Author Archives: Arnold Kling

Dependency ratios and inflation

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In a podcast with Rob Johnson of George Soros’ Institute for New Economic Thinking, Charles Goodhart and Manoj Pradhan offer an unusual explanation for secular trends in inflation. They say that a decline in the dependency ratio creates excess supply of workers relative to consumer, putting downward pressure on prices. This trend has started to reverse, so we will see upward pressure on prices. They say that this upward pressure will become visible soon after the virus crisis is over.

Think of this in worldwide terms, with the dollar as the universal unit of account. Over the last several decades, the world labor supply rose because of population trends and the inclusion of more countries, notably China, in the world production system. The share of consumers in the population remained steady, as a decline in birth rates offset population aging by reducing the growth of young dependents.

Going forward, the labor supply will grow slowly and population aging will outpace any further decline in birth rates. So the world dependency ratio will rise, and this will put upward pressure on wages and prices.

Note that money plays no role in this story. What about “Inflation is, anywhere and everywhere, a monetary phenomenon”? Perhaps if you include the hypothesis that the real mission of the central bank is to hold down government borrowing costs, you can tell the story in a way that Milton Friedman would not object. That is, as dependency ratios were falling, there was enough worldwide saving to keep down interest rates, and central banks did not have to monetize a large share of government debt, so that inflation fell. Going forward, worldwide saving will fall, and central banks will face a dilemma. As inflation appears, they will want to stop it by raising interest rates. But if they do that, governments won’t be able to afford the interest cost on their debt, so central banks will be forced to monetize a large share of debt.

Toward the latter part of the podcast, they are asked about why markets differ from their forecast. Basically, they say that markets are extrapolating forward based on the past, in which demographic pressure on inflation was downward. It will take markets a while to realize that we are in a new regime.

The Morton Schapiro indicator

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The Daily Northwestern reports,

After a week of abolitionist organizing on campus, University President Morton Schapiro’s email condemning student protests and the hashtag #ResignMorty trending on social media, Schapiro declared in a virtual dialogue Tuesday he “(doesn’t) walk back a single word.”

The letter referred to is quoted by Steven Hayward as reading, in part

We, as a University, recognize the many injustices faced by Black and other marginalized groups. We also acknowledge that the policing and criminal justice system in our country is too often stacked against those same communities. Your concerns are valid and necessary, and we encourage and, in fact, rely on your active engagement with us to make your school and our society equitable and safe for everyone. That said, while the University has every intention to continue improving NUPD, we have absolutely no intention to abolish it.

Northwestern firmly supports vigorous debate and the free expression of ideas — abiding principles that are fundamental for our University. We encourage members of our community to find meaningful ways to get involved and advocate for causes they believe in — and to do so safely and peacefully. The University protects the right to protest, but we do not condone breaking the law.

I view what is going on at Northwestern as a significant test case. The question it raises is whether the future of the left is represented by Maoists, as is feared by Yoram Hazony, or whether it is represented by Schapiro.

When it comes to moderation, Schapiro literally co-wrote with Gary Saul Morson the book, called Minds Wide Shut: How the New Fundamentalisms Divide Us. A few years ago, those co-authors wrote Cents and Sensibility, arguing for the need to connect economics with the humanities.

I also feel for Tiffany Riley, a Vermont high school principal, who wrote,

I firmly believe that Black Lives Matter, but I DO NOT agree with the coercive measures taken to get to this point across; some of which are falsified in an attempt to prove a point. While I want to get behind BLM, I do not think people should be made to feel they have to choose black race over human race. While I understand the urgency to feel compelled to advocate for black lives, what about our fellow law enforcement? What about all others who advocate for and demand equity for all? Just because I don’t walk around with a BLM sign should not mean I am a racist.

For which she was fired. [UPDATE: a reader sent me a story about Riley’s case.]

Persecution of heretics is the whole point of this awful religion.

Gossip resolution courts?

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Robin Hanson writes,

Today social media has amped up the power of gossip. Crowds can now form opinions on more cases, and thus enforce more norms on more people. But this has also revived the ancient problem of gossip rushing to judgement.

Sounds familiar.

Robin proposes this:

I seriously propose that some respectable independent groups create non-government non-profit “Cancel Courts”. When a crowd starts to complain about a target, these courts can quickly announce some mix of a speedy investigation and trial on this complaint. They’d solicit evidence from both sides, study it, and then eventually announce their verdict.

I see this as a proposal for resolving issues of social media gossip using a prestige mechanism. But the people who are using this tool are doing so to make a dominance move. They see prestige as a tool of the white supremacist patriarchy.

Police, suspects, and the rule of law

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A commenter writes,

All I’m asking for is pretty simple…stop resisting arrest and let the courts adjudicate the matter. Seems like a natural win/win for all parties.

I embedded this principle in an essay I drafted but never published, called “Rule of Law Matters.” RLM uses three principles:

1. The rights of policemen to issue orders are circumscribed by laws. Police who give improper orders, meaning orders that violate a civilian’s rights, will be fined or imprisoned based on the severity of the violation.

2. Civilians are absolutely obligated to obey any policeman’s order, even one that violates (1). Failure to obey any order is a crime that will be punished through the court system.

3. When a civilian violates a policeman’s order, including an order to stop and face arrest, there will be no physical attempt to enforce that order. If necessary, the civilian will be identified and tracked and later brought before a court to face punishment.

Point (1) should be adjudicated in the courts, not be anyone resisting arrest.

Point (2) is the commenter’s point. Note that contra Michael Huemer, I endorse a duty to obey.

Point (3) is an attempt to take the violence out of arrests. The assumption is that if you cannot arrest someone peacefully right away, you can do so later, and in the meantime little or no harm will have been done. The less plausible that is, the more one has to countenance the use of force during arrests.

You can’t legislate (liberal) morality

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A commenter writes,

I think most people on the right will do what most already do (what we’re already doing here), keep using the the left wing platforms for most stuff, while occasionally seeking political retreat in low-traffic, right-of-center blogs. That may be ok for individuals on the right, as they still get to interact with like-minded people, but in small, self-selected ghettos with .001% the attention Facebook and Twitter get. The flow of communication for the right will have been mostly throttled.

Earlier, David Henderson had described speaking on a panel in which James Todaro described being blocked on social media.

Hillsdale College did not invite a Marxist to be on this panel. Does anyone hear think that Hillsdale is censoring? No. Hillsdale is using its private property as it wishes. Moreover, if James is saying that he wants the government to step in to deal with this censorship, I can almost guarantee that he’ll like the result even less.

I agree with Henderson that I would rather live in a society where government has no role in regulating speech than in a society where government is supposed to “enforce” speech rights. The legitimate objection to the decisions of Twitter and Facebook to block certain content is that they are giving in to a mob of FOOLs (Fear Of Others’ Liberty).

The First Amendment is a formal doctrine that applies to Congress. Some of us would like to see free speech embedded in social norms, so that Facebook and Twitter are not subject to mobs of FOOLs. But in that sense free speech is liberal morality, and you cannot legislate morality.

My sense is that government schools today have many more teachers who are hostile to free speech principles than was the case when I was growing up. Perhaps that is where we have good reason to complain to government.

Finance theory and the Fed

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Eugene Fama says,

Actually, the central banks don’t do anything real. They are issuing one form of debt to buy another form of debt. If you are an old Modigliani–Miller person the way I am, you think that’s a neutral activity: You’re issuing short-term debt to buy long-term debt or vice-versa. That’s not something that should have any real effects.

Pointer from Alex Tabarrok.

Two papers that influenced my view of banking in general and central banking in particular were Bank Funds Management in an Efficient Market, by Fischer Black, and Banking in the Theory of Finance, by Fama. Both take seriously the modern theory of financial markets that begins with Modigliani-Miller. One could see smoke coming out of Scott Sumner’s ears even before he responded.*

In a Modigliani-Miller world, the financial structure of one firm does not matter. Investors use the financial markets to adjust their portfolios to undo the effects of one firm’s changes to its financial structure. The public ultimately holds what it wants to hold. If it doesn’t like the mix of securities that one firm creates (by substituting bonds for equity, for example), it has ways of dealing with that. The metaphor that I would propose is that a single firm’s changes to its financial structure is like me sticking my hand in the ocean, scooping up water, and throwing it in the air: I don’t make a hole in the ocean.

Modigliani-Miller is not strictly true. But it is the best first approximation to use in looking at financial markets. That is, you should start with Modigliani-Miller and think carefully about what might cause deviations from it, rather than casually theorize under the implicit assumption that it has no validity whatsoever.

Taking this approach, I view the Fed as just another bank. Its portfolio decisions do not make a hole in the ocean. That heretical view is the basis for the analysis of inflation in my book Specialization and Trade.

*Sumner’s response is actually beside the point, in my view. The Modigliani-Miller theorem does not in any way rely on different asset classes being close substitutes. It relies on financial markets offering opportunities for people to align their portfolios to meet their needs in response to a corporate restructuring.

Misfits for Kling

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The Three Languages of Politics is the subject of a podcast by Darnell Samuels and Joel Nicoloff, which I found heartwarming and head-sobering. It was heartwarming in that they clearly understood and bought into the book. It was head-sobering to consider how unconventional they are. If all I tell you is that they are young and Canadian, you are unlikely to guess their intellectual framework(s).

I hope you will listen and enjoy.

Virus update

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1. Timothy Taylor has a useful discussion and links regarding the issue of whether lockdowns have a large effect over and above voluntary changes in behavior.

2. The president told me [Marc Siegel] in a late July interview that he was more excited about therapeutics in the short term even than vaccines. Does that mean he reads my blog?

3. The average daily death rate has trended up recently.

4. Robin Hanson writes,

those virus harm estimates come from assuming a $7M value for each of these lives lost, and that I say does seem crazy.

He refers to estimates by David Cutler and Larry Summers of the direct harm caused by the virus vs. the indirect cost of prevention measures. The thrust of Robin’s post is that the cost of the prevention measures was probably higher than the cost of the virus, and that we are “over-preventing” COVID. I want to question that conclusion.

We should be cautious about employing the notion of “lost GDP.” There are two states of the world, one in which some activities have little or no perceived risk and the other in which those activities have a significant perceived risk. The value of “output” for those activities differs under those two states of the world.

Note that most of the prevention measures were voluntary. Many of us are making decisions to restrict travel, social activities, and in-person shopping. Our revealed preferences indicate that the GDP that we are thus giving up is worth less to us than the value of risk prevention.

Think of it as a relative price shift. Valuing today’s output at yesterday’s relative prices can be misleading.

Wonk, not woke

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Glenn Hubbard writes,

Two areas of emphasis should guide the policy discussion over preparation: skill development and redevelopment using community colleges, and enhanced training and skill development within firms. Public-policy changes can advance both.

Hubbard believes that a central policy challenge is to permit the creative part of creative destruction while mitigating the effects of destruction. His essay includes a reasonable set of proposals aimed at these goals.