March 7, 2019


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See exactly how the statement from Fed policy makers changed.

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See exactly how the statement from Fed policy makers changed.

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This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here. More Output, Fewer Workers U.S. factory output continued to grow in August, but the picture for employment was mixed, a possible sign of lingering uncertainty about the coronavirus pandemic among American manufacturers. A survey of […]

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Beijing hails recovery from ‘extraordinary’ year but provides little guidance on climate goals

Your daily news briefing

Biden administration moves to de-escalate long running trade row with temporary measure

Britain’s unilateral move to extend waivers on trade checks inflames tensions with EU

Call for new welfare state to reduce ‘unsustainable’ inequality worsened by pandemic

What may be the right level of fiscal stimulus for one country is not true for them all

The UK’s unilateral move to ease burden on business inflames tensions with EU

Your daily news briefing

Diplomacy is vital to deal with the trade organisation’s awkward squad

‘Assertiveness’ can meet approval on all sides

National People’s Congress set to be dominated by concerns over stability and rising debt

Hubris, resentment and insecurity still loom large in Britain’s attitude to the EU

New Zealand’s government should focus more on regulatory changes to unlock housing supply

Government faces complaints that measures have too many loopholes or put country’s business at a disadvantage

Country’s foreign minister says indefinite delay of deal with South American bloc would be damaging

For the most part, economists don’t give people advice on how to run their lives. Rather we tend to focus on explaining the behavior of consumers and businesses, usually assuming they are at least somewhat rational. One exception is when there is a “principal-agent problem”, the case where the people you hire (the agents) have interests that differ from you own interest.

Thus economists might advise someone to be a bit skeptical if one’s dentist recommends that you get a new crown. Is it actually needed, or is the dentist merely trying to pad his income?

There is one area where economists are especially likely to give advice–personal investments. The Efficient Market Hypothesis (EMH) suggests that it’s extremely hard for financial advisors to consistently beat the market. Because these professionals must be paid for their services, managed mutual funds tend to do worse, on average, than index funds. Thus almost all economists that I know recommend that average people invest in index funds.

Because of the EMH, the field of economics has its own distinct epistemology. We believe in the wisdom of markets. We believe that the optimal forecast of many economic variables is embedded in the consensus market forecast. AFAIK, other sciences don’t use this approach to ascertain what is true. Thus meteorologists don’t typically assume that a prediction market forecast of global temperatures in the year 2050 represents the optimal forecast, even were such a market to exist.

On the other hand, I do wonder if economists are being consistent in the way they apply concepts such as the principal-agent problem and the EMH. Doesn’t our criticism of managed mutual funds apply equally well to our own profession? Consider the following two approaches to policy:

1. Most economists seem to believe that it makes sense for our profession to do a lot of research on the macroeconomy, and then base our monetary policy on forecasts derived from computer models of the economy.

2. I believe that much of this research is wasteful, and that monetary policy should be guided by market forecasts of the relevant economic variables.

In order to see who’s right, let’s take the same analytical framework that makes economists so critical of the managed mutual fund industry and direct it toward our own field. We immediately see two problems. Just as with the financial industry, it is in the best interest of economists if society spends a lot of money financing research on predicting future macroeconomic outcomes. These are good jobs!

Second, the EMH suggests that the output of these investigations will be inferior to the consensus market forecast, and yet we usually argue that policymakers should rely on our computer models, not the consensus market forecast. Thus we seem to be dismissing the value of the EMH when it comes to our own profession, after using the EMH as a bludgeon to bash the financial services industry.

Of course one could argue that research by individual economists is a valuable input into the market forecast of inflation and GDP, but one could equally well argue that research by individual financial experts is a valuable input into the market pricing of assets.

And even if economic research should be subsidized because information has external benefits, that does not justify using a particular Fed model to set policy, rather than the market forecast.

Economists are also “agents”, and our self-interest is not the same as society’s self-interest. On the other hand, I’m also an economist, so why should you believe me? My self-interest might be to carve out a career as a contrarian.

I would respond as follows. I’m not trying to brainwash you; I’m merely pointing to some implications of ideas that many of you already know, especially those with some background in economics.  Back in 1996 (in a defense of free trade), Paul Krugman gave four suggestions to people trying to become public intellectuals.  This one struck home:

Adopt the stance of rebel: There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me!

That’s what I did in my new book, which comes out this summer.  And that’s what I’m doing here.  The principal-agent problem and the EMH are well-established ideas.  And it is well known that economists are highly skeptical of managed mutual funds, and often recommend indexed funds.  In this post, I’m merely pointing to the implication of applying this sort of analysis to my own profession.  Don’t automatically believe what I say—think about whether it makes sense.

After all, my best interest doesn’t coincide with your best interest.

PS.  You might argue that asset markets don’t exist for some key macro variables.  But that’s no excuse; the Fed can create them.

PPS.  Part 2 of my MMT critique is now out.  Now there’s a theory that categorically rejects the EMH!!


[Scroll to the end for a couple final reactions to comments .]

In a reflective moment, George Orwell wrote, “Every line of serious work that I have written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic socialism, as I understand it.”  Yet if you actually read his oeuvre, you’ll find a striking disparity: Orwell’s anti-totalitarian writing is massive, but his pro-socialist writing is wafer thin.  As far as I know, the closest thing Orwell produces to an argument for democratic socialism appears in his review of Hayek’s Road to Serfdom:

[Hayek] does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.


Capitalism leads to dole queues, the scramble for markets, and war. Collectivism leads to concentration camps, leader worship, and war. There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics.

In Orwell’s day, many readers would have responded, “Orwell wrote little, but the few pro-socialist words he wrote suffice.”  Even today, many would sympathize.  Yet despite my love for Orwell, he he’s thoroughly mistaken.  Point-by-point:

[Hayek] does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State.

Hardly.  As of 1940, quality of life for “the great mass of people” was near its all-time global high in the world’s most capitalist countries: the United States, United Kingdom, and Switzerland.  These countries were the richest and the freest – and not “just for the rich.”  Seriously, where on Earth would you rather be living in 1940?  You could say that the United States, United Kingdom, and Switzerland were even better for the great mass of people immediately prior to the Great Depression.  But that’s praising with faint damnation.

The trouble with competitions is that somebody wins them.

This is misleading even for athletics.  Yes, someone wins the game.  To continue winning, however, even the best teams have to keep practicing and improving.  Every day is another chance for losing teams to turn things around.

The same goes for business.  On any given day, some firms are doing great.  That doesn’t mean, however, that they’ve permanently “won.”  Even if all of their direct competitors go out of business, successful firms have to worry about future competitors.  Amazon is by far the best store in history, but they tirelessly strive to improve because they want to stay number one.

Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led…

“Monopoly”?!  What is Orwell even talking about?  I suppose he could be focusing on a few industries with large economies of scale, but even in his time that would have been a modest share of total output.  Or he might be thinking about industries like agriculture with state-sponsored cartels, but you can hardly blame “free capitalism” for that.

and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.

Mass unemployment is a grave evil, and the evil was probably never graver than during the Great Depression.  But even in Orwell’s day, economists had a compelling diagnosis and effective cures.

The diagnosis: Unemployment is caused by excessive wages.  The effective cures: Either (a) let wages fall, or (b) print more money to reduce wages surreptitiously.  Despite its popularity, “state regimentation” is a red herring that fails to address the actual problem.

Capitalism leads to dole queues, the scramble for markets, and war.

The dole was indeed a popular response to high unemployment.  But once you grasp the wage-unemployment connection, you start to worry that the dole prolongs unemployment by reducing the pressure to bring wages down to the full employment level.

The “scramble for markets” story is Leninist dogma.  As the gravity model predicts, rich countries mostly trade with nearby rich countries, not their nation’s colonies.  The post-war loss of colonies was a big blow to nationalist pride, but economically trivial because the colonies were never economically important in the first place.

And war?  Blame nationalism and totalitarianism, not “capitalism.”  If capitalist greed ran Europe in 1914, all of the major powers would have realized that preserving good economic relations with European neighbors was vastly more profitable than grabbing some remote, impoverished colonies.

Collectivism leads to concentration camps, leader worship, and war.

Yes, yes, and yes.

There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics.

On the contrary, the “way out” is to combine freedom of the intellect with a free market economy.  Fortunately, that’s easy because these two freedoms are not only compatible, but mutually supportive.  And if we restore the concept of right and wrong to politics, combining these two freedoms is precisely what we’ll do, because there is a strong moral presumption in favor of freedom.

Final Reactions

A few final reactions:

Miguel Madeira:

“Strictly hereditary dictatorship, per Pascal, has the lowest selection pressure for bloodthirsty power-hunger. ”

Unless we follow the KevinDC model – if we assume that bloodthirsty power-hunger dictators will purge all other potential bloodthirsty power-hunger dictators (meaning that his successor will probably be a risk-averse yes-man)…

I’d say that a truly risk-averse yes-man would steer clear of politics.  The most bloodthirsty dictators might select for underlings who are risk-averse by the standards of ruthless politics, but their absolute level of risk-aversion would still be low.


Thoroughly enjoyed this book club. I’ve been curious throughout whether you would ever touch on the meta-theory that Oceania is actually a lie and the totalitarian state is actually limited to a small autarkical geography. That the reasons that some of the balance of power arguments between the major powers seem shaky are attributable to the power of the government itself being a lie. The reference above to believing absurdities plays nicely into this, and reminds me somewhat of my travels in Cambodia and some of the reflections on the Khmer Rouge’s reign.

I never heard this story, but it doesn’t seem plausible.  Winston Smith clearly lives in England.  They still have a train system, airplanes, and rockets.  And he remembers nuclear war.  So it doesn’t sound like he’s living in a small isolated country.


Amazon is in many ways a fascinating company and deserves to be defended against most of its mainstream critics. However, it would be simplistic to explain its campaign for a $15 federally-imposed minimum wage by identifying it with a corporate Mother Teresa. Its more obvious reasons to preach for minimum wages are not defendable.

I will not repeat all the arguments against the minimum wage, summarized in a good article by Cato Institute’s Ryan Bourne (“The Case Against a $15 Federal Minimum Wage: Q&A”). My co-blogger David Henderson has also defended many of the standard economic arguments. There exist some disagreements among economists about the employment effect of minimum wages, but they mainly relate to the size and victims of the negative effect (see Bourne’s overview).

One thing is sure: Amazon would benefit from forcing higher costs on its small competitors, including mom-and-pop businesses. A higher minimum wage would have exactly this effect while it would have zero effect on Amazon’s costs. As the company already pays a starting wage equal to the proposed $15 minimum, the latter would be non-binding and irrelevant for the retail behemoth.

One reason why Amazon was able to bid up the wage of its entry-level workforce is that its technology and other capital embedded in its warehouses and distribution network increase the productivity of its employees, which justifies the bidding up from a pure profit-maximizing viewpoint. There is nothing wrong with profits, but there is something wrong with using state power to bankrupt one’s competitors. This is what is happening. Jonathan Meer, an economist at A&M University observes:

It’s a lot harder for Joe’s Hardware. We should take note that Amazon—the place with no cashiers—is the one calling for a higher minimum wage.

Other large companies—such as Walmart—have come out in favor of an increase in the federal minimum but not up to $15. In their case, indeed, $15 would be binding for some employees. (Cf. Eric Morath and Heather Haddon, “Many Businesses Support a Minimum-Wage Increase—Just Not Biden’s $15-an-Hour Plan,” Wall Street Journal, March 1, 2021)

Amazon has another reason to be politically correct, that is, to signal its virtue under current faddish and unrealistic ideas. The company can hope to cajole DC’s powerful men to spare it from some regulation that would bite. The systemic effects of such behavior point to crony capitalism and groveling toward the state, which are not good for free enterprise and future prosperity.

It is not clear, to say the least, what kind of acceptable ethics could justify Amazon’s current behavior.


When you do a Jack Stafford podcast, he writes and records an original song inspired by the interview. Are you ready for “Keyhole Solutions: The Song”?

No joke!

P.S. The actual podcast is here.



Many of the comments on my post yesterday, “Bernie Sanders, Minimum Wage, and Systemic Racism,” March 1, were particularly good. They have convinced me that I need to walk back some of the things I said. Like most people, I hate to admit that I’m wrong. Unlike most people, I’m typically quite quick to admit that I’m wrong. Back in the 1970s or 1980s, my friend Michael Walker, who founded Canada’s Fraser Institute, asked Friedrich Hayek why people don’t seem to be convinced by evidence or logic. Hayek replied (I can just picture him doing this with his characteristic half wince/half grin) that people’s ideas are one of their most treasured forms of private property and when you convince them that they’re wrong, they suffer a capital loss. That fit my experience. But my next thought on hearing it was that you already had the capital loss; you just, to use tax lingo, realized it. And to push the metaphor maybe too far, you get a tax break on the loss. Translation: you’re better off admitting you’re wrong because then you won’t make that mistake again and you’ll get clarity for the future.

Now to the issue at hand.

I’ll focus on 8 comments.

BC writes:

Then, is “systemic racism” used synonymously with “unequal outcomes”?  If not, then what would be an example of unequal outcomes that are unfavorable for African Americans that does not reflect systemic racism?

Good question, BC, to which I don’t have a good answer. It’s the first comment that got me wondering whether there is such a thing as systematic racism, at least as defined by the NAACP’s President Derrick Johnson.

John Hall, after raising the issue of SAT scores, writes:

I think David needs to think on this issue a little harder to distinguish between this case and the minimum wage case.

I think John is right.

Vivian Darkbloom, as is Vivian’s wont, has one of the best comments, writing:

I’m opposed to a minimum wage increase to $15 for all the reasons likely discussed here previously.

Nevertheless, I’m wondering how someone in favor of such a hike would respond to this definition (and the conclusion therefrom that the hike constitutes “systemic racism”):

“[NAACP President Derrick] Johnson defined systemic racism, also called structural racism or institutional racism, as ““systems and structures that have procedures or processes that disadvantages [sic] African Americans.””

It’s highly likely that a disproportionate number of African Americans would either lose their jobs or fail to get one (or work fewer hours) as a result of such a minimum wage hike.  However, is it possible that a disproportionate number of African Americans (those that keep their jobs or manage to get one) would benefit from a wage raise and enjoy a slightly higher standard of living?

What I’m getting at here is whether, per the proposed definition, one should look  solely at those disadvantaged, or  should one weigh the *net* effect on those all those affected by the change?  Could Bernie Sanders reply “I acknowledge that there will be some loss of employment and some reduced employment as a result of this hike.  But, those negative effects are exceeded by the benefits of those who will get a pay raise”.

The same thought goes for those “disproportionately arrested” for whatever reason.  Is it possible that African Americans “disproportionately benefit” from more policing in those communities?

I don’t have a ready answer, but on the side of those opposed, one tends to refer only to those who tend to lose, and those in favor only to those who tend to gain, with neither side seriously attempting a net benefit analysis.  I think it is rare with respect to policy changes that there are only winners *or* losers rather than winners *and* losers.

I agree with Vivian that one should look at all the effects and that, in doing so, one might find that the gains to the black gainers outweigh the losses to the black teenage losers. I doubt it, because a high percent of low-wage people are employed in industries that produce goods that are sold to other low-wage people. Think of McDonald’s in Alabama, for example. But Vivian’s point remains.

Also, Vivian’s point about the disproportionately arrested black people is also relevant. Heather Mac Donald often makes the point that cops in low-income neighborhoods are valued highly by residents, including black residents, because they protect them from crime by other people and that the criminals are disproportionately black. So one would want to look at the total effect.

That last point is interesting because it was precisely the “disproportionately arrested” point that my friend made who convinced me that there is systemic racism. I called my friend to talk it out and actually got him to doubt his own claim, based on Vivian’s reasoning.

zeke5123 writes:

I think this definition [of systemic racism] is dangerous. I am reminded of an example by Kendi that lowering capital gains tax is racist, because it disproportionately favors non-blacks since blacks are less likely to have wealth.

The counter to this is if lower capital gains rates lead to net efficiency, it is a sound policy regardless of the impact on certain cross sections of the populace. Indeed, if you implement enough net efficiency policies, it is very likely that you end up lifting up all cross sections. But this is basically just saying: implement policies that are Kaldor-Hicks improvements.

Once when, with a single policy, you bring into the discussion how it impacts certain cross-sections of the populace (i.e., in this case race), you are more likely not to implement Kaldor-Hicks efficiency polices because racism is bad. No — that way lies madness. Focus on Kaldor-Hicks efficiency generally* and the rest will follow.

I think in your examples you believe changing those policies is Kaldor-Hicks efficient — that is, you think on net minimum wage is bad. But if you argue we should eliminate minimum wage (or not raise it) to reduce structural racism, then why can’t Kendi argue we should raise capital gains to reduce structural racism? I get that people can walk and chew bubblegum at the same time, but ultimately I think your case against the minimum wage is that it is bad economics; not that it harms black people because that would be your argument against raising capital gains tax rate (assuming you agree doing so would be bad).

*I would worry about situations where a policy causes massive losses to Group A to benefit Group B by the losses plus epsilon. There are mismeasurement errors, political risks, etc. So, I would limit Kaldor-Hicks efficiency where there is not (i) massive losses to a particular group and (ii) the gains clearly outweigh the losses. For me, a good rule of thumb is a strong presumption of liberty.

I pretty much agree with what zeke said, including that it’s a dangerous definition and that there’s a strong presumption of liberty. My guess is that my presumption of liberty is even stronger than his, but that’s just a guess.

Knut P. Heen writes of Derrick Johnson’s definition of racism, which I adopted but am now furiously backpedaling on:

A definition of systemic racism which excludes all races but one. Great. I thought this was the definition of racism.


Andrew_FL writes:

Minimum wage laws have disparate impacts on many groups, but no one would say the minimum wage is part of “systemic ageism” or “systemic credentialism” even in the rare case of someone who would both correctly understand the consequences of such laws and be inclined to agree with this definition of “systemic racism”

The whole notion is more about proving that we are all guilty collectively of a crime none of us can be said to be guilty of individually. Of course, if committing the category error of attributing racialist ideology and malice to non-human things like “systems” leads to a vast deregulatory push in housing and labor markets, that’s great. If it leads to a mass redistribution of wealth from the supposed perpetrators to their supposed victims, not so much.

The first paragraph is particularly on target. Andrew’s second paragraph points out the perils of using bad arguments for good policies: they can also be used for bad policies. Better just not to use bad arguments, period, even when they help you, which is getting to where I’ll get to soon.

Tom Nagle writes:

While I concur with all your facts, your concluding logic seems flawed when you assert that “Bernie Sanders, therefore, advocates systemic racism”.

Think in terms of a Venn diagram. Circle A is defined to encompass all policies that embody systemic racism as defined in your post. Overlapping a small part of Circle A is another Circle, label it B, that encompasses all policies designed or intended to increase the share of national income earned by low wage workers. Bernie Sanders is a socialist who likely supports all the policies in Circle B. But is it fair to claim that Sanders “advocates systemic racism”–that is, the policies in circle A–even if the overlap is small, the consequences unintended, and he clearly does not support an overwhelming share of the policies that could be classified as systemically racist. Would it be fair to state that “David Henderson advocates the suppression of women’s rights in Afghanistan” because that is an unintended consequence of pulling the US military out of there, a policy that you support?

Good point. Tom, by the way, is the person who convinced me, with the police example, that there is systemic racism. As I noted above, in response to Vivian Darkbloom, he is starting to wonder about his own belief.

Finally, BW writes:

Here is a relevant Slate Star Codex post.

I read it. As is often true, that post is very good. Damn the New York Times.

So where am I? I’m back to doubting that we have systemic racism. And this might answer the first questioner, Dylan. He asked what I had thought systemic racism was before Tom Nagle convinced me that it existed. I had in mind things like slavery, compulsory segregation of restaurants, government requirements that people on buses and streetcars be segregated, etc.

Moreover, I doubt that the concept is useful. Let’s say that you convince me that Bernie Sanders does not believe in systemic racism. And, by the way, the commenters have convinced me. Does that make me dislike his proposal for a $15 minimum wage any less? No. Does it mean that the $15 minimum wage would not cause as much harm as I think it would? No.

I hereby resign as an expert on systemic racism.


A few months back, Alex Tabarrok criticized the delay in approving the new vaccines:

I am getting very angry at people like Anthony Fauci who say that FDA delay is necessary or useful to alleviate vaccine hesitancy.

Fauci told Fox News that the FDA “really scrutinises the data very carefully to guarantee to the American public that this is a safe and efficacious vaccine. I think if we did any less, we would add to the already existing hesitancy on the part of many people because … they’re concerned that we went too quickly.”

The WSJ says much the same thing just with a slightly different flavor:

…this regulatory rigmarole is essentially a placebo to reassure the public it will be safe to get inoculated.

The ‘we must delay to allay’ argument is deadly and wrong.

Now Fauci is at it again, this time with first-dose-first:

“We’re telling people [two shots] is what you should do … and then we say, ‘Oops, we changed our mind’?” Fauci said. “I think that would be a messaging challenge, to say the least.”

Fauci said he spoke on Monday with health officials in the United Kingdom, who have opted to delay second doses to maximize giving more people shots more quickly. He said that although he understands the strategy, it wouldn’t make sense in America. “We both agreed that both of our approaches were quite reasonable,” Fauci said.

So the “experts” have decided that the risk of the public eventually figuring out that they were lied to, and that thousands died needlessly, is smaller than the risk that the public will lose faith in the experts if they change their minds?  Yes, I guess that’s possible.  But what sort of training in social psychology does Fauci have that would allow him to make that sort of life and death decision?

And if first-dose-first is not reasonable for the US, then why is it reasonable for the UK?

Fauci said the science doesn’t support delaying a second dose for those vaccines, citing research that a two-shot regimen creates enough protection to help fend off variants of the coronavirus that are more transmissible, whereas a single shot could leave Americans at risk from variants such as the one first detected in South Africa.

Then why does Fauci approve of the J&J vaccine, which is one dose?  You might argue that J&J was tested as one dose, but that doesn’t answer the question.  AFAIK, the test of J&J vaccine did not show any more efficacy against the South African strain than did one dose of Pfizer or Moderna.

Fauci acknowledged that the United States repeatedly has shifted strategy during the pandemic — including his own reversal on whether Americans should wear face coverings — but said that the stakes are higher when it comes to communicating about vaccines.

“People are very skeptical on vaccines, particularly when the government is involved,” he said.

But if the stakes are higher, isn’t that even more reason to get it right?

Personally, I believe that the public would have more respect for experts if they didn’t repeatedly lie to us for our own good, if they honestly told us exactly what they believed.

I was just a boy when I first heard the term ‘confidence man’. The phrase sounded sort of good—a person who inspires confidence. Later I learned that it was equivalent to con man. Thus confidence is a two-edged sword, something that can help you or hurt you.

Don’t try to make me confident; act in such a way that I will respect you.  That will give me confidence.

Right now, I don’t have much confidence.


Early last year, I foresaw the epistemic horrors of the impending 2020 election, so I made this pledge.

I am ceasing intellectual discussions on social media until March 1, 2021. I will continue blogging and promoting my own work, but will not engage until then.

Here's why:

— Bryan Caplan (@bryan_caplan) January 24, 2020

Near the end, I asked Jonathan Haidt a question on twitter, and I impulsively responded to his answer.  I’d call that a clear violation of my pledge, but to the best of my knowledge, it was the only such violation.

So what did I learn as a result of this self-experiment?

1. Overall, I was glad that I made this pledge.  Not only did I avoid arguing about the election on social media.  As a free bonus, I also avoided arguing with anyone about COVID on social media.  Two exercises in futility averted.

2. As a result of the pledge, I ran many more Twitter polls.  Devising good questions felt more constructive, and I definitely learned more about other people’s views than I ever would have learned from arguing with them.  A nice illustration of my rule that asking questions is underrated.

3. What did I do with all the time I saved?  Honestly, I probably spent most of the savings homeschooling my younger kids, who joined my homeschool back in March.  But I also pursued a bunch of new side projects; most notably, my Amore Infernale is now being illustrated.

4. Did I miss arguing on social media?  Nope.  While free-wheeling exploration of ideas is my life, only a small share of my pre-pledge engagements qualified.  And searching for the pearls was an ordeal in itself.

5. During my experiment, I kept reading other people’s arguments on social media.  My modal reaction was, “Even now, this person has yet to find wisdom.”

6. The “wisdom” I had in mind was mostly the Epicurean realization that you have to set your expectations for human behavior down to rock bottom to avoid daily disappointment.  I never felt angry about the absurd vaccine delays because I expected all this and worse.  I never felt angry about the election because I expect every presidential election to be a disgrace.  The incidents that outrage almost everyone else are just a rounding error to me.

7. Other than Nazis and Communists, I used to respond to virtually everyone on social media.  My new plan is to only engage with people with exemplary manners.  Perhaps I’ll lower that high bar for a while when my next book comes out.  We’ll see.

8. Many people describe social media as an “addiction.”  I never would have so self-described, but outsiders might have called me an “addict” based on my pre-pledge behavior.  But at least for me, stopping required only mild concentration at first, then became second nature.

9. If stopping was so easy, why go “cold turkey” as I did?  Because the bandwidth gains are non-linear.  If I spend an hour a day arguing on social media, I’ll probably spend another hour thinking about the disputes.  But if I cut down to to 5 daily minutes of argument, I’d still probably spend at least 50 minutes rehashing everything in my mind.

10. Doesn’t argumentation hone my thinking?  If so, doesn’t non-argumentation atrophy my thinking?  You, dear readers, are in a better position to judge this than me.  Please share in the comments.


Last fall I argued with a friend that we don’t have much systemic racism in this country. My friend said we do and defined “systemic racism” as policies that aren’t necessarily intended to hurt black people disproportionately but do hurt them disproportionately.

Once he said it that way, I agreed. I thought of black people being disproportionately arrested for drugs, stopped more often by police even when it doesn’t end in confrontation, etc.

And I found this definition in an article in USA Today last June:

[NAACP President Derrick] Johnson defined systemic racism, also called structural racism or institutional racism, as “systems and structures that have procedures or processes that disadvantages [sic] African Americans.”

Given more time to think, I’ve realized that there’s a lot of systemic racism. One of the big ones is minimum wage laws, which hurt black youth disproportionately.

Milton Friedman was aware of that point back in 1966. In his Newsweek column “Minimum-Wage Rates,” September 26, 1966, discussing Congress’s passage of a bill to raise the minimum wage from $1.25 an hour to $1.60 an hour in 1968, Friedman wrote:

Women, teenagers, Negroes, and particularly Negro teenagers will be especially hard hit. I am convinced that the minimum-wage law is the most anti-Negro law on our statute books–in its effect not its intent.

Actually, if you examine the history, you find that it was anti-black in intent also as recently as the previous decade.  Massachusetts Senator John F. Kennedy, who favored the minimum wage, was explicit that he wanted to hamper competition from black workers in the South. But Friedman’s point remains. Intent aside, the minimum wage law is effectively anti-black.

Senator Bernie Sanders, in his all-out drive to get a $15 minimum wage, is pushing to have employers taxed extra if they don’t pay that minimum. If Bernie were to succeed, and it appears, fortunately, that he won’t, then black youths would be disproportionately hurt.

Bernie Sanders, therefore, advocates systemic racism.

HT2 Donald Boudreaux.


Adam Tooze has a post discussing the bond vigilante theory:

The phrase “bond vigilante” is normally attributed to Ed Yardeni a Wall Street economist who coined it in the 1980s to describe the role of bond markets in disciplining governments.

“Bond Investors Are The Economy’s Bond Vigilantes”, Yardeni once declared. “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.” As Yardeni later spelled out: “By vigilantes, I mean investors who watch over policies to determine whether they are good or bad for bond investors … If the government enacts policies that seem likely to reignite inflation”, Yardeni elaborated, “the vigilantes can step in to restore law and order to the markets and the economy.”

This is an example of reasoning from a price change.  If bond traders fear that government policies are likely to lead to higher inflation, this may result in higher interest rates (via the Fisher effect.)  But higher interest rates due to the Fisher effect are not a contractionary policy.  In order to prevent the inflation from occurring, the government must stop engaging in inflationary policies.  Bond vigilantes won’t solve the problem.

Tooze discusses the 1994 bear market for bonds, an example often cited by proponents of the bond vigilante theory:

Furthermore, 1994 was not a spontaneous bond market attack. It too was triggered by the Fed.

In the summer of 1993 Alan Greenspan had become worried about the acceleration of inflation. Even though the Clinton administration in August 1993 had forced through the fiscal consolidation plan that would return the US Federal government to surplus, Greenspan wanted to add further dampening pressure. He was convinced that allowing for inflation expectations real interests rates had fallen to zero.

Tooze is appropriately skeptical of the bond vigilante theory, but is also reasoning from a price change.  Tooze assumes the rate increase was caused by the Fed, presumably a contractionary monetary policy by the Fed.  I see no evidence for this claim.

Here it will be helpful to revisit an analogy I often use. A bus drives from Denver to Salt Lake City.  What determines the path of the bus?  Is the path determined by the way the driver adjusts the steering wheel, or by the layout of the highway (combined with an assumption that the driver prefers to avoid going off the road?)  In this analogy, the bus driver is the Fed and the road is the natural rate of interest under a 2% inflation target.

Here language fails us.  It’s not clear what people mean when they ask what “determines” the path of the bus.  The driver or the road?

Tooze provides this helpful graph of short-term interest rates:

Why did interest rates rise during 1994?  One could argue that the increase was caused by the Fed’s decision to raise its short-term rate target. Or one could argue that the Fed raised its target rate because the natural rate of interest rose as the economy strengthened in the mid-1990s, and they had to raise rates to keep inflation close to 2%.  I find the latter explanation more useful.

If someone asked me to explain why I drove though Green River on my way from Denver to Salt Lake City, I would not explain this fact by referring to how I turned the steering wheel left and right at various times, I’d refer to the layout of I-70.  I’d assume the listener understood that I tried to stay on the road.

But that view is not always adequate.  If I plunged off the road and fell into a deep canyon, I would not explain that fact by pointing to the map, I’d point to my incompetence as a driver.  If I wanted to explain why the US end up with 13% inflation in 1980, I would not assume that actual short-term interest rates always followed the path of the natural rate of interest, rather I’d assume they were mistakenly held below the natural rate during the late 1970s.

The 1990s were a successful period for monetary policy, and thus it’s enough to point to the map—movements in the natural rate of interest.  We can infer from stable 2% inflation that the actual interest rate stayed pretty close to the natural interest rate during the 1990s.

HT:  Matt Yglesias


banco-central-argentina-300x196.jpg What is Modern Monetary Theory?

The term “modern” in Modern Monetary Theory (MMT) is probably not the best choice of words, since it implies there is something new in MMT. As many MMT critics point out, looking for something new in MMT is a pointless excercise. There is nothing new to be found. Paul Krugman,1 Lawrence H. Summers,2 and Kenneth Rogoff3 are three renowned economists who did not pull their punches when uating MMT. Still, the lack of novelty and the strong adverse reactions have not stopped MMT’s rising popularity, especially among progressive-leaning policymakers. How so?

To understand this situation, it is important first to clarify what MMT is and is not. At least as I understand this theory, the term “modern” in MMT does not refer to something new or novel but to the modern-world way of doing monetary policy. Namely, the term modern refers to the epoch that starts with the abandonment of the remaining remnants of the gold standard 1971. “Modern” refers to the full adoption of fiat money; it is not a reference to a new model or theory. We can agree that the adoption of fiat money is a gamechanger in policymaking but disagree on the implications of such monetary regime change.

The fact that central banks issue fiat money means they do not have any IOU obligation to redeem the banknotes into gold or any other asset. Therefore, if the government can issue debt denominated in its own currency, treasury bonds can be paid for with monetary expansion without any risk of default. Furthermore, there is no limit to how much debt the Treasury can issue. Consequently, there is no limit to how much government spending can increase. There is no inflation risk in monetizing the deficit. Because this country issues a world-reserve currency, its demand is unlimited.

This is, in a nutshell, MMT’s thesis. Suppose a country can issue debt denominated on its own currency. In that case, modern-world conditions mean that its government can increase its spending without any limit. MMT’s conclusion that money creation is a free lunch has been seriously questioned by the economic profession. MMT conclusions seem more magical4 than real. It is no wonder that progressive-leaning policymakers are fond of MMT. This theory promises that paying for large programs such as the Green New Deal is free of economic problems.

Nothing New Under the Sun I: The Model “If MMT is found confusing by a large audience of professional economists, as seems to be the case, then the problem is not with the audience but with MMT.”

One of MMT’s problem is its lack of clarity, especially when it comes to explaining why its bold predictions are consistent even if not self-evident and in contradiction with the profession at large. This lack of transparency makes it difficult to identify MMT’s uniqueness. One way to highlight MMT’s distinctiveness is to re-frame MMT in terms of standard economic models. By doing this, any difference between MMT and well-known models or theories should become apparent. So far, MMT has not provided that exercise. The point is not so much about having a mathematical model per se, but us about building one as a way to bring clarity and self-awareness to what MMT stands for. If MMT is found confusing by a large audience of professional economists, as seems to be the case, then the problem is not with the audience but with MMT.

As a matter of fact, we already have models and theories that offer the same predictions as MMT. Old Keynesian models, such as the IS-LM and the Keynesian cross, predict the possibility of an increase in aggregate demand without affecting the price level. These models reach this prediction by assuming the price level is constant (the price level is not part of the model) because of the large number of idle resources. MMT reaches the same prediction by assuming an infinite demand for money. Leaving the merits and demerits of these Keynesian models aside, MMT fails to offer a significant difference. Consider, for instance, what the assumption of an infinite demand for money implies for the MMT model. Assuming an infinite demand for money means that the price level is stable even if monetary expansion occurs under full employment.

Furthermore, the simple-Keynesian characteristic of MMT does not work in its favor. These models’ price level stability depend on very particular conditions, such as a large number of idle resources. However, as the economy approaches full employment, inflation is to be expected. When pushed regarding this situation, MMT advocates recognize that inflation can be a problem in the limit. In such a case, fiscal policy (taxes) should be used to bring inflation under control. This stepback makes MMT look just like simple Keynesian models with a new cover. The alternative is that MMT is a theory that holds the undefendable assumption that there is no resource scarcity.

MMT’s recognition that inflation may be a problem is not a minor detail. It means that MMT’s prediction is contingent on present economic conditions rather than on universal assumptions. However, recognizing this contingency provides a difference between the Keynesian episode of the 1930s and MMT. The Keynesian revolution occurred during the Great Depression, a time where the assumption of high unemployment was appropriate. It was also a time with smaller governments and lower levels of public debt than the levels we see today. MMT arose, however, in a context closer to full employment and already large governments with more debt on their shoulders.

It is the case that, in contrast to the time of Keynes’s General Theory, today central banks issue irredeemable fiat money. It does not follow, however, that the possibility of monetizing deficits is a free lunch. MMT’s conclusion does not follow from its own premises. If MMT conclusions were correct, we should expect to see inflation rates go down in countries that issue a world-reserve currency. Yet, we know this is not what happened. Countries like the United States have seen the inflation rate increase with fiat money adoption rather than fall.

MMT does not seem to offer anything significantly different than the simple Keynesian models. However, as problematic as they may be, the simple Keynesian models were developed by paying consideration to the economic conditions present at the time. MMT seems to assume unrealistic initial conditions. Even if theoretically consistent, the admission that inflation can be a problem means MMT is inapplicable in current times.

Nothing New Under the Sun II: The Political Economy of MMT

There is no mystery about the political appeal of MMT. This idea promises a way to do away with the price tag of large government projects such as the Green New Deal, free healthcare and education for everyone, or any type of full-employment program. MMT is a gospel5 for policymakers who favor big government plans. For them, MMT means there is no budget constraint. The limit is their own imagination and any opposition from other political parties. It should not be a surprise if this description sounds familiar. Once again, MMT offers a parallel to the Keynesian episode.

MMT is not only known for its bold predictions. It is also known for its confusing, opaque, and contradictory rhetoric.6 Anyone familiar with Keynes’ General Theory will probably remember how confusing, opaque, and contradictory it is. However, for policymakers, such semantic confusion proved to be an asset rather than a shortcoming. Keynes’ General Theory provided an ideal platform7 (or excuse) to embark on a big government project.

John Maynard Keynes, a renowned British Professor, discovered an obscure economic insight that justified the execution of large government programs. Keynes did not provide just theoretical support to large spending advocates; he also provided psychological support. The success of the Keynesian-view of the world was partly due to a combination of a moral mandate and the political convenience of embracing Keynes’ ideas. In the long-run we are all dead, Keynes famously said; it is therefore immoral to sit and wait for the free market to finally correct itself. The government has the capacity and the moral obligation to take over when the market fails.

Taking the high moral ground that the government ‘must do something’ during a crisis means the theoretical shortcoming of Keynes and MMT theories become less relevant. Because the moral argument takes precedence, those who oppose an extensive spending program or MMT insights must be either ideological blindfolded or protecting their own self-interest. James Galbraith’s recent defense8 of MMT is an example of this situation. Maybe the fact that an MMT defense must resort to this type of ad-hominem strategy9 is inidcative of its inconsistency problems. This is the rhetorical argument surrounding MMT policies. The government has a moral mandate to create jobs or save the environment. And MMT provides an eye-opening theoretical discovery that only those who can (or want to) understand it can see.

The field of Public Choice offers an extensive literature that explains how and why ill-designed policies get to be embraced by policymakers. It is a common feature in economic history that many well-established economic conclusions clash with policymakers’ ambitions. Avoiding minimum wages, adoptiong free trade and peaceful immigration, and low and simple taxes are only some examples of how far the political world is from basic economics. Maybe the rapid and enthusiastic embrace of progressive-leaning policymakers of MMT should be read as a warning sign rather than as a missed opportunity to embark on pharaonic projects.

Nothing New Under the Sun III: The Historical Evidence

Another salient feature of MMT is its speculative tone. MMT predicts what would happen under certain conditions if a specific policy is executed. Explaining what actually happened seems to be less relevant. This builds some tension between historical records and MMT’s predictions.

It seems futile to point out countries that suffer or have suffered inflation as proof of MMT inconsistencies. The reason is that these countries do not evince the conditions required for MMT to hold. That is, they either cannot issue debt on their own currency, or they do not issue a world-reserve currency. Take the case of Argentina, which has been suffering high inflation rates for more than a decade. Argentina cannot issue peso-denominated debt, and its currency has no demand in the rest of the world. It is not even a good store of value for Argentines. Argentina’s inflation does not offer conflicting evidence to MMT because the required pre-conditions are not present. And this is the situation for any country with high inflation. Suppose one were to contrast MMT with real-world experience. In that case, one will find that either inflation is present in countries that do not conform to MMT requirements or countries that do evince MMT requirements but do not put into practice MMT policies. Either way, there is no empirical challenge to MMT.

However, the lack of empirical evidence regarding MMT’s prediction changes significantly if we revise the previous paragraph’s question. Instead of asking if countries with high inflation contradict MMT predictions, we should ask if MMT is not the reason these countries are where they are today. By changing the focus of the question from present conditions to past policies, the historical record becomes more illuminating. These countries become economically troubled (high inflation and unable to issue debt on their own currency) by following what we can call “MMT ideas.” Latin America10 can be considered a continental-size experiment of the outcomes of MMT-inspired policies. Countries like Argentina11 are not a challenge to MMT because they suffer inflation if they print too much money, but because MMT-type policies are how they got to be in their current situation. The historical view is important to avoid a misreading of the empirical evidence. The experience of countries such as Argentina is relevant because they came to lose the MMT-requirements precisely by adopting MMT ideas.

Conclusions For more on these topics, see Gold Standard, by Michael D. Bordo, Concise Encyclopedia of Economics. See also Democracy in Deficit: The Political Legacy of Lord Keynes by James M. Buchanan and Richard E. Wagner, Library of Economics and Liberty; and the EconTalk podcast episode Steve Fazzari on Stimulus and Keynes.

MMT has been enthusiastically embraced in some corners of the political world. It will not be a surprise if its popularity increases in the short-term. MMT offers a convenient gospel and a rhetorical device for the big-spending programs favored by the new government administration.

The critical reaction to MMT from a broad spectrum of economists is not because this theory is complicated. It may seem that the economics profession has overreacted to MMT. After all, there is no clear theory nor novel insight to reply to. The reason for such a critical reaction is because, far from being a free lunch policy, adopting MMT would be playing with fire.12 As far as MMT increases in popularity, we may conclude the opposite, that the critical reaction was not strong enough. Paraphrasing George Selgin,13 MMT is too good to be true, though a very appealing doctrine for policymakers.


[1] Krugman, Paul (2019). “Running on MMT” (Wonkish). The New York Times. February 25th.

[2] Summer, Lawrence H. (2019). “The Left’s Embrace of Modern Monetary Theory is a Recipe for Disaster.” The Washington Post. April 4, 2019.

[3] Rogoff, Kenneth (2019). Modern Monetary Nonsense. Project Syndicate. March 4th.

[4] Cochrane, John (2020). Maginal Monetary Theory Full Review. The Grumpy Economist. July 5th.

[5] Lemieux, Pierre (N/A). MMT Gospel : Is This Time Different?. Library of Economics and Liberty, Feb. 3, 2020..

[6] Bisin, Alberto (2020). Book Reviews. Journal of Economic Literature 58 (4): 1197-1201.

[7] Buchanan, James M. and Richard E. Wagner (1977[2000]). The Collected Works of James M. Buchanan: Vol. 8 Democracy in Deficit. Library of Economics and Liberty. Indianapolis: Liberty Fund.

[8] Galbraith, James K. (2020). Who’s Afraid of MMT? Project Syndicate. December 23rd.

[9] Cachanosky, N. (2021) Galbraith Offers a Poor Defenseof MMT. American Institute for Economic Research. January 16, 2021.

[10] Edwards, Sebastian (2019). Modern Monetary Theory: Cautionary Tales from Latin America. Economic Working Paper 19106. Hoover Institution.

[11] Cachanosky, N. (2019). What Should Modern Monetary Theory Learn from Argentina? American Institute for Economic Research. March 27, 2019.

[12]Yang, Ethan (2020). Modern Monetary Theory is Playing with Fire. American Institute for Economic Research. August 8, 2020.

[13]Selgin, George (2019). “The Modern New Deal That’s Too Good to be True. “Alt-M: Ideas for an Alternative Monetary Future. February 8, 2019.

*Nicolás Cachanosky is an Associate Professor of Economics at Metropolitan State University of Denver (MSU Denver) Department of Economics, Senior Fellow at the American Institute of Economic Research (AIER), and co-editor of LIBERTAS: Segunda Época.

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