A Better Wealth and Taxes

CATO has put out a much-improved version of my "Wealth and Taxes" series on wealth inequality and the wealth tax. Html here and pdf here. Many thanks to Chris Edwards and the CATO staff for editing and formatting it, and getting it out in this nice format. 

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Alan Reynolds wrote with interesting comments. Among others,

the $18+ trillion now invested in retirement, education and health savings accounts has gradually made middle-income investment income more and more invisible in tax returns as time moved on.   Exemption of $500,000 of capital gains on home sales further reduced the IRS-reported capital income of all but the top 1%.

...the Saez-Zucman methodology is sure to show the rich having a larger and larger share of taxable income from capital, and therefore of wealth based on that taxable income, because income from the savings of middle-income taxpayers has become increasingly unreported. 

Bottom line:

Because tax laws exempted a rising share of investment income (and residential capital gains) of the bottom 95%, the visible portion left showing for the top 1% must appear as a rising share (of a meaningless total). 

I still like my 2006 WSJ title: "The Top 1% of WHAT?"  Pre-tax, pre-transfer income reported on individual income tax returns was never meaningful, and capital income on those tax returns is incomparable over time. 

The Elephant's family

David Brooks essay in the Atlantic "The nuclear family was a mistake" has a lot of interesting ideas. We used to (1800s) largely live with extended family. In the mid 20th century we moved to mom, dad and kids, the nuclear family that David thinks is a mistake. Now we increasingly live the widely parodied Life of Julia (Taranto scathing review at WSJ, guide to parodies at Atlantic), individuals whose main relationship in life is to the federal government.

One aspect, tangential to the main theme, struck me. In all our economic discussions about inequality, when we stop shouting at each other, we come down to a commonsense middle ground: There are lots of obstacles in the way of economic, personal, and social advancement for Americans who start on the lower end of the economic ladder. Free marketers tend to point to government obstacles -- horrible schools in the thrall of teacher unions, land use policies that make it impossible to live near better jobs, social programs whose disincentives to work or move to work make that an impossible choice, and so on. Government-run-things advocates ask for more programs, a 58th job training program, UBI, government jobs, government provided housing, more money to the teachers unions, government-run pre-k and day care, gushers of money, and so on. Still, we get to a comfortable point that we agree on a problem, and we're talking about various ways to fix it.

Into this comfortable discussion, Brooks' essay points to the elephant in the middle of the room.  People on the lower economic end in this country start their lives in chaotic families.

In 1970, the family structures of the rich and poor did not differ that greatly. Now there is a chasm between them. As of 2005, 85 percent of children born to upper-middle-class families were living with both biological parents when the mom was 40. Among working-class families, only 30 percent were. According to a 2012 report from the National Center for Health Statistics, college-educated women ages 22 to 44 have a 78 percent chance of having their first marriage last at least 20 years. Women in the same age range with a high-school degree or less have only about a 40 percent chance. Among Americans ages 18 to 55, only 26 percent of the poor and 39 percent of the working class are currently married.

 In 1960, roughly 5 percent of children were born to unmarried women. Now about 40 percent are. The Pew Research Center reported that 11 percent of children lived apart from their father in 1960. In 2010, 27 percent did. Now, if you are born into poverty and raised by your married parents, you have an 80 percent chance of climbing out of it. If you are born into poverty and raised by an unmarried mother, you have a 50 percent chance of remaining stuck.

Nothing, nothing, in our pleasant dirigiste anti-inequality debate adds up to these kinds of numbers. A year of government run pre-K while not even talking about these facts is like handing out bandaids to cancer patients.

Grumpy Podcast

We're trying a Grumpy Economist Podcast. The first one talks about my series on wealth inequality and wealth tax. I can't stand listening to myself, as think I always sound dumb and regret all the things I could have said better, so I haven't listened. But I hope it sounds better to the rest of you and provides a useful new grumpy outlet. Thanks to Scott Immergut and Troy Senik who do all the work. 

Health policy wonks and the preservation of human capital

Austin Frakt at the New York Times covered an interesting survey of health economists, revealing their interesting support for the status quo  Mike Cannon at CATO has an interesting tweet storm in reaction, and Tyler Cowen at Marginal Revolution also comments.

My diagnosis comes at the end. Those whose human capital is knowledge of the current rules, and whose employment derives from the agencies who run the current system, are unlikely to challenge the status quo.

Frakt:

Imagine if American health policy were established by the consensus of health economists. What would the system look like? 

Health economists .. strongly reject repeal [of the ACA], with 89 percent opposing the idea.

Really, is this miserable status quo the best that thousands of professional health economists can dream up?

Health spending

Via the always excellent Marginal Revolution, which has its own commentary,  a splendid Random Critical Analysis post "why conventional analysis on health care is wrong."

Why does the US spend so much more on health care than other countries? Well, in part because we are a lot richer. We buy a lot of luxury goods. The fit of the line is impressive.

So, not mentioned in the original, is the spread of household income on the x axis. Particularly interesting in terms of the call that we should be more like Denmark, it's notable just how much lower household income is in Denmark, and the rest of Europe. Eyballing it, $32,500 per year vs. $48,000 per year.

Is it just that the price of health care is driven up by the US astronomically inefficient and uncompetitive system? Apparently not -- we consume higher quantities of health care.

This does not mean everything is all hunky-dory in the US health care and health insurance system. It just means the other countries are just as screwed up as we are, but being that much richer we choose to buy more of the screwed up overpriced good.

Off the Deep End: Navigating the Climate Crisis & Eco-Distress

No, it's not a joke, or the Babylon Bee, it's a real website at a real top university, which a number of readers of this blog have probably graduated from or donate money to.

Dialogue Circle: Navigating the Climate Crisis 

The climate crisis has been impactful and many have turned to activism and supporting environmental justice movements. This is very meaningful work and can also create a sense of despair, burnout, anger, hopelessness, and other distressing emotions. CPS counselors will help to facilitate a conversation and create a supportive space to process such experiences.  

Mindfulness and Eco-Anxiety 

Eco-anxiety is the fear we feel (sometimes acutely, sometimes as an underlying dread) about the climate crisis. Join in a discussion of how you experience eco-anxiety, and how mindfulness can help us respond to it. We’ll discuss managing worry loops, staying compassionate with difficult feelings and purpose-based coping, as well as practice a mindfulness meditation.  

Forest Therapy 

Forest therapy provides a chance to connect, slow down, and cope with the stressors of life, including eco-distress and other emotional experiences related to the climate crisis.

The jokes write themselves. An alternative suggestion: Spend some time learning and listening before activisting. Bjorn Lonborg's website is a good place to start.  You'll be just as upset, but for different reasons. In the meantime, where is the safe space for traumatized libertarians or people who wish for basic facts in public policy? 

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Update: I seem not to be able to post comments to my own blog. A response to JZ who disparages Bjorn Lonborg, and praises the impartial science of the IPCC. Here are some choice quotes from the latest IPCC report. "Confidence" means scientific confidence that the quoted steps are necessary to reduce global temperatures

D3.2. ... adaptation projects can.. increase gender and social inequality... adaptations [must i] that include attention to poverty and sustainable development (high confidence).

D6. Sustainable development supports, and often enables, the fundamental societal and systems transitions and transformations that help limit global warming... in conjunction with poverty eradication and efforts to reduce inequalities [high confidence]….  

D6.1. Social justice and equity are core aspects of climate-resilient development pathways that aim to limit global warming to 1.5°C...  

D7.2. Cooperation on strengthened accountable multilevel governance that includes non-state actors such as industry, civil society and scientific institutions, coordinated sectoral and cross-sectoral policies at various governance levels, gender-sensitive policies.... (high confidence).  

D7.4. Collective efforts at all levels, ... taking into account equity as well as effectiveness, can facilitate strengthening the global response to climate change, achieving sustainable development and eradicating poverty (high confidence)

Don't you love all that a-political, hard-nosed, reproducible, quantifiable, always skeptical science?

Supply and demand in local economics

Act 1: If housing is too expensive, allow the supply curve to operate.

In a surprising bit of excellent economics,  Conor Dougherty  writes "Build Build Build Build..."in Sunday's New York Times.

The story starts with the usual way of doing business (meaning, not doing business) in California:

A developer had proposed putting 315 apartments on a choice parcel along Deer Hill Road — close to a Bay Area Rapid Transit station, and smack in the view of a bunch of high-dollar properties. ... Zoning rules allowed it, but neighbors seemed to feel that if their opposition was vehement enough, it could keep the Terraces unbuilt....

Mr. Falk could see where this was going. There would be years of hearings and design reviews and historical assessments and environmental reports. Voters would protest, the council would deny the project, the developer would sue. ...

Spoiler: Where did this all end up?

Today, after eight years of struggle, his career with the city is over, the Deer Hill Road site is still just a mass of dirt and shrubs, and Mr. Falk has become an outspoken proponent of taking local control away from cities like the one he used to lead.

Mr. Dougherty comes to a most un-Times like view of the problem.

America has a housing crisis. ...One need only look out an airplane window to see that this has nothing to do with a lack of space. It’s the concentration of opportunity and the rising cost of being near it.... There is, simply put, a dire shortage of housing in places where people and companies want to live — and reactionary local politics that fight every effort to add more homes.

Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.

New paper: fiscal theory of monetary policy

A second new paper: "A fiscal theory of monetary policy with partially repaid long-term debt."

By "fiscal theory of monetary policy" I mean a model with standard DSGE ingredients, including inertemporal optimization and market clearing, monetary policy described by interest rate targets, price or other frictions, but closed by fiscal theory, "active" fiscal policy rather than "active" monetary policy.

I aim to build a standard simple but somewhat realistic model of this sort, a parallel to the three equation textbook model that has been part of the new-Keynesian tool kit since the 1990s. I keep the model as simple and standard as possible, so the effect of the innovations one the fiscal side are clearer.

Two parts of the specification are central. First, long-term debt allows the model to produce a negative response of inflation to interest rates. Long-term debt also allows a fiscal shock to result in a protracted inflation, which slowly devalues long term bonds, rather than a price level jump.

Second, and most important, the paper writes down a process for fiscal surpluses in which today's deficits are partially repaid by tomorrow's surpluses. Look quickly at the surplus response functions in my last post. When the government runs a deficit, it reliably runs subsequent surpluses that partially repay some of the accumulated debt. The surplus is not an AR(1)! It has an s-shaped response function.

So if you want a realistic fiscal theory model, you need a surplus with an s-shaped response function, but you need to keep "active" fiscal policy. This combination is the central innovation of the paper.

New Paper -- the fiscal roots of inflation

I recently finished drafts of a few academic papers that blog readers might find interesting. Today, "The Fiscal Roots of Inflation."

The government debt valuation equation says that the real value of nominal debt equals the present value of surpluses. So, when there is inflation, the real value of nominal debt declines. Does that decline come about by lower future surpluses, or by a higher discount rate? You can guess the answer -- a higher discount rate.

Though to me this is interesting for how to construct fiscal theory models in which changes in the present value of government debt cause inflation, the valuation equation is every bit as much a part of  standard new-Keynesian models. So the paper does not take a stand on causality.

Here is an example of the sort of puzzle the paper addresses. Think about 2008. There was a big recession. Deficits zoomed, through bailout, stabilizers, and deliberate stimulus. Yet inflation.. declined. So how does the government debt valuation equation work? Well, maybe today's deficits are bad, but they came with news of better future surpluses. That's hard to stomach. And it isn't true in the data. Well, real interest rates declined and sharply. The discount rate for government debt declined, which raises the value of government debt, even if expected future surpluses are unchanged or declined. With a lower discount rate, government debt is more valuable. If the price level does not change, people want to buy less stuff and more government debt. That's lower aggregate demand, which pushes the price level down. Does this story bear out, quantitatively, in the data? Yes.

If you don't like discount rates and forward looking behavior, you can put the same observation in ex-post terms. When there is a big deficit, the value of debt rises. How, on average, does the debt-GDP ratio come back down on average? Well, the government could run big surpluses -- raise taxes, cut spending to pay off the debt. That turns out not to be the case. There could be a surge of economic growth. Maybe the stimuluses and infrastructure spending all pay off. That turns out not to be the case. Or, the real rate of return on government bonds could go down, so that debt grows at a lower rate. That turns out to be, on average and therefore predictably, the answer.

Identities

OK, to work. The paper starts by developing a Cambpell-Shiller type identity for government debt. This works also for arbitrary maturity structures of the debt. Corresponding to the Campbell-Shiller return linearization, $$ \rho v_{t+1}=v_{t}+r_{t+1}^{n}-\pi_{t+1}-g_{t+1}-s_{t+1}. $$ The log debt to GDP ratio at the end of period \(t+1\), \(v_{t+1}\), is equal to its value at the end of period \(t\), \(v_{t}\), increased by the log nominal return on the portfolio of government bonds \(r_{t+1}^{n}\) less inflation \(\pi_{t+1}\), less log GDP growth \(g_{t+1}\), and less the real primary surplus to GDP ratio \(s_{t+1}\). Surpluses, unlike dividends, can be negative, so I don't take the log here. This surplus is scaled to have units of surplus to value, so a 1% change in "surplus" changes the log value of debt by 1%. I use this equation to measure the surplus.

Iterating forward, and imposing the transversality condition, we have a Campbell-Shiller style present value identity, $$ v_{t}=\sum_{j=1}^{\infty}\rho^{j-1}s_{t+j}+\sum_{j=1}^{\infty}\rho^{j-1}g_{t+j} -\sum_{j=1}^{\infty}\rho^{j-1}\left( r_{t+j}^{n}-\pi _{t+j}\right). $$ Take innovations \( \Delta E_{t+1} \equiv E_{t+1}-E_t \) and we have $$ \Delta E_{t+1}\pi_{t+1}-\Delta E_{t+1} r_{t+1}^{n}= -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}s_{t+1+j} -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1} g_{t+1+j}+\sum_{j=1}^{\infty} \rho^{j} \Delta E_{t+1}\left( r_{t+1+j}^{n}-\pi_{t+1+j}\right) $$ Unexpected inflation devalues bonds. So it must come with a decline in surpluses, a rise in the discount rate, or a decline in bond prices. Notice the value of debt disappeared, which is handy.

The bond return comes from future expected returns or inflation, so it's nice to get rid of that too. With a geometric maturity structure in which the face value of bonds of \(j\) maturity is \(\omega^j\), a high bond return today must come from lower bond returns in the future. $$ \Delta E_{t+1}r_{t+1}^{n} = -\sum_{j=1}^{\infty}\omega^{j}\Delta E_{t+1} r_{t+1+j}^{n} =-\sum_{j=1}^{\infty}\omega^{j}\Delta E_{t+1}\left[ (r_{t+1+j}^{n}-\pi_{t+1+j})+\pi_{t+1+j}\right] $$ Substitute and we have the last and best identity $$ \sum_{j=0}^{\infty}\omega^{j} \Delta E_{t+1}\pi_{t+1+j} = -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}s_{t+1+j} -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}g_{t+1+j} +\sum_{j=1}^{\infty} (\rho^{j} -\omega^{j})\Delta E_{t+1}\left( r_{t+1+j}^{n}-\pi_{t+1+j}\right) . $$ With long-term debt a weighted sum of current and future inflation corresponds to changes in expected surpluses and discount rates. A fiscal shock can result in future inflation, thereby falling on today's long term bonds. Equivalently, a surprise deficit today \(s_{t+1}\) must be met by future surpluses, by lower returns, or by devaluing outstanding bonds, so that the debt/GDP ratio is reestablished.

Results

I ran a VAR and computed the responses to various shocks.

Here is the response to an inflation shock - -an unexpected movement \(\Delta E_1 \pi_1\). All other variables may move at the same time as the inflation shock.

Inflation is persistent, so a 1% inflation shock is about a 1.5% cumulative inflation shock, weighted
by the maturity of outstanding debt.

So, where is the 1.5% decline in present value of surpluses? Which terms of the identity matter?
Inflation does come with persistent deficits here. The sample is 1947-2018, so a lot of the inflation shocks come in the 1970s. You might raise three cheers for the fiscal theory, but not so fast. The deficits turn around and become surpluses. The sum of all surpluses term in the identity is a trivial -0.06, effectively zero. These deficits are essentially all paid back by subsequent surpluses.

Growth declines by half a percentage point cumulatively, accounting for 2/3 of the inflation. And the discount rate rises persistently. Two thirds of the devaluation of debt that inflation represents comes from higher real expected returns on government bonds, which in turn means higher interest rates that don't match inflation. (More graphs in the paper.)

Growth here is negatively correlated with inflation, which is true of the overall sample, but not of the story I started out with. What happens in a normal recession, that features lower inflation and lower output? Let's call it an aggregate demand shock. To measure such an event, I simply defined a shock that moves both output and inflation down by 1%. Here are the responses to this "recession shock."

 Inflation and output go down now, by 1%, and by construction. That's how I defined the shock. This is a recession with low growth, low inflation, and deficits. Not shown, interest rates all decline too.

So where does the low inflation come from in the above decomposition. Do today's deficits signal future surpluses? Yes, a bit. But not enough -- the cumulative sum of surpluses is -1.15% On its own, deficits should cause 1% inflation, the fiscal theory puzzle that started me out in this whole business. Growth quickly recovers, but is not positive for a sustained period. Like 2008, we see a basically downward shift in the level of GDP. That contributes another 1% inflationary force. The discount rate falls however,  so strongly as to raise the real value debt by almost 5 percentage points! That overcomes the inflationary forces and accounts for the deflation.

Here is a plot of the interest rates in response to the same shock. i is the three month rate, y is the 10 year rate, and rn is the return on the government bond portfolio. Yes, interest rates at all maturities jump down in this recession. Sharply lower rates mean a one-period windfall for the owners of long term bonds, then expected bond returns fall too.

The point 

Discount rates matter. If you want to understand the fiscal foundations of inflation, you have to understand the government debt valuation equation. Inflation and deflation over the cycle is not driven by changing expected surpluses. If you want to view it "passively," inflation and deflation over the cycle does not result in passive policy accommodation through taxes, as most footnotes presume. The fiscal roots (or consequences) of inflation over the cycle are the strong variation in discount rates -- expected returns.

The fiscal process

Notice that the response of primary surpluses in all these graphs is s-shaped. Primary surpluses do not follow an AR(1) type process. In response to today's deficits, there is eventually a shift to a long string of surpluses that partially repay much though not all of that debt. This seems completely normal, except that so many models specify AR(1) style processes for fiscal surpluses. Surely that is a huge mistake. Stay tuned. The next paper shows how to put an s-shaped surplus process in a model and why it is so important to do so.

Comments on the paper are most welcome.

Free Market Health Care

There exists a Free Market Medical Association. 

Some quotes from the website:

.... innovation in healthcare can only happen when a buyer and a seller are able to business transparently and fairly.

The free market movement in healthcare is gaining steam. ...

Matching a willing buyer with a willing seller of valuable healthcare services is the goal of everyone involved in this movement. We help identify patients willing to pay cash, doctors willing to list their prices, businesses attempting to provide affordable quality insurance, and providers/services/and patient advocates that are helping make everything work.

The Free Market works when there is freedom of choice:

Willing buyer
Willing seller
Market clearing price

The association seems to be mostly a marketing platform plus a bit of information and advocacy.

In the words of the inimitable Ron Swanson of Parks and Recreation,

“Whatever happened to “Hey, I have some apples, would you like to buy them?” “Yes, thank you!” That’s as complicated as it should be to open a business in this country.”

I feel like a SETI researcher who finally hears an episode of Gilligan's Island beaming down from Alpha Centauri. I thought I was alone (except Mike Cannon at Cato, John Goodman of the Goodman institute and a few other assorted oddballs like myself -- oh, and the ghost of Milton Friedman of course) to think that a basically free market, including the guaranteed renewable and transferable insurance that a free market would provide, is a practical goal for US health care. Even normally sensible free market economists usually say silly things like "well, the free market is fine for everything else but health is too important to be left to the free market."

There is hope. Common sense people are starting to see the common sense that health care and health insurance need not be the same thing, and that the same cash market by which we pay contractors, tax preparers, lawyers, architects, financial managers, car repairers, plastic surgeons, vets, and other providers of complex services can lie at the basis of health care.  

Tesla Bubble?

Paul Vigna in the Wall Street Journal

Source: Wall Street Journal

"Tesla TSLA -18.51% Inc.’s shares rose 14% Tuesday to $887.06. They have surged 56% in the past week and have nearly quadrupled since early October.  Those outsize gains don’t match Tesla’s more modest fundamentals, which include annual losses."

"They do, however, resemble any number of other assets that have experienced prolonged bubbles, including shares of Qualcomm Inc. and other tech stocks of the dot-com era; oil in 2008 and bitcoin in 2017."

At these prices, Tesla is worth more than Ford and GM combined.

Holman Jenkins:

Tesla can earn a lot more profit per car, and can sell a lot more cars than it does now, and still its stock is priced as if its future profits will be coming from some unnamed something that is not the car-making business.

A correspondent:

I just looked at the minute by minute data for TSLA.  In the last 12 minutes of trading volume was 4.5 million shares, high price was 967, low price (in the last 12 minutes not the day) came 5 minutes later at 860, closed at 887.06.  

Shares outstanding is 180 million so the move from 969 to 860 erased 20 billion of market cap, in five minutes, on no news.  These numbers are so crazy they seem almost meaningless but they make for a good sound byte in a video.

And implicitly (he's more polite)

So Mr. Efficient Market, what do you make of that? 

I can't resist the temptation to plug an old paper, that I have long wanted to return to, "Stocks as Money." I wrote it in response to the internet boom and bust, and the excellent Owen Lamont -Richard Thaler "Can the market add and subtract" in particular. 

This pattern happens over and over (and over and over) again in financial markets. Surely we can do better as an "explanation" than "people are dumb." Or, as Lamont and Thaler put it so nicely,

one needs investors who are (in our specific case) irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold over-priced assets.

Patterns that are repeated over and over again need ether irredeemable human folly -- not much of an "explanation" as it can explain anything -- or economics, a model by which rules of the game produce a strange outcome despite people in the game understanding the game and where it ends. That's what "stocks as money" suggested.

Stocks as money points out these events do not happen in isolation. High prices are only one symptom. They always occur with 1) huge price volatility (check) 2) huge share turnover (check) 3) impediments to short-selling, especially at a longer horizon (check, more below)  4) in an asset where there is a lot of disagreement, a lot of potential news, a lot of different opinions about long run value. Bubbles do not happen in regulated public utility stocks.

"People are dumb and will pay too much for flashy stuff" does not explain why they should, a week later, change their minds and sell. It does not explain why high prices only happen with the other four.

So why would anyone buy Tesla?

Wokeademia spreads

In my first and second posts on "diversity statements," I discovered how these political loyalty oaths are now required by the University of California and the National Institutes of Health. 

In a quick look at academicjobsonline I discovered that this cancer has metastasized even further. "Diversity statements," professions of loyalty to the "diversity" cause, and testimonials about one's past commitment to "diversity" efforts pervade academic jobs postings. This is not just a requirement imposed by a nebulous bureaucracy, as I had assumed. It is deeply embedded in each department's recruiting, with therefore the active participation of faculty. 

At the cost of repetition, let me be clear about this sensitive issue. 

Universities started with a desire to hire African Americans, women, and other groups, to address the sadly small numbers of these on their faculties. Racial and gender discrimination being illegal, this was soon labeled a "diversity" effort. But for a long time "diversity" meant only who you hire, not their politics. 

The "diversity statement" is a new effort, in which every potential faculty member must pledge their personal loyalty to the diversity movement, and pledge future activity.  They also must describe their personal experiences advancing "diversity." And they must not mention ideological or other diversity. 

In part, as documented in my first post and references, this has simply been a way to more effectively impose illegal racial and gender quotas. 

 

The part I object to in these posts is the "diversity statement," and the activity it commands. This statement is a clearly political oath, and squashes ideological diversity. Republicans are a lot rarer on college faculty than any racial or sexual group! 

This post is not about the desirability of seeing more under-represented groups in academia. It is not about the previous "diversity" regime which mostly amounted to spending a lot more time making sure one had examined all potential candidates from under represented groups, and documented such to upper administration. We can discuss those another day. The point here is only about the diversity statement, and the requirement to bend ones research, political support and activity to its cause.

Here is a brief sampling of current job postings (it's a little late in the season, so the pickings are slim. I'll look again in the fall. All emphasis in italics are mine. Major news below, Cornell seems to have the same institution-wide diversity pledge requirement as the UC system. 

*******

CALIFORNIA STATE UNIVERSITY, LONG BEACH 

Position: Assistant Professor of History  

Required Qualifications:

Ph.D. in History with specialization in Modern World history, with an emphasis in either the African Diaspora, the Islamicate, or South Asia 

....

Demonstrated commitment to working successfully with a diverse student population 

Preferred Qualifications:

...Evidence of support for and/or experience related to the University’s strong commitment to the academic success of its diverse student body ...

Duties: 

...enthusiastically support the University’s strong commitment to the academic success of all of our students, including students of color, students with disabilities, students who are first generation to college, veterans, students with diverse socio-economic backgrounds, and students of diverse sexual orientations and gender expressions. 

How to Apply - Required Documentation:

An Equity and Diversity Statement about your teaching or other experiences, successes, and challenges in working with a diverse student population (maximum two pages, single-spaced)....

(Cal state Long Beach has lots of job postings at the moment, all with this language, so it does come from upper administration, but with the consent of the departmental faculty.) 

***********

Purdue University, History Department

Position Title: Assistant Professor of History

Position Description: Tenure Track Assistant Professor in Military History / History of the American Civil War Era 

Boot Camp

The Hoover Institution will host another "Policy Boot Camp" August 16-22. See here for details and how to apply. It's a one-week survey of serious policy analysis.

The program includes  economists such as John Taylor, Ed Lazear, Amit Seru, Caroline Hoxby, Erik Hurst, and yours truly. Learn about international affairs from H.R. McMaster, Jim Mattis and  Condoleezza Rice. Niall Ferguson on Nationalism vs. Globalism and Bjorn Lomborg on climate should be worth it all on their own. And many more.

It's designed for "college students and recent graduates," but I think that is a bit elastic. Food and lodging free.

Update: in response to a commenter. Yes, PhD students and even those a year or two out are welcome. 

Online Asset Pricing back again!

My online Asset Pricing course is back again, after one more software/administrative change once again threatened its demise.  It's still on Canvas, but you have to ask to sign on.

The course is here, University of Chicago Canvas course 23303. To log in and use it, you need to email  instructional.design@chicagobooth.edu.  The course is open to anyone, not just University of Chicago students. If that doesn't work, email me john dot cochrane at stanford dot edu, and I'll see what's wrong.

The videos, notes, and other materials are still available ungated on my website, here, under the "Asset Pricing" tab.

If all goes well you see this:

Economic note: It's interesting how software depreciates so rapidly, though its physical being depreciates not at all. Perfectly good software stops working as operating systems and machines get "upgraded," as IT departments seem to latch on to new "solutions" every three years, and so forth. Most of my email from before the mid 2000s is gone due to an "upgrade." My website is in the midst of an "upgrade" crisis, and I can't seem to keep the online class going for more than two or three years. There is an interesting economics paper in this. As son of a historian, I feel for the historians of a few hundred years from now who, looking back on our interesting era, will find a blank void, as all of our records are unreadable.

More wokeademia

An anonymous commenter on my last post points to an article by Jeffrey Mervis in Science Magazine. The National Institutes of Health -- that's the NIH, an arm of the Federal Government, that distributes your and my tax dollars to support research -- will

launch a $241 million initiative called Faculty Institutional Recruitment for Sustainable Transformation (FIRST). The money, over 9 years, would go to help each of roughly a dozen universities and medical schools support a cluster of 10 or more newly hired young faculty members. 

That sounds nice. The catch:

Not all of the 120 new hires would need to belong to groups now underrepresented in academic medicine, which include women, black people, Hispanics, Native Americans, and those with disabilities, says Hannah Valantine, NIH’s chief diversity officer. In fact, she told the Council of Councils at its 24 January meeting, any such restriction would be illegal 

Well, there is a welcome acknowledgment

and also run counter to the program’s goal of attracting world-class talent. But Valantine says every person hired must have a track record of working to change a culture that too often makes scientists from underrepresented groups feel unwelcome on campus and isolated in the laboratory.

(My emphasis) Read that again slowly. "Every. person. hired. must. have. a. track. record"... The minorities too. The NIH is now forcing universities to add a political litmus test for hiring.

This metamorphosis, from quotas, to affirmative action, to diversity, to active political loyalty to the "diversity equity and inclusion" enterprise, is spreading faster than I thought.

Wokeademia

I'm working on an economic view of political polarization. One aspect of that project is the extent to which many institutions in our society have become politicized. Today's post is one little data point in that larger story. It tells a little story of how to politicize an institution and silence dissenters.

Jerry Coyne reports on the "diversity equity and inclusion statement" required of anyone hired by the University of California, or desiring a raise or promotion. This is a required statement each candidate must write "Demonstrating Interest in and Ability to Advance Diversity, Equity, and Inclusion." It's not about whether you are "diverse," meaning belonging to a racial, gender, or sexual-preference group the University wishes to hire. It is a statement, as it says, of your active participation in a  political movement.

Ferguson and the billionaires at Davos

In my last post, I commented on Joe Stiglitz view, heading to Davos, that billionaires and corporate leaders are anxious to pollute the air.  In my wealth tax series I reported on the popular view on the Warren Sanders Saez Zucman view that corporate leaders and billionaires represent a regressive right wing political force, that must be stopped by any means including expropriation of their wealth, even if that means destroying the businesses that make them rich.

My colleague Niall Ferguson reports from Davos what seems actually to be on billionaires' minds: 

Take the World Economic Forum (WEF), the gathering of billionaires, millionaires, world leaders, do-gooders, busybodies and journalists that takes place each January in the Swiss resort of Davos. The overwhelming majority of people attending this year’s conference would, I have no doubt, affirm their commitment to reducing carbon dioxide emissions to avert catastrophic climate change, even while on board their Gulfstreams and in their Range Rovers.

I doubt if a single chief executive present at the WEF last week would dare publicly to challenge the view that a modern corporation should rigorously measure and regulate its behaviour in terms of its environmental and social impact, as well as its quality of governance (ESG, for short). As the US Business Roundtable declared last August, firms must now be run not only for the benefit of their shareholders but also for all their “stakeholders”: customers, employees, suppliers and communities. Milton Friedman is dead. Long live Klaus Schwab — founder of the WEF — who pioneered this notion of stakeholder capitalism.

“ESG-omania” (or “ESG-apism”) meant Davos 2020 was an orgy of virtue-signalling on climate change and diversity. To walk down Davos Promenade, the main drag, was to run a gauntlet of uplifting corporate slogans: “Sustainable solutions for Earth, for life”; “A cohesive and sustainable world starts with data”; “Let’s bring sea level and C-level together”.

Each year the WEF’s global risks report tells us what the business elite is most worried about. Ten years ago, the top five risks were “Asset price collapse”, “China economic slowdown”, “Chronic disease”, “Fiscal crises” and “Global governance gaps”. This year? “Extreme weather”, “Climate action failure”, “Natural disasters”, “Biodiversity loss” and “Human-made environmental disasters”.

(Related, the Wall Street Journal reported last week that Goldman Sachs will no longer fund fossil fuel development in the Arctic, or any US company that does not have women or "diverse" board members. And Jan 27, quotes "Salesforce chairman and co-CEO Mark Benhoff that "capitalism as we have known it is dead, and this obsession that we have with maximizing profits for shareholders alone has led to incredible inequality and a planetary emergency." ) 

In public, at least. In private, 

In quiet corners of the Davos congress centre you could hear Europeans wishing they could have at least a piece of this American action [Trumpian growth]— and complaining that Greta’s demand for “zero carbon now” was a recipe for zero growth.

... you say one thing in public and another in private. It was once the basis of life in communist systems all over the world. It turns out to be something capitalists can do just as easily, ...

Business people adopt whatever public views are convenient. And their public virtue-signaling means that winds now blow from the left. 

If Davos Man has come around to Trump — enough to expect, if not quite to hope, for his re-election — it is no guarantee that he will win on November 3. If January 2016 is anything to go by, you should probably bet against the Davos consensus and have a flutter on Bernie Sanders.

Niall organizes his thoughts around  "cognitive dissonance." Good old-fashioned "Hypocrisy" might be a more apt word. As in 

Do you give speeches about climate change at international conferences, having flown there by private jet? Do you ever sit in a big black car in a traffic jam, when you could quite easily have walked, despite knowing that this, too, is adding yet more carbon dioxide to the atmosphere?

Exhibit A: 

In this green new world, Davos Man must now prostrate himself before Stockholm Girl: 17-year-old Greta Thunberg, who delivered her latest tirade on Tuesday morning. “We don’t need a ‘low-carbon economy,’ ” she declared. “We don’t need to ‘lower emissions’. Our emissions have to stop. ...

I love Greta Thunberg, because she exposes the immense hypocrisy of the political climate establishment. When she went to school, she received the same alarmist pablum handed out to children around the world -- the climate is a crisis. Civilization is going to end. The world will be a red hot cinder in your lifetime. We have exactly 11 years to stop it. The other children, like those in communist countries including China today, understood the game. Mouth the pieties, get a good grade on the test, don't argue, and go out to play. Greta, who describes herself as neuro-diverse, took it seriously and literally. Well, if the planet is going to fry in exactly 11 years we darn well had better do something about it, and not just virtue-signal in our PR statements and buy some phony carbon offsets when we fly the Gulfstream back from Davos.

Niall's last point is excellent:

In the same way, if it’s climate change the WEF-ers are most worried about, you should probably brace yourself for a coronavirus pandemic. Talking of cognitive dissonance, what the hell were we all doing at a massive global conference last week? Fact: at least three of the WEF attendees were from — you guessed it — Wuhan.

What are the really big risks in the next 10 years? Pandemic, nuclear war, civil war, government collapse. The ones very few people are paying any attention to. The big ones are never the ones conventional wisdom sees coming a hundred years away.

Update:

On reflection, hypocrisy is not a good word either. What do you call the behavior, of mouthing platitudes that you know to be meaningless or false, from good old self interest? You know a Warren or Sanders presidency is a good possibility, and they will use the regulatory and judicial machinery ruthlessly. So let's get those public statements and virtue signals out fast -- support for "stakeholder" capitalism, climate crisis, "ESG" metrics or whatever it takes. You know that social climbing at Davos, your nonprofit boards,  (your hope to become dean someday, in academia) or just avoiding the twitter mob demand conformity. So you mouth the harder and harder to pronounce words, or even convince yourself of the worthiness of it all.  There must be a good word in  Russian, the art of getting along under a communist regime.  We say "virtue-signaling" but that does not cover the self-interest of going along with the crowd. I welcome suggestions for a good word.

The best of times, or the worst of times?

So how is the economy doing? A good friend passed along for comment a recent project syndicate essay by Nobel Prize winning economist Joe Stiglitz. For an alternative view, I found interesting commentary on the CEA website,  "The Impact of the Trump Labor market on historically disadvantaged Americans" and "The blue-collar boom reduces inequality"

A fact that cannot be missed is that overall GDP is growing. In terms of the overall economy, 2019 was the best year in all of human history. The 3.5% unemployment rate has not been this low since December 1969. So, if we wish to complain, it must be that this prosperity is not evenly shared. (I would also complain that things could be much better, but neither of our essays today is really about that point. Free-market paradise will have to wait.)

Stiglitz:

As the world’s business elites trek to Davos for their annual gathering, people should be asking a simple question: Have they overcome their infatuation with US President Donald Trump?

Two years ago, a few rare corporate leaders were concerned about climate change, or upset at Trump’s misogyny and bigotry. Most, however, were celebrating the president’s tax cuts for billionaires and corporations and looking forward to his efforts to deregulate the economy. That would allow businesses to pollute the air more, get more Americans hooked on opioids, entice more children to eat their diabetes-inducing foods, and engage in the sort of financial shenanigans that brought on the 2008 crisis.

Goodman on health insurance

John Goodman and Devon Herrick have a good essay on where we are with health insurance.

The central impetus of Obamacare was not to insure more people.

...About 95% of those who vote already have insurance, Schumer noted. So Obamacare was promising to spend a great deal of money on people who don’t vote.

Instead, their message focused on protecting sick people from abuses by insurance companies. More often than not, that meant protecting people who migrated from an employer plan to the individual market with a preexisting condition.

Virtually every Republican proposal to reform Obamacare has been attacked by opponents as weakening protections for those with preexisting conditions.

And Republicans from the President on down have, so far and in public, committed that they will continue to address this problem with the sledgehammer of forcing insurance companies to charge the same premium to everyone who shows up, sick or not. From this Adam and Eve apple the rest of the mess follows. For now insurance is outrageously expensive for healthy people.  And both the government and insurance companies work hard to ration and limit how well they serve sick people.

Once upon a time in America there was good, relatively expensive, individual health insurance. It was "guaranteed renewable." If you bought it when you were healthy, and then got sick, they could neither cancel your policy or raise your premiums. People with part time jobs or self employed bought it. It wasn't perfect, but then again nothing is.

There is a market-based answer to pre-existing conditions, which I've been plugging for 25 years now: improve that guaranteed renewable structure. Most of all, then doctors and hospitals compete to serve sick people, rather than shun them. Only in medicine does a business try to get rid of its most faithful customers. (Thanks to John and Devon for the plug.)

As John and Devon put it,

Before Obamacare, the customers for individual market insurance were either self-employed or buying coverage between jobs. They were mainly seeking financial protection against potential future medical expenses.

Especially the right to stay insured if they got sick.

In the meantime what happened to Obamacare? It has largely expanded medicaid and subsidized exchange policies for low income people. And it has destroyed the market for individual health insurance. If you make more than the qualifying income, and are not affiliated with some large business that runs an employer-based group, you are screwed.

Great Society Review

I just finished Amity Shlaes' Great Society. It's a great book. I warmly recommend it.

The US is debating a fourth great wave of US government expansion. Theodore Roosevelt to Wilson the original progressive era and WWI; Frankin Roosevelt's new deal; and the Kennedy-Johnson-Nixon "great society" of this book came before us.

Plus ça change, plus c'est la même chose, is in many ways the theme of the book. The Great Society offers lots of parallels to our time, and a cautionary tale that it will all end badly once again. But not all is the same, and the many ways our time is different from the 1960s is also good to ponder -- for better and for worse.

Amity is a gifted writer and storyteller. Pay attention to her books also for how they are written. How do you tell the story of an era in a way that is comprehensible and memorable? Amity picks a few central (and now often overlooked) people, a few programs, and a few benchmarks (the Dow, the price of gold), and tells the story of the era through their eyes. It's the Game of Thrones approach to the Great Society.  Do not expect even a comprehensive list of all great society programs, diff in diff regression discontinuity estimates of their causal effects, or even charts and graphs (all curiously packed in an appendix and never referred to in the text) or the customary eyeball-glazing recitations of statistics. This was her approach to the Great Depression in Forgotten Man, equally effective. It complements, but does not substitute for that more structural work.

Introduction

In case you don't get the point, Amity starts right off in the introduction with Michael Harrington who wrote "a then-famous bestseller called The Other America" and who worked for Sargent Shriver, which is one of the main characters of the book (Daenerys Targaryen?)

Why not socialism? The president had been in office three months, and he wanted new ideas to distinguish himself from his predecessor. Could the author bring up socialism at the lunch? The very word “socialism” had been toxic until recently. ... The taboo was weakening, though.

..“socialism” might sound too controversial for the White House. The writer could, however, pitch ideas that took the country toward socialism. ... Laws that backed up organized labor so it might represent a greater portion of the American workforce... Higher minimum wages... Minimum wages that covered more workers, even those who did not work in an office or full-time. A dramatic change in the training of bigoted policemen in the big cities. ... The money was simply in the wrong hands. ... a tax system that captured the elusive wealth of the superrich. The moment had come to level incomes in a systematic fashion. 

..The story sounds like something that could happen today."

The 1960s and early 1970s included a huge expansion of programs. And the results were in the end mostly abject failure.

Today

progressive proposals that bear a strong resemblance to Michael Harrington’s, from redistribution via taxation to student debt relief to a universal guaranteed income, are becoming popular again. Once again, many Americans rate socialism as the generous philosophy. But the results of our socialism were not generous. May this book serve as a cautionary tale of lovable people who, despite themselves, hurt those they loved. Nothing is new. It is just forgotten.

It is also a refreshing reminder of just how old most of the "new" ideas we are being bombarded from on the left are -- and a warning of how long they will pester us, at least as long as we are unwilling to learn.

From an SDS (students for democratic society) manifesto:

"The wealthiest 1 percent of Americans own more than 80 percent of all personal shares of stock"

The capsule stories of the 1960s focus on the civil rights triumph, the remaining politically successul programs such as medicare and medicaid, the vietnam war, and a vague hippy nostalgia. Shales' story, and the central roles of the forgotten (largely)  men she tracks are a novel tonic.

Stories

Walter Reuther, head of United Auto Workers, is a central figure, and the fight between the old-left unions and the new-left students epitomized by Tom Hayden, for the soul of the Democratic party.

Sargent Shriver, and the Office of Economic Opportunity are the stand-in for many ill fated programs. It starts with the predictable story of chaos that results from a flood of federal money.   The flood of federal money  did not stop the cities from burning.  The OEO is the beginning of Federal support for "community action" programs, including political activity.

"Community action programs, the authors [of the Community Action Program Workbook—262 pages on how to apply for and run a federally funded program] wrote, should provide the “stimulation of change.” One marker of a successful community action group was that it “increased competence in protest activities.” The OEO ... welcomed experiments, including those where community action organizers paid by Washington were “facilitating the opportunities for the poor to participate in protest actions.”

That kind of language was enough to send mayors like Dick Daley through the roof.

In the end, the cities went up in flames. The OEO morphed in many ways. One interesting almost afterthought of the original program, legal aid to the poor -- who can obect to that, helping poor people who can't afford lawyers? -- ballooned the way all such programs do,

"the governor [Reagan] was after the lawyers again, assailing California Rural Legal Assistance. The nonprofit should have stuck to individual legal aid cases for rural indigents, Reagan said, but instead had “converted itself into a vehicle for class action lawsuits against various government agencies.” Reagan told the crowd that his staff had reckoned that if the CRLA won all its suits in California, the cost of welfare there would increase by $1 billion—the same amount Johnson and Shriver had first set as the budget for the entire War on Poverty."

Here was where the government started paying lawyers to sue the government for more government.

Amity tracks disastrous housing policies through the life of the Pruitt-Igoe housing project in St. Louis, begun in earnest but remote social-planner hope, though destroying the community where it sat, and ending in controlled demolition.

"In some cases, only welfare families were entitled to the lowest rents at Pruitt-Igoe. And to receive welfare under Missouri’s rules, a family could have only one parent—the mother. So families considering life in the towers had to make a terrible choice: stay together or take the apartment. ..Families who moved into Pruitt-Igoe often lost a father. ...The social workers even policed apartments at night, checking to see if fathers had secretly returned, grounds for eviction. "

The consequences of which are predictable.

"Pruitt-Igoe elevators, which stopped only every few floors, were muggers’ traps. Poor maintenance meant the elevators often jammed, leaving gangs’ victims in with them for long extra minutes. The gangs lurked in the halls and made tenants “run the gantlet” to get to their doors. Young men threw bricks and rocks at windows and streetlamps; the activity was a regular sport..... Because there were no toilets on the ground floor, children had accidents there and in the elevators, and the elevators gradually became public toilets. The community area was a sorry joke... No one seemed able to stop the decay. "

I love this:

"Social scientists were descending on the complex to conduct multiyear investigations, and that irritated the tenants further."

we've been at it a long time, missing the ends of our noses.

"At Pruitt-Igoe, rents were scaled to income. Every time the Straughters’ wages went up, their rent went up, a tax on striving"

Income-capped rent subsidies are with us today.

"After tens of millions and decades of urban renewal spending, Detroit did not look renewed. Detroit looked, Mayor Cavanagh said, like a city that now did need a Marshall Plan, like “Berlin in 1945.” Almost three thousand businesses had been sacked, with damage many times greater than in Watts just two years before. "

In the end

"There was hypocrisy [and I would say a great deal of paternalistic disdain] in the  different treatment of the middle class and poor. For the middle class, the government had aimed to re-create and sustain the world of Alexis de Tocqueville, subsidizing home purchasers for suburban settlers. For the poor, however, the government had operated in the world of Karl Marx: government-sponsored housing blocks with tenants, not owners. Black citizens—Pruitt-Igoe was now all black—had been ripped from their roots when they moved North, uprooted again when they were moved for urban renewal, and then placed in high-rise rentals where putting down new roots was impossible."

"How might neighborhoods like this one have turned out if local companies, local authorities, and local individuals had led in the 1950s and 1960s, building their own Great Society? How might St. Louis have looked if the jobs had stayed? No one knew.  But here in the shadow of

Pruitt-Igoe, Father Shocklee and Pruitt-Igoe tenants had discovered one possibility. With his small housing program, Father Shocklee had shown that “the poor” were more like the middle class than people supposed. They gained from something only when they had a chance to own it."

Daniel Patrick Moynihan is a second central character in Amity's story (Tyrion Lannister?) Moynihan was a Democrat, but wrote the important and controversial "The Negro Family: The Case For National Action," pointing out, among many other things, the perverse incentives of welfare.

"From his work at Harvard and in Washington, Moynihan thought he had learned what was wrong with American welfare. The first trouble was that poverty funding tended to flow to bureaucrats—social workers, not poor people. “Feeding the horses to feed the sparrows,” Moynihan called it.  In many states, those social workers spent their time in perverse endeavors: inspecting apartments at Pruitt-Igoe to make sure no fathers were present, for example. Taxes hit people when they entered the workforce, reducing the appeal of working just as Eartha Kitt said. ...In some states, for example, a welfare mother working at the same job as a family father not on welfare took in 50 percent more than the man, because she was entitled to keep a portion of her welfare. Why not bypass the bureaucrats and send the money to families, regardless of whether fathers were present?"

And then he took a job with Nixon, and became one of Nixon's main advisers. He nearly got passed a negative income tax, the equivalent of today's universal basic income. In his grudging New York Times review, Binyamin Applebaum finds this story "curious," because it did not pass in the end. But it nearly did, which makes it important. Amity covers well the failed attempt to over rule right to work laws, which also nearly passed. Near failures good and bad are equally instructive to our current situation, no matter the flap of butterfly wings that determines their fate.  (The quick review of the UK's longer experience starting p. 335 is well worth it too.)

I found this amusing

"The crowd at Harvard had held even Hubert Humphrey, and at times Robert Kennedy, in contempt. Any interest in Nixon Harvard rated worse than reprehensible

The schoolmates of Moynihan’s children stopped talking to them. Alan Rabinowitz, a fellow academic, wrote a satirical poem chiding Moynihan for his betrayal, “The Knight Before Nixon.”

Plus ça change in academia, and much Trump-deranged society.

Fairchild semiconductor plays a small but significant role. It's good to remember how different the US economy of the 1950s was. There really were a few very large companies in most industries, and most technology came out of defense. The emergence of an innovative private tech sector is one of those many ways we are not replaying exactly the same song. The slow emergence of Toyota and VW, selling better cars and forcing change in Detroit is another.

Money and gold

A minor story for the book caught my eye, and I pass it on first as many blog readers are interested in monetary issues. One of the themes of the book --  the snow level on the great white wall -- is the price of gold, and the US continuing problems of gold outflow, the emergence of inflation, and the eventual collapse of the Bretton Woods system. This is an event much too little studied by macroeconomists, though my international and economic history friends tell me that shows just how parochial we are and we should start reading their papers.

In macroeconomics perhaps we are too influenced by Milton Friedman's great called home run, the 1968 presidential address, where he forecast inflation would emerge along with unemployment. But Friedman's story was told entirely in terms of the money supply and to a lesser extent interest rate targets, the one too large and the other too low. And that is how the stylized history has come down to us: Fiscal deficits from the Great Society and Vietnam war, combined with too loose monetary policy, set off inflation.

That story leads to the puzzle of our age: If the (by current standards) comparatively minor Johnson-Nixon deficits set off a grand inflation why do our huge deficits have no such effect now, despite many officials stated desire for more inflation?

The story of the book reminds us that the mechanics were quite different then, and leads me to the speculative thought that the gold standard mechanism brought on inflation much more quickly than our current arrangements. In part, it may have been designed to do so -- to force governments to make fiscal adjustments quickly rather than let the problem get so big the fiscal adjustment will be immense, much as Doug Diamond and Raghu Rajan model short term debt and its runs as a disciplining device to managers.

The world was different then. We had fixed exchange rates, and it was difficult to move capital from country to country -- to buy foreign stocks, for example. Bretton Woods was not really set up to handle today's large trade deficits financed by large capital account surpluses. When the US started running trade deficits, other countries piled up dollars, and the main thing they could do with those dollars was to turn them in to their central banks, who in turn used them to drain gold from the Fed. So, it strikes me that open capital markets that allow us to finance large trade deficits are an important reason our system has held up so long.

Amity tells the sad tale of stopgap measures -- bans on using dollars for foreign travel, half-hearted interest rate increases, looney schemes for the Federal Government to mine gold, and of course the tragedy of price controls.

In any case, the remaining gold standard between central banks, not very open capital markets, not very open currency markets and fixed exchange rates were a crucial part of the inflation dynamics in this period, not just bad money supply or interest rate rules.

The episode also raises the counterfactual question why the US did not use the many devices used to defend the gold standard through the centuries. Borrow gold. Temporarily suspend convertibility.

Coda

At the end of a review that had to be negative, though he had to admit the quality of the book, New York Times review, Binyamin Applebaum writes

"Half a century later, in the midst of a revival of interest in ideas like Moynihan’s basic income proposal, readers may find themselves wondering whether the nation’s problem is really too much government — or, perhaps, not enough."

One wonders just what it would take to ever change his mind on that one. Were the 60s riots, the 70s economy, and the evident pathologies of the welfare system not bad enough, or do we have to go full Venezuela first? After all these years, and with the same policies on agenda, with the same predictable disincentives and unintended consequences, could not his call be at least for smarter government, not just more? For a larger government that learns from rather than repeats this sad history?