Change, demographic and intellectual

 New post over at grumpy-economist.com substack

Pro Dollarization

With President Milei's election in Argentina, dollarization is suddenly on the table. I'm for it. Here's why. 

Electric vehicles, carbon taxes, supply and demand, virtue signals, and China

If you have not been paying attention, our government has decided that all electric vehicles are the solution to the climate problem. At least as long as they are made in the US with union labor and benefits. California has committed to banning the sale of anything else. In today's post, a few tidbits from my daily WSJ reading on the subject. 

From Holman Jenkins on electric cars:  

If the goal were to reduce emissions, the world would impose a carbon tax. Then what kind of EVs would we get? Not Teslas but hybrids like Toyota’s Prius. “A wheelbarrow full of rare earths and lithium can power either one [battery-powered car] or over 90 hybrids, but, uh, that fact seems to be lost on policymakers,” a California dealer recently emailed me.

[Note: that wheelbarrow of rare earths comes from multiple truckloads of actual rocks. Also see original for links.] 

...The same battery minerals in one Tesla can theoretically supply 37 times as much emissions reduction when distributed over a fleet of Priuses.

We're all supply siders now -- Summers and Poilievre

Larry Summers wrote an interesting oped at the Washington Post. Mostly, he still is of the adaptive-expectations ISLM view that interest rates must exceed current inflation before inflation will decline. (The issue here (blogpost) and here (paper).) But listen to this:

Questions of macroeconomic policy are not about values but judgments about the ultimate effects of various actions. As Fed chair during the early 1980s, Paul Volcker famously tamed out-of-control inflation at the cost of a severe recession. But he did so not because he cared less about unemployment or worker incomes than his predecessors did but because he rightly recognized that delay in containing inflation would only mean more pain down the road.

Would we all recognize common goals, but differences on cause and effect to get there.  

That’s why it’s vital that the Federal Reserve not waver. Chair Jerome H. Powell has vowed to impose sufficiently restrictive monetary policy to return inflation to within range of the Fed’s 2 percent target. The more confident that workers, businesses and markets are that the Fed will follow through on that, the less painful the process will be.

Within the conventional monetary policy community, praise for Volcker and the view, basically, that the Fed should focus on inflation and the labor market will take care of itself is sensible, but remarkably Reaganish. 

The tidbit that I found most interesting

Finally, the crisis of inflation should not be wasted. A bright spot in the dismal inflation period of the 1970s was the collaboration of Stephen G. Breyer (then counsel to the Senate Judiciary Committee), Sen. Edward M. Kennedy (D-Mass.) and the Carter administration on airline deregulation. In this era, high inflation should be a spur to regulatory changes — from addressing Jones Act increases in shipping costs, to strategic tariffs, to rules that force oil and gas to be transported via truck rather than pipeline, to punitive zoning restrictions — that will both reduce prices and make the economy work better.

As you know I've been preaching that "supply side" growth is the central problem and also the key to reducing inflation. Larry hasn't quite gotten to the latter, but this is the economist most identified with "secular stagnation," "hysteresis" and the view that all we need to do is borrow or print more money and hand it out to create growth. Now deregulation and the supply side is the key to growth. 

Larry is starting to sound like a Reagan Republican!  I'm sure he would say circumstances have changed -- that was ZLB (zero lower bound on interest rates), this is inflation. That's a consistent view. But inflation should wake us all up as it has Larry: All the old verities are over, there is only supply now, and that comes mostly from getting out of the way, as Larry recommends, not new "investments" of more borrowed money thrown down ratholes. 

*** 

Pierre Poilievre, the leader of Canada's Conservative party, wrote a great Oped in the National Post. Now that Liz Truss has imploded, perhaps Poilievre will become the international hope for a successful free market libertarian politician. 

Finance Minister Chrystia Freeland wants us to believe she has had an epiphany. After years of ignoring my warnings that Liberal deficit spending would cause inflation to balloon, followed by interest rates, she now claims to agree with me in a leaked letter to fellow ministers. Even her boss, Prime Minister Justin Trudeau, is uttering words unthinkable to him not long ago: “fiscal responsibility.”

The cost of government is driving up the cost of living. A half-trillion dollars of inflationary deficits have sent more dollars chasing fewer goods, which always leads to higher prices. 

We're all FTPLers (fiscal theory of the price level) now, some sooner than others. A clear explanation of how central banks create money and buy treasury debt follows. Then

 the Bank of Canada must pay interest — at the going rate. Because rates are now rising, the central bank is now losing money and will need a bailout from the federal government for the first time in history — something I predicted would happen two years ago. 

Fiscal constraints on monetary policy. Nice. 

Liberals like to say that all this inflation is the result of the Russian invasion of Ukraine. But less than 0.3 per cent of Canada’s trade is with those two countries, and the things that they produce are things we already have — food and energy. In fact, the higher commodity prices should have helped our resource-heavy economy, but for the fact that the Trudeau government has hit farmers with fertilizer tariffs and carbon taxes and blocked or bungled every single pipeline or LNG export terminal proposed in seven years.

Beside my thread, but an important point. His bottom line 

Instead of creating more cash, we need our economy to produce more of what cash buys: more food, energy and homes. That means removing gatekeepers that have made Canada the second slowest country in all the OECD to get a building permit. As prime minister I would challenge all three levels of government to work together to offer the fastest building permits in the OECD. This would mean going from 250 days to 28 days to beat the now first-placed South Korea....We would remove taxes and tariffs on farmers’ fuel and fertilizer....Finally, we would reform our taxes to reward work, savings, and investment so our workers and businesses can produce more of the goods we need. 

Simply put, we would stop creating cash and start creating more of what cash buys: food, homes, energy, manufactured goods and more. That is the only path to bigger buying power for paycheques and savings.

FTPL and deregulation-focused supply side growth. Well, us free market libertarians are like Chicago Cubs fans, there's always hope!

Truss Tragedy

(at Project Syndicate)

The Liz Truss Tragedy

The former British prime minister’s downfall holds important lessons for growth-minded policymakers in the United States, Europe, and elsewhere. While her diagnosis of the country’s economic problem was spot on, she fatally mismanaged both the politics and the messaging of her policy response.

STANFORD – Liz Truss’s stint as British prime minister is over, but she was right that the United Kingdom needs growth. Her downfall is tragic, because growth is the only path out of the country’s economic dilemma. 

The UK is surprisingly poor. Its GDP per capita is just $43,000, compared to $60,000 in the United States. The average British home is one-third the size of the average US home. Worse, the country’s economy is not growing. Its GDP per capita is lower than it was in 2007. Productivity – the underlying source of economic growth – has been flat for over a decade. 

The UK desperately needs supply-side reforms. Surging inflation tells us that demand-side stimulus is a spent force. 

Gramm, Early and the Unfixable Problem

Phil Gramm and John Early have a new WSJ oped, based on their smashing new book. Both are based on an astounding fact: The numbers used by the Census Bureau, and countless following researchers, to define income inequality and poverty do not include taxes, which reduce income of the rich, and transfers, which increase income of the poor. The latter, obviously, matters to just how many Americans fall in the Census Bureau's definition of poverty.

Specifically, in the oped, the new refundable tax credit cannot, by arithmetic, do anything to alleviate measured child poverty because 

"the income numbers used to calculate the official poverty rates don’t count refundable tax credits as income to the recipients. "

This is wonderful for advocates of ever larger transfer programs, as it creates a problem that can never be measured to be fixed! 

The more general issue 

The Census Bureau fails to count two-thirds of all government transfer payments to households in the income numbers it uses to calculate not only poverty levels but also income inequality and income growth. In addition to not counting refundable tax credits, which are paid by checks from the U.S. Treasury, the official Census Bureau measure doesn’t count food stamps, Medicaid, the Children’s Health Insurance Program, rent subsidies, energy subsidies and health-insurance subsidies under the Affordable Care Act. In total, benefits provided in more than 100 other federal, state and local transfer payments aren’t counted by the Census Bureau as income to the recipients

The book goes on to show how this startling omission overturns just about everything you've heard from the hyperventilating classes about income inequality. Granted, spending zillions on rotten health insurance that people value much less than a dollar per dollar is not quite the same as cash, but there are lots of cash or cash equivalent transfers in there. 

A question I do not know the answer to: Do means-tested programs count as "income" the transfers from other means-tested programs? If a program is only available to, say, those with less than $50,000 per year income, does that figure include any other means-tested programs?  Even the ones that send cash, rather than in-kind transfers such as rent, energy, and health insurance subsidies? I suspect largely no. If not, the incentives for means-tested programs are far worse than even they appear. Facts welcome.

One might easily respond that ok, but evil capitalism created wider pre-tax pre-transfer inequality, and only by the grace of larger and larger transfers has some measure of stability been restored. Well, which is the cause and which is the effect -- wider pre-tax pre-transfer inequality, or the large expansion of means-tested programs, all of which add to the stupendous marginal tax rates facing Americans with less opportunity? The book goes on to argue convincingly the latter. I'll cover that later. Noting here, they anticipate the argument. 

China game theory

In the last Goodfellows, we batted around the question of how China would respond to Nancy Pelosi's visit. 

In this context, news just came in, announcing responses that we had not thought of: China is giving the US a big middle finger on climate. The announcement, from the Ministry of Foreign affairs, is short and clear: 

In disregard of China’s strong opposition and serious representations, Speaker of the U.S. House of Representatives Nancy Pelosi visited China’s Taiwan region. On 5 August, the Ministry of Foreign Affairs announced the following countermeasures in response:

1.Canceling China-U.S. Theater Commanders Talk.

2.Canceling China-U.S. Defense Policy Coordination Talks (DPCT).

3.Canceling China-U.S. Military Maritime Consultative Agreement (MMCA) meetings.

4.Suspending China-U.S. cooperation on the repatriation of illegal immigrants.

5.Suspending China-U.S. cooperation on legal assistance in criminal matters.

6.Suspending China-U.S. cooperation against transnational crimes.

7.Suspending China-U.S. counternarcotics cooperation.

8.Suspending China-U.S. talks on climate change.

My emphasis. Slip the knife in at the end. (The others are also interesting.) 

Regulatory capture: trucking edition

Dominic Pino has a lovely National Review article on Mexican trucks. Watch the sausage in the making. Excerpts with commentary

Congress banned Mexican truckers from entering the U.S. in 1982. NAFTA, which came into effect in 1994, committed the U.S. to removing that restriction by 2000.

1994 was 28 years ago.  

The U.S. left the restriction in place anyway, and was found to be in violation of the agreement in 2001... The Bush administration said it would remove the restriction.

But organized labor and environmental groups...sued to keep the restriction in place. The environmentalists claimed that Mexican trucks did not meet American safety and environmental regulations. The Teamsters and other unions had an obvious motive: keeping out the competition....

In 2004.. the Supreme Court ruled against the environmentalists and unions and said that the Bush administration could remove the restriction and bring the U.S. in line with its obligations under NAFTA. Clarence Thomas wrote for the unanimous court.

Unanimous.

Inflation and the end of illusions.

An oped at Project Syndicate

Inflation’s return marks a tipping point. Demand has hit the brick wall of supply. Our economies are now producing all that they can. Moreover, this inflation is clearly rooted in excessively expansive fiscal policies. While supply shocks can raise the price of one thing relative to others, they do not raise all prices and wages together. 

A lot of wishful thinking will have to be abandoned, starting with the idea that governments can borrow or print as much money as they need to spray at every problem. Government spending must now come from current tax revenues or from credible future tax revenues, to support non-inflationary borrowing. 

Stimulus spending for its own sake is over. Governments must start spending wisely. Spending to “create jobs” is nonsense when there is a widespread labor shortage. 

Unfortunately, many governments are responding to inflation by borrowing or printing even more money to subsidize energy, housing, childcare, and other costs, or to hand out more money to cushion the blow from inflation – for example, by forgiving student loans. These policies will lead to even more inflation. 

Time for Supply

At Project Syndicate essay, with Jon Hartley. It's not the first, and it won't be the last on the issue! 

Now that surging inflation has refocused everyone's attention on the long-ignored supply side of the economy, the question is how best to support broad-based growth, efficiency, and innovation. The answer is not necessarily deregulation, but the need for smarter regulation is increasingly apparent – even to progressives.

STANFORD – The return of inflation is an economic cold shower. Governments can no longer hope to solve problems by throwing money at them. Economic policy must now turn its attention to supply and its cousin, economic efficiency. 

The issue is deeper than delayed goods deliveries and a year’s worth of sharp price increases. From the end of World War II to 2000, US real (inflation-adjusted) GDP per capita grew 2.3% per year, from $14,171 to $44,177 (in 2012 dollars). Americans became healthier, lived longer, reduced poverty, and paid for a much cleaner environment and a vast array of social programs. But since 2000, that post-war growth rate has fallen almost by half, to 1.4% per year. And it’s worse in Canada and Europe, where many countries have not grown at all since 2010 on a per capita basis. 

Nothing matters more for human flourishing than long-term economic growth. So, no economic trend is more worrisome than growth falling by half, especially for the well-being of the less fortunate. 

The eruption of inflation settles a long debate. Sclerotic growth is not the result of demand-side “secular stagnation,” fixable only with massive fiscal and monetary stimulus. Sclerotic growth is a supply problem. We need policies to increase the economy’s productive capacity – either directly or by reducing costs. 

How? The simplest and most important thing governments can do is to get out of the way. Byzantine regulations and capricious regulatory authorities stymie business. We do not need thoughtless deregulation, but rather smarter regulation that is simple, effective, avoids disincentives and unintended consequences, and is not distorted to protect current business and prop up regulatory empires. That means adding sunset clauses to regulations, regularly re-evaluating existing measures, and instituting a right to external appeal. 

Institute for progress

We need to be reminded occasionally that nothing matters but long-run growth, and long-run growth all comes from productivity, better knowledge of how to better serve human needs and desires.  Yet economic policy is almost all not about growth, but rather about redistribution, and in particular propping up old ways of doing things and the rents associated with them. 

Courtesy Marginal Revolution, the Institute for Progress is a noteworthy new effort to produce growth-oriented policy. Institutions are important, to spread the word and create a constituency for tending the golden goose. 

..productivity growth has been in long-term decline since the 1970s. This is supposed to be the age of ambitious infrastructure investments in the battle to fight climate change, but we can’t even build new solar plants without being vetoed by conservation groups. Hyperloops and supersonic airplanes promise to revolutionize transportation, but building a simple subway extension in NYC costs up to 15 times more per kilometer than it does in other cities around the world. ...The pace of scientific progress has been slowing.... 

(Here and elsewhere see the original for links.) Why? 

Over the last 50 years, we’ve increased the number of veto points at nearly every governmental level, failed to invest in state capacity, and raised the stakes of the debate through polarization. So it perhaps shouldn’t be a surprise that the federal government that went to the moon in 1969 botched production of simple diagnostic tests during a once-in-a-century pandemic.

But the potential is there. Maybe we are not running out of ideas after all, but merely on the edge of technical revolutions, like changing from rail to airplanes:    

...there are genuinely exciting — potentially game-changing — discoveries on the horizon. 

Supply

The Revenge of Supply, at Project Syndicate

Surging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return your calls – economic orthodoxy has just run smack into a wall of reality called “supply.” 

Demand matters too, of course. If people wanted to buy half as much as they do, today’s bottlenecks and shortages would not be happening. But the US Federal Reserve and Treasury have printed trillions of new dollars and sent checks to just about every American. Inflation should not have been terribly hard to foresee; and yet it has caught the Fed completely by surprise. 

The Fed’s excuse is that the supply shocks are transient symptoms of pent-up demand. But the Fed’s job is – or at least should be – to calibrate how much supply the economy can offer, and then adjust demand to that level and no more. Being surprised by a supply issue is like the Army being surprised by an invasion. 

The current crunch should change ideas. Renewed respect may come to the real-business-cycle school, which focuses precisely on supply constraints and warns against death by a thousand cuts from supply inefficiencies. Arthur Laffer, whose eponymous curve announced that lower marginal tax rates stimulate growth, ought to be chuckling at the record-breaking revenues that corporate taxes are bringing in this year. 

Equally, one hopes that we will hear no more from Modern Monetary Theory, whose proponents advocate that the government print money and send it to people. They proclaimed that inflation would not follow, because, as Stephanie Kelton puts it in The Deficit Myth, “there is always slack” in our economy. It is hard to ask for a clearer test. 

But the US shouldn’t be in a supply crunch. Real (inflation-adjusted) per capita US GDP just barely passed its pre-pandemic level this last quarter, and overall employment is still five million below its previous peak. Why is the supply capacity of the US economy so low? Evidently, there is a lot of sand in the gears. Consequently, the economic-policy task has been upended – or, rather, reoriented to where it should have been all along: focused on reducing supply-side inefficiencies. 

One underlying problem today is the intersection of labor shortages and Americans who are not even looking for jobs. Although there are more than ten million listed job openings – three million more than the pre-pandemic peak – only six million people are looking for work. All told, the number of people working or looking for work has fallen by three million, from a steady 63% of the working-age population to just 61.6%. 

We know two things about human behavior: First, if people have more money, they work less. Lottery winners tend to quit their jobs. Second, if the rewards of working are greater, people work more. Our current policies offer a double whammy: more money, but much of it will be taken away if one works. Last summer, it became clear to everyone that people receiving more benefits while unemployed than they would earn from working would not return to the labor market. That problem remains with us and is getting worse. 

Remember when commentators warned a few years ago that we would need to send basic-income checks to truck drivers whose jobs would soon be eliminated by artificial intelligence? Well, we started sending people checks, and now we are surprised to find that there is a truck driver shortage. 

Practically every policy on the current agenda compounds this disincentive, adding to the supply constraints. Consider childcare as one tiny example among thousands. Childcare costs have been proclaimed the latest “crisis,” and the “Build Back Better” bill proposes a new open-ended entitlement. Yes, entitlement: “every family who applies for assistance … shall be offered child care assistance” no matter the cost. 

The bill explodes costs and disincentives. It stipulates that childcare workers must be paid at least as much as elementary school teachers ($63,930), rather than the current average ($25,510). Providers must be licensed. Families pay a fixed and rising fraction of family income. If families earn more money, benefits are reduced. If a couple marries, they pay a higher rate, based on combined income. With payments proclaimed as a fraction of income and the government picking up the rest, either prices will explode or price controls must swiftly follow. Adding to the absurdity, the proposed legislation requires states to implement a “tiered system” of “quality,” but grants everyone the right to a top-tier placement. And this is just one tiny element of a huge bill. 

Or consider climate policy, which is heading for a rude awakening this winter. This, too, was foreseeable. The current policy focus is on killing off fossil-fuel supply before reliable alternatives are ready at scale. Quiz: If you reduce supply, do prices go up or go down? Europeans facing surging energy prices this fall have just found out. 

In the United States, policymakers have devised a “whole-of-government” approach to strangle fossil fuels, while repeating the mantra that “climate risk” is threatening fossil-fuel companies with bankruptcy due to low prices. We shall see if the facts shame anyone here. Pleading for OPEC and Russia to open the spigots that we have closed will only go so far. 

Last week, the International Energy Agency declared that current climate pledges will “create” 13 million new jobs, and that this figure would double in a “Net-Zero Scenario.” But we’re in a labor shortage. If you can’t hire truckers to unload ships, where are these 13 million new workers going to come from, and who is going to do the jobs that they were previously doing? Sooner or later, we have to realize it’s not 1933 anymore, and using more workers to provide the same energy is a cost, not a benefit. 

It is time to unlock the supply shackles that our governments have created. Government policy prevents people from building more housing. Occupational licenses reduce supply. Labor legislation reduces supply and opportunity, for example, laws requiring that Uber drivers be categorized as employees rather than independent contractors. The infrastructure problem is not money, it is that law and regulation have made infrastructure absurdly expensive, if it can be built at all. Subways now cost more than a billion dollars per mile. Contracting rules, mandates to pay union wages, “buy American” provisions, and suits filed under environmental pretexts gum up the works and reduce supply. We bemoan a labor shortage, yet thousands of would-be immigrants are desperate to come to our shores to work, pay taxes, and get our economy going. 

A supply crunch with inflation is a great wake-up call. Supply, and efficiency, must now top our economic-policy priorities.

*********

Update: I am vaguely aware of many regulations causing port bottlenecks, including union work rules, rules against trucks parking and idling, overtime rules, and so on. But it turns out a crucial bottleneck in the port of LA is... Zoning laws! By zoning law you're not allowed to stack empty containers more than two high, so there is nowhere to leave them but on the truck, which then can't take a full container. The tweet thread is really interesting for suggesting the ports are at a standstill, bottled up FUBARed and SNAFUed, not running full steam but just can't handle the goods. 

Disclaimer: To my economist friends, yes, using the word "supply" here is not really accurate. "Aggregate supply" is different from the supply of an individual good. Supply of one good increases when its price rises relative to other prices. "Aggregate supply" is the supply of all goods when prices and wages rise together, a much trickier and different concept. What I mean, of course, is something like "the amount produced by the general equilibrium functioning of the economy, supply and demand, in the absence of whatever frictions we call low 'aggregate demand', but as reduced by taxes, regulations, and other market distortions." That being too much of a mouthful, and popular writing using the word "supply" and "supply-side" for this concept, I did not try to bend language towards something more accurate. 

How much does climate change actually affect GDP? Part I: An illogical question.

How much does climate change* actually affect GDP? How much will currently-envisioned climate policies reduce that damage, and thereby raise GDP? As we prepare to spend trillions and trillions of dollars on climate change, this certainly seems like the important question that economists should have good answers for. I'm looking in to what anyone actually knows about these questions. The answer is surprisingly little, and it seems a ripe area for research. This post begins a series.  

I haven't gotten deep in this issue before, because of a set of overriding facts and logical problems. I don't see how these will change, but the question frames my investigation. 

An illogical question

The economic effects of climate change are dwarfed by growth. 

Take even worst-case estimates that climate change will lower GDP by 5-10% in the year 2100. Compared to growth, that's couch change. At our current tragically low 2% per year, without even compounding (or in logs), GDP in 2100 will be 160% greater than now. Climate change will make 2100 be as terrible as... 2095 would otherwise be.  If we could boost growth to 3% per year, GDP in 2100 will be 240% greater than now, an extra 80 percentage points.  8% in 80 years is one tenth of a percent per year growth. That's tiny.  

In the 72 years since 1947, US GDP per capita grew from $14,000 to $57,000 in real terms, a 400% increase, and real GDP itself grew from $2,027 T to $19,086 T, a 900% increase. Just returning to the 1945-2000 growth rate would dwarf the effects of climate change and the GDP-increasing effects of climate policy. 

Comparing the US and Europe, Europe is about 40% below the US in GDP Per Capita, and the the US is about 60% above Europe. So Europe's institutions do on the order of 5-10 times more damage to GDP than climate change.    

Residential zoning alone costs something like 10-20% of GDP, by keeping people away from high productivity jobs. Abandoning migration restrictions could as much as double world GDP (also here). 

It is often said that climate change will hit different countries differentially, and poor countries more, so it's an "equity" issue as much as a rich-country GDP issue. Yet just since 1990, China's GDP Per Capita has grown 1,100%, from $729 to $8405 (World bank). As the world got hotter. 1,100% is a lot more than 10%. We'll look at poor country GDP climate effects, but from what I've seen so far, reducing carbon doesn't get 1,100% gains. 

Eurosclerosis update

 

All pre-covid. European GDP per capita fell in the decade following the financial crisis. US growth was nothing to write home about, but things could be worse. The we-should-be-more-like-Europe crowd has some explaining to do. (The Word Bank's software misplaced the UK label; it is the red line on the top of the European group.) From the World Bank, HT Marginal Revolution.

The graph is in dollars, so part of the effect is that the dollar got more valuable relative to the euro. (Thanks to the commenters who noticed that I misread the graph caption. Blog post now fixed to reflect that.) 

Update

A correspondent sends along the following graph from IMF data. IMF data uses PPP adjustments, not straight conversion to dollars. So the exchange rate really is an issue in comparing US to EU growth.  

Relative inflation has not been that different between the two countries. 

At least by these measures, EU inflation has been only very slightly less than US inflation 

So indeed, the exchange rate is the major part of the difference between the two graphs. Whether PPP or actual exchange rates are "right" for this purpose I leave for another day. Certainly the average American's ability to buy European goods has risen relative to the average European's ability to buy American goods. Why exchange rates diverge so long from PPP measures remains, I think, a central puzzle. But thanks to blog readers for quickly pointing out that the Marginal Revolution graph isn't as immediately relevant as it seemed. 

Ip on Bidenomics

Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all. 

There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy. 

There used to be 

"certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work."

By contrast President Biden's (really his team's) "embrace of bigger government" is founded on different economic ideas. To wit, abridged: 

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. ...faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason.. said, that “‘depression economics’ applies basically all of the time.”

I guess I'm an old fogie. 

San Francisco bans affordable housing

"San Francisco bans affordable housing," is the spot-on conclusion of a lovely post by Vadim Graboys (link to twitter). 

The post is titled "54% of San Francisco homes are in buildings that would be illegal to build today" with an interactive graph of those homes. 

Or, put another way, "To comply with today's [zoning] laws, 130,748 homes would have to be destroyed, evicting around 310,000 people."

The latter statistic is fun, but actually severely understates the damage of San Francisco's (and Palo Alto's!) zoning laws. The only reason current homes are illegal is that they were built under slightly less restrictive zoning laws. So that measures how much zoning laws have gotten stricter over time. It does not measure the much larger number of homes and apartments that were never built.

A conversation with Tyler Cowen

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here  and embed below 

Update:

My comments on efficient markets and active management provoked a lot of email. 

I mentioned Jonathan Berk, and should have mentioned his coauthors Rick Green and Jules Van Binsbergen, on how active management can persist even though investors don't make any money on it. The basic idea is really clever:  A manager has 5% alpha skill on $10 milllion, i.e. he can earn $500k, but the skill does not scale. So he earns 5%, charges 1% fee, investors get 4%.  Investors see his great performance and rush in.  Now he has $50 million assets under management. He still earns $500k. He charges 1% fee, and investors get zero alpha. It’s equilibrium – if investors leave,  alpha to investors goes up again, and they return. Investors are earning the same zero alpha they get on the index so why not. And that’s about what we see. Fees persist in equilibrium, fees are equal to alpha on average, alpha post fees are about zero, flows follow performance. The seminal paper is "Mutual Fund Flows and Performance in Rational Markets" Jonathan B. Berk, Richard C. Green  Journal of Political Economy 2004  112 1269-1295 and a series following, here . It's not a perfect theory, but the glass is nearer full than empty, and it's a lovely supply and demand starting place to understand an industry that persists for decades. 

More generally, the average fund earns no alpha, almost guaranteed by free entry. The trouble is distinguishing the good ones from the bad ones, on ex-ante characteristics. The filters used by academics are pretty weak -- past returns, ratings, education of principals etc. On the other hand, now we just move it all up to the meta-game. Picking managers is no different than picking stocks. Skill on skill, alpha on alpha, fees on fees...

GoodFellows interview with Ayaan Hrsi Ali

I learned a lot. The book is very interesting. Direct link in case the following embeds don't work.

 

 

Europe productivity -- and US too

 

 Source Stephan Schubert

Source: Chad Jones "straight out of the Penn World Tables, and I first learned about it from Lee Ohanian and Jesus Fernandez-Villaverde"

In the top graph you get the impression that German and French workers are using up to date technology, including both machines, firm organization,  opportunities to trade in a wide market, etc. but that they simply choose to, are incented to, or forced to work fewer hours than US workers. Italy and UK are still plodding along 20% or so inside the frontier.

The bottom graph points a bleaker picture. I'm not an expert, but if labor productivity is high and total productivity is low, that means that the productivity of other inputs must be atrocious.  Chad (amazing expert on all things growth) "It is stunning to me that Spain and Italy have had negative TFP growth for 20 years." 

I remember when real business cycles came out, and many were incredulous at the idea of negative productivity shocks. How can you forget how to do things? Well, maybe not for business cycles, but a society clearly can forget, and retrench. For centuries, remember, Italians looked up in wonder at the cupola of the Pantheon, the arches of the dry aqueducts, and wondered how they had been built. 

Source: Eli Dourado.  

Before you get all "go USA", let us not forget the largest economic disaster of our own times. These are all relative to the US. How is the US doing? Productivity slowed down suddenly, sharply, and it seems permanently around 2000. 

In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.  Economic policy should have one central goal -- get productivity growing again, or (in my view) get out of the way of its growth. This is the one little hope that has not been let out of the policy Pandora's box, focused on everything else right now. 

Update: 

John Fernald and Bing Wang date the recent slowdown at 2003. The end of the first tech boom has something to do with it -- but why hasn't the second tech boom shown up in more productivity? 

Ed Prescott's famous Ely Lecture* looked at US vs. France and concluded high marginal tax rates reduced French working hours. 

Many commenters chalk it up to culture and a preference for leisure. I'm old enough to remember when French people worked Saturday mornings and chuckled at the lazy English who took the whole weekend off. An important work of social science on this question here.  

An excellent Vox Post by Fadi Hassan and Gianmarco Ottaviano on Italian productivity. Too much investment in the wrong places, not enough computers. I speculate also too-small companies. Labor laws, regulations and taxes make it desirable to stay small, private, family-run -- and thus local, non-financialized. 

*BTW, looking up the citation, I learned that the AEA canceled Ely of the Ely lecture, and renamed the lecture series. 

The puzzle of Europe

Here are two unsettling slides I made for a talk. Here is GDP per capita in US, UK, France and Italy and China (2020 dollars, source world bank) 

To make the comparison easier, here is each country not including China, divided by the US: 

Here are the 2019 numbers (in 2019 dollars, again World Bank) US: $65,297. UK $42,330. That's 35% less than the US. Or, the US is  54% better off than the UK.. France: $40,494. Italy: $33,228 That's 50% less than US. Or the US is 96% better off than Italy.  China: $20,261.

And it's been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy... Once noticeably better off than the UK, and contending with France, Italy's GDP per capita is now lower than it was in 2000. 

GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it's getting worse. 

What the heck happened? It could happen here too. Maybe it already has, just not as bad. 

This should be profoundly unsettling for economists.  Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world's biggest free trade zone really is a striking fact to gnaw on. 

Sure, other things are not held constant. Perhaps what should have been the world's biggest free trade zone became the world's biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, "it would have been even worse" is a hard argument to make. 

Economists haven't been talking about Eurosclerosis for a while but I think we should. 

These are huge numbers. The worst estimates of climate change are 7% of GDP in 2100. And those are surely overstated (see the excellent new paper by José Luis Cruz and Estban Rossi-Hansberg) You may admire the NHS for saving money, but even if the 20% of GDP we spend on health care is totally wasted, we're still ahead.  Lots of people admire the European model. Just how far Europe is behind the US is remarkable -- and getting worse. 

(Follow up post on productivity)