01 Sep 2016

Did Hayek Favor Targeting NGDP?

Austrian School, Banking, Market Monetarism 18 Comments

I think I may have blogged about this before, but hey, if I can’t quite remember, maybe you guys can’t either. (Plus, there could be new readers.)

Sometimes I see people claiming that Hayek supported NGDP targeting, or perhaps that Hayek’s preferred monetary regime would mimic NGDP targeting. I am by no means a Hayek scholar, but when I dug up his Nobel acceptance speech (for other reasons) I was struck by this passage:

The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. [Hayek, 1974]

That doesn’t sound like a full-throated defense of stable NGDP growth.

Now, I think the issue is that perhaps earlier in his career, Hayek had supported the maintenance of MV during a depression. I asked von Pepe, who keeps track of such things better than me, and he dug up this comment from Jerry O’Driscoll:

I wasn’t at the debate and don’t know what Larry White or anyone else said. I do know what Hayek said, however, and I know my economic history.

It is entirely anachronistic to say that Hayek or anyone else wanted to maintain nominal GDP in the Great Depression. National income accounting hadn’t been invented yet. Here is a link to the history of NIA.http://www.bea.gov/national/pdf/nipaguid.pdf

[What] Hayek wrote in P&P [Prices and Production] is that neutral money meant keeping MV constant. He later clarified that he never intended this to be a guide to policy for any number of reasons. Velocity was not observed in real time and he thought the demand for money changed cyclically and unpredictably. And then there is the knowledge problem I referenced.

(His statement of the knowledge problem predates P&P. So we have additionally textual evidence that the concept of money neutrality wasn’t intended be a guide to activist policy.)

To say something would be desirable in [principle], but is impossible to execute in practice is not a fault. It is intellectual honesty. I don’t think he ever used these words, but Hayek thought that fractional reserve banking with central banks was inherently unstable.

On this, he was in the Henry Simons/Milton Friedman camp. He expressed support for both 100% reserve banking and free banking, but did not think either…was politically possible.


01 Sep 2016

Why Market Exchanges Are Not Acts of Measuring Value

Economics 20 Comments

Hoisted from the comments of my last post:

This is in response to Tel, but I’m doing it stand-alone so it doesn’t get lost in the indentation:

Shoot, Tel, I meant to hit this point but I forgot. When Jim trades 10 pizzas to Sally in exchange for a painting, we can say that the painting has the same market value as 10 pizzas. However, there is no measurement going on here.It’s not that they each had a certain amount of “market value” inherently, and then we put the pizzas up to the painting to figure out how many “pizza market values” were contained in the painting.

E.g. when you put a meter stick against a barn and measure it as 13.4 meters, it works because you assume they both possess units of length and you’re seeing how many of the meter stick’s lengths *equals* the length in the barn.

But when Jim trades 10 pizzas for the painting, he does it because he thinks the painting has MORE value than the 10 pizzas, and vice versa for Sally. They are not measuring market value, they are consulting their subjective value rankings. They are not using equality, they are using inequality.

So there is nothing at all analogous in two people making an exchange and thereby producing a market exchange rate, and a person using a meter stick to measure the length of an object.

01 Sep 2016

Do Individuals Measure Value? Mises vs. David Friedman

*Choice*, David Friedman, Shameless Self-Promotion 24 Comments

You guys may remember that a a week or so ago, I asked for help in sourcing a David Friedman quote, that Bryan Caplan had put at the top of his blog post. That led to…

My latest blog post at the Independent Institute. An excerpt:

As the quotation above indicates, Mises agrees with Friedman that people place all satisfactions on a single scale of value. However, I still maintain that Mises would not agree that these individuals aremeasuring value.

Now at this point, we can imagine Friedman pushing back by asking, “What’s the problem? If we evaluate the potential satisfaction from a work of art, along with the potential satisfaction from a pizza, using the same scale of value, then doesn’t that mean we are implicitly measuring value in pizza-units as well as in art-units? Hence my claim, that economists ‘think everything can be measured in anything’? Use an analogy with length: If you agree that we can place a baseball bat and a pencil on the same scale of length, then can’t I measure baseball bats in terms of pencils?”

But to repeat my original claim, the mere fact that we can place disparate satisfactions on the same value scale is not the same thing as saying we can measure the subjective value of the different satisfactions.

I must confess, it took me a minute to isolate exactly what was wrong (from a Misesian perspective) with Friedman’s discussion, since at first glance it seems like Friedman is just making an obvious “economistic” point. Yet he was smuggling in the concept of measurement, which does not follow from the fact that people put, say, lifespan and chocolate cake on the same scale. (And I grant you, even that term “scale” is probably dangerous–it would be better to use more ordinal language, like “preference ranking.”)

Incidentally, David Friedman and I have had this debate over cardinal vs. ordinal utility before. I am sure he would push back against Mises/me and say modern economics does too rely on cardinal utility.

30 Aug 2016


Potpourri 7 Comments

==> In the latest Lara-Murphy Show, Carlos and I respond to a research note from a brokerage firm that had wondered whether passive investing were worse than Marxism. (We said no.)

==> Brittany Hunter explains that “private prisons” in today’s America are not the same thing as Rothbardian privatization of judicial and police services.

==> David R. Henderson has been posting some great stuff over at EconLog, on topics such as carbon tax, the FDA’s corrupt crackdown on e-cigs (which shows how having the FDA actively makes people less healthy), and the nationalization of U.S. mortgages.

==> THE BEST post on the EpiPen stuff comes from Scott Alexander. Don’t just skim the beginning and assume you’ve got it; you need to read the whole thing to fully appreciate its beauty.

==> Incidentally, I got the link to that Alexander post from Scott Sumner. In Sumner’s post, besides giving the link to that great article, he also offers the following gem. Can people understand why the following sounds funny/ironic to me?

PS. Alex Tabarrok linked to an excellent Scott Alexander post that exposes the progressive tendency to respond to every failure of regulation with a call for more regulation. I see an analogy with fiscal stimulus. Instead of asking central banks to do more (the obvious solution) they propose dubious schemes to try to use fiscal policy to make up for the failures of monetary policy.

30 Aug 2016

Two Things From Tom and Me

Contra Krugman 2 Comments

First, hear us tackle Krugman’s excuses for ObamaCare. (He says it’s the fault of obstinate Republicans and health insurers with ulterior motives. You know, Aetna is losing hundreds of millions of dollars on purpose because they don’t like Obama.)

Second, doesn’t the below look fun? Well guess what, that’s the ship hosting the Contra Cruise!

You still have time. Put off your kid’s braces and sign up today for the Contra Cruise.

29 Aug 2016

Scorecard of Gary Johnson’s Interview With Chris Wallace

David R. Henderson, Libertarianism 20 Comments

[UPDATE below.]

I’m upset with Gary Johnson because he is running as a Libertarian, so I hold him to a higher standard than other candidates. But I realize I’m possibly being too hard on the guy, so when David R. Henderson recently singled out Johnson’s August 28 interview with Chris Wallace as his best performance yet, I decided to do an experiment.

Specifically, I decided that I would jot down each policy issue as it came up, and then ask: (a) Did Gary Johnson give the standard libertarian answer on it (if applicable); and (b) Did Johnson explain why this was the libertarian position, to educate the viewers? So I’ll embed the video below, and then underneath will be my scoring.

Free Trade: Johnson is good in that he wholeheartedly supports free trade. However, he then goes on to link it to the “IPP” (sic), which Wallace has to correct as the “TPP.” So that’s bad for two reasons: (1) The flub is embarrassing, but (2) Johnson didn’t say one word about the distinction between lower tariff rates and the legitimate concerns over IP and other measures that transfer sovereignty. So this is a very tricky topic, yet Johnson is proudly saying that the libertarian position is to embrace the TPP. This is an unforced error in reaching out to progressives who liked Sanders but don’t trust Clinton.

Immigration: I know this too is a tricky topic, but for somebody like Gary Johnson I’m fine if he says (as he does in the interview) that the libertarian position is to allow anybody to come here and work. However, when he elaborates, he says immigrants are just taking the jobs that Americans don’t want. That’s not really a good argument, because there aren’t a fixed number of jobs and whether native workers take them depends on the wage rate, which of course varies based on (illegal) immigration. (It would be more accurate to say, “Have you seen the Mexican guys busting their a**es on lawns when it’s 100 degrees out? Do the teenagers in your cul de sac want to work like that?”)

(Not a huge deal, but start at the 4:00 mark and you’ll see Johnson try to “get real” and he says, “Look, Hillary or Clinton, isn’t the polarization in Congress going to be greater than ever?” That’s a flub, he was trying to say TRUMP or Clinton, or Hillary or Trump, not “Hillary or Clinton.”)

Cut Spending 20%: Wallace said this was Johnson’s position, which is great if true, but Johnson didn’t talk about it, because Wallace lumped it in with the elimination of various government agencies (next item).

Eliminating Federal Agencies: Wallace said that Johnson wanted to eliminate the IRS, Commerce Dept., Department of Education, DEA, and NSA. So this is great, and epitomizes my problem with Johnson. I heard Wallace list these items, and I thought, “OK, I have been too hard on Johnson and too eager to argue with Scott Sumner. If this is the baseline, that Johnson is calling for this stuff, then yeah that’s so hardcore I gotta cut the guy some slack, that takes guts to call for abolishing the IRS and NSA.”

So guess what happened? The first thing Johnson does is try to clarify that he did NOT want to eliminate all of those agencies. Wallace says, “It’s on your website,” and Johnson says, “Not on my website, you might read that on somebody else’s website.” (Note these aren’t exact quotes, but close.) Johnson clarifies which agencies he DOES want to eliminate. You ready? Education, Commerce, and Housing and Urban Development (HUD), and he wants to roll the Dept. of Homeland Security back into the FBI. Nothing about the IRS or the NSA, the two that made me initially cut him some slack for being hardcore. He doesn’t even want to eliminate the DEA at first, even though that’s his signature issue. (If you guys think I misunderstood him, tell me in the comments and I’ll fix. But I’m pretty sure that’s what he clarified as his position.)

Replace Personal Income Tax and Corporate Income Tax with National Sales Tax: Sure, if we could choose between an income tax and a sales tax, I’d far prefer the latter. But I actually would not support a deal like this in practice, because I would fear that it would simply bring the national sales tax in, and we’d eventually have the income taxes again down the road. So I’m not even willing to give Johnson credit for having this position.

But then when it comes to selling the position (and using the opportunity to educate Americans about libertarian principles), again it was a train wreck. Wallace asks a tough question about this proposal being very regressive, and Johnson says, “Again, Weld and I aren’t running for dictator or king.” (This was the second time he’d said this during the interview.) So Wallace crushes him by replying, “Now wait a minute. When you say you aren’t running for dictator, it means we shouldn’t take your policies seriously, because you know they won’t get through Congress.” And yes, that’s exactly what Johnson WAS doing with that phrase.

Foreign Policy: He was good on agreeing with Wallace that Johnson was a non-interventionist and thought Obama’s policies had had unintended consequences. But when Wallace brought up ISIS, Johnson’s first response was to say we should contain ISIS, and that, “Think of them as sands through the hourglass, we’re going to see the sands through the hourglass.” I barely understand what that it supposed to mean. Anyway, Wallace keeps hitting him, saying ISIS wasn’t contained because of the attacks in Belgium, etc. Johnson says these were ISIS-inspired, and asks whether ISIS itself was carrying out these attacks directly. Wallace says, “Well in the case of France they’d seem to, yes.” (Crushing.)

Johnson wisely realizes he is losing this, so he pivots and says that military personnel support him over the other candidates. From this point forward, I admit he did a good job, speaking passionately (he actually looked angry) and citing some specifics on Obama/Clinton policies, without tripping over his words. I am assuming this is the segment that David R. Henderson liked.

(To give more specific praise: Johnson was really good on why eliminating ISIS was a fool’s errand, and his pivot to North Korea was good. I also liked that he wanted to reach out diplomatically to Russia and China.)

Drugs: Then, at the very end, Wallace brought up something I didn’t realize. Johnson had been the CEO of a company that sold cannabis. I knew people had called him a “pot entrepreneur” but I thought it was just a joke about his habits.

So, I can pull a Seinfeld and say, “Not that there’s anything wrong with that,” but I thought the one saving virtue of Johnson is that he was an accomplished governor and would show America that the Libertarian Party was serious, and not a freakshow. Well…

In conclusion, with the exception of maybe 2 minutes on foreign policy and then a brief statement of his view on marijuana legalization, this 11 minute interview was a train wreck. I am not saying this to be funny, I am dead serious: If we were back in college and were going to pick somebody to represent libertarians in a debate for the student body, I would have vehemently objected if someone who had given this 11-minute performance wanted to be the guy. I would have thought surely out of the 20 people in our group of hardcore libertarians, we could find a better representative of our perspective. And remember, this is the interview that David said is the best he’d seen yet from Johnson.

UPDATE: Oh! I forgot to mention. When Johnson was trying to sell his tax reform plan to Wallace, in order to reassure him that it wouldn’t be too regressive, Johnson said that his “Fair tax” would involve sending a “pre-bate” to every American. In other words, the Libertarian candidate’s tax reform plan would mean that literally every single tax-paying American would get a check from the federal government. (David at the end of his EconLog post also noted that that aspect of Johnson’s proposal was really problematic.)

So Johnson is already admitting his plan is not going to go through in its current form; why not ask for something really nice?

29 Aug 2016

Cass Sunstein on Social Cost of Carbon

Climate Change, Shameless Self-Promotion 9 Comments

My latest at IER. How do you guys feel about my demonstration below? I think it’s pretty decisive, but then again, I’m presumably biased to like my own argument.

To avoid  confusion, I’m not going to use indenting etc. The italicized block quote below is from Cass Sunstein, and then the rest is my reaction.


First established by the Barack Obama administration in 2010, the central value for the social cost of carbon, last updated in 2015, is now $36. That figure is set within a range from $11 to $105, meant to acknowledge scientific and economic uncertainty. (Disclosure: As administrator of the White House Office of Information and Regulatory Affairs, I was involved in the process.) The $36 figure has international resonance; many nations are paying attention to it. It also plays a large role in discussions about the size of any possible carbon tax.

Although Sunstein doesn’t seem to realize it, the above statements contain a shocking admission. The “scientific and economic uncertainty” surrounding the concept mean that the Obama Administration was reporting a range for the “social cost of carbon” going from $11 to $105. When journalists or others cite the point estimate of $36, that is simply the “central value” in the broader range. As Sunstein himself admits later in his article: “Any particular number will of course be highly controversial.”

That range is enormous if the “social cost of carbon” (SCC) is going to be the foundation of the cost/benefit analyses of regulations involving greenhouse gas emissions. What would the world need to look like for Sunstein (or the circuit judges) to agree with the petitioners, that the SCC is an arbitrary concept?

Things that are actually settled science do not exhibit such controversy. For example, this NASA page reports that the (equatorial) radius of the moon is 1,738.1 kilometers. Now that’s just a rounded estimate, of course. If we polled various astronomers and physicists, they might disagree slightly on the best figure to report for “the radius of the moon.” However, no reputable scientists would say, “Any particular moon radius reported is controversial, but we are confident the range of the true figure is between 531 kilometers and 5,069 kilometers.” Would that make you confident that the scientists had a good idea of how big the moon was? Note that I used the same ratio of lower and upper bounds to the “central value” that Sunstein used for the social cost of carbon.

Or take human population. Nobody knows for certain how many people are on planet earth right now, but surely the proper experts have a pretty good idea. This website for example says the figure is some 7.4 billion people. To repeat, this is obviously just an estimate, and various scientists might disagree with each other and the best figure to report. But surely they wouldn’t say, “To account for the uncertainty in our analysis, we will report a range for the total global population between 2.3 billion and 21.6 billion. This is settled science—we are really confident the human population is somewhere in that range.”

If a government agency issued that kind of statement—saying the global population was somewhere between 2.3 billion and 21.6 billion—after studying the matter, and then issued regulations and taxes costing trillions of dollars on the basis of these calculations, would you feel good about the process?

Of course not. Such huge disparities in the bounds would indicate that scientistsdon’t really have a handle on these issues. And by the same token, when Cass Sunstein proudly tells us that the Obama Administration thinks the social cost of carbon is $36 per ton, but that it issued a range of $11 to $105 because of the “scientific and economic uncertainty” (his phrase, not mine), that should be Exhibit A in the petitioners’ case.

29 Aug 2016

Ice Cube on Trump, Hillary Clinton, and Sanders

Trump 19 Comments

This interview was posted back in April, but I just saw a clip on Twitter yesterday. Look at Ice Cube–writer and performer on such songs as “F*** tha Police”–discussing Trump and Clinton:

(In case you don’t get the reference, Hillary Clinton in 1996 referred to “superpredators” whom the authorities had to “bring to heel.”)

What’s my point in posting this? Simply this: If your theory of Donald Trump’s support is that “there are more racists in America than I previously realized,” you are wrong. Sure, racists do support Trump, but that doesn’t explain why Trump is so popular.

Or, do you think Bill Kristol and Scott Sumner need to explain to Ice Cube the plight of minorities in America, and how he shouldn’t trust a white man spouting lies?

P.S. Remember kids, I do not like Donald Trump. But when people make asinine, smug criticisms of him–like saying Sean Hannity is the only person in America who supports Trump–then I must speak up. Yes, a Trump Administration would be awful (in an absolute sense), but a lot of the “big guns” opposing him right now don’t understand what it is that his supporters like.