"Yes, we're planning to add this note to all future stories about Trump," the [Huffington Post] spokesperson said. "No other candidate has called for banning 1.6 billion people from the country! If any other candidate makes such a proposal, we'll append a note under pieces about them."

Is the Huffington Post spokesperson unaware that under current immigration law, only about a million or so new immigrants are allowed into the United States every year? Is he/she also unaware that none of the Democratic and Republican candidates for president advocates substantially liberalizing that law?

This means that all of the candidates advocate banning over 6 billion people from the country.

Of course, you can argue that Trump wants not even to let those 1.6 billion people enter the country, so that the issue is simply entry, not immigration.

But not so fast. Talk sometime to people from other countries who routinely get turned down. I ran into two young Chinese people, while visiting my daughter in Thailand a few years ago, who told me that the U.S. government would not give them visas to enter the United States. Has the U.S. government said no 1.6 billion times? Probably not. It doesn't need to. Nor would Donald Trump's government need to say no 1.6 billion times either, because (a) It's a certainty that not all 1.6 billion Muslims would want to enter and (2) even of those many Muslims who do want to visit the United States, many would be discouraged by the experience of their fellow Muslims.

I look forward to the Huffington Post's appending a note about Hillary Clinton the next time they write about her. How long do you think I will have to wait?

I often get commenters complaining that the Fed should not be controlling interest rates. They think the market should set rates. In one sense I agree, but in another sense I wonder if the commenters are confused. I wonder if people think the Fed moves interest rates away from the market equilibrium. It does not, it influences the market equilibrium. Let's start with an analogy from the oil industry, and while doing so I want you to think about how inadequate the English language is in this area.

Consider two cases:

1. President Carter introduces price controls on oil, setting a price ceiling at $25/barrel, even as the market price in $34/barrel. A shortage results, with long gas lines.

2. The Saudi oil company Aramco adjusts oil production to keep market prices at $36/barrel. There is no shortage, no gas lines.

In ordinary English, these are two ways that governments could be said to "control" prices. But I think you'll agree that they are vastly different methods, and have vastly different implications for the economy. The term 'control' is being used in two very different ways.

I hope it's obvious that the Fed's control over interest rates is like the Aramco case, not the price ceiling case. There are at least three different senses in which the Fed could be said to control interest rates:

1. The Fed might fix interest rates, via usury laws.

2. The Fed might target interest rates (as the Fed actually does.)

3. The Fed might target some other variable like the money supply or exchange rates, and yet nonetheless Fed actions indirectly determine the level of interest rates.

Or I suppose the Fed could be abolished. But as long as the Fed exists, the meaning of the term 'control' is more ambiguous than you might think. Consider 3 policy options:

1. The Fed has a 2% inflation target, and sets a new fed funds targets every 6 weeks, adjusting rates as needed to target inflation. In that case is the Fed controlling inflation, interest rates, or both?

2. The Fed has a 2% inflation target, and sets a new fed funds targets every single day, adjusting them as needed to target inflation. In that case is the Fed controlling inflation, interest rates, or both?

3. The Fed has a 2% inflation target, and has no fed funds target. Instead it targets the TIPS spread, or a CPI futures contract. In that case is the Fed controlling inflation, interest rates, or both?

Case one and two are pretty similar, as we've merely shortened the time between meetings from 6 weeks to 1 day. And yet arguably cases #2 and #3 are much more similar to each other, than to case #1. That's because in both case #2 and #3, the interest rate changes each day, in a way that the Fed believes will stabilize expected inflation over time. The interest rate path is quite similar in those two cases.

Here's the problem. Fed policy affects all nominal variables, including nominal interest rates, nominal exchange rates, nominal GDP, the nominal prices of apples, oranges and Brazilian hot wax treatments. All nominal variables. In the 1970s, the Fed printed lots of money, causing almost all nominal variables to be higher than they would have otherwise been. But we usually don't think of the Fed as "controlling" those prices, for two unrelated reasons. One reason is that the Fed's actions don't impact real variables, in the long run. The other reason is that the Fed was not targeting most of those variables. Does it matter if they were? Not as much as you might think.

Consider two policies: In one case the Fed continually adjusts the target fed funds rate in order to keep expected inflation at 2%. In the other case the Fed continually adjusts the target nominal price of zinc, in order to keep expected inflation at 2%. If the Fed does its job in a competent way, then the path of zinc prices would be identical under either regime. Does it then make sense to talk about the Fed "controlling" zinc prices in one case but not another?

Yesterday I did a post criticizing Mike Konczal on the distinction between the Fed acting and not acting. Let me provide a better analogy over here, as some missed the point. It might make sense to distinguish between an "activist ship engine" that is fed lots of fuel and an idle engine. But the steering wheel of a ship is different. There is no single setting of the steering wheel that is more active than another. It doesn't require any more fuel to set steering at NNE than at NNW.

By analogy, it makes sense to talk about using fiscal policy, as the natural benchmark is a fiscal policy set on classical cost/benefit considerations, and the alternative is a deficit that would not otherwise occur, used to boost GDP in a recession. Deficits require costly future taxes with deadweight losses. In contrast, it's nonsensical to talk about "using monetary policy" unless your alternative is pure barter. There is no benchmark of not using monetary policy; rather there are merely different settings of various monetary indicators. (Even with no Fed, the private money issuers would have some sort of "policy".) If the Fed would like to see NGDP growth at X%, and a certain policy setting would achieve that, then any failure to achieve X% growth can be said to be "caused" by the Fed.

Konczal talked about a housing crisis causing a drop in AD, and the Fed not responding. But there is no evidence that that's what happened. If, after July 2007, the Fed had kept the monetary base growing at exactly the same rate as in the 5 previous years, there might well have been no recession. Or there might have been a Great Depression. (In my view there would have been no recession in 2008, but major problems later, but we can't ever know.) So it's meaningless to talk about a housing crash causing a drop in AD in 2008, without knowing the Fed's policy regime.

The Fed meets every 6 week to set policy. The only question is whether they set the right or wrong policy. They have no ability to "do nothing"; it's a meaningless concept for monetary policy.

PS. I just got this email from the Hypermind prediction market:

Bravo ssumner, Suite à la fermeture d'un concours sur Hypermind, votre compte de gains en Euro a été crédité de 10€

It's one of those good news/bad news situations. The good news is that I'm 10 euros richer. The bad news is that my ability to beat the market undercuts my belief in the EMH. Should I hope that I was right or wrong about the EMH?

(I shorted the one year NGDP contract early in 2015, when it was trading around 4.2%. NGDP growth ended up being 2.9%)

I'm looking forward to reading Robert Gordon's new book, The Rise and Fall of American Growth. PBS recently did an 8-minute segment on it that lays out his argument nicely.

HT2 John Cochrane and Greg Mankiw.

I won't try to resolve the issue of whether future growth will be higher or lower than that of the period from 1870 to 1970 here--or anywhere. It can't be resolved. We simply can't know whether economic growth, properly measured, will be higher. John Cochrane points out that real GDP does not measure consumer surplus. And that's a problem.

I do want to point out, though, a simple error that PBS reporter Paul Solman makes that one would expect anyone who understands basic math not to make.

Note the quote from President Obama near the top of the story (at the 0:33 point):

Anyone claiming that America's economy is in decline is peddling fiction.

But there's no contradiction. Obama claimed that the U.S. economy is not in decline. What does this mean? That growth is positive. Is growth positive? Yes. Has growth, measured by real GDP, fallen since the golden era Gordon discusses? Possibly yes.

It's basic math, but it's basic math that people often forget. One of the most valuable things I learned in Ben Klein's course in monetary theory at UCLA was always to distinguish between levels and rates of change.

Solman does it again at the 2:08 point, saying, "But MIT's Erik Brynjolfsson doesn't buy the argument that the U.S. economy's best days are over."

I should hope he doesn't. Nor does Gordon. If per capita economic growth persists, then the U.S. economy's best days are ahead.

UPDATE: Commenter David below reminds me that I've discussed the consumer surplus point before. Here's one instance.

My post on elite high schools and college admission led an Ivy League admissions officer to email me.  Here's what he wrote, with his kind permission.  Name and school redacted.

Bryan,

Your post on TJ caught my eye, as last year I read admissions files from NOVA for [redacted Ivy League school] (along with an actually qualified admissions officer), including those from TJ. Feel free to share any of this, though for reasons of discretion (and being junior faculty!) please don't include my name/exact institution.

Much of what you wrote rings true from my experience, but I'm not sure I'd reach the same conclusion you did. 

We definitely held students from TJ to a higher standard than those from less prestigious schools. In fact, if memory serves they were held to the highest standard by any NOVA students by a decent margin. 

Why? From our perspective, mainly knowing that students there get lots of encouragement/coaching to do the kinds of things that look good on an application, so a student from TJ that looks equally good on paper as someone from another school (setting aside class rank) is probably less good of a student. Also, there was some desire to give students who had fewer opportunities a leg up, though this effect probably wouldn't help the children of a professor even if they went to a less prestigious school. 

On the other hand, we also certainly accounted for the strength of the school when interpreting class rank. I don't remember exact numbers, but I think we gave students from TJ a close look in the 2nd and even 3rd decile while this would be a kiss of death from most other schools. 

From a parent/student perspective, the question is whether the boost in application quality from being surrounded by high achievers and resources/opportunities students don't get elsewhere outweighs the fact that they will face a higher bar when admissions officers read their file.  Theoretically, I would think that causal effect of going to TJ on chances of admissions is probably neutral to somewhat positive. To the extent that admissions officers care about getting talented students who are prepared for an elite college, even if they fully filter out the better preparation at schools like TJ when making inferences about talent, they will still appreciate the better preparation in and of itself. Nothing in my empirical observations led me to think this theoretical expectation is wrong. 

(Of course this sets aside the impacts outside of chances of admission to an elite school, like what they actually learn or how they might be harmed by the pressures of going to such a school!)

Hope this is of interest,

David A. Graham argues that firms that make charitable contributions create long-term problems.

For those who haven't been paying attention to the news lately, the government of Flint, Michigan totally messed up, selling lead-laced water to Flint residents for 16 months, despite repeated objections from local residents complaining about the water. The Michigan Department of Environmental Quality and the federal government's Environmental Protection Agency messed up too. For more details see Shikha Dalmia, "Flint's Water crisis isn't a failure of austerity. It's a failure of government."

In a recent article at The Atlantic titled "The Private Sector Is Now Providing Basic Services to Flint," David A. Graham writes:

A coalition of some of America's biggest companies is organizing a trucklift for Flint, promising to deliver 6.5 million bottles of water to the city in order to provide clean drinking water for schoolchildren through 2016. Walmart, Coca-Cola, Nestlé, and PepsiCo say they will deliver 6.5 million bottles to Flint, enough for the city's 10,000 students.

He also admits the problems with government, writing:

Failures of government and the effective disenfranchisement of Flint voters produced the crisis

Graham's problem is much like Vinny's, who "wanted to win [his] first case without any help from anybody." Graham writes:

But the big water donation might raise even more uncomfortable questions. Walmart, Coca-Cola, Nestlé, and Pepsi aren't just charitable organizations that might have their own ideologies. They're for-profit companies. And by providing water to the public schools for the remainder of the year, the four companies have effectively supplanted the local water authorities and made themselves an indispensable public utility, but without any amount of public regulation or local accountability. Many people in Flint may want government to work better, but with sufficient donations, they may find that the private sector has supplanted many of government's functions altogether.

HT@ Robby Soave.

Tyler Cowen's post on Marginal Revolution today gives an interesting take on the effects of jettisoning Millian liberalism from the left / Progressive ideology. Not only would eugenicist ideas have never gained any traction historically, he argues, but the lack of appreciation for the broader philosophy of individual liberty is "one reason why the commitment of the current Left to free speech just isn't very strong".

In support of this argument Nick Cowen, PhD candidate in Political Economy at KCL, has just published a paper in American Journal of Political Science titled "Millian Liberalism and Extreme Pornography". Here is the abstract:

How sexuality should be regulated in a liberal political community is an important, controversial theoretical and empirical question--as shown by the recent criminalization of possession of some adult pornography in the United Kingdom. Supporters of criminalization argue that Mill, often considered a staunch opponent of censorship, would support prohibition due to his feminist commitments. I argue that this account underestimates the strengths of the Millian account of private conduct and free expression, and the consistency of Millian anticensorship with feminist values. A Millian contextual defense of liberty, however, suggests several other policy approaches to addressing the harms of pornography.

This seems perfectly consistent with Tylers's claims regarding the state of contemporary left ideology and free speech. In the paper, Nick documents the recent the prohibition of "extreme pornography" in the UK under the Criminal Justice and Immigration Act (2008) and its recent extension in the 2015 Criminal Justice and Courts Act, which have reinvigorated arguments for censorship. He shows how feminist supporters of the law, though critical of its implementation in particular cases, inappropriately apply Mill in support of censorship.

"Millian liberalism sees rights as political, not metaphysical. Critiquing the ontological status of rights does not impact straightforwardly on the content of the rights that a Millian defends. The harm principle affirms a tractable set of rights that includes possession of extreme pornography. Rather than rendering the harm principle indeterminate, the "Applications" section of On Liberty helps to establish its boundaries by explaining what counts as private conduct to be protected from state intrusion. Moreover, Mill's argument in The Subjection of Women does not support censorship."

"A Millian anticensorship position stands not on affirming rights in the abstract, but on critical observations of what happens when governments censor. In the case of pornography, regulation addressing "cultural harm" leads authorities to punish arbitrarily members of sexual minority groups for the crimes and social problems of the rest of the community. Moreover, far from being valueless, queer feminist accounts of pornography, even extreme pornography, acknowledge its role in education and self-development, including the affirmation of alternative sexual identities. These accounts suggest that Millian defenses of free expression are applicable to sexually explicit expression. The anticensorship position does not affirm unlimited rights to free expression, but proposes boundaries that rule out certain kinds of state intervention, including the ban on extreme pornography as presently constituted."

The whole paper is worth a read.

Curious, also, how censorship regulation in this case was also coupled with issues of immigration. The 2008 act, in criminalizing extreme pornography, also gave the Secretary of State the power to designate immigrants as "foreign criminals". This grants the state the ability to subject immigrants to compliance with additional regulations, with failure to do so being imprisonable offences. Progressives at the turn of the century were some of the first to justify immigration restrictions based on only on the quantity, but the "quality" of immigrants (Thomas Leonard eloquently documents this one of my favorite history of economics papers). Both of these positions, it seems to me, stem from the ease at which many on the left are willing to trade-off protection of individual liberty for the belief that the apparatus of the state can be wielded for the particular aims and purposes they themselves support.

Tyler Cowen has an excellent post on progressivism and individual rights. At one point he discusses the views of Kevin Drum:

Kevin Drum had an interesting point in response (and do read his full post, there is more to it than this quick excerpt):

Early 20th century progressives supported eugenics out of a belief that it would improve society. Contemporary liberals support abortion rights and right-to-die laws out of a belief in individual rights that flowered in the 60s.

Most of all Drum is saying that the earlier history is not very illustrative of anything for today.

I view it this way. Go back to Millian liberalism of the mid-19th century. Had American or for that matter British Progressivism been infused with more of this philosophy, the eugenics debacle never would have happened. For instance if you look at the British Parliamentary debates of 1912 over the Mental Deficiency Bill, the anti-eugenics forces drew heavily upon Mill for their inspiration. This was standard stuff, but the Progressives of the time didn't see much of a pro-liberty reason for being pushed into a Millian position, quite the contrary.

The claim is not that current Progressives are evil or racist, but rather they still don't have nearly enough Mill in their thought, and not nearly enough emphasis on individual liberty. Their continuing choice of label seems to indicate they are not much bothered by that, or maybe not even fully aware of that.

My thinking doesn't fit neatly into either camp. On most political issues my thinking is much more libertarian than progressive, and yet the philosophical justification I rely on is utilitarian. In my view most progressives lean left because they underestimate the costs of government policies that restrict liberty---especially in the field of economics.

Here's where things start to get complicated. Progressives are split on free speech. Do the pro-free speech progressives rely on individual rights or utilitarian reasoning? The most common justification I hear is "rules utilitarianism", which suggests that while society might be better off if certain types of speech were banned (say Nazi propaganda), society would be worse off if the government were given the authority to determine which type of speech should be banned, as it would inevitably bleed over to unpopular minority views that ought to be heard. So we should adopt the set of broad policy rules that best maximizes aggregate utility, such as the 1st amendment. I agree and indeed would have it cover most commercial speech as well.

This raises the difficult issue of how far to stretch "rules utilitarianism." One could argue that while society would be better off if wearing seat belts were mandatory, society is worse off if government has the right to make mandatory any action that they see fit to mandate. So perhaps the government should be prevented from interfering in a very broad class of individual behavior, not just speech. And I have some sympathy for this view.

But in the end I'm not willing to go all the way to a constitutional provision locking in extreme libertarian governance. That's partly because it's not clear to me where you would draw the line. Are taxes coercion? What about carbon taxes aimed at preventing externalities? I worry that the economy is too complex for any simple form of rules utilitarianism to stretch over all human interaction. In the end, we must do the best we can in each area of governance. My goal is to convince progressives that the best interests of society involve a much bigger role for free markets and individual choice than common sense might suggest. (This is not my area of expertise, readers may want to look at books such as Richard Epstein's "Simple Rules for a Complex World".)

This is one reason the eugenics story is so useful. To progressives of the early 20th century, these seemed like reasonable regulations, which would improve society. That should be a warning to modern progressives that rules that may seem very beneficial today (say a law requiring everyone be paid at least $15/hour), may be viewed as being very sinister by future generations (as a law banning millions of low productivity workers from seeking gainful employment in the legal economy, forcing them into a life of crime). This would be an ironic reversion to early views on the minimum wage, which often did have sinister overtones, perhaps even racist.

Even if people are voluntarily choosing to do X, society may want to ban X. But the hurdle should be extremely high, far higher than most progressives realize. My dad smoked his whole adult life, knowing that it was dangerous. He was very intelligent and felt it was worth the risk. He died from smoking at age 69. My stepfather smoked for decades, and then decided to stop at age 75. He's 91 and still plays handball (a very strenuous game.) For selfish reasons I wish my dad had not smoked, but we should respect both their choices.

PS. My suggestion that free speech should apply to most commercial speech may seem rather lame---why not all? I haven't thought much about this issue, but perhaps collusive speech should be excluded from protection? I'd appreciate any thoughts on this issue.

On Monday, I attended an excellent event at the Hoover Institution on the work and influence of the late Robert Conquest. Recall that he was the person who, with his 1968 book, The Great Terror, "outed" Joseph Stalin as a mass murderer. I took my autographed copy of his book and showed one of Bob's grandsons how weather worn the binding was compared to the front cover because it had been exposed to the sun since I bought the book in--1968.

In a discussion with one of the other participants during a break, I said that the Pacific Ocean is awfully handy as a protection against a Chinese attack on the mainland. She pointed out that terrorists, Chinese or otherwise, could carry out a terrorist attack within the United States without an invasion. I agreed, but said that would be unlikely.

Immediately, she proposed a bet. I loved that because I'm almost always the one who proposes a bet and this time I didn't have to.

She has given me permission to state our bet but she said that it's a private matter between us and so she doesn't want me to use her name. I agreed.

Here's her side of the bet:

By January 25, 2021, there will be a terrorist attack in the United States (including the continental United States, Hawaii, and Alaska) that kills at least 3,000 people.

Of course, she and I both hope I win.

[T]he further back into the past one looks, the more the economic history of a given place tends to diverge from the economic history of the people who currently live there. For example, the territory that is now the United States was inhabited in 1500 largely by hunting, fishing, and horticultural communities with pre-iron technology, organized into relatively small, pre-state political units. In contrast, a large fraction of the current U.S. population is descended from people who in 1500 lived in settled agricultural societies with advanced metallurgy, organized into large states. The example of the United States also makes it clear that, because of migration, the long-historical background of the people living in a given country can be quite heterogeneous.

We construct a matrix detailing the year-1500 origins of the current population of almost every country in the world. In addition to the quantity and timing of migration, the matrix also reflects differential population growth rates among native and immigrant population groups. The matrix can be used as a tool to adjust historical data to reflect the status in the year 1500 of the ancestors of a country's current population. That is, we can convert any measure applicable to countries into a measure applicable to the ancestors of the people who now live in each country.

The matrix has 165 rows, each for a present-day country, and 172 columns (the same 165 countries plus seven other source countries with current populations of less than one half million). Its entries are the proportion of long-term residents' ancestors estimated to have lived in each source country in 1500. Each row sums to one. To give an example, the row for Malaysia has five nonzero entries, corresponding to the five source countries for the current Malaysian population: Malaysia (0.60), China (0.26), India (0.075), Indonesia (0.04) and the Philippines (0.025).

P&W now revisit earlier research on long-run growth, using their matrix to transform the key variables.  Instead of looking at the long-run effects of places' traits, they look at the long-run effect of tribes' traits.  They focus on two measures: state history and years of agriculture.  State history measures how long a country "had a supratribal government, the geographic scope of that government, and whether that government was indigenous or by an outside power."  Following previous work, they massage this measure: "The version used by us, as in Chanda and Putterman (2005, 2007), considers state history for the fifteen centuries to 1500, and discounts the past, reducing the weight on each half century before 1451-1500 by an additional 5%."  Years of agriculture, in contrast, is not massaged.  It's simply the "the number of millennia since a country transitioned from hunting and gathering to agriculture."

Since migration history is bimodal, adjusting these measures for migration has a bimodal effect.  Most countries are near the 45-degree line, but a few radically diverge.  Here's state history by location versus people:



Here's agricultural history by location versus people:

Now for the punchline: Migration-adjusted measures are much more predictive of modern GDP than raw measures.  "Not surprisingly, given previous work, the tests suggest significant predictive power for the unadjusted variables. However, for both measures of early development, adjusting for migration produces a very large increase in explanatory power. In the case of statehist, R2 goes from .06 to .22, whereas in the case of agyears it goes from .08 to .24. The coefficients on the measures of early development are also much larger using the adjusted than the unadjusted values."  Regression tables:

P&W try an array of robustness tests.  The most notable challenge they address, however, is "What about geography?"  Earlier researchers have found strong effects of latitude and being landlocked.  Correcting for these factors, the effects of migration-adjusted history crash, but remain absolutely large.

After further checks, P&W switch gears to analyze how ancestry matters for current inequality.  Punchline:

[T]he heterogeneity of a country's population in terms of the early development of its ancestors as of 1500 is strongly correlated with income inequality. We also show that heterogeneity with respect to country of ancestry or with respect to the ancestral language does a better job than does current linguistic or ethnic heterogeneity in predicting income inequalities today.

A finance student from Coventry sent me Paul Krugman post from 1997, which has some interesting things to say about today.

Fifteen years ago, just after François Mitterrand became president of France, I attended my first conference in Paris. . . . The only thing I do remember is a conversation over dinner (canard aux olives) with an adviser to the new government, who explained its plan to stimulate the economy with public spending while raising wages and maintaining a strong franc.

To the Americans present this program sounded a bit, well, inconsistent. Wouldn't it, we asked him, be a recipe for a balance of payments crisis (which duly materialized a few months later)? "That's the trouble with you Anglo-Saxon economists--you're too wrapped up in your theories. You need to adopt a historical point of view." Some of us did, in fact, know a little history. Wasn't the plan eerily reminiscent of the failed program of Leon Blum's 1936 government? "Oh no, what we are doing is completely unprecedented."

Krugman then discusses France's supply-side problems:

To an Anglo-Saxon economist, France's current problems do not seem particularly mysterious. Jobs in France are like apartments in New York City: Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants. A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant. New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live. France's policies have produced nice work if you can get it. But many people, especially the young, can't get it. And, given the generosity of unemployment benefits, many don't even try.

Here's the conclusion, written a few years before the euro was created:

But let us not blame French politicians. Their inanities only reflect the broader tone of economic debate in a nation prepared to blame its problems on everything but the obvious causes. France, say its best-selling authors and most popular talking heads, is the victim of globalization--although adroit use of red tape has held imports from low-wage countries to a level far below that in the United States (or Britain, where the unemployment rate is now only half that of France). France, they say, is the victim of savage, unrestrained capitalism--although it has the largest government and the smallest private sector of any large advanced country. France, they say, is the victim of currency speculators, whose ravages President Chirac once likened to those of AIDS.

The refusal of the French elite to face up to what looks like reality to the rest of us may doom the very European dreams that have sustained the nation's illusions. After this last election it is clear that the French will not be willing to submit to serious fiscal discipline. Will the Germans still be willing to give up their beloved deutsche mark in favor of a currency partly managed by France? It is equally clear that France will not give up its taste for regulation--indeed, it will surely try to impose that taste on its more market-oriented neighbors, especially Britain. That will give those neighbors--yes, even Tony Blair--plenty of reason to hesitate before forming a closer European Union.

But if it turns out that Chirac's political debacle is the beginning of a much larger disaster--the collapse of the whole vision of European glory that has obsessed France for so long--we can be sure of one thing: The French will blame it all on someone else.

Krugman was skeptical about the euro project, but didn't anticipate disaster:

Now a unified European market is a pretty good idea. There is even a reasonable case for unifying Europe's currencies--although there is also a good case for doing no such thing.

It's too bad that Krugman no longer does this sort of blogging. It's kind of fun to go back and read posts from a time when "socialism" was still a dirty word in America, not a policy that most Democrats have a favorable view of.

[S]ome people cut their schooling short so as to pursue more immediately lucrative activities.  Sir Mick Jagger abandoned his pursuit of a degree at the London School of Economics in 1963 to play with an outfit known as the Rolling Stones... No less impressive, Swedish épée fencer Johan Harmenberg left MIT after 2 years of study in 1979, winning a gold medal in the 1980 Moscow Olympics, instead of earning and MIT diploma.  Harmenberg went on to become a biotech executive and successful researcher.  These examples illustrate how people with high ability - musical, athletic, entrepreneurial, or otherwise - may be economically successful without the benefit of an education.  This suggests that... ability bias, can be negative as easily as positive.

Never attribute to malice that which can be adequately explained by stupidity. This sound aphorism may have a less pithy political corollary: Never attribute to strategy what can be explained by emotion.

I also oppose any wholesale substitute for the social security system, whatever its name (such as a negative income tax, a guaranteed income or what have you) that makes payments only to the poor. A program for the poor will most likely be a poor program.

...Mr. Friedman attacks the idea that American social security is primarily a system of redistribution of income to middle income people. Actually I think he is probably right about that. But, that is part of the system's political sagacity. Since most of the people in
the United States are in the middle income, middle class range, social security is a program which appeals to them. Anyhow, to the extent that he is right that there is a transfer of money from low income people to middle income people, the situation could be improved by certain changes in the financing. You don't have to do away with the entire social security system to rectify that.

But let me emphasize that the reason why the Office of Economic Opportunity and other such programs don't get appropriations, don't get support from the taxpayer, is simply that they do not appeal to the middle class, middle income person. True, if you are an economist, you may exclude all matters of politics from your thinking. But to do so is not reality, Milton. [Laughter.]

And so I say that the essence of social security, with its appeal to middle income people, is desirable and those things that are legitimately criticized about the system could easily be remedied by certain changes. My major objection to the negative income tax as a complete substitute for social security is that I am convinced that, in the United States, a program that deals only with the poor will end up being a poor program. There is every evidence that this is true. Ever since the Elizabethan Poor Law of 1601, programs
only for the poor have been lousy, no good, poor programs. And a program that is only for the poor-one that has nothing in it for the middle income and the upper income-is, in the long run, a program the American public won't support.

Mr. Friedman calls a lot of the things he doesn't like about social security rhetoric. And that gets me to a point I want to stress. My point is that economists do not determine all of the choices and options and attitudes prevailing in this nation. People do live by rhetoric. You can't understand what goes on in the United States if you don't understand something about
rhetoric. And think of all the people in this audience who would be out of a job if we didn't have such a thing as rhetoric. [Laughter.]

I believe in rhetoric because it makes a lot of things palatable that might be unpalatable to economists. [Laughter.]

Here's a true story that illustrates two things I love in political discussions, two things that are all too rare.

In April 1980, while the Mariel boatlift was beginning, the fact that some, and possibly many, of the Cubans coming to America were criminals was starting to make President Jimmy Carter vulnerable. By that point in the presidential campaign, Ronald Reagan was starting to outpace the front runner for the Republican nomination, George H.W. Bush.

That's what has happening nationally.

At the time, I was living in Oakland and was dating a woman in San Francisco. This woman, Tory, rented a room in a house in the Haight-Ashbury area of SF. The house was owned by the noted short story writer Kay Boyle. One evening, I went to pick up Tory to go out and she, Kay Boyle, and Joan Baez Sr. were just ending their local Amnesty International meeting. In those days (they possibly still do it now--I have lost track), Amnesty International members would get together and write letters to officials of oppressive governments in which they asked the officials to lighten up on various prisoners. It sounds implausible that this would work, but my impression--and this is why I joined AI later (although I later quit for this reason)--is that it sometimes did work.

I got talking to Joan Baez Sr. and the discussion shifted quickly to the issue of the day: the Mariel boatlift. We both agreed that the people should be let in to the United States. We discussed the issue of their potential criminality and I said "I like what Ronald Reagan said." Joan Baez looked at me quizzically and asked "What did Reagan say?" I answered, "Reagan said that when people are jumping from a burning building, you don't insist on checking their criminal record before putting out a net." Ms. Baez looked surprised, probably that Reagan had said it, and said "I agree."

So why do I like this story? Two reasons. First, for what it said about Reagan: he did not forget his principles even though speaking out against Carter's policy might have helped his campaign. Second, for what it said about Ms. Baez: she didn't judge the truth or importance of the statement by who said it.

[F]ormulas used by elite colleges in the admissions process, especially an emphasis on class rank in high school, create a higher hurdle for students who are educated in public high schools where there is a high concentration of talented young people in one school. Students who have excellent test scores and high grade point averages (GPAs) from rigorous courses but are not at the top of their class are downgraded by these formulas. For such students, entry into elite colleges from star public schools requires higher test scores than entry from elsewhere.

The formula calculates an AI by combining three components: SAT I scores, SAT II scores, and the student's class rank in his or her particular high school.

The odds of being in the top decile for a student in an exam star public school was only 24 percent of the odds of a student with the same SAT scores from a nonstar public school (the reference category). The odds of a student from a nonexam star public school being in the top decile was 30 percent of the odds of an equivalent-scoring student in a nonstar public school. 

Consider the following two paradoxes:

1. Falling wages are associated with falling RGDP. Falling wages cause higher RGDP.

2. Falling interest rates are associated with falling NGDP growth. Falling interest rates cause higher NGDP growth.

You often hear people say correlation doesn't prove causation, but rarely do correlation and causation go in opposite directions as often as in these two cases. I've talked a lot about interest rates in this blog, is there anything to be learned by comparing interest rates to wages? I believe the answer is yes.

The following is going to be an ad hoc model, which just happens to be true during most of recent US history. The "never reason from a price change" maxim warns us to not assume that it will always hold true.

Let's suppose that most employment fluctuations are caused by the combination of NGDP shocks and sticky nominal wages. For simplicity, assume that when NGDP falls by X%, nominal wages fall by only one half times X% in the short run, that is, only half as much as would be required to keep the labor market in equilibrium. We might observe three countries that see NGDP plunge by 2%, 10% and 20%. In those three countries nominal wages fall by only 1%, 5%, and 10%, that is by one half as much as NGDP fell. That's what we mean by sticky wages.

Now think about what that implies. The country where wages fell by the most (minus 10%) is the country where wages are the furthest above equilibrium. And that's likely to be the country with the highest unemployment rate. What conclusion would the average person draw from these stylized facts? They'd conclude that wage cuts "don't work". Cutting wages just causes NGDP to fall even further, and is thus self defeating. I'd argue that this is one of the most important themes in Keynes's General Theory.

And yet I believe this view is completely wrong. For the country where NGDP fell by 20%, a larger wage cut, say 15% or 18%, would have moved wages closer to equilibrium, and this would have led to lower unemployment. Keynes had causation exactly backwards, on an issue that is central to his critique of classical economics.

I hope that by now you see the connection to interest rates. Falling interest rates are a sign of a weak economy. As with wage cuts, a Fed decision to cut interest rates makes the economy stronger than otherwise. So then why are falling interest rates usually associated with a weak economy? Because a weak economy puts downward pressure on market interest rates, and the vast majority of Fed rates changes are merely reacting to changes in the economy, not causing them.

Here's a good recent example. Since the December rate increase, short-term interest rates in the fed funds futures market have been trending downwards. Instead of the 4 rate increases in 2016 predicted by the Fed last month, markets are now forecasting only one or two at most. So what are we to make of this change in the expected path of rates? It's theoretically possible that this reflects an expected easing of monetary policy. That is, the Fed is now less likely to raise rates, even assuming no change in the macroeconomic environment. An easier money policy, which would be expected to boost growth.

In fact, it's far more likely that these lower interest rate forecasts are a prediction of a weaker than expected economy, and also a prediction that the Fed will react to the weaker than expected economy by raising rates less that previously expected. Do we have any evidence for this claim? Yes, a mountain of evidence. All sorts of other asset markets are becoming much more bearish about the economy. If the Fed's likely decision to move away from an aggressive path of rate increases really were an expansionary policy, then asset prices would be rising as bond yields fell. But asset prices are falling with bond yields.

Interest rates usually fall when there is a NGDP growth slowdown. And yet it's also true that interest rates are usually too high when there is a NGDP downturn. This implies the Fed's target interest rate is sticky; it falls more slow than would be required to maintain stable NGDP growth. Sound familiar? So periods when interest rates are falling are also periods where interest rates are becoming increasingly too high.

I believe that Keynes noticed that the deeper the depression, the lower the level of interest rates. Because he viewed low rates as being an expansionary monetary policy, he wrongly concluded that interest rate cuts were relatively ineffective in a deep depression. Unlike with wages, he did not wrongly reverse causation; he was too good a monetary economist to do that. (We'd have to wait for the Neo-Fisherians for that error.) But he did become excessively pessimistic about the potency of monetary stimulus in a depression, and for much the same reason that he wrongly thought that wage cuts would be ineffective in a depression.

His erroneous views on wage flexibility led him to reject classical solutions for depressions. In fairness, wage flexibility is not the best solution, even if Keynes was wrong about causation. The second error led Keynes to reject the views of progressives like Fisher, Hawtrey, Cassel, and even the Keynes of the Tract on Monetary Reform, who favored using monetary policy to stabilize the price level (or NGDP.) Keynes wasn't hostile to their suggestion, he just didn't think that monetary policy alone could get the job done.

By the 1990s, New Keynesians had moved away from Keynes on these issues. They thought monetary policy was enough for stabilization of aggregate spending. And they thought wage cuts were expansionary. Due to the zero bound, economists have recently drifted back to old Keynesian ideas. My view is that they were that view was wrong in the 1930s, wrong in the 1990s, and they are wrong today.

PS. When would wage changes be associated with output moving in the opposite direction? Perhaps if they were caused by exogenous policy shocks, such as the higher wages after July 1933 implementation of the NIRA, which slowed the recovery, or the lower wages resulting from Germany's labor market reforms of 2004, which helped boost growth and reduce unemployment.

Progress on health care? Really? While Obama is President? The Obama who said you can keep your doctor and your insurance and oh, by the way, your insurance will cost less? That Obama?

Yes, really. But it has little or nothing to do with Obama.

In February 2012, in a post titled "How to Cut the Cost of Contraceptives by Regulating Less," I wrote:

Nevertheless, there is a way that the federal government now cuts access to contraceptives in a way that substantially raises the cost. Were the government to get rid of the regulation that does this, women's access to contraceptives would rise and the cost would fall.

What is the regulation? It's the one that requires contraceptive pills to be prescription drugs. If, instead, drug companies were allowed to sell contraceptives over the counter, access would rise and cost would fall.

And now it's happening.

Writes Megan McArdle:

Oregon is making hormonal birth control legally available without a doctor's prescription, and California is set to follow suit. This is great policy, and the rest of the country should follow this example.

My recent book on the Great Depression is not easy to review. The arguments are complex, and not always easy to follow. I did my best, but it's a very complicated story. Given my low expectations, I was pleasantly surprised by a couple of recent reviews that described my views fairly accurately (I'd have a few very small quibbles).

Arnold Kling does a nice job summarizing the key arguments of the book, and then ends with a few reservations:

Although I highly recommend The Midas Paradox, I did not find it entirely persuasive. I worry that it relies too much on Sumner's reading of the link between wages, prices, and output. My concerns are these:

1. The price index that Sumner uses is the Wholesale Price Index. This is a volatile index that largely excludes finished goods and instead tracks goods that are intermediate inputs to other producers. From the standpoint of those final-goods producers, an increase in the WPI indicates not a positive demand shock but an adverse supply shock. Sumner did not succeed in convincing me that the causality runs from increases (decreases) in the WPI to increases (decreases) in output, rather than the other way around.

2. For the past 60 years or so, the cyclical behavior of real wages has not been consistent. In fact, on average, real wages have risen at least as rapidly during recoveries as during recessions.

The real wage cyclicality question is quite complex, and I have a 1989 JPE paper on the subject if you are interested in more detail. The final chapter (which is sort of a technical appendix) covers this issue in lots of detail, including the reasons why the model used in this book is ad hoc, and does not apply to the post-war period. I do believe that a model replacing real wages with W/NGDP would hold up during the post-war period.

As far as the question of causality is concerned, you can think of a monetary shock such as the 1933 devaluation as boosting both prices and output directly, or as boosting prices (or NGDP) directly, and then output rises because real wages fall. I prefer the latter framing.

Clark Johnson wrote a book on the Depression back in the 1990s, which anticipated some of my themes, especially French gold hoarding. I highly recommend the book to readers interested in the Great Depression.

Clark also did a good job of summarizing my arguments in a review over at Lars Christensen's blog, but had a few objections:

In proposing a hypothetical increase in the gold price, perhaps at the time of the Genoa Conference in 1922, Mundell and Johnson intended a counterfactual through which subsequent deflation might have been prevented. Almost no one suggested changing the gold price at the time - in my research the only advocacy I found for a price increase came from a gold producers' association. In 1934, of course, the US raised the price it would pay for gold - which removed weak systemic demand as a cause of the international depression.

Sumner raises the objection that increasing the price of gold in the early 1920s would have risked significant inflation unless central banks raised their demand for gold in the short run. I believe he overstates the threat of inflation. For one thing (as Sumner acknowledges in his theoretical chapter), prewar gold reserve ratios fluctuated considerably; central banks did not generally act as though bound to monetize new gold to satisfy "rules of the game" - nor did central banks of the US, France, or Germany show much inclination to monetize excess reserves a few years later. Also, only the US among major economies was on a gold standard during the early 1920s, so there would have been no central bank coordination requirement had the price then been raised.

Clark also suggests (probably correctly) that I underestimate the subtlety of Keynes's argument:

Keynes' deeper concern in the General Theory, much more than in his earlier writings, was with what he saw as the tendency of "present day capitalist individualism" to lead into stagnation. He put forth such concepts as that of an "average marginal efficiency of capital" falling to zero, and the "euthanasia of the rentier, of the functionless investor." Such conclusions are only incidentally related to Keynes' understanding of monetary economics.

Clark continues:

Private gold movements, as Sumner describes them, were baffling and somewhat contradictory - first driven by fear of a revaluation of the dollar gold dishoarding, then by fear of a devaluation and gold hoarding. The second makes little sense: with new gold piling up at the Fed, and no deflationary pressure coming from abroad, why would US monetary authorities have wished to devalue in 1937?

Industrial production rose by about 40 percent from the pre-NIRA-shock peak in July 1933 to the precrash peak in July 1937 - at which time it was higher than it had been at its peak in 1929.6 This was a disappointing rate of growth for a period shortly after the worst depression in US history, but growth it was; it is not convincing to roll this four-year period into a longer "supply-side depression."

The 2007 downturn, in contrast, as Sumner observes, began with a financial crisis, the heart of which was widespread and often hidden exposure to low-quality mortgage debt. US monetary policy was not an initial trigger, and probably did not become contractionary until the dollar started to rise sharply in July 2008, at which point the recession entered a harsh, and unnecessary, new phase.

I've focused on a few areas where I at least slightly disagree. But I'd encourage people to read the entire review, which contains lots of interesting observations, including the following:

Paul Krugman has argued that the recovery of profits and stock prices since 2009 owes much to wage compression. - if he is correct, it is the opposite of the pattern Sumner describes post-1933. It is reasonable to expect that an incoming US administration in 2017 might want to use administrative measures to boost compensation - possibly through a higher minimum wage, mandatory home leave provisions, or obligatory profit sharing. If monetary expansion slows while wages and salaries grow faster, the recovery will face an uncertain future, and perhaps a short one.

I frequently argue that anti-EMH theories are not useful. That is, theories of irrational market behavior, such as "bubbles", are simply not useful to policymakers, academics and ordinary investors. If they are useful to anyone (it's hard to know either way) it would only be to the tiny, tiny, number of lucky individuals who are smarter than the markets. I'm certainly not one of them.

I thought of this when I read a recent interview with Larry Summers:

The essence of democratic governmental institutions is that they're supposed to distill the conventional wisdom and act on it, and the essence of bubbles is that the conventional wisdom is dead wrong. To expect democratically accountable institutions to be good at recognizing and puncturing bubbles is unrealistic.

And speaking of Larry Summers, TravisV directed me to this article:

Jeffrey Gundlach and Larry Summers are joining derivatives traders in saying the Federal Reserve is too ambitious in its plans to raise interest rates against a backdrop of slowing global economic growth.

Gundlach, the co-founder of DoubleLine Capital LP, said moves by the central bank to raise rates are fighting non-existent inflation and hurting gross domestic product growth. Summers, the former Treasury secretary, said the economy can't withstand the four rate increases that policy makers project this year.

Turbulence in global financial markets emanating from China has fueled concern of a global slowdown as oil prices dropped to a 12-year low. That has traders and investors questioning the Fed's stance that domestic inflation will rebound gradually as U.S. wages pick up. Derivatives traders are pricing in fewer than two quarter-point rate increases in 2016.

"I'd be surprised if the world economy can comfortably withstand four hikes," Summers said Wednesday in an interview with Bloomberg TV. "Markets agree with me and that's why, despite the statements that are being made, markets aren't expecting four hikes."

PS. If there is a recession this year then I'll have to issue a mea culpa, as I advocated Yellen over Summers a couple of years ago.