Correlation and causation

Bryan Caplan has a new post where he claims that people can avoid poverty with three simple steps:


1. Finish high school.


3. Get married before you have children.

This made me wonder if Bryan was confusing correlation with causation.  He denies this:


I am not at all convinced by this argument.  Indeed I don’t see any real argument being made here.  It seems equally plausible to me that the sort of person who doesn’t finish high school is different, on average, from those who do.  The dropout may (on average) be less smart, less interested in classes, less motivated, and/or perhaps a bit anti-social.  None of those traits are normally associated with financial success.  If you put a gun to their heads and forced this cohort to finish high school, would that by itself change those personal characteristics?  Maybe slightly, but how much?  Would this group then become identical to other high school grads?  I doubt it.

As for marriage, the Nordic countries tend to have a much higher share of births out of wedlock, and yet typically have relatively low rates of poverty:

You might argue that their culture is different, and that in Scandinavia even unmarried men often take an interest in raising their children.  I accept that, but again it just makes me wonder if it’s marriage that is the key, or if the deciding factor is the personal characteristics of those who fall into poverty.

I certainly agree that working hard and being responsible are useful traits, and that some people are poor due to unfortunate life choices.  I would push back, however, against any suggestion that there are simple public policy fixes, such as policies that discourage people from dropping out of high school or encouraging marriage.  Those policies might work, but simple correlations don’t prove that.  (BTW, I lean toward policies that make work more attractive, such as low wage subsidies and housing deregulation, as opposed to basic income programs that might discourage work.)

Also keep in mind that definitions of poverty are based on “households”, where the poverty line increases only modestly each time a person is added to a household.  Thus if two single people making $10,000 each decide to double up and live in the same apartment, that pushes them above the poverty line.  It’s not obvious their situation improved (otherwise no one would ever chose to live alone), but the US government treats the decision to share an apartment as an improvement of living standards.  This biases the statistics toward the conclusion that marriage improves one’s economic well being.

Thus you might just as well argue that poverty could be almost eliminated if everyone lived like Chinese college students in the 1980s, with eight people per apartment.

Even with minimum wage jobs, a household of eight will earn far more than $47,650.  But would those “households” be better off, or would people get on each other’s nerves?  (My wife shared a room with 7 other college students in the 1980s, in Beijing.)

Finally, most women have a strong preference to have children.  Finding a suitable husband is not always a “simple” process.


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From UBI to Anomia

AEI’s Nicholas Eberstadt and Evan Ambramsky have eye-opening answers to a jarring question straight out of Richard Scarry: What do jobless men do all day?  Background:

Thanks to the American Time Use Survey (ATUS) from the Bureau of Labor Statistics, we have detailed, self-reported information each year on how roughly 10,000 adult respondents spend their days—from the moment they wake until they sleep.1 These surveyed Americans include prime-age men who are not in labor force (or “NILF” to social scientists), ordinarily in their peak employment years, who are neither working nor looking for work. By examining the self-reported patterns of daily life of these grown men who do not have and are not seeking jobs, we may gain insights into the work-free existence that some UBI advocates hold to be a positive end in its own right.

Immediate answers:

NILF men report much less paid work than their peers—an average of just 12 minutes per day, nearly six hours a day less than employed men, and almost five hours a day less than employed women, but also close to an hour a day less than unemployed men. Perhaps more surprisingly, their time freed from work is not repurposed into helping out around the home, such as doing housework, cooking, and other tasks of home maintenance. In fact, they devote significantly less time to such home chores than unemployed men—less, too, than women with jobs. NILF men also spend much less time helping to care for other household members than working women—less time, as well, than unemployed men.

Apart from work, by far the biggest difference between the daily schedules of NILF men and everyone else comes in what the ATUS calls “socializing, relaxing, and leisure,” a category that encompasses a range of activities, from listening to music to visiting a museum to attending a party. On average, prime-age NILF men spend almost seven and a half hours a day in such diversions—over four hours a day more than working women, nearly four hours a day more than working men, and over an hour more than jobless men looking for work.


NILF turns out to be a catch-all category that merges two very different populations. One of them is adult students, out of the labor force for training to improve their job prospects upon return. The other is a group British parlance calls “NEET”—an acronym for “neither employed nor in education or training.” The NEETs are in effect complete labor force dropouts. And in contemporary America, the overwhelming majority of prime-age male NILFs are NEETs: in the years 2015-19, according to Census Bureau data, fewer than one in six NILFs was an adult student. In the lead-up to the COVID pandemic, this meant one in 10 prime-age men was neither working, nor looking for work, nor seeking the skills that might help them return to the workforce.

If we disaggregate prime-age NILFs into NEETs and adult students, two strikingly different ways of life are revealed.


On the one hand, adult students reportedly spend an average of nearly six hours a day on their education or training—and since those averages include weekends and holidays, these men are committing over 2,100 hours a year to their schooling. The converse of such motivation is an unusually low involvement in “socializing, relaxing, and leisure”—distinctly less than for working men, though not as little as for prime-age working women, a notoriously “leisure-poor” population.

On the other hand, self-identified prime-age NEET men spend about seven and a half hours a day in “leisure activities.” That works out to about 2,700 hours a year—almost 1,600 hours a year more than working women, nearly 1,400 hours a year more than working men, and remarkably enough, over 450 hours a year more than unemployed men.

The deeper patterns:

The overwhelming majority of this “leisure” is screen time: television, internet, DVDs, and all the rest. NEET men reported an average of over five hours a day in front of screens—nearly 1,900 hours a year, almost equivalent to the time commitment of a full-time job. ATUS does not ask specifically about video games; if it did, even more NEET screen time commitment would almost certainly be recorded.

To go by the time-use surveys, prime-age men without work who are not looking for jobs and not engaged in training spend almost three times as many hours in front of screens as working women and well over twice as many as working men. Strikingly, they also report over 300 hours more screen time per year than their unemployed counterparts—men likewise jobless but who want to get back to work. And the reality is even more disturbing than these time-use numbers can convey on their own. According to a 2017 study by Alan Krueger, almost half of NILF men reported taking some form of pain medication every day. The fraction for NEET men would likely be higher still. The rhythms of life for a great many of the prime-age men in America currently disengaged with the world of work is defined not simply by days and nights sitting in front of screens—but sitting in front of screens while numbed or stoned.

I’ve long opposed the Universal Basic Income for a great many reasons.  First and foremost: Helping everyone regardless of need is an absurd way to allocate finite charitable resources.  Eberstadt and Ambramsky add another potent objection to the list: the UBI encourages the recipients to fritter away their own lives.

There would seem to be no shortage of anomie, alienation, or even despair in the daily lives of men entirely free from work in America today. Why, then, would we not expect a UBI—which would surely result in a detachment of more men from paid employment—to result in even more of the same?

Paternalistic?  Indeed.  But as I’ve argued before, the very fact that an adult fails to support himself suggests that he is a poor judge of his own interests – and donors are right and prudent to impose conditions on their assistance.  I call this “Ward Paternalism”:

Let’s call this “Ward Paternalism” – paternalism limited to people who are dependents of the government.  For example, rather than give welfare recipients cash to spend, a Ward Paternalist might give them food stamps instead.  Why?  To nudge them into buying groceries instead of alcohol.

Key point: Under Ward Paternalism, anyone who doesn’t want to be nudged can simply decline to become dependent on the government.  You can spend your own money your own way, no questions asked.  If, however, you ask taxpayers for help, the help comes with strings attached to encourage you to get your life in order.  He who pays the piper, calls the tune – and why shouldn’t the tune be, “Get your life in order”?

Or in slogan form: If an independent adult can fairly protest, “It’s my money and I’ll do what I want with it,” why can’t taxpayers just as fairly protest, “It’s our money and you’ll use it as we think best”?


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What is this “monetary policy” that you refer to?

Tyler Cowen recently linked to a study by Alina Bartscher, Moritz Kuhn, Moritz Schularick, and Paul Wachtel of the effects of “monetary policy” on racial inequality. The study focuses specifically on the effect of unanticipated monetary shocks on racial inequality:

For the empirical analysis, this paper relies on the most widely used monetary policy shock series – the (extended) Romer-Romer shocks (Coibion et al., 2017) as well as different financial market surprise measures taken from Bernanke and Kuttner (2005) and Gertler and Karadi (2015). The estimations yield a consistent result. Over a five-year horizon, accommodative monetary policy leads to larger employment gains for black households, but also to larger wealth gains for white households. More precisely, the black unemployment rate falls by about 0.2 percentage points more than the white unemployment rate after an unexpected 100bp monetary policy shock. But the same shock pushes up stock prices by as much as 5%, and house prices by 2% over a five-year period, while lowering bond yields on corporate and government debt and pushing up inflation. The sustained effects on employment and stock and house prices appear to be a robust feature in the data, across different shock specifications, estimation methods, and sample periods.

These empirical results seem plausible to me, but what are the policy implications? In my entire life, I’ve never met anyone who favored having the Fed go around and create a bunch of “unexpected 100bp monetary policy shocks”.

You might argue that this doesn’t matter, and that the results would also hold for anticipated changes in monetary policy. But decades of macroeconomic research suggests that one cannot draw this inference; unexpected changes in monetary policy have vastly different effects from expected changes in monetary policy. For instance, an unanticipated easing of monetary policy will often boost asset prices, while an anticipated expansionary policy will often reduce asset prices, as during the 1970s.

Now you might argue that asset prices didn’t do poorly during the 1970s because of easy money, they did poorly because of high inflation.

Ahem . . .

When economists have debates about the appropriate monetary policy, they usual agree that policy should in some sense be predictable and stable. Disagreement may occur over issues such as the optimal rate of inflation. One economist may advocate 2% trend inflation, another may advocate 4%, and a third may advocate 0% inflation. Or they might prefer a different target, such as NGDP growth.

A study of the effect of monetary shocks on asset prices tells us nothing about the effect of changes in the steady state rate of inflation. Thus unexpected monetary stimulus often creates a temporary boom, boosting asset prices, while a permanent increase in inflation raises the effective tax rate on real capital income, thus depressing real capital prices. This is what happened during the 1970s.

This means that a temporary switch to easier money will boost the racial wealth gap by raising asset prices, and a permanent switch to much easier money (say 10% inflation) will reduce the wealth gap—but only by making the rich poorer at a faster rate than it makes the poor even poorer.

While I question the authors’ interpretation of their results, I completely agree with the final sentence of their conclusion:

Clearly, this does not mean that achieving racial equity should not be a first-order objective for economic policy. We strongly think it should. But the tools available to central banks might not be the right ones, and could possibly be counter-productive.

PS.  Here’s some data on the racial wealth gap:


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Romney’s child allowance proposal

Mitt Romney has proposed a child allowance of $4200/year for children under age 6 and $3000/year for children age 6 to 17, which is gradually phased out for people making over $200,000 (depending on the child’s age.) It is to be paid for without boosting the budget deficit, by reducing certain other poverty programs and also eliminating certain tax deductions, such as what’s left of the SALT deduction. (This last element is one of my favorite parts of the plan.)

I don’t know enough about the plan to have a firm opinion, but from a utilitarian perspective it seems to have some positive features:

Equity: The net effect is to shift money from the affluent to the poor, which probably results in a significant gain in aggregate utility.  (Yes, we can’t measure utility, but it seems likely that this factor is a net plus.)

Efficiency: It’s hard to say whether Romney’s plan improves or reduces efficiency, and that’s where I’ll focus the rest of the post.  But the mere fact that “it’s hard to say” is a sort of plus for the plan, because the equity considerations seem to be pretty clearly utility improving. With most welfare proposals, greater equity comes at a cost of lower efficiency.  I think it’s fair to say that either Mitt Romney is a very clever guy, or he has smart advisors, or both. At the end I’ll suggest a modification that would boost the equity of the plan, without any clear loss in efficiency.

1. Some conservatives like the fact that these child benefits would boost the birth rate, pointing to the fact that people say they want more children than they actually have.  I don’t share their worry that the birth rate is too low, and I don’t trust polls.  Some conservatives worry that paying poor people to have kids would cause so-called “inferior” people to reproduce.  I also don’t share this worry.  For me, the effect on births is a non-factor.

2.  Work disincentives can come from either the income or the substitution effects.  The substitution effect in Romney’s proposal is small, as parents don’t lose the child allowance until their income rises to well above $200,000.  So on that basis it won’t discourage poor people from getting a working class job.  There is a very mild work disincentive for upper middle class people experiencing the phase-out of the benefit.  The income effect refers to the fact that poor people might no longer work because they feel they can live on the child allowance without working (perhaps combined with other programs like food stamps.)  It seems to me that this disincentive would be quite modest for the size of benefits proposed by Romney.  Still, in net terms there’s probably a mild work disincentive from the issues I’ve discussed thus far.

3.  Many of the other provisions actually boost efficiency.  Several other (inefficient) poverty programs are either reduced or eliminated.  Furthermore, there’s a substantial gain from reducing the complexity of both the welfare system and the income tax system.  Eliminating the SALT deduction also discourages wasteful state and local spending.  So the various provisions that pay for the benefit have a significant positive impact on economic efficiency.

Combining points #2 and #3, I see no clear evidence of either an overall gain or loss of efficiency.  And again, the equity benefits seem pretty clear to me.

One final comment.  Why not make the child allowance fully universal, and then slightly boost the payroll tax (on wage income only) on people making over $200,000 a year to pay for it?  On an equity basis, that would redistribute money from the very rich down to the upper middle class, as people with very high wage income would pay more extra tax than they’d gain from the child allowance, while the opposite is true for the upper middle class—those making modestly above $200,000.

On efficiency grounds, my proposed modification would make the income tax system much simpler, so that’s a net gain.  The increase in the payroll tax rate would be smaller than the implicit marginal income tax during the phaseout range of Romney’s proposal (which mostly applies to people in the $200,000s), so extremely affluent people would face slightly higher MTRs while modestly affluent people would face significantly lower MTRs.  Overall, I doubt there’d be much change in economic efficiency, maybe even an increase.



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The equity and efficiency of SALT cap repeal

There’s currently some discussion in Washington DC about repealing the limitation on the deductibility of state and local taxes (from one’s federal taxes.) Back in 2018, the US government began limiting SALT deductions on federal income taxes to no more than $10,000/taxpayer. Repeal of this provision would have effects on both economic efficiency and economic equity:


Repeal would cause many more people to itemize their taxes, which would increase the time and money costs of preparing taxes. It would also drive a wedge between the local cost of state and local spending and the total cost. Thus 70% of the cost of a $1 billion government project in New York or California might be paid for by local taxpayers, while the other 30% would be paid for by taxpayers in all 50 states. This would push states toward projects that don’t pass cost/benefit analysis, but that might seem desirable if one ignores the external costs imposed on out-of-state residents.  An example might be high-speed rail in California.


Repeal of the SALT limitation would reduce taxes on upper income taxpayers. Because there is no free lunch, other taxpayers would have to pick up the slack.  If we run large budget deficits, then future taxpayers would absorb the bill.

PS.  Because I live in California, I would pay less in taxes if SALT limits were repealed.  However, my taxes would become much more complicated in terms of required record keeping, so I doubt I’d be any happier.  Don’t just think in terms of “who pays”; a successful country is one that avoids lots of needless deadweight losses.


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Economic Questions About the “Temple of Democracy”

Is it true, as House Speaker Nancy Pelosi claimed, that Congress is a temple of democracy (“U.S. Capital Police Officer Brian D. Sicknick, who died after assault on Capitol, Protected With a Kind Touch,” Washington Post, January 8, 2021)? She said:


This invites a reflection on how Congress, democracy, and the state work. Any moral value attached to these institutions must be consistent with, although not limited to, their likely functioning and consequences.

Anthony de Jasay is one of the many economists who, over the last eight decades of so, have tried to understand the state (the whole apparatus of government). For him, the state is, in positive reality, a redistributive machine that favors some individuals and harm others. One’s ultimate judgement on the state depends also on moral values related to what the state should do. If it is considered good to harm some individuals in order to benefit others (and if de Jasay’s positive analysis is correct), then the state is good. If coercively harming some for the benefit others is morally rejected, then the state is morally bad.

Could we, de Jasay asked, imagine a sort of state that would not be a redistributive Leviathan, that would not be in the business of redistributing pleasure and pain, happiness and submission, but would instead only aim at preventing invasion by, or evolution of, such a state? A sort of state that would not aim at governing? This minimal state, he calls the “capitalist state.” It has never existed anywhere near its pure form but some systems of political authority have been farther from it than others. Many anarchist theorists such as de Jasay think that the capitalist or minimal state cannot survive because it would, by its very logic, soon grab the redistributive function in order to reward its supporters at the cost of other (less loyal) subjects. The state who democratically steals from Paul to give to Peter because the Peters are more numerous than the Pauls is one instantiation of that.

In this perspective, the temple of democracy appears more like a den of thieves and a gang of bullies. It is often difficult to distinguish the state from an organized and heavily armed mob. Although I have come to believe that Lysander Spooner’s attack on the state on that basis is weak, it is still worth reading his 1870 pamphlet The Constitution of No Authority, which describes the democratic state of being “a secret band of robbers and murderers.”

The economic and philosophical issues involved are more complicated than they may appear at first sight. For example, suppose that the state is far from the capitalist state but does prevent the installation of another state that would be even worse—or that it prevents the descent into violent anarchy, as Thomas Hobbes feared. Many politicians commenting on last week’s troubles seem to believe, strangely, that, hic et nunc, anarchy is a more pressing problem than tyranny. (In the Washington Post, David Ignatius even uses an oxymoron: “the Trump anarchists”!) The mob was in effect calling for more state power even if some of its participants may have been duped into believing the contrary.

Little exercise: Why is it easier to be duped on the political market than on ordinary economic markets?

And all this is not speaking of what sort of democracy Pelosi is referring to. If it is majoritarian democracy, which majority do specific electoral methods and institutions favor? What happens when the majority wants both A and non-A, as the paradox of voting and Arrow’s impossibility theorem show is unavoidable? If it is not majoritarian democracy, which minority rules? Does the specific sort of democracy used pursue an illusory “will of the people”? On these questions, economics and, in its wake, political science have had much to teach over the past few decades. (Many of my Econlog and Econlib pieces have been concerned with these issues.)

At any rate, it is not sufficient to simply assume that glorified individuals (“lawmakers”) voting laws thousands of pages long (without knowing what’s in them except for their pious labels and professed intentions) constitute a temple of democracy.


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Three Economists Walk Into a Discussion, Part 1

On September 15, the Stanford Institute for Economic Policy had a virtual discussion about both Covid-19 and the views of the two major presidential candidates. The moderator was Gopi Shah Goda of SIEPR and the two interviewees were Kevin Hassett, who had been chairman of the Council of Economic Advisers under President Trump and Austan Goolsbee, who had had the same job under President Obama.

I watched it live.

I’ll hit some highlights and make some comments. This is Part 1.

At 4;24, Goda asks: “What are the right economic policies to provide relief to those whose livelihoods have been adversely affected by the pandemic and stimulate the economy? How much spending should we do in the short run on Covid relief issues like extended and extra unemployment and stimulus payments?”

She started with Kevin, and I got my first big disappointment. Notice that she asked two questions. Kevin, though, answered only the second. He gave a big number for spending and didn’t mention any other means of relief: deregulating, letting people work in occupations without having to get a license, allowing restaurants to sell food, allowing restaurants to open, getting the FDA to allow people to use home tests for the coronavirus.

And his number for additional federal spending was big: $1.5 to 2.5 trillion.

Goolsbee’s answer was what I would have predicted: lots more federal spending and a big bailout of state and local government.

14:50: Kevin defines classical liberals like me out of the discussion with “I don’t think there’s anyone who thinks there shouldn’t be state and local aid.”

15:10: Austan gets it right: There are a great number of people who are opposing state and local aid.

17:10: Austan has a funny line that riffs on the old can opener joke: “This is not just ‘assume we have a can opener; let’s assume we have the greatest of all can openers.’” Then he says that you wouldn’t want to use the price system to allocate the vaccine.

23:43: Goda asks about the differences between the two candidates’ tax policies.

24:20: Austan says that Biden wants to raise taxes on high-income people and on corporations. What’s important, he says, is what the money is used for. If the added revenue were used to provide universal child care, that would be very pro-growth, says Austan.

But wait. This is not a discussion between politicians. This is a discussion between economists. What’s the market failure that would justify government provision of child care? Austan doesn’t  even mention one. If my wife and I, when we were younger, had wanted to hire child care so she could work, we would have compared her after-tax income to our net-of-child-care-tax-credit cost of hiring child care. I showed in a piece in the Journal of Policy Analysis and Management in the late 1980s that the structure of the tax credit at the time could be seen as a way of offsetting the distorting high marginal tax rate of the second earner, typically the women. But Austan isn’t making that argument; in fact, for high earners, he wants an even higher marginal tax rate. Moreover, various changes in the tax law have been the tax credit much less pro-growth.

At about the 25:00 point, they get into a real substantive discussion about what happened to real wages and real family incomes after the tax cut. They literally disagreed about what the numbers were. Austan said that the effects of the tax cut on real median family incomes were disappointing. Kevin said that in a debate with Austan in Philadelphia a few years earlier, he had predicted that real median family income would rise by $4,000 and that the data that just came in (which were pre-pandemic), the number was actually a $4,900 gain. Kevin also pointed out that over 6 million people had moved out of poverty, the biggest drop since the War on Poverty had begun under LBJ. Kevin also pointed out that he had predicted that income inequality would fall as a result of the 2017 tax cut and that it had fallen.

Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages.

29:10: Kevin catches Austan’s characterization of the proposed Biden tax hike as an increase in taxes on billionaires. Kevin points out that it would apply to people making over $400K annually. He then expresses optimism that Biden will hold off on raising marginal tax rates, due to the state of the economy.

31:00: Here is where Austan gives numbers on increases in real median family income that differ dramatically from Kevin’s data.

Aside:  As a viewer, I was able to type a question on line and I did. We learned near the end from Goda that a number of viewers had asked a similar question and it was this: “You two are disagreeing on actual facts; show us your sources.” I asked Mark Duggan, the SIEPR director, for the source and he sent me the link to the Census data that Kevin had cited. Kevin turned out to be right about the large growth in median family income of families, including black and Hispanic families. I’m still scratching my head about what data Austan had in mind.

32:00: Kevin says that growth in median real family income in the first 3 years of Trump vastly exceeded any 3-year period under Obama.

32:10: Goda lays out the deficit issue nicely and asks about the two candidates’ plans.

In Part 2, I’ll cover the rest of the discussion.




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O’Rourke on the Millennials and Socialism

As soon as children discover that the world isn’t nice, they want to make it nicer. And wouldn’t a world where everybody shares everything be nice? Aw … kids are so tender-hearted.

But kids are broke — so they want to make the world nicer with your money. And kids don’t have much control over things — so they want to make the world nicer through your effort. And kids are very busy being young — so it’s your time that has to be spent making the world nicer.

This is from P.J. O’Rourke, “This is why millennials adore socialism,” New York Post, September 12, 2020.

Lots of good stuff here. I do want to address one error, an error that P.J. seems to agree with “progressives” about. He writes:

That would have been in the 19th century — during America’s first “Progressive Era” — when mechanization liberated kids from onerous farm chores and child labor laws let them escape from child labor.

Actually, it wasn’t child labor laws that let them escape from child labor: it was economic growth. As people grew wealthier, parents no longer needed their children to be productive. Instead, they could support the family without their children’s income and so instead could send their kids to school. And incidentally, as E.G. West showed in Education and the State, the state in Britain was not a major funder of education and yet schooling was widespread.

It is true that child labor laws reduced child labor around the edges. But they’re an instance of what is almost a general law in economic policy. I’m using “general law” in the sense of regularity. The laws that pick up enough support are usually ones that require people to do what the majority are doing already. I believe for example, although I can’t find the source immediately, that the legislated 40-hour work week came about only after it had become standard practice.

Another good excerpt:

Intellectuals like Marxism because Marx makes economics simple — the rich get their money from the poor. (How the rich manage this, since the poor by definition don’t have any money, is beyond me. But never mind.)

This excerpt reminds me of a great paragraph from Paul Krugman’s 1990 book The Age of Diminished Expectations that I used in the first edition of The Concise Encyclopedia of Economics, in a sidebar on the article “Distribution of Income” by Frank Levy:


The O’Rourke piece is excerpted from P.J. O’Rourke, A Cry from the Far Middle, 2020.


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Rosewater’s River of Wealth

Second in a #ReadWithMe Series


The Rosewater Foundation’s inflation-adjusted $87 million endowment represents roughly $700 million, not billion, in today’s dollars.  Nothing to sneeze at, but I apologize for the error in my first entry.  I must have had federal stimulus bills on my mind…


I have now read the second quarter of Rosewater.  Eliot Rosewater has walked away from high culture, a beautiful French wife, and charitable support of the arts – returning instead to small-town Indiana, where he can help “these discarded Americans, even though they’re useless and unattractive.”  “That is going to be my work of art”, he gushes (44).  With the help of Southern Comfort and the Foundation’s millions, Eliot becomes a social worker, therapist, coach, and benefactor to the downtrodden.


In this fun and rich continuation, I will focus on three economic themes.


First, the human condition has been one of misery:  before the 19th century, everybody was poor (there were no antibiotics, novocaine, or indoor plumbing in the wealthiest of courts).  It is easy to understand despair in the face of famine, low life expectancy, and limited socioeconomic opportunity.  But it is harder to understand why the small percentage of humanity that was able to escape abject poverty feels malaise rather than gratitude.  The portmanteau “affluenza” was coined in the early 1950s to describe either “feelings of guilt, lack of motivation, and social isolation experienced by wealthy people” or “extreme materialism and consumerism associated with the pursuit of wealth and success and resulting in a life of chronic dissatisfaction, debt, overwork, stress, and impaired relationships.”  A decade earlier, Joseph Schumpeter had warned that capitalism might contain the cultural seeds of its own destruction.  Vonnegut writes of “one more kid rotten-spoiled by postwar abundance” (42) and Sylvia Rosewater suffers from samaritophobia, which could be quickly summarized as rich guilt (52).  Why the high rates of depression in rich countries?  Comedian Tom Lehrer joked of a Dr. Samuel Gall (inventor of the gallbladder), who was able to retire at an early age, because he had specialized in diseases of the rich.  He was on to something.


Second, a delightful and curmudgeonly friend once described the modern American university as “a country club – with a brothel attached to it.”  As a libertarian, I am not so worried about the students’ after-hours activities… assuming, of course, that there are hours in the first place, and that the students aren’t goofing off around dumbed-down classes with grade inflation.  But add a hearty dose of post-Marxist identity politics, and you’ve got real trouble.  So I was amused when Senator Rosewater appealed to his alma mater.  If the mother is nourishing, she is also a minister of culture, a transmitter of social mores:  “Ask yourself what Harvard would think of you now” (120).  Eliot reassures his father than an annual donation of $300,000 from the Foundation buys him plenty of respect.


Third, we have the most interesting economic theme in the first half of the book:  the Money River, Eliot’s theory of income and wealth (122-124).


I close with some questions:

  1. What virtues are required to sustain capitalism? Does capitalism indeed contain the seeds of its own destruction?  Is capitalism sustainable if the culture of savings that leads to wealth engenders a culture of consumption?
  2. Why is wealth icky, when capitalism is plainly the greatest anti-poverty program ever? What about the post-1800 growth, or the post-1980 massive drop in extreme poverty – or the 130,000 people around the world who were lifted out of poverty, yesterday and every day, without a fuss or a headline?
  3. There are three actors (or… dare I use the word?…  classes?) around the River of Wealth:  born slurpers, experts who help the slurpers, and the masses who don’t know about the river – and a fourth, rare group, those who are guided to the riverbank.  What do you make of this?  On the one hand, the theory holds that one is simply born into a certain class, and that work and merit are irrelevant.  On the other hand, could we not translate the River of Wealth as the much less romantic “human capital”?  Some acquire it readily, but many are excluded (because of a failed K-12 government monopoly, college tuitions bloated by federal subsidies, regressive job licensing requirements, mass incarceration, and the million other obstacles of the swarms of regulations that harass the poor and eat out their substance).



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Stop asking the Fed about inequality (and start asking about inflation)

At a recent press conference, I was dismayed to see a number of reporters asking Jay Powell about inequality—an issue far beyond the scope of monetary policy—while asking few questions about the highly questionable current stance of monetary policy.

A recent Yahoo Finance article illustrates the confusion:

Federal Reserve Chairman Jerome Powell on Wednesday acknowledged economic inequality in the United States but said monetary policy tools can only do so much to narrow the income gap.

Research from within the Fed itself, however, suggests that the central bank may be more effective when policymakers pay mind to income inequality while designing policy tools.

Actually, inequality is a long run issue and the Fed cannot do anything to address the problem.  Money is neutral in the long run.

Pointing to previous economic research, Cairó and Sim note that higher-income groups tend to save more than lower-income groups (or in economic terms, have a lower marginal propensity to consume). The authors argue that higher-income earners can “overaccumulate” financial wealth and sustain high savings rates; lower-income earners are more likely to spend larger shares of their income just to make ends meet.

This presents a dilemma for the Fed, which broadly wants to discourage saving and spur consumption (or in economic terms, drive aggregate demand) to fuel an economic recovery.

This is a common mistake, conflating “consumption” with “aggregate demand”. Most textbooks say the opposite, that monetary stimulus is aimed at boosting investment.  Because saving equals investment, this implies monetary policy is expected to boost saving as well.  Indeed both saving and investment are procyclical, even as a share of GDP.  They both rise faster than GDP during booms and fall faster than GDP during recessions. (Note that I am responding to the Yahoo article and not the scientific paper, which I have not read.)

I also disagree with the standard textbook description of the transmission mechanism.  Aggregate demand equals consumption plus investment plus government output plus net experts, and hence you can think of monetary policy as being intended to boost the sum of those four categories, measured in nominal terms.  Or more simply, boost NGDP.  Thus Zimbabwe monetary policy sharply boosted nominal spending in 2008, even as real consumption and real investment plunged.  (Try explaining this to an MMTer.)

The suggestion: an “optimal” monetary policy prioritizing the reduction in unemployment to improve the welfare of lower-income wage earners – even at the expense of welfare losses to higher-income earners holding onto financial assets.

The monetary policy that boosts employment in the short run is the same policy that boosts real equity prices in the short run—expansionary policy.  In the long run, the optimal monetary policy keeps employment close to the natural rate, and that’s also the monetary policy that’s best for equity prices.

Readers of this blog know that I currently favor a more expansionary monetary policy.  But not because of its effects on inequality.  In the short run, a more stimulative policy would help low wage workers and it would help stockholders.  And in the long run, money is neutral.  If you want to do something about inequality, look elsewhere.

Meanwhile reporters need to ask the Fed why they don’t intend to hit their inflation target in 2022.  And keep asking the question over and over again until Jay Powell provides an intelligible answer.



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