In my previous post, I discussed how Milton Friedman was right about 4 key issues during the 1960s and 1970s. He argued that interest rates are not a good indicator of the stance of monetary policy. He argued that the long run Phillips Curve was vertical, which means no long run tradeoff between inflation and unemployment. He argued that fiscal policy was not an effective way to control inflation. And he suggested that wage/price controls would not work. But why was he able to see what other top economists failed to see? What do these four cases have in common? Perhaps conventional economists were putting too little emphasis on the distinction between real and nominal variables. Friedman saw that persistent inflation is a nominal problem, and it has nominal causes. Edward Nelson (vol. 2, pp. 155-56) quotes Friedman in 1977, looking back on his 1967 Presidential address: The essence of my argument in that paper was that the monetary authorities had a monetary instrument with which they could ultimately control only monetary variables, such as the price level and nominal income; that it is not possible to use monetary instruments to achieve a real target, whether that real target be the real interest rate or real output or unemployment rate. When analyzing inflation, Keynesians were explicitly or implicitly focused on 4 real variables: 1. real interest rates 2. unemployment 3. the velocity of money 4. price mark-ups (in percentage terms) 1. In the 1960s, Keynesian wrongly assumed that rising nominal interest rates represented rising real interest rates, and hence “tight money”. There are actually two problems here. The obvious problem is that nominal interest rates might be rising due to inflation (the Fisher effect.) The less obvious problem is that although tight money often does temporarily increase real interest rates, it is not true that rising real interest rates imply tight money. Real interest rates move around for many different reasons. And finally, for any given money supply, higher nominal interest rates are actually inflationary, as they boost velocity. 2. Keynesian wrongly assumed a long run tradeoff between inflation and unemployment. While it is true that a tight monetary policy raises unemployment in the short run, it is not true that rising unemployment implies tight money, or lower inflation (as we saw in the 1970s.) For any given level of nominal GDP (M*V), a booming economy is actually deflationary. Low unemployment can co-exist with low inflation, as we saw in 2019. High unemployment can co-exist with high inflation, as we saw in 1981. 3. Keynesians typically don’t talk about velocity. But the claim that fiscal policy can control inflation is implicitly a claim that fiscal austerity reduces velocity. Nominal spending is M*V, so if you don’t plan to control the money supply, the only (demand-side) way to reduce inflation is by reducing velocity. Friedman didn’t think fiscal policy had much effect on velocity, and even if it did, it would at most be a modest one-time effect. If the Fed boosts the growth rate of the money supply from 5%/year to 10%/year (at a time of positive interest rates), you are almost certainly going to eventually end up with higher inflation. Even if a tax increase reduces the velocity of circulation by 2% in a single year, it will have almost no impact on longer run inflation, which is driven by rapid money growth. Here’s very important distinction. If you boost money growth from 5% to 10%/year, if will cause inflation to be roughly 5% higher as long as the rapid money growth continues. Fiscal policy is not like that. Even if you permanently switch to a more expansionary fiscal policy, it will only cause a one-time increase in velocity. Monetary policy works by influencing a nominal variable (M), while fiscal policy works by influencing a real variable (V). It’s really hard to cause persistent inflation by influencing real variables like velocity.  In contrast, it’s easy to increase the money supply growth rate as much as you like. 4. The same argument applies to price controls. Let’s say that firms have some monopoly power and that price controls are able to reduce price mark-ups by 2%. That merely produces a one-time 2% fall in the price level, relative to where it would otherwise have been. Go much further with price controls and you end up with severe shortages. But if the Fed is simultaneously boosting money growth from 5%/year to 10%/year, the disinflation effects of the price controls will be overwhelmed by the effects of faster money growth.  That’s the story of the 1970s. To summarize, Keynesians were treating inflation like it was a microeconomic problem, which could be addressed by influencing real variables. It’s true that if you want to lower the relative price of a single good in the economy, you need policies that impact real variables. But inflation is a nominal phenomenon, and it requires nominal solutions. You need to reduce the growth rate of the nominal money supply. In some respects the Keynesian mistake was understandable. Between 1879 and 1968, the price of gold was fixed, except during 1933-34 when it rose from $20.67/oz. to $35/oz. During much of that long period, people tended to think in terms of high and low price levels, not high or low rates of persistent inflation. In a world where price levels bounce up and down and inflation is not persistent, the four Keynesian fallacies discussed above are much less of a problem. Real and nominal interest rates are similar, the Phillips Curve is more stable, tax increases can slightly reduce the price level during a period of high prices, and price controls can have a modest effect during a temporary price level surge. But if the inflation rate rises from 2% to 8%/year, and the high inflation persists for a long period, then real theories of inflation become almost worthless. It’s a monetarist world, and Milton Friedman was the master of that world. PS.  Some of these arguments are less applicable to a world of zero interest rates.  But Friedman was winning his arguments with the Keynesians at a time when nominal interest rates were far above zero. (0 COMMENTS)

SARS-CoV-2 has a very unusual feature: it is surprisingly good at infecting a particular type of cell that has what is known as an angiotensin-converting enzyme 2 receptor. Some other animals have ACE2 receptors, but SARS-CoV-2 works much better in human or human-like ACE2 receptors. The significance of this cannot be overemphasized. SARS-CoV-2 needs four things to happen to infect a human. It must enter the body and it must attach to certain cells. It must be cleaved at precisely the correct spot by the victim’s cells. The remaining genetic piece must then enter and infect the cell. Every one of these four steps has a low probability of occurring by chance. The probability of all four of these unlikely events developing randomly through mutations is, therefore, very low. Could SARS-CoV-2 have acquired its clever attributes from another coronavirus of the same family? Are there coronaviruses that exploit human-like ACE2 receptors? For this, we need to discuss the furin cleavage site, which is where the ACE2 receptor precisely cuts SARS-CoV-2, as described in step 3 above. This is from Charles L. Hooper and David R. Henderson, “The Origin of SARS-CoV-2,” AIER, June 18, 2021. Another excerpt: Location, Location, Location If camels infected humans in the Middle East, we wouldn’t expect to see the first cluster of cases in, say, Honolulu. Early cases typically happen where the virus first became contagious. And even if people travel, they are likely to become sick or infect others en route, leaving a trail of evidence. There are nine Metro lines and 40 hospitals in Wuhan and yet all the patients treated for Covid-19 between 1 December 2019 and early January 2020 were cared for in hospitals close to the Metro Line 2 commuter line, connecting Wuhan and WIV. That’s highly unlikely by random chance alone. Charley did all the research for this and almost all the writing. I edited it but he very generously gave me co-authorship. Read the whole thing. (0 COMMENTS)

The Spring issue of Regulation contains my review of an interesting book by historian Donald Critchlow, In Defense of Populism. In his view, the different waves of left-wing and right-wing populism in America were useful social movements. A few short excerpts from my review: [Critchlow] argues that these “social movements” are necessary for “democratic renewal” by translating popular discontent into government actions. Populism is necessary for democracy but, he notes, democratic change has paradoxically generated “an enlarged bureaucratic government that is further removed from the people.” … Critchlow’s story starts with the populism of the last two decades of the 19th century, culminating in the founding of the People’s Party (also called the Populist Party). At the federal level, populist ideas included an income tax, antitrust legislation, more regulation of banks, expansion of the money supply, protection of workers and consumers, and federal aid to farmers. State-level populism often called for even more government intervention. … Dominated by religion and anticommunism, the first phase [of the conservative populist reaction after World War II] was often proto-Trumpian in its simplistic understanding of the world. Critchlow gives many examples. Carl McIntire, a Presbyterian minister and popular religious radio broadcaster, believed that Catholicism was more dangerous than communism. Originally a supporter of Barry Goldwater, who was more a libertarian than a conservative, McIntire later became, more logically, a follower of segregationist George Wallace. Billy Hargis, another radio preacher, thought that “it is ignorant people who are going to save this country.” His associate, David Noebel, believed that the Beatles were part of a Soviet conspiracy to brainwash American youth with hypnotic techniques. Robert Welsh, founder of the John Birch Society, thought that Eisenhower was a Soviet agent and Sputnik was a hoax. Later, the Birchers shifted to attacking the New World Order as a Masonic conspiracy. All that without the help of today’s social networks—not a mean feat! Critchlow includes Ronald Reagan in this [post-war, religious and anti-communist] phase of the right-wing populist movement, which is debatable, as is his claim that Trump amplified Reagan’s message. Although Reagan turned out to be more conservative than libertarian, he was not (let the truth be told) an ignorant buffoon. I comment: Each succeeding populism thus adds its own bricks to the construction of the totalitarian state. But there is more in Critchlow’s book. Part of my conclusion: These failings should not distract us from In Defense of Populism as a good book of American history. It is scholarly and as objective as such books can be. (1 COMMENTS)

Finally, when Dikembe Mutombo came to Georgetown University in 1987, what was his career plan? Answer: to become a doctor and return to the Congo and help his people, who badly needed doctors. But then Georgetown Hoyas basketball coach John Thompson recruited Mutombo to play basketball. He excelled at the game and had a lucrative eighteen-year career in the NBA, playing for the Denver Nuggets, the Atlanta Hawks, and the Houston Rockets for fifteen of those years. But Mutombo didn’t forget his original goal. He donated $3.5 million of his earnings toward building a hospital in the Congolese capital of Kinshasa. If he had stuck with his plan to become a doctor, he would have been only one doctor in the Congo. Instead, by specializing in basketball, he earned enough to pay multiple doctors in the Congo. This is from David R. Henderson, “A Refresher Course on Free Trade,” Defining Ideas, June 17, 2021. Another excerpt: If free trade is such a good policy, why do so many non-economists think it’s controversial? Part of the answer lies in the asymmetry between producers and consumers. Consider the case of sugar. We in America pay approximately double the world price of sugar because the US government sets tight quotas on sugar imports. That, incidentally, is why Coca-Cola is produced with corn syrup in the United States but with sucrose (sugar) in Canada and Mexico. Over 300 million of us pay a little more annually for higher-price sugar but the few major sugar producers in the United States make tens of millions to hundreds of millions more in revenue, and their employees make a few thousand dollars more in annual income than they would make in their next best use. The overall loss to consumers calculated by Washington State University economics professor William S. Hallagan a few years ago was $2.25 billion annually. The offsetting gain to domestic sugar producers was $0.85 billion and the gain to the lucky importers who got to buy the sugar at the world price and then sell it at the higher US price was $0.30 billion. The loss to consumers outweighs the gain to producers and importers but the average consumer’s loss is only about $10 per year, while the average producer’s gain is large. This gives producers a large incentive to be involved in the setting of sugar quotas, while the average consumer pays virtually zero attention. That’s why it’s true that even though the intellectual case for free trade is largely settled, those interest groups that want to limit trade are creating most of the buzz. That buzz occasionally misleads even some scholars who study trade and generally understand it. Zack Beauchamp of Vox recently quoted the following comment on Biden’s trade policy by Tufts University scholar Dan Drezner: “It’s totally America First.” No, it’s not. It’s American producers first; consumers don’t seem to count. Are US consumers not Americans? To ask the question is to answer it. Of course they are. If Trump truly favored or Biden favors an “America first” policy on trade, both would be strong advocates of free trade because with rare exceptions, the consumer losses from restrictions on trade exceed the gains to producers. By the way, even my point above about the Biden/Trump trade policy being “producer first” is overstated. Trump imposed, and Biden has kept, some protectionist measures on items that are inputs into production. Those measures hurt some U.S. producers. Read the whole thing. (0 COMMENTS)

What if where you park, and how much you do or don’t pay for it, could benefit your community it multiple ways? How can cities and communities create a sustainable way of dealing with the supply and demand of free parking or metered parking? In this episode, EconTalk host Russ Roberts sits down with Donald Shoup, Distinguished Research Professor in the Department Urban Planning at UCLA, to discuss the unintended consequences of free curb parking and parking requirements. In his book, The High Cost of Free Parking, Shoup  urges cities to charge for curbside parking and use the proceeds to improve the neighborhood beyond the curb. Stroup also explains the surprising harm done by requiring new buildings to provide a minimum level of off-street parking. Let’s hear what you think about the relationship between parking and urban life. Answer our questions in the prompts below, or use them to start a conversation with friends offline. We’re here for the conversation.   1- Shoup sums up his book in three points. What are those three main points? What are some of the effects of requiring off-street parking everywhere? Does Shoup suggest that developers shouldn’t provide parking for future residents of the apartments? What is the role of the planner in the scenario? Can you predict anymore unseen consequences for free curb-side parking or requiring off-street parking for new buildings? What about the consequences for charging curb-side parking?   2- What city does Shoup first use as an example to illustrate the effects of charging for curb-side parking? Explain what happened when the money earned from curb-side parking was used to restore and clean sidewalls in that community. Would you be more inclined to visit a city which charged for parking but had clean community spaces? Is that something you would even consider before going? Does this reflect the results of Shoup’s example? Why do you (or why don’t you) think this is the case?   3- What aspect of Shoup’s research does Roberts praise as being “a fantastic application of economics?” How does this point reflect the positive effects that not requiring off-street parking for new buildings will have on poor people in the area?   4- Has Shoup convinced you that charging for curb-side parking could be a plus in your own community? Are you more willing to pay for curb-side parking if the money goes back to maintaining that community? Do you have any other reflections or related experiences to Shoup’s points?     (0 COMMENTS)

A few weeks ago our microwave went on the blink. It still worked but when we opened the microwave’s door, a fan immediately started up. The GE repairman showed up today. After examining it quickly, he was pretty sure he could fix it. But, he warned us, it was about 8 or 9 years old and the typical life expectancy of that model was between 6 and 8 years. He seemed to be hinting that we should buy a new one. I asked him how much a new one would be. He replied that it would be about $300. That didn’t sound bad. “Can we buy from you and does that include the installation?” “No,” he answered. “You would go to a place like Home Depot but we don’t install.” “How much would it cost to fix this one?” I asked. “A little over $200,” he answered. “But the service charge of about $130 goes towards that $200, right?” I asked. “Yes,” he answered. So the $200 was misleading. The $130 service charge was a sunk cost. A little quick arithmetic told me that the marginal cost of getting the microwave fixed would be only a little over $70. And we would have a working microwave right away. So we had him fix it. Sunk cost versus marginal cost. (0 COMMENTS)

In the late 1940s, Milton Friedman was considered an important economist who had made significant technical contributions. At the beginning of the 1950s, however, he moved away from Keynesian economics and as a result was increasingly viewed as a bit of a nut. Two decades later, however, Friedman had become far and away the most important macroeconomist in the world. Much of the ongoing macro debate revolved around economists addressing Friedman’s ideas, pro or con. How did this happen? Edward Nelson’s outstanding two volume study of Friedman provides the most complete answer that I have seen. During the 1960s, Friedman rejected 4 key tenets of Keynesian economics. And within less than a decade, all four of his critiques were shown to be correct. As a result, Keynesian economics absorbed much of monetarism, and this led to the creation of a new macroeconomic framework called New Keynesianism. Keep in mind that when I talk about “Keynesians”, I am not describing the views of J.M. Keynes or the views of modern Keynesians, I am describing the views of many of the most prominent Keynesian economists during the 1960s. (Samuelson, Tobin, Modigliani, Solow, Heller, etc.) Here are the four Keynesian ideas that Friedman rejected: 1. Nominal interest rates are the correct indicator of the stance of monetary policy.  The Fisher effect is not an important factor in the US. 2. Fiscal austerity (higher taxes) is the best way to reduce excessive aggregate demand. 3. There is a stable (negative) relationship between inflation and unemployment (the “Phillips Curve”). 4. Modern economies face an increasing problem of cost/push inflation, and hence wage/price controls are often the best way to control inflation. Let’s take these one at a time. In the mid-1960s, Friedman argued that nominal interest rates were rising because of increasing inflation expectations. Nelson points out that Keynesians like James Tobin rejected this claim (vol. 2, p. 113.) By the 1970s, inflation and nominal interest rates had increased much further, and there was almost universal agreement that Friedman was right and Tobin was wrong. Nominal interest rates are not a good indicator of the stance of monetary policy. Thus the Keynesians were saying that if you want tight money to reduce inflation, you need high interest rates. Friedman basically said no, high interest rates are not the solution; you need to reduce growth in the money supply. By the late 1960s, the US had both high interest rates and a fast growing money supply, and inflation kept rising. It turned out that Friedman was right. But Keynesians did not draw the correct inferences from this episode. Rather they decided that monetary policy must not be very effective, and instead advocated higher taxes as a way to reduce inflation (the MMT approach.) In 1968, LBJ raised income taxes so high that the US budget went into surplus, but inflation continued to increase. Friedman had two reasons for doubting the efficacy of higher taxes. First, his permanent income theory suggested that temporary tax changes would be offset by changes in private saving, leaving aggregate demand almost unaffected. More importantly, he saw that a tax increase could only slow inflation by reducing velocity, which would have only a one-time effect. Even if velocity fell one or two percent, the contractionary effects (on M*V) would soon be overwhelmed by increasingly rapid growth in the money supply. Thus Keynesians assumed that tax increases could slow inflation, while Friedman said no, you need to reduce the growth rate of the money supply. When the tax increases failed to slow inflation, Keynesians began to focus on the Phillips curve, which suggested that there was an inverse relationship between inflation and unemployment. A policy of higher inflation would lead to lower unemployment, and vice versa. Friedman said this was wrong, as workers would eventually catch on to changes in the rate of inflation and demand compensating changes in nominal wage rates. In the long run, unemployment would return to the natural rate, regardless of the trend rate of inflation.  By 1970, we had high inflation and high unemployment, which showed that Friedman was right.  (Note that this was three years before the first oil shock.) Thus the Keynesians thought that high unemployment was the solution to inflation.  Friedman said no, you need to reduce the growth rate of the money supply. When the high unemployment of 1970 did not work, Keynesian economists blamed inflation on “cost-push factors”, such as monopoly power or strong labor unions.  They supported wage/price controls, which President Nixon implemented in August 1971.  After a brief decline in inflation, the problem got much worse during the mid and late-1970s.  Friedman saw that while wage/price controls might lead to a one-time drop in the price level of a few percentage points, as long as the money supply was growing rapidly, any gains from wage/price controls would be soon overwhelmed by a rising money supply. Thus Keynesians said that the solution for high inflation is wage-price controls, whereas Friedman said no, these controls will not work; you need to reduce the growth rate of the money supply.  See a pattern here? In the early 1980s, the Fed finally began reducing the growth rate of the money supply, and inflation fell sharply. Why isn’t the amazing success of Friedman’s ideas better understood?  It’s partly because his preferred policy target—stable growth in a monetary aggregate such as M2—was not adopted due to concerns about unstable velocity.   Even Friedman eventually accepted inflation targeting as a reasonable alternative.  And the other four ideas discussed above all got incorporated in 1990s-era New Keynesianism.  NKs accepted the importance of the Fisher effect, switching their focus from nominal to real interest rates.  They accepted that monetary policy is the appropriate tool to control inflation, not fiscal policy.  They accepted Friedman’s Natural Rate Hypothesis, the idea that higher inflation will not permanently reduce unemployment.  And they accepted that a contractionary monetary policy, not wage/price controls, is the solution to inflation. In one important respect, Friedman’s achievement is even more amazing than what I have outline here.  In all four cases, Friedman’s claims were made at a time when they looked wrong.  The Fisher effect had not been a very important factor in the setting of US interest rates when inflation expectation were near zero, including the period when the price of gold was pegged at $20.67/oz (1879-1933).  And during 1934-68, when gold was $35/oz, inflation expectation were generally pretty low (even as actual inflation bounced around unpredictably.)  During the early to mid-1960s, inflation expectations were probably not much more than 1%.  The Fisher effect became a major factor after Friedman began warning about the issue.  Similarly, in the mid-1960s it was widely believed that tax changes had a big impact on aggregate demand, as the Kennedy tax cuts of 1964 were followed by a strong economy (albeit perhaps for supply-side reasons.)  Keynesians were genuinely surprised when the big tax increase of 1968 failed to slow inflation.  When Friedman gave famous AEA Presidential address outlining the Natural Rate Hypothesis in late 1967, a stable Phillips curve seemed quite plausible, indeed the 1960s fit the model better than almost any other decade.  It was in the 1970s that the relationship completely broke down.  And the Nixon wage/price controls seemed to work at first; it was only a few years later that they began to fall apart.  Thus in all four cases Friedman rejected the orthodox view at a time when the orthodox approach seemed to be working fine, and in all four cases his views were eventually vindicated. Milton Friedman’s achievements in the late 1960s and early 1970s were truly amazing, and deserve to be better known. In a subsequent post, I’ll try to explain how Friedman was able to see the flaws in mainstream Keynesianism before most other economists.  Why was his model better?  We’ll see that all four of his successful critiques have something in common. (0 COMMENTS)

My interview on Open Borders aired last night on the PBS NewsHour.  Check it out! (0 COMMENTS)

All of the last set of comments were directed at Huemer, but I’ll add a few comments of my own. Anon: 1.To my mind, part of the problem with questions like “Is there a God?” is not that they are meaningless or that they have no answer. Rather, it’s that they are unanswerable. Are questions like, “Does Bigfoot exist?” answerable?  How about, “Did aliens build the pyramids?”  Or how about, “Do ghosts exist?”  My answer to all of these is, “Almost certainly not.”  Am I wrong? Hellestal: In order to create an accurate description of “only” the brain in its vat, the scientists, and the brain apparatus — as if that were all that existed, without relying on the simple rules of physics playing out from a (presumably simple) original condition — you would need an absolutely absurd quantity of description. Overwhelming. Doesn’t it depend on the required degree of accuracy?  Yes, it would be immensely difficult to simulate every detail down to 10 decimal places of accuracy, but most people are barely paying attention to most stuff anyway, much less measuring stuff with any precision.  I say a lot of novels contain more details about what the characters are experiencing than most of us typically pay attention to in real life. Henri Hein: I sympathize both with the skeptical view and the defenders of knowledge. I think the skeptic’s claim that we cannot know anything with 100% certainty must be correct. At risk of sounding like a 17-year-old Objectivist, “must be correct” sounds about the same as claiming to “know with 100% certainty.” (0 COMMENTS)

Robin Hanson and I disagree about alien visitation.  While he doubts that aliens are visiting Earth right now, I’m virtually sure that they aren’t.  As a result, we’ve made a bet.  The terms: 1. Robin pre-pays me $10. 2. If I become convinced that aliens have visited the Earth during our lifetimes, I pay Robin $10,000*1.05^(year-2021) in nominal dollars. 3. If either of us dies before (2), my heirs keep the money and the bet ends. Or as Robin puts it: I proposed this bet in reaction to this tweet of his: https://t.co/8VPEXM7j5b — Robin Hanson (@robinhanson) May 31, 2021 Why would Robin make such a bet?  Because we’re best friends and he trusts me. What would it take to convince me?  Ideally, I want to see alien critters with my own eyes, but I will settle for seeing technology so advanced I can’t imagine humans made it.   I would also settle for very high-quality, ample duration video of alien critters or tech, confirmed by multiple high-status media outlets. In short, I want The Day the Earth Stood Still, but I’ll settle for anything in that general ballpark. (0 COMMENTS)