What is the outlook for black Americans today- is the black experience glass half full or half empty? Is racial discrimination the root of all problems in Black America? In this episode, EconTalk host Russ Roberts welcomes the Wall Street Journal‘s Jason Riley, who argues the current situation has been distorted by activists with conflicting interests. Says Riley, “I’m not someone who believes that racism has been vanquished from America. The question is: does racism explain the outcomes we see today…?” Now we’d like to turn the conversation over to you. After listening to the episode, consider the prompts below and share your replies. We’d love to see them here online, but we’re equally pleased if we can help you start a conversation with someone offline.     1- The conversation begins with a discussion of police violence. Riley argues that the media preoccupied with breaking down police encounters by race, but not criminality by race. Which is the bigger problem- policing or black criminality? To what extent do you agree this presents a distorted view to the public? What are some of the unintended consequences Riley says results from this media (and social media) attention?   2- Riley notes that during the period between the Civil War and the Civil Rights movement, black lives improved greatly and in a great many ways. What does he suggest we should learn from that? How does this relate to what Riley call the problem of black elites? How does Riley use the case of immigration as a comparison to black Americans today?   3. For what reasons does Riley argue that the Drug War has become a victim of revisionist history? To what extent do you agree with his statement that, “if your goal is to a). reduce mass incarceration, or b). reduce the racial disparities among our incarcerated population, among the prison population, going after the drug war is barking up the wrong tree.”   4- Riley sadly suggests he thinks racism is a part of human nature. Is that true? As he and Roberts speculate at the end of the conversation, would everything really be hunky-dory if  the US eliminated racism?   5- The episode ends with a brief discussion of Riley’s new biography of Thomas Sowell. What do Riley and Roberts see as Sowell’s legacy?   (0 COMMENTS)

In some recent posts, I threw out the idea of banning corporations from paying ransomware. I expected the idea to be shot down in the comment section, but I didn’t see any persuasive arguments against the proposal.  In fairness to my commenters, however, most of their arguments were far superior to those offered in a recent Bloomberg article: Consider a simple example. Suppose a state legislature, sick and tired of the number of people being robbed on the street, decides to make it a crime to give money to a mugger. The legislation might well reduce the supply of muggings, but only by imposing the cost of this public good — fewer robberies — on the victims. Yet handing my wallet to the mugger who is pointing a gun at my head is completely rational. Punishing me to lower the crime rate is a peculiar way for a free nation to behave. Freedom? By that argument the Foreign Corrupt Practices Act interferes with the “freedom” of corporations to pay bribes to foreign officials. The Bloomberg article does provide some useful information, however: [A]fter Colonial Pipeline forked over $4.4 million in Bitcoins to the hackers at DarkSide, the decryption tool the company received in return proved so ineffective that the company wound up rebuilding its network from scratch. So not only did Colonial Pipeline damage the US economy by encouraging other criminals to extort money from other American corporations, they didn’t even achieve their objective after they paid the ransom.  We would have done Colonial Pipeline a favor by banning the payment of ransom.  Nor is this an isolated case: Even for those who pay, the chances of full data recovery are slim.  An April 2021 report from Sophos places the likelihood of getting all the data back at 8%. As for the claim that my idea is obviously infeasible, tell that to the Biden administration: In response to the growing threat, more and more observers have become attracted to the theory that the best way to stop ransomware attacks is to make paying the ransom illegal. Biden administration officials have suggested that the notion has merit. We can end the problem of US corporations paying ransom.  So why not do it? (1 COMMENTS)

Over time, the labor force (employed plus unemployed) usually tends to grow at a pretty stable rate. In addition, hourly wage rates are sticky, or slow to adjust to shocks. As a result, a healthy economy requires a relatively slow but steady growth in nominal labor compensation. One way to do that is to have the central bank target NGDP growth at 4% or 5%/year. In a recent post, I suggested that the Covid recession was one case where NGDP targeting might not have worked very well. That’s because the labor force plunged much lower in March and April 2020. Given the slow adjustment in nominal wages, it was appropriate to have some slowdown in NGDP growth. For the same reason, it’s probably appropriate that French NGDP dips a bit each year in August.  Thus central banks probably shouldn’t try to target current NGDP, rather they should set policy at a position expected to produce on target future NGDP. How far in the future? I’m not sure, but a year or two seems reasonable. Here’s an example. Suppose the Fed is targeting NGDP growth at 4%/year. Also suppose that in the 4th quarter of 2024, the previous 12-month growth rate has been only 3%. In that case they might aim for a total growth of 9% by the 4th quarter of 2026. This would represent growth of 4%/year for 2 years, plus 1% more of catch up growth. I believe that sort of policy regime would have worked fine during the Covid recession, although I can imagine situations where even that approach might not be appropriate.  (Say an epidemic kills 50% of the labor force.) I’d also emphasize that the Covid recession was highly unusual.  Even the Spanish flu of 1918-19 did not cause a big recession or a major fall in the labor force. (The big recession in 1920-21 was unrelated to the Spanish flu—it was caused by tight money.)  So the Covid recession was very unusual, and monetary policy going forward would do better to focus on preventing ordinary recessions. PS.  Stable NGDP growth also helps with financial stability.  That slightly modifies the analysis provided here, but doesn’t overturn the result. (0 COMMENTS)

Reader Joe Munson sent me this thoughtful message.  Reprinted with his permission. Dear Bryan, It occurred to me the other day that many high schools and even colleges will basically waive certain subjects for you if you have even moderate learning disabilities (or can get a psychologist to say you do). Foreign languages, gym, even math can basically be waived (I know, because math and foreign languages were waived for me). This is strange, if these subjects were so crucial, you would think schools would want to force the people with learning disabilities to spend more class time on them, not less. Moreover, my university would actually let you test out of foreign language classes and get the credits for taking them– just as long as you paid them for the knowledge you already knew (tons of people did and do this, and thought it was super reasonable) I just thought I would email you because I think it may be particularly convincing to some people, because rhetorically, if you want to defend the status que, you either have to say disabled students won’t succeed anyway, or concede that the subjects are not important. It’s also so strange that the Ken Robinson talk is the most viewed TED talk and it argues that school creates a massive negative externality by killing creativity. If he is right then schools are really much worse than basically everyone realizes. I just thought it might add to the persuasiveness of your education as  80 percent signaling theory, which seems so profoundly correct to me. Best, Joe   P.S. Hope to see you at Capla-Con Austin! (1 COMMENTS)

When I called Don Boudreaux yesterday, he was awaiting a call from his insurance company after the condo above him had leaked water into his condo. We got talking about insurance and I remembered my first interaction with my auto insurer, State Farm. I was a fairly safe driver, so even though I had driven from age 16 on, I had my first fender bender when I was 31 or 32. I was crossing a bridge from Washington, D.C. to Arlington, VA and I crashed into a trailer being hauled by a truck. The other driver and I agreed that I had not damaged his trailer but I had damaged mine, and it was entirely my fault. My mind had wandered back to this or that work issue. With a lot of trepidation, I called up my insurer, State Farm. I talked to the person as if I were talking to my father and expecting to get yelled at. He or she didn’t. The claims person calmly took my information and told me how to go about getting a repair estimate. This response by the insurance company representative may not surprise you and it would no longer surprise me. That’s the point. Sometimes we bring into the bigger world our mindset from growing up in a family and expect the people in that bigger world to react the way family members might. But State Farm was providing a service that it was charging for. The company had a strong incentive to tell its employees to treat their customers professionally. What I remember still is how good I felt from that interaction compared to how I had expected to feel.   (0 COMMENTS)

The Book Club on Mike Huemer’s Knowledge, Reality, and Value continues.  Today, I cover Part 2 of the book.  To repeat, though I’m a huge fan of the book, I’m focusing almost entirely on disagreements. 1. One of Huemer’s preferred responses to the classic Brain-in-a-Vat (BIV) scenario is that – especially compared to the Real World story – its a weakly-supported theory. The Real World theory predicts (perhaps not with certainty, but with reasonably high probability) that you should be having a coherent sequence of experiences which admit of being interpreted as representing physical objects obeying consistent laws of nature. Roughly speaking, if you’re living in the real world, stuff should fit together and make sense. The BIV theory, on the other hand, makes essentially no predictions about your experiences. On the BIV theory, you might have a coherent sequence of experiences, if the scientists decide to give you that. But you could equally well have any logically possible sequence of experiences, depending on what the scientists decide to give you. Why, though, couldn’t we race the Real World theory against the Simulation-of-the-Real-World theory?  Instead of a generic story of BIVs, we could have a specific story saying the real world exists and provides the inspiration for the simulation we’re in.  I know it sounds ad hoc, but notice that modern technologists are already trying to simulate the real world with virtual reality and such. Huemer goes on to argue for “direct realism” as an even more straightforward response to BIV.  Question for him: To what extent is this approach compatible with just saying that the reasonable Bayesian prior probability assigns overwhelming to the Real World story?  (In Moorean terms, this closely resembles an appeal to “initial plausibility.”) 2. Huemer exhaustively covers the modern Gettier-inspired objections to the classic definition that knowledge is “justified, true belief.”  The objections to the definition are convincing.  Still, what’s wrong with the slightly modified view that when we call X “knowledge,” we almost always mean that X is a “justified, true belief”?  By analogy, we would probably call a floating antigravity platform a “table.”  Yet when we call something a table, we almost always mean a platform on top of one or more supports.  In other words, we can think of “justified, true belief” as a helpful description of knowledge rather than a strict definition.  What if anything is wrong with that? 3. Crazy as it seems, I have no other notable disagreements with Part 2.  So let me end with my favorite insight.  After showing the many desperate attempts to define “knowledge,” Huemer explains that mathematically precise definitions are grossly overrated: This is no counsel of despair. The same theory that explains why we haven’t produced any good definitions also explains why it was a mistake to want them. We thought, for instance, that we needed a definition of “know” in order to understand the concept and to apply it in particular circumstances. Luckily, that isn’t how one learns a concept, nor how one applies it once learned. We learn a concept through exposure to its usage in our speech community, and we apply it by imitating that usage. Indeed, even if philosophers were to one day finally articulate a correct definition of “knowledge”, free of counter-examples, this definition would doubtless be so complex and abstract that telling it to someone who didn’t already understand the word would do more to confuse them than to clarify the meaning of “knowledge”. So often I’ve heard people say, “Is X good?  It depends on how you define ‘good.'”  And what I want to reply is, “We both know what the word ‘good’ means.  The question is whether X possesses it.” As usual, please leave questions for Huemer and myself in the comments, and we’ll respond in the next week or so.       (0 COMMENTS)

Greed is good or useful when greedy people automatically serve the interests of their fellow humans; exchange on free markets is the paradigmatic case. Greed is bad when it works by exploiting or dominating others, including through political force or deceit. At least, that is the way an economist would think if he is willing to make a value judgment in favor of the consumer, which is what he generally does when evaluating a public policy or an economic system. Assuming that a corporate income tax is justifiable, we can apply the same principle to the international corporate tax system and to the new minimum tax proposed by the G-7 governments (Paul Hannon, Richard Rubin and Sam Schechner, “G-7 Nations Agree on New Rules for Taxing Global Companies,” Wall Street Journal, June 5, 2021). In the current system, national states may compete in attracting international corporations with lower taxes. The governments who thus compete are greedy: by attracting corporations from states that tax more, they gain more revenues. But the result is to provide incentives for governments not to tax their countries’ corporations at too high rates. This state greed through tax competition is beneficial to most people. The exceptions consist of tax exploiters, that is, those in governments or among the latter’s clienteles who live off other people’s taxes—who, after all the churning of government services and subsidies, are net tax consumers instead of net taxpayers. The proposed new system would prevent tax competition by imposing a common minimum corporate tax rate, which amounts to creating an international tax cartel. A cartel acts like a monopoly by charging the maximum that the market will pay. Modeling the tax Leviathan as a monopolistic revenue maximizer has an honorable tradition in public-choice theory: see the 1980 book of Geoffrey Brennan and James Buchanan, The Power to Tax. The sum total of the taxes collected by the cartel members would be higher than currently, which is precisely why some governments want a cartel. The Irish government, for example, would not be able to continue poaching foreign companies with a lower tax rate than the minimum. It would thus lose money and some sort of explicit or implicit compensation, in money or in kind, or else some threat, may be necessary to persuade it to join the cartel. Most taxpayers in the cartel would be worse off. Note that this tax cartel is not a new idea related to the Covid-19 pandemic. It has been brewing for about a decade, notably at the OECD. Leviathan was hungry before the pandemic, during the pandemic, and he is still hungry. It was hungry before digitization (which made tax competition easier)  and still is. Of course, the state is greedy because government actors like politicians, bureaucrats, and individuals in favored clientèles are greedy. In this attempt to blunt tax competition, state greed is pretty obvious even if it remains opaque to the rationally ignorant taxpayer. For the typical taxpayer, the cost of gathering and understanding related information is not worth the benefit because of his infinitesimal influence on tax policy and the low or unknown effect of corporate taxes on his own revenue. But the net benefit is obvious for the statocrats: Treasury Secretary Janet L. Yellen and other administration officials have said that getting other countries to go along with a base tax rate on overseas profits would minimize any disadvantage to American companies and make them less likely to move their operations to countries with lower taxes. … “That global minimum tax would end the race to the bottom in corporate taxation…” she said in a statement. (Alan Rappeport, “Finance Leaders Reach Global Tax Deal Aimed at Ending Profit Shifting,” New York Times, June 5, 2021) Tax competition pushing national states to levy lower taxes is apparently a “race to the bottom.” Like when your private suppliers compete to offer you a lower price? Ms. Yellen would have been closer to the truth by paraphrasing Willie Sutton: Why do you tax corporations? Because that’s where the money is. Moreover, who actually pay corporate income taxes—employees in lower wages, consumers in higher prices, or shareholders in lower returns, including household pension funds which hold perhaps 30% of American stocks—is opaque and largely unknowable. No taxpayer is easier to pluck than one who is invisible and unaware that he is being plucked. What is sure is that the estimated half-trillion dollars that the U.S. government expects to raise that way over the next decade will come from individuals, mostly Americans, who will have real resources grabbed away from them. The losers in the new scheme would thus be the consumers and the net taxpayers. The losers would lose more than the winners gain because of the so-called “deadweight loss” of taxes, that is, the reduction in production caused by tax disincentives. Cartelized political greed not only transfers money from taxpayers to governments but it also misallocates resources in the process. The scheme would also increase the power and danger of governments. (0 COMMENTS)

While it is expected to get more spending during emergencies, the assumption behind the increase is that the increase will not be sustained in the future. You wouldn’t know it based on the Biden administration’s recent budget request. While the recession is receding and the economy is quickly moving toward full employment, the document shows a $7.2 trillion budget for FY2021, and requests $6 trillion for FY2022. Just to give an idea of the scale of this request, in FY2020, spending reached $6.5 trillion up from $4.4 trillion in FY2019. But I guess “enormous” is what describes best all spending bills these days, as evidenced by the scale of Uncle Sam’s COVID-19 relief bailouts—most of which are reflected in last year’s and this year budget’s numbers. As a reminder, there were 5 of them: $192 billion from the Families First Coronavirus Response Act; $2.2 trillion from the Coronavirus Aid, Relief, and Economic Security (CARES) Act; $733 bil­lion for the Paycheck Protection Program and Health Care Enhancement Act; $915 billion for the Coronavirus Response and Relief Act; and, finally, $1.9 trillion for the America Rescue Plan Act of 2021. Much of this response was, and is still, considered “stimulus”, designed to save jobs that would have been lost or to create jobs that would have gone uncreated otherwise, and ultimately create economic growth. Was it though? To answer that question, Garett Jones and I decided to do a review of the most recent literature on the short-term effects of government spending. That paper is now out. This is our main conclusion: “The evidence presented in this policy brief suggests that government purchases—for example, directly hiring federal employees, paying contractors for public projects, and so forth—probably reduce the size of the private sector at least a little, even while they increase the size of the gov­ernment sector. On net, incomes grow, but privately produced incomes shrink. Therefore, govern­ment purchases tend to crowd out private consumer spending, private investment, and exports to foreign countries. Many economists say that government purchases still stimulate growth in the private sector when the economy is at its lowest ebb, such as when interest rates near zero or when deep recessions occur. But the massive fiscal multiplier that economists rely on to reach that conclusion (whereby government spending jump-starts the private sector into vigorous action, usually by hiring work­ers whose incomes are spent on various goods and services in ever-expanding circles of consump­tion) is largely a myth. According to the best available evidence, there are no realistic scenarios where the short-term benefit of stimulus is so large that the government spending pays for itself. In fact, even when government spending crowds in some private-sector activity, the positive impact is small, and much smaller than economic textbooks suggest.” That’s what our review of the literature finds. But it is worth adding to points as they relate to the current moment. For starters, the COVID 19 recession was more of a cost shock, or a bad supply shock, which makes it a poor fit for Keynesian stimulus in the first place. Then, as far as multipliers in a zero lower bound interest rate environment are concerned, I find Scott Sumner’s insight on this point compelling. As we write: Economist Scott Sumner at the Mercatus Center at George Mason University argues that the finding [a zero lower bound interest rates can cause the fiscal multiplier to be larger than one] is conditional on having an incompetent or passive monetary policy in place; that is, having a monetary policy not designed to hit a growth target in aggregate demand. However, if the Federal Reserve is acting appropriately, it has already set its policy to achieve optimal growth of expected aggregate demand, a rate of growth that should not change along with fiscal policy. Therefore, the central bank will attempt to neutralize the impact of fiscal stimulus (perhaps with quantitative easing or by communicating to financial markets that future monetary policy will be different) and thus will push the fiscal multiplier toward zero, helping ensure that expected aggregate demand growth is unchanged by fiscal policy.” If you think that the current monetary policy of the Federal Reserve is reasonably competent, then you shouldn’t expect the fiscal stimulus to have much of an impact because the Federal Reserve will offset the effect of any stimulus such that inflation will average about 2 percent during the 2020s. The closer to zero the multiplier, the bigger the crowding out of the private sector. This is, of course, before taking future taxes into account. I am not expecting newspapers to stop calling government spending “stimulus”, but it would be nice if textbooks would adjust their Keynesian theory content to reflect what we know the value of the multiplier actually is rather than what Keynesians hope that value will be. At the very least, they should note that just because an idea is true in theory does not mean it is true in fact. Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (1 COMMENTS)

I’ve finished reading the first volume of Edward Nelson’s impressive new study of Milton Friedman, and highly recommend the book to anyone interested in macroeconomics. This remark on page 380 caught my eye: In the half century or more after 1951, Friedman would receive a lot of criticism from monetary researchers and practitioners for his alleged neglect of interest rates and his supposed reluctance, or outright unwillingness, to describe monetary policy actions or their effects in terms of interest rates.  However, it was concluded in chapter 5 that the record of Friedman’s statements is more nuanced than this criticism suggests. [As an aside, that criticism would be valid for my own views on money and interest rates, which are not nuanced.  I have a recent paper that criticizes the interest rate approach to monetary policy.] While Friedman did accept that monetary policy had an effect on interest rates, and that this could impact the broader economy, it’s also undeniable that he was often quite critical of the interest rate approach to monetary policy used by Keynesian economists.  Keynesians argue that an expansion in the money supply will reduce interest rates, which boosts aggregate demand.  Friedman argued that an increase in the money supply would boost aggregate demand, and interest rates might rise or fall depending on the relative strength of the liquidity, income and Fisher effects.  The extra money would directly push rates lower, but if the policy led to faster growth in real income or inflation, this would tend to push nominal interest rates higher.  The overall effect was ambiguous, especially after a few months or years. In a recent post, I quoted Friedman on the Phillips Curve, an area where he was also skeptical of Keynesian orthodoxy: There was, however, a crucial difference between Fisher’s analysis and Phillips’s, between the truth of 1926 and the error of 1958, which had to do with the direction of causation. Fisher took the rate of change of prices to be the independent variable that set the process going.  [From p. 273 of Nelson’s book.] This requires a bit of history.  In 1926, Irving Fisher had argued that inflationary shocks impact real output.  In the 1960s, Keynesian economists used Edmund Phillip’s (1958) empirical study to argue that changes in the unemployment rate impact inflation.  Put simply, Fisher thought that rising inflation could cause a boom, whereas Keynesians thought a boom could cause rising inflation. Is there any connection between Friedman’s heterodox views on these two separate issues?  Let’s begin with the simplest possible monetary model of nominal GDP: M*V(i) = P*Y Here I assume that velocity is positively related to the nominal interest rate, an assumption that is supported by a wealth of empirical evidence.  That means that a lower interest rate will tend to reduce velocity, and other things equal that will tend to reduce nominal spending. That claim might seem surprising, but it is pretty obvious when you think about it.  Consider a simple thought experiment.  The Fed suddenly boosts the money supply by 20%.  (For simplicity we’ll use the monetary base, which is directly under the Fed’s control.)  Obviously the level of NGDP (i.e. P*Y) doesn’t change overnight.  So at the moment the money supply rises by 20%, the velocity of circulation must fall by an equal amount, leaving M*V and P*Y unchanged.  The extra money lowers the nominal interest rate, which reduces the opportunity cost of holding money enough to induce people to hold 20% larger cash balances, at least in the very short run (say the same day).  On that point, both Keynesians and monetarists agree.  The more difficult question is what happens next.  Before considering what happens next, let’s think about the very long run equilibrium. In the very long run, money is neutral.  A one-time 20% boost in the money supply has no long run effect on interest rates, no long run effect on velocity, and no long run effect on real output.  Instead, prices rise by 20% and nothing changes in real terms.  The more difficult question is what comes before the long run and after the very short run.  It’s the intermediate period between these extremes that is so difficult to model. We know the Keynesian explanation.  More money leads to lower interest rates.  Lower interest rates lead to more spending.  Because prices are sticky in the short run, the extra spending increases real output.  When increased spending pushes output past its natural rate, the economy overheats and inflation results.  More money causes lower interest rate which causes more output which eventually leads to higher prices. For monetarists like Friedman, that’s not a satisfactory explanation.  Start with the impact of interest rates on nominal spending.  If lower interest rates lead to lower velocity, it’s hard to see how low interest rates are expansionary.  Indeed if money growth is extremely rapid, then interest rates will often rise as lenders begin to expect higher inflation and demand to be compensated with higher nominal interest rates.  But higher nominal interest rates will increase the velocity of circulation, causing inflation to rise by even more than the money supply.  This happened in Germany in the 1920s and America in the late 1970s.  So it’s too simple to say that easy money has an expansionary effect because it leads to low interest rates.  Easy money has an even more expansionary effect when it leads to higher interest rates. Now think about the impact of economic growth on inflation.  It seems obvious that a booming economy is inflationary, right?  But if you look at the equation above, it’s clear that (for any given level of nominal spending) the faster the rate of economic growth, the slower the rate of inflation.  For any given P*Y, more Y means less P. In the monetarist model, more money causes more nominal spending (P*Y) because the public has a well-defined demand for money, and will try to get rid of excess cash balances by spending the new money that is injected into the economy.  Velocity is not absolutely fixed, but it’s stable enough that the new money will tend to boost NGDP.  (At least when interest rates are above zero.)  And higher nominal spending will tend to boost real output in the short run, because wages and prices are sticky, or slow to adjust.  In the long run, only prices will increase and output will return to the natural rate. Put even more simply: In the Keynesian model, real shocks have nominal effects. In the monetarist model, nominal shocks have real effects. Of course both claims are true to some extent, which Friedman acknowledged.  But it’s fair to say that he put more weight on the nominal shock – > real effect perspective, at least compared to his Keynesian critics.  In a 2013 article, Nelson contrasts the two views: [T]he Bank of England sees monetary policy as exerting effects on spending in the first instance through effects on nominal spending. This view of policy transmission lines up with older expositions of monetary policy transmission—both by monetarists and, it should be stressed, Keynesians (like Tobin, 1981)—and seems to be implicit in past Bank of England discussions of the connections between monetary policy and the economy (see King, 1997). This view is not consistent with standard models of monetary policy transmission that have become prevalent in recent decades; indeed, this view has been treated caustically by Svensson (1999, p.642). Svensson refers to ‘a previous, somewhat simplistic, view of the transmission mechanism for monetary policy … [under which] monetary policy only determines nominal GDP, but cannot affect the distribution of nominal GDP between inflation and output growth’. To Svensson, nominal GDP is not useful in monetary policy analysis: while monetary policy certainly affects nominal GDP, nothing is gained by thinking of monetary policy as working via nominal GDP; the reaction of nominal GDP to monetary policy reflects the dependence of prices and output, individually, on variables that are affected by monetary policy. The behavior of nominal GDP is then derived recursively, by the behavior of its two definitional components; nominal GDP does not itself appear in the structure of the model. Svensson is espousing a widely held (modern Keynesian) view. To be clear, it is not a question of whether monetary policy affects P and Y individually, or nominal GDP (P*Y) as a whole.  Both claims are clearly true.  Rather the issue is which modeling approach is the most useful. The Keynesian approach depends of the estimation of all sorts of difficult to observe variables, such as the “natural rate of interest” and the “natural rate of output” (or unemployment.)  Policy is appropriate when the output gap is zero and the interest rate equals the natural rate.  But how can we estimate the various natural rates? In contrast, Friedman advocated the broad money supply (M2) as an indicator of the stance of monetary policy, and some market monetarists favor NGDP futures prices.  There is no natural rate of M2 or NGDP to estimate, just targets to set. Friedman won a lot of debates during the 1960s and 1970s because his critique of Keynesian economics was mostly correct.  Keynesians did make the mistake of assuming that rising interest rates meant that money was getting tighter and falling rates meant money was getting easier (some still do).  Keynesians did make the mistake of assuming that there was a long run trade-off between employment and inflation. You might think that the model mentioned above (M*V(i) = P*Y) is “dumb”. But this seemingly naive and simplistic view of the world won a lot of debates in the 1960s and 1970s.  Unfortunately, Friedman was probably wrong about M2 being the appropriate indicator of the stance of monetary policy; the expected rate of growth in NGDP is a more reliable indicator.  So Friedman lost some debates in the 1980s. If a macroeconomist lives long enough, they’ll eventually end up on the losing side.  I’ve been advocating NGDP targeting for decades, and then as soon as people started paying attention we get a once in 100-year recession where NGDP targeting would not have been appropriate.  But perhaps targeting 2 year forward expected NGDP would still have been fine. Back in 2009, some people seemed to think I had something useful to say about the economy.  I’m in no position to know if that’s correct, but if it is then it is largely due to what I learned from Milton Friedman. (0 COMMENTS)

Bryan Caplan makes a number of good points about straw manning and steel manning in his critique of philosopher Mike Huemer and in his 2015 post on the same issue. One of the major, and obvious points he makes is that you’re not arguing against a straw man if an actual person you’re arguing with is making the argument you’re arguing against. I would put his overall point even more strongly. I’ll do it with an example. Imagine that I’m arguing with someone on the minimum wage. The person claims that increases in the minimum wage will benefit people who are working at below the proposed minimum and will have no downsides for them. I point out that some of the least skilled workers will lose their jobs and even some or many of those who keep their jobs will lose other non-pecuniary benefits of the job. I could go on to then make a more sophisticated argument, for example the monopsony argument, that the person “should have made.” I don’t. Here’s why. First, I’m trying to deal with people as they are. The person I’m arguing with has made presumably a good-faith argument for his position. If I then substitute another argument that he hasn’t made, it is, to some extent, a way of dismissing the idea that his argument is the one he really believes. It borders on bad faith on my part. Second, arguments are ideally conversations. If I substitute a stronger argument for his bottom line–the minimum wage should be raised–I’m jumping ahead in the conversation without giving him a chance. I’ve short-circuited a conversation. I should instead let my argument sink in and see where he goes from there. Third, by steel manning, I’m implicitly attributing bad faith to him. In raising the stronger argument for his bottom line, I’m implicitly assuming that he wanted an increase in the minimum wage regardless of the argument for it. I’m essentially saying, “Here’s a stronger argument for increasing the minimum wage because I know you want the government to do so and you are looking for arguments to justify its doing so.” Fourth, people have a great ability to rationalize. It’s possible that the person I’m arguing with really does want the increase in the minimum wage and is trying out his best argument for it. If I give him a better argument for it, he might glom on to it. But I’m not inside his brain. I don’t know why he glommed on to it. Maybe the new argument makes sense to him or maybe he’s saying to himself, “Ah, good, I now have a better argument for the position I always wanted to believe in.” It’s better to let him sit with my original argument against his policy proposal and let him come up with a better argument. This reduces the likelihood of quick rationalization and helps him build his intellectual firepower. This actually dovetails with my second point above. I vaguely recall a talk I gave about 20 years ago in which someone in the audience made an easy-to-refute argument against a deregulation proposal I had made. Unfortunately I don’t remember the venue, the topic, or the person’s argument. I started pointing out what was wrong with the argument. I saw the person obviously listening to me, even nodding his head as he was grokking what I was saying. It looked to be the start of a good conversation. Unfortunately, a friend of mine was in the audience and he knew almost as well as I did what other arguments the audience member could have made. I say “unfortunately” because this friend was a strong believer in steel manning. He interrupted my conversation with the audience member and said words to the effect, “No, David, that guy’s argument is a weak one but there are better arguments. Why not deal with the strong ones?” I usually read audiences well. I saw the original questioner kind of turn off and exit the conversation. My friend had interrupted what could have been a good conversation between the audience member and me. I can’t prove it, but I think that hurt the questioner’s intellectual growth. (1 COMMENTS)