensibly about drug offenses, the prosecutors can use the evidence seized to charge robbery. The article itself is focused on prosecutorial abuse, but my interest lies elsewhere.  I’d like to talk about the throwaway line that cocaine distribution is a minor crime.  Is that true?    I don’t see why it should be a crime at all.  But does society view it as a minor crime? Here are the penalties for cocaine distribution in Alabama: Trafficking In Alabama, it’s illegal to sell, manufacture, delivery, or otherwise bring into the state illegal drugs, including cocaine. Trafficking of cocaine is a Class A felony, but the punishment depends on the amount of coke sold or intended to be sold or transported. The mandatory minimum sentences are: For 28-500 grams the minimum is 3 years in prison and a $50,000 fine For 500 grams to 1 kilogram the minimum is 5 years and a $100,000 fine For 1-10 kilos, the minimum is 15 years and a $250,000 fine For over 10 kilos the penalty is life imprisonment without parole That doesn’t seem minor! The NR article is not focused on cocaine distribution.  But in writing the article the journalist had to quickly come up with a minor crime, to contrast with armed robbery.  It seems like cocaine distribution was the first thing that popped into his head.   Here’s a question to think about.  Should we criticize the reporter for falsely assuming that cocaine distribution is a good example to use for a minor crime, or should we criticize the state of Alabama for penalizing perpetrators of a minor crime as if it were a major crime? Here’s another question.  How reliable is our intuition as to the severity of any given crime?  To answer that question, let’s think about another crime—statutory rape.  This crime occurs when an adult has sex with a person below the age of consent.  But just as with our drug laws, states don’t seem to agree as to the appropriate cutoff point for adulthood:   Blue states have a 16-year age of consent, brown states have a 17-year cutoff, and in green states the age of consent is 18.  (And notice that there’s no strong correlation with political tendencies in each state.) Europe has somewhat lower ages of consent: In dark blue counties like Britain and Spain the age of consent is 16.  In light blue countries like Sweden and France it’s 15.  And in teal countries like Germany and Italy it’s 14.  (Ireland has 17 and Turkey has 18.)  As in the US, the pattern seems almost random. While I have no idea what figure is appropriate, several points are clear.  There is an enormous difference between an age of consent of 14 and 18.  It seems rather implausible that the optimal cutoff point would vary that much between two western countries.  My conclusion is that either much of Europe has legalized outrageous crimes, or much of the US is imprisoning people that have not committed serious crimes for long periods of time.  Thus, just as with our drug laws we should not trust our intuition about sex crime laws.  Those intuitions are likely correct in some places and incorrect in others.  In some countries prostitution is legal, whereas in others it is illegal.  Someone must be wrong! Unlike drug and sex crimes, all developed countries ban murder, forcible rape, armed robbery, car theft, arson, tax fraud, kidnapping and a host of other crimes.  The punishments may differ, but all of these acts are widely recognized as being crimes. But sex and drugs are different.  Some regions allow acts that are illegal in other areas.  Even more surprisingly, the gradation in penalties is generally quite abrupt.  Ex ante, you might expect that there would be slight differences in penalties between regions—analogous to the US giving a driver going 85 mph a $200 fine while Germany allows speeding.  Not so.  Actions like selling pot and sex with a teenager are either completely legal, or else are treated as such serious crimes that prison sentences are appropriate.   I don’t know of a single jurisdiction that gradually stiffens the penalty as the sex crime gets worse.  In other words, one doesn’t see something like:  $1000 penalty for sex with a 17-year old A week in jail for sex with a 16-year old A month in prison for sex with a 15-year old. A year in prison for sex with a 14-year old. (I’m not suggesting those punishments are appropriate, just making the observation that it’s odd that activities on either side of an arbitrary line are viewed so radically differently—either perfectly fine or serious crimes.) Similarly, if selling pot is completely legal in 19 states, you might (ex ante) expect the penalty for selling pot in the other 31 states to be rather modest.  But it isn’t.  Marijuana sellers often serve long prison terms. I encourage people (including myself) to not trust our own intuition about sex and drug crimes.  The wildly inconsistent way that these crimes are treated in various states and countries provides abundant evidence that the intuition of many people is unreliable.  For underage sex, utilitarianism might suggest the sort of gradated penalties discussed above.  But one must be careful with financial penalties.  There’s a famous story that when a day care center imposed financial penalties on parents that were late in picking up their kids, it led to even more examples of lateness.  (On the other hand, if the penalty is equal to the inconvenience imposed on day care providers, then who cares?)  In the case of sex crimes, a financial penalty might lead some adults to view sex with teenagers as a sort of legalized prostitution, something that could be paid for.  (The famous Epstein case is worth thinking about in this context.)  But again, if the penalty equals the expected harm done (adjusted for risk of being caught) then are our intuitions correct?   I don’t have any good answers on the age of consent, but the arbitrariness of our sex and drug laws makes me uncomfortable.  Something is probably wrong, but it’s hard to know what approach is right. It’s also worth thinking about why these laws are so arbitrary.  One possibility is that once it’s decided that a certain sex act or drug use should be criminalized, no legislator wishes to stand up and suggest the penalty is too high.  If you suggest that 6 years in prison for car theft is too much, and 1 year is appropriate, no one will suspect you have a secret desire to steal cars.  But what legislator wishes to suggest that 6 years in prison is an excessive penalty for sex with a 15 year-old?  Your colleagues might give you a “funny look”. PS.  For similar reasons, whenever I read a range of estimates of the death toll from some political atrocity, I tend to privately lean toward the lower estimates.  Who wants to stand up and suggest that the Chinese government killed 800 people in Tiananmen Square, not 3000?  Who wants to suggest the Great Leap Forward killed 20 million rather than 40 million? As a result, when there’s a great deal of uncertainty the larger estimates will usually tend to gain more traction.  (To be clear, I don’t believe there’s much uncertainty about the Nazi Holocaust.) PPS. In European countries where the age of consent is 14, there is often a stricter limit (16 or 18) for people in a position of trust, such as teachers.  And European countries have some other odd quirks that Americans might view as “eye-opening“. (0 COMMENTS)

Nick Gillespie of Reason has done one of the best interviews I’ve seen from him, and that’s a fairly high bar. It’s of my friend and co-author (on hopefully a forthcoming journal publication) Phil Magness. Phil is the most productive 40-something in the world on issues I’m interested in. He found huge problems with Nikole Hannah-Jones 1619 Project. He called out Princeton history professor Kevin Kruse for plagiarism. He’s found huge problems in Nancy MacLean’s hatchet job on James Buchanan. He finds some pretty scary thinking behind Hans-Hermann Hoppe’s work that’s critical of immigration. And one of his latest targets is Karl Marx. The interview is long, but I found I could easily follow it and take notes with it at 1.25 speed. The first few minutes are about Kruse’s plagiarism. At about 8:30, they turn to Nancy MacLean. At about 13:00, they turn to Nikole Hannah-Jones. They then turn to the sea change in academia that has occurred since I became an assistant professor in 1975. Some other highlights, with approximate times: 28:50: George Mason University economics department and law school as Moneyball. 33:40: Phil’s resources versus Nancy MacLean’s. 42:00: Interesting comment on Victor Davis Hanson. 43:45: Ludwig von Mises on migration. 44:00: Hans-Herman Hoppe inverts Mises’ thoughts. Hoppe is a Habermasian critical theorist and a fan of eugenicism. 50:30: Fascinating story about Mises attending Keynes’s talk in Germany in 1926, a talk that later led to Keynes’s “The End of Laissez-Faire,” and then writing a critique in which he calls Keynes out for talking positively about eugenic theory with actual Nazis in the audience. 54:25: David Hume on Oliver Cromwell. I realize the deficiencies in my Grade 10 correspondence course on British History. Either this wasn’t covered or I totally missed it or forgot it. 56:30: Marx as almost a nobody until the fateful year 1917. 1:02:20: No citations to “neo-liberal” before 1990. 1:04:45: NIMBY housing policy making it really hard for the young generation. 1:10:00: Rhode Island governor Gina Raimondo (who is now Secretary of Commerce) setting up illegal border check points. 1:13:50: Niall Ferguson’s opening to push extreme lockdown policies.     (0 COMMENTS)

Someone just sent me this over the transom letter (if you don’t know what that means, you young kid you, look it up; ok, ok, it means “offered or sent without prior agreement; unsolicited”): “I’d like to know your thoughts on this topic and my interpretation: If one voluntarily agreed to a student loan, the loan was ‘canceled,’ and the debtor decides not to pay back the lender, wouldn’t this hole in the budget have to be filled by placing debt obligations on others? The ethical issue is the debt transfer, and accepting this guarantees another injustice occurs by tax, debt, or the currency devaluation theft of the taxpayer.”   Here is my response: I’m a professor. We’re not obligated to directly answer any questions. We’re allowed to beat around the bush instead. So let me share with you my thoughts on this matter from a slightly different perspective than the one you request. I’m a libertarian. I look at all such issue through the prism of that political economic philosophy. So I ask, should libertarians favor or oppose the government’s forgiveness of student debt? I’m of two minds on this issue as you’ll see. With Murray Rothbard and Lysander Spooner, I regard the government as a “band of murderers and thieves.” So, I oppose anything that benefits them. They seem to think that loan forgiveness benefits them, otherwise they wouldn’t do it, so I’m against this initiative of theirs if only for that reason. Further, as you point out, this program will benefit people who were subsidized into extra education. Then, the government will turn around and tax all people, including non-beneficiaries, to make up for this loss. As a libertarian, I can hardly favor the government taking money from one group of people, no matter what are their characteristics, and giving it to another group of people, no matter what their characteristics. On the other hand, if we look just at this program, and avert our eyes from the government later raising taxes to finance it, we reach a different conclusion. The less money the government has, the better. This initiative will impoverish them just a little bit. Who will it enrich? Why these students who won’t have to pay off their loans. Who is a greater enemy of liberty: the government or these students? Well, that’s a no brainer. These students haven’t been taxing, regulating, murdering, stealing, cancelling, etc. At least not to anything like the same degree. So, as a libertarian, I favor a transfer of money from statists to these relatively innocent students. Thus, we have two effects, one in favor, one against. Which one is more powerful? How should we weigh them? That is an empirical issue, not one of deontology. As a result, the way ahead for libertarians, in my view, is unclear. If an answer is demanded of me, my prudential judgement is to oppose this program. (0 COMMENTS)

Except in rare cases, pharmaceutical companies develop drugs for the U.S. market. For drugs that make it in America, potential sales in Europe, Japan, Canada, China and elsewhere are gravy. Drugs that can’t make it in the U.S. are scuttled. Probable success in America is a necessary and sufficient condition for the development of new drugs. There are four main reasons for this: This is from Charles L. Hooper and David R. Henderson, “Expensive Prescription Drugs are a Bargain,” Wall Street Journal, September 13, 2022 (September 14 print edition.) Why did the Journal give it the title it did? It’s accurate. Here’s another excerpt: Research by Columbia University economist Frank Lichtenberg suggests that 73% of the increase in life expectancy that high-income countries experienced between 2006 and 2016 was due solely to the adoption of modern drugs. He also found that the pharmaceutical expenditure per life-year saved was $13,904 across 26 high-income countries and $35,817 in the U.S. Most Americans would pay $36,000 to live an extra year. We also address the fact that governments around the world free ride on Pharma’s R&D that we Americans pay disproportionately for. In short, it sucks to be us. But we still get a good deal, as the paragraph above shows.   (0 COMMENTS)

At TheMoneyIllusion, commenter Jeff recently argued: A common sense objection JSP [Joe SixPack] might make would be to ask for proof that authorities even *can* “stabilize” any of the quantities they talk about targeting. Isn’t it possible that a large economic system is simply too complex to “stabilize” in such a fashion? Has it ever really been demonstrated in all of history, excepting brief interludes supported by fortuitous tailwinds? Potentially, with a lot of effort, you could perhaps stabilize one dimension, one specific quantity, but not without creating such large stresses in other dimensions that you risk ripping apart the entire machine (a la American flight 587: I can see why people might say this, but I think it’s wrong.  It’s true that I’ve suggested that NGDP targeting would help to stabilize the economy.  But I bet you could find people who believe that a gold standard would provide for a more stable economy.  That doesn’t mean they favor using monetary policy to directly stabilize the real economy.  Rather, they think that pegging the price of gold at a fixed amount would indirectly help to provide an environment more conducive to overall economic stability. I certainly don’t favor trying to stabilize the real economy in the way a communist regime might have attempted with a 5-year plan.  Rather I favor stabilizing the value of money, in the hope that this indirectly leads to a more stable real economy. Instead of pegging the price of gold at a fixed amount, I favor pegging the price of NGDP future contracts at a specific amount.  In both cases monetary policy is merely trying to stabilize money in terms of one asset price, not trying to micromanage an entire complex economy. In the same comment section, commenter Alex S. correctly points out that the Keynesians are the ones that propose a complicated policy of macroeconomic stabilization: In the Keynesian world (in the policy world, this is the lens that both left- and right-leaning policymakers tend to think of the economy through—though they tend to differ on parameters such as effects of tax cuts) first comes RGDP, then PGDP (GDP price level), and then some afterthought called NGDP. You forecast actual and potential RGDP to get the output gap, and plug that into a Phillips Curve to forecast PGDP (inflation). Then, you combine your RGDP and PGDP forecasts to get NGDP that goes into an appendix, if even that. Thus, NGDP and any target applied to it, is intricately dependent on your RGDP and PGDP forecasts, making it difficult for Keynesians to see the relevance of NGDP. In the Keynesian world, the interest rate path that is communicated affects the output gap (RGDP against trend RGDP), which then affects inflation (PGDP). In other words, your instrument (interest rate target) comes ahead of your goals because it is your primary way of…wait for it…”communicating the stance of monetary policy.” This creates a lot of uncertainty about the one thing the Fed actually controls: the expected path of the level of NGDP. They are the ones guilty of thinking that monetary policy can skillfully control real variables such as real GDP and employment.  I say just control one nominal target, and let the real economy adjust to that nominal equilibrium. PS.  There is a rumor that I plan to retire tomorrow.  After working almost continually since age 13, I need a break. (I’m almost 67-years old.) But fans of market monetarism should not be discouraged, as not much will actually change.  I’ll still be discussing my ideas in my two blogs, and have a book on monetary policy that will come out later this year.  The main difference is that I’ll no longer collect a nice 6-figure income for working from home. Seriously, I’d like to thank all of the people that I worked with at the Mercatus Center.  David Beckworth is doing a great job as the monetary policy program director, and I am very optimistic about program’s future.  Also thanks to Pat Horan, who did a great job as program manager, and all of the other talented people involved in the program. (0 COMMENTS)

Jon Murphy’s post this morning reminded me of a job I had when I was 12 or 13 in which I helped internalize what otherwise would have been an externality. I posted about it briefly here, but I’ll say more. The house I lived in in Carman, Manitoba was on a busy highway about 1/4 mile from Syl’s Drive Inn. Don’t ask me why it it’s called “Inn” instead of “In.” I remember it as having one n in the 1960s, but my my memory may be imperfect. The Drive Inn, which opened in April each year and closed in October, was owned by Quentin Sylvester. It served chips (our word for French fries), hamburgers, hot dogs, milkshakes, soft ice cream cones, and pop (our word for sodas.) There was one nasty problem: some customers, after eating in their cars, would throw their garbage on the road. Either Quentin Sylvester was a very observant man or he got complaints from residents nearby. Either way, he came up with a solution: hire someone to clean the streets of garbage for about 3 blocks towards downtown from the drive-in. He came to me and offered me 50 cents per day to come to his drive in early in the morning (about 6:30 a.m.), clean the area on his property and burn the trash, and then scour the street (highway) for garbage over those 3 blocks. I accepted. (Many years later, I introduced my daughter to Syl and told her about how much I had been paid. He told me that he would have been willing to bargain to 75 cents. Damn!) Although I didn’t keep close track, my guess is that the trash over those 3 blocks was over 80 percent of the trash that customers dumped off-site. By the way, I have a vague recall (although it is vague) that after a few weeks of doing this, I realized that it wasn’t much bother to pick up other trash that clearly wasn’t from Syl’s. There wasn’t much of it. I didn’t pick up icky cigarette butts though. (0 COMMENTS)

The government of the United Kingdom will cap energy prices paid by households, which have jumped following the reduction of supplies from Russia. Apparently, one goal, if not the goal (since households could have been simply subsidized to dampen the shock), is to reduce the rate of inflation (see “U.K. Government to Cap Household Energy Prices for Two Years,” Wall Street Journal, September 8, 2022): The move is aimed at preventing inflation from rising even faster in a country that already has the highest rate among Western nations at 10.1%. If inflation can be reduced by price caps on a few goods, capping all prices would eliminate inflation. Why didn’t we think of that before? The error is that tapping one (relative) price—for example, the price of natural gas—will do nothing to reduce inflation, which is an increase in all prices irrespective of the movement of prices relative to each other. Perhaps the confusion comes from the fact that the measure of inflation (the Consumer Price Index or other similar indexes) must, of necessity, rely on the observation of actual prices, which incorporate both inflation and changes in relative prices. A change in a price is equal to its change relative to other prices plus inflation, the latter being, to repeat, a change in the general price level (see my post “The Elementary Basics of Inflation”). Another way to clear the confusion is the following. Suppose there were no inflation. The elimination by the Russian government of 40% of the gas supply in Europe would result in roughly the same increase in gas prices as we now see. The current rate of inflation, about 10%, is tiny compared by the recent increase in the European gas price of as much as 1000%. Without a cap, the jump in the price of gas would be compensated by a reduction of other prices as people would want to buy fewer other goods and services in order not to reduce too much their consumption of gas or gas-produced goods. (Technically, this approach is informed by the monetarist theory of inflation and by general-equilibrium theories where changes in relative prices come from a move along the production possibility frontier.) My argument is not only that price caps will merely hide inflation, which is pretty obvious. It is that price caps interfere with the change in relative prices, which is essential to the transmission of price signals regarding relative scarcities in the economy and, thus, essential to economic efficiency. Capping a price (say, gas) whose increase would have signaled an increased scarcity of the related good will have two efects: it will modify the statistical estimate of inflation, but without changing the underlying inflation at all; and it will mess with the price of gas relative to other goods.  Gas will remain no less scarce, as shortages or the need of government subsidies to producers will show. But the cap will blur the correct signaling of the new scarcity, encouraging more consumption and, without subsidies, less production of the scarcer good—that is, it will prevent an efficient adaptation to the new situation. This is why “we,” meaning Western governments and most economists, do not generally think about reducing inflation by capping prices, let alone by capping only a few prices. Ignoring this will have dire political and economic consequences. (Incidentally, a few rulers, like president Richard Nixon in the early 1970s, did think of controlling inflation with economy-wide price controls, and failed: see Hugh Rockoff, Drastic Measures: A History of Wage and Price Controls in the United States [Cambridge University Press, 1984], even if this author does not agree with all my argument.) (0 COMMENTS)