Archive for August, 2016

Helicopter Money and the Reflux Problem

Although I try not to seem overly self-confident or self-satisfied, I do give myself a bit of credit for being willing to admit my mistakes, of which I’ve made my share. So I am going to come straight out and admit it up front: I have not been reading Nick Rowe’s blog lately. Realizing my mistake, I recently looked up his posts for the past few months. Reading one of Nick’s posts is always an educational experience, teaching us how to think about an economic problem in the way that a good – I mean a really good — economist ought to think about the problem. I don’t always agree with Nick, but in trying to figure out whether I agree — and if not, why not — I always find that I have gained some fresh understanding of, or a deeper insight into, the problem than I had before. So in this post, I want to discuss a post that Nick wrote for his blog a couple of months ago on “helicopter money” and the law of reflux. Nick and I have argued about the law of reflux several times (see, e.g., here, here and here, and for those who just can’t get enough here is J. P. Koning’s take on Rowe v. Glasner) and I suspect that we still don’t see eye to eye on whether or under what circumstances the law of reflux has any validity. The key point that I have emphasized is that there is a difference in the way that commercial banks create money and the way that a central bank or a monetary authority creates money. In other words, I think that I hold a position somewhere in between Nick’s skepticism about the law of reflux and Mike Sproul’s unqualified affirmation of the law of reflux. So the truth is that I don’t totally disagree with what Nick writes about helicopter money. But I think it will help me and possibly people who read this post if I can explain where and why I take issue with what Nick has to say on the subject of helicopter money.

Nick begins his discussion with an extreme example in which people have a fixed and unchanging demand for money – one always needs to bear in mind that when economists speak about a demand for money they mean a demand to hold money in their wallets or their bank accounts. People will accept money in excess of their demand to hold money, but if the amount of money that they have in their wallets or in their bank accounts is more than desired, they don’t necessarily take immediate steps to get rid of their excess cash, though they will be more tolerant of excess cash in their bank accounts than in their wallets. So if central bank helicopters start bombarding the population with piles of new cash, those targeted will pick up the cash and put the cash in their wallets or deposit it into their bank accounts, but they won’t just keep the new cash in their wallets or their banks accounts permanently, because they will generally have better options for the superfluous cash than just leaving it in their wallets or their bank accounts. But what else can they do with their excess cash?

Well the usual story is that they spend the cash. But what do they spend it on? And the usual answer is that they buy stuff with the excess cash, causing a little consumption boom that either drives up prices of goods and services, or possibly, if wages and prices are “sticky,” causes total output to increase (at least temporarily unless the story starts from an initial condition of unemployed resources). And that’s what Nick seems to be suggesting in this passage.

If the central bank prints more currency, and drops it out of a helicopter, will the people refuse to pick it up, and leave the newly-printed notes lying on the sidewalk?

No. That’s silly. They will pick it up, and spend it. Each individual knows he can get rid of any excess money, even though it is impossible for individuals in the aggregate to get rid of excess money. What is true for each individual is false for the whole. It’s a fallacy of composition to assume otherwise.

But this version of the story is problematic for the same reason that early estimates of the multiplier in Keynesian models were vastly overstated. A one-time helicopter drop of money will be treated by most people as a windfall, not as a permanent increase in their income, so that it will not cause people to increase their spending on stuff except insofar as they expect their permanent income to have increased. So the main response of most people to the helicopter drop will be to make some adjustments in the composition of their balance sheets. People may use the cash to buy other income generating assets (including consumer durables), but they will hardly change their direct expenditures on present consumption.

So what else could people do with excess cash besides buying consumer durables? Well, they could buy real or financial assets (e.g., houses and paintings or bonds) driving up the value of those assets, but it is not clear why the value of those assets, which fundamentally reflect the expected future flows of real services or cash associated with those assets and the rates at which people discount future consumption relative to present consumption, is should be affected by an increase in the amount of cash that people happen to be holding at any particular moment in time. People could also use their cash to pay off debts, but that would just mean that the cash held by debtors would be transferred into the hands of their creditors. So the question what happens to the excess cash, and, if nothing happens to it, how the excess cash comes to be willingly held is not an easy question to answer.

Being the smart economist that he is, Nick understands the problem and he addresses it a few paragraphs below in a broader context in which people can put cash into savings accounts as well as spend it on stuff.

Now let me assume that the central bank also offers savings accounts, as well as issuing currency. Savings accounts may pay interest (at a rate set by the central bank), but cannot be used as a medium of exchange.

Start in equilibrium where the stock of currency is exactly $100 per person. What happens if the central bank prints more currency and drops it out of a helicopter, holding constant the nominal rate of interest it pays on savings accounts?

I know what you are thinking. I know how most economists would be thinking. (At least, I think I do.) “Aha! This time it’s different! Because now people can get rid of the excess currency, by depositing it in their savings accounts at the central bank, so Helicopter Money won’t work.” You are implicitly invoking the Law of Reflux to say that an excess supply of money must return to the bank that issued that money.

And you are thinking wrong. You are making exactly the same fallacy of composition as you would have been making if you said that people would leave the excess currency lying on the sidewalk.People in aggregate can only get rid of the excess currency by depositing it in their savings accounts (or throwing it away) therefore each individual will get rid of his excess currency by depositing it in his savings account (since it’s better than throwing it away).

There are 1,001 different ways an individual can get rid of excess currency, and depositing it in his savings account is only one of those 1,001 ways. Why should an individual care if depositing it in his savings account is the only way that works for the aggregate? (If people always thought like that, littering would never be a problem.) And if individuals do spend any portion of their excess currency, so that NGDP rises, and is expected to keep in rising, then the (assumed fixed) nominal interest rate offered on savings accounts at the central bank will start to look less attractive, and people will actually withdraw money from their savings accounts. Not because they want to hold extra currency, but because they plan to spend it.

There are indeed 1,001 ways that people could dispose of their excess cash balances, but how many of those 1,001 ways would be optimal under the assumptions of Nick’s little thought experiment? Not that many, because optimal spending decisions would be dictated by preferences for consumption over time, and there is no reason to assume that optimal spending plans would be significantly changed by the apparent, and not terribly large, wealth windfall associated with the helicopter drops. There could be some increase in purchases of assets like consumer durables, but one would expect that most of the windfall would be used to retire debt or to acquire interest-earning assets like central-bank deposits or their equivalent.

So, to be clear, I am not saying that Nick has it all wrong; I don’t deny that there could be some increase in expenditures on stuff; all I am saying is that in the standard optimizing models that we use, the implied effect on spending from an increase in cash holding seems to be pretty small.

Nick then goes on to bring commercial banks into his story.

The central bank issues currency, and also offers accounts at which central banks can keep “reserves”. People use both central bank currency and commercial bank chequing accounts as their media of exchange; commercial banks use their reserve accounts at the central bank as the medium of exchange they use for transactions between themselves. And the central bank allows commercial banks to swap currency for reserves in either direction, and reserves pay a nominal rate of interest set by the central bank.

My story now (as best as I can tell) matches the (implicit) model in “Helicopter Money: the Illusion of a Free Lunch” by Claudio Borio, Piti Disyatat, and Anna Zabai. (HT Giles Wilkes.) They argue that Helicopter Money will be unwanted and must Reflux to the central bank to be held as central bank reserves, where those reserves pay interest and so are just like (very short-term) government bonds, or savings accounts at the central bank. Their argument rests on a fallacy of composition. Individuals in aggregate can only get rid of unwanted currency that way, but this does not mean that individuals will choose to get rid of unwanted currency that way.

It seems to me that the effect that Nick is relying on is rather weak. If non-interest-bearing helicopter money can be costlessly converted into interest-bearing reserves at the central bank, then commercial banks will compete with each other to induce people with unwanted helicopter money in their pockets to convert the cash into interest-bearing deposits, so that the banks can pocket the interest on reserves. Competition will force the banks to share their interest income with depositors. Again, there may be some increase in spending on stuff associated with the helicopter drops, but it seems unlikely that it would be very large relative to the size of the drop.

It seems to me that the only way to answer the question how an excess supply of cash following a helicopter drop gets eliminated is to use the idea proposed by Earl Thompson over 40 years ago in his seminal, but unpublished, paper “A Reformulation of Macroeconomic Theory” which I have discussed in five posts (here, here, here, here and here) over the past four years. Even as I write this sentence, I feel a certain thrill of discovery in understanding more clearly than I ever have before the profound significance of Earl’s insight. The idea is simply this: in any intertemporal macroeconomic model, the expected rate of inflation, or the expected future price level, has to function, not as a parameter, but as an equilibrating variable. In any intertemporal macromodel, there will be a unique expected rate of inflation, or expected future price level, that is consistent with equilibrium. If actual expected inflation equals the equilibrium expected rate the economy may achieve its equilibrium, if the actual expected rate does not equal the equilibrium expected rate, the economy cannot reach equilibrium.

So if the monetary authority bombards its population with helicopter money, the economy will not reach equilibrium unless the expected rate of inflation of the public equals the rate of inflation (or the future price level) that is consistent with the amount of helicopter money being dropped by the monetary authority. But the fact that the expected rate of inflation is an equilibrating variable tells us nothing – absolutely nothing – about whether there is any economic mechanism whereby the equilibrium expectation of inflation is actually realized. The reason that the equilibrium value of expected inflation tells us nothing about the mechanism by which the equilibrium expected rate of inflation is achieved is that the mechanism does not exist. If it pleases you to say that rational expectations is such a mechanism, you are free to do so, but it should be obvious that the assertion that rational expectations ensures that the the actual expected rate of inflation is the equilibrium expected rate of inflation is nothing more than an exercise in question begging.

And it seem to me that, in explaining why helicopter drops are not nullified by reflux, Nick is implicitly relying on a change in inflation expectations as a reason why putting money into savings accounts will not eliminate the excess supply of cash. But it also seems to me that Nick is just saying that for equilibrium to be restored after a helicopter drop, inflation expectations have to change. Nothing I have said above should be understood to deny the possibility that inflation expectations could change as a result of a helicopter drop. In fact I think there is a strong likelihood that helicopter drops change inflation expectations. The point I am making is that we should be clear about whether we are making a contingent – potentially false — assertion about a causal relationship or making a logically necessary inference from given premises.

Thus, moving away from strictly logical reasoning, Nick makes an appeal to experience to argue that helicopter drops are effective.

We know, empirically, that helicopter money (in moderation of course) does not lead to bizarre consequences. Helicopter money is perfectly normal; central banks do it (almost) all the time. They print currency, the stock of currency grows over time, and since that currency pays no interest this is a profitable business for central banks and the governments that own them.

Ah yes, in the good old days before central banks started paying interest on reserves. After it became costless to hold money, helicopter drops aren’t what they used to be.

The demand for central bank currency seems to rise roughly in proportion to NGDP (the US is maybe an exception, since much is held abroad), so countries with rising NGDP are normally doing helicopter money. And doing helicopter money, just once, does not empirically lead to central banks being forced to set nominal interest rates at zero forever. And it would be utterly bizarre if it did; what else are governments supposed to do with the profits central banks earn from printing paper currency?

Why, of course! Give them to the banks by paying interest on reserves. Nick concludes with this thought.

The lesson we learn from all this is that the Law of Reflux will prevent Helicopter Money from working only if the central bank refuses to let NGDP rise at the same time. Which is like saying that pressing down on the gas pedal won’t work if you press the brake pedal down hard enough so the car can’t accelerate.

I would put it slightly differently. If the central bank engages in helicopter drops while simultaneously proclaiming that its inflation target is below the rate of inflation consistent with its helicopter drops, reflux may prevent helicopter drops from having any effect.

On Liberalism, Political Correctness, and Illegal Immigration

Last week I wrote a post about criticism by some left-wing liberals of Tim Kaine. My post elicited a series of comments from Peter Schaeffer. I responded to his first comment in the comment section, and he has followed up with some further comments, which raise a number of important issues, partly historical and partly philosophical. While his comments are in some respects insightful, I think that are also very misguided. But it is certainly the case that many of the positions he takes are rather widely held, including by some well-known public figures, so I think that they are worth responding to. So even though some of what Peter and I disagree about are fairly obscure matters of British and American history, I think that it is worth taking the time to respond to most of Peter’s comments.

Peter begins by challenging the main point of my previous post, which was that the attacks on Tim Kaine for being insufficiently liberal, owing to Kaine’s support for free trade, were historically anomalous and ignorant, liberalism having originated in Britain as a political party and political ideology in the course of the mid-19th century struggle over free trade, in which liberals were the advocates for free trade. Peter takes issue with a comment I made in reply to Lars Christensen’s comment on my post. I wrote:

The idea that support for free trade means that you are not a liberal was just too hilarious for me to ignore.

To which Peter responded:

It’s not hilarious at all. It’s reasonable and serious. Modern liberalism is not British 19th century liberalism and doesn’t claim to be. Modern liberalism rejects the ideas (laissez-faire capitalism) and the consequences (extreme inequality) that British 19th century liberalism enthusiastically supported.

They may share the same word, they are not the same thing.

I am fully aware that modern liberalism and 19th century liberalism are not the same thing; much of my post was devoted to explaining why modern American liberalism moved away from 19th century liberalism. But the differences don’t mean that they are totally unrelated and have nothing in common. John Stuart Mill, unmentioned by Peter, was an exemplar of 19th century liberalism, and he surely was not indifferent to the extreme inequality resulting from pure laissez-faire capitalism. Nor did I deny that it is possible to be a liberal and oppose free trade. All I said was that it is a stretch to say that if you support free trade, you can’t be a liberal, which seemed to be the message of the “liberal” opponents of Tim Kaine.

Peter continued:

The nation of Columbia provides a good example. The Columbian Liberal Party was originally a liberal (using the old British sense of the word) party and is now a liberal party (in the modern sense of the word).

What point Peter is trying to make by citing the not very relevant or interesting (WADR) example of the obviously dysfunctional Columbian Liberal Party escapes me. And Peter goes on to show exactly how dysfunctional the party is by providing the following bit of historical trivia.

To put this in perspective, in 1982 Pablo Escobar (yes, that Pablo Escobar) was elected as an alternate member of the Chamber of Representatives of Colombia as a CLP candidate. Presumably, 19th century British liberals would not have welcomed Pablo as one of their candidates.

To which all I can say is: OMG! Perhaps, Peter would like to identify for us which liberals, other than the dysfunctional Columbian ones, he thinks would have welcomed such a one Pablo as a candidate.

From his confusing musings about the squalid state of Columbian liberalism, Peter moves on to a bitter attack on 19th century British Liberalism, accusing the Liberals of having been supportive of slavery and the South in the Civil War. He cites, as he has previously, the remarkable statement by a 19th-century British politician and diplomat, Charles Bowring (whose obscurity can be inferred his absence in the index of Morely’s three volume biography of Gladstone): “Jesus Christ is Free Trade and Free Trade is Jesus Christ.”

To show that this weird formulation was somehow typical of British Liberals, Peter cites Lord Palmerston, the Liberal Prime Minister during the American Civil War, who complained to Charles Francis Adams (US ambassador to Britain) about the Morril tariff, from which Peter infers that tariffs were more hateful to the British Liberals than was slavery. Peter also cites Gladstone as a Liberal supporter of secession. In fact, Palmerston and all the British Liberals were opposed to slavery. However, Palmerston believed that the national interests of Britain might be better served (Britain First?) if the Confederate States were to secede from the Union. It is true that Gladstone made a speech in 1862 in which he suggested that the early military successes of the Confederacy meant that the South had succeeded in creating a new nation, and that it might be best to acknowledge that reality. Gladstone later regretted that this speech, calling the speech “an undoubted error, the most singular and palpable, I may add the least excusable of them all. In the autumn of that year [1862] . . . I declared in the heat of the American struggle that Jefferson Davis had made a nation, that is to say, that the division of the American Republic by the establishment of a Southern or secession state was an accomplished fact. Strange to say, this declaration, most unwarrantable to be made by a minister of the crown with no authority other than his own, was not due to any feeling of partisanship for the South or hostility to the North.” J. Morely, Life of Gladstone, vol. 2, p. 81).

In addition, both Richard Cobden and John Bright, the two leaders of the Anti-Corn Law League, and the most fervent British supporters of free trade, were both equally fervent supporters of the Union. And I just found this 2013 article by Bill Cash, author of a recent biography of Bright showing that Lincoln and Bright were united by common ideals and deep mutual admiration.

For those who have seen the brilliant film Lincoln with Daniel Day-Lewis, you may have noticed in the scenes set within the study that there was a photograph in the left hand corner of the mantelpiece of a great British statesman, John Bright. I have that exact photograph in my personal collection, as described in my book, John Bright: Statesman, Orator, Agitator (IB Tauris, 2011). Bright was the leading advocate in Britain against slavery throughout the American Civil War and who was highly esteemed by Abraham Lincoln for his advocacy in the run up to the Emancipation Proclamation – which had its 150th anniversary on 1 January, 2013.

During the course of the American Civil War, Bright had devoted all his energies to protecting his beloved American democracy – a key influence on his own campaigns for parliamentary reform – centring his arguments on the moral repugnance of slavery. In this, he had the support of the workers at his own cotton mill in Rochdale who, even when impoverished during the cotton famine caused by the war, refused to accept Southern slave-grown cotton. Yet, the relationship between Bright and Lincoln was not merely a real influence on Lincoln himself but on the history of the civil war and the relationship between Britain and America from that time on and still today.

When Steven Spielberg and Day-Lewis were interviewed on television about the film, both of them revealed that what had fascinated them, as much as everything else, was the mind of Abraham Lincoln. And what the photograph in the film represented was the extent to which Lincoln himself paid his own tribute to Bright.

It was testimony to Bright’s influence that Schuyler Colfax (who, as those who have watched the film will have seen for themselves voted for the constitutional amendment in 1865) and Henry Janney – both of whom were confidants of Lincoln – wrote to Bright after the assassination telling him that his portrait and only his portrait was in President Lincoln’s reception room. Lincoln had sent two portraits of himself to Bright, and of the two portraits hanging in Lincoln’s own office, one was of Bright.

Vice-President Schuyler Colfax, then Speaker of the House of Representatives, wrote to Bright in 1866, requesting a likeness of Bright, saying, “Your face is quite familiar to me already, as your portrait hung up in President Lincoln’s Reception room, and often, in the many evenings I spent with him there, he referred to you with sincere regard & even affection. Every loyal man & woman in the land knows you, knows you and esteems you. But your correspondence with Senator Sumner, whom I often meet (& we often talk about you, you may be assured) has informed you of all this.”

A letter from another of the confidants of Lincoln, Henry Janney (dated 24 April, 1865, immediately after the assassination), wrote to Bright relating how he “told the President I had a letter from thee and he requested me to bring it up and let him see it, saying, ‘I love to read the letters of Mr Bright.’ I complied, when he read carefully every word, then remarked to those around him, ‘my friend has show me a letter from Mr Bright. I believe he is the only British statesman who has been unfaltering in his confidence in our ultimate success – look there.’ I stepped up to the wall and seeing a familiar face read beneath it John Bright MP. It was the only portrait in the room.”

It is perhaps, then, no surprise that a long-standing testimonial from Bright calling for Lincoln’s re-election was found in Lincoln’s pocket when they were emptied immediately after his assassination. Bright was known to Lincoln’s intimate friends as greatly influencing the president’s mind.

In the midst of his anti-liberal tirade, Peter suddenly dives into a discussion of political correctness, possibly in reply something I wrote in response to his disparagement of the support that modern liberals lend to political correctness. Here’s what I said:

Political correctness can be problematic, but that doesn’t justify abusive speech in the public arena. Yelling “political correctness” in response to criticism of indecent and abusive rhetoric and incitement is just as reprehensible as suppressing legitimate debate under the guise of “political correctness.” Both sides of this idiotic debate are just sloganeering.

I thought that was a pretty clear statement of opposition to attempts to shut down debate in the name of political correctness; I was just pointing out that abusive and indecent speech cannot be justified or exempted from appropriate expressions of disapproval by the bare assertion that the speaker was merely objecting to political correctness. But Peter doesn’t see it that way:

It is naïve to view Political Correctness (PC) as some sort of antidote to “abusive speech in the public arena”. PC is a comprehensive system of authoritarian thought control that exists to exclude non-PC ideas from the public arena, no matter how innocently they are expressed and no matter if they are well-supported by facts. Note that PC has been highly successful to date in achieving its goals of censorship, oppression, etc.

Peter seems to imply that I believe that Political Correctness is an antidote to “abusive speech in the public arena,” but what I said was that abusive speech cannot be justified as an antidote to, or protest against, Political Correctness. Big difference – but, apparently, not big enough for Peter to grasp. Peter then goes on to cite the case of Larry Summers, who was subjected to considerable public criticism for his comments at an academic conference about the reasons for the under-representation of women in tenured positions in science and engineering at top universities and research institutions.

However, the pseudo-Stalinist show trial of Larry Summers (roughly derived from Saletan, Parker, Taylor, and others) is one of the best example. Larry Summers’s comments to the NBER conference were a model of legitimate, highly rational, scientific, academic discourse (read them in the original). For daring to mention (part of) what science knows he was pilloried around the world and driven from office. His subsequent recantations and groveling apologies would have made a communist show-trial judge proud.

The first thing to notice about Peter’s comment is his Freudian slip in referring to the “pseudo-Stalinist show trial of Larry Summers” when the Slate article by William Saletan to which Peter refers was titled “The pseudo-feminist show trial of Larry Summers.” And the second thing is that Kathleen Parker’s column about the rescinding of an invitation by the University of California to Summers to deliver a commencement address compared Summers’s treatment to McCarthyism not to Stalinism. I disapprove of how Summers was forced out of his position as President of Harvard, in part owing to his comments on the reasons for the under-representation of women in the sciences and engineering at top universities and research institutions. But to compare Summers’s treatment to Stalinist oppression is so far over the top that one has to wonder about Peter’s grasp on reality.

Certainly it was embarrassing for Summers to be subjected to verbal abuse and unjustified accusations of prejudice against women. He was also compelled to apologize more abjectly for his remarks than the substance of those remarks warranted. I don’t dismiss the possibility that discrimination is one factor in explaining the paucity of tenured female faculty in the sciences and engineering at top universities, and I can see why Summers’s remarks could have been misunderstood to deny that such discrimination is a factor reducing the number of females in those positions. But after being forced out of his position at Harvard – and his remarks about women were only one factor in turning the Harvard faculty against Summers – Summers received a quite lucrative severance package as well as an appointment as the Charles W. Eliot University Professor at Harvard. It was hardly to the credit of the University of California to rescind its invitation to Summers to deliver a commencement speech, but to suggest that such an action rises to the level of McCarthyism, much less Stalinism, is simply laughable.

If you want to know what Stalinism really looks like, read this article in Saturday’s New York Times about the recent show trials of four Chinese human-rights activists who were compelled to read self-denunciations in court after being convicted of subversive activities in promoting human rights and civil society.

BEIJING — Chinese lawyers and rights activists appeared in televised trials throughout this week in what seemed to be a new, more public phase of President Xi Jinping’s campaign to cleanse the country of liberal ideas and activism.

Legal experts and supporters of four defendants denounced the hearings, held on consecutive days in Tianjin, a port city near Beijing, as grotesque show trials. All four men were shown meekly renouncing their activist pasts and urging people to guard against sinister forces threatening the Communist Party, before they were convicted and sentenced.

But for the government, the trials served a broader political purpose.

By airing the abject confessions and accusations of a sweeping, conspiratorial antiparty coalition, Mr. Xi’s administration was “putting civil society in all its forms on trial, and vilifying them as an anti-China plot,” Maya Wang, a researcher on China for Human Rights Watch, said in emailed comments.

I don’t defend what was done to Summers, but the way that Summers was treated pales in comparison to what was done to those four brave Chinese activists. Peter continues:

The issue isn’t “abusive speech in the public arena”, but ideological suppression of anyone who dares to deviate from PC orthodoxy.

To restate the obvious yet again, I condemn the ideological suppression of opinions that deviate from PC orthodoxy. But waving the flag of opposition to PC orthodoxy does not give anyone a free pass to engage in abusive speech in the public arena. Which is exactly what abusive speakers are doing nowadays to evade responsibility for their abuse and their threats. Peter goes on to cite an excellent article by Jonathan Chait chastising liberals for siding with the PC police. And Chait makes the valid point that anti-liberal right-wingers and misguided liberals and leftists are all happy to conflate liberalism with left-wing ideology, ignoring the key difference between liberalism and left-wing ideology, which is that liberalism holds that there are certain neutral principles that take precedence over specific objectives and concrete outcomes. Or stated differently, liberalism stands for the idea that it’s not only the ends that people are trying to achieve that matters, it’s also the means that they use to achieve those ends that matters. Certain means are illegitimate no matter how noble the ends. One might have thought that this would satisfy Peter, but it doesn’t.

However, the issue here go further. Let’s say that PC only objected to “abusive speech in the public arena”. That’s not true (at all). But let’s say it was true. So what? Charlie Hebdo has no right to satirize Islamists? Didn’t Voltaire say “I Disapprove of What You Say, But I Will Defend to the Death Your Right to Say It”? What exactly is “abusive speech”? The church regarded Galileo’s claims as “abusive speech”. Was the church right to suppress Galileo? Today’s “abusive speech” may well be tomorrow’s truth. How can any society hope to find truth without allowing dissenting opinions?

Peter seems unable to grasp even basic distinctions. I can express disapproval of Charlie Hebdo without banning it, or tolerating, much less justifying, terrorist attack against the magazine and its staff. Being against abusive speech does not mean suppressing it; it means that those who practice abusive speech should be just as subject to criticism as is everyone else who ventures to expose his thoughts to public scrutiny. When you express an opinion, both the substance of the opinion and the manner in which you express it are legitimately subject to criticism. Trying to shield yourself from criticism by saying that you are being anti-PC is nothing but a dodge and a scam. And to suggest preposterously that Galileo was imprisoned for abusive speech is just a travesty. Legitimate criticism of the way in which an argument is presented is not the same as suppressing the opinion.

In a further comment, Peter responds to something I wrote in response to Benjamin Cole’s comment. I wrote:

I don’t dismiss the effects of trade on workers as some free traders do, but that doesn’t mean that all free trade does is harm workers. Same for the effects of immigration. Those effects are complex, and they are hard to disentangle. Property zoning is a real problem and I am certainly against criminalization of push-cart vending, just as I am against criminalization of non-legal (“illegal” is a pejorative misnomer, which invidiously connotes criminality as does the term “amnesty” when used in the context of immigration reform) immigration.

Peter wrote:

“Illegal” is a statement of fact. We have immigration laws. If you have violate them, you have done something illegal. Sort of like robbery, assault and battery, and arson. These acts are violations of the law. They are illegal. Stealing a car is illegal. If you steal a car and drive it, you are an illegal driver. If you rob a bank, you are a criminal. Calling car thieves and bank robbers criminals (illegals) isn’t pejorative, it’s simply a statement of fact.

“Illegal” is a statement of fact only insofar as there are statutes that declare immigration not in compliance with the statutorily established procedures for immigration to be illegal. But that doesn’t mean that illegal immigration is no different from robbery, theft, fraud, assault, battery, and arson. Robbery, theft, fraud, assault, battery, and arson are common law offenses. The act of immigration is not in and of itself a criminal, destructive, or anti-social act. Intrinsically destructive and anti-social acts are common law crimes even without a statutorily created offense. Illegal immigration is a crime only because statutes declare it to be such, not because any aspect of immigration is presumptively illegal. So the analogy between immigration and offenses at common law is completely false, without merit, pejorative, and invidious.

The fact that calling illegals, “illegals”, is now deemed to be non-PC (offensive even) is a classic example of how PC is used to censor honest discussion of the issues facing America.

Of course, everyone knows this. If illegals weren’t violating U.S. laws, why would anyone be trying to provide Amnesty for them? Why would any legalization be needed? The fact that the advocates of Amnesty demand “legalization” proves that “illegals”, are in fact illegal.

No, Peter, you are insisting that your narrative is factual and that mine is PC and censorious. So we are having an argument about how to describe the fact that people who cross a certain international border without complying with the procedures established for such crossings to be lawful are subject to punitive consequences for failing to comply with the prescribed procedures. You are simply invoking PC as a way of trying to get the upper hand in this discussion about a given factual situation. But PC is a completely irrelevant red-herring. Stick to the facts. And the fact is that, unlike robbery, theft, etc., immigration, i.e., crossing an international border, is not an offense at common law. Amnesty is your term. It implies that there was an offense, but the only offense was non-compliance with an administrative procedure specified by an arbitrary statute. There was no offense at common law, as you yourself acknowledge below. There is a huge difference between an amnesty for a technical administrative violation and an amnesty for offenses at common law.

Please observe that ”illegal” is not just a generic statement. Illegally entering the U.S. is a Federal crime (see below). Illegally residing in the U.S. (even after legally entering) is a Federal civil offense (deportation is the stated penalty). Of course, documentation fraud, Social Security fraud, identify theft, etc. are all Federal crimes and the vast majority of illegals have violated these laws.

Peter, you confirm that illegally residing in the US is not a criminal offense even under US law. And your further comments about the definition of “immigrant” under US immigration statutes do not change the fact that there is nothing inherently criminal or offensive about illegal immigration, and that the criminal status of illegal immigrants is the result of the administrative system created by US immigration policy, not the offensive nature of the actions of those who enter or remain in the US in violation of those administrative regulations.

I don’t dispute that the US, as a sovereign state, has the right to establish such regulations, but those regulations have no inherent moral content, as do common law offenses. They are purely utilitarian. And any assessment of how those regulations are being implemented, administered or modified should be made strictly on the basis of how the system as a whole contributes to or detracts from the benefit of the people of the US. And as I indicated in my reply to Benjamin’s comment, it is difficult to disentangle the effects that immigrants have on the well-being of current residents and citizens of the US. Platitudes about upholding the rule of law are simply question-begging when, unlike the basic laws of just conduct, the immigration laws in question have no moral content, but are merely instruments for achieving the goals of the current immigration policy of the US.

Trump’s Economic Advisers and Me

Donald Trump announced his stable of 13 economic advisers last Friday. Most of them are professional business types — hedge fund managers, bankers, financiers, real-estate men, one oil man — who have contributed heavily to Trump’s campaign.  Three of the advisers — Peter Navarro, Stephen Moore, and David Malpass — have some background as professional economists. Peter Navarro is a Harvard Ph. D. and a professor of economics and public policy at the University of California at Irvine, Tyler Cowen recently wrote a short piece about him for Bloomberg. Stephen Moore is a visiting fellow at the Heritage Foundation, a former member of the Wall Street Journal editorial board and a frequent contributor of op-ed pieces to the editorial page of the Wall Street Journal and other publications. David Malpass was undersecretary in the Treasury Department during the Reagan administration and later was chief economist at Bear Stearns before starting his own consulting firm.

I don’t know any of these people, but as it happens, I have written about both Moore and Malpass on this blog. In fact, both of my posts were written almost exactly five years ago in August 2011; they were both provoked — I choose that verb carefully — by op-ed pieces they wrote for the Wall Street Journal editorial page.

The first post (“There They Go Again” on 8/5/2011) was about Malpass. Here’s what I had to say about him.

In today’s Wall Street Journal, David Malpass, who, according to the bio, used to be a deputy assistant undersecretary of the Treasury in the Reagan administration, and is now President of something called Encima Global LLC (his position as Chief Economist at Bear Stearns was somehow omitted) carries on about the terrible damage inflicted by the Fed on the American economy.

The U.S. is practically alone in the world in pursuing a near-zero interest rate and letting its central bank leverage to the hilt to buy up the national debt. By choosing to pay savers nearly nothing, the Fed’s policy discourages thrift and is directly connected to the weakness in personal income.

Where Mr. Malpass gets his information, I haven’t a clue, but looking at the table of financial and trade statistics on the back page of the July 16 edition of the Economist, I see that in addition to the United States, Japan, Switzerland, Hong Kong, and Singapore, had 3-month rates less than 0.5%.  Britain, Canada, and Saudi Arabia had rates between 0.5 and 1%. . . .

As for Malpass’s next sentence, where to begin?  I won’t dwell on the garbled syntax, but, even if that were its intention, the Fed is obviously not succeeding in discouraging thrift, as private indebtedness has been falling consistently over the past three years.  The question is whether it would be good for the economy if people were saving even more than they are now, and the answer to that, clearly, is:  not unless there was a great deal more demand by private business to invest than there is now.  Why is business not investing?  Despite repeated declamations about the regulatory overkill and anti-business rhetoric of the Obama administration, no serious observer doubts that the main obstacle to increased business investment is that expected demand does not warrant investments aimed at increasing capacity when existing capacity is not being fully utilized. . . .

From here Malpass meanders into the main theme of his tirade which is how terrible it is that we have a weak dollar.

One of the fastest, most decisive ways to restart U.S. private-sector job growth would be to end the Fed’s near-zero interest rate and the Bush-Obama weak-dollar policy. As Presidents Reagan and Clinton showed, sound money is a core growth strategy—the fastest and most effective way to tell world capital that the U.S. is back in business.

Mr. Malpass served in the Reagan administration, so I would have expected him to know something about what happened in that administration.  Obviously, my expectations were too high.  According to the Federal Reserve’s index of trade weighted dollar exchange rate, the dollar exchange rate stood at 95.66 when Reagan took office in January 1981 and at 90.82 when Reagan left office 8 years later.  Now it is true that the dollar rose rapidly in Reagan’s first term reaching about 141 in May 1985, but it fell even faster for the remainder of Reagan’s second term. . . .

Then going in for the kill, Mr. Malpass warns us not to repeat Japan’s mistakes.

Only Japan, after the bursting of its real-estate bubble in 1990, has tried anything similar to U.S. policy. For close to a decade, Tokyo pursued a policy of amped-up government spending, high tax rates, zero-interest rates and mega-trillion yen central-bank buying of government debt. The weak recovery became a deep malaise, with Japan’s own monetary officials warning the U.S. not to follow their lead.

Funny, Mr. Malpass seems to forget that Japan also pursued the sound money policy that he extols. . . . In April 1990, the yen stood at 159 to the dollar.  Last week it was at 77 to the dollar.  Sounds like a strong yen policy to me. . . .

I will just note that, given Mr. Malpass’s affection for a strong dollar, it seems a bit odd that Trump, who constantly rails against currency manipulation and devaluations by other countries, which tend to raise the exchange value of the dollar against those currencies, has chosen Malpass as an economic adviser and that Malpass has agreed to advise Trump, who seems to want anything but a strong dollar. But then again, it’s a strange world that we are now living in.

Then almost two weeks after Malpass’s little masterpiece, along came Mr. Moore with another gem of the kind that the Wall Street Journal editorial page specializes in. The result was that I wrote this post (“The Wall Street Editorial Page is a Disgrace” 8/18/2011).

Stephen Moore has the dubious honor of being a member of the editorial board of The Wall Street Journal.  He lives up (or down) to that honor by imparting his wisdom from time to time in signed columns appearing on the Journal’s editorial page.  His contribution in today’s Journal (“Why Americans Hate Economics”) is noteworthy for typifying the sad decline of the Journal’s editorial page into a self-parody of obnoxious, philistine anti-intellectualism.

Mr. Moore begins by repeating a joke once told by Professor Christina Romer, formerly President Obama’s chief economist, now on the economics department at the University of California at Berkeley.  The joke, not really that funny, is that there are two kinds of students:  those who hate economics and those who really hate economics.  Professor Romer apparently told the joke to explain that it’s not true.  Mr. Moore repeats it to explain why he thinks it really is.  Why does he?  Let Mr. Moore speak for himself:  “Because too often economic theories defy common sense.”  That’s it in a nutshell for Mr. Moore:  common sense — the ultimate standard of truth.

So what’s that you say, Galileo?  The sun is stationary and the earth travels around it?  You must be kidding!  Why any child can tell you that the sun rises in the east and moves across the sky every day and then travels beneath the earth at night to reappear in the east the next morning.  And you expect anyone in his right mind to believe otherwise.  What?  It’s the earth rotating on its axis?  Are you possessed of demons?  And you say that the earth is round?  If the earth were round, how could anybody stand at the bottom of the earth and not fall off?  Galileo, you are a raving lunatic.  And you, Mr. Einstein, you say that there is something called a space-time continuum, so that time slows down as the speed one travels approaches the speed of light.  My God, where could you have come up with such an idea?  By that reasoning, two people could not agree on which of two events happened first if one of them was stationary and the other traveling at half the speed of light.  Away with you, and don’t ever dare speak such nonsense again, or, by God, you shall be really, really sorry.

The point of course is not to disregard common sense — that would not be very intelligent — but to recognize that common sense isn’t enough.  Sometimes things are not what they seem – the earth, Mr. Moore, is not flat – and our common sense has to be trained to correspond with a reality that can only be discerned by the intensive application of our reasoning powers, in other words, by thinking harder about what the world is really like than just accepting what common sense seems to be telling us.  But once you recognize that common sense has its limitations, the snide populist sneers — the stock-in-trade of the Journal editorial page — mocking economists with degrees from elite universities in which Mr. Moore likes to indulge are exposed for what they are:  the puerile defensiveness of those unwilling to do the hard thinking required to push back the frontiers of their own ignorance.

In today’s column, Mr. Moore directs his ridicule at a number of Keynesian nostrums that I would not necessarily subscribe to, at least not without significant qualification.  But Keynesian ideas are also rooted in certain common-sense notions, for example, the idea that income and expenditure are mutually interdependent, the income of one person being derived from the expenditure of another.  So when Mr. Moore simply dismisses as “nonsensical” the idea that extending unemployment insurance to keep the unemployed from having to stop spending, he is in fact rejecting an idea that is no less grounded in common sense than the idea that paying people not to work discourages work.  The problem is that our common sense cuts in both directions.  Mr. Moore likes one and wants to ignore the other.  (continue reading here).

So, no question about it, Mr. Trump, the man who chose Corey Lewandowski and then Paul Manafort to run his campaign, and selected Meredith McIver to work with Melania Trump on her speech to the Republican convention, proves again that he is a great judge of talent.


About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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