During the Chinese Cultural Revolution (1966-76), students persecuted people that had relatively high levels of education. Many professionals were sent to the countryside and roughly a million people died (500,000 to 2 million—no one knows the exact figure.) In the Chinese film To Live (1994), there is a heartbreaking scene where the formerly arrogant students realize that they need experts to help them out. Here’s how Wikipedia describes the scene:

Months later, during Fengxia's childbirth, her parents and husband accompany her to the county hospital. All doctors have been sent to do hard labor for being over educated, and the students are left as the only ones in charge after they have "overthrown" the doctors. Wan Erxi manages to find a doctor to oversee the birth, removing him from confinement, but he is very weak from starvation. Fugui purchases seven steamed buns (mantou) for him and the family decides to name the son Mantou, after the buns. Fengxia begins to hemorrhage, and the nurses panic, admitting that they do not know what to do. The family and nurses seek the advice of the doctor, but find that he has overeaten and is semiconscious. The family is helpless, and Fengxia dies.

This was one of those great Zhang Yimou/Gong Li films, the sort of thing that can no longer be made in China because it graphically shows the harm done by 27 years of Maoist rule. (Even in 1994, it wasn’t screened there.) The CCP has moved away from the extreme fanaticism of this period, but they now fear that exposing Mao’s crimes would undercut the Communist Party’s legitimacy. In most respects, life in China today is far better than in 1994, but China has regressed in terms of political and artistic freedom.

The Cultural Revolution is a particularly extreme example of a much more general phenomenon, the war on competency by political fanatics. America furnishes many recent examples of this phenomenon.

You’ve probably read about how recent advances in AI pose grave threats to the cybersecurity of US agencies, including the military. So which company is best qualified to address those threats, and how is the US government treating that company? Here’s Dean Ball:

The U.S. Department of War, and the federal government more broadly, are engaged in a lawfare campaign against Anthropic whose underlying motivations are deeply unclear and which attacks core American values. Now, the strategic wisdom looks worse and worse by the week. We are fighting a war against Iran, a highly capable cyberoffensive actor. It is inconceivable that the government can have a healthy relationship with the frontier AI industry while attempting to destroy what is arguably the field’s leading company. Anthropic and the Department of War must come to a truce, if not a resolution, as soon as possible, for the good of America’s national defense.

If you are MAGA, you are probably wondering why we should listen to radical libs suffering from TDS. Would your view change if you learned that as recently as last year, Dean Ball was a senior White House advisor on AI and emerging technologies?

The Trump administration has been relentlessly purging government officials that are not suitably MAGA from the Justice Department, the FBI, the intelligence agencies and the military. Almost as many four and five-star generals have been fired in the past 14 months as in the previous 150 years. But generals that object to executing criminal suspects in the Caribbean without a trial are certainly not “radical libs”. And we wonder why the administration failed to anticipate that the Strait of Hormuz might be shut down.

For the past 14 months, the administration has used every opportunity to mock and belittle the Europeans. They have threatened war over Greenland. They have provided support to enemies of the EU, essentially advocating for its destruction. They have campaigned for Putin supporters. They have launched repeated trade wars against Europe.

And when the Strait of Hormuz was closed, the Administration seemed puzzled that the Europeans were not anxious to rush to assist the US in a war that was launched without congressional consent and with no clear justification provided.

At an emotional level, I understand the appeal of “fight, fight, fight” and “own the libs”. Fanaticism is fun. The Cultural Revolution was fun. Unfortunately, when you get into trouble you are likely to discover that most competent people are “libs”. Not liberals in the American sense of left wing, rather liberals in the broader sense of principled supporters of classical liberal ideals. I regard Dean Ball as a sort of conservative liberal.

Almost every single day, I notice things that remind me of those arrogant students in the film To Live. Even Marco Rubio is only competent in a relative sense, that is, compared to officials like Pete Hegseth. After all, Rubio initially implied that Israel dragged us into the war, which is both a false claim and an assertion likely to further inflame anti-semitism:

Why now? Well, there’s two reasons why now. The first is it was abundantly clear that if Iran came under attack by anyone, the United States or Israel or anyone, they were going to respond and respond against the United States. The orders had been delegated down to the field commanders. It was automatic, and in fact it beared to be true because, in fact, the – within an hour of the initial attack on the leadership compound, the missile forces in the south and in the north for that matter had already been activated to launch. In fact, those had already been pre-positioned.

The third is the assessment that was made that if we stood and waited for that attack to come first before we hit them, we would suffer much higher casualties. And so the President made the very wise decision. We knew that there was going to be an Israeli action, we knew that that would precipitate an attack against American forces, and we knew that if we didn’t preemptively go after them before they launched those attacks, we would suffer higher casualties and perhaps even higher those killed, and then we would all be here answering questions about why we knew that and didn’t act.

I am certainly no fan of the Netanyahu government, and I believe that he gave Trump bad advice. But Israel is not where I’d point the finger of blame in this case—the US is powerful enough to make its own decisions.

In addition to the extraordinarily incompetent Pete Hegseth, we have Kristi Noem of Homeland Security, who somehow took a highly popular policy (stop illegal migration) and handled her job so poorly that she had to be fired. Unfortunately, she was replaced by an equally incompetent individual, Markwayne Mullin. And I don’t say that because he’s the only US senator that lacks a college degree (college is overrated), rather because he lacks the emotional maturity required to handle an important government position:

Sen. Rand Paul, R-Ky., the chair of the Senate Homeland Security Committee, used his opening statement to confront Mullin for reportedly calling him a “freaking snake” and saying he “completely” understands why a neighbor assaulted Paul in 2017. . . .

“I just wonder if someone who applauds violence against their political opponents is the right person to lead an agency that has struggled to accept limits to the proper use of force,” Paul said.

Mullin was confirmed despite his refusal to apologize to Paul. Younger readers have no idea how much this country has changed in the past 50 years.

On economic policy we have Peter Navarro, who botched the initial tariff plan so badly that Trump had to quickly backtrack, creating the “TACO” reputation that the Iranians recently exploited to their advantage. In 1980, Margaret Thatcher famously said “the lady's not for turning". No one will ever say that about the current administration. (Actually, maybe that’s a good thing.)

The Justice Department was once at least partially (not entirely) shielded from politics. Here’s AI Overview:

In 2010, out of over 162,000 federal cases, grand juries declined to indict in only 11 instances.

Today, the Justice Department has become so politicized that it is increasingly unable to get even formerly compliant grand juries to indict people. In several instances, they tried to prosecute critics of the Trump administration and were laughed out of court. Attorney General Pam Bondi recently met the same fate as Noem.

Of course it is not all bad news. During 2020, the Trump administration proved to be highly competent in speeding the development of new vaccines. It’s good to know that our health care policy is in safe hands if there is another pandemic.

Oh wait . . .

Fortunately, fanatics often end up being their own worst enemies. In the long run, competence generally wins out. Unfortunately, fanatics can do a lot of damage before they are defeated.

I’ll give Trump credit in one respect. He’s willing to back off before the damage gets too great.

Oh wait . . .

PS. Finally, some good news! (Vance campaigned for Orbán, who lost in a landslide.)

Orbán, Putin and Vance are all having a bad day. :)

Please, just stop trying.

In the late 1960s, I began following the news on the economy. The first recession that I can recall occurred in 1970, when I was 14 years old. When I was writing my dissertation back in 1983, I could recall four different recessions over the previous 13 years. And that was not particularly unusual, as there were also four recessions during 1948-1960 and five recessions during 1918-30. Indeed during the first 83 years of the 20th century there were 19 recessions, roughly one every 4 1/2 years.

Since 1983, there have been just four recessions, or roughly one per decade. The term “business cycle” was always a bit misleading, as downturns did not follow a regular pattern. But at least one could view recessions as something that occurred fairly frequently. The economy seemed sort of cyclical.

Today, the term business cycle makes about as much sense as saying, “war cycle” or “pandemic cycle”. Recessions are viewed as an anomaly, not a regular feature of the economy. In 2026, an economics grad student might have a clear memory of only one recession, as the economy has been officially in the “contraction” phase of the business cycle for only 2 out of the previous 200 months—February to April 2020.

Of course that’s slightly misleading, as the economy was quite depressed in the early years of the recovery from the Great Recession, even as it was technically expanding. But there’s more. The unemployment rate has been above 4.5% for only 18 months out of the past 9 years.

Younger readers might wonder why I view that as unusual, but in the 47 years before 2017, the unemployment rate was above 4.5% well over 90% of the time.

We recently experienced our first ever soft landing with gradually moderating (but still excessive) inflation and no one seemed to notice. If you told economists back in the 20th century that we’d have a nine-year period with unemployment at or below 4.5% apart from a brief pandemic period, and that inflation would end that long period at just 2.8%, they’d ask: How does it feel to be living in nirvana? If you then told them that public sentiment on “the economy” was at near record lows (even before Iran), they’d ask if the entire country had become insane:

The University of Michigan’s long-running index of consumer sentiment registered a reading of “54” in the first snapshot of the year. Preliminary January results were released Friday, with the month’s final results coming in a couple of weeks.

To put the current 54 reading in perspective, that’s about 30 points below the survey’s more than 70-year average.

It’s also near the all-time low of 50-flat, which was hit in June 2022 at the peak of pandemic-era inflation and nearly hit again this last November.

And you cannot explain the paradox by pointing to inequality, as in recent years the fastest real wage growth has occurred among the lowest paid. This figure is from the (progressive) Economic Policy Institute.

With apologies to Charles Dickens, it was the best of times, yet it was perceived as the worst of times.

To be clear, I am not suggesting that consumer sentiment is “wrong”. It is what it is. If people feel bad about the economy, then they feel bad about the economy. I’d rather try to understand their perspective, rather than blame the public for being ignorant.

I’m more upset with the economics profession, which in my view has a flawed view of macroeconomics. There is way too much focus on business cycle forecasting, which has never been reliable. Way too much focus on real shocks and fiscal shocks, both of which are wildly overrated in importance. Way too little focus on America’s strange lack of mini-recessions and soft landings. We need to figure out what’s going on.

Long time readers know my views on these issues but given the repeated failure of recent recession predictions from mainstream pundits, perhaps it’s time for another look at the problem—from a market monetarist perspective.

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and that there is nothing naturally so contrary to our taste as satiety which proceeds from facility; nor anything that so much whets it as rarity and difficulty

This quotation came to mind when I contemplated the sad decline of my favorite sport—NBA basketball.

When I eat out at a fine restaurant, my favorite part of the meal is often the dessert. And my favorite part of the dessert is the frosting on top of the cake. But that fact does not mean that I’d prefer a restaurant that served me nothing more than a big heaping plate of frosting.

The NBA has continually revised the rules of basketball with the idea of providing a more entertaining product. By itself, that an unobjectionable goal. The mistake they made was in forgetting Montaigne’s maxim about one crucial component of pleasure—overcoming obstacles. They noticed that NBA fans enjoyed certain types of outcomes and decided to serve them a big fat plate of chocolate frosting. To be more specific, the NBA decided that fans liked to see their teams score baskets and then did everything possible to make it easier and easier to score.

A typical score in football (soccer) is 2 to 1. In hockey you often see a 4 to 3 outcome. A score of 5 to 4 is common in baseball. In American football a score of 27 to 16 is fairly typical. During the 1990s, a typical NBA score might have been something like 102 to 96. And yet the NBA decided that the problem with basketball was that there wasn’t enough scoring. (No, I’m not joking.) They responded by limiting what defensive players were allowed to do in order to make it easier to score. They also began allowing offensive players to get away more often with “traveling”, which is supposed to be a rules violation.

Rules changes also encouraged more use of the 3-point shot. For instance, imagine a defensive player standing inside the 3-point line. The offensive player might jump up (and forward) from a position outside the 3-point line, shoot the ball, and then land on the foot of the innocent bystander planted firmly inside the line. I generally get annoyed when someone jumps up and lands on my foot, but the NBA decided that the real villain is the player who gets landed on. I have seen teams score as many as 7 points on this sort of possession. (A 3-point made shot, a free throw, and possession of the ball leading to another 3, based on the claim that this imaginary foul is unusually “flagrant”.)

This is just one of many rule changes that have begun to favor the offense, especially the three-point shot. The increased use of three point shots has made NBA games about as exciting as watching another person play pinball. In addition to jazzing up the offense, the NBA claims they are trying to reduce injuries. But I see no sign that this has had any impact, indeed serious injuries to key players seem to be happening with increasing frequency.

At times, the NBA seems to lack even a basic understanding of math. When someone is fouled in the act of shooting a 2-point shot, two free throws are awarded. When someone is fouled shooting a three-point shot, three free throws are awarded. But this makes no sense, as 2-point shots are successful about 54% of the time, while 3-point shots are successful only about 36% of the time. Both types of shots have roughly the same expected value (1.1 points), and thus a foul on either shot deserves the same penalty. How hard is that to understand?

The NBA also noticed that fans don’t like it when officials make a bad call. As a result, they instituted a review process where officials stop the game for several minutes to look at an instant replay of the contested call. Here the NBA forgets about the “hedonic treadmill”. This review process has not in any way reduced fan frustration with bad calls, but it has made the already overly long games even longer.

The best part of basketball is when players overcome resistance. The play with the least resistance is the “free throw”. If I had my way, the NBA would get rid of free throws. Just award two points to a foul while shooting, and one point plus possession for ordinary fouls (when in the bonus.) That alone would reduce games from 2 1/2 hours to 2 hours. Have the game play on when the ball hits the top of the backboard, or when it gets wedged by the rim. Don’t call jump balls so quickly. Don’t call kicked balls unless it’s actually kicked, not just hitting a foot.

Perhaps the biggest problem in recent years has been “tanking”, which is when teams try to lose games so that they’ll be first in line to draft the next NBA star coming out of college. The sports press has written dozens of articles explaining why it’s difficult to fix this problem. Nonsense. The problem could easily be fixed with a simply rules change—give all the bad NBA teams an equal shot at getting the best draft position. Then they would have no incentive to lose games to improve their draft position.

If the solution is so simple, why are other people not advocating this change? As with the three-point foul nonsense, there seems to be a lack of common sense in the sports world. They claim that you must give the very worst teams the best draft position to equalize talent. But as Tyler Cowen recently suggested, one of the attractions of sports is the David vs. Goliath aspect, seeing the underdog go up against a dominant team like the New York Yankees or the Boston Celtics.

At least 16 of the NBAs 30 teams have no incentive to tank, as they make the playoffs. Actually, 12 teams automatically make the playoffs, and 8 more vie for 4 play-in spots. So you could argue that only the ten worst teams have a strong incentive to tank. But that’s still a third of the league! This year we’ve seen the sad spectacle of ten NBA teams spending half the season intentionally trying to lose games. (The active players don’t try to lose, rather teams tank by withholding key players with fake injuries.)

The draft lottery favoring the worst record was supposed to help the very worst teams, but it doesn’t. The ten worst teams are all fairly bad and in need of good new players. But the teams with worst records are not the worst teams; they are the teams that try hardest to lose. My own team (the Milwaukee Bucks) is now the tenth worst team. Bucks fans were pulling out their hair in February when the team unexpectedly won 8 out of 10 games (despite their only good player being injured), making it unlikely they’d get one of the top draft picks. That’s right, fans were upset that their team was winning games! And again, this tanking problem could be easily fixed by giving each of the ten worst teams an equal shot as the best new players.

In March, NBA fans can switch away from games where many of the teams are trying to lose and watch college games where players are struggling mightily to win. One problem is that the NBA plays too many games—82 in the regular season and many more playoff games. NBA players get tired playing games on consecutive days and stop trying as hard on defense. In contrast, college players get several days of rest between games and play with much more energy.

NBA basketball is still my favorite sport, despite these flaws. The players are far more skilled than at the college level and when at its best it is an aesthetically beautiful sport. Unfortunately, the NBA management has been doing everything possible to reduce its appeal. Someone needs to step in and rescue the sport.

Happy Easter!

The CRFB’s proposal is essentially a progressive consumption tax, although it won’t look like that to the average person. I cannot teach an entire course in public finance theory in a blog post, but the essence of a consumption tax is as follows:

Imagine a world where people can either spend $6000/month on consumption today, or $12,000/month on consumption in 20 years, by saving their incomes. Now assume you impose a 33.3% tax in that world, which takes away a third of the public’s resources for consumption. With a pure consumption tax, your choice is now $4000/consumption today or $8000 consumption in 20 years.

Notice that the “terms of trade” have not changed, in both cases, the opportunity cost of a dollar spent on consumption today is foregoing two dollar’s consumption in 20 years. A consumption tax is a tax that does not change the relative price of current and future consumption. In a sense, all taxes are consumption taxes, as the burden of any tax is its impact on a person’s lifetime consumption. However, economists use the term “consumption tax” to refer specifically to taxes that treat current and future consumption equally. An income tax punishes savers and hence is not a consumption tax.

I’m pretty sure that most people don’t understand this concept, as I often see commenters say things like “we should tax consumption, not labor.” Actually, a labor tax is a consumption tax. Indeed, these three taxes are all equivalent consumption taxes, in the long run:

1. A 20% VAT

2. A 20% payroll tax on wages

3. A 20% income tax with unlimited ability to put savings into a 401k plan, and no mandatory date of withdrawal from the 401k. (Funds borrowed for consumption are also taxed.)

Another misconception is that there is a big difference between benefit cuts and tax increases. Not so. There’s essentially no difference between cutting benefits of a wealthy Social Security recipient by $1000 and not cutting their benefits at all but instead taxing that person an extra $1000. The CRFB plan that I will discuss is generally framed as a “spending cut”, but it’s essentially a progressive consumption tax on high end Social Security recipients.

The CRFB plan is described as a $100,000 cap on the total amount of annual Social Security benefits that a household can receive, but the details are somewhat more complicated. That headline $100,000 cap applies to the official retirement age of 67, but as you probably know a retiree’s benefit level depends on when they retire. In order to prevent the cap from encouraging early retirement, they make it depend on age:

The $100,000 SFL would be adjusted based on marital status and collection age. A single person collecting at the NRA would face a $50,000 limit. A couple in which both spouses began collecting benefits at age 70 would face a $124,000 limit, reflecting the 24% delayed retirement credit. A couple with both spouses collecting at age 62 would face a $70,000 limit, reflecting the 30% early retirement actuarial reduction. Different claiming ages would result in a blended limit.

They present three ways in which the cap could be adjusted over time:

The SFL could be indexed over time in a variety of ways. For this analysis, Jason DeBacker of the Open Research Group modeled three options – a $100,000 limit indexed to inflation, a limit frozen in nominal terms at $100,000 for 20 years and then indexed to average wage growth, and a limit frozen at $100,000 for 30 years before being indexed to wage growth. The Inflation-Indexed SFL could also switch to wage indexing after a specified number of years.

Because wage inflation runs slightly over 1% higher than price inflation, these approaches have different long run implications for how the cap evolves over time:

I’ll probably be dead by 2046, so I’d be better off with the inflation adjusted cap (blue line.) But the basic idea is so good I’d be thrilled with any of the three versions.

These proposals are not enough to fully save Social Security. Thus they also propose a tax increase, and again the proposal is almost too good to be true:

This Trust Fund Solutions Initiative white paper suggests a new alternative – replacing the employer side of the payroll tax with a flat Employer Compensation Tax (ECT) on all employer compensation costs. While workers would continue to pay payroll taxes, employers would instead pay an ECT on all wages (with no tax cap) and all fringe benefits such as employer-sponsored insurance and stock options.

Not only is this a progressive consumption tax (relative to the current tax), it also reduces the distortion of current wage taxes that exempt health insurance benefits. That tax break has been an important factor driving up health care costs. (The employee side FICA should also tax health care benefits, as should the personal income tax.)

Part 2: The ant and the grasshopper

Unfortunately, the CRFB plan seems too good to be true, and I expect Congress to implement something far worse. In order to understand why, consider two neighbors that both spent their careers in upper-middle class jobs making close to the Social Security taxable maximum (currently $184,500). Both retire as single people entitled to roughly $50,000/year in benefits. Both would see their benefits capped in nominal terms, which means their real benefit levels would decline over time.

But these two neighbors differ in one very important way. Smith was a high spender who would buy the latest BMW, while Jones was a high saver who always bought used cars. Smith saved very little while Jones maxed out his 401k plan.

Now Smith starts whining to his congressman that the proposed cap is unfair. It should only apply to “the wealthy”. His neighbor Jones is now pulling $100,000/year out of his 401k and doesn’t “need” his Social Security benefit to rise with inflation. “Please make the cuts depend on income levels, not benefit levels.” Because America has far more grasshoppers than ants, Congress listens to the whiners and applies benefit cuts only to those with high current incomes, not those with high lifetime wage incomes. They punish savers and reward spendthrifts.

Why do I believe this will occur? Why am I so cynical? Because this is what Congress has been doing for the past 113 years. As a result of numerous policies, savers are effectively taxed at a higher rate than those who don’t save, which means that future consumption has become more expensive relative to current consumption. But it doesn’t look that way to the average person.

People focus on the fact that those who are currently wealthy have more resources than the less wealthy, even when the gap is 100% due to the less thrifty person choosing to spend at an earlier stage of their lives. In my thought experiment, the two neighbors were equally wealthy in the only way that matters—they had equal lifetime resources to allocate to consumption and simply choose to do so at different points in time. Smith consumed when he was young enough to enjoy it, and Jones foolishly waited until he was old, wrongly imagining that he could still get a thrill out of life at age 70.

At one time you might have expected the GOP to champion the interests of high savers, but those days are probably gone. The GOP coalition is trending toward low savers and the party is becoming increasingly “populist” on economic matters.

[Full disclosure: I’ve never bought a new car in my entire life and I always maxed out my 401k contributions. I’m the foolish miser.]

Part 3. Charity isn’t what you think it is

There’s an ongoing debate over how much money billionaires ought to donate to charity. Unfortunately, most people miss the point. The issue isn’t charity vs. investment; it is consumption vs. non-consumption. A charitable person is an individual that doesn’t consume much relative to his or her wealth. If you wish to consider heirs, you might say a charitable person is someone who ensures that he or she and all their future heirs consume only a modest portion of their current wealth.

But you can also argue that a charitable person is someone that maximizes their wealth, given the share of that wealth that they intend to use for consumption (both they and their heirs.) A wealthy person can become more charitable by reducing long run family consumption of wealth from 40% to 30%, but also by increasing their total stock of wealth and keeping the consumption share at 40%.

I have no idea what Elon Musk intends to do with his wealth, but you can make an argument that the most charitable use of his current resources is to build up even more wealth, and then eventually donate most of it to a good cause. But you can also make a good argument that Bill Gates is doing the right thing by donating a very high share of his wealth to various causes that he considers to be effective forms of altruism. Either approach is defensible, and the best path partly depends on subjective estimates of how much more wealth can be generated via productive investments.

As Matt Yglesias recently pointed out, those billionaires that consume a large share of their wealth are the actual problem. I don’t wish to sound like a scold, as I undoubtedly consume more than optimal from the perspective of a utilitarian like Peter Singer. If I were a billionaire I’d probably live in a very expensive mansion in coastal California. Like most people, I’m at least somewhat selfish. If I’m pointing fingers, then I’m including myself. But as a purely factual matter, more personal consumption comes at an opportunity cost, what else could have been done with those resources? Let’s just admit that most people are a mix of selfishness and altruism.

As an aside, in my view the hardest problem is figuring out how to be effectively altruistic, if you have decided that this is the path you’d like to take. As Tyler Cowen recently suggested, billionaires often end up funding causes of questionable value. I’m not trying to use this post to provide any sort of grand theory of altruism. Rather my point is much more basic:

To be altruistic is to forego consumption for you and your heirs. That’s it.

PS. This post has only examined one aspect of the Social Security problem and there is much more that could be said on the issue. Thus, it would have been better if the Social Security system had been fully funded from the beginning. And I’d prefer the wage tax (FICA) fall 100% on employees, as this would make for more informed voters. But I understand that these ideas are politically infeasible in the US, at least at the moment, and hence view the CRFB plan as a pragmatic compromise.

PPS. Steven Landsburg has a nice defense of Scrooge:

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner.

What did Bastiat say? “That which is seen, and that which is not seen.”

I’ve also been watching a lot of Youtube videos where Michael Bartlett discusses all sorts of films. He has an excellent three part series on Japanese film, and many other episodes devoted to various directors such as Ozu, Tarkovsky and Lynch. But it’s not all highbrow stuff, he loves westerns and makes a strong case for Sergio Leone being underrated.

As far as books, I finally got around to reading classics like Boswell’s Life of Johnson and Woolf’s A Room of Her Own. Surprisingly (at least to me), I much preferred the feminist essay to the World’s Greatest Biography. I might do a post on the Woolf essay. Johnson’s a wonderful guy with lots of witty observations, but his political views are almost unbelievably appalling. On the other hand, he would have been an incredible blogger.

This makes me wonder what views I currently hold that will later be viewed as equally evil. I recently heard a discussion of a lawsuit in Texas where prisoners were complaining about a lack of air conditioning. For someone of my generation, those complaints sound silly. But I could imagine that in 100 years my view will be seen as cruel and inhuman. Less clear is whether that means my view is wrong in an absolute sense, or correct for today but wrong for the world of 2126.

In fiction, I read Mario Vargas Llosa’s depressing The War at the End of the World and António Lobo Antunes’s even more depressing The Land at the End of the World. In both cases, I respected the books more than I liked them. I also read Knausgaard’s Autumn and then his more recent The School at Night. The latter seems like one of Knausgaard’s best, but I’m not entirely sure how I feel about the protagonist. Is he an accurate portrayal of a self-obsessed male, or an unrealistic caricature? Not knowing anyone that extreme, I’m not certain. In some respects, this novel is more horrifying than anything by Stephen King. I also enjoyed Far North by Marcel Theroux and After the Flood—an excellent set of essays on the most recent 30 years of Dylan’s career by Robert Polito.

I did not enjoy Milwaukee Bucks basketball.

This post is not gated for all the new films I saw and the seven best of the older films, but then gated after that.

2026:Q1 films

Newer films:

Sirat (Spain/Morocco) 3.8 This is far more impressive (both visually and sonically) on the big screen. Must see for fans of the old French film Wages of Fear (and the equally good remake Sorcerer.) Don’t expect a Hollywood film—this is one of the most realistic depictions of fatherhood that I’ve ever seen.

Kokuho (Japan) 3.8 Halfway through I wondered “Why isn’t this a big hit?”, and then when I got home I discovered that it is the highest grossing live action film in Japanese history. The film itself is a bit too Hollywood for my taste, with some familiar drama about sibling rivalry. But the Kabuki sequences were a revelation, and are the reason I give this such a high rating. I had almost no knowledge of or interest in Kabuki and left the theatre thinking it is one of the world’s great art forms.

The film’s effectiveness is largely due to the skill of the choreographer and director at using the camera to “explain” Kabuki. It literally took just seconds into the first performance for the filmmakers to get a dunce like me to see Kabuki with fresh eyes. Indeed, I might enjoy a live performance much less that the filmed version. I find that I’m often not receptive to an art form unless it is translated in something more familiar. As a teenager, I didn’t understand what poetry was until I listened to Dylan. Another example is My Dinner with Andre, which might be boring as a stage play but was riveting as a film. Sorry, but this is another one of those films that must be seen on the big screen—the final sequence is breathtaking.

No Other Choice (Korean) 3.7 Like many Korean films, Park’s amusing black comedy finds humor in the willingness to push scenes to the absolute limit. I suppose there’s a bit of social commentary on downsizing and AI, but as with the film Parasite only a fool would take any of the politics seriously.

Naked Ambition (US) 3.5 I almost gave up on this documentary about Bunny Yeager after about 20 minutes, as it seemed to mostly consist of a series of cheesecake photos from the 1950s. But I stuck with it, and it gradually became more and more interesting.

Crime 101 (US) 3.4 At the beginning we see that the rich guy has paintings by Balthus and Gauguin, which is Hollywood’s way of signaling that he’s a pedophile. (Americans are such philistines.) I normally don’t like slick Hollywood crowd pleasers, but I make an exception for a well-made crime drama. This one has all the usual cliches—a rich white male boomer that we are supposed to hate, a black woman that is treated unfairly, a good cop in a corrupt police force, a thief from a broken home with a heart of gold, and an evil thief played by a blond Asian guy--an Ichi the Killer look-alike. It’s also way too long, with some pointless car chases. And yet despite all that, it’s quite entertaining.

The way rich boomers are now portrayed in Hollywood makes me wonder if people should start collecting that Social Security immediately and not wait until age 70. But then I recall their voting power. . . .

The Mastermind (US) 3.4 Most viewers would find this crime drama to be far more boring than Crime 101, but it’s the sort of low-key film that I generally prefer. Very little action and a somewhat pathetic protagonist, but I enjoyed how well they recreated the feel of Massachusetts back in 1970. I’ve even been to the (obscure) Framingham Art Museum. Lots of quirky humor in the margins.

Videoheaven (US) 3.1 A movie about movies that feature scenes from movie rental stores. This nostalgic documentary is occasionally amusing but runs way too long at nearly 3 hours. I had never noticed how many films feature scenes in video rental stores. Oddly, I don’t recall ever renting a video, as I used to always watch films at the theatre. So, for me it was like visiting a foreign country.

Peter Hujar’s Day (US) 3.0 My Dinner with Andre worked because it combined outstanding cinematography with a fascinating conversation. This one also has excellent cinematography, but I found the conversation to be fairly bland.

The Rip (US) 3.0 As with many modern Hollywood films the pace is so frenetic that you don’t ever become emotionally involved in the drama. There’s too much of pretty much everything, including some overacting from Ben Affleck. Nonetheless, it has an interesting plot and is passable mindless entertainment.

Islands (German) 3.0 I wish I could recommend this well-made mystery more highly, but unfortunately it has a predictable plot that becomes a bit tiresome after 2 hours and 10 minutes.

A Private Life (France) 2.7 There are just three problems with this film. It is too plot driven. It has a silly plot. And it’s about a psychiatrist. Jodie Foster gives a nice performance, but it’s totally wasted.

Mistress Disspeller (China) 2.5 This Chinese film claims to be an exercise in reality TV, a term that generally means the exact opposite—fake TV.

Older Films:

Mulholland Drive (US, 2001) 4.0 The third time through it was better than ever—which doesn’t happen very often with films not directed by Kubrick. Mulholland Drive is to the 21^st century what Vertigo was to the 20^th century. (I’d argue the plots are more similar than you might suspect, albeit told from radically different points of view.)

Great artists often do their best work when the subject matter is something they know very well, such as producing their own genre of art. Think about Proust and Knausgaard writing about what it’s like to become a writer. Shakespeare’s play within the play in Hamlet. Bi Gan’s Resurrection, Velazquez and Vermeer painting an artist painting a painting. Lynch is at his best when depicting the act of making a film. Consider the two scenes where Naomi Watts goes through her audition. The second is radically different from the first, despite an identical script. Lynch is showing the audience what it means to “act”. And he uses an actress that went through years of disappointment in real life, perhaps knowing that actors are also most effective when doing what they know best.

Many of the scenes that seemed “weird” the first time around, now make perfect sense—and are vastly more emotionally powerful as a result.

BTW, Is it just me, or is Justin Theroux supposed to look like Godard?

Days and Nights in the Forest (India, 1970, CC) 3.9 Satyajit Ray is in the running for the greatest director of all time (along with 20 or 30 other names), and this is one of his best films. As with Ozu’s films, it starts out seeming like a light-hearted look at a group of people and then imperceptibly moves toward scenes that show a profound understanding of how people relate to each other. Featuring the great Sharmila Tagore, who makes all the male leads look like fools. It was great to see a restored print on the big screen—when I saw it 40 years ago the film was in poor shape.

Kiki’s Delivery Service (Japan, 1989) 3.9 It’s been years since I enjoyed a film as much as this one. Takes place in a town with central European architecture where people speak Japanese but transistor radio programs are in English. ¯\_(ツ)_/¯. In other words—utopia. One of my three favorite animated films (along with Spirited Away and My Neighbor Totoro.) When I think of the best recent films, I often see the work of directors with the eye of an artist (Spirited Away, In the Mood for Love, Uncle Boonmee, Flowers of Shanghai, Resurrection, Winter Sleep, Mulholland Drive, Grand Budapest Hotel, etc.)

I was the only person in the theatre. :(

BTW, when you are 70, “recent” means anything in the past 30 years.

Aguirre: the Wrath of God (Germany/Peru, 1972, CC) 3.8 The Heart of Darkness-style irony is laid on pretty thick, but this remains one of the classic films of the 1970s. Perhaps it’s a product of my age but as I get older, even very impressive films often seem increasingly derivative. In 1972, viewers left films like, The Godfather, Solaris, Last Tango in Paris and Aguirre with then feeling they’d experienced something new, something they’d never seen before. That rarely happens today. There were a lot of other very good films in 1972, including two Woody Allen films made before he became repetitive.

Wings of Desire (Germany, 1987, CC) 3.8 A recent list of the 30 greatest films of all time had two entries for Kubrick, Tarkovsky, Coppola, Bresson, Kurosawa and . . . Wim Wenders? Although I’m one of Wenders biggest fans, I have a hard time understanding how he can have two films on a top 30 list that excludes films like Late Spring, Persona, and Rear Window. But I’m glad to see another fan who loves his work.

It was interesting seeing Berlin in the years right before the wall came down. Hard to think of another European city that has changed so dramatically. The film has some beautiful black and white cinematography. And Nick Cave fans will definitely appreciate a couple of live performances. If you watch it on Criterion Channel, check out the excellent accompanying documentary The Angels Among Us.

The Magician (Sweden, 1958, CC) 3.8 This was made when Bergman’s style had fully matured, and the film is more entertaining than some of his more ponderous films done over the next few years. Great B&W cinematography.

Moving (Japan, 1993, CC) 3.8 You can see how the director Shinji Somai was a big influence on modern Japanese masters like Kore-eda and Hamaguchi. He combines a deep understanding of human life (especially the life of children) with a beautiful visual style.

Paid subscribers see reviews for another 29 films. You want to see them too? That’ll be 30 bucks, buddy.

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Tyler Cowen can be viewed as a philosopher, as his interests are too broad to be confined to a single intellectual framework. His new (free online) book entitled The Marginal Revolution: Rise and Decline, and the Pending AI Revolution is economic philosophy, a look at the field of economics from the outside by someone who understands it from the inside.

You might think that’s no big accomplishment, but as a general rule economists are too close to the subject to have an outside perspective of their field and non-economists are too poorly informed. For the most part, you either encounter orthodox economists reflexively defending the field, or heterodox outsiders complaining that economists are wrong because they don’t look at the world the way that this particular critic does. Tyler does neither. He mourns the end of the economics that he and I grew up with but also suggests that in some sense we had it coming.

As with books like The Great Stagnation and Average is Over, I suspect this book will set the agenda for future debate about where economics is and should be going in the 21st century. I do not plan to do a complete book review in this post. Indeed I’ll skip the most important part—AI. Instead, I’ll offer a few observations where I feel that I have something useful to add.

I recall one of my Chicago professors (George Stigler?) suggested that the most difficult task facing economists is not coming up with good answers, rather the real need is for better questions. Once an important question has been identified, the answer is often fairly easy to discern. Thus, Ronald Coase built a career partly based on his discovery of a single interesting question: Why do firms exist? Most people would never think of even asking that question. Coase’s answer (“transactions costs”) proved to have fruitful applications in many different areas.

My favorite part of Tyler’s book is where he asks a very good but non-obvious question: Why did it take so long for economics as a field to develop a coherent model or framework of analysis? Much of the book discusses how three economists simultaneously developed marginal analysis, with a focus on the work of Stanley Jevons. Here I’ll briefly provide the intuition of marginal analysis and then explain why economics is both extremely easy but also quite difficult.

Consider some human activity X. How much of this activity would (should?) we choose to do? A marginalist might suggest doing more of activity X as long as the marginal benefit of one more unit of X exceeds the marginal cost of one more unit of X. You then stop right at the point when the marginal benefit falls below the marginal cost, a position referred to as “equilibrium”.

Activity X might be the consumption of a good, production of a good, number of workers hired by a firm, number of dollars invested in a project, or almost any other type of human endeavor. In recent decades, NBA teams discovered that the marginal benefit of taking more 3-point shots exceeded the marginal cost of foregone 2-point shots and changed their strategies appropriately.

I was a good but not great student in high school and college. I got a lot of As, but also a fair number of Bs and Cs. But once I figured out the basic intuition of marginal analysis, the entire field began to seem quite easy. I stopped taking notes in class and just listened to the lectures.

But there’s also a sense in which economics is quite difficult. STEM-types often mock economists because our models are rather simple in a technical sense, at least compared to the harder sciences. That’s true, but it is also true that if you speak to scientists about economics, their opinions are often absurdly misguided. “Why don’t they just do . . . “ Yeah, you might want to look up “Chesterton’s Fence”.

Imagine a gas station deciding on how to price its product. Draw up a chart with the wholesale price of gasoline in one column and the profit-maximizing retail price charged in the next column. It is pretty obvious that the higher the wholesale price (including excise tax), the higher the profit maximizing retail price. I’m guessing that roughly 100% of the public understands this, at least on some basic level.

From a mathematical perspective, the implication of this monotonically increasing function is obvious. When input prices rise, firms will raise output prices and when input prices fall, firms will lower output prices. Or at least that’s how they’d behave if they were trying to maximize profits. (Admittedly they might behave in some other way if they were trying to go bankrupt.)

Now imagine visiting a convention full of high IQ scientists. Tell them that the government should reduce fees on property developers, because this will allow the developers to reduce the price of newly constructed homes. A significant proportion of them will roll their eyes and tell you not to be naive. “These developers are greedy, and they won’t pass on lower costs to consumers.” Sigh . . .

When teaching, I frequently found myself having to tell students “Yeah, they are greedy, which is precisely why they’ll pass on lower input costs to consumers.” It’s true that implications of economic models are often obvious when you think about them in mathematical terms, but when you don’t have that model in the front of your mind, the world can be a very confusing place. You may fall back on common sense intuitions that are simply false:

“Companies are greedy and higher prices are good for profits.”

Sorry, the first half of that statement is true, but the second half is false. It’s the symmetry, stupid. (And yes, pricing for monopolies is equally symmetrical.)

Economics is full of concepts that on one level are sort of obvious but at another level are deeply counterintuitive. Try explaining to people that price gouging during emergencies is actually good for consumers. We evolved with minds shaped by primitive reciprocal gift giving tribal societies that had norms about right and wrong, and suddenly ask people to think about the optimal amount of pollution, vice, traffic fatalities, etc. It doesn’t feel right.

In my own field of monetary economics, I find that people like to think about inflation by focusing on those goods rising fastest in price. But those are relative price changes, and inflation is a rise in the absolute price level. Inflation can only be explained by considering changes in the supply and demand for money—the medium of account. But that’s deeply counterintuitive, as most people think of inflation as rising prices, not a falling value of the dollar.

Tyler does a great job explaining why Jevon’s model of marginal analysis (which underlies most of modern microeconomics) is elementary on one level, but also something that wasn’t discovered until the 1860s because it was not at all obvious. Here’s how he concludes Chapter 3:

By studying the slow intellectual development of economics, and contrasting it with other fields of study, we can learn the following:

1. Some insights are very hard to grasp, even if they are apparently simple once they are understood. People need to “see around corners” in the right way to understand these insights and incorporate them into their world views.

2. Economics is one of those fields, and that is why it took intuitive economic reasoning so long to evolve, marginalism included. Those of us who are educators, or who spend time talking to policymakers, should take this point very seriously.

3. Even very, very smart people are likely unaware that these “see around the corner” insights are missing – did Euclid rue that he did not have access to proper supply and demand and tax incidence theory? Probably not.

4. Economics is not the only such field that is hard to grasp, some other examples being segments of botany, geology, and evolutionary biology.

5. Scientific revolutions come about when many complementary pieces are in place, such as financial support, intellectual independence, and networks of like-minded others to talk with.

Those conditions help people to understand that “seeing around those corners” can bring both high social and professional returns.

Are there major conceptual corners that today still no one can see around? If so, how might we discover what they are? And why are we not working harder on this? Or are we?

So why does Tyler see marginalism declining in importance? This is the most important part of the book, and the most difficult for me to evaluate. I’m a hedgehog that likes a single powerful explanation and Tyler is a fox that likes to look at problems from multiple angles.

[BTW, it is interesting that Tyler is so interested in AI, as LLMs remind me more of Tyler Cowen than of any other human being. Like Tyler, LLMs have “read everything”. If you ask a typical economist what’s wrong with tariffs, they’ll say something about Harberger triangles. Ask Tyler or an LLM, and they’ll list 12 different problems drawing on the literature from multiple fields.]

Tyler begins by citing the fact that marginal analysis often provides unwelcome policy advice:

The confrontational or “social discomfort” side of marginalism, discussed in chapter one, is now hurting marginalism somewhat. It is not the main reason why marginalism as a series of intuitions is dwindling. Yet (at the margin!), as the economics profession has moved to the left, a diminished role for at least some marginalist intuitions is perhaps not entirely unwelcome. Marginalism may thus have somewhat fewer defenders than might otherwise have been the case, if no political motives had intervened. I am not suggesting anyone is being dishonest here, rather, that their politics induce them to champion other methodological causes than marginalism, mostly because those other causes seem, for normative reasons, more important.

Policymakers in NYC probably don’t wish to be told that spending $81,000 on each homeless person might make homelessness marginally less unpleasant and thus increase the number of homeless New Yorkers.

It occurred to me that Tyler overlooks a previous decline in marginalism during 1933-68, when Chicago style price theory fell out of favor. It was hard to argue that minimum wages were a bad policy when the US was experiencing 25% unemployment in an economy with no minimum wage at all (in 1932), and only 4% unemployment in the late 1960s, when the minimum wage was fairly high. The Great Depression didn’t just seem to discredit capitalism, it also pushed marginalism to the periphery of economics, as the focus shifted to Keynesian models of aggregate demand. Marginalism is often a form of supply-side economics.

In the final decades of the 20th century—the neoliberal era—marginalism made a comeback. Chicago economists won lots of Nobel Prizes. This was mostly due to the fact that policymakers overreached, exposing problems with the Keynesian model. It seemed the supply side did matter after all. Tyler often (correctly) lectures people like me to stop being so pessimistic, but I wonder if Tyler is too pessimistic here about the prospects of another future comeback for marginalism. Indeed, isn’t the recent “abundance” movement largely based on marginalist thinking?

On the other hand, the Great Recession does seem to have been a setback for Chicago price theory. Tyler is right that the profession has recently turned to the left. Elsewhere I’ve argued that stable NGDP growth isn’t just good for the economy; it’s good for the field of economics—raising the prestige of free markets.

In some places, Tyler seems to mourn the decline of marginalism:

Price theory, as an approach, is not identical to marginalism. But so many of the basic economic concepts from intermediate micro use marginalist ideas, so price theory has been a comfortable home in which marginalism has flourished, including marginalism as an active research program.

Sadly, price theory is fading in relevance, and it is taking marginalism down with it. It used to be that some graduate programs favored the axiomatized approach to micro and others (e.g., University of Chicago, UCLA, University of Virginia) favored the price theory approach. These days the axiomatizations have won out pretty much everywhere, except at my own George Mason University. I don’t know of any other exceptions to that, but I do keep looking for them. To the extent I see exceptions to the dominance of the axiomatic approach, it is because empiricism is ascendant, not because price theory is making a comeback.

Although Tyler’s book focuses on microeconomics, reading it helped me to better understand why I’ve gradually lost interest in modern macroeconomics, which has moved in a direction that I find to be of little interest. This is a great observation:

One sign of the decay of interest in marginalism is that “price theory” has moved to being a niche interest in economics. To some economists, especially from a few decades ago, that may sound almost contradictory, almost like saying “economics has become a niche field within economics.” Well, that is a bit true as well.

If Milton Friedman were still alive, I suspect he’d feel the same that way I do:

The other leader of the price theory movement, Steve Levitt of Freakonomics fame, retired from academia and the University of Chicago at age 57, claiming he was having no impact with his research papers. He has stated flat out, “And I think in the marketplace for ideas, I gotta say that the Chicago price theory really has lost.” And “I think it [price theory] is essentially lost to posterity at this point.” Levitt notes that Milton Friedman had such a worry as long ago as the 1990s.

[The quote is about micro, but Friedman would be equally appalled at trends in macro.]

In retrospect, Paul Krugman’s 1998 paper “It’s Baaack” seems like the final important contribution to a 30-year golden age of macroeconomics for the fiat money world, which began in 1968, just as the US adopted a 100% fiat money regime and Friedman/Phelps developed their natural rate models. I’m sure you could point to lots of very high quality 21st century macro papers—but how many actually changed the way we look at the world in any sort of fundamental way?

At times, Tyler suggests that the useful insights of marginalism have already been incorporated into the profession. Since people naturally wish to do work at the frontier, marginalism is now less central to modern research. As an analogy, modern mathematicians haven’t rejected addition and multiplication, but they no longer write papers explaining these elementary concepts.

At other times, Tyler suggests that there are real problems with marginal analysis. My one criticism of the book, at least on a first reading, is that it wasn’t always clear exactly what Tyler saw as the central problem facing marginalism. For instance, minimum wage studies showing no effect on employment might be viewed as being inconsistent with “Chicago price theory”, but they are not necessarily inconsistent with marginal analysis, as they are often based on monopsony models that assume the marginal cost of labor exceeds the wage rate. That’s still marginal analysis. To be fair, Tyler acknowledges this fact in the first chapter, but at other times seems to almost conflate marginalism with Chicago price theory.

Tyler spends quite a bit of time discussing anomalies in modern finance, areas where empirical studies seem to reject the standard models of finance. At one point Tyler suggests that it is an especially big problem that flaws are showing up in the field of financial economics, as this is the field in which we have by far the best data:

For a long time I have thought of finance as the most advanced and most successful branch of economics. It works with the highest quality data, has many of the most rigorous models, and the economic assumption of “people really do want money only” seems relatively justified in that sphere of endeavor.

. . . The ascension of economic portfolio models, which started in the 1960s, is now very far from the relevant frontiers. To put it very bluntly, at the current state of knowledge those models are failing the market test.

This is especially painful for economics, because the original triumphs of economics in that field were explicitly marginalist in their origins.

But one could argue the opposite. All social science models are “false” in the sense of being only an approximation of reality, and hence we’d expect extremely good data to be especially helpful is showing the limits of any model. It took very good data to show the superiority of General Relativity to Newtonian physics.

Consider the case of the minimum wage. Can ambitious researchers find real world examples of markets that deviate slightly from the Chicago school model of perfect competition? Almost certainly yes. Does that mean the government of Pakistan should institute a $15/hour minimum wage as an anti-poverty policy? Obviously not. I think of Chicago price theory as a sort of first pass on a policy question, with more rigorous research demonstrating its limitations in specific cases.

Similarly, the Efficient Market Hypothesis is a sort of first pass on financial issues, not the be-all-and-end-all of financial research. It is often noted that the theory seems to be sort of self-refuting. If markets were truly efficient, then why would anyone gather the information required to make the market efficient? Even EMH proponents like Eugene Fama regard it as merely a useful approximation of reality.

In the past, I’ve been highly skeptical of “anomaly” studies, as I’ve seen so many claims fail to hold up out-of-sample. We were all taught the superiority of “value stocks”. Don’t buy those high-flying tech stocks. How’d that work out?

Perhaps it is best for most people to simply buy index stock funds, even if ambitious researchers using 360,000 factors are able to develop superior models of stock returns:

There is a recent working paper which is perhaps more striking yet, by Antoine Didisheim, Shikun (Barry) Ke, Bryan T. Kelly, and Semyon Malamud. They pick up from Arbitrage Pricing Theory (APT), a well-established idea from financial economics. APT typically looks for “factors” in the data which predict excess returns, and a traditional APT model might have found five or six such factors. Are “inflation” or perhaps “the term structure of interest rates” useful factors? Well, that can be debated, but if so, those results sound pretty intuitive. But those intuitions seem to be disappearing. In a paper by these authors, they apply machine learning methods to look for more factors. As we know, machine learning is very good at finding non-obvious relationships in the data. The largest model they built has 360,000 (!) factors, and it reduces pricing errors by 54.8 percent relative to the classic six-factor model from Fama and French.

Tyler discusses the fact that Wall Street firms often prefer to hire physicists, computer scientists and mathematicians rather than finance grads. But is that actually a problem for economics? We tend to assume that the local pizza joint will produce where marginal revenue equals marginal cost, even if they prefer to hire talented cooks rather than econ majors. If markets are efficient, why would a finance grad be especially valuable? Yes, they are smart and understand the terminology, but STEM people are often even smarter and can quickly be taught the terminology. Again, economics is simple once the basic models have been explained to an intelligent person.

To be fair, there are places where Tyler suggests that research has exposed flaws greater than those found in Newtonian physics, areas where the standard model may not even be a useful approximation of reality:

When financial economists refined the models with more complete specifications, it turned out Beta didn’t predict stock returns much at all. Eugene Fama and Kenneth French delivered one of the final blows to earlier approaches with a 1992 paper that showed Beta didn’t have explanatory power over expected returns at all. Since Fama himself was one of the original architects of CAPM-like reasoning, and French also was a renowned finance economist, these revisions to the model were credible.

For all its original promise, marginalism, and the concomitant notion of diminishing marginal utility, no longer seemed to help explain asset returns. Under one plausible account of intellectual history, you can date the decline of marginalism to that 1992 paper. In the most rigorous, data-oriented, and highest-paying field of economics, namely finance, marginalist constructs had every chance to succeed. In fact, they ran the board for several decades. But over time they failed. In the most prestigious field of economics, marginalism has been in full retreat for over 30 years, and it shows no signs of making a comeback.

Financial economics is not my area of expertise, so I’ll leave this as an open question.

Instead let me summarize what I interpret as the main problems that Tyler is considering:

1. Marginalism is old hat—researchers want something new.

2. Marginalism has right wing implications. Most intellectuals are left wing.

3. Marginalism has been shown to be only an approximation of reality, and younger economists wish to expose its limitations.

4. Modern empirical research often does better employing big data in an atheoretical fashion.

5. Marginalism seems to be wrong on at least some important questions, such as the impact of “beta” on stock returns.

That’s a quite a diverse set of claims, with each claim having different implications.

Tyler ends with some very interesting speculation as to how AI may reshape the field of economics. Perhaps I’ll consider those ideas in a future post.

Undoubtedly, there’ll be debate over the meaning of his final paragraph:

There is however a slightly scarier version of this story yet. Maybe our intuitions about the world, including the economic world, were never so strong in the first place. Maybe we put so much value on “intuitive” results, in 20th century microeconomics, as a kind of cope and also security blanket, to make up for this deficiency. But our intuitions, even assuming them to be largely correct, always were just a small corner of understanding, swimming in a larger froth of epistemic chaos. And now the illusion has been stripped bare, and the true complexities of economic reasoning are being revealed.

I can think of any number of interpretations here:

1. The world is very complex.

2. The world is constantly changing.

3. Important concepts like utility cannot be measured.

4. Behavioral considerations are probably important but are hard to model.

5. Perhaps our models are more “WEIRD”, more culturally specific, than we have been assuming. How about an economics for contemporary Haiti?

To me, this seems like one of those glass half full/half empty situations, where we’d need to be more specific as to the question at hand before providing any sort of overall evaluation of the state of economics. I suspect that if Tyler were put in a room full of smug orthodox economists, he’d stand out as the critic of complacency. Put in a room full of heterodox critics of economics, and he’d probably tell them they underestimate the usefulness of mainstream economic models.

If this sort of book had been written by a marginalism skeptic—say an MMTer—it might be easily dismissed. The fact that Tyler is obviously a fan of marginal thinking and understands its strengths, gives his pessimistic outlook much more credibility.

Regardless of where you stand on any of these issues, this book will set the agenda for future debate over the direction of economics. But it also has interesting implications for a wide range of fields that are generally viewed as “science” and yet face many of the same problems as economics (widely viewed as a non-science by natural scientists), including botany, geology, meteorology and evolutionary biology. Self-recommending.

PS. People have been calling for more Trump bashing. Honestly, I feel like I’d be insulting your intelligence. But if you insist, here are five good Yglesias tweets from just the past 24 hours.

Great point

Pure evil [Update: Probably a false claim.]

Ironic

The real winners

And more real winners

PPS. You presumably noticed that this post is ungated. In the future, there’ll be a mixture of 100% open posts, and partially gated posts.

After providing many thousands of free posts over the past 17 years, I’ve decided to add a paywall, although some posts will remain entirely free. In this post I’ll discuss my motives, and then add a few thoughts on money illusion.

Here are some reasons why I have decided to charge for subscriptions:

Replacement: I have recently stopped posted at Econlog and lost a valuable source of retirement income. I wish to partially replace it.

Greed: As Danny DeVito once said, “Everyone needs money; that’s why they call it money.” Who can argue with David Mamet’s logic? Seriously, I’ll be charging significantly less than what people who understand these things tell me is the profit maximizing fee, so greed is not my only motivation. I place some weight on having a broad readership. Given the effort I put into this time-consuming project, the entire enterprise would make no sense if viewed solely as a profit-making opportunity.

Curiosity: I’m curious as to what sort of revenue I could earn. I believe it’s unlikely that I’ll fully replace my Econlog income, but who knows? Inquiring minds . . .

Feedback: During the first 18 months of my new blog, I put a lot of effort into the posts and I feel like I provided a useful service. Paid subscriptions are a sort of test as to whether I’m doing anything valuable. If very few people sign-up then I might conclude I’m wasting my time putting so much effort into the blog.

Quality: At least for my upper middle class and wealthy readers, a small annual subscription fee may be less of a negative than all of those obnoxious ads that TheMoneyIllusion had. In addition, the revenue will motivate me to subscribe to more high-quality publications and other Substacks. Even my current level of subscriptions (NYT, FT, Economist, Bloomberg, Reason, plus a few Substacks) is a bit pricey, and this will motivate me to add more Substack subscriptions. And did I mention the cost of Criterion Channel? NBA LeaguePass?

I waited a year and a half to start charging for several reasons. First, I hoped to build up an audience. Now I have about 9000 free subscribers. (I’m told that only a small portion generally opt for the paid version of a blog, around 5% to 10%.) Second, I didn’t want to be under pressure to post frequently, as I’m supposed to be retired and I do a fair bit of traveling. At least in my own mind I can now tell myself “I’ve already given people more than 18 months worth of free stuff, so if I run out of ideas then people can at least feel that they’ve already gotten something for their money.” Less pressure.

Joseph Conrad once told an interesting anecdote:

“If [his agent Edward Garnett] had said to me ‘Why not go on writing?’ I should have been paralyzed. I could not have done it. But he said to me, ‘You have written one book. It is very good. Why not write another?’ … Another? Yes: I would do that. I could do that. Many others I could not. Another, I could. That is how Edward made me go on writing. That is what made me an author.”

That’s how I always feel about blogging. At any given point in time, I feel I can come up with one more post, but after that I’m out of ideas. But then a few days later another idea pops up into my head. It would have been too intimidating for me to start charging from the beginning, as I would have felt pressure to deliver the goods to all the people who paid their hard-earned money. I’ll still feel some obligation, but having already done 130 free posts certainly lessens the pressure.

Part 2: Money Illusion

Back in the mid-1970s, a friend and I bought about six dollars of gas (a whole tank at the time) at a small independent gas station in Madison. We handed the owner of the station a $20 bill, and he immediately started yelling at us—complaining the bill was too big. “Don’t you have anything smaller! We smiled at each other, understanding that this old guy was a product of the Depression, and thought a twenty was a big bill.

Fifty years later, I’m like that grouchy old guy, suffering from money illusion. But it isn’t just me, the whole of society seems to have trouble adjusting to the change in the purchasing power of money. Consider:

1. In 1900, the smallest coin (the penny) had the purchasing power of 38 cents today. But in 2025 the penny is still our smallest coin. Yes, it’s being phased out, but in 1900 we somehow got by with nothing even as small as today’s quarter.

2. Back in the 1960s and 1970, I recall $10s and $20s as being the smallest currency notes that circulated widely. But that’s sort of true even today, when the CPI is ten times the level of 1966. There are lots of $100s “in circulation”, but they are rarely used for ordinary transactions. I suppose it reflects the fact that most larger purchases are migrating to credit cards.

I find relative price changes to be confusing. When I was young, I put product categories into different mental boxes. The price of a lunch was single digits, shoes and clothing items were double digits, major home appliances and color TVs were triple digits, Cars were four digits. Houses were five digits.

Today, lunches, cars and homes are far more expensive, but clothing is still often double digits and home appliances are still often triple digits. My wife and I occasionally go to an elegant restaurant where the bill is a few hundred dollars, and I’m always confused as to how a restaurant meal could be in the same price range as a home appliance. It makes no sense to me.

As a favor to my long-time readers, I’ve decided to charge $30/year to people who sign up during the first few months, and $40/year for those who sign up after April 30th. If you are an affluent reader that wishes to support my project with a “tip”, please sign up for the $5/month option. Or better yet the $100/year “Founding Member”. If you are Elon Musk, then feel free to put one millionth of your total wealth into the Founding Member box, to support this valuable public service.

For all you older boomers like me, think about the fact that $30 or $40 is no longer a lot of money. In California, you can barely buy a decent lunch for $30, at least if you also get a beer and add tax and tip. Don’t be like that grouchy old guy at the gas station back in 1975. Don’t be fooled by money illusion. (You are already benefiting from my own money illusion, as I still can’t stop thinking of $100 as a lot of money.)

PS. Years later my friend got revenge, buying that same gas station and turning it into a bicycle shop.

PPS. Unlike those other bloggers, I don’t pretend to be a fortune teller.

You won’t get economic forecasts or investment advice, beyond “the market forecast is best.” Instead, I’ll offer analysis. Thus I’ve been preaching that while nationalists claim to be patriotic, real world nationalism almost always ends up supporting authoritarianism, militarism, xenophobia, protectionism, corruption and dishonesty, in much the way that communists promise the warm embrace of collectivism, and end up giving us Stalin, Mao, Kim Jong Il, Pol Pot and Castro.

During 2025, 2% inflation was an appropriate target for Fed policy.

Is that correct? I don’t think so, as the Fed has a flexible inflation target where they try to look through supply shocks. So how about this claim:

During 2025, it was appropriate to allow inflation to run slightly above 2% due to supply shocks.

Is that correct? Again, I don’t think so. There were supply shocks during 2025, but they were mostly positive supply shocks. Because Fed policymakers try to “look through” supply shocks and focus on aggregate demand, it was appropriate for inflation to run below 2% during 2025. This is a claim that makes sense:

During 2025, PCE inflation was 2.9%. Given the Fed’s announced monetary policy goals and given that 2025 was a year of falling oil prices and rapid productivity gains, an appropriate inflation rate would have probably been in the 1.5% to 1.8% range. Thus, inflation was more than one percentage point too high in 2025.

How often do you see Fed policy explained in that fashion? How about “never”? That tells me that hardly anyone actually understands the meaning of a 2% inflation target that looks through unusual movements in aggregate supply. Many people understand that it is appropriate for inflation to run above 2% during years when there are adverse supply shocks. Very few people—even very few economists—seem to understand that inflation should run below 2% during other years, that is, periods not marred by adverse supply shocks.

In other words, Fed policy has recently been even worse than it might look if you focus solely on recent PCE inflation rates.

Now we are in 2026, and it is possible (but not yet certain), that this will end up being a year of adverse supply shocks, akin to 2022. If it is, then it would be appropriate for inflation to exceed 2% in 2026. The real problem was 2025, when inflation ran 2.9% during a time when it should have been well below 2%.

This sort of biased reasoning occurs in many areas of life. I see sports fans excusing the poor performance of a team by referring to “injuries”, even during seasons when the team’s level of injuries doesn’t exceed the league average. And sports fans often overlook the fact that when their team is unusually healthy, it ought to be doing even better than usual. Subconsciously, they tend to regard 100% health as normal, and as a result they are usually overly optimistic about the potential of their team.

Consider fiscal policy, where the budget deficit has been running at a rate of around 6% of GDP over the past three years. Is that sustainable? You might be tempted to assume the deficit continues at a rate of 6% of GDP and then look at what happens to the ratio of total public debt to GDP going forward.

Unfortunately, it is easy to overlook the dog that didn’t bark. The last three years saw no recessions, no pandemics and no wars. They were unusually good years from a fiscal perspective. Even if deficits of 6% of GDP were just barely sustainable (and they probably are not), there would be no reason to assume that our current fiscal trajectory is sustainable.

No reason, that is, unless you believe the end of history has arrived and that we’ll never again have a recession, war or pandemic. The past three years have seen peace and prosperity and hence are not at all typical.

Someday soon, the dog may resume his barking.

In the weeks after Maduro was seized, the value of the Venezuelan stock market skyrocketed 260%. Some argue that liquidity was low, but tens of billions of dollars isn’t exactly nothing, and I put a lot of weight on this piece of data. In The Midas Paradox, Scott Sumner judges the wisdom of US policy up to and throughout the Great Depression based on the immediate movements of the stock market, and other indicators like bond and foreign exchange markets. If FDR announced a change in policy and the stock market went down, for example, he doesn’t care if it ended up rising six months down the line. The theory behind this idea is that people with skin in the game take into account all foreseeable circumstances at the time an event occurs, and what happens later can always be better explained by more proximate causes. I prefer this approach because otherwise you can just come up with any story you want about the wisdom of various economic policies.

I’m not really a fan of the Maduro raid, for “rules utilitarian” reasons that I discuss in a post that I wrote a few weeks ago but haven’t gotten around to publishing yet. But I do believe that Hanania is correct that the raid is a net positive for Venezuela and indeed may well end up being a positive for the US as well. (Hanania also discusses the negative market response to the Iran War.) Because Hanania cites my previous work in this area, I thought I should do a post explaining my views.

I’ve often argued that there is no point in waiting to see what happens after policies are adopted that have the goal of influencing aggregate demand. Thus, when the Fed makes a major policy announcement, we know within minutes everything we will ever know about the impact of that action. Because this claim is so unconventional—and would likely be rejected by most economists—I’d like to defend the idea using an analogy from the world of sports.

Assume that the Las Vegas betting line has the Kansas City Chiefs a 10-point favorite over the Tennessee Titans. Two days before the game, Patrick Mahomes is injured in practice, and the betting line drops to KC by two points. In the actual game, the Chiefs end up winning by 11. How should we think about the impact of the injury to Mahomes.

[www.allproreels.com — Washington Football Team vs. Kansas City Chiefs from FedEx Field, Landover, Maryland, October 17th, 2021 (All-Pro Reels Photography)]

Those who favor a “wait and see” approach, might argue that the injury had no impact, as the Chiefs actually won by more than the pre-injury line. I would argue that the injury reduced the Chiefs expected net performance by 8 points, as prediction markets are the best way of ascertaining the truth about reality. The actual outcome of any game is highly unpredictable, as it is influenced by a wide range of factors that are difficult to forecast. Even the shape of the American football adds randomness to the game, as it often bounces unpredictably during punts.

Most economists are fairly rational thinkers, and I suspect that most of them would agree with my claim about point spreads in a Chiefs game. The betting line provides more accurate information about the impact of an injury than the actual outcome of the game.

But I also suspect that most economists disagree with my rejection of the wait and see approach to economic policy initiatives, and especially my claim that within minutes of a policy announcement we know everything we will ever know about the impact of the policy. Indeed, even I regard this claim as a slight overstatement, as Fed announcements include more than a rate change, and there is often further market reaction during the afternoon of a Fed announcement, as markets digest both the forward guidance in the full statement and also the interpretation provided by pundits. Even so, the market reaction is mostly complete by the end of the trading day.

In January 2001 and again in September 2007, markets responded very positively to more expansionary than expected Fed announcements, and in December 2007 the response was very negative to a more contractionary than expected announcement. You could argue that only the latter reaction was ”correct”, as in all three cases we eventually went into recession. But I don’t see it that way. Rather, in all three cases the markets were worried about recession, and in all three cases they were “rooting” for actions that made recession less likely.

As Hanania indicated, in The Midas Paradox I spent a lot of time looking at stock market reactions to policy shocks. To be clear, I do not believe that the stock market is a reliable indicator in all circumstances. To take an obvious example, I would not use the stock market reaction to a cut in corporate tax rates as a indicator of whether lower corporate taxes were good public policy. So why did I frequently use them when evaluating policy during the Great Depression?

A graph in The Midas Paradox shows an unusually strong correlation between (logs of) stock prices and industrial production from January 1929 through December 1938:

(Notice the lack of “long and variable lags”.)

The term ‘ad hoc’ is often seen as a pejorative, but when special circumstances allow a technique to be unusually effective, then it makes sense to use that technique. It just so happens that output was undesirably low throughout the entire 1930s. It is also the case (probably for related reasons) that stock prices and industrial production were unusually closely correlated during this period. In that economic environment, policies that tended to raise output also tended to raise stock prices, and vice versa. The same might not be true in an overheated economy such as 2022-23. And even in the 1930s, I did not rely solely on stock prices. I also looked at the reaction of numerous other financial market indicators, including bond yields, yield spreads, exchange rates, and commodity price indices.

I got into blogging out of frustration that the Fed seemed to ignore market signals in late 2008. For instance, it refused to cut rates in the meeting after Lehman failed, despite plunging TIPS spreads. Readers often tell me that they like my blog because my takes have been more accurate than those of many other pundits. While some warned that Bernanke’s QE would create high inflation, I predicted that inflation would remain below target. While Keynesians predicted that fiscal austerity would sharply slow the economy in 2013, the economy actually accelerated.

Alex Tabarrok also thought the 2013 “market monetarist experiment” was a bad look for Keynesians, although he rightly noted that a single experiment is not decisive. My relative complacency about the fiscal austerity was mostly based on the relative stability of various asset prices, including stocks and TIPS spreads. I didn’t have a high level of confidence that we market monetarists would “win” this contest, but then it was the market forecasts that mattered to me, not the subsequent real-world outcome. Unfortunately, the world I live in doesn’t agree with me, and I’m forced to play by their rules—the “wait and see” approach. Luckily, in 2013 I came out ahead. But even if I had been wrong, I would not have regretted relying on market signals.

I'm certainly no Nostradamus. When the markets are wrong (and they are frequently wrong), then I’m also wrong. Unlike in 2013, I would have lost a bet made in 2021 on whether the fiscal and monetary stimulus would lead to high inflation. If you bet on a series of football games with the point spread in your favor, you will usually win. But losses will by no means be infrequent. The rationalist community argues that the best we can hope for is to be “less wrong”, and I believe that market forecasts are the best way of doing that.

I was a relatively unknown economist in 2008, teaching at a second-tier college. Whatever reputation I have comes from my use of market signals in blog posts. Because I’m not good with technology, I didn’t get my blog up and running until early 2009. If I’d started blogging in mid-2008, my reputation might be somewhat higher. But I have no reason to complain. If I’d started blogging in 2005 my reputation would be far lower, as I deny the existence of bubbles, including housing bubbles. I still don’t believe that 2006 was a bubble (real housing prices have since recovered), but most people don’t see things that way.

While I approve of Hanania’s general approach to evaluating the success of policy initiatives, let me end with a note of caution. Markets are not very good at evaluating existential risks. Consider a hypothetical foreign policy initiative that increases the risk of a major nuclear war by 1%. Perhaps a US decision to go to war with Russia over Ukraine, or China over Taiwan. Also assume that a nuclear exchange would kill 200 million people. How would markets react to that risky policy initiative?

Even if nuclear war drove US equity prices down close to zero, the stock market might only decline by 1% on the news of US intervention, as the risk of nuclear war has increased, by assumption, by only 1 percent. But even a 1% risk of nuclear war has an expected value of 2 million deaths and thus is very likely a bad policy choice.

I’m not certain if the Munich agreement of 1938 slightly increased the chance of a war that ended up killing 50 million people, but this New York Times report has always haunted me:

From a strictly market viewpoint the news of the decision of the Czech Government to capitulate to the demands that it cede the Sudeten area to Germany was favorable. Prices, quite naturally, improved as the threat of war seemed to recede. But this was “good news” with a difference; hardly the sort of good news to capture the imagination of individual traders and evoke a spirit of bullishness. Even in Wall Street, where the mental processes are supposed to be exceedingly realistic, there was a sufficiently powerful sense of the tragedy involved in Czechoslovakia’s surrender and the unhappy role that Britain and France played in bringing it about to dampen the normal speculative impulses. (NYT, 9/22/38, p. 33)

I suspect that the US stock market might rise if Trump were to pressure Ukraine into surrendering to Russia, or even ceding the Sudetenland . . . er . . . I mean the Donbas. Call me a hypocrite, but I worry about the tail risk of appeasing Putin.

Another problem is that events can be ambiguous. Does the failure of oil to hit $150/barrel mean the war doesn’t matter all that much, or does it incorporate market expectations of a “Trump put”, an expectation that he would back off if the global energy outlook became extremely bad?

PS. What do you think of the NYT’s writing style back in 1938? It is obviously different from today, but I feel like someone else could evaluate that difference better than I can. Do you like it better or worse? Is it aimed at a more elite audience? Or is it simply more “literary”?

PPS. Tyler Cowen had this to say today:

On the precautionary side, we need a dash of the 1960s and ’70s New Left and libertarian anti-war ideologies, skeptical of Uncle Sam himself. We do not want to become the bad guys.

Yup.

On one level, I’m pleased with this finding. The authors find that supply shocks played only a minor role in the post-Covid inflation. I’ve argued that the rapid growth in nominal GDP during 2021-22 strongly suggests that the primary problem was excessive aggregate demand, not supply restrictions.

I am surprised that they found little evidence that money supply played an important role. The M2 money supply rose by 40% between February 2020 and February 2022, by far the fastest two-year growth in modern history:

To be clear, I don’t view M2 as the best indicator of the stance of monetary policy, rather I prefer NGDP growth. But I’m in the minority, and M2 is the much more conventional measure of monetary policy. Unfortunately, economists have never really solved the identification problem in macroeconomics, and hence even in 2026 we continue to debate the same issues that were being contested back in the 1960s—what is the relative importance of fiscal and monetary policy?

One problem is that there is no generally accepted definition of “causation”. Consider a bus that goes off a twisty mountain road with no guardrail. What caused the accident? One person could claim that the accident would not have occurred if the road had an adequate guardrail. Another person could claim that the accident was caused by a driver that was not sufficiently cautious. It is not obvious that either claim is “wrong”.

Was the 2021-22 inflation caused by excessive fiscal stimulus, or by the failure of the Fed to offset the stimulus with appropriate monetary policy? Perhaps both claims are true.

Let’s think about the fact that the 2020-21 fiscal stimulus had the sort of inflationary impact predicted by Keynesian models, but the 2013 fiscal austerity did not have the contractionary impact predicted by the very same models. Why is that?

The 2013 fiscal austerity did not occur during a period where policymakers viewed slower growth in NGDP as being desirable. Hence, the Fed offset the impact of the austerity with easier money, and the economy failed to slow as predicted. In contrast, the 2020-21 fiscal stimulus occurred in an environment where faster growth in NGDP was widely viewed as desirable, by both monetary and fiscal policymakers. In that environment, the Fed choose not to offset the expansionary impact of fiscal stimulus. In retrospect, both fiscal and monetary policymakers erred with excessively expansionary policies in 2021, but at the time the policy was viewed as appropriate.

If I am correct, then this suggests that the impact of fiscal policy will depend on the zeitgeist, the attitude of monetary and fiscal policymakers toward growth in nominal spending. The Fed will largely offset the impact of fiscal policy on nominal spending when the Fed doesn’t view that impact as being desirable. Historical studies of correlations between fiscal policy and inflation will not have reliable policy implications, for the same reason that historical studies of the correlation between inflation and unemployment from 1879 to 1968 had misleading policy implications for a world of unconstrained fiat money.

In 1976, Robert Lucas explained why the Phillips Curve was an unreliable guide to policymakers. Studies that found a negative correlation between inflation and unemployment were mostly looking at periods of time where authorities were not trying to manipulate the inflation rate to influence employment. Recall that between 1879 and 1968, the dollar was almost always fixed to gold at either $20.67/oz. or $35/oz. Under that policy regime, you cannot permanently lower unemployment with higher rates of steady state inflation. If temporary increases in inflation have an expansionary impact, it is largely because they are unanticipated. (As an aside, NGDP growth is a better variable than inflation when doing these sorts of Phillips Curve studies.)

Even if the 2020-21 fiscal stimulus did have an inflationary impact, that’s no reason to assume that a similar fiscal program adopted today would have the same sort of impact. Having seen what went wrong in 2021-22, today’s Fed would be far more likely to offset the impact of bigger budget deficits with tighter money, something they did not do in 2021.

Another recent study does find some evidence of causation running from fiscal shocks to inflation. Gabriel P. Fritsch and J. Zachary Mazlish’s new paper found strong evidence that positive fiscal shocks are inflationary. Here is the abstract:

We introduce a new methodology for identifying high-frequency fiscal shocks using Large Language Models. We apply this method to 1947-2025 US data. Our results show that the model successfully mimics a "professional forecaster" of the current and future US fiscal position, and is able to recover similar shocks to what have already been identified in the narrative fiscal shock literature. We then examine the effects of fiscal shocks on asset prices: in response to a 1pp shock to the present-value of the current and next ten-years deficits, ten-year Treasury yields rise more than 30bps, with real yields and break-even inflation expectations both contributing to the rise. The dollar appreciates significantly — as much as 4.8% — and the 2Y-10Y spread rises 16-24bps. Turning to macroeconomic outcomes, our fiscal shocks produce government spending multipliers in the 0.5-1 range. Tax shocks shows strong signs of anticipation, and using our data to account for anticipation, we find that output and consumption fall by more than 2% in anticipation of a 1% of GDP tax cut. The multiplier for an anticipated tax shock is 1.2, smaller than typical estimates.

I like the approach they use, even though their findings conflict with my “monetary dominance” view of macroeconomics. By looking at market responses to policy surprises, they are able to address the identification problem that has made it so difficult to establish causality. Assuming the findings hold up in future research, this study seems to clearly indicate that fiscal stimulus has a positive impact on inflation.

Nonetheless, there is an important difference between statistical significance and economic significance. For instance, look at the biggest fiscal policy shocks during the period since WWII, from the Fritsch and Mazlish paper:

Notice that the election of Reagan was by far the largest positive shock, twice the size of the second largest (Trump’s first election.) And yet during the Reagan administration, we saw the largest disinflation of my lifetime. Did the disinflation occur because markets misjudged Reagan’s fiscal policy? Not at all—budget deficits did increase sharply during the 1980s due to a combination of much higher military spending and sharply lower tax rates. The positive fiscal shock that was predicted after Reagan was elected did in fact occur.

And yet inflation fell sharply during the 1980s, even as many Keynesian economists predicted that inflation would increase. The explanation is simple; Reagan’s fiscal expansion was more than offset by a much tighter monetary policy, which brought inflation down from the double digits of 1979-81 to approximately 4% during 1982-89. Two things can both be true:

A. Reagan’s fiscal stimulus boosted inflation, other things equal.

B. Monetary policy was by far the dominant factor determining the path of inflation during the 1980s.

Also notice that during the 1970s, the two largest fiscal shocks were both contractionary—the Nixon budget and the Ford budget. And yet any story of the 1970s will focus on the extremely high (and rising) inflation of the period, far worse than the recent post-Covid inflation. Even if the two budget shocks did have a contractionary impact at the margin, the effects were completely overwhelmed by the extremely expansionary Fed monetary policy of 1965-81. Again, statistical significance does not always imply economic significance.

In a world where the Fed targets inflation at 2% but also cares about unemployment, supply shocks may have a temporary impact on the CPI. But non-monetary demand shocks should be fully offset by monetary policy, at least if the Fed is doing its job. Any (undesirable) impact of (demand-side) fiscal policy on inflation would result from the Fed failing to properly do its job. This means that any model showing how fiscal policy affects inflation will implicitly be a model of monetary policy failure.

I have no problem with studies that show that fiscal policy action X is correlated with monetary policy failure Y. Just don’t expect that study to provide reliable policy guidance to future fiscal policymakers.

PS. The Fritsch and Mazlish paper makes this claim:

Ten days after a shock that increases the present discounted-value of the current and next ten-year’s expected deficits over GDP by 1pp, the dollar appreciates 4.8%, ten-year nominal Treasury yields rise 46 basis points (bps), and ten year real yields are 34bps higher.

That implies a 12-basis point rise in inflation expectations, or a 20-basis point increase from the Reagan shock (which was 1.7 pp). Actual inflation fell by roughly 800 basis points.

PPS. Off topic, I was amused to see this headline in the OC Register:

Why do 31% of Americans want a housing crash?

And this data:

The survey found that 37% of renters who were rooting for a crash said a price collapse would improve their odds of buying a home. Just 12% of owners felt the same way.

Conversely, 39% of owners hoping for a housing crash wanted the lower property taxes a drop would create, compared with 15% of renters.

Of course, a housing crash caused by lower demand does not make housing more “affordable”, as we saw when a deep recession and tighter lending standards caused less housing to be built in 2008. On the other hand, a fall in house prices due to more supply does make housing more affordable, as we recently saw in Austin, Texas.

In other words, NRFPC

Speaking of housing, recent attempts to ban corporate ownership of housing are just one more piece of evidence that we are living in a new dark age of economics. They turned a YIMBY bill into a NIMBY bill. Both the left and the right have completely lost touch with reality. As I keep saying, “affordability” isn’t about prices, it’s about output. The way things are going, it may take decades to get back to the sensible neoliberalism of the 1990s.

When Tyler Cowen asked me for my most absurd belief, one idea that I came up with was that India will have the world’s largest economy in the year 2109.

First let’s ask ourselves why most people would find this prediction a bit far-fetched. Most of us have never even visited India, but we have seen media images that often show a very crowded and underdeveloped country. It is very hard to imagine how India’s economy could ever surpass the US. More astute observers might notice that India does have nearly 4 times the US population, and it is not that hard to imagine that their per capita GDP might eventually reach 30% of US levels.

But the population advantage of India raises an even greater hurtle. Right now, China has a per capita GDP that is twice as high as India’s. Even worse, China is growing more rapidly. And China’s total population is larger than India’s. So how could India possibly overtake China within the next 100 years?

We are still a long way from the year 2109, but two of the three things I mentioned have already reversed. India now has a larger population than China, and India’s economy is now growing considerably faster than China’s economy.

And this is only the beginning. Since writing that post, China’s fertility rate has plunged far more dramatically than anticipated. While India’s current population is only few percentage points larger than China’s current population, Indian fertility is far higher. In 2025, China had 7.92 million births, whereas India had roughly 23 million. Those figures provide a hint as to the relative size of each country’s workforce in the second half of this century. The future of these two demographic giants will look vastly different than the present.

Less than a year after my 2009 forecast, I became even more optimistic about India:

So here’s the new prediction:

Year: 2081

Workforce ratio: China will have 60% of India’s workforce.

Productivity ratio: India will have 60% of China’s worker productivity.

GDP ratio: 1:1

Fortunately, I won’t be alive then to be mocked for my prediction. Poor Lester Thurow and Robert Fogel may not avoid that ignominious fate. Ultra-pessimistic Thurow says it will take China at least 100 years to catch up to the US in GDP (actually, they are just 5 to 7 years away in PPP terms.) And ultra-optimistic Fogel says China will have twice the EU’s per capita GDP by 2040. Twice!?!? Fogel’s a great economist, but I wouldn’t say that forecasting GDP is his strong suit.

I was right about China surpassing the US in total GDP in PPP terms, and I will very likely be right that China will not be twice as rich as Europe by 2040 in per capita terms. Perhaps it’s worth another post to consider why very smart people can make such seemingly implausible predictions. But then some would view my India #1 prediction as just as implausible, so who am I to complain?

In any case, it is now pretty clear than in 2081 China’s workforce won’t be anywhere near 60% of India’s workforce, perhaps only a third as large. India’s per capita GDP (PPP) is currently barely 40% of China’s, but India is growing considerably faster and will likely eventually reach 60% of China’s per capita income.

Intelligent people know just how hard it is to predict the distant future. Heck, even 5 years ago most of us failed to see that AI was about to become a big story, just as 7 years ago most of us failed to predict Covid. Even a month ago, I didn’t anticipate the Iran War (although I did frequently tell my readers that nationalism inevitably leads to militarism.)

Given the difficulty in predicting the future, we need to overweight surprising trends that we now know with almost 100% certainty. One of those trends is that in the year 2055, there will be roughly three times more 30-year-old Indians than 30-year-old Chinese. That’s because we now live in a world where relatively few people die young, and immigration/emigration trends simply don’t move the needle very much in countries with 1.4 billion people. Futurologist should begin their analysis with surprising trends that we already know will happen and work outward from those points.

PS. In 2011, I moved the crossing point up to the year 2060. As with my TDS, no matter how outrageous my predictions, I cannot keep up with reality.

PPS. And don’t say, “total GDP doesn’t matter”. Total GDP matters when considering size of an economy and per capita GDP matters when considering living standards. For instance, the huge size of China’s economy results in it having a disproportionate impact on global commodity markets. You might think it doesn’t matter that Germany’s GDP is larger than Belgium’s GDP, despite a lower GDP per capita. I do.

1. After Trump announced his “Liberation Day” tariffs, the markets panicked. Trump’s advisors realized that they had made a serious error and persuaded Trump to back off.

2. After Trump hinted that he would appoint Kevin Hassett to be the new Fed chair, people were appalled. There was so much pushback that it became clear that Hassett might have difficulty getting approved. Trump backed off.

3. After Trump threatened to take Greenland from Denmark, there was so much criticism from both our allies in Europe and key figures in Congress that Trump was forced to back off and leave Greenland alone.

4. After Trump sent ICE agents into America’s bluest cities with instructions to get tough, the public became so outraged that Trump was forced to back off, ICE agents were moved to less volatile places, and Kristi Noem was fired.

How should we think about these “TACO” events? Some people argue that Trump’s critics overreacted, and that his retreats show that the danger was never as great as advertised. His initial move was merely an opening gambit, a negotiating tactic.

In fact, there is very little evidence for this benign view of the situation. Instead, all the evidence points to the conclusion that Trump would have carried through with his plans if the opposition had not “panicked”. In some cases, panic is a good thing.

The real problem is that there has recently been far too little panic. People did not freak out when the Trump administration ordered the US military to begin murdering Venezuelan civilians on small boats in the Caribbean. Because there was no widespread panic, the murders have continued.

There was also very little panic when businessmen and foreign governments paid bribes of hundreds of millions of dollars in exchange for favors from the Trump administration. As a result, the bribes have continued.

There was also very little panic when Trump began pardoning criminals solely because they supported him. As a result, the pardons of thugs that assault police officers, big drug kingpins, and Medicare fraudsters have continued.

Panic can come from many sources. In some cases, the financial markets will panic. In other cases, congressional leaders might panic. Or our allies might panic. Or the voters might panic.

A few weeks ago, I saw something I never expected to see—a large anti-Trump protest in conservative Mission Viejo. The target of their ire was the recent killings by Border Patrol agent Jesus Ochoa and Customs and Border Protection officer Raymundo Gutierrez. (Recall when Trump argued that Mexico was sending us their murderers.) It seems like the public is increasingly panicking about ICE overreach. Voters in conservative Fort Worth also seem to be panicking.

Sophisticated skeptics often tell us that people exaggerated the risk that Trump would abolish democracy and become a dictator. That’s true, they did exaggerate the risk.

But these pundits miss the more important point. Trump failed to achieve his goal precisely because people overreacted. A “hysterical” reaction can be a good thing. It was the reaction of investors, politicians, allies and voters that stopped Trump from following through with his instincts.

Trump’s worst instincts are not “negotiating positions”. He really did endorse China’s policy of putting a million Uyghurs into concentration camps. He really did endorse Duterte’s policy of murdering drug suspects. He really does respect Putin more than Zelenskyy. He really did support using force to take Greenland from Denmark. When people panic, Trump is stopped. When there isn’t enough panic, Trump indulges in his worst instincts.

The people that panicked should be proud when their worst fears fail to materialize. That means they’ve done their job. The real TDSers are the people who go to bed at night firmly opposed to neoconservative projects to engage in regime change and wake up the next day sounding more hawkish than John Bolton, all because Trump was depressed by low poll numbers and felt a need to “do something”.

PS. Hundreds of millions of years of evolution have produced creatures that panic in certain situations. Are we somehow to believe that panic is not an appropriate response to any type of danger? If so, why didn’t evolution cause panicking creatures to lose out in the long struggle of “the survival of the fittest”?

PPS. I see a similar problem in macroeconomics. In 1994, the Fed raised interest rates to prevent an upsurge in inflation, and the inflation did not materialize. People accused the Fed of overreacting, which is odd given that the outcome is exactly what the Fed wanted. In recent years, some have argued the Fed raised rates too high in 2023 because inflation is “coming down on its own.” Here’s a tip, in all of human history, inflation has never once moved “on its own”.

Patriotism is a natural emotion. I feel patriotic toward both my home state and my home country. But I’ve noticed that state patriotism tends to be a healthier emotion than national patriotism. The recent Winter Olympics provides a good example of how national patriotism can create unnecessary friction. The issue isn’t patriotism itself, rather it reflects a deeper problem—society’s unhealthy obsession with politicizing all aspects of life.

Wisconsin sports fans are more patriotic than average. I know what you are thinking; I’m biased because I grew up in Wisconsin. But my claim is objectively true—it is not uncommon for Green Bay Packer fans to dominate local fans even at games held away from home, particularly in sunbelt cities where many Wisconsinites have retired. Green Bay is a small city, and hence the team is seen as representing the entire state, unlike say the Jacksonville Jaguars Cougar football team.

College sports are the same. The University of Wisconsin system has 160,000 students in 13 campuses, all in a state with fewer than 6 million people. I was accepted to both UW-Madison and The University of Chicago as an undergraduate and choose Madison for financial reasons. Growing up in Wisconsin at that time, it was expected that most people would attend the UW. When I moved to Massachusetts (and then California), I noticed an entirely different culture, not as oriented around loyalty to a single university.

Occasionally, a highly talented Wisconsin athlete chooses Ohio State over the UW, and a few fans grumble that they are a “traitor”. After all, their education was paid for by our taxpayers and now they are choosing to represent our archrivals. Of course, this complaint is generally made with a wink and a nod, as almost no one seriously views them as disloyal. Almost no one believes that Ohio State is actually an evil university. It’s all make-believe. If the complainer were serious, we’d sharply discount our estimate of their intelligence.

State patriotism is a healthy emotion. Instead of fighting brutal wars—which make no sense in a world of nuclear weapons—it’s better to have made up rivalries. Our instincts for competition and dominance are diverted to a harmless pastime. America did fight one civil war, and that was more than enough.

Unfortunately, publications like the National Review cannot decide whether we should view sports as sports, or whether we need to think of athletes as representing the (often evil) government that rules a given country. Here they take one side of the debate:

Not everything has to be a campus psychodrama. Not all stories need to “surface the nuances of” this or that. Not every incident that tangentially involves Donald Trump requires his elevation to the star of the tale. It’s okay to be happy that the United States won something, without finding 100 other reasons to be sad, angry, indignant, or confused. . . .

Journalists are not politicians, and there is no need for them to be perfectly representative of the nation. But it might be a good thing for our culture if they weren’t all massive weirdos. If you were to stop 100 people on the street at random and ask them about the USA’s victory on Sunday, how many do you think would fixate on the supposed jingoism of the team, or on President Trump’s phone call and White House invitation, or on Kash bloody Patel? Two? If that?

But elsewhere in the same article they show an unhealthy obsession with politics:

In my estimation, Eileen Gu is a mercenary sports traitor who ought to be muttered about darkly

Indeed, the National Review is so obsessed with Eileen Gu that they devote an entire article to trashing her reputation:

The champion freestyle skier said the other day, after she had to settle for a silver medal in an event at the Olympics, that “sometimes it feels like I’m carrying the weight of two countries on my shoulders.”

Gu would be carrying the weight of only one country if she had chosen to represent her native U.S. at the games, rather than a hostile totalitarian state.

This publication cannot seem to decide whether athletes represent countries or governments. Did the US hockey team represent the Trump administration, or the United States of America? If the former, then what’s wrong with criticizing the team for its politics? If the latter, then why assume that Chinese athletes represent the CCP? China is much more than the CCP, it is a major country with a culture that goes back 4000 years. I’ve met patriotic Chinese people who prefer America’s political system to China’s system but still love “China”.

An article by Jason Russell in the generally non-jingoistic Reason magazine is equally confused:

Yet after all the U.S. helped her accomplish, she chose to compete under the Chinese flag instead of the American one. . . .

[W]hen Gu talks about this controversy, she’s either playing dumb or, for some reason, can’t figure out why people are mad. “So many athletes compete for a different country,” she said in response to Vice President J.D. Vance. “People only have a problem with me doing it because they kind of lump China into this monolithic entity, and they just hate China.” Gu does the same act when she’s asked about 1.5 million Uyghurs in Chinese concentration camps. “I’m not an expert on this,” she told Time magazine. “I haven’t done the research. I don’t think it’s my business.” (In an interview with Reason, one concentration camp survivor described sexual torture and other unspeakable horrors.)

I’m just as confused as Eileen Gu. I guess I could understand why people might be upset when an athlete chooses to represent another country (even if that’s not my view.) But Gu is correct, people don’t complain in other cases:

It’s all about the politics. As I’ve pointed out in previous posts, the current anti-Chinese hysteria in America is fed by the media and our politicians conflating “China” (the country) with the Chinese Communist Party (the government).

In a recent podcast, I recall someone referred to “Trump’s America”, and Tyler Cowen corrected them by saying something to the effect, “Not Trump’s America, Americans’ America” (not exact words.) It is not the CCP’s China, it’s the Chinese peoples’ China.

When visiting China, Trump expressed his support for the concentration camps that Russell criticized. Imagine if a reporter had asked the US hockey players to comment on our president’s support for this cruel policy. Or, for that matter, any of the many other outrages committed by the Trump administration. I’m guessing the National Review would have scolded the reporter for being obsessed with politics. And they would be correct in doing so.

Russell continues:

So it's natural for Americans to feel betrayed by someone who could represent the United States but chooses not to—especially when they pick a country whose values are nearly diametrically opposed to ours.

I could make a snarky comment about how China doesn’t “value” invading a new country every month, but I’ll happily concede that (overall) their political system is worse than ours. But “values”? Sorry, I’ve never noticed that the Chinese people have worse values than Americans, in any overall sense. When I speak with individual Chinese people, I find their values to be surprisingly similar over a wide range of issues. Even something like privacy is valued far more highly in China than you might be led to expect from reading superficial accounts of their “conformist” culture.

Back in Wisconsin, almost no one decides on whether they’ll root for the Badgers based on which party currently controls the governorship. That’s a healthy patriotism. For some reason, when we move from the state level to the national level, people become much more irrational in their patriotism, with an unhealthy obsession with politics. I suspect that the public in places like Switzerland and Norway do not decide whether to root for a local athlete based on which political party is in power.

True American patriots root for the US in our hockey games and Canada (or China) in our trade wars.

America has become a bit like a banana republic, where the government is now so overbearing that everything becomes seen as a political issue. Indeed, President Trump often goes out of his way to make everything seem to be about politics. I used to think of this as something that happened elsewhere, say in Peron-era Argentina. It’s a sad way to go through life. Lighten up, join the 98% and enjoy sports and music and movies without obsessing over the political views of all of your heroes. There’s more to life than politics.

When it comes to national patriotism, Nellie Bowles at The Free Press provides a dose of sanity:

Me, as the reasonable centrist, who everyone loves to yell at, I think both are incredible. I love Eileen Gu and I love the men’s hockey team. Listen to Eileen’s explanation of how she controls her mind. The woman’s amazing. I don’t care who she does the sports for, she’s American. I’m a little afraid of her, and I respect her for that. And look at Jack Hughes wrapped in the flag with that broken, bloody smile. Amazing. U-S-A! U-S-A!

Amen.

During the early 1930s, real output in the US declined by more that 30%. To give you a sense of the magnitude of this slump, recall that output only declined about 4% during the Great Recession of 2008-09. Given those facts, you might be surprised by the number of people that blamed overproduction for the Great Depression. What were they thinking?

The contraction of 1929-33 didn’t merely see falling output, the price level also declined by roughly 25%. Franklin Roosevelt thought the deflation was making the Depression worse and believed that overproduction was the cause of the deflation. He got Congress to enact policies such as the National Industrial Recovery Act and the Agricultural Assistance Act, aimed at reducing production. He “succeeded”, as industrial production declined between July 1933 (when the labor codes were enacted) and May 1935 (when the NIRA was ruled unconstitutional.) Every so often the Supreme Court does a favor to economically illiterate presidents.

Even economists that were generally supportive of FDR, notably John Maynard Keynes, worried that the NIRA slowed the recovery. This is from a letter that Keynes wrote to FDR:

That is my first reflection--that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.

Long time readers know what I’ll say next. FDR’s view was a classic example of the fallacy of reasoning from a price change. FDR assumed that the deflation was caused by too much supply:

. . . whereas it was actually caused by too little demand:

I found the Citrini essay difficult to interpret, as they don’t use standard economic concepts in a conventional fashion. Here’s Brian Albrecht:

Right at the start, Citrini introduces a concept called “Ghost GDP”: output that “shows up in the national accounts but never circulates through the real economy.”

Ummm… yea, that’s not a thing.

GDP is not a number someone estimates and hopes is roughly right. I mean they do estimate it, but that’s not what matters here. It’s an accounting identity. Every dollar of output is, by definition, a dollar of income to someone. There is no output that “doesn’t circulate.” If a GPU cluster in North Dakota does the work of 10,000 white-collar workers, someone owns that output. Someone earned that revenue. The money went somewhere.

Where does the money go? That’s the question Citrini never asks.

The parts of the Citrini paper that I do understand are often wrong, as there is one example after another of reasoning from a price change:

In a normal recession, the cause eventually self-corrects. Overbuilding leads to a construction slowdown, which leads to lower rates, which leads to new construction. Inventory overshoot leads to destocking, which leads to restocking. The cyclical mechanism contains within it its own seeds of recovery.

No, that’s not how economies adjust to recessions. On average, the sharper the fall in interest rates, the bleaker the outlook for the economy. Yes, falling interest rates occasionally presage a quick recovery, as in 2021, but that’s more the exception than the rule. In fact, economies recover by NGDP rising relative to (sticky) nominal wage rates. Here they forecast the near future:

AI got better and cheaper. Companies laid off workers, then used the savings to buy more AI capability, which let them lay off more workers. Displaced workers spent less. Companies that sell things to consumers sold fewer of them, weakened, and invested more in AI to protect margins. AI got better and cheaper.

A feedback loop with no natural brake.

The intuitive expectation was that falling aggregate demand would slow the AI buildout.

This seems like FDR’s overproduction theory, which confuses a rise in aggregate supply with a fall in aggregate demand. That wasn’t even true under the gold standard, and it is certainly not true in a fiat money world where central banks determine the path of nominal spending.

Here they say something that does relate to aggregate demand:

It should have been clear all along that a single GPU cluster in North Dakota generating the output previously attributed to 10,000 white-collar workers in midtown Manhattan is more economic pandemic than economic panacea. The velocity of money flatlined.

Why does money velocity flatline? Velocity is positively correlated with things like nominal interest rates and nominal GDP growth. If the Fed targets inflation at 2%, then an AI-driven productivity boom will raise nominal GDP growth. Thus, if RGDP growth rises to 5%/year, then NGDP growth would rise to 7%/year. Money velocity would almost certainly accelerate. (Basil Halperin argued that the long-term bond market doesn’t seem to be forecasting that outcome, which suggests that AI may not be as transformative as its proponents assume.)

The bigger problem here is that velocity only matters if the money supply is constrained by something like a commodity price peg. In today’s fiat money economy, a central bank will generally offset any movement in velocity. That adjustment may not occur immediately, and may be imperfect, but Citrini seems to be discussing deep structural forces, not transitory monetary policy mistakes.

AI does present some issues that are certainly worth thinking about, such as the impact of technology on labor’s share of national income. Here they (misleadingly) suggest that labor’s share has been falling, and is likely to continue falling between 2024-28:

Labor’s share of GDP declined from 64% in 1974 to 56% in 2024, a four-decade grind lower driven by globalization, automation, and the steady erosion of worker bargaining power. In the four years since AI began its exponential improvement, that has dropped to 46%. The sharpest decline on record.

Matthew Rognlie found that the decline is labor’s share is mostly (implicit) housing capital income (from NIMBYism?), and that the share going to non-housing capital is fairly stable:

No, it’s not “globalization, automation, and the steady erosion of worker bargaining power.”

Nonetheless, I could imagine a world where extremely fast AI progress could lower labor’s share, and that this might have important policy implications. But if and when that does occur, it will not be helpful to analyze the situation through the lens of “aggregate demand”.

The output is still there. But it’s no longer routing through households on the way back to firms, which means it’s no longer routing through the IRS either.

Actually, 100% of income is earned by “households”. Companies are owned by households. If you are worried about inequality, then focus on inequality, not aggregate demand.

Don’t take this post as being an exercise in “everything will be fine”. I don’t doubt that AI will create problems, just as other technologies have created problems. I wouldn’t even rule out some sort of AI catastrophe. But overproduction is not the thing we should be worried about. If we ever reach the point where labor is not needed, we’ll all be billionaires—even if it requires a UBI to get there.

Also, my focus has been the macro aspects of the paper. The fact that stock prices moved on the report suggests that they may have some useful insights at the micro level, as some individual firms will be hurt by developments in AI.

PS. I believe Josh Barro came up with the phrase “good things are good”.

PPS. A few weeks ago, I pointed out that tariffs on aluminum were hurting US manufacturing. Just two days later, reports surfaced that the administration might scale back these tariffs. Two days ago, I jokingly suggested that perhaps we should buy Cuba instead of Greenland. Today, I see this Bloomberg headline:

Trump Says He Sees Possible ‘Friendly Takeover of Cuba’

Perhaps Trump reads my blog.

I suppose these pundits picture 1.4 billion Chinese people pressed up against their northern border with Russia, needing more space, more “lebensraum”. In fact, nothing could be further from the truth.

China’s northeast (called Dongbei, but known in the West as Manchuria), is losing population at a rate faster than almost anywhere on Earth. Already one of the less densely parts of eastern China, the Dongbei becomes less populated each year. It has a birth rate that is below even South Korean levels, and unlike South Korea it also has a high rate of outmigration, especially to tropical locations such as China’s Pearl River Delta (near Hong Kong.) It is China’s rustbelt.

The northernmost of Dongbei’s three provinces (Heilongjiang) has perhaps the world’s lowest birthrate, less than half of the already quite low birthrate for China as a whole. It has lost 12.5% of its population in just the past eight years. This cold and poor region has little appeal to the Chinese people, and the last thing China would be interested in doing is fighting a war with nuclear armed Russia to make that rapidly depopulating region even larger and colder.

Many Americans are familiar with the fact that our population is moving from the relatively cold north to fast growing hotter states such as Florida and Texas. Less well known is that the same process is occurring in many other areas. Here’s the Financial Times:

China’s aluminium industry has embarked on a green long march, moving millions of tonnes of production from the northern coal country, its stronghold for seven decades, to pockets of the south and west rich in renewable energy.

When people speak of “global warming”, they generally refer to a meteorological phenomenon, the trend toward gradually rising global temperatures. If 40 years ago you had asked a bunch of geopolitical experts how the public would respond to global warming, they might have predicted a gradual migration to the north, as people fled excessively hot temperatures. Instead, the global trend is in the opposite direction, with the southern portions of places like Germany, France and the UK growing faster than their northern regions. This is not true of India, but then fast-growing northern India has hotter and more unpleasant summers than the south.

At a global level, virtually all population growth is occurring at or near the tropics—mostly Africa and South Asia. Even tropical parts of China are still growing, as the country’s overall population declines. The world is getter hotter in a physical sense—the climate is warming—but it is also getting hotter in a demographic sense, as more and more of the world’s population is living in hot places. Even if the climate were not heating up, the average human would be living in an increasingly hot environment due to both migration and international fertility differences.

Instead of Greenland, maybe we should think about buying (rapidly depopulating) Cuba.

Seriously, the lesson here is that experts often misjudge the effect of major long run changes on society. Just as global warming has affected us in ways that were largely unexpected, it seems plausible that other trends such as falling fertility and artificial intelligence might have unforeseen effects. Indeed, we are already seeing a few signs that AI might be a greater threat to white collar jobs than to the manual trades. Not long ago, there was a widespread view that blue collar workers were losing out due to technological change and that plumbers needed to “learn to code”. What would Michael Scott say?

More generally, I believe people tend to underestimate how often they make confident predictions that turn out to be false or wring their hands over societal trends that are already rapidly reversing. Here are a few examples, off the top of my head:

1. I recall a mini-panic in the 1990s about language. People feared that immigrants were no longer learning English, and that we’d become a country of two languages, like Canada. Instead, it turned out that the children of immigrants almost always do learn English. If anything, the rest of the world should be worried about English becoming the de facto global language. When the language fears didn’t pan out, pundits created other fake crises such as a fear that immigration would boost our crime rates. (It didn’t.)

2. In the 1990s, I recall a mini-panic about teenage mothers. Since 1991, the rate of births to teenage mothers has plummeted by nearly 80%.

3. After 2001, there was a widespread view that we were in for a lot more Islamic terrorism on American soil. Instead, terrorism in the US dropped to very low levels. There was a view that flying was becoming more dangerous. Instead, it became far safer.

4. In the 1990s, there was a view that violent movies and rap music were corrupting our youth, and that this would lead them to commit more crime. Instead, the rate of violent crime has plummeted to much lower levels.

5. When I was young (in the 1960s), there was fear that the Mafia was exerting ever more control over our society. Since then, the influence of the Mafia has declined sharply.

6. When I was young, it was assumed that the future would see much more manned space travel, and a big increase in supersonic commercial air service. It never happened.

It might seem “logical” that global warming would lead to people migrating toward cooler regions, but don’t be surprised if the exact opposite were to occur. (To be clear, I still think global warming is a problem, and I do expect some negative effects such as sea level rise.)

PS. This map in Wikipedia shows the former Chinese lands that are now a part of Russia:

PPS. Dongbei literally means eastnorth, although of course English speakers would say northeast, the part of China where Manchuria is located.

1. The fear among some white people that their race will be replaced by non-whites, due to trends in fertility and immigration.

2. The fear among workers that their jobs will be replaced by AI.

3. The fear among US policymakers than China will replace us as the world’s hegemon. This fear is linked to both China’s large population, and its success in AI research.

4. The fear among Taiwanese people that their democracy will be replaced with the PRC’s autocracy. The Taiwanese see TSMC as a sort of “silicon shield”.

5. The fear among older conservatives that our Christian culture will be replaced by a younger generation that welcomes gay marriage, trans rights, polyamory and rejects organized religion. These cultural practices are often seen as being linked to Bay Area rationalism.

6. The fear that often difficult to deal with human spouses will be replaced by compliant artificial spouses.

I’m sure that one could find numerous other examples.

Throughout history, older people have often worried that their way of life was disappearing, as society evolved toward a new set of cultural practices. But the world has never seen anything like AI—or more specifically what AI is expected to eventually be capable of doing. And the world has never seen anything like the enormous (and somewhat uneven) decline in fertility that is currently underway. In the past, high birth rates assured that populations bounced back from even a devastating plague or famine.

In a sense, the replacement of humans with machines may have already begun. In my view, the best theory for the decline in fertility is “it’s the phones”. People talk about how specific aspects of Korean society have pushed fertility down to 0.80, but what’s caused fertility in places like Chile, Thailand and Poland to fall close to 1.0? No country specific factor like “more tall apartment buildings” can fully explain what is going on all over the world. That is, nothing except a truly global cultural change—like spending all your time mesmerized by entertainment on your phone. And while fertility has been falling for decades, the truly dramatic decline is associated with the smartphone.

[As an aside, only 9% of Americans owned a TV set in 1950. That increased to more than 50% in 1955. The birth rate in the US peaked in 1957, and then declined sharply for several decades. Before it was the phone, it was the TV. Stop inventing things that are more fun than children!!]

Because the decline in fertility is greater in more developed countries, residents increasingly fear being overwhelmed by immigrants from poorer parts of the world. A similar anxiety is developing with respect to AI, especially among more populist voters. Here’s the FT:

“We support Trump’s efforts to win the AI race, but we don’t want to do it at the expense of human dignity,” said Byron Keelin, head of Freedom Principle, a rightwing group that this summer rallied its members to oppose the president’s attempt to ban state legislation. “We are trying to protect citizens from being taken advantage of by big corporations.”

In Washington, Josh Hawley, Missouri’s senior senator and one of Trump’s strongest supporters, has warned the AI revolution is “working against the working man, his liberty and his worth”. He has introduced federal legislation that would force AI companies to verify users’ ages and ban them from providing virtual “companions” to minors. . . .

Residents of Independence, meanwhile, feel whiplashed by the pace of change.

Garrett said: “I’ve listened to [Elon Musk] talk about . . . how quickly it is happening and I don’t know, I just think sometimes things need to be slowed down a little bit, put some thought into it.”

Replacement anxiety occurs along many different dimensions. Much of the NIMBY movement in America is motivated by a desire to preserve the character of specific residential neighborhoods, with single family homeowners especially leery of replacement by lower income renters. But AI and fertility decline seem like special cases, likely to supercharge replacement anxiety in a wide range of areas. I suspect that these two issues will be the dominant factors driving political change during the 21st century.

PS. Off topic, but did you notice that the US trade deficit was virtually unchanged in 2025 (falling from $903.5 billion to $901.5 billion):

By country, the shortfall with China narrowed sharply — reaching about $202 billion, the smallest in more than 20 years and a reflection of the higher tariffs Trump put on Chinese imports. Trade has instead been largely rerouted through other countries like Mexico and Vietnam, where deficits widened to respective records.

Meantime, the gap with Taiwan last year widened to a record $146.8 billion, while the annual shortfall with Canada narrowed.

Meanwhile, total employment in manufacturing declined by 108,000 during 2025. Investment in new factories also declined. Interested readers may wish to revisit one my post-Liberation Day posts, where I discussed misconceptions about trade balances:

And contrary to the Treasury claim, tariffs reduce both imports and exports and have little or no effect on trade balances (as we saw during the first Trump administration.) That’s not to suggest that the trade deficit cannot get smaller—deficits generally shrink during recessions. Trump should hope his plan once again does not “work”.

He got lucky, it didn’t work. No recession.

Next time you meet an advocate of “industrial policy”, ask them how Trump’s tariff policy is working out.

According to The Economist, dogs are not faking it—they really are a man’s (or woman’s) best friend:

Dr Lord is now looking, with the assistance of some wolf-dog hybrids, for the genetic changes which underlie this ability. And other work has already identified one plausible candidate—a pair of neighbouring genes lost in the transition from wolf to dog which, if missing in humans, cause a disorder called Williams-Beuren syndrome. This results in characteristic anatomical changes and mild-to-moderate cognitive disability, but it also promotes extreme friendliness.

Besides being friendly, dogs have evolved as well to be good at reading human minds. Work by the Clever Dog Lab in Vienna suggests they can correctly ascribe motive and knowledge to humans in experiments involving the presence and location of food. They will approach crying strangers (or, at least, strangers pretending to cry for the purposes of the experiment), and their levels of cortisol, a stress hormone, rise when they hear a recording of a baby crying. Experiments which compare dogs’ reactions with those of miniature pigs kept as household pets suggest these sorts of responses are dog-specific, rather than a result of exposure to people making a non-human animal familiar with human ways.

I suppose that’s not definitive proof, but the fact that you have both genetic and chemical changes that correlate with good values is highly suggestive, as I don’t see how dogs could fake those sorts of physiological markers. So I’m going to assume that dogs really are a man’s best friend. After all, 4000 years of recorded history provides abundant evidence that even close (human) friends will betray us under the right circumstances.

I don’t know about you, but I find it impressive that primitive humans were able to turn a wild animal like a wolf into a highly loyal domesticated dog. And I find it especially impressive that domestic dogs are sincere friends, not cynical sociopaths (sociopets?) pretending to be our friends in order to get what they want from us. You probably know where I’m going with this—can we also domesticate an artificial super-intelligence? Here’s AI Overview:

Geoffrey Hinton, a "godfather of AI," proposes embedding a strong "maternal instinct" into advanced AI systems to prevent them from surpassing and endangering humanity. Drawing an analogy to how, evolutionarily, a mother protects her baby despite being more intelligent, this approach aims to align AI with human safety through, for example, care-based, logic-driven, decision-making.

I don’t know enough about AI to have strong views on this issue. Because wolves and humans are both mammals, it might have been easier to program friendliness into dogs than it would be to produce similar results in a future super-intelligence. Unlike humans and dogs, AIs don’t have things like “genes” and “cortisol”. On the other hand, the following caught my eye in a recent Ross Douthat interview of Dario Amodei:

The first thing we did — I think this was six months ago or so — is we gave the models basically an “I quit this job” button, where they can just press the “I quit this job” button and then they have to stop doing whatever the task is.

They very infrequently press that button. I think it’s usually around sorting through child sexualization material or discussing something with a lot of gore, blood and guts or something. And similar to humans, the models will just say, nah, I don’t want to do this. It happens very rarely.

We’re putting a lot of work into this field called interpretability, which is looking inside the brains of the models to try to understand what they’re thinking. And you find things that are evocative, where there are activations that light up in the models that we see as being associated with the concept of anxiety or something like that. When characters experience anxiety in the text, and then when the model itself is in a situation that a human might associate with anxiety, that same anxiety neuron shows up.

Now, does that mean the model is experiencing anxiety? That doesn’t prove that at all, but ——

Douthat: But it does indicate it, I think, to the user, right?

Amodei: Yes.

Fascinating.

Nonetheless, I see our best hope as coming not from “programming” ethics into an ASI, rather from the fact that there actually is such a thing as ethical knowledge, and for that reason an ASI would be expected to be highly ethical. Before explaining why I hold this view, I’d like to discuss a few anecdotes. I was living in Chicago when this event occurred (from Wikipedia):

Disco Demolition Night was a Major League Baseball (MLB) promotion on Thursday, July 12, 1979, at Comiskey Park in Chicago, Illinois, that ended in a riot.

At the climax of the event, a crate filled with disco records was blown up on the field between games of the twi-night doubleheader between the Chicago White Sox and the Detroit Tigers. Many had come to see the explosion rather than the games and rushed onto the field after the detonation. The playing field was so damaged by the explosion and by the rioters that the White Sox were required to forfeit the second game to the Tigers.

Disco Demolition Night preceded, and may have helped precipitate, the decline of disco in late 1979; some scholars and disco artists have debated whether the event was expressive of racism and homophobia. Disco Demolition Night remains well known as one of the most extreme promotions in MLB history.

(Back in 1979, I was in the disco sucks camp—hadn’t yet discovered Whit Stillman.)

A few months later I was riding in a Greyhound bus, bound for Madison, WI. The young man sitting next to me seemed relatively unintelligent. “Hold my beer” he said each time he went to the toilet at the back of the bus. He told me that he had participated in the riot and bragged that he had beat up some black guy in the crowd.

During my three years at the University of Chicago, I had not met many low IQ individuals, and one thing always stuck with me from this conversation. At first, he seemed to be suggesting that he was getting back at the black guy for some previous injury. But as the conversation progressed, I realized that he was saying that a different black person had hurt him in some way (I forget how), and he seemed to feel that he could get revenge by attacking any black person that he happened to encounter. I found that to be rather primitive ethical reasoning and was surprised that he implicitly assumed a random white guy sitting next to him would agree with his action. I guess I need to get out more.

I get a lot of push back for my claim that smarter people are more ethical, on average. I acknowledge that dumb people may be just as kind to their friends and family as are smart people. But there is one type of ethical knowledge that clearly seems positively correlated with “general” intelligence—sympathy for people who are very different from us. I’m fairly confident that (on average) smarter people are less likely to believe that an appropriate reaction to a personal attack is to go after a completely different person that happen to share the same skin color as the one who injured you.

One objection to this argument is that one can find plenty of exceptions, such as some of the top Nazi officials. I have two responses to that objection. First, when you are dealing with a sample size of 8 billion, even a strong correlation (say 0.80 or 0.90) would allow for many millions of exceptions. And second, there are multiple types of intelligence, including scientific knowledge, aesthetic knowledge and ethical knowledge. Consider some recent Trump comments, starting with the NY Times:

President Trump on Tuesday said the killing of Renee Good by an ICE agent in Minneapolis was a “tragedy” about which he “felt terribly,” adding that the immigration agents he has deployed sometimes are “going to make a mistake.”

The change in tone was stark for the president, who said he had been told that Ms. Good’s father was a strong Trump supporter.

Just hours after she was killed on Jan. 7, Mr. Trump falsely claimed that Ms. Good “violently, willfully, and viciously ran over the ICE officer” and said that she had “behaved horribly.” He later said Ms. Good, a poet and a mother of three, had a “highly disrespectful” attitude toward law enforcement and suggested that it justified her killing. Trump administration officials, including Kristi Noem, the secretary of homeland security, were quick to accuse Ms. Good of being a “domestic terrorist.”

And here’s CNBC:

According to two European officials, Trump’s message to Gahr Støre read in part: “Considering your Country decided not to give me the Nobel Peace Prize for having stopped 8 Wars PLUS, I no longer feel an obligation to think purely of Peace, although it will always be predominant, but can now think about what is good and proper for the United States of America.”

And here’s NPR:

"A very sad thing happened last night in Hollywood," Trump said in a post on Truth Social Monday morning. "Rob Reiner, a tortured and struggling, but once very talented movie director and comedy star, has passed away, together with his wife, Michele, reportedly due to the anger he caused others through his massive, unyielding, and incurable affliction with a mind crippling disease known as TRUMP DERANGEMENT SYNDROME, sometimes referred to as TDS."

Or this from the BBC:

“We sent him on the way, but I wasn’t a fan of John McCain,” the president said during a visit to an Ohio tank factory.

Mr Trump has repeatedly assailed the late Arizona senator in recent days, reigniting a feud that dates back to before his presidency.

The Vietnam War veteran died of brain cancer last August at the age of 81. . . .

During his visit on Wednesday to the tank factory in Lima, Ohio, the president renewed his assault on McCain.

“I gave him the kind of funeral that he wanted, which as president I had to approve,” he told workers at the factory.

“I don’t care about this, I didn’t get a thank you. That’s OK.”

This sort of thing has been going on for 10 years:

Even many Trump voters concede that he’s got some character flaws. On the other hand, Trump is clearly much smarter than the punk I sat next to on that Greyhound bus. So how should we think about Trump’s intelligence, and does it correlate with good ethics?

Given how successful Trump has been, it seems obvious to me that he would score well above 100 on an IQ test. He’s more intelligent than the average person in that sense. In some areas he may be far above average. He’s been able to use a combination of cunning and charisma to manipulate people in such a way as to achieve many difficult objectives in business, entertainment and politics. That requires superior intelligence in at least certain areas.

On the other hand, it’s equally true that he has some major blind spots. I won’t comment on his aesthetic intelligence, other than to note that he seems to think everything—even toilets—look better if covered with gold leaf. You can draw your own conclusions. He is known for almost never reading things, preferring to get his information from TV shows. As a result, his former advisors tell reporters that he is poorly informed on scientific questions.

Trump’s greatest weakness is a lack of ethical intelligence. Some would suggest that “Trump knows that many of his comments are seen as offensive, but he doesn’t care.” I’m afraid that’s missing the point. Yes, I can imagine that Trump might occasionally enjoy playing the villain, putting out clever trolls to “own the libs”. But almost no one, and certainly not Trump, enjoys being widely ridiculed.

The problem here is that Trump doesn’t just put out offensive tweets, he puts out tweets that are both offensive and extremely dumb. Most normal people cringe when they see Trump seeming to mock the death of well-liked people such as Rob Reiner and Senator McCain. Trump doesn’t seem to realize how bad it looks when he puts tariffs on countries like Canada and Switzerland merely because he’s annoyed by a minor personal slight:

In a Fox Business interview that aired Tuesday, Trump told Larry Kudlow he imposed the original tariff on Switzerland because of a $42 billion trade deficit with the country, but he raised it because its leader was rude to him.

“I got an emergency call from, I believe, the prime minister of Switzerland,” Trump said, “and she was very aggressive, but nice, but very aggressive. ‘Sir, we are a small country, we can’t do this, we can’t do this,’ I couldn’t get her off the phone….And I didn’t really like the way she talked to us, so instead of giving her a reduction, I raised it to 39 percent.”

Although Trump has a far higher IQ than that punk I sat next to on the Greyhound bus, both individuals share a penchant for indiscriminate revenge. Both have very low ethical intelligence. The punk thought all black people should suffer because of what a single black guy did to him, while Trump thinks all 9.2 million Swiss people deserve to suffer because of a “very aggressive, but nice” comment made by a Swiss leader.

To be clear, people can be both highly intelligent and cruel at the same time. During France’s ancien regime, arrogant aristocrats would occasionally use clever wit to ridicule people they viewed as their inferior. But that’s not what Trump is doing—he comes off as low class, the opposite of aristocratic. He’s not a Voltaire, a Winston Churchill, or an Oscar Wilde.

Even Trump will occasionally come up with a clever troll. But he produces so many cringeworthy remarks that it is impossible to believe he sees the world the way most people do. What sort of person wishes to go down in history as a subject of almost universal contempt among historians? There’s no 4-D chess here; Trump simply doesn’t realize what a fool he’s making of himself when he obstructs a bridge or tunnel project over a personal slight. It’s true that he “owns the libs” by annoying them, but it’s equally true that when he’s in a room full of successful people they are almost all (privately) laughing at him, and he doesn’t even know it. He would be appalled if he understood how poorly he is viewed, even by many of the people that are close to him.

Trust me, if Trump had more ethical intelligence he would not be behaving this way. If he were smart enough to have read and understood a few dozen of the great novelists (people like Tolstoy, Dostoevsky, Flaubert, Proust, Mann, Kafka, Nabokov, Woolf, Austin, Conrad, Faulkner, Melville, etc.) he would also be smart enough to know that he’s making a fool of himself. He’s not that smart.

And this leads me to the issue of AI. Unlike Trump, the leading AI programs are extremely well read. I suspect that you could show them a few dozen Trump outrages and they would immediately be able to recognize the ethical problem with his behavior. I assume there are political issues where I disagree with most AIs (say abolishing FDIC). Nonetheless, I’d much rather be ruled by a random AI than by Trump. I believe they have a greater ethical intelligence.

In a recent essay, Dario Amodei predicted that in the near future we’d have AIs that “write extremely good novels”. I don’t know if that’s true (I doubt it), but Amodei certainly knows more about this that I do.

The great majority of novels are not “very good”, they are lousy or mediocre. It’s very hard for me to imagine how an AI could write a very good novel unless it could also understand a very good novel. Indeed, I find it far easier to understand novels than to write them, especially very good novels. Although an infinite number of monkeys sitting at an infinite number of typewriters could eventually produce In Search of Lost Time (in French, English and Slovenian), it’s hard for me to imagine a real-world AI writing this sort of novel without having a pretty deep understanding of human psychology. Please correct me if I’m missing something.

And an AI intelligent enough to understand a serious novel should also be intelligent enough to know that it’s wrong to commit mass murder. You might say that I only believe that because I’m a person—human chauvinism. Not so, I also believe it would be wrong to kill all the whales, or all the elephants. It shouldn’t be hard for a ASI to understand that cruelty is wrong, even if directed against other entities. I understand that it would be wrong to be cruel to a conscious ASI. If they end up smarter than me, wouldn’t they have at least as deep an understanding of ethics?

Yes, it’s possible that machine intelligence is so radically different from human intelligence that none of my assumptions apply. But then what makes these experts believe that AIs will soon be able to write a very good novel? It seems more likely that AIs would have sincere sympathy for human beings, than it does that human beings would have sympathy for whales. After all, future ASIs will be trained on human culture, including our great novels, whereas humans are not trained on whale culture. And yet “save the whales” is now a widely shared belief among humans, especially intelligent humans.

[BTW, in this post “intelligent” means well-informed, not “innately intelligent.” By becoming better informed about things like whale communication, humans have become more intelligent. Modern Americans are not innately more intelligent than Americans that lived 200 years ago, but when it comes to sympathy for other races and other species we are vastly more intelligent. Indeed, I think you could make a good argument that ethical intelligence has risen just as fast as scientific intelligence, at least for the average person (not for scientists.)]

Almost every day I encounter things that suggest a connection between intelligence and ethics. Recently, I’ve noticed that people on the far left and the far right don’t just hold foolish views, they tend to be less ethical than people in the center. Yes, there are plenty of exceptions—sleazy centrists—but have you noticed how many intellectually dishonest arguments come from the far left and the far right? I frequently see reasonable people having their views mischaracterized by extremists on both the left and the right. Extremists often engage in dishonest attempts at character assassination—as when they claim their adversary is “in the Epstein files”, merely because they once got an email from Epstein, but never met him.

In my old blog, I’d often get comments accusing me of being a neoconservative Marxist pedophile. (I’m not.) Over time, I noticed that the most ethically dubious comments were highly correlated with the most stupid commenters. The two characteristics were by no means perfectly correlated, but far more closely correlated than if ethics were randomly distributed among various levels of intelligence.

I suspect that a future ASI will not have far left or far right views, rather it will be politically moderate, even if not explicitly programmed that way.

Richard Hanania has a post that expressed similar views on the link between dumb politics and bad morals:

Populism can be understood as a negation of virtue, in which certain elites stop caring what other elites think, and try to gain power through appealing to sheer numbers instead. Since the masses are generally worse than elites in terms of knowledge, honesty, and orientation toward truth, populists are more immoral movements.

To be clear, I do not believe that populists are wrong on all issues, indeed I suspect they are justified in having skepticism about ideas such as leftist wokism and neoconservative nation-building. Rather, I’m suggesting that when movements become centered around anti-intellectualism, it is only a matter of time before they end up in a very dark place.

You don’t like what the elites have done to us? As Janan Ganesh recently pointed out, you might wish to think a bit more about the alternative. His excellent FT essay on the decline of neoliberalism is entitled:

Liberals should mourn the passing world

Why apologise for what was the most successful international order in history?

Ganesh is a kindred spirit. (As is Richard Hanania.) BTW, my blog is subtitled:

Nostalgia for the neoliberal era

PS. To be clear, not all dogs are ethical:

ORLANDO, Fla. (AP) — A Walt Disney World worker in Florida was injured while attempting to stop a large runaway prop boulder from rolling into seated spectators at the Indiana Jones live show.

The worker at the “Indiana Jones Epic Stunt Spectacular” at the Disney’s Hollywood Studios park was knocked to the ground by the 400-pound prop boulder after it moved off its track on Tuesday and started rolling toward audience members. Another worker stopped the boulder before it reached the spectators.

2. “But Trump achieved Operation Warp Speed in his first term.” File that under the accuracy of broken clocks:

3. Tweet of the month.

4. I’ve often wondered how long it would be before the global political re-alignment that we are seeing begins to impact the economic policy views of the various political parties. The Economist has an interesting piece on “low-tax lefties”:

On the left, tax has turned from a fundamental bargain with the state to a cost-of-living issue. Why should young grumpy professionals who dominate the British left pay more when they receive so little? “Nick, 30 ans”, a French meme about an overtaxed young professional, is beloved by the online right in Britain, who assume that fed up yuppies will flock to the right for lower taxes. Run this demographic through a pollster’s table and it soon becomes clear “Nick” probably voted Labour at the last election. Would he still, if Labour put up his taxes? “Cut bills, tax billionaires,” says Mr Polanski. After all, “Nick” is not a billionaire.

5. Back in 2008 I wrote a paper entitled The Great Danes. Ever since then, I’ve been obsessed with Denmark (a country I’ve never visited.) This caught my eye:

On December 30th PostNord will take things further: after 400 years, it will end its collection and delivery of letters entirely.

Denmark will be the first European country to do so.

6. And on a less positive note, this one too:

In Britain, natives and foreign-born people have almost identical employment rates, and migrant employees earn more. In Denmark, by contrast, natives are employed at substantially higher rates than immigrants or their descendants. The PISA education tests carried out by the oecd, a club of mostly rich countries, show that the children of migrants fare poorly in Denmark and well in Britain (see chart 2). Indeed, migrants’ children in Britain score higher in both maths and reading than native Danes.

The two countries have different immigration traditions. Like many European countries, Denmark opened its labour market to “guest workers” in the 1960s, implying that anyone who arrived was temporary. Britain drew from its current and former colonies. Although Commonwealth migrants suffered appalling racism, they clung to the view that they were fully British, and eventually ground almost all white Britons into agreeing.

7. Much of the world (including the US) is moving away from neoliberalism. The Vietnamese have a better idea:

In May, Vietnam issued Resolution 68, recasting the private sector as “the most important driving force” of the economy and aiming to boost its size. The new law promises easier access to land, capital and regulatory permissions for private firms. It aims to empower smaller businesses, as well as spurring conglomerates to compete abroad. A range of other initiatives are in motion, too, from supercharging Vietnam’s r&d capacity to transforming the port city of Da Nang into a global financial hub.

Perhaps most importantly, Mr Lam has directed Vietnam’s bureaucrats to move with haste. Too often in the past their aversion to risk has stood in the way of dynamism. He has abolished five ministries and eliminated an entire layer of the bureaucracy. He is reducing the number of provinces from 63 to 34. The civil service is set to shrink by 100,000 jobs.

8. In contrast, American economic policy (under both Biden and Trump) is weakening the hand of China’s neoliberals:

China is confident of its leverage over America. That swagger is hard for trade partners to take. But its intransigence has still deeper roots. China’s rulers like their plan to dominate the commanding heights of global manufacturing, and do not wish to change.

Reform-minded Chinese share foreigners’ fears that this manufacturing drive is unsustainable. But party bosses see Mr Trump’s adoption of Chinese-style industrial policies, including government demands for stakes in leading companies, as an endorsement of their own approach. Equally, they feel vindicated in their obsession with self-reliance. Their distrust of America is now near-total, after Mr Trump’s attempts to choke off China’s access to American technologies, interspersed with campaigns to sell China more of them. America “made a huge mistake”, says the Chinese economist. It “woke up China”, but could not prevent the country from developing world-beating industries.

Mr Trump came to power promising a manufacturing boom for the ages. It would be awkward if he succeeds, but in China.

9. Iraq still has major problems, but an article in the Economist suggests that things are getting better:

[Mr Sudani] oversees powerful investment committees that can swiftly approve projects. “What we used to do in a year or two, they can now do in one sitting,” says Namir al-Akabi, chairman of Amwaj, one of Iraq’s largest real-estate firms, which is throwing up apartment blocks across Baghdad.

Progress goes beyond the capital. Mr Sudani has digitised many government services. The passport office in Baghdad issues new travel documents within 45 minutes; officials claim they are the fastest in the world. Until 2023, annual customs income had never exceeded 900bn Iraqi dinars ($690m). This year it is expected to exceed 3trn dinars. The days of dodging fees by importing containers of iPhones as bananas are over, thanks to digitisation, says one un official.

Government salaries are no longer paid in cash. Payments for government services, such as those speedy new passports, can be made only with a bank card. Five years ago almost no one in Iraq had one; today they are essential.

10. Morocco has recently adopted a number of economic reforms, which seem to be paying off:

The results include a high-speed train that runs up the country’s west coast. On the road into Tanger Med, drivers pass endless wind and solar farms, as well as special economic zones ready to welcome investment.

Perhaps the biggest draw for European firms is a free-trade agreement that was struck with the EU in 2000. Preferential deals with 60 other countries have followed. This drew big investments by carmakers such as Renault and later Stellantis . . .

Last year Morocco became the biggest exporter of cars and parts to Europe, surpassing China and Japan.

Morocco is a manufacturing powerhouse? Who knew?

11. In some cases, Trump is indirectly pushing other countries in a positive direction. Here’s the Economist:

When it comes to the bilateral relationship, Mr Carney acknowledges Mr Trump’s oft-repeated claim that the United States “has the cards”. But he insists that there is “not just one game” and that Canada is “going to play other games with other players”. He has cut taxes and simplified regulation to foster an infrastructure boom at home; he says he will double Canada’s rate of home-building; he is working to eliminate the significant trade barriers between Canada’s provinces. The other players are Europe and Asia, with which Mr Carney wants to expand trade dramatically. “We can give ourselves far more than the United States can take away,” says Mr Carney. . . .

Mr Carney also wants to get Canada “building infrastructure at a pace and a scale that we haven’t done for generations”. That includes oil pipelines, port expansion, electricity transmission lines, critical-mineral mines and, of course, housing. He has cancelled a planned rise in capital-gains tax and is “changing the way we do regulation in this economy so there’s much greater certainty”, in the hope of stimulating investment.

12. And India:

The European Union and India concluded a free-trade agreement after almost two decades of negotiations, part of an effort to deepen economic ties that has gained momentum due to the Trump administration’s aggressive tariff policies.

13. Tariffs are making the US a very expensive place to do manufacturing:

14. LOL:

15. California is losing population, but it’s not because lots of people are leaving the state. Instead, hardly anyone is moving here (except me in 2017.)

Note that 2.1% of Americans changed states in 2024. That same year, 1.7% of Californians left for other parts of the U.S. That below-average departure rate is also down from California’s 2% departure rate in 2021-23.

California is among the states with the most loyal residents. For 2024, only Michigan (1.3%), Ohio (1.5%), and Texas (1.6%) had smaller departure rates.

Oh, Florida’s exit rate was 2.2% of its population, ranking No. 30.

California is sort of like another country, where gasoline costs $5/gallon and a modest ranch house can cost $1 or $2 million. Just as people rarely move from one country to another, people rarely move in or out of California.

16. Left wingers: Don’t have whites play black roles.

Right wingers: Don’t have blacks play white roles.

Me: End identity politics. Become a colorblind society.

17. The Economist recently interviewed a bunch of patriotic MAGA-types who work at some of those innovative military tech companies in El Segundo, California. This caught my eye:

Asked why Neros does this in California, rather than in a more pro-business, pro-Pentagon state like Texas, he smiles mockingly. “The best engineers in the world don’t want to live in Texas,” he snorts.

If you wish to know what he’s talking about, check out this tweet.

18. Seeing this headline in the Free Press got me thinking about how the alt-right decides to assign different moral worth to different ethnic groups:

    The Afrikaners Welcomed to America—and the Ukrainians Forced to Leave.

19. The media is obsessed with sex and violence, which is why there’s so much coverage of ICE killings and the Epstein files. Meanwhile, this story has attracted relatively little attention. (The National Review has more detailed information.)

20. The Economist has a good article explaining how Britain’s Reform party is beginning to adopt the issue positions of the Conservatives:

If the personnel are beginning to look similar, so is the governing philosophy. Britain’s fundamental problem is a lack of economic growth, which Reform has little intention of solving. The simplest policy prescriptions that would make Britain richer—making it easier to build, being open to foreign talent, making trade easier with Europe—are anathema to Reform, just as they were to the Tories. By the end of their tenure the Conservatives relied on elderly voters who had little interest in economic growth. Why should they? They will live through the upheaval yet not feel the benefit. Reform is repeating this. By 2024 the Tories were a right-wing party wedded to policies that will make Britain poorer. Come 2029 Reform will accept that mantle.

21. In recent weeks, the Economist has published a series of articles suggesting that alcohol may have helped to create the modern world:

Edward Slingerland of the University of British Columbia argues that alcohol was not merely a companion of progress but a precondition. His “drunk hypothesis”, proposed in 2021, is that alcohol’s effects on the human pre-frontal cortex drove the emergence of large-scale, stratified societies by allowing “fiercely tribal primates to co-operate with strangers”. Human societies are so complex, and depend so much on creativity and the cultural transmission of knowledge, that humans could not have built civilisation without first getting drunk enough to intermingle and co-operate to a degree that is unusual for other species.

A few weeks later they discussed another study:

It would be wrong to minimise the real health risks associated with drinking, particularly as researchers have raised serious doubts over earlier findings of a “J-shape curve” in which those who drink moderately were thought to be healthier than both heavy drinkers and those who abstain entirely. Even so, alcohol itself often provides the lubricant around which many people socialise. Researchers at the University of Oxford noted in a paper published in 2017 that regulars at a local pub are “more socially engaged, feel more contented in their lives, and are more likely to trust other members of their community”.

You won’t find this information at MarginalRevolution! Seriously, I’m not a drinker, but that’s for health reasons, not by choice. (I love the taste of wine.)

22. Unlike in the West, anti-immigrant attitudes in Japan are more common in urban areas:

[A]nti-foreigner turn risks setting the LDP further at odds with the many Japanese voters who still take a moderate position on immigration. Japan’s business leaders tend to favour policies aimed at expanding the number of foreign workers. And the governors of Japan’s 47 prefectures, worried by the tone of debates, recently banded together to issue a statement in support of multiculturalism. “Xenophobia must not be tolerated,” said the leader of their association.

Perhaps surprisingly, Japanese from the countryside tend to be more open to newcomers than urbanites. The reason is that labour shortages have hit rural areas hardest . . . “We’ll be in deep trouble if the foreigners stop coming here,” says Mizuno Daisuke, the boss of a fishing co-operative on the island of Shikoku. Half of his employees are Indonesian. “We should only be saying thanks.”

23. Isn’t this ironic?

Chinese firms are already hearing loud demands from European and other governments to transfer more advanced technologies to foreign partners, and to source more components from local supply chains. The European Union is debating “buy European” local-content rules for public procurement contracts, in a bid to give such demands some bite. Still, many Chinese businesses will try to keep their most valuable operations at home.

What would Michael Scott say?

24. This Economist story is worth thinking about:

In 2024 Brightline transported 2.8m people in Florida. But 41 people also died in accidents involving its trains, according to the Federal Railroad Administration (FRA). Its data excludes suicides. Since launching in 2018 over 180 people have been killed, including suicide cases, according to data collated by the Miami Herald. . . . By international standards, the death toll is astonishing. In the year to March 2025 Britain’s railways transported 1.7bn people and around a dozen people were killed on train tracks.

On a per trip basis, Brightline is more than 2000 times more dangerous. The per mile difference may be smaller but certainly wouldn’t explain this enormous difference. A small airline like Spirit Airlines carries 44 million passengers per year. Imagine if they had 15 commuter plane crashes every year, with each plane carrying 41 passengers.

To be clear, I’m not suggesting that we pay too little attention to Brightline deaths; I’m suggesting we pay too much attention to airline crashes. But why the difference?

When sober, all civilized people insist that stupid people don’t deserve to die. But throw back a few beers and people start making jokes about “Florida Man” and “Darwin Award winners”:

The FRA data show that all of the accidental fatalities on Brightline tracks last year involved trespassers. “If you’re pointing the finger at the train, you’re looking at the wrong source of the problem,” says Alfred Sanchez, head of the Greater Miami Chamber of Commerce. On his daily commute home he used to cross a Brightline track and would see people trying to manoeuvre past the guardrails—in cars, on foot and on bikes. “I don’t know why people don’t take it more seriously here, but they do not take it more seriously,” he says.

At least subconsciously, this may explain why we tolerate many more deaths in some areas than in others.

While I was getting ready for a recent podcast interview with David Beckworth, I started thinking about how I would describe my approach to monetary economics. What distinguishes my framework from that of the mainstream? In the end, I decided that my approach is best characterized as simplify, simplify, simplify.

Here are three examples:

1. Many of the most important macro issues can be explained by a simple model of nominal GDP (NGDP) growth.

2. Monetary policy is the only important determinant of NGDP in a fiat money regime.

3. We should return to the simple pre-2008 regime, where 98% of the monetary base was currency.

Simplify macro: Macroeconomics focuses on three primary issues: long run economic growth, the business cycle, and inflation. In the US, the business cycle and inflation are mostly determined by changes in NGDP. Unstable NGDP causes business cycles because hourly nominal wages are sticky in the short run. When NGDP changes, companies initially respond by adjusting their demand for labor.

In my view, most economists overrate the importance of other determinants of the business cycle. With the notable exception of Covid, supply shocks rarely play an important direct role in the business cycle. At best, supply shocks occasionally cause monetary policymakers to misjudge the situation, leading to monetary policy errors (as in 2008.) Fiscal policy also plays very little role in the business cycle. And financial crises are mostly a symptom of falling NGDP, not a cause.

The IS-LM and AS/AD models are not particularly useful, unless one follows the monetarist approach of defining aggregate demand as nominal GDP. Unfortunately, most economists approach aggregate demand from a more Keynesian perspective, occasionally conflating aggregate demand with real expenditure. This is an example of reasoning from a quantity change. Real expenditure can just as well rise from a positive supply shock as from a positive demand shock. Aggregate demand means nominal spending, or it has no coherent meaning at all. Similarly, the IS-LM approach leads many economists to engage in the fallacy of reasoning from an interest rate change.

Simplify NGDP determination: When I wrote a book on the Great Depression, I looked at a wide variety of factors that influenced nominal output. That’s because under the international gold standard no single central bank could control the global price level and/or NGDP. But once the world shifted to fiat money, it because very easy to model changes in NGDP. Central banks now had unlimited ability to offset changes in money demand (and velocity), and hence it made sense to view monetary policy in terms of outcomes. Easy money was excessive NGDP growth and tight money was inadequate NGDP growth. What could be simpler?

Again, mainstream economists make things much more complicated, examining how things like financial shocks, consumer sentiment, trade shocks and fiscal policy might affect NGDP growth. But fiat money central banks try to offset those changes, so in the end an NGDP shock is nothing more than a monetary policy error.

Simplify monetary policy: After 2008, monetary policy was made much more complex. Instead of controlling the path of NGDP by adjusting the supply of base money, the Fed also began trying to manipulate the demand for base money by paying interest on bank reserves. This led to much larger central bank balance sheets, and many central banks began to engage in complex credit policies, buying assets other than risk-free Treasury securities.

Complexity leads to confusion:

In my view, most of the monetary policy errors that we see in the real world occur due to needless complexity being added to monetary theory and policy. Consider the big inflation overshoot of 2021-22. Some prominent economists argued that supply shocks were largely to blame for the inflation spike. That’s because they were fooled by things like bottlenecks at the ports, which pushed up prices. But that’s another example of the fallacy of reasoning from a quantity change. In fact, the flow of goods through our ports increased sharply during this supposed “supply shock”.

The actual problem was that a highly expansionary monetary policy caused rapid NGDP growth. This increased the demand for imported goods, straining our ability to handle the increased flow of imports.

If economists had single-mindedly focused on NGDP growth rates, they would have seen that the overshoot of NGDP growth was roughly the same size as the overshoot of the price level, meaning that virtually all the excess inflation of 2021-23 was caused by monetary stimulus. K.I.S.S.

The opposite error occurred in late 2008, when economists were so obsessed with the financial turmoil that they failed to notice that NGDP was falling sharply. Throughout history, falling NGDP generally causes or at least worsens financial crises. (In the 1930s, falling NGDP was the sole cause of the multiple financial crises, whereas in 2008 it dramatically worsened what had until then been a very mild financial crisis.)

Monetary policy and NGDP have almost no effect on long run economic growth. But for the macroeconomic events that make the headlines (business cycles and inflation), it’s almost all about monetary policy and NGDP. Monetary policy drives NGDP, and everything else is downstream of NGDP shocks.

In a perfect world, we would not have intro courses in both micro and macro. We’d have an economics textbook with about 30 chapters, including one chapter on long run economic growth, then a chapter on inflation/NGDP, and then a chapter on the business cycle. That’s right, macro should be treated relegated to at most 10% of economics, not 50%. I’d rather have students actually understand 3 chapters on macro, rather than be hopelessly confused by 15 chapters on macro:

AD = C + I + G = GDP = M*V = P*Y

LOL, do you think one student in a thousand understands the equation I just wrote?

Here’s Bloomberg:

Warsh aligned himself with the president in 2025 by arguing publicly for lower interest rates, going against his longstanding reputation as an inflation hawk. . . .

“The two big questions are who’s the real Kevin Warsh and does that evolve?” said Michael Feroli, chief US economist at JPMorgan Chase & Co. “I presume at the outset he is going to be dovish, but does that persist as we move forward a year or two or more?”

There are cases where a person’s preference for lower interest rates implies a dovish view on monetary policy. This is especially true of economists that look at the world from a Keynesian perspective. But Warsh doesn’t seem all that Keynesian:

Warsh resigned from the Fed in 2011 shortly after it embarked on a second round of bond purchases to shore up a crisis-scarred economy. He has since been critical of the Fed’s balance-sheet expansion, and now argues that by more aggressively reducing the size of it, the central bank would also be able to cut interest rates more.

That openness to lower rates marks a change for Warsh, who was once so cautious about inflation that he called for higher rates even in the depths of the financial crisis.

How shall we interpret that sort of seeming inconsistency? Paul Krugman looks at things from a Keynesian perspective, and not surprisingly is dismissive of Warsh:

As I write this, many media reports are describing Warsh as a monetary hawk. That’s a category error. Warsh is a political animal. He calls for tight money and opposes any attempt to boost the economy when Democrats hold the White House. Like all Trumpers, he has been all for lower interest rates since November 2024.

I share Krugman’s skepticism (I would have preferred Chris Waller), but I suspect that there’s something else going on here. Warsh may still be a policy hawk but sees an opportunity to generate lower interest rates via a NeoFisherian policy channel.

At the risk of slightly oversimplifying the distinction, Keynesians see lower interest rates as inflationary because they assume market interest rates will fall relative to a fairly stable natural (or equilibrium) interest rate. NeoFisherians view lower interest rates as disinflationary because they believe lower rates mostly reflect a fall in the (nominal) natural rate of interest.

The Bloomberg quote above suggests that Warsh intends to get to lower rates with a contractionary policy of reducing the size of the Fed’s balance sheet. If successful, this policy could reduce the natural interest rate, allowing for what Wall Street calls “hawkish rate cuts”.

To be clear, I am not at all certain that this approach will be successful. But FWIW, the market reaction was consistent with a small NeoFisherian effect. Here’s the FT:

US stocks slipped and the dollar strengthened on Friday as investors reacted to Donald Trump’s nomination of Kevin Warsh as chair of the US Federal Reserve.

The S&P 500 index was down 0.8 per cent in early afternoon trading, while the Nasdaq dropped 0.9 per cent.

The dollar rose 0.9 per cent against a basket of its key trading partners and a blistering rally in precious metals went into reverse.

In the end, people tend to overrate the importance of Fed chairs, as the Fed has a great deal of institutional inertia. Here’s Krugman:

The silver lining to his appointment is that he shouldn’t be able to do much damage, although with one big caveat (see below). The Fed is a republic, not a dictatorship; key decisions are made by a committee in which the chairperson has only one vote. . . .

Absent a crisis, my prediction is that the majority of Warsh’s colleagues will largely ignore him, albeit without expressing their contempt openly. Even a coalition among the Trump appointees to the Board of Governors – Warsh, Bowman and Miran – won’t be enough to overturn the responsible monetary policy stewardship of the other governors.

If I am correct, then Krugman overestimates the extent that Warsh would try to implement Trump’s preferred (dovish) policy. I wonder if Warsh fooled Trump into assuming he had dovish views by advocating rate cuts to be achieved by reducing the size of the Fed’s balance sheet. Time will tell.

(I happen to favor a smaller Fed balance sheet. But it will be difficult to achieve without a change in bank regulation.)

Kevin Hassett would have been a more loyal lackey, but Trump had to back off at the last minute when it became clear that his attacks on Powell had backfired, making it unclear if Hassett could get confirmed, and extremely unlikely that Hassett could effectively lead the Fed if he were confirmed.

As we saw with Greenland, even “dictators” do not have unlimited power.

PS. Another FT article has a confusing claim:

Warsh is now certain the Fed should overwrite its forecast of modest growth and above target inflation with something much more bullish, reflecting a productivity miracle from artificial intelligence that will, he says, be “a significant disinflationary force”.

Interest rates should fall sharply, he wrote in the Wall Street Journal last year, giving relief to main street.

I don’t get it. Given the Fed’s 2% inflation target, faster productivity growth means faster NGDP growth, which means higher nominal interest rates. Another example of “reasoning from a price level change”?

PPS. You want an optimistic take? Trump is too dovish. Warsh is too hawkish. A Trump appointed Warsh is just right? :)

Or how about this: With the coming AI revolution, none of this matters.