Tag: Bryan Caplan

Explaining the Absence of Stagflation Expectations

As I wrote before, the corona shock constitutes a supply shock. Normally, a supply shock reduces the long-term productive capacity of the economy resulting both in reduced output and inflationary pressure. Hence Bryan Caplan was wondering on Twitter why nobody is talking about stagflation:

I replied on Twitter already but want to provide a more thorough discussion of the topic here.

The corona shock is different from other supply shocks because, in principle, it does not need to result in reduced long-term productive capacity. Basically, the corona shock constitutes a deliberate temporary shutdown of large parts of the economy. The goal should be to enable businesses which had to shut down temporarily to start right up again once health experts have given the green light for that to happen. The long-term productive capacity of the economy will only be hurt, if businesses that needed to shut down go bust before the economy is turned on again.

Since the corona shock does not permanently reduce the productive capacity of the economy, there is no need for real wages to adjust and hence no need for rising prices. That’s one part of the answer.

For the rest of the answer consider the economy as a whole. Let’s say 20% of the economy is shutdown by public-health mandate, voluntarily or because of a break-down of supply chains.

If NGDP in the economy (under normal circumstances) is roughly 20 trillion USD, this means that the NGDP produced by the part of the economy that is still running would, under normal conditions, amount to roughly 16 trillion USD (= 80% x 20 trillion USD). Let’s call the NGDP produced by the running part of the economy NGDP_r and the NGDP produced by the other part of the economy NGDP_h (whereby “h” stands for “hibernation”).

Under normal conditions we would have NGDP_r = 16 trillion USD, NGDP_h = 4 trillion USD and therefore NGDP = NGDP_r + NGDP_h = 20 trillion USD.

Under shutdown, NGDP_h obviously equals 0 USD. But what will happen to NGDP_r? The development of NGDP_r (= nominal spending on products and services produced by the part of the economy that is still running) determines how prices will develop. If NGDP_r increases, there will be inflationary pressures. If NGDP_r shrinks, there will deflationary pressures. If it stays at roughly 16 trillion USD,  neither inflationary nor deflationary pressures will arise.

Intuitively, one will probably expect nominal NGDP_r to shrink. After all,  a sizeable part of the population has just lost their sources of income. But intuition is not what matters. What matters is monetary policy because monetary policy controls nominal spending in the economy.

In normal times, monetary policy can (by reducing the real interest rate) counterbalance or at option outweigh any negative effect on NGDP_r resulting from the shutdown. That is, in normal times NGDP_r may grow or shrink or stay the same – depending on the objectives of the central bank.

However, we do not live in normal times. Nominal interest rates have been close to or at the zero lower bound (ZLB) for a decade. Reducing real interest rates (enough to significantly boost nominal spending) by simply adjusting the nominal rate downwards no longer works. In order to boost NGDP growth at the ZLB, the central bank has to commit to temporarily higher inflation (NGDP growth) in the future.

But since the central bank’s inflation targeting regime cuts off this route to boosting NGDP at the ZLB, NGDP_r is likely to fall during the shutdown.

Hence, the hit to Real GDP caused by the corona shutdown will most likely be accompanied by (moderate) deflationary pressures. Stagflation (reduced RGDP accompanied by higher inflation) is not on the table.

The Economics of Stupidity

Here’s Bryan Caplan:

I’m an IQ realist, all the way.  IQ tests aren’t perfect, but they’re an excellent proxy for what ordinary language calls “intelligence.”  A massive body of research confirms that IQ predicts not just educational success, but career success.  Contrary to critics, IQ tests are not culturally biased; they fairly measure genuine group differences in intelligence.

Yet I’ve got to admit: My fellow IQ realists are, on average, a scary bunch.  People who vocally defend the power of IQ are vastly more likely than normal people to advocate extreme human rights violations.  I’ve heard IQ realists advocate a One-Child Policy for people with low IQs.  I’ve heard IQ realists advocate a No-Child Policy for people with low IQs.  I’ve heard IQ realists advocate forced sterilization for people with low IQs.  I’ve heard IQ realists advocate forcible exile of people with low IQs – fellow citizens, not just immigrants.  I’ve heard IQ realists advocate murdering people with low IQs. 

When I say, “I’ve heard…” I’m not just talking about stuff I’ve read on the Internet.  I’m talking about what IQ realists have told me to my face.  In my experience, if a stranger brings up low IQ in Africa, there’s about a 50/50 chance he casually transitions to forced sterilization or mass murder of hundreds of millions of human beings as an intriguing response.  You can protest that they’re just trolling, but these folks seemed frighteningly sincere to me.

Don’t such policies flow logically from IQ realism?  No way.  If someone says, “I’m more intelligent than other people, so it’s acceptable for me to murder them,” the sensible response isn’t, “Intelligence is a myth.”  The sensible response is, “Are you mad?  That doesn’t justify murder.”  Advocating brutality in the name of your superior intellect is the mark of a super-villain, not a logician.

But don’t low-IQ people produce negative externalities – negative externalities that well-intentioned consequentialists will want to address?  I’m no consequentialist, but the consistent consequentialist position is: Not if the “solution” is worse than the problem!  And if your “solution” involves gross human rights violations, there’s every reason to think it is worse than the problem.  We should be especially wary of self-styled consequentialists who rush toward maximal brutality instead of patiently searching for cheap, humane ways to cope with the social costs of low IQ.

A couple of questions may arise from reading this:

    1. Where the hell does he meet these people? What are the negative externalities low-IQ people supposedly produce?
    2. If there are such negative externalities, what are the “cheap, humane ways” to cope with them.

What are the negative effects of having a low IQ? Well, people with low IQ are, on average, less productive than people with high IQ. That’s definitely a negative effect – but does it also constitute a negative externality? I.e. does it not only negatively affect the person with the low IQ but also third parties?

Under institutions of private property this is not the case.

The only negative effect of low productivity caused by low IQ (or laziness for that matter) is on the salary of the respective person. In a private-property society, salary – the amount for which a person can sell what he or she produces – corresponds closely to the real value of that product to the people who consume it. You get out what you put in. If you put less in, you get less out.

However, besides the sphere of private property there is yet another sphere: politics. And in the political sphere there is no comparable internalisation of the negative effects of stupidity as in the sphere of private property. When a government produces bad laws, everybody bears the costs, not just those who voted the politicians into office. So, in the political sphere low-IQ people can indeed produce a virtually unlimited amount of negative externalities.

Of course, due to, e.g., rational ignorance even a democracy consisting exclusively of high-IQ people would overproduce bad laws. However, adding stupidity to the mix certainly exacerbates the problem.

The solution proposed by some IQ realists is apparently to eliminate low-IQ people – either by straight out killing them or through “softer” methods such as a No-Child Policy for people with low IQs.

The thing is: this would not only be morally reprehensible but also (pardon the pun!) stupid: a waste of resources and also not very effective. Not eliminating stupids, but eliminating politics – the only sphere where stupids can, and do, cause significant social costs – is the smart solution.

Just because we are used to law being produced monopolistically by parliament doesn’t mean this is the best or even only possible way.

In a Polycentric Legal System law would be a private good produced on a private market. Different people in the same country could subscribe to different legal codes.

Now, when a low-IQ person buys bad law, this is, in principle, his/her problem. The negative effects of the bad legal code are internalised by the persons subscribing to that law – at least far more so than in a democratic system where I am no less subject to the costs of bad laws than the people voting for them. Of course, this internalisation is not complete because I may have to incur costs to have my good legal code applied in the case of a conflict with somebody subscribing to a bad legal code.

However, market forces can be expected to lead to rapid improvement in the quality of law in general.

In a democracy you buy nothing but promises. You may know how one party ran the country for the past four years, but not how the opposition party might have run it. In a Polycentric Legal System people can compare alternative brands – much like in the case of “normal” products. Information would be imperfect, as it is in making most decisions; people may make mistakes. Stupid people may make more mistakes. But at least alternatives exist; they are there to be looked at. You can talk with neighbors who subscribe to a different legal code and compare costs and benefits.

By turning law over to the private market, making a choice between different legal rules will be much like making a choice between different cars or different Internet providers. So we can expect the same positive effects of competition.

Remember that the sphere of private property is made up of the same people as the sphere of politics but the quality of the products in the former is infinitely better.

Achieving efficient law simply requires changing the way people choose legal rules, not changing the people who make the choice.